Minutes 

The Meeting of the FDIC Advisory Committee on Economic Inclusion 

of the 

Federal Deposit Insurance Corporation 

Held in the Board Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

The meeting of the FDIC Advisory Committee on Economic 

Inclusion ("ComE-IN" or "CommitteeN) was called to order by ComE- 

(Crr, In Chairman Diana L. Taylor. 

The members of ComE-IN present at the meeting were: Diana L. 

Taylor, ComE-IN Chairman and immediate past New York State 

Superintendent of Banks; Ted Beck, President and Chief Executive 

Officer, National Endowment for Financial Education; Kelvin Boston, 

Executive Producer and Host of PBS' Money wise with Kelvin Boston; 

Martin Eakes, Chief Executive Officer, Self-~elp/Center for 

Responsible Lending; Lawrence K. Fish, Chairman and Chief Executive 

Officer, Citizens Financial Group, Inc.; Rev. Dr. Floyd H. Flake, 

Senior Pastor, Greater Allen AME Cathedral of New York; Ester R. 

Fuchs, Professor, School of International and Public Affairs, 

Columbia University; Wade Henderson, President and Chief Executive 

Officer, Leadership Conference on Civil Rights, and Counselor to 

the Leadership Conference on Civil Rights Education Fund; Alden J. 

McDonald, Jr., President and Chief Executive Officer, Liberty Bank 

and Trust Company, New Orleans, LA; Frederic S. Mishkin, Governor, 

Federal Reserve System; John W. Ryan, Executive Vice President, 

Conference of State Bank Supervisors; Robert K. Steel, Under 

Secretary of the Treasury for Domestic Finance, U.S. Department of 

Treasury; Peter Tufano, Sylvan C. Coleman Professor of Financial 

Management, Harvard Business School, and Senior Associate Dean and 

Director of Faculty Development; and Elizabeth Warren, Leo Gottlieb 

Professor of Law, Harvard University. Erica F. Bovenzi, Designated r Federal Officer for the Committee and Deputy General Counsel of the 
F Federal Deposit Insurance Corporation ( "Corporation" or "FDIC" ) , was also present at the meeting. Committee members Ronald 

Grzywinski, Chairman, ShoreBank Corporation of Chicago; Manuel 

Orozco, Senior Associate at the Inter-American Dialogue, and Senior 

Researcher, Institute for the Study of International Migration, 

Georgetown University; Maria Otero, President and CEO, ACCION 

International; and Deborah C. Wright, Chairman and CEO, Carver 

Bancorp, Inc., were absent from the meeting. 

Members of the Corporation's Board of Directors present at the 

meeting were Sheila C. Bair, Chairperson; Martin J. Gruenberg, Vice 

Chairman; and Thomas J. Curry, Director (Appointive). Corporation 

staff that also attended the meeting included Alice C. Goodman, 

Lisa K. Roy, Sara A. Kelsey, Sandra L. Thompson, Lee Bowman, 

Michael H. Krimminger, David M. Barr, Andrew B. Stirling, Jr., 

Angelisa M. Harris, Valerie J. Best, and Leneta G. Gregorie. 

William Apgar, Jr., Faculty Chair, Kennedy School of 

Government Senior Executive Program for State and Local Government 

Officials, and Senior Scholar, Joint Center for Housing Studies, 

Harvard University; John C. Weicher, Director, Center for Housing 

and Financial Markets, Hudson Institute; Michael Shea, Executive 

Director, ACORN Housing Corporation; Diane Thompson, Supervisory 

Attorney, Land of Lincoln Legal Assistance Foundation; Kenneth D. 

Wade, Chief Executive Officer, Neighborworks@ America; Michael 

Desmond, Tax Legislative Counsel, Office of Tax Policy, U.S. 

Department of Treasury; and Jack M. Guttentag, Professor of 

Finance, Emeritus, Wharton School, University of Pennsylvania, also 

attended the meeting. 

Committee Chairman Taylor opened and presided at the meeting. 

FDIC Chairman Bair welcomed CornE-IN members and guest 

speakers. She then provided an update on several matters: (1) the 

FDIC Board of Directors approval of the Committee's recommendation 

at its March meeting to initiate a pilot program of low cost, small 

dollar loans to be launched by individual banks; (2) the progress 

of meetings held with the securitization industry on subprime 

lending; and (3) the launching of a new program by the Alliance for 

Economic Inclusion and Neighborworks America to provide affordable 

refinancing opportunities. Chairman Bair also advised that staff 

are continuing to look at the legal and practical implications of 

banks investing in the Prosper Marketplace, Inc. lending platform 

an issue that was raised at the March meeting. 

Committee Chairman Taylor then introduced the first two 

speakers, William Apgar, Jr. of Harvard University and John C. 

F 

July 16, 2007 
ec\ Weicher of the, Hudson Institute, who would discuss the factors 

that contributed to the current subprime mortgage situation. 

Mr. Apgar began his presentation by summarizing recent data on 

mortgage delinquencies and foreclosures, noting that they were at 

historical highs in the lSt Quarter 2007 and likely to go even 

higher as adjustable rate mortgages funded through 2006 began to 

reset. He then identified as contributing factors consumer 

behavior, the existing market structure, and a fragmented 

regulatory framework. 

Mr. Apgar offered a three-part solution to the subprime 

mortgage crisis: (1) consumer education; (2) uniform rules that 

hold brokers and mortgage companies to the same standards as loan 

officers and banks; and (3) a requirement for marketplace 

accountability for failure to exercise due diligence in the 

purchase of mortgage obligations. 

Next, Dr. Weicher provided a brief history of the subprime 

mortgage industry. He noted that although it had not existed 20 

years ago, subprime loans currently represented 15 percent of the 

market. He then cited the factors that led to the rise of the 

subprime mortgage market. Mr. Apgar stated that while he 

anticipated problems in the subprime mortgage market to continue 

(Ca until sometime in 2009, when the most recently funded adjustable 

rate mortgages would reset, mortgage counseling and loan 

forbearance could help to mitigate the default rate. 

Committee Chairman Taylor then opened the floor to questions 

and comments. In the discussion that followed, Committee members, 

Mr. Apgar, and Dr. Weicher explored additional factors which may 

have contributed to the growth of the subprime loan market, 

including affordability constrained real estate markets, an 

information revolution that facilitated wide availability of credit 

scores and automated underwriting systems, and, in many low-income, 

minority communities, the proliferation of unregulated, non-bank 

entities that filled the void created by the absence of banks. The 

discussion revealed a discrepancy in the connotation of the term 

"subprime." Mr. Fish indicated that his institution did not engage 

in subprime lending because of perceived reputational and financial 

risks. Mr. McDonald, on the other hand, indicated that the 

majority of loans made by his institution are by definition 

\\subprime," albeit with a higher, but manageable risk. Committee 

Chairman Taylor agreed that it was important not to blur the 

distinction between subprime lending and predatory lending. 

July 16, 2007 
The Committee also discussed in more detail the various ways 

in which the regulatory environment could be altered to enhance the 

ability of banks to offer alternative products in the subprime 

market. Chairman Bair expressed support for responsible subprime 

lending by insured financial institutions and suggested that 

perhaps the bank regulators should examine whether capital 

treatment of subprime lending operated, either explicitly or 

implicitly, to discourage such lending. Several Committee members 

suggested that perhaps a fresh look at the Community Reinvestment 

Act (\\CRAN) might be warranted to see if the methodology for 

defining an institution's assessment area and their \\communityN 

remain relevant in the current structure of the financial services 

industry. There was a general consensus that uniform application 

of existing regulatory guidance on subprime lending to non-bank 

entities would allow banks to compete favorably in the subprime 

market. 

Committee Chairman Taylor announced that the meeting would 

recess briefly. Accordingly, at 10:59 a.m., the meeting stood in 

recess. 

The meeting reconvened at 11:12 a.m. that same day, whereupon Cr\ Committee Chairman Taylor introduced the second panel of speakers, 

Kenneth D. Wade of ~eighborworks~ America; Diane Thompson of the 

Land of Lincoln Legal Assistance Foundation; Michael Shea of ACORN 

Housing Corporation; Michael Desmond of the U.S. Department of 

Treasury; and panel moderator, Sandra L. Thompson, Director, FDIC 

Division of Supervision and Consumer Protection ('DSC Director 

Thompson" ) . 

DSC Director Thompson initiated the panel presentation by 

noting the recently issued regulatory guidance by the FDIC and 

other federal financial institution regulatory agencies on subprime 

lending. She further advised that the regulatory agencies also 

issued guidance in April 2007 that encourages financial 

institutions to work constructively with delinquent residential 

borrowers. 

Mr. Wade discussed ~eighbor~orks@ America's efforts to assist 

borrowers in avoiding foreclosures, including the establishment of 

the Center for Foreclosure Solutions ("CFS"), an organization whose 

focus includes: building foreclosure counseling capacity; working 

with local coalitions to assist homeowners; conducting research on 

foreclosure prevention initiatives; and a public education 

campaign. He particularly noted the public education campaign, 

r 

July 16, 2007 
r which is jointly sponsored with the Ad Council, and is primarily 

aimed at increasing consumer awareness of the options available for 

avoiding foreclosure, including a toll-free number for consumers to 

call and receive individual counseling assistance. Mr. Wade then 

thanked FDIC Director Curry for his work as Chairman of the 

Neighborworks@ America Board of Directors and expressed his 

appreciation for the assistance of Neighborworks@ America's many 

partners, including the FDIC. 

Next, Ms. Diane Thompson briefed the Committee on the typical 

characteristics of mortgage loans she saw in her legal aid practice 

in East St. Louis, Illinois. She advised that the majority of her 

cases involved extensive fraud by brokers and appraisers, and what 

she characterized as "willful blindness" by lenders, with 

inadequate or falsified documentation of borrower income, inflated 

property appraisals, "upselling" of loan products to generate 

greater broker compensation, and lack of due diligence on the part 

of lenders, typically resulting in 2/28 or 3/27 mortgage loans at 

excessive interest rates to marginal borrowers. She noted that in 

many instances, such loans were unaffordable and in default even 

before the rate reset and that frequently the borrowers were never 

told what kind of loan they were getting or saw any of the loan 

documents until the time of closing thereby depriving them of the 

F opportunity to make rational, informed decisions. 

Ms. Thompson then advised the Committee on the problems 

encountered by legal advocates in assisting troubled borrowers. 

She noted that, despite the existence of regulatory guidance on 

subprime lending and non-traditional mortgage loans, foreclosure 

counsel frequently argue that compliance with guidance is not 

mandatory and, therefore, unenforceable. Ms. Thompson suggested 

that certain basic principles should be encouraged by the 

regulators for servicers in developing sustainable workout 

arrangements (q., affordable loan modifications) with borrowers 

in default, and that such arrangements should be available at the 

outset, for example, (1) the loan principal should be written down 

to the actual value of the residence (by a properly conducted 

appraisal); (2) if the interest rates have been boosted because of 

"upselling," the interest rate should be reduced to the par rate; 

and (3) small loan emergency funds; or (4) making second mortgages 

available rather than forcing the borrower to refinance entire 

mortgage. 

Next, Mr. Shea, echoing Mr. Apgarts earlier comments regarding 

the lack of uniformity in rules applicable to bank and non-bank 

lenders, stated that there was also a lack of uniformity in the 

practices and policies of subprime mortgage servicers resulting in 

r""* 

July 16, 2007 
inequities for borrowers in default. He observed that, with one or 

two notable exceptions, subprime servicers took a case-by-case 

approach to borrowers who fell behind on their payments; that most 

subprime servicers not affiliated with banks employed only 

collections personnel who were unable to offer the full range of 

loss mitigation solutions; and that, therefore, all but a few 

subprime servicers continued to place borrowers into unaffordable 

workout arrangements rather than providing loan modifications 

offering long-term affordability. 

Ending his presentation, Mr. Shea stated that over the past 

year, his organization and others had noticed a reduction in the 

number of lower income borrowers being steered into subprime loans, 

particularly for home purchases; and that in recent weeks, larger 

subprime servicers, generally those affiliated with banks, were 

entering into more loan modification agreements, with a greater 

willingness to modify ARMS by locking in the initial rate if a 

borrower could demonstrate that the reset rate would be 

unaffordable. 

Mr. Desmond provided an overview on tax issues that could 

arise in connection with real estate mortgage investment conduits 

(\\REMICsN), cancellation of indebtedness income, and information 

reporting requirements with respect to cancellation of indebtedness 

income. In response to a question from DSC Director Thompson as to 

whether extension of an initial ARM rate would trigger the 

information reporting requirement, Mr. Desmond advised that 

cancellation of debt only occurs when there is a change in the 

principal amount of the loan. 

During the ensuing discussion, a number of issues were 

explored by Committee and panel members, including the higher rates 

of foreclosure in minority communities and their impact on those 

communities; methods that could be employed to encourage borrowers 

in danger of default to be more proactive in contacting their 

lenders; and the extent to which insured financial institutions' 

willingness to restructure securitized loans was limited by the 

terms of complex and varying Pooling and Servicing Agreements 

(\\PSAsM). Also discussed were various recommendations for 

improving the outcome for troubled subprime borrowers. 

Recommendations included development of a national foreclosure 

policy to replace individual state policies which, in some 

instances, allow foreclosure proceedings to be initiated within as 

few as 30 days from the date of default; a nationwide moratorium on 

foreclosures for a sufficient period of time to allow the adoption 

of standardized solutions to the subprime crisis; an industry-wide 

incentive structure that encourages loan modification, rather than 

i*" July 16, 2007 
foreclosure as the initial approach to addressing defaulted 

mortgage loans; and across-the-board voidance of prepayment penalty 

provisions in subprime mortgage loans. Several legislative 

remedies were also advanced. Mr. Henderson suggested legislation 

to ease the restrictions on restructuring REMIC assets, and Ms. 

Warren suggested amendment of the Bankruptcy Code to place mortgage 

lenders on equal footing with other secured lenders with respect to 

the rescheduling of debt, thereby providing borrowers with more 

leverage in getting servicers to negotiate loan modifications. 

Vice Chairman Gruenberg summarized the consensus of the 

Committee by noting that, since not every borrower would have 

access to a legal advocate like Ms. Thompson or community advocates 

like Messrs. Shea and Wade, it was important to impose as much 

uniformity as possible on the handling of defaulted subprime 

mortgage loans because, in the absence of such uniformity, many 

borrowers would lose their homes. 

Committee Chairman Taylor announced that the meeting would 

recess for lunch. Accordingly, at 12:52 p.m., the meeting stood in 

recess. 

The meeting was reconvened at 1:30 p.m. that same day at which 

time Committee Chairman Taylor introduced Jack M. Guttentag, 

Professor of Finance, Emeritus, Wharton School, University of 

Pennsylvania, to discuss the role of mortgage brokers in the 

subprime mortgage industry. 

Professor Guttentag began by stating that, in his opinion, the 

immediate cause of the crisis in the subprime market was not 

mortgage brokers, which were a consistent presence in the market, 

but the rising rate of foreclosures triggered by the general 

decline in real property price appreciation, which had previously 

allowed homeowners to refinance before ARM resets. He 

acknowledged, however, that brokers were central actors in a system 

that delivered loans at high cost, discouraged escrow accounts, and 

steered borrowers into unfavorable loan products such as 2/28 ARMS. 

Offering proposals to address the problem of loan overcharges, 

Professor Guttentag advised that one proposal, included in 

legislation currently pending before Congress, was a requirement 

that brokers act as agents of the borrower. He suggested that such 

a requirement would only be effective if it set forth specific 

broker obligations. As an alternative proposal, Professor 

Guttentag suggested adoption of a rule mandating that any rebate 

r""" \ 

July 16, 2007 
paid by a lender be credited to the borrower, not paid to the 

broker, thereby requiring borrower authorization of the amount paid 

to the broker. He cautioned that under the second proposal, it was 

important to define "broker" as a loan provider who does not take 

market risk. He explained that the current definition of a 

"broker" as someone involved in providing loans to borrowers but 

who does not advance funds excludes correspondent lenders who, 

except for one minor difference, provide services identical to 

those provided by brokers. For loan officers, he proposed that the 

same rule should include a provision that prohibits lenders from 

deviating from their posted rates, thereby preventing loan officers 

from marking up lender price sheets. 

In the discussion that followed, Committee members sought to 

clarify what was meant by "overage" and "upselling," and asked 

questions to clarify the specifics of Professor Guttentag's 

recommendations. Ms. Warren stated that it should be made clear 

that the proposal to credit lender rebates to the borrower for 

broker compensation should be accompanied by a disclosure that the 

amount of the rebate was directly correlated to the borrower's 

acceptance of an above par rate. She stated that without such a 

disclosure, crediting the rebate to the borrower would be 

meaningless. 

r Committee Chairman Taylor then introduced Sara A. Kelsey, FDIC 

General Counsel, to discuss the existing legal framework for 

addressing the crisis in the subprime mortgage industry. Ms. 

Kelsey briefly summarized the laws pursuant to which federal bank 

regulators could promulgate rules and guidelines relative to 

subprime loans, including the CRA, the Homeowners Equity Protection 

Act ("HOEPA"), and Federal Trade Commission Act. She indicated 

that although the federal financial institution regulatory agencies 

had issued guidance on non-traditional and subprime mortgages, the 

problem with guidance was its lack of enforceability. She noted, 

however, that the Board of Governors of the Federal Reserve System 

("FRB") had recently held hearings on its authority under HOEPA and 

expressed hope that the FRB would soon initiate rulemaking on 

subprime mortgage loans that would be applicable to both bank and 

non-bank entities. 

Ms. Kelsey also advised that the states, which had proposed a 

wide range of legislative and regulatory proposals with respect to 

subprime lending, were a major source of innovation. She observed, 

however, that the differing state rules and regulations contributed 

to the lack of uniformity. She suggested that any federal 

regulation should be viewed as a floor, rather than a ceiling, 

July 16, 2007 
thereby allowing continued state innovations to determine the most 

effective and efficient means of regulating the subprime industry. 

The Committee members then discussed at length issues for 

national standards relative to the subprime mortgage industry, 

including how best to define "subprime," the stigma associated with 

current usage of the word "subprime," and the distinction between 

subprime and predatory loans. Chairman Bair expressed the general 

consensus of the Committee that defining 'subprime" according to 

the number of percentage points above par would provide a clearer 

indicator for the purposes of HOEPA rulemaking than defining based 

on borrower characteristics. The Committee also discussed a number 

of other issues, including disclosure and accountability, 

prepayment penalties, assignee liability for abusive loans, and 

whether lenders who offer only subprime loans have a responsibility 

to refer borrowers who qualify for prime loans to other lenders who 

can better serve their needs. 

The Committee then made the following suggestions for the 

FDIC's consideration: (1) that "subprime" be defined on the basis 

of the extent to which a loan exceeds a specified number of 

percentage points above par rate as defined in the Home Mortgage 

Disclosure Act (HMDA) and include fees in the calculation; (2) 

that prepayment penalties be prohibited, except to the extent 

(a necessary to cover administrative costs for processing the loan; 

(3) that secondary market liability be established for securitized 

loans and loans underlying collateralized debt obligations; (4) 

that escrow accounts for taxes and insurance be required for all 

loans below a certain dollar amount threshold, with the option for 

all borrowers to pay additional funds into an escrow account; (5) 

that mortgage brokers be subject to uniform education and licensing 

requirements and standards of behavior, enforceable through 

regulatory oversight, with primary oversight responsibility at the 

state level and federal preemption only in the event state laws 

fail to meet a minimum federal threshold; (6) that meaningful, 

binding, and timely disclosure of mortgage terms, sufficient to 

facilitate marketplace comparisons, be mandated, with the specifics 

of recommended disclosures to be determined after Committee members 

had an opportunity to review a model disclosure form developed by 

the Conference of State Bank Supervisors; (7) that stated income 

loans should be prohibited, with provision for use of alternative 

documentation of income by self-employed individuals; and (8) that 

mortgage loans be underwritten, at a minimum, to the fully indexed, 

fully amortized rate. 

July 16, 2007 
There being no further business, the meeting was adjourned. 

~x&utive./Secretary 

Federal Deposit Insurance Corporation 

And Committee Management Officer 

FDIC Mviaory Committee on ECQ~OP~~C 

Inclusion 
Minutes 

of 

The Meeting of the FDIC Advisory Committee on Economic Inclusion 

of the 

Federal Deposit Insurance Corporation 

Held in the Executive Dining Room 

Federal Deposit Insurance Corporation Building 

Washington, D.C. 

Open to Public Observation 

July 16, 2007 - 9:14 A. M. 

I hereby certify that, to the best of my knowledge, the attached 

minutes are accurate and complete. 

a L. Taylor 1 

Chairman 

FDIC Advisory Committee on Economic Inclusion 

Dated: October 10, 2007