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Federal Document Clearing House
Congressional Testimony
July 27, 2001, Friday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 4150 words
COMMITTEE:
SENATE BANKING, HOUSING & URBAN AFFAIRS
HEADLINE: PREDATORY MORTGAGE LENDING
TESTIMONY-BY: JOHN A. COURSON
BODY: July 27, 2001
Hearing on
"Predatory Mortgage Lending: The Problem, Impact and Responses." Second
Hearing in a Series
Prepared Testimony of
Mr. John A. Courson
President and CEO Central Pacific Mortgage Company on behalf of the Mortgage
Bankers Association
Good morning Mr. Chairman and members of the
Committee. My name is John Courson, and I am President and CEO of Central
Pacific Mortgage Company, headquartered in Folsom, CA. I am also Vice President
of the Mortgage Bankers Association of America (MBA), and it is in that capacity
that I appear before you today. This morning I have been asked to testify before
your Committee to present MBA's views on the very serious issue of predatory
mortgage lending. First, I want to thank you for inviting the MBA into this very
important discussion on a very urgent matter. I commend the Committee's
leadership in calling for these hearings, as we believe that a full
understanding of the issues is the only responsible way to finding solutions to
the scourge of abusive mortgage lending.
As Vice President of the trade
association that represents the real estate finance industry, and as President
of a mortgage company, I am deeply troubled by the continuing reports of
predatory and abusive lending practices that persist in our industry. It is
imperative that you know, from the outset, where MBA stands on this issue. We
condemn these practices in the strongest possible terms. The MBA recognizes that
this is a problem that is real, and one that carries real repercussions for
those communities that are affected. Although so-called
predatory
lending practices are difficult to measure and quantify, there is no
hiding from the fact that certain rogue lenders and certain unscrupulous brokers
continue to prey on our most vulnerable populations. Nor can we hide from our
responsibility-as members of the finance industry-to act in the face of this
continuing problem.
For over eighty years, the MBA has stood for
integrity and fairness in mortgage lending. Our members have helped millions of
Americans achieve the dream of homeownership. In so doing, we have established a
tradition of encouraging the highest standards of responsible lending.
We therefore want to make clear that ending unfair lending practices is
a major priority for our Association. We have devoted substantial amounts of
attention and time to this issue. We want to state in no uncertain terms that it
is time to address the problems of
predatory lending head-on,
and in a way that does not constrict the flow of capital to credit-starved
communities. Today, I will address the MBA's views on what needs to be
accomplished to bring lasting and effective solutions to these abuses.
"Subprime" Lending
Before I do so, however, I think it is
important to set forth some background on the nature and recent growth of the
so-called "subprime" lending, since most of the reports of mortgage abuse appear
to stem from this segment of the market. In general terms, that sector of the
mortgage market that has become known as the "subprime market" serves customers
that do not qualify for conventional, prime rate loans. The reasons why such
consumers do not qualify are varied, but generally, these borrowers may have
blemished credit records, or perhaps unproven credit or income histories.
A further element of this market, and of subprime loans generally, is
that they tend to be more expensive in terms of fees and rates. This is so
because they generally carry extensive due diligence costs and require hands-on
servicing, and because they are inherently riskier than loans made in the prime
market.
It is imperative to note that subprime lending has been
extremely beneficial to thousands of families in the last couple of years.
Subprime lending has opened up new markets and helped many consumers that would
not have received needed funds but for the special products available in this
sector of the market. The subprime market provides a legitimate and much needed
source of credit for many families. As the Department of Treasury and the
Department of Housing and Urban Development acknowledged in a recent report,
"[b]y providing loans to borrowers who do not meet the credit standards for
borrowers in the prime market, subprime lending provides an important service,
enabling such borrowers to buy new homes, improve their homes, or access the
equity in their homes for other purposes."
Defining the Problem
It is unfortunate, however, that as the subprime market has expanded,
the reports of predatory and abusive lending have apparently increased as well.
We note that the problem of abusive lending is not really new nor limited to the
subprime market alone. State regulators report that they have been dealing with
these types of issues for a long time, and that what was once called "mortgage
fraud" is now being dubbed "
predatory lending." Regardless of
the name, a major part of the challenge that we face in finding solutions to
this problem is that it has proven quite difficult to answer the threshold
question of how to define "
predatory lending" or what
constitutes "abuse" in the general context of mortgage lending. Surely we can
identify examples of practices that everyone would agree are "abusive," but the
problem we face is that these examples could be both under- inclusive and
over-inclusive, depending upon the full circumstances of the loan transaction.
Thus, often identified "predatory" practices could include the following:
excessive fees and points that are often financed as part of the loan; loan
"flipping" or "churning," in which a loan is repeatedly refinanced in a way that
degrades the owner's equity in the property; intentionally making a loan that
exceeds the borrower's ability to repay; and overly aggressive sales techniques
that deliberately mislead the borrower.
It is important to note that in
every example noted, the full context of the transaction must be analyzed to
properly assess whether an abuse has occurred. It is impossible, for example, to
identify "excessive" fees without knowing the nature and difficulty of the
service provided in exchange for that fee. Nor can we recognize repeat
refinances that are meant to strip equity without looking at the fee structure
of the transaction and the equity of the consumer. In order to determine that a
consumer has been "deliberately misled," we have to study the disclosures and
the oral representations made in the context of the specific transaction at
hand. Since every loan is unique and every transaction is tailored to specific
needs and conditions, the answer of whether mortgage abuse has occurred in any
given situation is dependent upon the totality of the circumstances of the
borrower and the transaction. It is daunting, therefore, to isolate the specific
"bad acts" that are employed by unscrupulous lenders in a way that allows for
appropriate regulation.
We note that even those regulatory agencies with
jurisdiction over mortgage credit practices have not provided any clear guidance
on the topic. Those agencies that have attempted to provide a definition have
uniformly avoided the real issue, opting instead to provide either "categories"
under which the abuses "tend to fall," or simply advancing descriptive examples
and anecdotes of the more common abuses that they may have observed in the
market. Under either approach, the fundamental definitional issues are left
unanswered. Sometimes the terms "
predatory lending" and
"subprime lending" are used interchangeably. This confusion and lack of adequate
definitions at federal and state levels, and the problem of lack of organized
and coordinated data on
predatory lending, is confirmed and
described at length in a recent report issued by the Senate Banking Committee
Staff to Chairman Gramm, released in August 2000.
Source of Problem
MBA believes that
predatory lending is a problem that
has various sources. As we attempt to tackle this problem, it is necessary to
isolate these sources, as they must be addressed individually before we can be
successful in crafting lasting solutions. In short, the MBA believes that the
three fundamental sources that need to be attacked jointly are the complexity of
the laws, lack of education, and lack of enforcement.
Complexity of
Mortgage Laws/Process
First and foremost, we believe that a fundamental
root problem leading to abusive lending is the confusion created by the
complexity of the mortgage process. Any consumer that has ever been through a
settlement closing knows how confusing and cumbersome the process can be.
Mortgage disclosures are voluminous and often cryptic, and consumers simply do
not understand what they read nor what they sign. In addition, the mandated
forms lack reliable cost disclosures, making it difficult for prospective
borrowers to ascertain true total closing costs and renders comparison shopping
virtually impossible.
There are various confirmations of this core
problem. In a recent report prepared by the Federal Reserve Board and the
Department of Housing and Urban Development, these federal agencies ascertained
that most consumers do not understand the relation between the contract interest
rate and the Annual Percentage Rate ("APR") listed in the Truth in Lending
disclosures. The agencies explain that "the [consumers'] belief was based on
misconceptions about what the disclosures represent. For example, consumers
believed the APR represents the interest rate. . . and the amount financed
represents the note amount. . . ." These are fundamental misunderstandings that
can lead to very serious repercussions for unwary or unsophisticated shoppers.
In fact, there are reports that these cryptic forms, and the public's
misunderstanding of them, make the federally-required Truth in Lending
disclosures a very useful tool for predators to confuse and defraud consumers.
We can name a myriad of other examples, but simply put, the complexity
of the current system is the camouflage that allows unscrupulous operators to
hide altered terms and conceal crucial information without fear of the consumer
discovering or even understanding the import of the masked or undisclosed items.
In light of this complexity, confounded borrowers often have no choice but to
turn to the loan officer for advice and explanation of the contents of the
disclosures. In instances of abusive lenders, the consumer's reliance closes the
loop of deception-the victims of these scams are completely blinded to the
realities and repercussions of the transaction. These problems are exacerbated
ten-fold in instances of uneducated or illiterate consumers.
Lack of
Consumer Awareness/Education
The complexity of the mortgage process
leads directly to, and is intertwined with, the second source of
predatory lending-lack of consumer awareness and education. It
is a reality today that even well-educated consumers tend to lack basic
understanding of the mortgage shopping and home buying processes. For example,
the borrower surveys conducted by the Federal Reserve Board revealed that over
20 percent of those surveyed contacted only one single source of credit. I
already mentioned that consumers do not understand the meaning and importance of
the APR figure. Nor do mortgage shoppers entirely comprehend that the early Good
Faith Estimate disclosures are not final. Often, home-buyers believe that
"listing" real estate agents carry fiduciary responsibilities vis-a-vis the
purchaser. They generally do not. Again, all these misperceptions have real
repercussions in the market, and they all stem from basic misunderstandings of
the real estate and mortgage finance market.
Lack of Enforcement
The third problem creating a favorable environment for abusive lenders
is the general absence of real enforcement in this area. It is important to
understand that the mortgage lending industry is one of the most heavily
regulated industries today. Mortgage lending is subject to pervasive state
regulation and must comply with a wide array of federal consumer protection laws
including the Truth in Lending Act, Real Estate Settlement Procedures Act, Fair
Housing Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Home Mortgage Disclosure Act, Federal Trade Commission Act,
and Fair Debt Collection Practices Act. Many of the "predatory" abuses reported
today either violate current law or result from lack of disclosures that violate
current laws. We note that in practically all instances, these predatory loans
also involve outright fraud and deception. We have to set a new priority to
aggressively enforce the multitude of existing laws.
MBA believes that
these root causes must be addressed in order to fully erase the pernicious
lending practices that are occurring today. Any approach that does not address
these three basic prongs-simplification, education, and enforcement-will merely
deal with the effects and not with the underlying causes of the problem.
Anything short of this full approach will fail to resolve the crisis.
Looking Ahead
I reiterate that there is general agreement that
there is a problem with abusive lending in many markets today. While there is
some disagreement as to how to eliminate these practices, I believe that the
mortgage industry, policy makers, and consumer representatives all share a
sincere desire to end the abuses. I believe that we are all gathered here today
to engage in a serious dialogue as to what needs to be done to advance real
solutions to this problem.
Let me then address some steps we can all
take to bring an end to this problem. As I mentioned before, we all share in the
responsibility to ensure that
predatory lending is eliminated.
Consumers
First, as outlined above, education of consumers is a
most basic step in the struggle to push predators out of our neighborhoods. MBA
believes that an educated consumer is the best prophylactic to predatory abuse.
Presently, MBA is assembling a workgroup to develop a series of
resources aimed specifically at consumers that believe that they are being
victimized by predatory lenders. The objectives of this initiative is to develop
advice and materials that can be accessed directly and immediately by consumers
seeking protection from unfair activities. To this end, the workgroup is
developing a full list of legal rights and ethical norms that all consumers
should expect from honest and reputable lenders. This list will be made
available to the general public and disseminated to government officials,
consumer protection agencies, and consumer advocates to ensure that all
prospective borrowers fully understand their rights in the transaction.
In connection with this document, the workgroup will also develop a
system whereby affected consumers can obtain direct access to an enforcement
agency or other source of immediate assistance on items pertaining to their loan
situation. MBA believes that this direct access is crucial to protecting
vulnerable borrowers. Again, the goal under this system is to provide immediate
help to those consumers that feel they are being victimized by loan predators.
This system would include a method for identifying "warning signs" of possible
abuses that would alert consumers that they may be dealing with less than honest
operators. Once a consumer identifies certain suspicious signs-i.e., aggressive
solicitations, unexplained changes at the closing table, requests to leave line
items blank on material forms-then that consumer would be empowered to seek
further immediate advice from a trusted third party before completing the
transaction. We note that there is no system today that effectively delivers
help and useful information that a victim requires at the very point where the
abuse is occurring. We are trying hard to create a structure of support that
works effectively and that can be implemented immediately. We hope to report
back to you very soon with good news on our advancements.
Industry
The MBA has always been proactive in the fight against
"
predatory" lending abuses. As lenders and brokers, we share a
strong responsibility to fight predatory abuses on various fronts. I will
outline some of the examples of positive industry activities that are making a
difference in this endeavor.
First, our Association was the first, and
remains the only national trade association to sign a "fair lending/best
practices" agreement with HUD. This agreement was signed in 1994 and renewed in
1998. In this agreement, MBA committed to a number of steps that will promote
fair lending and assist the industry in reaching underserved groups in our
society.
Recently, MBA developed a set of "Best Practices" for our
members. These Best Practices encourage members to conduct their business
according to the standards contained therein and participate in periodic audits
to test for compliance. These guidelines are designed to ensure that all
customers are given fair and equitable treatment.
Further, MBA entered
into a contractual relationship with the Mortgage Asset Research Institute
(MARI) to create a national database of companies and individuals that have been
identified by law enforcement or regulatory bodies as having engaged in illegal
or improper behavior.
In 1998, MBA founded the Research Institute for
Housing America (RIHA) and currently funds its projects, which support research
and other activities to help determine how discrimination occurs in home buying
process, and to eliminate discrimination. RIHA projects also endeavor to develop
useful research on meeting consumer demand for mortgage financing in
under-served markets and to measure the societal benefits and costs of
homeownership.
As mentioned above, we believe that consumer awareness
and education are among the most effective tools available for combating
predatory lending practices. In this area, we think that
industry participants can do much to develop educational tools and programs that
will enable consumers to make more informed choices. For example, MBA is a
founding and active member of the Board of the American Homeowner Education and
Counseling Institute (AHECI). The purpose of AHECI is to provide training and
certification to the homeownership counseling industry. As a founding member of
this organization, MBA provided $100,000 in start-up funds.
MBA has
worked with the National Council on Economic Education (NCEE) over the past
several years to educate school children around the country in understanding the
importance of good credit and the need for sound financial planning and
management skills, as well as how to go about purchasing and financing a home.
Recently, MBA partnered with NCEE with a donation of $130,000 to promote a
program that will educate high school youth and adult consumers on the perils of
abusive lending.
Lastly, MBA is currently engaged in discussions with
lending organizations and other groups to determine how to best provide useful
and complete information and education for homebuyers, with a special emphasis
on subprime borrowers.
Government
MBA believes that there is
much that government can do to put an end to
predatory lending
abuses. First and foremost, MBA strongly believes that much more must be done to
enforce the laws that are currently on the books. In the past quarter century,
both federal and state governments have put in place a far-reaching body of laws
designed to prevent abuse of consumers in credit transactions. Generally, there
is a myriad of laws that exist in the different states that could effectively
address the abuses that are occurring in the market today. These include
prohibitions against unfair and deceptive trade practices; prohibitions against
discrimination and redlining in finance transactions; limitations on specific
terms of consumer and mortgage credit; limitations on insurance products;
penalty provisions for non-compliance; prohibitions of deception
misrepresentation, non-disclosure and concealment; and common law rules against
fraud.
Before any additional laws are adopted, policy makers must
realize that it does no good to legislate against practices that are already
illegal in all jurisdictions. More laws will inevitably increase the complexity
and costs of lending without a corresponding increase in consumer protection.
Simply piling on more prohibitions will not resolve a crisis that today is
caused by actors that operate at the outer fringes of the law. To be serious
about solutions, we must pledge a full commitment to engage in serious
enforcement of the laws.
MBA fully understands that enforcement actions
are not an easy undertaking. They require much time, careful examinations,
documentation of disclosures and documents, documentation of sales techniques,
interviews with parties involved, among other things. In the end, however, this
is the most effective way to stamp out these pernicious practices. To this end,
MBA calls for increased funding of consumer protection agencies to accord them
with all necessary resources so that we may begin to, once and for all, clamp
down on unscrupulous actors in earnest.
Second, MBA believes that, in
order to fight
predatory lending, it is absolutely essential to
enact comprehensive reform of the current mortgage lending laws. As mentioned
above,
predatory lending is in many ways a symptom of larger
problems that have evolved from complicated and outdated mortgage laws. Without
broad changes to existing laws and comprehensive reform of current cost
disclosures, any efforts to address
predatory lending will
merely deal with the effects and not with the underlying causes of the problem.
If the process remains confusing and perplexing, consumers will continue to be
tricked and deceived. MBA has worked tirelessly to come up with a system that
improves the consumer's opportunities to shop and allows for timely and
effective disclosure of settlement costs and vital information to consumers.
Under MBA's comprehensive reform package, lenders would be allowed to
provide mortgage applicants with an early price guarantee that permits consumers
to effectively shop for mortgage products in the market. Under this plan, the
closing cost guarantee to be provided to consumers would include all costs
required by the lender to close the loan. This guaranteed disclosure system
would let consumers know, early in the mortgage application process, the maximum
settlement costs a lender could charge. Under MBA's plan, the cost guarantee
would be binding and enforceable.
MBA's reform proposal also seeks to
streamline all current federal loan disclosures so that they provide home
shoppers with clearer and more concise information without the confusion
inherent in the current forms. We envision a system where disclosures and
educational materials, including advising consumers of the availability of
counseling, would be provided to the consumer very early in the mortgage
application process, in effect. We believe that these educational materials must
be rewritten and restructured to make them more understandable and much
friendlier to consumers. For example, MBA believes that interactive resources or
the use of media other than booklets would go a long way in augmenting the
accessibility and the use of these materials. And, unlike the current RESPA
materials, these materials would contain full and comprehensive advice regarding
mortgage abuse, including possible sources of counseling.
We note also
that by streamlining the current legal and regulatory landscape, we also make it
easier to identify abuses and prosecute unscrupulous players. If we remove all
gray areas from the current process, and provide for clear penalties and
remedies that punish violators, we will make it easier to regulate, examine, and
enforce.
Lastly, and in connection with previous statements, MBA
believes that governmental agencies everywhere must do more to promote consumer
awareness and education. To this end, we support expanded funding for the
development of counseling programs and counseling certification systems that
assure that consumers receive all information they need to protect themselves in
this very complex transaction.
Conclusion
In summary, the MBA
believes that the continuing search for solutions to this problem must expand to
comprehensively include all the underlying factors that allow
predatory
lending to flourish. We can no longer afford to focus on band-aids that
merely cover up the harms. We must address
predatory lending
through direct attacks on three fronts -a commitment to full enforcement, robust
education, and a simplification of existing laws. Nothing short of that will
suffice.
Thank you for the opportunity to appear before the Committee. I
look forward to answering your questions.
LOAD-DATE: July 31, 2001