SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1480 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: ESTHER "TESS" CANJA, PRESIDENT

AFFILIATION: AARP

BODY:
July 27, 2001

Hearing on

"Predatory Mortgage Lending: The Problem, Impact and Responses." Second Hearing in a Series

Prepared Testimony of Ms Esther "Tess" Canja President of the Board of Directors AARP

Good morning, Chairman Sarbanes, Ranking Member Gramm, and members of the Senate Banking, Housing and Urban Affairs Committee. My name is Esther "Tess" Canja. I live in Port Charlotte, Florida, and I serve as President of AARP.

AARP is actively engaged in efforts to protect consumer rights and interests. The Association has been directly involved since the early 1990s in researching issues, litigating cases, and working with federal and state regulatory agencies and legislative bodies to expose, hold accountable and seek redress from those who are responsible for a wide range of exploitive financial practices. AARP appreciates this opportunity to bring into greater focus one of the most troubling forms of these exploitive financial practices - which is making unjustifiable high cost home equity loans to older Americans. For most Americans, home equity accumulation is a factor of time (for many a "working lifetime"), and therefore is highly correlated with age. For older Americans, the most abusive loans are often the refinancing and equity-based home modification loans because they target the value of the home - frequently the owner's largest financial asset. These forms of abusive lending are particularly devastating when the older homeowner is living on a modest or fixed income.

It has been AARP's long-standing view that loans become predatory when they:

- take advantage of a borrower's inexperience, vulnerabilities and/or lack of information;

- are priced at an interest rate and contain fees that cannot be justified by credit risk;

- manipulate a borrower to obtain a loan that the borrower cannot afford to repay; and/or

- defraud the borrower.

The investment in homeownership among older Americans is substantial. For example, based on American Housing Survey data for 1999, the median mortgage loan-to-value ratios (LTVs) steadily decrease from 74.8 for those under 35 years of age, to 31.7 for those age 65 and older. That is to say, the median homeowner's equity increases by more than two-and-one-half times by age 65+. The U.S. Census reports that American homeownership averaged an all-time high of 67.4 percent for the year 2000.

What is it about older American homeowners that makes them particularly attractive to predatory lenders? Older homeowners are often targeted for mortgage refinancing and home equity loans because they are more likely to live in older homes in need of repair, less likely to perform repairs themselves, and are likely to have substantial equity in their homes to draw on. Many of them are nearing or are in retirement, and therefore are more likely to be living -- or are preparing to live -- on a reduced or fixed income. In this context, some of AARP's most recent research, litigation, and advocacy activities focus on abuses found in home repair and modification loans.

With some obvious qualifications, this means that the longer a homeowner lives in his or her home, building up equity as they pay down their mortgages, the greater the risk that they will be subject to lenders seeking excessive financial advantage through one of these loans. AARP has worked to educate its members as well as the public-at-large about how consumers can better protect themselves against such financial risks. We believe consumer education to be a necessary part of a multi-level approach.

AARP also recognizes that the damage done by predatory practices is not limited to those who have lost, or are at risk of losing their home - as devastating as these losses clearly are. It also includes those older Americans who need and desire access to competitive, realistic risk-based home loans, but are reluctant or unwilling to pursue financial services and products due to their fear of potential exploitation. Ultimately, all forms of commerce - including financial services -- are based on trust that each party to a transaction has been treated fairly, and disagreements resolved equitably. Whenever it occurs, predatory home lending undercuts the very essence of this basic tenet of commerce.

Consider these findings from an AARP-sponsored study, released in May of 2000, entitled "Fixing to Stay". For Americans age 45 and over:

more than 4-in-5 say they would like to stay in their current residence for as long as possible;

more than 9-in-10 age 65 or over feel this way; and

almost 1-in-4 anticipates that they or someone else in their household will have difficulty getting around their home in the next five years.

When asked why they have not modified their home, or have not modified as much as they would have liked, respondents cited a number or reasons, including:

not being able to do it themselves (37%);

not being able to afford it (36%);

not trusting home contractors (29%);

not knowing how to find a good home contractor or company that modifies homes (22%).

In most areas, the results of this national survey, when compared to its sample of minority individuals (that is, African Americans and Hispanics) were similar. However, there were a few important differences:

among those who have refinanced their home or taken out a mortgage against their home, minorities are more likely to say they did so to obtain funds for home maintenance or repairs (50% minorities versus 35% national sample);

however, minorities are also more likely than the national sample to be very or somewhat concerned about:

being able to afford home modifications that would enable them to remain at home (44% versus 30%);

finding reliable contractors or handymen (41% versus 28%);

finding information about home modifications (34% versus 21%).

AARP's efforts to address these problems--whether through the sentinel effects of its litigation, its legislative and regulatory advocacy, or its counseling and education programs-- are directed at improving credit market performance, not limiting consumer access to credit for those with a less-than-perfect credit history. AARP believes that our - and other - consumer financial literacy campaigns are an important and necessary component of public and private sector efforts to make consumers their own first line of defense. However, while consumer education and counseling programs are necessary, they are not sufficient.

AARP submitted comments on March 9, 2001, supporting the Federal Reserve Board's (the Board) proposal to strengthen the Home Ownership and Equity Protection Act (HOEPA) regulations in an effort to reduce abusive lending practices targeted at the most vulnerable borrowers. In its comments on the proposed regulatory amendments, AARP suggests that the Board use its current statutory authority to:

lower the Annual Percentage Rate (APR) trigger, expand the definition of points and fees, and prohibit certain unfair practices such as the use of "riders" to change the terms of a consumer agreement.

In addition, the Board solicited proposals for making legislative changes that address predatory lending practices. AARP recommended three statutory amendments to HOEPA that we believe are worthy of consideration by the Board for submission to the Congress. We recommended:

inclusion of all fees and points in the loan's finance charges; inclusion of open-ended credit and purchase money loans within HOEPA's coverage; and the elimination of the "pattern or practice" requirement for HOEPA protection; that is, the borrower would only have to establish that a lender has made an unaffordable loan under HOEPA - not that the lender has engaged in a pattern or practice of such lending.

AARP agrees with the Board's assessment of the beneficial impact of its proposed amendment, that by expanding the coverage to an additional group of high cost loans it will "ensure that the need for credit by subprime borrowers will be fulfilled more often by loans that are subject to HOEPA's protections against predatory practices." AARP believes that the Board should issue the final HOEPA amendment as soon as prudently possible.

Chairman Sarbanes, and members of the Committee, the problems associated with abusive home equity-related lending practices are complex. To date, agreement on a comprehensive reform of the mortgage finance system to address these problems has proven elusive. Therefore, we are encouraged by the Committee's continued efforts to call attention to predatory mortgage lending and to establish effective deterrents. AARP is committed to working with this Committee, the Congress and the Bush Administration to address the problems posed to the elderly by these devastating lending practices.

Thank you. I will try to answer any questions you may have.



LOAD-DATE: July 31, 2001