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50–322 2009

S. HRG. 110–920 

ENDING MORTGAGE ABUSE: SAFEGUARDING 

HOMEBUYERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING, TRANSPORTATION, AND COMMUNITY 

DEVELOPMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

EXPLORING HOW HOMEBUYERS AND HOMEOWNERS CAN BE SAFEGUARDED FROM PREDATORY AND ABUSIVE MORTGAGE PRODUCTS 

AND PRACTICES 

TUESDAY, JUNE 26, 2007 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


dcolon on DSK2BSOYB1PROD with HEARING
(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

JONATHAN MILLER, Professional Staff 

MARK A. CALABRIA, Republican Senior Professional Staff Member 

JIM JOHNSON, Republican Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

CHARLES E. SCHUMER, New York, Chairman 

MIKE CRAPO, Idaho, Ranking Member 

DANIEL K. AKAKA, Hawaii 

ROBERT P. CASEY, Pennsylvania 

JACK REED, Rhode Island 

THOMAS R. CARPER, Delaware 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

ROBERT MENENDEZ, New Jersey 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JOHN E. SUNUNU, New Hampshire 

CARMENCITA N. WHONDER, Staff Director 

GREGG A. RICHARD, Republican Staff Director 


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(III) 

C O N T E N T S 

TUESDAY, JUNE 26, 2007 

Page 

Opening statement of Chairman Schumer ............................................................ 1 

Prepared statement ................................................................................... 48 

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 4 

Senator Brown .................................................................................................. 6 

Senator Tester .................................................................................................. 7 

Senator Casey ................................................................................................... 8 

Senator Menendez 

Prepared statement ................................................................................... 50 

WITNESSES 

David Berenbaum, Executive Vice President, National Community Reinvestment Coalition ...................................................................................................... 10 

Prepared Statement ......................................................................................... 51 

Anthony Yezer, Professor, Department of Economics, George Washington University ................................................................................................................... 11 

Prepared Statement ......................................................................................... 85 

Denise Leonard, Chairman and Chief Executive Officer, Constitution Financial Group, Inc., on behalf of the National Association of Mortgage Brokers . 13 

Prepared Statement ......................................................................................... 99 

John M. Robbins, Chairman, Mortgage Bankers Association .............................. 14 

Prepared Statement ......................................................................................... 145 

Wade Henderson, President and Chief Executive Officer, Leadership Conference on Civil Rights ......................................................................................... 15 

Prepared Statement ......................................................................................... 160 

Alan E. Hummel, Senior Vice President and Chief Appraiser, Forsythe Appraisals, LLC, on behalf of the Appraisal Institute .......................................... 17 

Prepared Statement ......................................................................................... 168 

Pat V. Combs, President, National Association of REALTORS ........................ 18 

Prepared Statement ......................................................................................... 181 

Michael D. Calhoun, President, Center for Responsible Lending ....................... 19 

Prepared Statement ......................................................................................... 198 


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dcolon on DSK2BSOYB1PROD with HEARING
(1) 

ENDING MORTGAGE ABUSE: SAFEGUARDING 

HOMEBUYERS 

TUESDAY, JUNE 26, 2007 

U.S. SENATE, 

SUBCOMMITTEE ON HOUSING, TRANSPORTATION, AND

COMMUNITY DEVELOPMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The subcommittee met at 2:45 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Charles E. Schumer (Chairman of 

the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHARLES E. SCHUMER 

Chairman SCHUMER. The hearing will come to order, and I want 

to thank our witnesses and apologize for being late. I want to welcome everyone to this critical hearing on ‘‘Ending Mortgage Abuse: 

Safeguarding Homebuyers,’’ and I want to thank our witnesses, a 

broad-based group, who are appearing before this Subcommittee 

today. 

Many of the members of this subcommittee, including myself, 

know firsthand about rising home foreclosures that are devastating 

communities in our home States, and the big question is why. Is 

it really ‘‘the economy, Stupid’’? Is it as simple as a lack of borrower education? Is it a sharp rise in family financial emergencies? 

Or is it downright bad lending practices? I hope we will get to the 

heart of this question today so we can figure out how to best solve 

it. 

There are a lot of different interest represented in this room 

today to ensure we get all perspectives. But at least we can all 

begin by agreeing that sustainable homeownership is the key to 

having a strong financial future in this country. Buying a home is 

the largest purchase most families will ever make, and it is a path 

to wealth and asset accumulation for families and their future generations. It is also critical to building flourishing communities. 

Yet our mutual respect for the basic principle of homeownership 

has not been enough to prevent a widespread effort to exploit the 

most vulnerable segments of our population by tricking them into 

signing on to loans that they can ill afford, making it impossible 

for many to achieve the American dream. 

The subprime storm has left virtually no corner of this country 

untouched. You cannot go a day without reading or hearing about 

families in places like New York or Ohio or Pennsylvania that are 

stuck in risky loans they cannot afford and desperate for a way out 


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that allows them to preserve their home. The problem is bad and 

getting worse. 

This map shows the areas with the greatest increases in reported 

foreclosures over the 2 years. Depressed regions, like parts of the 

Middle West—as you can see, the darker it is, the greater the percent. Depressed economic regions, like parts of the Middle West 

that have experienced significant job losses in recent years, have 

also been prime targets for deceptive lending practices. And even 

in growing States—look at Colorado, look at Georgia—unsuitable 

loans abound. According to Realty Track, nearly 3,000 foreclosure 

actions were reported, and my colleague and former Chairman of 

this Subcommittee Wayne Allard’s State of Colorado last month 

alone had 3,000 foreclosures. 

Before our eyes, whole communities are being set up to fail when 

we should be arming them with the tools to succeed. It is bad 

enough that these families will have to lose their main source of 

financial stability, not to mention creditworthiness, but if these 

foreclosures are concentrated in a small number of communities, 

the effects will be devastating. Studies have shown that even one 

foreclosure could lower the value of nearby homes by almost 1.5 

percent. That is about $3,000 in lost home value per neighbor, or 

$150,000 of lost neighborhood value for just one foreclosure. That 

is an amazing statistic. If 2 million homes foreclose nationwide, our 

communities would lose $300 billion in neighborhood wealth and $6 

billion in local taxes that go to fund schools and roads. 

So the question is: Why is this happening? I think, in my view, 

the fundamental reason is simple. The catalysts behind this impending avalanche of foreclosures are risky subprime mortgage 

loans that thousands of middle- and lower-income Americans were 

basically tricked into borrowing, even though the loans themselves 

are designed to fail them. These so-called liar loans are often 

wrapped in complex rate terms, high fees, and shocking rate increases that in the near term leave the borrower unable to afford 

rising mortgage payments. 

I will ask all of you panelists why these loans have not been underwritten at the fully indexed rate. It is utterly amazing that they 

are underwritten at the low teaser rate, and then people just are 

unable to pay them. Many industry participants argue that these 

loans themselves are not to blame. It is not the product, they say; 

it is the economy. But one look at this payment chart for the most 

popular subprime loan in recent years, the 228 adjustable rate 

mortgage, and the answer is clear. The loans are traps. 

Now, in this example, the borrower starts off paying $1,331 a 

month. That is 44 percent of his monthly paycheck. And because 

subprime borrowers do not have to escrow, this payment does not 

include the estimated $200 monthly payments for taxes and insurance. Now, after just 30 months, the teaser fixed rate expires, and 

the borrower’s monthly payment jumps over $400, as you can see 

here. After 30 months, it is $1,737. Now it is 58 percent of income. 

Then when you go to 36 months, it is $1,950. That is 65 percent 

of income. And in 42 months, it is 72 percent of income. That is 

because the mortgage rate goes up, the teaser rate is low, and you 

end up paying a whole lot. 


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Now, I know a man from my hometown in New York named 

Frank Ruggiero. He has now become famous because he became 

our witness here. Let me tell you what happened to Frank. 

He had a home. He did not need another home. Someone kept 

calling him on the telephone. He had diabetes and he needed dialysis, and his medical plan did not cover it. Someone kept calling him 

on the telephone saying, ‘‘Refinance your mortgage and I will provide you an extra $50,000 in cash,’’ which Frank definitely needed. 

They refinanced his home. Oh, and the mortgage broker told 

him—he asked him, ‘‘What will the interest rate be?’’ And he 

said—I think it was like 13—we will have the numbers here 

maybe. But he told him, ‘‘It will only be $100 more than your 

present mortgage rate.’’ That was true for the first several months. And what happened with Frank was this: Of the $48,000 in additional debt on his home, guess how much Frank received? This is 

pathetic. $5,728. All the rest went to closing costs. The broker received $9,300 from the proceeds, and an additional fee of $11,900 

from the lender—we want to hear lenders shouldn’t be responsible? 

$11,900 from the lender as a yield spread premium because he 

duped Mr. Ruggiero with such a profitable loan. 

And then Ruggiero, after his payments went up, just like it did 

on that chart, rather dramatically, he is now—so he got an extra 

$5,000, and he is about to lose his home. Queens Legal Aid is trying to stop it from happening. 

He was perfectly fine before. And this person called him on the 

phone and called him on the phone and called him on the phone, 

and he finally said yes. He was a bus driver for the city of New 

York. He was not a great financial expert. He could not follow all 

this, but he is a typical American. 

That has to stop, and if I have anything to do with it, we will 

stop it. We will stop it. We will not just blame the market or blame 

this or blame that. We will do something to stop it. 

So the economy was not the problem here. ‘‘It is the product, Stupid.’’ No one should be tricked into signing on to a loan that is almost certain to fail them. The very existence of these loans is not 

a sign of the market working. The fact that these loans are underwritten almost exclusively to borrowers that cannot afford them is 

not a market failure. 

By some estimates, 80 percent of subprime loans are these exploding ARMs, and a very high percentage do not go to finance new 

homes. We are all told, well, do these subprime mortgages because 

it is the first step for people financing new homes. I think 11 percent of subprime ARMs go to people financing a new home. The 

rest go to either people refinancing, like Frank, or financing a second home. 

What we want to examine today is why this product even came 

to be and in such volume. Why are nearly three-quarters of 

subprime loans being originated by independent brokers or nonbank affiliates with no Federal supervision or finance companies 

with only indirect Federal supervision? 

Look at this chart. Independent brokers make up about half of 

the subprime lending market. That is the person who went to 

Frank. Another 25 percent are indirectly regulated and 23 percent 

are federally regulated. And when you look at what has happened, 


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there is a correlation. The federally regulated loans are in much, 

much better shape than the non-federally regulated. 

Why are these bad loans being sold primarily to families that already own a home? According to the chief national bank examiner 

for the Office of the Comptroller of the Currency, as I said, 11 percent of subprime loans went to first-time buyers last year. 

The bottom line is that, in my opinion, it should be illegal for 

lenders to qualify a borrower for a loan that is anything less than 

its fully indexed rate. The industry must determine a borrower’s 

ability to pay. Subprime borrowers should also be required to escrow for taxes and insurance, like all prime loan borrowers. Including the taxes and insurance would make it impossible for most to 

get approved for these high-rate mortgages. Thus, the reason the 

industry excludes them in many, many cases. Lack of escrows will 

only result in borrowers returning to lenders in serious trouble or 

default when tax and insurance payments are due. 

I have heard one horror story after another where brokers go 

into communities, attend church services, not only offer to provide 

the loan, not only guarantee the loan, but offer to find the realtor, 

the appraiser, the lawyer. It is an unregulated world that is on the 

loose without adequate supervision, and we need to change it. 

So one of the things I have focused on with my colleagues, Senator Brown, who is here, and Senator Casey, also a Member of this 

Committee, is creating a national regulatory structure for mortgage 

brokers and other originators in addition to pushing the regulators 

to conduct more oversight using HEPA and other relevant laws. In 

April, we introduced a strong bill, S. 1299, to offer a fix to make 

it harder for irresponsible brokers and non-bank lenders to sell 

mortgages that are designed to fail the homeowner and result in 

foreclosure. My goal is to strengthen standards for subprime mortgages by regulating the mortgage brokers and all originators under 

TILA by establishing on behalf of consumers a fiduciary duty and 

other standards of care. 

In addition, our bill outlines standards for brokers and originators to assess a borrower’s ability to repay a mortgage, requires 

taxes and insurance be escrowed on all subprime loans, and it 

holds lenders accountable for brokers and appraisers. The bill will 

also focus on appraisers, a group that has been talked about much 

less. The bill would protect appraisers who have often been pressured into becoming silent partners in many of these scams, providing inflated appraisals at the originator’s behest. 

It is clear that the subprime market has been the Wild West of 

the mortgage industry for far too long. We need a sheriff in town. 

I want to thank all of you for being here, thank my colleagues, 

and call on Mr. Crapo for an opening statement, then my colleagues who wish to give opening statements should be prepared 

to do so as well. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much. Mr. Chairman, I appreciate the opportunity to work with you on this important subcommittee, and I appreciate this hearing today in an effort to focus 

on ending mortgage abuse and safeguarding homebuyers. I, too, 

look forward to working with you and my other colleagues as we 


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monitor the performance of the mortgage market and determine 

what, if anything, Congress should do. 

Our focus needs to be on finding the right balance. We have already had hearings in our full Committee on this issue in general, 

and the same types of horror stories as you have pointed out in the 

example from New York, Mr. Chairman, were brought up there. 

And I do not believe there is anybody in America who would or, 

frankly, who could justify the kinds of practices that have been described in these two hearings, and certainly those types of abuses 

need to be stopped. 

The question that we need to focus on is: How do we need to adjust the system? And what type of balance do we need to reach? 

Actions that we take which would restrict credit would very probably avoid the abuses that we have heard about in the hearing so 

far today and in previous hearings. Actions which go too far could 

restrict credit to those who actually would benefit from having 

credit or perhaps would have benefited from having a different 

level or different type of credit arrangement. And I think we have 

got to reach that balance where we make sure that one of the 

strengths that helps people to move into homeownership—namely, 

the availability of credit in this country—is not harmed in our effort to avoid the serious abuses about which you talked, Mr. Chairman. 

It is important to note that, in addition to the regular meetings 

and forums with mortgage and market participants, our Federal 

regulatory agencies have undertaken a number of important initiatives already in response to this issue in recent months to try to 

help address problems in the subprime mortgage market. These activities range from a recent joint statement encouraging banks to 

work constructively with borrowers who find themselves in difficulty making their mortgage payments, to their ongoing activities 

to finalize the proposed joint statement on subprime mortgage 

lending, which addresses risks relating to certain adjustable mortgages of the kind, I believe, that you are referring to, Mr. Chairman. 

Moreover, the Federal Reserve Board has initiated a review of 

the mortgage disclosures required under the Truth in Lending Act, 

as well as action at a recent public hearing to determine whether 

specific lending practices are unfair or deceptive and should be, 

therefore, prohibited under HEPA authority. 

I am going to be very interested as we go through this hearing 

and other hearings to get answers to these kinds of basic questions 

as to: 

One, what kind of market discipline needs to be in place? And 

is there market discipline in place today that is helping to address 

the problem? 

Number two, what type of regulatory regimes should be in place 

to avoid the abuses that we all want to avoid, while making sure 

that we still maintain a healthy and robust system of credit for 

homeownership in this country? 

Three, do we need to have more legislative authority from Congress or do our regulatory agencies and housing markets have existing authority under existing law to take the actions necessary to 

assure that the mortgage abuse is avoided and eliminated? 


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I guess, again, the question I want to answer in the end is the 

one I began with, and that is, where is the right level, where 

should the pendulum end up as we try to adjust the system in such 

a way that we do not have to talk about the kinds of stories that 

have been brought up in the hearings that this Committee has held 

so far in which it appears clear to everyone that people were put 

into loans that were designed to fail from the outset and which 

were designed to result in foreclosure, but to yield profits up front 

to some of those who were marketing the loans. 

Some have said in other hearings that there is no long-term incentive in the market for that kind of practice and that the market 

itself will correct it. Others have said that for certain participants 

in the market, there is indeed an incentive for those kinds of practices and that there needs to be a regulatory regime to assure that 

it does not continue. 

It is the answers to those kinds of questions that I think are critical to achieve in this hearing, and I will be looking for answers 

to those kinds of questions from our witnesses. 

I want to thank our witnesses for coming here today and also for 

your involvement in this important part of America. Homeownership is really a big part of the American dream, and we want to 

make sure that everyone in America has the availability of credit 

to get their hand on that rung of the American dream as best they 

can. We want to make sure that that rung, when they reach for 

it, is real and that the opportunities that they believe they are 

being offered are real and that they are not being moved into a situation which will in the end result in the kind of financial tragedies that will further deprive them of opportunities to achieve 

homeownership. 

Thank you, Mr. Chairman. 

Chairman SCHUMER. Thank you, Senator Crapo. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Thank you for calling this afternoon’s hearing. I want to thank our witnesses, who 

bring a variety of views on how to best protect borrowers from abusive mortgage practices. 

Our witnesses have been asked by the Chairman to be brief, so 

I will be as well. We face a crisis in Ohio. We have the highest inventory of foreclosed property in the country, and the problem is 

not behind us. One zip code in Cleveland, 44105, led the Nation 

over the last 3 months in foreclosure filings. This neighborhood, 

known as ‘‘Slavic Village,’’ was once a thriving working-class community, home to generations of Americans of Czech and Polish descent. This spring, it was home to nearly 800 foreclosure filings, 

and as Chairman Schumer pointed out, every filing in the neighborhood depresses the value of everyone else’s home. 

I must say I take no comfort in the observation of the Mortgage 

Bankers Association that the subprime mortgage problem is not all 

that bad if you exclude Ohio, Michigan, and Indiana. I doubt the 

people of Slavic Village do either. 

Ohio’s economy is not performing as well as those of other States, 

but the unemployment rate in Ohio has actually dropped over the 


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past 2 years, from just over 6 percent to 5.7 percent this May. So 

that alone does not explain the explosion of foreclosure filings in 

my State. 

As the chart over there indicates, over the past 2 years foreclosure filings have tripled in the cities and the suburbs of Cincinnati in the southwest, Columbus in central Ohio, Dayton in the 

southwest, Toledo in the northwest, and in Cleveland in the northeast—the length and breadth of my State. 

Like the falling statewide unemployment rate over the past 2 

years, regional unemployment patterns also suggest it is not all 

about the economy. Union and Delaware counties, for example, 

generally relatively more affluent communities just north of Columbus, have unemployment rates today of 3.9 percent, and yet foreclosure filings have tripled in those two counties over the past 2 

years. Something more than a bad economy is driving this foreclosure epidemic. The industry must own up to its responsibility. 

I just do not buy the theory that we should let things sort themselves out in the marketplace. 

Thousands of real people whose life savings can be tied up in 

their homes are being robbed by unscrupulous appraisers and brokers and lenders. The fact that the weapon of choice is a pen 

makes it no less reprehensible. A stick-up on the street and you 

might be out a week’s pay. A stick-up at the broker’s office and you 

might be out a life’s work. 

We need to put a stop to it. We need the people in this room to 

help rather than shift the blame, both for your customers and for 

the many honest people you represent. 

Thank you, Mr. Chairman. 

Chairman SCHUMER. Senator Tester. 

STATEMENT OF SENATOR JON TESTER 

Senator TESTER. Thank you, Mr. Chairman. I also want to echo 

my comrades on this Committee and welcome you to testify here 

this afternoon. I look forward to your comments. 

I revert back to the—some would call it the ‘‘good old days,’’ but 

just the old days when, where I come from, a rural State, Montana, 

the farmer would come in to get his loan and would literally have 

hat in hand trying to get the dollars to be able, you know, to operate his business or buy a new piece of equipment or potentially 

purchase a piece of land. 

Somewhere over those last few decades, things have changed a 

lot. It seems to me that now it is far easier to get the money and 

it is far easier to get into difficulty as far as the loan process goes. 

Whether it is in subprime lending or with credit cards, it makes 

little difference to me. I think we are putting folks in a bad situation. I do not know if it is bad lending practices. I do not know if 

it is the economy. I do not know if it is consumers striking out and 

putting more pressure on the banks, although I kind of doubt on 

the latter. 

But, I guess, you know, Senator Crapo brought up some good 

points in that—you know, where do we achieve the balance—the 

balance of making capital available but yet without hanging out 

young families or, as Senator Schumer pointed out, older folks who 

are in need of money because of medical problems, or other probVerDate Nov 24 2008 06:00 Dec 16, 2009 Jkt 050322 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\A322.XXX A322

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lems? It does not make sense to me, though, as a Senator from the 

State of Montana, that banks or lending institutions, at least the 

ones that want to be around for a while, are doing themselves any 

favor by forcing people into foreclosures and potentially bankruptcy. 

And so as we move forward here, I would hope that we get some 

good answers to these questions so that we can move forward policies that make sense for middle America, for those folks who want 

to be able to own a home and live the American dream in a reasonable sense of the word and so we are not driving young families 

into bankruptcy and foreclosure. 

So, with that, Mr. Chairman, I do also want to thank you for the 

hearing and welcome everybody here, and I look forward to your 

testimony. Thank you. 

Chairman SCHUMER. Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Mr. Chairman, thank you very much for this 

hearing, and I know we want to get to our witnesses. 

Just very briefly, I think what was already said we can reiterate 

largely, but I do want to focus on a couple of data points which I 

am sure have been recited already, but they bear repeating. 

I am hearing the same thing that you have heard from States 

like Ohio and New York and the State of Montana or the State of 

Idaho, where people have had it up to here with this problem. And, 

if anything, it is getting worse. The data shows that the rate of 

new foreclosures on subprime adjustable rate mortgages jumped 20 

percent in the first quarter of 2007. Also, when you look at early 

payment defaults or delinquency rates, whatever data point you 

are talking about, it has gotten a lot worse. And I know there is 

a lot of finger pointing, and Washington is a town where there is 

a lot of the blame game going on. But what needs to happen as a 

result of this hearing and as a result of what we learn from this 

hearing is a set of solutions. 

I want to highlight the legislation Senator Schumer introduced 

along with Senator Brown and I, the Borrowers’ Protection Act— 

some basic things we should not have to legislate about, they 

should be done already: 

Establish a fiduciary duty for mortgage brokers and other nonbank mortgage originators. We have been very specific about brokers and originators, but maybe we should not have been so specific. Maybe we should have broadened that to other players in the 

lending field. 

Faith and fair dealing standard. Why do we even have to have 

that in place? They should be doing that anyway. 

Requiring originators to underwrite loans at the fully indexed 

rate; escrowing accounts, prohibiting steering. Go down the list. 

This kind of activity is an insult to the country, and it is about 

time that we cracked down on it. And I do not care who is standing 

in our way. It is about time we got serious about this. When you 

have people with a lot of money and a lot of power that are preying 

upon people that do not have the time or do not have the expertise 

to know what deal they are getting into. It can happen to anyone. 

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dcolon on DSK2BSOYB1PROD with HEARING
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educated and so-called sophisticated person, but especially someone 

who does not spend every day in the market, so to speak, and is 

not a banker or a lender. 

So I think we should be aggressive and unforgiving of those who 

prey upon the individuals who have been adversely impacted by 

this. 

So, Mr. Chairman, I am glad you have brought us together for 

this, and I am glad that my colleagues are here. But we need to 

pass this legislation, and we need to get serious so that map that 

you just saw of the State of Ohio, not to mention the other States, 

is not replicated across the country. 

Thank you very much. 

Chairman SCHUMER. Thank you, Senator Casey. 

And now let me introduce our witnesses. I will introduce them 

in the order they will speak, which is from my left to my right, except they did not put them in order on this sheet, so I am going 

to be shuffling around here. 

David Berenbaum serves as the National Community Reinvestment Coalition’s Executive Vice President. The NCRC is a national 

trade association representing more than 600 community-based organizations that work to increase fair—that work to be fair. Oh, 

here it is—fair and equal access to credit, capital, and banking 

services to traditionally underserved populations. 

Anthony Yezer is a professor and member of the Department of 

Economics at the George Washington University, where he directs 

the Center for Economic Research. He teaches courses in regional 

economics, urban economics, and the economics of crime. His research interests have included the measurement and determinants 

of credit risk in lending, the effects of regulation on credit supply, 

and fair lending. 

Denise Leonard is President and CEO of Constitution Financial 

Group, a Massachusetts-based financial company specializing in 

Fannie Mae, Freddie Mac, and HUD mortgages. Ms. Leonard also 

serves as President of the Massachusetts Mortgage Association and 

is a Vice Chair of the Government Affairs Committee of the National Association of Mortgage Brokers. 

John Robbins is the Chairman-elect of the Mortgage Bankers Association and is currently serving his fifth term on the Board of Directors for that organization. He is also CEO and a co-founder of 

the American Mortgage Network, a wholesale mortgage bank based 

in San Diego and now a wholly owned subsidiary of the Wachovia 

Bank. 

Wade Henderson is the President and CEO of the Leadership 

Conference on Civil Rights, the Nation’s oldest and most diverse coalition of civil rights groups that includes over 180 organizations. 

In addition, he currently sits on the Board of Directors of the Center for Responsible Lending. Prior to his role with the Leadership 

Conference, Mr. Henderson served as the Washington Bureau Director of the NAACP and Associate Director of the Washington office of the ACLU. 

Alan Hummel is Senior Vice President and Chief Appraiser for 

Forsythe Appraisals based in St. Paul, Minnesota, one of the largest property valuation firms in the country. Mr. Hummel has also 


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served as the National President of the Appraisal Institute, and as 

a member of their Executive Committee and Board of Directors. 

Pat Combs serves as President of the National Association of Realtors. NAR is America’s largest professional association representing more than 1.3 million members of the residential and 

commercial real estate industry. Ms. Combs further serves as Vice 

President of Coldwell Banker-AJS-Schmidt, the second largest real 

estate company in Michigan. 

And last, but not least, is Michael Calhoun, President and Chief 

Operating Officer of the Center for Responsible Lending, a nonprofit research and policy group committed to protecting homeownership by working to eliminate abusive financial practices. CRL has 

led efforts through research and policy advocacy to combat predatory lending and has worked for regulatory changes to require responsible practices among lenders nationwide. CRL is an affiliate 

of Self-Help, a nonprofit that both makes direct loans to homeowners and is also active in the secondary mortgage market. SelfHelp has directly loaned over $228 million to 3,300 borrowers, and 

its secondary market activities has enabled $4.3 billion in financing 

for almost 50,000 homeowners. 

We thank every one of you for being here. In the interest of time, 

we ask people to make 3-minute statements. That is too short, I 

think, so if everyone could limit themselves to 5 minutes, that 

would be great. And then we will get into the questions. 

Mr. Berenbaum. 

STATEMENT OF DAVID BERENBAUM, EXECUTIVE VICE PRESIDENT, NATIONAL COMMUNITY REINVESTMENT COALITION 

Mr. BERENBAUM. Thank you, Chairman Schumer, and I would 

like to express my appreciation to all the Members of the Subcommittee—Senators Crapo, Brown, Tester, and Casey. And, in 

particular, I would like to congratulate the sponsors of Senate bill 

1299. 

The National Community Reinvestment Coalition’s members, unfortunately—over 600 members in all 50 States—disproportionately 

are in many of the hot-spot areas where foreclosure and discrimination unfortunately are widespread in the marketplace right now. 

Rather than rely on my remarks, I would like to build my initial 

statement on some of the comments that you have made in your 

introductory statements. 

I think it is very telling that the market has been directing much 

of our policy right now. Wall Street dictated that, in fact, the flow 

of funds to the subprime market must cease because we are facing 

risk, and all of a sudden we are facing a meltdown in the 

securitization markets for subprime. 

Just last weekend, Bear Stearns announced that they will be infusing $320 billion into an effort to save a particular securitization 

pool. I find it ironic that when a simple proposal to allocate $300 

million to help consumers around this country, that is labeled a 

‘‘bailout,’’ when, in fact, the market is protecting itself already. 

That has been the problem. For the past 5 years, community 

groups, consumer protection groups, fair lending groups, and all of 

our members in the National Community Reinvestment Coalition 

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writing that not only endangered communities, their tax bases, 

their municipal governments, their ability to, in fact, have sound 

services and celebrate homeownership, but was going to impact on 

the safety and soundness of our banking institutions themselves. 

Those cries for action fell on deaf ears, and here we are today. 

There are many reasons for why we are where we are at. Including in our testimony are studies looking at disparities in lending, 

both controlling for credit and examining HMDA data, looking at 

the impact of prime versus non-prime lending. Community groups 

and CRA advocates celebrate prime lending. Do not believe any 

other statement that to realize homeownership we have supported 

non-prime or, in fact, non-traditional products. That is a myth and 

untrue. 

A 46-percent rate of discrimination by mortgage brokers in 10 

cities that NCRC tested around the country. Within that data, brokers stating, ‘‘Don’t worry. We have appraisers who will work with 

us to meet marks.’’ Widespread pressure brought on responsible appraisers who are part of the checks and balances in our system. 

In fact, we have a regulatory failure here on a level that is, 

frankly, putting the economy at risk, and it is not simply a nonprime issue. As interest rates start to go up, it will reach the prime 

marketplace as well. 

S. 1299 will address many of the issues of concern. It is reasonable to ask lenders to play a role in watching, policing the activities 

of brokers who they work with in their wholesale channels and to 

ensure arm’s-length roles for, in fact, the appraisal industry. 

It is unfortunate today that appraisal management companies 

are opening up reports from appraisers and changing those documents. That is a clear violation of the law, but becoming a widespread practice. We need to implement laws that will ensure that 

services do not rush borrowers to foreclosure. 

In other testimony, we have spoken to law firms that are profiting from the foreclosure process and not affording consumers who 

have the ability to pay or arrange a forbearance or who should be 

afforded an opportunity for a new loan if they are inappropriately 

placed in a non-traditional product the ability to do that type of 

workout. 

We do celebrate what all of the people at this table, all the trades 

have done, and the regulators have done. The real question is: Why 

is it so late in the process? And what can we do to ensure that best 

practices and principles become the law for the future? 

Thank you. 

Chairman SCHUMER. Mr. Yezer. 

STATEMENT OF ANTHONY M. YEZER, PROFESSOR, DEPARTMENT OF ECONOMICS, GEORGE WASHINGTON UNIVERSITY 

Mr. YEZER. Mr. Chairman, Members of the Committee, thank 

you for having me. My written testimony is before you. I am going 

to direct my remarks to a few highlights. 

Chairman SCHUMER. By the way, without objection, all of the 

witnesses’ entire statements will be read into the record. I apologize for not doing that at the beginning. 

Mr. YEZER. First, the Chairman discussed instances of predatory 

lending. The vast majority of subprime lending is not of that charVerDate Nov 24 2008 06:00 Dec 16, 2009 Jkt 050322 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A322.XXX A322

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acter. I could certainly address predatory lending otherwise. I do 

not think that there is much that Mr. Bernanke regulates that I 

would classify as predatory. I have had some very dismal experience with predatory lending in my own family. Actually, it resulted 

in a death. And so I am very sensitive to it. But I am basically 

talking about subprime lending, and, of course, that is the large 

bulk of lending that has resulted in a substantial rise in defaults 

and foreclosure. 

So let me pose some questions that you should ask yourself just 

before you even think about solving that problem. 

How did we get to where we are today? Why do we have this situation now? Why didn’t we have it in 1995? In 1985? In 1975? Why 

are we having it now? 

An interesting question. The Chairman speculated on this. Well, 

guess what we did? We beat the lenders over the head, the depositories over the head, to serve the underserved. They went out and 

acquired subprime lenders. They hardly knew how to manage 

them. And we vastly increased the supply of subprime credit as a 

function of Government policy, and lots of us predicted this was 

going to result in a problem. This also resulted in knocking the 

props out from under FHA, so FHA’s share fell from—what, 12 to 

6 or 5? FHA, of course, being a primary policy that protects the uninformed homebuyer. 

OK, so that is how we got to where we are. Now, what is the beginning of a solution? Well, No. 1, maybe you ought to back off 

some of the regulations that created the problem. No. 2, what is 

a really bad solution? A new regulation that would cutoff mortgage 

credit supplies at a critical time in housing markets. You cutoff 

credit supply to housing markets, and you are cutting the demand 

for housing at a time when prices are falling. It does not get worse 

than that. Really scary. 

What should precede a new solution? The answer is careful benefit/cost analysis to assure that regulations and policies generate 

benefits that greatly exceed the cost. You can pass a regulation to 

generate the benefit. But what about the cost? I mean, if 90 or 95 

percent of these subprime folks are, in fact, repaying successfully, 

then you want to cut them off, too? I don’t know about that. I 

mean, you have a situation where a spouse discovers the other 

spouse in bed with somebody else. What do we they do immediately? Of course, they get together at the breakfast table and say, 

‘‘OK, we have got a good credit rating, so let’s do a large cash-out 

refinancing and use the proceeds to fund the lawyers for the divorce.’’ Right? That is what they do? No, of course not. One of the 

spouses goes out and maxes out all the credit cards, ruins their 

credit history, and the only way they can do a cash-out refinancing 

is in the subprime market. Otherwise, there is a forced sale of the 

house, and the kids are all disrupted. 

This is a real issue. Lose your job, your spouse, or your health, 

and you are rapidly thrown into the subprime market because the 

prime market does not want to deal with you. 

OK. A couple more background points on the current situation. 

Why do we observe high default rates? Guess what? We have got 

people lending to the people with FICO scores of 600 or less. People 

with FICO scores of 600 or less default. That is what they do. That 


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is what FICO tells us they do. Totally predictable. Why has it been 

sort of delayed? Because you can refinance people out of defaults 

as long as house prices are rising fast enough. This is all well understood. 

Is a particular loan product, the option ARM with a prepayment 

shock, responsible for the problem? No. It is the low FICO scores. 

Look, there is a paper by Pennington-Cross and Ho in which they 

basically do a proper prepayment and default analysis of option 

ARMs, and guess what? There is a big prepayment spike at 24 

months. The people know what is coming, and they prepay out of 

the option ARM at 24 months. There is not a big default spike. 

OK? 

Now, yes, some people get in trouble, but some people have a 

great experience with the option ARM and are using it really successfully. Possibly you do not want to ban something that a lot of 

people are using successfully. 

The last point is underwriting. I don’t think any of the lenders 

that Bernanke regulates failed to have good underwriters. Yes, 

predators do not have good underwriters, but you are not going to 

get at them by beating on Bernanke. 

Thank you. 

Chairman SCHUMER. Ms. Leonard. 

STATEMENT OF DENISE LEONARD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CONSTITUTION FINANCIAL GROUP, INC., 

ON BEHALF OF THE NATIONAL ASSOCIATION OF MORTGAGE 

BROKERS 

Ms. LEONARD. Good afternoon, Chairman Schumer, Ranking 

Member Crapo, and Members of the Subcommittee. My name is 

Denise Leonard. I am Chairman and CEO of Constitution Financial Group in Massachusetts. I am here today testifying on behalf 

of the National Association of Mortgage Brokers. I have been a 

mortgage broker and a mortgage lender for 17-1/2 years. Like most 

mortgage brokers, I am a small business owner with four employees. 

I appreciate the opportunity to testify today before the Subcommittee on the need to combat predatory lending practices while 

mandating a strong and competitive housing market. We commend 

Chairman Schumer’s ‘‘all mortgage originator’’ approach; however, 

we believe the value of such an approach lies in the uniformity of 

treatment between competing distribution channels. 

To give consumers real protection and not the illusion of protection, any proposed legislation should apply uniformly and in the 

same manner to all loan originators—brokers, bankers, and lenders. Whether a mortgage originator is large, small, State-regulated, 

or federally regulated, consumers deserve the same level of protection no matter which distribution channel they use. 

We have built the most competitive and innovative mortgage 

marketplace in the world, and the dynamics of that marketplace 

have changed dramatically. As recently reported in 2006, Wall 

Street had over a 60-percent share in the mortgage market. Because of this, there are no longer clear lines that divide different 

distribution channels. Today mortgage originators routinely act in 

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sumers cannot tell the difference. Bankers’ and brokers’ offices look 

alike. Most States don’t require signages that say I don’t have to 

say I am a mortgage banker, I am a mortgage broker. Bankers and 

brokers don’t take deposits, and most States do not require originators to disclose the nature of their relationship to the customer. 

Today we urge you to consider offering consumers real protection 

by requiring all mortgage originators to meet minimum standards 

of education, testing, and criminal background checks. Creating a 

fee-based national registry that is run by a Federal agency like 

FTC or HUD which includes all originators, including those working for State and federally chartered banks, lenders, and their subsidiaries. We do not want to have a safe haven for these bad actors 

to be able to continue to do business. Watters v. Wachovia has now 

left a hole in consumer protection standards that really needs to be 

addressed. Mandating that HUD adopt a uniform disclosure that 

outlines the role of the mortgage originator and his or her relationship to the consumer. Since 1998 we have urged HUD to adopt a 

uniform disclosure, outlining for consumers the role the mortgage 

originator is willing to take. 

Many things have happened in the marketplace. Many things are 

to blame. We would like to see—you know, one foreclosure is one 

too many, as far as we are concerned, and on behalf of NAMB, I 

am here today to say that we stand ready to be your partner in 

designing and implementing these important consumer protections. 

Thank you. 

Chairman SCHUMER. Thank you. 

Mr. Robbins. 

STATEMENT OF JOHN M. ROBBINS, CHAIRMAN, MORTGAGE 

BANKERS ASSOCIATION 

Mr. ROBBINS. Thank you. MBA shares the commitment of this 

Committee to assuring protections for consumers against abusive 

lending. The challenge for policymakers is to balance the need to 

assure consumer protections against the need to assure the availability of credit. Good lenders do not trick borrowers. Good lenders 

qualify borrowers on their ability to repay that debt. 

Every foreclosure is a personal tragedy in which no one wins. 

Out of 75 million homeowners, approximately 370,000 have a 

subprime ARM and are in trouble. Far fewer of that number will 

ultimately face foreclosure. Therefore, any solutions should be narrowly tailored to address the problems and not adversely affect the 

larger mortgage market. 

The problems associated with the subprime market were driven 

by a number of factors: overcapacity of capital, a drop in home 

price appreciation, and an increase in unemployment in specific regions of the country. A current report by the JEC confirms this 

view. Make no mistake, though. Bad loans were made. 

The problems of the market are being addressed by Chairman 

Dodd through the leadership of market participants as well as by 

Federal regulators who are tightening regulatory requirements. 

MBA is proud of its participation in the Dodd summit and is 

achieving results for homeowners by implementing the principles 

that resulted from that summit. 


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While we agree with the broad intent of S. 1299, the outcome it 

would mandate will unnecessarily diminish the availability and affordability of mortgage credit. Specifically, the subjective standards 

in S. 1299 would impose significant liability risks. The bill’s underwriting criteria will force lenders to eliminate or disadvantage 

many mortgage financing options that have helped contribute to 

the near record level of homeownership in this country. 

S. 1299 also makes a lender liable for acts of an independent 

mortgage broker over which the mortgage lender has no control 

and which likely occurred before the lender even purchased the 

mortgage. MBA believes that, in addition to assuring the availability of mortgage credit, there are three things that the Government can do to help protect consumers: first, make financial education a priority in this Nation; second, simplify and make more 

transparent the mortgage process and the functions and fees of key 

professionals; third, achieve a strong and a balanced uniform national standard for mortgage lending with increased consumer protections and more accountability for mortgage professionals, including much better licensing requirements and establishment of a national registry to help protect against bad actors moving from place 

to place. 

Sound national regulatory standards for mortgage professionals 

are essential steps to establishing stronger mortgage lending protections for borrowers. 

Thank you. 

Chairman SCHUMER. Mr. Henderson. 

STATEMENT OF WADE HENDERSON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, LEADERSHIP CONFERENCE ON CIVIL 

RIGHTS 

Mr. HENDERSON. Thank you, Chairman Schumer, Ranking Member Crapo, and Members of the Subcommittee. I am Wade Henderson, President of the Leadership Conference on Civil Rights. I am 

also the Joseph Rauh Professor of Public Interest Law at the University of the District of Columbia Law School, and I am honored 

to testify in today’s hearing on protecting homeowners and eliminating abusive and predatory mortgage lending practices. 

Now, like all of us, I am troubled that today’s hearing is necessary. For many years, the civil rights community and consumer 

groups have argued that the modern mortgage lending system is 

broken, that traditional lenders have abandoned their fiduciary responsibility to many of the communities they serve, that greater 

enforcement of existing consumer protections was needed, and, finally, that the subprime mortgage lending system, which should 

work in a complementary way with traditional lenders, has in some 

instances become the primary source of mortgage lending and promoted unsound and abusive loans. 

The impact of these interrelated problems on both borrowers and 

our entire economy is now being felt. My remarks today will focus 

on the national crisis in subprime mortgage lending foreclosures. 

Now, you know, look, we strongly believe that responsible 

subprime lending does serve a valuable and necessary role in creating opportunities for people who might otherwise never own a 

home or who wish to use their homes as collateral for important 


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economic needs. The basic problem we face today, though, is that 

the responsible part of responsible subprime lending has given way 

to a high-risk profit motive that jeopardizes the future of some of 

the most vulnerable members of our communities and our constituencies. 

In recent years, we have witnessed an explosion in the abuse of 

legitimate but risky mortgage products, such as the so-called 228 

loan, and rapid abandonment of the use of sensible lending practices. As we are now learning, when unsafe or predatory loans are 

made on a widespread basis in a volatile housing market where 

supply far exceeds demand, yet where prices have been driven up 

to unsustainable levels through widespread speculation and fraudulent appraisal practices, you have a meltdown just waiting to happen. 

Now, of course, we still have yet to determine the full impact of 

the current crisis. So far, one thing is clear: the number of foreclosures on subprime mortgages has been rising fast and will almost certainly keep rising. The Center for Responsible Lending, a 

member of the Leadership Conference which we will hear from 

today, suggests that perhaps as many as 2.4 million subprime 

mortgages could fail in the next several years. If that happened, we 

indeed have not just a crisis but an absolute disaster. 

The Leadership Conference is particularly concerned about rising 

foreclosures among African Americans, Latinos, and low-income 

households. As Chief Justice John Marshall once said, ‘‘The power 

to lend is the power to destroy.’’ So minority and low-income communities have long been targeted by a wide range of predatory 

lending practices that strip borrowers of what little wealth they 

have, prevent them from getting more affordable credit in the future, making them especially vulnerable to the wave of unsound 

mortgage lending practices in recent years. 

I will not go through the specific disparities between African 

Americans, Latinos, and white borrowers. I think my colleague Mr. 

Calhoun will emphasize that. But I think it is very clear there is 

clearly a racial disparity, one that seems to suggest individuals are 

being steered into subprime loans who happen to be African American and Latino. And while we remember here that not all 

subprime loans are predatory, it is evident that race or ethnicity 

of borrower—factors that should never play a role in lending decisions—frequently determine the cost of a mortgage loan. And as 

foreclosures continue to increase, minority communities are likely 

to be hit especially hard as a result. 

Now, how the growth of subprime foreclosures will affect the 

economy at large is still difficult to predict. But as indicated by 

Bear Stearns’ announcement last Friday that, using its own money, 

it was bailing out a $3.2 billion hedge fund that was failing due 

to subprime mortgage collapse, an announcement that sent shock 

waves of concern through the financial world, we are beginning to 

see some very troubling signs. 

It is tempting to point fingers and lay blame to a now disastrous 

situation. Depending upon whom you ask, mortgage lenders blame 

brokers, brokers blame appraisers, appraisers blame realtors, realtors blame developers, and borrowers blame all of the above. But, 

of course, it does not help that our society is virtually hooked on 


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easy access to credit and that people hoped, basic laws of economics 

notwithstanding, that the good times of the housing boom would 

last forever. 

Ultimately, we believe that the blame should not be laid on any 

one group or sector, but on the fact that the entire subprime mortgage lending system, as we currently know it, is broken. The legal 

and regulatory structure that governs mortgage lending has simply 

failed to adapt to the widespread changes that have taken place in 

the subprime market in recent years. 

Now, I am encouraged that many stakeholders—— 

Chairman SCHUMER. Please conclude your remarks. 

Mr. HENDERSON. I will wrap up—have begun to do voluntary efforts, but let me make one last point, and that is particularly clear. 

We at the Leadership Conference are encouraging lenders to take 

another very important voluntary step, and that is, an immediate, 

though temporary, moratorium on all foreclosures on subprime 

mortgages that include payment shock provisions. That would 

allow lenders to work with deserving homeowners to help them 

keep their homes by putting them on more sensible loans. 

Now, obviously some borrowers use subprime loans hoping to 

simply get rich during the real estate boom, but a moratorium, a 

temporary moratorium, is vital to finding and helping borrowers 

who truly deserve relief. 

My last point, Senator Schumer, is that we support the bill, S. 

1299. We think it is an important step. We in the civil rights community are proud to be associated with its introduction. 

Chairman SCHUMER. I am glad I did not cut you off. 

[Laughter.] 

Mr. HENDERSON. Thank you. 

Chairman SCHUMER. Mr. Hummel. 

STATEMENT OF ALAN E. HUMMEL, SENIOR VICE PRESIDENT 

AND CHIEF APPRAISER, FORSYTHE APPRAISALS, LLC, ON 

BEHALF OF THE APPRAISAL INSTITUTE 

Mr. HUMMEL. Mr. Chairman and Subcommittee Members, America’s professional appraisers thank you for addressing the problems 

in the mortgage industry. The current mortgage crisis with property flipping, fraud, foreclosures, inappropriate pressure, and bad 

consumer advice is sending shock waves through our communities 

and our economy. This issue demands bold action. 

Because honest appraisals and fair dealings are essential for the 

legitimate mortgage process, effective reform demands that pressure on appraisers to report predetermined values must stop. Much 

of the problem comes from the way that the real estate financing 

industry is structured. It is a house divided. Well-regulated financial institutions perform pretty well. Unregulated mortgage originators do not. 

Playing by the rules, legitimate sectors in the mortgage industry 

compete with the free booters cutting corners. Despite decades of 

effort, pressure on appraisers has doubled since 2005. Too often, 

appraisers feel pressure to doctor their valuations so that deals can 

go through. 

I have been pressured. I have said no to this pressure. I have lost 

jobs because I have said no. I have not been paid for assignments 


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that I completed because I did not complete the reports to the client’s direction. I have been threatened to be blacklisted if I did not 

remove certain information from appraisal reports that I felt was 

necessary to produce credible, important facts for secure and fair 

lending decisions to be made. 

Recently, a broker client e-mailed me and complained that I had 

mentioned a rotting porch in a particular property that I appraised. 

The house had numerous problems, and they had focused on the 

fact that within the appraisal report, we had taken a picture of 

where we had actually stepped through the floor of this porch. We 

took a picture of the hole, showing the rotting that was going on 

in this house. The e-mail says, ‘‘Don’t you know Appraisals 101? 

Don’t you know that if you put that in the appraisal report, I can’t 

make the loan I want to make? How are you going to fix this for 

me?’’ 

His solution was simple: Put a rug over the hole in the floor. 

Don’t talk about it. 

I was being pressed literally to sweep a serious problem under 

the rug. As an appraiser, I cannot do that. 

Sometimes coercion is hard to document. Just a hint in a conversation. Other times it descends into threats that ‘‘You will never 

work in this town again.’’ 

The time has come for a comprehensive approach of lender accountability to stop mortgage abuse. S. 1299 addresses many of the 

appraiser independence issues that we face. These reforms, along 

with other actions, include the Federal Reserve implementing an 

anti-coercion provision in its definition of ‘‘abusive lending practices,’’ States developing appraiser independence rules modeled on 

those of the Federal banking regulators, strict enforcement of 

present rules, and better education of consumers, lenders, and others. These measures together can set the industry straight. 

Senators, an independent appraisal is crucial to maintaining the 

integrity of the mortgage loan process. I urge you enact laws so we 

can do our jobs, not to sweep problems under the rug. 

Thank you for the opportunity to speak to you today about this 

important issue, and I am happy to answer any questions that you 

might have. 

Senator CASEY [presiding]. Ms. Combs. 

STATEMENT OF PAT V. COMBS, PRESIDENT, NATIONAL 

ASSOCIATION OF REALTORS 

Ms. COMBS. Well, thank you very much, Members of the Subcommittee. I appreciate being here today to testify. My name is Pat 

Combs, and I am Vice President of Coldwell Banker-AJS-Schmidt 

in Grand Rapids, Michigan, and the 2007 President of the National 

Association of Realtors. 

Realtors work with mortgage lenders every day. Most are responsible mortgage professionals who have helped millions of consumers achieve homeownership. However, some lenders have taken 

advantage of borrowers with impaired credit, charging high fees, 

steering them into more expensive loans, and offering interest rates 

that increase dramatically after the first few years of the loan. 

As a result, many of these consumers are losing their homes. As 

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est foreclosure rates in America. I work directly with buyers and 

sellers in Grand Rapids every day, and I can tell you from personal 

experience that when people lose homes to foreclosure, our communities, the housing market, and our economy all suffer. 

Abusive lending is a national problem, and it requires solutions 

that strengthen homebuyer protections. Realtors ask Congress to 

consider the following recommendations: 

First, we ask that you refer to NAR’s responsible lending principles as you consider anti-predatory lending legislation. In short, 

we believe mortgage originators should: verify the borrower’s ability to repay the loan based on all terms; underwrite loans based 

on verified income and assets with fewer exceptions; offer a choice 

of mortgages with interest rates and other fees that reflect the borrower’s credit risk; eliminate prepayment penalties or make them 

as minimal as possible; ensure appraisals are based on sound, independent valuations; and inform borrowers of how a property is valued and provide a copy of each estimate or opinion. We also suggest strengthening penalties for abusive acts. Realtors adhere to a 

strict code of ethics that ensures all parties to the transaction are 

treated fairly. We believe lenders should be held to a similar standard. 

Second, we ask you to help advance legislative, regulatory, and 

private sector foreclosure avoidance and mitigation efforts. 

Third, we ask you to consider increasing funding for programs 

that provide financial assistance, counseling, and consumer education. 

NAR has worked with our partners at the Center for Responsible 

Lending and NeighborWorks to produce our brochures on predatory 

lending and foreclosure, and I have attached some of these to all 

of the testimony. We would be happy to make these available to all 

of your constituents. 

Realtors help families to achieve the dream of homeownership. 

We support responsible lending based on sound, independent appraisals, with increased consumer protections to ensure that the 

dream our members help fulfill does not turn into a family’s worst 

nightmare. 

As the leading advocates for homebuyers, homeowners, and 

homesellers, we stand ready to work with you on this important 

issue. Thank you. 

Senator SCHUMER [presiding]. Thank you, Ms. Combs. 

Mr. Calhoun. 

STATEMENT OF MICHAEL D. CALHOUN, PRESIDENT, CENTER 

FOR RESPONSIBLE LENDING 

Mr. CALHOUN. Chairman Schumer, Ranking Member Crapo, 

Members of the Committee, you have all heard much about the crisis in the mortgage market this year. Borrowers have been sold exploding ARM mortgages, lenders have collapsed, and the negative 

impact has hurt many American communities and the economy as 

a whole. 

The Center for Responsible Lending conducts extensive research 

in this market. Last year, our research found that abuses in the 

subprime market were widespread, homeowners had been placed in 


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unsustainable home loans, and millions of families were at risk of 

losing their homes. 

In preparation for this hearing, we examined data from ten recent securitizations of subprime mortgages, loans originated after 

the current crisis began. Unfortunately, we found that these same 

mortgage abuses continue. Specifically, we found that these recent 

loans had the following features and characteristics: 

First, the exploding ARM loans continue to dominate. Nearly 

three-fourths of these recent loans were adjustable rate mortgages 

where initial monthly payments increased by 30 to 40 percent, 

even when market rate interest rates do not increase. In addition, 

these loans were typically underwritten only to the initial teaser 

rate. Almost 40 percent of these recent loans were stated income, 

low-doc loans, where the borrower’s income is not documented, 

even though most of these borrowers have paychecks and W–2s. 

Seventy percent of these loans had prepayment penalties that 

locked borrowers into bad loans and are used with kickbacks to 

mortgage brokers. 

Finally, very few of these loans—only about a quarter—have escrow for taxes and insurance, which makes the monthly payments 

appear lower, but results in financial stress when the bills come 

due. 

These practices continue because the market structure has not 

changed. First, these practices are not just profitable; they are lucrative for many mortgage originators. Most of these mortgages are 

sold to borrowers by mortgage brokers, and the number is actually 

in the subprime prime market about 70 percent. The chart that 

was shown earlier, a significant number of mortgages, subprime 

mortgages originated by national banks still come through the 

broker channel, and so that is how you get to the 70-percent figure. 

These brokers are paid bonuses for putting borrowers in higherinterest-rate mortgages than the borrower qualifies for. Brokers 

are paid at the loan closing and have little interest in whether the 

loan is sustainable in the long term. Indeed, when a borrower is 

forced to repeatedly refinance an exploding ARM mortgage, this 

flipping of the mortgage produces additional revenue for the mortgage broker. 

Second, there is an absence of substantive protections for American homeowners. Mortgages are families’ most important but 

among the least protected transactions. We at the Center for Responsible Lending commend Senators Schumer, Brown, and Casey 

for their action in introducing the Borrowers’ Protection Act of 2007 

to correct this. We are also hopeful that the Federal Reserve will 

act soon using its existing authority and mandate to stop abusive 

mortgages. 

I want to address very quickly a couple of comments that have 

been made. First, the subprime market is working well for most 

borrowers. The MBA’s own mortgage figures showed that 10 percent of all subprime ARM mortgages nationwide are presently seriously delinquent. An additional 5 percent of those mortgages are 

now in foreclosure. That is right now in 1 year. If 15 percent of the 

mortgages are either in foreclosure or serious trouble at any time, 

that adds up to a lot of families who get harmed over any number 

of years. 


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Our studies showed that as many as one in five of these borrowers will lose their home, not just enter foreclosure but lose their 

homes. These cannot be explained by the traditional disability, divorce, or job loss. Those have not doubled in recent years, even 

though foreclosures have. It cannot be explained by the unemployment figures. If you look at the seven highest unemployment figures of States across the country, four of them have above the national average for foreclosures, three of them have below the national average for foreclosures. 

But if you look at the fact that borrowers are getting exploding 

ARMs underwritten to the teaser rate, using up to 55 percent of 

their gross, not their take-home pay, with no documentation of 

their income, no escrow, and often inflated appraisals, it would be 

a shock if we were not having a foreclosure crisis. 

In summary, we are seeing the same abusive practices because 

the incentives and regulatory framework have not changed. This 

market presently works only in the same sense as the student loan 

market was working with widespread kickbacks and steering that 

was profitable for some colleges and disastrous for many students. 

States have shown that you can enact strong protections for consumers and that the subprime market will continue to thrive. The 

subprime volumes have quadrupled in the last 6 years despite increased regulation. We at the Center for Responsible Lending 

strongly support the subprime market and its continued growth, 

but it needs to become a product that enriches families, increases 

homeownership, rather than negatively hurts so many American 

families. 

Thank you. 

Chairman SCHUMER. Thank you, Mr. Calhoun, and I want to 

thank our broad range of witnesses. We will try to go two rounds 

in the questioning if we can. We hope to close by 4:30. We will try 

to limit questions to 5 minutes as best we can. 

My first question is to both Ms. Leonard and Mr. Robbins. In 

Frank Ruggiero’s case, where the broker made so much more 

money than Frank actually got on the loan, where he was not informed of the dramatic increase in the mortgage rate, so he lost— 

you know, in the mortgage payment. 

Do you believe there should be some regulation of the mortgage 

broker and of the mortgage lender in those situations, or none at 

all? Ms. Leonard. 

Ms. LEONARD. Well, I am confused as to how he would not have 

known what the fees were involved, because as a broker, I would 

have to disclose all of that yield spread premium on the good-faith 

estimate and on the HUD. 

Chairman SCHUMER. I think what happened here, because I 

know this case well, is there were a whole lot of papers with a 

whole lot of fine print. He could not understand it all, and he was 

just told, ‘‘Don’t worry. It is only going to be’’—‘‘your payment is 

going to be $1,400 a month.’’ And this is what we are getting at 

here. The—— 

Ms. LEONARD. I think it—I am sorry. 

Chairman SCHUMER. The bottom line is people are defenseless 

here, and you can—you know, it is almost like caveat emptor, and 

there is disclosure in a way that is beyond the reach, not just of 


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a few people but of many, many, many, many people. And the only 

way to deal with it is some form of responsibility. And your organization seems to feel that—I mean, it will not hurt the responsible 

people who are doing a good and fair job. It will just regulate the 

bad ones who give the whole industry a bad name. So why would 

you be against this kind of regulation? 

Ms. LEONARD. In terms of a fiduciary responsibility? 

Chairman SCHUMER. Yes, in terms of—I was asking a broader 

question. In terms of some regulation of the mortgage broker by 

the Federal Government, because right now it is very limited and 

up to States, and States do not do it. 

Ms. LEONARD. Well, I think a Federal requirement would preempt what—— 

Chairman SCHUMER. Exactly. I am just asking would your organization be willing to support such a requirement. Some kind of requirement. 

Ms. LEONARD. It depends on what that requirement—— 

Chairman SCHUMER. So you would not rule it out? 

Ms. LEONARD. It depends on what it would be. 

Chairman SCHUMER. OK, good. 

Mr. Robbins, same thing. The lender in this situation, it seems 

to me, should have some knowledge of what is happening here, and 

if the mortgagee is unwilling to pay, if the borrower is unwilling 

to pay, unable to pay, they ought to be looking over the shoulder. 

I mean, frankly, when these loans get way up into the secondary 

market, two things happen. First, they cannot keep track of them 

all. But, second, they end up paying a price. Ask Bear Stearns. But 

the broker in Frank’s case and the lender in Frank’s case are off 

scot free making record profits while he is gone. 

So why shouldn’t there be some form of regulation, some responsibility, and now to Mr. Robbins, of the lender—the lender of first 

resort. That seems to me the best way to check these bad practices 

with very little harm done to legitimate lenders. And I think a lot 

of us think—not everybody here—that the reason people do not 

want regulation is because these practices that I outlined here are 

much more widespread than, say, Mr. Yezer would have us believe. 

Mr. Robbins. 

Mr. ROBBINS. Well, No. 1, we think that the mortgage process 

needs to be revamped. No. 1, it is far too easy to hide fees, commissions, and interest rates, what you are actually paying, in the morass of forms that have been developed over the years to protect 

consumers. In fact, they do not protect consumers at all, Senator. 

I mean, bad players literally hide in this morass of legal paperwork. That is one of the reasons the mortgage bankers have adopted Project Clarity, which very simply states exactly what your loan 

is, what the terms are—— 

Chairman SCHUMER. But right now, with very little penalty, if 

the broker did not abide by that or just pushed the papers and the 

lender made the loan, they could all walk away scot free, even if 

it did not meet the standards you are voluntarily setting up in your 

organization. 

Mr. ROBBINS. We absolutely support fair dealing standards. 

Chairman SCHUMER. Why wouldn’t you support making the lender responsible to make sure that at least the loan is suitable. It 


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seems to me a fundamental—banks have to do it. Brokers have to 

do it. Why shouldn’t you folks have to do it? 

Mr. ROBBINS. Good lenders—— 

Chairman SCHUMER. No. We want to deal with the bad lenders, 

and we think there are a lot of them. 

Mr. ROBBINS. Well, I mean, good lenders, No. 1, do not trick borrowers. Good lenders underwrite loans—— 

Chairman SCHUMER. Agreed. Agreed. 

Mr. ROBBINS [continuing]. Based upon the ability—— 

Chairman SCHUMER. We are not trying to legislate for the good 

lenders. We are trying to legislate for the bad lenders, but it also 

will not hurt the good lenders. 

Mr. ROBBINS. Well, I think if I read your bill correctly, you are 

saying establish something that already exists with a good lender, 

which is a responsibility or a fair dealing responsibility, and—— 

Chairman SCHUMER. Or a suitability standard. 

Mr. ROBBINS. I mean, I can tell you that good lenders today manage mortgage brokers—— 

Chairman SCHUMER. So can I just get this—so you would not oppose the kind of standards in our bill? 

Mr. ROBBINS. No. 

Chairman SCHUMER. Good. Glad to hear it. Next question—well, 

I am over my time. I will wait until the second round. 

Mr. Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. I suppose 

that—perhaps, Mr. Robbins, this question is best for you, or Ms. 

Leonard. But according to a Bloomberg article on June 13th, the 

closing or sale of more than 50 mortgage companies and stricter 

credit rules will reduce subprime lending to $350 billion this year, 

a 47-percent drop from the $665 billion that the industry lent in 

2005, and that is according to a Washington Mutual analysis. Are 

you familiar with that? And do you believe that that kind of a reduction in subprime lending is occurring? 

Mr. ROBBINS. Yes. 

Ms. LEONARD. I am not familiar with it, but I do believe yes. 

Senator CRAPO. And what do you attribute that reduction in 

subprime lending to? 

Mr. ROBBINS. Principally to the fact that the market has really 

already moved to punish lenders that became too aggressive in 

their products and programs. I mean, there are two lenders that 

have currently failed that accounted for close to about a 50-percent 

market share of, you know, essentially bad loans that should not 

have been made, and I am talking specifically about the 100-percent no-income, no-asset subprime loan, let alone the other 48 and 

the market share that they contributed. 

So the market has already moved to punish the players pretty 

substantially. It wiped out their shareholders on that product. That 

100-percent loan is not available in the marketplace. But, in fact, 

the pendulum has swung much further to a point where it has also 

affected—it is affecting underwriting and underwriting products 

and programs in the primary markets as well. 

Senator CRAPO. Ms. Leonard, would you agree with that? 

Ms. LEONARD. I agree with that, and what it has done—and the 

fear is, as you stated earlier, if the pendulum swings too far in the 


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opposite direction, that the very people that we need to help who 

are facing, you know, possible increases in their loan adjustments, 

those products and programs will no longer be available to be able 

to do that. 

While we agree that, you know, the stricter guidelines should be 

there and there has been a huge market correction that has taken 

place, it is trying to keep that balance, as you said. 

Senator CRAPO. All right. Thank you. So I guess in the market 

so far, it seems to me that a 47-percent reduction in lending is a 

huge adjustment. And if I am understanding you correctly, the 

dangerous products, the ones which were being oversold, are largely in that category of those that have been squeezed out by these 

market adjustments? 

Ms. LEONARD. Yes. 

Mr. ROBBINS. Yes. 

Senator CRAPO. Ms. Combs, I would like to ask you sort of a follow-up question on that. In the same Bloomberg article that I referred to earlier, it states that subprime mortgage lenders have 

tightened the credit guidelines so much that they are squeezing 

about 500,000 first-time buyers out of the market, and that is according to the National Association of Home Builders. Does that 

track with your experience or your understanding? 

Ms. COMBS. I had not seen the report. I do not know that. I am 

finding that a lot of our first-time homebuyers are reaching toward 

FHA, and we are hoping that we can pull that FHA modernization 

bill out and get that rolling, because I think that is going to be a 

real positive thing to use as we move forward without some of the 

subprime products that are out there. So we are hoping that that 

is going to really energize that first-time home market. 

Senator CRAPO. Thank you, and I agree with you on that FHA 

reform. I think that is going to be a critical part of the focus that 

we need to pay attention to here. 

I have got only a minute left, and I just wanted to toss out—and 

I think maybe Mr. Calhoun and Mr. Yezer and Mr. Robbins and 

Ms. Leonard or others may want to jump in on this. I seem to get 

a lot of different competing information about how many foreclosures are actually happening. Mr. Calhoun, you indicated 5 percent with 10 percent in danger. I am looking at another article 

coming out of the Financial Times that indicates that very few of 

the delinquent mortgages in the subprime will ever actually see 

foreclosure. And I have heard that kind of information coming from 

other sources. 

Would anybody here like to just jump in and tell me—I know Mr. 

Calhoun basically already has registered his opinion that he thinks 

that it is much higher than is being alluded to. I am curious as to 

whether any others on the panel think the numbers of foreclosures 

that we are hearing about are low or high or about what we expect 

in the market or what have. Mr. Berenbaum. 

Mr. BERENBAUM. Senator Crapo, if I may jump in, there is another troubling concern that the media is beginning to report on 

and some studies are about to come out on and, that is, consumers 

are beginning to rely on consumer credit, and, frankly, prioritizing 

paying some of their gas expenses and other expenses over their 

mortgages. 


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Senator CRAPO. In order to keep their mortgage alive? 

Mr. BERENBAUM. Well, in order to struggle to keep everything 

juggling in the air right now. And this gets to the role of the economy and also some of these more non-traditional mortgages. The 

situation is compounding, and I am afraid the numbers, regardless 

of what happens with interest rates, we have a few, a year or two 

ahead with these adjustments that are going to be very difficult. 

Senator CRAPO. Well, my time is up, but I am going to get another round. I see three or four of you that may want to jump in 

on this. I am going to come back to this when it is my turn next, 

so just get ready. 

Chairman SCHUMER. Thank you. 

Senator Casey. 

Senator CASEY. Thank you very much, Mr. Chairman. I did want 

to note for the record, which I should have noted in my opening, 

just from data from Pennsylvania, subprime adjustable rate mortgage foreclosures, the first quarter 2005 versus the first quarter 

2007, nationally 1.44 percentage—I am talking about 1.44 to 3.13, 

but in Pennsylvania, 1.59 to 2.6. So virtually almost a doubling in 

that time period. 

The first question I wanted to ask was to—actually, two, I think 

Mr. Henderson and Mr. Calhoun. Both of you referred to racial disparities, and I noted that in some of the material that we have. I 

think it bears repeating or emphasis. 

FDIC Vice Chairman Marty Gruenberg noted in a speech last 

year, and I quote, ‘‘Significant racial and ethnic differences in the 

incidence of higher-priced lending remained unexplained’’—unexplained—‘‘even after accounting for other information reported in 

the HMDA data. The Federal Reserve study found that borrowerrelated factors accounted for roughly one-fifth of the disparity.’’ 

So I think the record is pretty clear that there are some—and 

you could even highlight that more with numbers. The bias in 

subprime lending, the most recent HMDA data show that nearly 55 

percent of African American homebuyers and 46 percent of Hispanic homebuyers received high-cost mortgages. By comparison, 

only 17 percent of non-Hispanic whites got high-cost loans. So for 

African Americans, it is 55 percent, Hispanics 46 percent, for everybody else 17 percent. 

I wonder if either or both of you could comment on that data. 

Mr. HENDERSON. Well, Senator, I think that the HMDA data 

that you have recited is data that we would rely on and certainly 

it seems to confirm the very suspicions that we share with you 

with respect to the racial disparities in high-cost loans. 

The additional evidence that we have suggests that African 

Americans were 3.2 times and Latinos 2.7 times more likely to receive subprime purchase loans than white borrowers, and for refi’s, 

African Americans were 2.3 times and Latinos 1.6 times more likely to receive subprime loans. 

The evidence that we have seen clearly suggests that there is a 

racial disparity that is not entirely explained by virtue of the status, the economic status of the borrowers. We have seen too many 

instances where borrowers with prime credit end up being steered 

into high-cost loans when, in fact, they could qualify for prime 

loans, not subprime loans, and should be encouraged to do so. 


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But I think what you have seen is the absence of, in some instances, credible banking institutions in various communities and 

the overreliance on subprime loans because of their easy access and 

their willingness to fill the void that banking interests have created 

and their failure to respond. 

So we think the system is interrelated. We agree that subprime 

lending has a useful purpose, but not as the prime source of lending when other institutions have abrogated their fiduciary responsibility in the communities that they serve. 

And in response to Mr. Crapo, I think if one looks at what happened in Pennsylvania, the statistics that you cited, or go to statistics about foreclosures in Newark, New Jersey, or Cleveland, Ohio, 

or Detroit, Michigan, you are seeing a profound impact—a profound 

impact—on communities that are just beginning to, you know, recover from economic downturns that they experienced while other 

parts of the country were growing. 

And so we are relying not simply on statistical information. We 

are relying on surveys of individual families and borrowers and 

seeing the devastation in the communities in which these foreclosures are beginning to mount. It is a deeply troubling situation 

that cannot be resolved entirely by the good-faith, voluntary efforts 

of many of the people here on the panel. You need something far 

stronger and a more effective coordinated response. 

Mr. CALHOUN. If I could add something real quick—— 

Senator CASEY. Let me add something, Mr. Calhoun. I have only 

got about 30 more seconds, but I will come back in the next round. 

You referred in your testimony—I was trying to locate it in the 

written testimony. I did not, and it may be in there and I probably 

missed it. But on bonuses, can you recite that again, that information you presented on bonuses? What do you get a bonus for in the 

instances you are talking about? 

Mr. CALHOUN. Mortgage lenders have so-called rate charts that 

show required interest rates for any type of loan and any borrower 

credit score history. And they also have on those same charts figures that show how much the broker gets paid if the loan has a 

higher interest rate than the rate that the borrower qualifies for. 

And for a given loan, like the example that Chairman Schumer 

gave, those percentages can be 1 to 2 or even more percent of the 

total loan amount. So you are talking about, for example, in your 

case the broker got, I believe, a yield spread premium of almost 

close to $10,000, and that is in addition to what the borrower paid 

the broker up front for its services in helping them through the 

mortgage market. 

Senator CASEY. Thank you. I am over time. I will come back. 

Chairman SCHUMER. I will follow up if I might take the liberty 

of the Chair and ask Ms. Leonard: Do you believe that practice 

should be allowed, that the higher the interest rate that the mortgage brokers gets, the bigger bonus they should get? Do you think 

that should ever be allowed? 

Ms. LEONARD. Well, if you are talking about the yield spread premium and how we get paid, in order to—I cannot go ahead and put 

a borrower into a higher-rate loan and make more money on the 

back end without having their debt-to-income go up as a result. So 

I cannot automatically just—because I could get more money, beVerDate Nov 24 2008 06:00 Dec 16, 2009 Jkt 050322 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A322.XXX A322

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cause I could put them in a higher rate, doesn’t necessarily say 

that I would be able to. If I did that, then they would no longer 

qualify or I wouldn’t be able to get them approved. 

Chairman SCHUMER. Well, I will take this out of my time, and 

the second round will go longer. HUD did a study that showed borrowers pay about $7.5 billion in excess yield spread premiums to 

mortgage brokers. YSPs, as they are known, are fees hidden from 

the consumer, and they are supposed to be used to defray closing 

costs, and HUD indicates borrowers are overpaying by 50 percent. 

Ms. LEONARD. But they are not hidden from the consumers because we have to disclose them. We always have. We disclose them 

on our—— 

Chairman SCHUMER. You disclose them in writing in a big document? 

Ms. LEONARD. Yes. It is disclosed on the good-faith estimate. It 

has to be disclosed on the HUD. And as Mr. Robbins said in his 

opening statement, there should be transparency for all functions—— 

Chairman SCHUMER. To those of you dealing with the individuals, Mr. Calhoun, do the people ever know of this fee? 

Mr. CALHOUN. Most borrowers do not even understand they have 

just paid this. 

Chairman SCHUMER. How can it be justified? Isn’t it an incentive 

to give—40 percent of these subprime borrowers qualify for prime 

loans. Isn’t it an incentive to rip people off? And why should we 

justify it? 

Ms. LEONARD. No, it is not, because if I can qualify them for a 

prime loan and make the same yield spread, I am going to do that. 

I am going to—— 

Chairman SCHUMER. Why? You make a bigger bonus if you qualify them for a higher spread. 

Ms. LEONARD. No, I do not. Not in my market. 

Chairman SCHUMER. OK. But if somebody did, that shouldn’t be 

allowed, right? 

Ms. LEONARD. If they—— 

Chairman SCHUMER. If somebody made—if the broker made 

more money by qualifying people for a higher interest rate loan, 

even though they would qualify for a lower interest rate loan, 

should they be able to make a bonus? Not whether it does happen 

or not, but hypothetically, should that be allowed to happen? 

Ms. LEONARD. Yes, because it is not a bonus. It is a profit anyway. 

Chairman SCHUMER. OK. 

Ms. LEONARD. But the banks get to make it—— 

Mr. YEZER. Can I comment a second? 

Ms. LEONARD. Yes, please. 

Mr. YEZER. You understand that there are some cases in which 

what a broker does is trivial and the person is qualified. Usually 

when you are dealing with someone who has a lot of financial acumen, in some cases brokers have to work with households for a 

year or more in order to get them qualified because these are—they 

have to actually help them to cure their own credit history. If you 

want them to work with these people to actually qualify—— 


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Chairman SCHUMER. I did not ask that question, Mr. Yezer. You 

are not even answering the question. 

Mr. YEZER [continuing]. Then they need to be compensated. 

Chairman SCHUMER. I want to ask you the question. 

Ms. LEONARD. Can I—— 

Chairman SCHUMER. If somebody qualifies for a lower interest 

rate—OK?—and they get—— 

Ms. LEONARD. But they automatically—— 

Chairman SCHUMER [continuing]. A higher interest rate in their 

loan—— 

Ms. LEONARD. Right. 

Chairman SCHUMER [continuing]. Should the broker get an 

added bonus because they got a higher interest rate. Yes or no, Mr. 

Yezer, hypothetically. 

Mr. YEZER. The major lenders run borrowers through a 

scheme—— 

Chairman SCHUMER. I did not ask that. 

Mr. YEZER [continuing]. Which qualifies them at—— 

Chairman SCHUMER. Can you give me a yes or no answer? Can 

you give me a yes or no answer? 

Mr. YEZER. Actually, I am sorry. If a person—— 

Chairman SCHUMER. A hypothetical. Borrower A qualifies for a 

prime mortgage, OK? 

Mr. YEZER. Yes. 

Chairman SCHUMER. The broker signs him up or her up for a 

subprime mortgage at a higher rate, even though they qualify for 

a prime mortgage, should the broker get an added financial bonus 

for doing that? Yes or no. 

Mr. YEZER. The answer is no, and—— 

Chairman SCHUMER. Thank you. 

Mr. YEZER [continuing]. The major lenders run them through a 

screen so they cannot do it. They know this trick. 

Ms. LEONARD. But they don’t, and you don’t understand the process. 

Chairman SCHUMER. Ms. Leonard and Mr. Yezer, you are on a 

different planet than Mr. Berenbaum, Mr. Calhoun, Mr. Hummel, 

and probably Ms. Combs and Mr. Henderson, because everyone 

knows this happens regularly—— 

Ms. LEONARD. But if you would let me explain—— 

Chairman SCHUMER [continuing]. And we are trying to prohibit 

it. 

Ms. LEONARD. On a prime loan, if I put you in a 6.5-percent rate 

with a yield spread of 1 percent on the back and you could qualify 

for 6.75 on the back, I am going to make more money on that prime 

loan versus a subprime loan. 

Chairman SCHUMER. OK. Maybe in your business that is true, 

Ms. Leonard, but we have found instance after instance where, 

with other brokers, they make more money by getting them the 

6.75. 

Mr. ROBBINS. Can I offer—— 

Chairman SCHUMER. Mr. Robbins. 

Mr. ROBBINS. I am a wholesale lender who works with mortgage 

brokers. 

Chairman SCHUMER. Yes. 


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Mr. ROBBINS. And the vast majority of the brokers that we deal 

with do not abuse yield spread premium. 

Chairman SCHUMER. Correct. 

Mr. ROBBINS. Are yield spread premiums abused? Absolutely. 

Chairman SCHUMER. Right. Thank you. 

Mr. ROBBINS. Do borrowers understand that what they are paying in a yield spread premium? The vast majority of the time, no, 

they do not. 

Chairman SCHUMER. How many of you—raise your hands— 

would agree that there are occasions—we can argue about how 

many—where it is abused? Raise your hands. How many of you 

agree that we should prohibit it? 

Mr. ROBBINS. Let me explain why—— 

Chairman SCHUMER. Go ahead. 

Mr. ROBBINS [continuing]. Why yield spread premium is a good 

thing if it is disclosed properly: because in some cases it saves borrowers cash. And where a borrower, as an example, buying a new 

house is moving in, wants to do landscaping and other things—— 

Chairman SCHUMER. Lower downpayment. 

Mr. ROBBINS [continuing]. They will choose to take a higher interest rate because they qualify for it and save the two or three or 

four or five thousands dollars that they would pay in cash and use 

that to furnish the home. 

Chairman SCHUMER. Understood. 

Mr. ROBBINS. So there is a tradeoff, and a yield spread premium 

is a good thing, used properly. Used improperly, it is a bad thing. 

Chairman SCHUMER. No question. But it can be used as an incentive to put people at a higher mortgage rate when they necessarily would not want to be or have to—— 

Mr. ROBBINS. It could be, yes. 

Chairman SCHUMER. Especially when it is abused and not disclosed, especially when it is a first-time homebuyer, especially 

when it is someone who is not well educated in the ways of finance. 

Ms. LEONARD. But the only time it is not disclosed is when the 

banks are getting it is SRP. We have to disclose—— 

Mr. ROBBINS. No, wait a minute. You know, it—— 

Chairman SCHUMER. Mr. Calhoun, do you know of instances 

where it has not been disclosed and the borrower did not know? 

Mr. CALHOUN. There is not under present law an enforceable 

right for the borrower to get that information. 

Chairman SCHUMER. Correct. 

Mr. CALHOUN. HUD has said that it should be disclosed, but the 

borrower who does not get it disclosed has no right to take any action. 

Chairman SCHUMER. Right. Do you agree with that, Ms. Leonard? I am not saying what happens in your company. I am saying 

there is no right—that it is often not disclosed, and there is no penalty when it is not, and then the poor borrower is stuck. And that 

is what we are trying to change here, and you are arguing we 

should not, basically, because you are saying we should not regulate anything. 

Ms. LEONARD. I guess because—— 

Mr. BERENBAUM. Senator Schumer, if I may just add in—— 

Chairman SCHUMER. Please. 


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Mr. BERENBAUM [continuing]. This gets back to the Watters v. 

Wachovia issue, to have one meaningful standard that reaches all 

originators, whether they are a broker or a banker. 

Chairman SCHUMER. Right. 

Sorry. Mr. Menendez. And I have a lot of other questions, but I 

will defer to Mr. Crapo before I do my next round. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you for 

pacifying the panel before I got to them. 

[Laughter.] 

Chairman SCHUMER. Part of my job. 

Senator MENENDEZ. A moment of levity. 

Let me thank the Chairman for his leadership on this, and I 

would ask unanimous consent that my full statement be included 

in the record. 

Chairman SCHUMER. Without objection. 

Senator MENENDEZ. I am really disappointed that we are back 

here, and in my mind not all that much has changed. You know, 

we still see a tsunami of foreclosures across the country, and I am 

afraid another storm is about to hit as the adjustable rate mortgages, the mixed tranche sets and resets. And it seems to me that 

each participant in the life of the loan has to step up to the plate 

and take some real responsibility and action. 

I am personally tired of hearing that the marketplace is going to 

take care of all this on its own. It does not seem to be moving in 

that direction. If we want to quiet the storm, it seems to me that 

brokers, lenders, realtors, appraisers, credit agencies, investing 

firms, and regulators need to take a step forward. 

And so in that context, as well as that, I am seriously concerned 

about the realities of the racial and ethnic disparities that exist 

here that cannot be substantiated simply by income. If it could be 

substantiated simply by income, one would understand. But it cannot and, therefore, that is a real concern that I have. It seems to 

me that there are certain blatant racial and ethnic biases in the 

process, and turning what is for most people the majority of household wealth which comes from homeownership equity, turning that 

dream into a nightmare. 

Let me just ask, Mr. Robbins, I see the subprime market dominated by adjustable rate mortgages, and the majority of those are 

hybrid ARMs. And we see those ARMs and mortgage brokers and 

lenders use the initial low teaser interest rate to entice very often 

debt-strapped families into the loans. When the rate adjusts higher, homeowners are faced with the choice of another expense of an 

equity-stripping refinance, struggling to pay an unaffordable loan 

or foreclosure. 

So do you support underwriting loans to the fully indexed rates? 

Mr. ROBBINS. It depends on how you qualify a fully indexed rate. 

At a rate that it could achieve 7 or 8 years afterward, no. At a rate 

that—a non-teaser rate, at the rate that it should be at, the start 

rate of the loan, the fully indexed start rate, absolutely. I think 

most good lenders do that already. 

Senator MENENDEZ. OK. And in your testimony, you say that unemployment was and continues to be the main factor in the rise of 

delinquencies and foreclosures across the Nation, not mortgage 


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products. But do you see any connection between the way we underwrite hybrid ARMs and the subprime crisis we are in? 

Mr. ROBBINS. We have not seen in the database that we currently have, which is 43 million loans, or about 86 percent of all 

loans serviced, a tie directly to mortgage product. Now, foreclosures, we think foreclosures may likely continue to rise before 

they get better. Ultimately, is there—as I had said, will some result as a result of bad lending and back product? Yes. We believe 

that there were loans that should not have been made. And I was 

very clear about that. I was very clear about saying that subprime 

100-percent, no-income, no-asset loan was a loan that made no 

sense. 

Senator MENENDEZ. Because I see there are a whole bunch of 

scholars and experts, most recently in the New York Times, who 

have said that another tsunami is on the way because during the 

next 5 years, over $1 trillion in adjustable rate mortgages will 

reset. And so I look at that and I say to myself we are still looking 

at a very significant—— 

Mr. ROBBINS. Well, adjustable rate mortgages, you know, I mean, 

properly utilized, have sustained homeownership for the last 25, 30 

years in this country. Adjustable rate mortgages—— 

Senator MENENDEZ. And I think that is what we are trying to 

get at, whether in all cases they are properly utilized. 

Let me go to something, Ms. Leonard, that the Chairman was 

pursuing in a different context. Do you think that mortgage brokers have a legal duty to act in the best interests of the borrower? 

Ms. LEONARD. I think I have a duty to act in good faith and fair 

dealing with—— 

Senator MENENDEZ. I did not ask you that. Do you believe that 

you have a legal duty to act in the best interests of the borrower? 

Ms. LEONARD. I think that I do that anyway. It does not need 

to be regulated. 

Senator MENENDEZ. Well, do you believe that you have the obligation to use your most reasonable efforts to get the customers the 

best loan they can? 

Ms. LEONARD. Well, I do not have access to all of the loan programs and products, so within what I do, within the investors that 

I have relationships with, I try to do the best job for my borrower 

and put them into the best loan available to them through me. 

Senator MENENDEZ. Well, I am trying to get a sense of whether 

you believe on behalf of your association that you have a legal responsibility to use the most reasonable efforts to get your customer 

the best loan they can? It is a rather straightforward question. 

Ms. LEONARD. We do. 

Senator MENENDEZ. Is that a yes or a no? 

Ms. LEONARD. Yes. 

Senator MENENDEZ. You do, OK. Because I would hope that 

mortgage borrowers, people who arrange financing in what is often 

the family’s largest financial interest and assets, would not owe 

less of a duty to a borrower than a real estate agents or attorneys 

owe their clients at the end of the day. 

Mr. Chairman, I have other questions, but I will wait until the 

next round. 


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Chairman SCHUMER. Thank you. I just am going to read something into the record. I will have to be on my way. Mr. Casey will 

chair. But I wanted to read this in just to talk about, as Ms. Leonard seems to be the one person at this table who does not believe 

we ought to have some kind of regulation, maybe Mr. Yezer as 

well. 

This is an affidavit from somebody named Mark Baumchil, who 

worked for Ameriquest Mortgage Company. You have heard of that 

company, Ms. Leonard? 

Ms. LEONARD. Yes. 

Chairman SCHUMER. It is a pretty big one. 

Ms. LEONARD. Yes. 

Chairman SCHUMER. OK. Here is his affidavit. I am just going 

to read points of it and then ask unanimous consent that it be put 

in the record. 

‘‘When I started my employment with Ameriquest, I received 

training demonstrating and encouraging high-pressure sales tactics. Such training included watching a series of videos relating to 

mortgage sales tactics featuring Dale Vermillion. Account executives were also shown scenes from ‘Boiler Room,’ a movie about unethical and illegal high-pressure sales practices.’’ 

Then he says, ‘‘They were using it as a model, not as something 

to avoid.’’ 

Here are some of the things he says. ‘‘Ameriquest taught me and 

encouraged me to inflate the stated value of the customer’s property for the purpose of qualifying them for a refinanced loan. 

Ameriquest trained and encouraged account executives, through 

scripts and otherwise, to encourage borrowers to take out cash from 

their mortgage loans for such things as home repairs and vacations 

in order to increase the loan amount.’’ 

‘‘It was a common and open practice at Ameriquest for account 

executives to forge and alter borrower information or loan documents. For instance, I saw account executives openly engage in 

such conduct as altering borrowers’ W-2 forms, pay stubs, 

photocopying borrowers’ signatures, and copying them onto other 

unsigned documents and other similar conduct.’’ Et cetera, et 

cetera. It is a long affidavit. 

Chairman SCHUMER. Should the people who did this at 

Ameriquest have some kind of regulation, or should we just leave 

it up to them to do a good job, Ms. Leonard? 

Ms. LEONARD. They should be held accountable for their actions. 

Chairman SCHUMER. How should we do that? 

Ms. LEONARD. By bringing action against them for what they did. 

Chairman SCHUMER. Do you think there should be some kind of 

governmental regulation? Let’s say they are judgment proof. 

Ms. LEONARD. Well, how could they be judgment proof, because 

there is already regulation—— 

Chairman SCHUMER. They might be bankrupt. 

Ms. LEONARD. They are lenders. 

Chairman SCHUMER. They might be bankrupt. 

Ms. LEONARD. Remember, they are a lender, so—— 

Chairman SCHUMER. They do not have the kinds of regulations 

we are talking about here. 

Ms. LEONARD. Why don’t they? 


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Chairman SCHUMER. Because they are not on the books. Should 

they? If there are no regulations—let’s just posit there are. 

Ms. LEONARD. It should be fair for—it should be level for everyone. 

Chairman SCHUMER. Should they have some kind of regulation, 

this company? Let’s assume they have none now. 

Ms. LEONARD. If they had none, yes. 

Chairman SCHUMER. Thank you. OK. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. When I 

was ending my questions, I had raised the question of why we have 

such a disparity in terms of projections about the level of foreclosures that are currently happening and that are expected to 

happen in the future. And I noted that I think there were a couple 

who wanted to jump in on that. 

Mr. Yezer, did you want to respond to that? 

Mr. YEZER. Yes. For something like that, again, when I talk 

about benefit/cost analysis by professional economists, you have excellent staff at the Board of Governors who could get such an estimate for you. They have access to proprietary data sets that would 

get you a pretty good number and an unbiased number. So I would 

actually recommend consulting someone like that. 

Senator CRAPO. All right. Anybody else? Yes, Mr. Calhoun. 

Mr. CALHOUN. Yes, Senator. I do not think that the numbers are 

so far apart. I think that there is a lot of confusing of apples and 

oranges. And one number that you hear—and it is the one that has 

been talked a lot about today by the MBA—is the snapshot. How 

many loans are in trouble right now as we sit here? And if you look 

at their testimony on pages 6 and 8, they acknowledge that 10 percent of subprime ARMs are presently seriously delinquent and another 5 percent are in foreclosure right now. But more loans will 

be—those loans will go through the foreclosure process. In our 

analysis, we assume, like they do, and other experts, that about 

half of them will cure. But when you follow loans through the life 

of the loan, which is what we did, you find out that over the life 

of the loan, you add up all those snapshots, and it means the numbers out there range—for example, I think Lehman Brothers is 

higher than our numbers. Moody’s says 16 percent of these folks 

are going to lose their homes. We say 20. Lehman has said as 

many as 30. But it is a whole bunch of these folks at a level not 

seen since the oil field crisis and even beyond. 

Mr. BERENBAUM. There is also another issue with regard to depreciation in housing and then the overvaluation initially of the 

housing in the mortgage marketplace, which many homeowners 

now are trapped in their housing and do not have access to equity 

or are overleveraged. And that reaches into the middle class as 

well. 

Mr. CALHOUN. And if I can just add one other point that has 

been asked, do loan features make a difference? We have done research where we have held borrower credit scores and other characteristics constant and found that these abusive features dramatically increase the probability of foreclosure. For example, you can 

look at the MBA’s number, the foreclosure—the seriously delinquent rate, using their numbers as of today in their testimony 


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today, for the subprime ARMs it is nearly double what it is for the 

subprime fixed-rate mortgages. It does matter what kind of loan 

you get. 

Senator CRAPO. Mr. Robbins, did you want to respond? 

Mr. ROBBINS. Yes, I do. No. 1, the subprime loans will always 

have a substantially higher delinquency ratio than a prime one. We 

all know that going in. 

We know that the highest level of ones in foreclosure was about 

10 percent in the year 2000, in the fourth quarter of the year 

2000—pardon me, 2001. 

We know that, as I had said, approximately 320,000 loans—and 

it is a snapshot, a point-in-time number, and that will be larger 

over a period of time. The 2.4 million loans that you hear, you 

know, is thrown out as a projection, and yet using Center for Responsible Lending’s number, this is a cumulative number that has 

transpired since 1998. 

And so if you add what actually has been foreclosed upon from 

that point to this, and then say what is going to happen in the future, we would agree with that number. But it is a cumulative 

number over a long period of time. It is not what is going to hit 

us as a tidal wave in the next couple of years. There are 6.5 million 

subprime loans in this country, total. OK? Out of those 6.5 million 

subprime loans, 20 percent would be what? A million three, 1.3 

million? 

We also know that about 50 percent of all subprime loans get 

cured or do not complete the foreclosure process. And so if you say, 

OK, of all subprime loans in this country, 20 percent will go into 

foreclosure—he said be foreclosed against. What he is saying is 

that 40 percent of that number, 6.5 million, would go into foreclosure with that number to be foreclosed against. And short some 

economic catastrophe, when we know that today 83 percent of the 

people are paying—making their payment on time, we don’t see 

that number as a credible number of a long period of time. We 

think it is less than that by a substantial margin. 

Mr. HENDERSON. But even if Mr. Robbins is correct about the 

numbers, even if he is entirely correct about the numbers, the selective impact of these foreclosures on communities in which individuals, companies have created loans that—or marketed loans 

that have significant flaws has been devastating. 

Again, I cite Newark as an example. I cite Cleveland. I cite Pennsylvania. I cite New York. I think there are examples in the market 

of a differential impact in some communities that, in effect, reflects 

a level of impact far beyond what Mr. Robbins has suggested. 

A blip in the market obviously is seen as a relatively minor incident for those who are examining the entirety of the market. But 

for individuals who are caught up in the morass of foreclosure, it 

is devastating. And when you have a concentrated group of those 

individuals in selected communities, the impact can be quite significant. And if you take the argument as well that unemployment 

is contributing to this problem, look at communities that are going 

through transition, either because the forces of globalization have 

affected industries in those towns or you have had significant unemployment increases. And I think you have a recipe for real disaster. 


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Mr. ROBBINS. Well, we know that 750,000 jobs were lost in manufacturing in the Rust Belt States, the five States that we cite in 

there, since the year 2000. So that is going to have a disparate effect on those communities. That is why in the State of Ohio the 

prime rate foreclosure rate is 3 times higher than the national average. 

Mr. CALHOUN. I think a really critical point, though, is that the 

numbers we are talking about understate the threat to American 

homeowners. When all of us here talk about foreclosure rates, we 

are talking about what is the risk that the borrower will lose their 

home in this particular loan. Well, subprime loans turn over very 

quickly. The average life is 30 months or less. So all of us here are 

talking about somewhere between 1 in 10 and 1 in 5 of those families losing their homes in that average 30-month period. Most of 

those borrowers at the end of 30 months do not win the lottery and 

pay off their subprime loan. A significant portion of them go into 

a new subprime loan where they are once again at risk of losing 

their home. 

If you spread this out over 10 years, well north of 1 in 3 families 

who are in the subprime market for 10 years will lose their home— 

not go into foreclosure, but lose their home, over 10 years in the 

subprime market. 

Mr. YEZER. Let me just—— 

Chairman SCHUMER. Mr. Yezer, Senator Crapo is going to do a 

follow-up. I just want to thank the panel. I must go to another 

place. 

I also want to make one other—because it was a great discussion. I am glad we had it this way with the back and forth, and 

I hope it continues when my colleague Senator Casey will take over 

the chair. 

The one other thanks I wanted to make is, this is the last hearing for somebody who has served this Committee and me and the 

people of New York and America extremely well, and that is 

Carmencita Whonder, my banking person, who is going on to other 

things. So I wanted to thank her for her service on the record from 

all of us. So thank you. 

[Applause.] 

Chairman SCHUMER. The record will show loud applause. 

[Laughter.] 

Senator CRAPO. Mr. Chairman, could we also have unanimous 

consent to keep the record open after the hearing for further questions? 

Chairman SCHUMER. Yes, and that has been done, and we will 

submit written questions. We all have some. Thanks. 

Senator CRAPO. Thank you. And I asked the Chairman for permission, before he leaves, to just have one follow-up, even though 

my time has been far exceeded. 

Mr. Calhoun, I wanted to be sure I was understanding you right. 

Are you telling me that in the subprime market 1 in 3 persons who 

obtains a subprime loan will lose their home? 

Mr. CALHOUN. If they are in the subprime market over a 10-year 

period. And then during that time, a typical subprime borrower 

would refinance as many as three times during that 10-year period. 


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Senator CRAPO. But at some time, if they stay in for more than 

10 years, at some time they will lose their home. How many people 

actually do that? What percentage? 

Mr. CALHOUN. The number—— 

Senator CRAPO. You are not saying that one-third of all subprime 

loans are resulting in successful foreclosure? 

Mr. CALHOUN. To be clear, our projections based on—we use 

Moody’s housing appreciation projections. We project that 1 out of 

5 subprime borrowers will lose their home—not just go into foreclosure, but lose their home in their current loan. Fitch projected 

that that would be 12 to 16 percent, because they use more optimistic housing projection numbers. We use Moody’s numbers. Lehman Brothers projected it would be even higher than what we projected. 

But if you look at a borrower, which many subprime borrowers 

do, and if you talk to the brokers here, I think they will confirm 

this, many subprime borrowers refinance from one subprime loan 

to another, and all of these foreclosure rates we have been talking 

about today are how many are going to lose it in that current loan, 

which is typically a very short-lived loan. I do not think there is 

any dispute on this panel about how—— 

Senator CRAPO. You are not saying they refinance. You are saying they lose their home. 

Mr. CALHOUN. Yes. 

Senator CRAPO. Mr. Robbins. 

Mr. ROBBINS. Well, No. 1, we know historically that if a borrower 

stays in the home 18 months, their chance of being a very successful homeowner is increased dramatically. 

No. 2, approximately 50 percent—and this is, again, according to 

some of our major servicers, and I want to reiterate that we represent 43 out of 50 million homeowners in the United States, so 86 

percent have been producing these numbers for 30 years. That 

about 50 percent of subprime borrowers in a couple major portfolios 

refinance into prime loans. And of the remaining 50 percent, 25 

percent refinance into a subprime fixed, and the other 25 percent 

refinance into another subprime, in this case a 228 or a 327, when 

the reset date occurs. 

And so we think from what we see in those specific cases, what 

history has taught us about loan modifications, which can be used 

in about 80 percent of the cases where a borrower will work with 

us and respond. With the industry we think that the numbers 

being utilized and thrown out today are sensationalized to a great 

degree. 

Senator CRAPO. Well, I see my time is far gone. I appreciate the 

indulgence of my colleagues. Thank you. 

Senator Casey [presiding]. Thank you, Senator. 

Mr. Robbins, I want to get back to you. I know you have been 

the subject of a number of questions and it has been an interesting 

exchange. 

You have been to my office and to others over the last couple of 

weeks going back, in my case several weeks. I want to direct this 

to you. You have a job to do here today and you are representing 

your point of view. 


dcolon on DSK2BSOYB1PROD with HEARING
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But I do want to, first of all, point out on page 12 and 13 of your 

testimony. You cite three things that should happen here. No. 1, 

borrower education. No. 2, that the MBA believes simplification of 

the mortgage process and all necessary consumer information 

would make it much easier for an empowered consumer to navigate 

the market and such improvements are long overdue. That is No. 

2. No. 3 is uniform lending standards. 

So we are talking about borrower education, all necessary consumer information. And No. 3, uniform lending standards. They 

are the recommendations. 

I have to say, after listening to the testimony today, after listening to the questions that were asked, after discussions with you 

and a lot of other people over these many weeks now, I have to say 

these three recommendations fall, I think, far short of what needs 

to get done. Because when I look at these, and I want to give you 

a chance to comment, when I look at these, when I—first of all, 

borrower education, I think that is really, really trying to shift the 

blame here, frankly, to borrowers who are not informed enough. 

But we can debate that a long time. I just think you are wrong on 

that. 

But the other two, necessary consumer information and uniform 

lending standards, I think that is exactly what we—not just contemplated in the legislation that I am a cosponsor, but I think it 

is very specific. We talk about establishing a fiduciary duty for 

mortgage brokers and other non-bank mortgage originators. 

Two, create a faith and fair dealing standard for all originators. 

Three, requiring originators to underwrite loans to the fully index 

rate. And applying, in essence, throughout this legislation, truth in 

lending requirements. 

Now I do not think there is any difference, and in fact I think 

this gets to it much moreso than your recommendations do. Because if you are going to talk about all necessary consumer information and giving as much information as possible about uniform 

lending standards, what else are we talking about here? 

Mr. ROBBINS. Well, let me expand on the three areas, because it 

was originally said OK, what will it take to help reduce the predatory lending done in the United States? And the Mortgage Bankers 

Association came up with three areas that would help dramatically. 

The first is consumer education. And it really is more than—it is 

fundamentally getting to the heart, including education if you remember our conversation in your office, about educating youth in 

this country. We need a financial literacy court to be taught in high 

schools in this country. 

And it is not that any single one of these is the right answer. 

It is a collection of all of them. 

Senator CASEY. Well, let me just interrupt for 1 second. I think 

we can get a lot of agreement on that. But I do not think that is 

the cure. You are going to identify three cures to the subprime 

lending—— 

Mr. ROBBINS. But each of them by themselves—— 

Senator CASEY [continuing]. Fiasco or crisis—— 

Mr. ROBBINS [continuing]. Is not the answer. 

Senator CASEY. I think that in the top three. 


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Mr. ROBBINS. I think it is one of the areas that we could help 

is making, when creating smarter consumers, the same ones that 

are subject to those credit cards and that rash of consumer information when they come out of high school and creating better consumers, so that they can shop mortgages. 

No. 2, it has to do with truth in lending. What you talk about 

is changing the process so that the process is crystal clear to borrowers. You know, our responsibility is certainly to educate them 

on the product that they are choosing. But what they need to do 

is make sure they understand that product, they understand what 

the payments are, they understand what the risk and rewards of 

that product are so they make an education decision on that product. 

The current system does not allow that to occur because it disguises all that information. And ultimately the chairman of Fannie 

Mae said the same thing. He said he recently bought a house, 

signed his name 45 times, and found four forms he could not understand in the process. 

Last, we said the uniform national standard created—that affects 

all lenders the same nationwide. But part of that process was the 

licensing of mortgage brokers and bringing them into a regulatory 

constraint of some time so that—we thought that that also, testing 

the same things that we have heard from them today, would help 

the process substantially. 

Senator CASEY. And I do not want to abuse my privilege as the 

temporary chair, but I will get a little more time. Senator 

Mendendez deserves time and kudos for patience. 

Mr. Henderson, I want to have you weigh in on this but again, 

there is a question that we can deal with today or you can submit 

more testimony, written testimony for the record. But what is 

wrong with a fiduciary duty for mortgage brokers? What is wrong 

with faith and fair dealing for all originators? What is wrong with 

fully indexing the rates? 

Mr. ROBBINS. I do not think you heard me disagree with any of 

those. 

Senator CASEY. I mean, I think they are pretty basic and they 

are usually part of every faith and fair dealing and real estate 

transaction right now with banks. 

Mr. ROBBINS. Our industry agrees with faith and fair dealing. 

Our industry, I mean, again, depending on a fully index rate, it depends on how you define a fully index rate. 

Senator CASEY. Are you saying you endorse part of this bill? 

Mr. ROBBINS. I am saying there are parts of this that I like very 

much. 

Senator CASEY. That is good. I am glad we can establish common 

ground on that. 

Mr. ROBBINS. No, absolutely. 

Senator CASEY. I want to let him get to this. I will try to get next 

to you. 

Mr. HENDERSON. Look Senator, we would support the three recommendations that Mr. Robbins has discussed. But they are not responsive to the problem of the crisis in subprime lending. So let us 

put that aside. 


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Mr. Robbins never mentioned, for example, the elimination of 

prepayment penalties. 

Mr. ROBBINS. I would like to talk about it. 

Mr. HENDERSON. That really load some of these loans with penalties that borrowers are simply unaware of and simply cannot afford to pay. He did not talk about, for example, eliminating the 

yield spread premium with respect to bonuses that mortgage brokers may get. While he supports licensing and some element of regulation, you did mention that, it was not part of the three essential 

elements that he listed as his recommendations which we think are 

especially important. 

And in response to Senator Menendez’s question about whether 

mortgage brokers should have a fiduciary responsibility to provide 

the best loan, the most suitable loan for the borrower that they 

represent, the acknowledgment of an ethical duty that, indeed, one 

or two brokers may follow is different from a standard that is universally applied to an entire industry. 

In our view, there is something more that is needed beyond the 

kind of voluntary compliance that we have talked about here today. 

We are not interested in trying to over regulate the market. We do 

not believe that the market works best under the heavy thumb of 

regulation. But what we are seeing here today certainly is the opposite of the notion of some regulatory interference in the market. 

We have seen an absence of regulatory involvement, an abdication 

of the spirit if not the letter of the way in which these laws are 

to work together in an integrated fashion to ensure a fair marketplace. 

I agree with Chairman Schumer. There is a touch of caveat 

emptor, let the buyer beware, in terms of how this process works. 

And it is simply not working well. And the crisis we are seeing 

today is an example of that. 

That is one of the reasons that we have urged for a very modest 

temporary moratorium, a voluntary moratorium, on the part of the 

lenders who are holding the bulk of these subprime loans that are 

scheduled to be triggered in a way that will be harmful. We think 

taking a deep breath, allowing some effort to coordinate the voluntary efforts that individual lenders have taken, is an important 

step. 

We have not argued the need for regulation immediately to examine this issue. But the failure of the industry collectively to 

come to terms with the nature of this crisis leaves us no choice but 

to recommend some level of intervention beyond what we have 

seen. That is one of the reasons we think your bill is such an important tool and we hope that Congress moves immediately to try 

to enact it. But we are also hoping that the industry itself will 

come to terms with the fact that it needs to do more than the kind 

of voluntary efforts which have been undertaken, which are not 

really responsive to the entity of the problem. 

Mr. ROBBINS. If I could offer one comment—— 

Senator CASEY. I have to gavel myself to a close. I want to let 

Senator Menendez—I will come back, because I have got more. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

I just want to pursue three different things as quickly as possible. You know, when I left off with Mr. Robbins, we were talking 


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about the Times article and the experts that said that another tsunami is on the way because over the next 5 years $1 trillion in adjustable rate mortgages will reset. At least as to that claim, that 

there is going to be $1 trillion in adjustable rate mortgage that 

reset, is there a dispute about that? 

No. OK. 

Now, Mr. Calhoun, I understand that that potentially can result 

in about 2 million families losing their homes. Is that a projection 

that is reasonable? Is it within the ambit? How would you describe 

it? 

Mr. CALHOUN. Again, to be very specific about that, as Mr. Robbins said, there are about 6.5 billion subprime loans out there right 

now. Our projection is that one in five of those the borrower will 

lose their home before that loan is refinanced or paid off. 

Senator MENENDEZ. And that would mean roughly how many 

people or families? 

Mr. CALHOUN. That would be 1.3 or 1.5 million presently in the 

subprime market. 

And then, the numbers are not clear as to—there is not good 

data as to how many of those borrowers refinance into new 

subprime loans. He gave an example of some very limited data that 

was only for lenders and it did not include brokered loans, which 

tend to refinance more often. 

But if you assume that 40 percent of these borrowers, this is 

what we did in our study. If you assume 40 percent of the borrowers graduate to a better prime loan or fixed rate at the end, 

rather than refinance into another subprime loan, you end up with 

over one in three of these borrowers losing their homes before they 

escape the subprime market. 

And I do not think we can—if there are two points that we come 

out of here with, one is again, following up with Mr. Henderson’s 

comments, literally a generation of wealth accumulation in the minority communities, African American and Hispanic communities, 

are at threat here. This is the greatest threat in a generation to 

that equity that has been built up over a lifetime. 

The second is we have firm evidence that this market has not 

and will not fix itself. And I will give you three quick examples. 

One is one of the largest subprime lenders had a policy for many 

years of not paying yield spread premiums. And in fact, on its 

website, actively telling borrowers that yield spread premiums created a conflict of interest for the broker to increase their interest 

rate. So you should never pay them. 

That lender found that the brokers simply would not send him 

any loans. They would take them elsewhere and they had to reverse its policy. 

Another lender, who is now out of business, that we met with a 

year ago, acknowledged that these exploding ARMs were 

unsustainable and they were hard to justify in the market. But it 

also had come to the conclusion that if it stopped taking those exploding ARMs from brokers, the loans would go elsewhere and its 

business would fall in half. 

And last, as we heard so vividly earlier today about appraisals, 

again and again appraisers who play by the rules and try and resist the intense pressure to jimmy the numbers up are competiVerDate Nov 24 2008 06:00 Dec 16, 2009 Jkt 050322 PO 00000 Frm 00044 Fmt 6633 Sfmt 6602 E:\HR\OC\A322.XXX A322

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tively disadvantaged. They lose business. Those who try and play 

by the ethical rules in today’s market are disadvantaged and are 

hurt, just like consumers are, because there are no standards. 

It is like a football game. If you do not prohibit holding, you are 

going to have a lot of holding. 

Senator MENENDEZ. And if I may interrupt, because you are taking most of my time. 

Mr. CALHOUN. I apologize. 

Senator MENENDEZ. But I appreciate your answer very much. 

And that brings me to the question I want to go to Mr. Robbins 

on. Because there is a universe that clearly either loses their home 

or goes back again into the subprime market for an extension of 

what they hope will be an extension on their dream, it is particularly important to look at the nature of the subprime market, particularly the adjustable rate mortgages that I want to go back to. 

Because on page five of your testimony, you talk about the causes 

of foreclosure. 

Mr. ROBBINS. Correct. 

Senator MENENDEZ. And you stress economic factors. And you 

cite data from Freddie Mac’s Workout Prospector as the source of 

the information, from what I can see of your footnote. 

But our staff spoke to Freddie Mac this morning and according 

to them the Workout Prospector does not include any subprime 

loans. And so, in other words, if it does not include any subprime 

loans as its rationale for why, in fact, people ultimately lose their 

standing, it seems that the data may simply not apply to the 

subprime market. 

In addition to that, I would point out that Michael Stanton, the 

Director of the Financial Services Research Program at GW University Business School, gave a presentation this past May in 

which he said that in 2001 to 2002 the subprime foreclosures were 

an economic condition story. 

But he went on to say that in 2006 and 2007 and beyond it is 

a story of disappearing equity and rising interest rates, in contrast 

to the earlier period. I take that to mean that the rising home 

prices are no longer sufficient to bail out lenders and investors 

from the kinds of bad loans such as 228s that dominated the 

subprime market. 

If that is the case, then there should be a real concern about how 

we look at the subprime market, particularly in the adjustable rate 

mortgage, particularly as it relates to the question I asked you earlier about the fully indexed rate. Because all of these are variables 

that are clearly going to affect a very significant universe. 

Mr. ROBBINS. And I think I was clear in saying that I support 

underwriting at a fully indexed rate. 

Senator MENENDEZ. But do you know that your data does not include the subprime mortgages? 

Mr. ROBBINS. No, I was not aware that the Freddie Mac data did 

not include subprime loans. 

Senator MENENDEZ. Well, I think that affects significantly and I 

think this is a real concern. 

Mr. ROBBINS. But the data that I shared relative to the mortgage 

banking industry does include subprime loans. 


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Senator MENENDEZ. You make the comment, and I do not want 

to belabor the question, but it is under the heading subprime market troubles and perspective. 

Mr. ROBBINS. Right. 

Senator MENENDEZ. The data that you are using is not related 

to the subprime market and therefore we have got to look at mortgage products in addition to whatever economic factors. That is my 

point. 

And last, if I may, Mr. Chairman, with your indulgence, it will 

be my last question. I want to turn, just briefly but importantly, 

to this disparity. As a Hispanic-American, I find it incredibly incredible. And I think reading this whole section is important so 

that we understand the paragraph. Because I think we talk about 

the number, but it is the juxtaposition of the numbers that is a 

problem. 

‘‘The several analysis of information collected under the Home 

Mortgage Disclosure Act has shown that African Americans and 

Latino borrowers received a disproportionate share of higher rate 

home loans—’’ and this is the point I want to emphasize ‘‘—even 

when controlling for factors such as borrower income and property 

location.’’ Even when controlling for factors such as borrower income and property location. 

And that most recent Home Mortgage Disclosure Act data shows 

that nearly, as Senator Casey said, 55 percent of African-American 

home loan buyers and 46 percent of Hispanic home loan buyers received high cost mortgages. And by comparison, by comparison, 

only 17 percent of non-Hispanic whites got these high cost loans. 

So the suggestion that it is simply an income issue is false—— 

Mr. YEZER. Absolutely. 

Senator MENENDEZ [continuing]. When you control the essence of 

both a combination of factors on borrower income, property location, and you see this disproportionate effect and it cannot be explained simply on income. Then I would ask Mr. Henderson, Mr. 

Calhoun, do you have any insights into that for the Committee? 

Mr. HENDERSON. Senator Menendez, I think your question dramatically underscores one of the great difficulties that we as a Nation and we in the civil rights community have had particularly in 

trying to get a handle on the problem that we are addressing today 

and the lack of effective regulation that exists currently and our inability to rely on voluntary compliance alone to produce the kinds 

of results I think we as a nation would want. 

I mean, I do not think anyone is taking issue in challenging the 

numbers that you have emphasized today. They come from the 

Home Mortgage Disclosure Act. 

The difficulty we have had, quite frankly, is getting HMDA data 

released and made available so that we can address these issues 

in a much more aggressive and forthright manner. It really underscores what we consider to be the very modest regulatory intervention that the bill which you and the Chairman have supported, it 

seems to us would make with respect to the overall problem. 

And what I have not heard anyone say on the panel that opposes 

this kind of modest intervention, why should we continue to rely 

on a system that does not ultimately address the kinds of disparities that go to the heart of the meaning of equal opportunity in the 


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21st century? If we cannot rely on the industry itself to address 

these issues, surely then we have to take additional steps to make 

the system work more effectively. 

Senator MENENDEZ. Mr. Calhoun. 

Mr. CALHOUN. First of all, we should not be surprised by this result. In the last few years we saw this exactly same dynamic in the 

automobile financing market, where lenders were—the major finance companies paid bonuses to car dealers for increasing the interest rate on consumer car loans above what the consumer qualified for. And there the data showed overwhelmingly that the borrowers who paid the biggest penalties were Hispanic and African 

American borrowers. 

We have that same bonus system with yield spread premiums in 

the mortgage market. We should not be surprised that we get the 

same result. The result in the auto market is all the major lenders 

have now tapped those bonuses that they will pay to try to reduce 

or eliminate the discriminatory impact. 

The second thing, and I will be very quick, I would refer everyone to studies of testers that Mr. Berenbaum’s organization has 

sent out where they send out blind testing of lenders. They will 

send out equally matched potential borrowers. And over and over 

again the African American and Hispanic borrowers are quoted 

worse terms and given fewer options. And this is across a wide 

array of cities, a wide array of lenders. And they have done this 

testing repeatedly. And discouragingly, it continues to show those 

results. 

But all borrowers should support and would benefit from the 

anti-steering provision in your bill that prohibits steering people to 

loans with higher rates than what they qualify for. It happens to 

all borrowers, Caucasian, African American, and Hispanic, but particularly to the latter two groups. But all groups would benefit from 

that protection. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Senator CASEY. Thank you, Senator Menendez. 

I have two more questions. I know we are going over now. We 

will come to a close and then I want to give people another 30 seconds. 

Two questions. One, the first one for Ms. Leonard and Mr. Robbins. This question, which is I think fundamental to borrowing in 

a way that is fair and equitable and in the best interests of the borrower, frankly, escrowing for taxes and insurance, which is a common practice with prime loans. Subprimes, inherently riskier, it is 

not happening. 

A, would you agree with that part of the legislation for 

escrowing? 

Ms. LEONARD. Yes, with high loan to value loans, yes. 

Senator CASEY. Mr. Robbins? 

Mr. ROBBINS. Yes. 

Senator CASEY. Great. 

One more question, and then I will let everyone get a last word 

before we—it is five o’clock right now. 

Mr. Hummel, I wanted to get back to you about your testimony, 

which I thought was particularly striking in terms of what you 


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have experienced personally in the world of appraisals. You work 

in Minnesota? 

Mr. HUMMEL. My personal practice is in Iowa and Minnesota. 

Our offices are in 30 States. 

Senator CASEY. But whether it is Iowa or Minnesota or anywhere 

else, what is the typical process that would be triggered by a complaint by an appraiser who has been unduly pressured by a lender 

or by anyone in the process to fix an appraisal or to commit fraud, 

frankly? What is the typical process that would be triggered? What 

kind of prosecution, so to speak, can take place? 

Mr. HUMMEL. The typical process right now is one of frustration 

because there is no process. Because the lenders have a disparate, 

if even existing, regulatory structure, we do not know who to contact. We may contact a banking commissioner. We may contact a 

regulatory agency such as OTS or FDIC if they are a federally regulated bank. Those are relatively easy in order to contact. 

But it is the disparity between the States, of which there is anything from virtually registration only to a complex licensing system 

with very little enforcement. If a complaint is lodged, we may or 

may not hear anything. 

That is why we are in such support of 1299, because it does set 

forth a Federal mandate that a system will be in place that is 

equal across all States for accountability. 

Senator CASEY. Thank you. And I want to go right to left and 

just give everyone 30 seconds, lightning round. If you hear the 

gavel, you know you went too long. And then we will wrap up. 

Mr. Calhoun. 

Mr. CALHOUN. I think the lesson that comes from looking at the 

appraisals is that disclosure is not enough. In fact, it can be counterproductive if you do not have substantive standards. 

And second, even substantive standards are not enough without 

accountability. In many States across this country, it is illegal to 

pressure an appraiser to raise the number. But there is no accountability. There is no enforcement. 

That is why we, at the Center for Responsible Lending, so much 

applaud your efforts in this bill to place on the lender, who really 

is at the hub of the transaction, the responsibility to know the 

broker, to know the appraiser. That is the only way that this problem will ever be cleared up, is by creating incentives for the market 

to police itself. 

And we again appreciate your efforts to bring reform to this market. 

Senator CASEY. Thank you. 

Ms. Combs, on any topic? 

Ms. COMBS. Sure, actually this topic. I hope that we are not, at 

this point, closing the door after the horse ran out. And I strongly 

support the elimination of prepayment penalties. I think that 

would very, very highly help every one of those folks who are in— 

probably not at this point, but in the future—who are looking at 

the possibility of refinancing and/or foreclosure. 

And also, that we support every borrower that qualifies for a 

prime loan to be able to get that prime loan and not having them 

taken off somewhere else and talked into some other type of loan. 


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And finally, if there would be some way that you could take a 

look at the Internet and some of the things, the abuses that are 

happening there on a lender perspective, it would really, really 

help those of us who are trying to do a really good job in working 

with buyers and sellers and helping them get a really good legitimate loan. Because I think the Internet has done something out 

there that has put the crazies in people’s minds. 

So I thank you so much for having the opportunity to be with 

you here today. Thank you. 

Senator CASEY. Thank you. Mr. Hummel. 

Mr. HUMMEL. If anybody was not convinced and they walked into 

this room, as to the need for this legislation, they have got to be, 

by listening to this discussion. I was just absolutely amazed as the 

discussion went where we were talking about the fact that good 

people do not need laws because they are doing it right anyway. 

And I cannot agree with that more because I would work, and 

probably have worked, with just about every industry member at 

this table. They are good people. 

And my members at the Appraisal Institute, the American Society of Appraisers, the National Association of Independent Appraisers, the Association of Farm Managers Rural Appraisers, all professional organizations, who are also regulated. I work with their 

members and successfully. They are not the ones that are creating 

the problems. 

The laws need to be on the books for those individuals that are 

not doing what they should do, that are not just coercing appraisers or bankrupting consumers. That is what the law is intended 

for. That is who the law is necessary for. 

And we applaud your success in bringing the legislation this far 

and will do whatever we can to encourage it to be passed. 

Senator CASEY. Thank you. Mr. Henderson? 

Mr. HENDERSON. Thank you, Senator Casey. 

Look, the mortgage lending system is deeply flawed and we now 

have a crisis in subprime home mortgage foreclosures. The crisis is 

having a disproportionate impact on African American families, 

Latino families, low income families. And that disproportionate impact is not explained away by factors that would ordinarily justify 

such a problem. 

Voluntary compliance is necessary but it is insufficient to address the magnitude of the problem, which we have outlined today. 

And I think your bill, S. 1299, is a modest intervention in the regulatory marketplace but a necessary step that would help protect 

borrowers from being compromised in the way that we have heard 

described today. 

So we think that all of these steps are necessary and we think 

that they should be done as soon as possible. Thank you. 

Senator CASEY. Thank you. Mr. Robbins? 

Mr. ROBBINS. We support a lot of what 1299 has. We think prepayment penalties, used correctly, are very important. If they get 

the full value, consumers get a lower rate when they sign up. And 

they are used on fixed rate loans, as well as adjustable. 

S&E liability is an important issue. 60 percent of the home loans 

in this country are put in mortgage-backed securities and sold 

around the world. You cannot hold an investor 10,000 miles away 


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responsible for the origination of the loan. If you do, they are just 

going to go to another asset, they are going to buy that, and they 

are not going to buy mortgage-backed securities, which will have 

a huge disaster and credit crunch the likes that we have never 

seen if you change that. 

The forbearance is something that the market has the ability to 

do now. The market has the ability to handle these foreclosures. 

There is no resource constraint in the market to deal with this. If 

you go into a blanket foreclosure you will exacerbate significantly 

the number of foreclosures in this country. It will hurt people and 

not help them, because the clock continues to run on that. It would 

be a terrible, terrible idea. 

And the market has adjusted substantially relative to where it 

was. And that, along with a uniform national standard adopted, 

will help significantly in the issues that we have seen and correct 

the predatory lending that we have seen in the country. 

Thank you. 

Senator CASEY. Ms. Leonard. 

Ms. LEONARD. Thank you. We, too, agree with many of the features of the legislation. But what we would like to see, as well, is 

national registry so that there is not a safe haven, that there has 

to be a tracking for all of these bad actors that disallows them to 

move around from point A to point B and not be tracked. We hope 

that everyone in this industry would agree to that. 

We believe in increased professional standards with criminal 

background checks for everyone. So that again there is a way to get 

out of this industry the very individuals who have harmed people 

along the way. 

Senator CASEY. Thank you. Mr. Yezer. 

Mr. YEZER. No one disagrees that this legislation would have 

benefits. The question is costs. I could save 45,000 American lives 

a year, easily. Just require people to drive in golf carts. That is 

45,000 lives per year saved. That is a lot. 

I am not sure that passes a benefit/cost test, though. I think you 

need some—I have heard a lot of ridiculous numbers and assertions here, quite frankly. I think you really need to go to the bank 

regulators, get professional economists to help you out with all this. 

Man, the lenders are already running away from this market. In 

response to this, and the threat of litigation, if they run faster, you 

may engineer the recession of 2008. You could make the textbooks. 

Senator CASEY. I am resisting the temptation to respond, but we 

will wrap up. Mr. Berenbaum. 

Mr. BERENBAUM. Thank you very much. The membership of 

NCRC fully support 1299. We would like to see some additional 

language affording servicing protections. 

We also want to commend Senator Reed for some of his efforts 

in his bill, and particularly the data base to monitor foreclosure 

trends. Selected foreclosure in low to moderate income communities 

is a great concern to us. Often we found in the 1980’s that low to 

moderate income communities faced foreclosure more quickly, even 

though they were qualified for forbearance agreements. So the 

Reed idea is a very good one. 

And last, I do think we need to address the issue of the 

securitizers. Freddie Mac has done the correct thing in stepping up 


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and offering new standards for subprime and 228s. Others have not 

followed. As well, there are tax implications on the tranches and 

pools. If we want to keep Americans in their homes, we need to 

relax those standards so that we can keep those Americans there 

for the securitized portfolios. 

Senator CASEY. Thank you. This hearing is adjourned. 

[Whereupon, at 5:11 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 


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PREPARED STATEMENT OF CHAIRMAN CHARLES SCHUMER 

I want to welcome everyone to this critical hearing on ‘‘Ending Mortgage Abuse: 

Safeguarding Homebuyers’’ and thank the witnesses who are appearing before the 

Subcommittee today. Many of the member of this Committee, including myself, 

know first hand about the rising home foreclosures that are devastating communities in our home states. The big question is why? Is it really ‘‘the economy, stupid’’? Is it as simple as lack of borrower education? Is it a sharp rise in family financial emergencies? Or is it downright bad lending practices? 

I hope we will get to the heart of this question today, so that we can figure out 

how best to solve it. 

There are a lot of different interests represented in this room today to ensure we 

get all perspectives. 

But at least we can begin by all agreeing that sustainable home ownership is the 

key to having a strong financial future in this country. Buying a home is the largest 

purchase most families will ever make and it is the path to wealth and asset accumulation for families and their future generations. It is also critical to building 

flourishing communities in which homeowners and small businesses are willing to 

invest in their local economies, create new jobs, and contribute to the country’s economic growth. 

Yet, our mutual respect for this basic principal has not been enough to prevent 

a widespread effort to exploit the most vulnerable segments of our population by 

tricking them into signing on to loans they can ill-afford—making it virtually impossible for many to truly achieve the American Dream. 

African-Americans, Hispanics, single mothers, and the elderly are targeted everyday in predatory lending schemes and deceptive loan practices—enticed into mortgages with low ‘‘teaser’’ rates that will only reset to future payments that the borrowers cannot mathematically afford. For example, a study by HUD and the U.S. 

Treasury found that sub-prime loans were issued 5 times more frequently to black 

neighborhood households as they were to white neighborhood households. And 39 

percent of homeowners living in upper-income black neighborhoods have sub-prime 

refinancing—twice the rate of homeowners living in lower-income white neighborhoods. 

This sub-prime storm has left virtually no corner of this country untouched. You 

can’t go a day without reading or hearing about the families in New York, in Ohio, 

in Pennsylvania that are stuck in risky loans that they can’t afford, and desperate 

for a way out that allows them to preserve their home. The problem is bad and getting worse. This map shows the areas of the country with the greatest increases in 

reported foreclosures over the past two years. 

[Point to the national heat map] 

Depressed economic regions, like parts of the Midwest that have experienced significant job losses in recent years, have also been prime targets for deceptive lending practices. And even in growing states like Colorado and Georgia, unsuitable 

loans abound. According to RealtyTrac, nearly 3,000 foreclosure actions were reported in my colleague and former Chairman of this Subcommittee Wayne Allard’s 

state of Colorado last month alone. 

Before our eyes whole communities are being set up to fail when we should be 

arming them with tools to succeed. The risk of a foreclosure boom in these communities is real. In a widely publicized report, the Center for Responsible Lending estimated that 2.2 million sub-prime loans made in recent years have already failed or 

will end in foreclosure, costing homeowners as much as $164 billion, primarily in 

lost home equity. 

It is bad enough that these families that have to foreclose will lose their main 

source of financial stability, not to mention their credit-worthiness, but if these foreclosures are concentrated in a few communities, the effects would be devastating. 

Studies have shown that even one foreclosure could lower the value of nearby homes 

by almost 1.5%. That is about $3,000 in lost home value per neighbor, or $150,000 

of lost neighborhood value for just one foreclosure. It two million homes foreclose 

nationwide, our communities would lose $300 billion in neighborhood wealth and $6 

billion in local taxes that go to fund schools, roads, etc. 

So . . . the question is why is this happening? There is a lot of blame going 

around, but I think the fundamental reason is very simple. 

The catalyst behind this impending avalanche of foreclosures are risky subprime 

mortgage loans that thousands of middle and lower income Americans were tricked 

into borrowing, even though the loans themselves are designed to fail them. 

The so-called ‘‘liar loans’’ are often wrapped in complex rate terms, high fees, and 

shocking rate increases that in the near-term leave the borrower unable to afford 

rising mortgage payments. 


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I ask all of you panelists why have these loans not been underwritten at the fully 

indexed rate? 

Many in the industry participants argue that that these loans themselves are not 

to blame—it’s not the product, they say, it’s the economy . . . and that is why we 

are seeing record delinquencies and foreclosures. 

But one look at this payment chart for the most popular subprime loan in recent 

years—a ‘‘2/28 Adjustable Rate Mortgage’’—and the answer is clear. These loans are 

traps. 

In this example, the borrower starts off paying $1300 a month, which is 44% of 

his monthly paycheck of $3,000. And because subprime borrowers don’t have to escrow—this payment doesn’t even include the estimated $200 monthly payment for 

taxes and insurance. 

After just 30 months, the initial teaser fixed rate expires, and the borrower’s 

monthly payment jumps over $400. 

Then, at 36 months, it resets again, to nearly 50% higher than her initial monthly 

payment. In 42 months, assuming the underlying interest rate rises 1.5 percentage 

points, the borrower is paying $2200 a month—or 72% of their income—to service 

this mortgage. 

In order to prevent payment shocks and stave off foreclosure, this borrower needs 

to get a 63% pay raise before his mortgage starts resetting—or win the lottery. And 

the worst part about it, is that the broker knows this from DAY ONE. 

They know full well that the likelihood of the homeowner defaulting on their loan 

is high, but they don’t care because they’ve already made their money. 

I know a man from my hometown by the name of Frank Ruggiero, who was talked 

into signing on to such a loan. Unfortunately due to his weekly dialysis treatments 

he could not be here today to share his story first hand. 

In Mr. Ruggiero’s case, he was recently tricked by an aggressive broker who told 

him to refinance his mortgage of $368,000 with a new mortgage of $416,000. Of the 

$48,000 additional debt on Mr. Ruggiero’s home, he received only $5,728, and the 

balance went to closing costs. Out of this deal, the broker alone received $9,300 from 

the proceeds and received an additional fee of $11,900 from the lender as ‘‘yield 

spread premium’’ because he duped Mr. Ruggiero with such a profitable loan. 

Mr. Ruggiero is one of millions of borrowers that are getting duped into loans that 

are designed to fail the borrower and benefit the broker. 

The economy is not the problem here. It’s the product, stupid. No one should be 

tricked into signing onto a loan that is purposely designed to fail them. The very 

existence of these loans is not a sign of the market working. The fact that these 

loans are underwritten almost exclusively to borrowers that can’t afford them is a 

market failure. By some estimates, 80% of subprime loans are these ‘‘exploding’’ 

ARMS. 

And what I want to examine today is why this product even came to be, and in 

such volume. Why are nearly three-quarters of subprime loans being originated by 

independent brokers or non-bank affiliates with no federal supervision, or finance 

companies with only indirect federal supervision? 

[Point to pie graph of large share of independent brokers in subprime market] 

And why are these bad loans being sold primarily to families that already own 

home? According to the chief national bank examiner for the Office of Comptroller 

of the Currency, only 11 percent of subprime loans went to first-time buyers last 

year. The vast majority were refinancings that caused borrowers to owe more on 

their homes under the guise that they were saving money. 

The bottom line is that it should be illegal for lenders to qualify a borrower for 

a loan for anything less than its fully indexed rate. The industry must determine 

a borrower’s ability to pay. 

Subprime borrowers should also be required to escrow for taxes and insurance, 

like virtually all prime loan borrowers. Including the taxes and insurance would 

make it impossible for most to get approved for these high rate mortgages, thus the 

reason the industry excludes them. Lack of escrows will only result in borrowers returning to lenders in serious trouble or default when tax and insurance payments 

are due. 

We must put an end to these practices and now. 

I have heard one horror story after another where brokers go into communities, 

attend church services and not only offer to provide the loan, not only guarantee 

loans, but also offer to find the realtor and the appraiser. There is an unregulated 

world that is on the loose without adequate supervision—and we need to change 

that. 

One of the things I have focused on—with my colleagues Senators Brown and 

Casey—is creating a national regulatory structure for mortgage brokers and other 


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originators in addition to pushing the regulators to conduct more oversight using 

HOEPA and other relevant laws. 

In April, we introduced a strong bill, S.1299, to offer a fix to make it harder for 

irresponsible brokers and nonbank lenders to sell mortgages that are designed to 

fail the homeowner and result in foreclosure. 

My goal is to strengthen standards for subprime mortgages by regulating mortgage brokers and all originators under the Truth in Lending Act (TILA) by establishing on behalf of consumers a fiduciary duty and other standards of care. In addition, the bill outlines standards for brokers and originators to assess a borrower’s 

ability to repay a mortgage, requires taxes and insurance to be escrowed on all 

subprime loans and holds lenders accountable for brokers and appraisers. 

The bill will also focus on appraisers a group that has been talked about less. The 

bill would protect appraisers who have often been pressured into becoming the silent partners in many predatory lending scams, providing inflated appraisals at the 

originators’ behest. 

It is clear that the subprime mortgage market has been the Wild West of the 

mortgage industry for far too long. We need a sheriff in town. Thank you, I look 

forward to hearing your testimonies. 

PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ 

Thank you, Mr. Chairman. I would like to begin by thanking Chairman Schumer 

and Ranking Member Crapo for holding this important hearing today on safeguarding homebuyers. Chairman Schumer, your leadership on this issue has been 

commendable and I look forward to continuing to work with you to address this current subprime situation. 

I want to start by saying that I am disappointed to see that we are back here 

again and that not much has changed—there is still a tsunami of foreclosures across 

the country and I am afraid another storm is about to hit as adjustable mortgage 

rates reset. We cannot excuse or ignore this problem any longer—each participant 

in the life of a loan needs to step up to the plate and take real responsibility and 

action. I am tired of hearing that the market will take care of it and tired of the 

finger pointing. Every broker, lender, realtor, appraiser, credit rating agency, investing firm and regulator needs to make changes if we have any hope of quieting this 

storm. 

We need to address the use of adjustable rate mortgages and seriously weigh the 

benefit against the cost—with over 7 percent of subprime loans with an adjustable 

rate mortgage in foreclosure in NJ—I think the cost is simply too great. I support 

Senator Schumer on this and believe we must underwrite these loans to the fully 

indexed rate. 

We need to address the blatant racial and ethnic bias in subprime lending. Why 

is it that nearly 55% of African American home buyers and 46% of Hispanic home 

buyers receive high-cost loans—compared to 17% of non-Hispanic whites? We need 

to find a way to address this disparity. For the Hispanic community in particular, 

the majority of household wealth comes from ownership equity alone so a predatory 

loan can turn the American dream of owning a home into an absolute nightmare. 

We also need to increase access to financial literacy programs and counseling 

services so that prospective homebuyers can make informed decisions. I say to every 

homebuyer: know your mortgage. 

We need to work on creating a national standard, that does not preempt strong 

state laws, so that we can define and penalize predatory lenders. 

And beyond the issue of predatory lending, we need to examine the effect of raising the FHA loan limit as I suspect it will create more alternatives for subprime 

borrowers. 

We cannot sit by any longer while unsuspecting Americans watch their dream of 

homeownership turn into a nightmare of financial ruin. 

I look forward to hearing from our witnesses and I stand ready to work with all 

interested parties on this important matter. 

Thank you. 


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