efficient, when accurate information is available to all participants. information helps consumers by improving their ability to compare mortgage products and to choose those that will help them meet their personal goals. we are keenly aware, however, of the substantial volume of disclosures and other documents that mortgage lending already entails, and we are sensitive to the risk that too much information may be of practically as little value to many consumers as no information at all. accordingly, we intend to consider mortgage disclosures comprehensively, with an eye to improving their usefulness to consumers, while remaining mindful of the total burden for industry. perhaps most importantly, we will engage in extensive consumer testing of mortgage disclosures, to ensure that disclosures provide information that consumers can readily use. our goal is better disclosures, not necessarily more disclosures. we also recognize that disclosures may not always be sufficient to combat abusive practices. because some bad lending practices may require additional measures, the federal reserve will seriously consider how we might use our rulemaking authority to address abusive practices without restricting consumers'access to beneficial financing options and responsible subprime credit. in addition to improved disclosures, regulations that restrict or prohibit practices that are " unfair or deceptive " may also be necessary. we have heard concerns about consumers being steered into mortgages they cannot afford and of repeated refinancings involving closing costs that strip away a borrower's home equity. today, we will gather information on how we might craft rules to stop such abusive practices. we also will seek information from state officials regarding their experiences with drafting laws and rules to combat predatory lending efficiently and effectively. during today's hearing, we will seek information from panelists on certain specific questions. i would like to close by briefly touching on some of those. there are four terms or practices that have been most frequently cited as troublesome in the mortgage market, especially the subprime and home equity markets. they are : • prepayment penalties, • failure to require escrows for taxes and insurance, • stated income and low - documentation lending, and • failure to give adequate consideration to a borrower's ability to repay a loan. at least some of these practices can be beneficial to at least some consumers. for example, an informed borrower might choose a loan with a prepayment penalty in exchange for a lower interest rate or lower closing costs. on the other hand, prepayment penalties also can be abusive, such as when a borrower

subordinated debt, we should carefully study how the existing market functions and the degree to which current practices may already be fulfilling many of the objectives of a mandatory system. in addition, we will be focusing increased research effort on topics related to market discipline in general and subordinated debt in particular. we must get a reasonable estimate of how much additional market discipline would be imposed by forced issuance of risk - sensitive debt. how much more effective would subordinated debt holders be than uninsured deposit holders when they raise funding costs for a risky bank? does the strength of penalties associated with bank debt issuance vary systematically across bank liabilities or with the business cycle? this research may also help us understand how to strike a balance between supervision, regulation, and market discipline in order to most effectively achieve the safety and soundness of our financial system. conclusion i hope my review of the difficulties and challenges associated with developing an operationally feasible market discipline policy has not been disheartening. such has not been my intention. rather, i have sought to realistically review the practical issues and tradeoffs that need to be resolved. when all is said and done, however, it seems clear that market discipline remains our first line of defense. it is perhaps the most flexible option for maintaining bank safety and soundness in a rapidly evolving environment and has the potential to strengthen and complement bank supervision and regulation, particularly on the outside chance that the market knows best. while i believe that more research is needed to make the case for a policy to enhance market discipline through subordinated debt, and to pin down the design features of a specific policy for such instruments, we should not ignore the abundant evidence that highlights the promise of market discipline in general and – perhaps – subordinated debt in particular.