SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 4121 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: MR. NEILL FENDLY,CMC, PAST PRESIDENT OF THE

AFFILIATION: NATIONAL ASSOCIATION OF MORTGAGE BROKERS

BODY:
July 27, 2001

Hearing on

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

Prepared Testimony of

Mr. Neill Fendly,CMC Past President National Association of Mortgage Brokers

Mr. Chairman and Members of the Committee, I am the Immediate Past President of the National Association of Mortgage Brokers (NAMB), the nation's largest organization exclusively representing the interests of the mortgage brokerage industry. We appreciate the opportunity to address you today on the subject of abusive mortgage lending practices.

NAMB currently has over 12,000 members and 41 affiliated State associations nationwide. NAMB provides education, certification, industry representation, and publications for the mortgage broker industry. NAMB members subscribe to a strict code of ethics and a set of best business practices that promote integrity, confidentiality, and above all, the highest levels of professional service to the consumer. In these hearings, the Committee will hear a number of individual stories as well as comments from advocates about some egregious, and in our view inexcusable, mortgage lending practices. You will also hear from others in the mortgage industry about possible solutions, which NAMB supports and is actively involved in developing. My testimony today will briefly outline some of these. But I would like to focus this testimony on helping the Committee understand the important and unique role of mortgage brokers in the mortgage marketplace, and offer the unique perspective of mortgage brokers in examining the problem of predatory lending.

Today, our nation enjoys an all-time record rate of homeownership. While many factors have contributed to this record of success, one of the principal factors has been the rise of wholesale lending through mortgage brokers. Mortgage brokers have brought consumers more choices and diversity in loan programs and products than they can obtain from a branch office of even the largest national retail lender. Brokers also offer consumers superior expertise and assistance in getting through the tedious and complicated loan process, often finding loans for borrowers that may have been turned down by other lenders. Meanwhile, mortgage brokers offer lenders a far less expensive alternative for nationwide product distribution without huge investments in "brick and mortar."

In light of these realities, it is no surprise that consumers have increasingly turned to mortgage brokers. Today, mortgage brokers originate more than sixty percent of all residential mortgages in America. The rise of the mortgage broker has been accompanied by a decline in mortgage interest rates and closing costs, an increase in the homeownership rate, and an explosion in the number of mortgage products available to consumers. These positive developments are not mere coincidences. They would not have been possible without the advent of wholesale lending through mortgage brokers.

Mortgage brokers now have an extremely important role in our economy. With the collapse of the savings and loan industry in the 1980s, followed by the rapid consolidation of mortgage banking firms in the 1990s, today we find that in many communities, particularly in central cities and small towns, people might have a hard time finding a retail bank branch or retail mortgage lending branch. But they can usually find a mortgage broker right in their community that gives them access to hundreds of loan programs. Mortgage brokers are generally small business people who know their neighbors, build their businesses through referrals from satisfied customers, and succeed by becoming active members of their communities.

The recent expansion in subprime lending, which has been noted by the Committee in these hearings and others, has also relied heavily on mortgage brokers. Mortgage brokers originate about half of all subprime loans. Many mortgage brokers are specialists in finding loans for people who have been turned down by other lenders. These are hard-working people who, for one reason or many reasons, do not fit the profile that major lenders prefer for their customers. Each of them is unique. Some lenders just do not want to be bothered with such customers that take a little more time and effort to qualify. Some do not want to accept the risk of lending to someone who may have had a bankruptcy, an uneven employment history, or a problem with a previous creditor.

Mortgage brokers can usually find a loan for someone who has been turned down by others. Most mortgage brokers who originate subprime loans do so primarily because they enjoy helping people. Certainly these loans can be profitable, and borrowers do pay higher rates and fees because of the increased risk, but subprime loans are also time-consuming and often very difficult to arrange.

Mortgage brokers often do an amazing amount of work on these loans. They work with borrowers, sometimes for weeks, to help them understand their credit problems, work out problems with other creditors, clean up their credit reports when possible, and review many possible options for either purchasing a home or utilizing their existing home equity as a tool to improve their financial situation. The brokers are rewarded with the knowledge that they have enabled a hard-working family to buy its first home, avoid foreclosure, get out from under a crushing load of high-rate credit card debt, finance their children's education, pay delinquent taxes, repair their homes, and even help their parents pay off their mortgages and health care bills.

People of all income levels may end up in situations that leave them unable to qualify for the lowest mortgage rates and fees. But they still need, and deserve to have, access to mortgage credit. It is a lifeline for those who are drowning in debt, facing a huge medical bill, trying to survive a layoff. It is the least expensive source of credit for those who may have made some mistakes or had some misfortune in the past and now need money to improve their home, finance their children's education, or even start a business. They need to have the widest possible range of choices when they are buying a home or need a second mortgage. And today they do. It is important for them, and for others like them in the future, that Congress be very careful to avoid measures that will rob them of choices they deserve and the tools they need to manage and improve their financial situation.

One of the most important choices available to consumers with low incomes, little or no cash, and/or impaired credit is the "no- or low-cost" loan. Mortgage brokers have originated thousands of loans for people who were able to buy a home, refinance, or obtain a home equity loan with little or no upfront closing costs or broker fees. These costs are financed through an adjustment to the interest rate. Retail lenders offer "no- or low-cost" loans at adjusted rates as well. When a mortgage broker arranges a loan like this, the broker is compensated by the lender from the proceeds of the loan. This kind of payment goes by many names, but is often called a "yield spread premium." These payments are perfectly legitimate and legal under federal law, the Real Estate Settlement Procedures Act, so long as they are reasonable fees and the broker is providing goods, services, and facilities to the lender. These payments to mortgage brokers are also fully disclosed to borrowers on the Good Faith Estimate and the HUD-1 settlement statement, and are included in the interest rate. Retail lenders, however, are not required to disclose their profit on a loan that is subsequently sold in the secondary market, as most mortgages are today.

This method of enabling consumers to obtain loans through mortgage brokers with little or no upfront costs is now under assault in the courts. Despite Statement of Policy 1999-1, issued at the direction of Congress by the Department of Housing and Urban Development in 1999, which clearly set forth the Department's view that the legality of mortgage broker compensation must be judged on a case by case basis, trial lawyers across America have continued to file and pursue class action lawsuits claiming that all such payments are illegal and abusive.

Recently, the 11th Circuit agreed with the plaintiff in one of these suits and allowed a class action to be certified. Although at first glance this appears to be only a procedural decision, it has resulted in a flood of new litigation against mortgage brokers and wholesale lenders, and caused a great deal of uncertainty and anxiety in the mortgage industry. The cost of defending these class actions is staggering. The potential liability could run to over a billion dollars. The prospect of a court deciding that the prevalent method of compensation for over half the mortgage loans in America is illegal is chilling, to say the least.

If these lawsuits succeed, some lawyers will benefit at the expense of the mortgage industry. Their clients might get small refunds, or a few dollars off the cost of their next loan. But the real losers will be tomorrow's first time home buyers, tomorrow's working families, tomorrow's entrepreneurs who will not be able to get a mortgage without paying hundreds of dollars up front. And, further down this road, many small businessmen and women may not be able to stay in business as mortgage brokers without being able to offer these "no-cost" loans. As competition decreases, all potential mortgage borrowers will suffer higher costs and fewer choices.

This illustrates the unintended consequences that can come from litigation, regulation, or legislation that singles out one part of the mortgage industry, places blanket restrictions or prohibitions of certain types of loan terms or products, or places unreasonable restrictions on interest rates and fees. We have ample reason to believe that such measures will increase the cost of homeownership, restrict consumer choice, and reduce the availability of credit, primarily to low- and moderate-income consumers.

To further illustrate the problem with blanket restrictions on loan terms, consider the balloon loan. A balloon term in a given loan could be abusive if the borrower has not been advised that the loan contains such a feature and is not prepared for the practical ramifications. Further, it may be that the borrower's situation does not make such a feature appropriate. Yet, very often, a balloon is a valuable tool to help a borrower obtain a lower interest rate and lower monthly payments that are affordable. If the borrower's circumstances are such that a refinance loan should be reasonably feasible at some time in the future, and possibly even at a lower interest rate because the borrower has improved his or her credit standing in the meanwhile, then a balloon term can be a desirable feature. Many reputable, mainstream lenders offer balloon loans to customers in all credit grades, and many borrowers freely choose such loans, because they are good options in many cases.

The same is true for other loan terms or conditions frequently cited as abusive, including negative amortization, prepayment penalties, financing of closing costs, and even arbitration clauses. In certain circumstances, each of these may be abusive, but in the majority of cases they provide the consumer with a feature that fits his or her unique circumstances, such as a reduced interest rate or lower monthly payment.

Virtually no loan terms are always abusive, and almost any loan term that is offered in the market today can be beneficial to some consumers. Whether a loan is abusive is a question that turns on context and circumstances, from case to case. This is the primary reason why NAMB and the mortgage industry have opposed legislation or regulation that would impose new, blanket restrictions or prohibitions on loan terms. We believe such measures will increase the cost of homeownership, restrict consumer choice, and reduce the availability of credit, primarily to low- and moderate-income consumers.

NAMB believes that the problem of predatory lending is a threefold problem of: abusive practices by a small number of bad actors; lack of consumer awareness about loan terms; and the complexity of the mortgage process itself. We believe all three of these areas must be addressed, together and with equal force, if the problem is to be solved without the unintended consequences mentioned earlier. The mortgage industry is working vigorously in all three areas, and NAMB wants to continue working with Congress to address all these areas - in particular, reform and simplification of the mortgage process.

Addressing Abusive Practices

Those of us who are hard-working, reputable mortgage originators want nothing more than to get the bad actors out of our industry. We do not like competing against people who fraudulently promise deceptively low rates or costs and don't disclose their fees, thereby making those of us who obey the law appear more expensive. We do not like the bad publicity our industry receives from media stories about lenders or brokers who take advantage of senior citizens and poor people. We know the long term survival of our industry depends on having satisfied customers and maintaining the trust people have in us as professionals, so we cannot afford to have anyone making loans that hurt consumers and violate that trust.

All types of institutions have bad actors among their ranks. This is not an issue that is confined to lenders, mortgage brokers, depository institutions, or independent companies. Bad actors are found among all of these types of entities. We wish to emphasize in particular that mortgage brokers are not the only ones involved; we have observed that many have blurred the distinction between mortgage brokers and various other types of companies.

A popular misconception is the belief that abusive lenders operate within existing regulatory guidelines. Rather, most of them choose to ignore laws and regulations that properly apply to them. There is a small minority of institutions that do not obtain state licensure as required. Some ignore state consumer protection laws. They do not observe the existing restrictions in the federal HOEPA. They may even violate basic disclosure rules under RESPA and TILA. In many cases they are committing outright fraud, which violates yet other state and federal statutes. And, in general, they do not join industry groups such as NAMB or the comparable organizations for their respective industries.

There are many tools at our disposal now to deal with these people and companies. Laws already exist at the federal and state level that give regulators and prosecutors the authority to revoke licenses, impose fines, and even pursue criminal prosecution of lenders or brokers that commit fraud, charge unreasonable fees, and otherwise violate HOEPA, RESPA, TILA, and other federal statutes. The Federal Trade Commission has brought enforcement actions under HOEPA. These enforcement actions do have a deterrent effect on others. The Department of Housing and Urban Development is improving its own lender approval and enforcement policies for FHA lending. Many states have toughened their licensing laws, usually with the full support of our affiliated state mortgage broker associations.

The industry is also taking steps to address practices and behaviors in the market that can be eliminated and thereby maintain trust in our industry. We note that one of these, the sale of single premium credit life insurance, has been dramatically curtailed in recent weeks by the major companies involved with that product. In another example, a major subprime lender recently stopped using several hundred mortgage originators that did not meet its standards of professional practice. NAMB supported this effort and continues to encourage wholesale lenders to use their broker agreements to ensure sound origination practices. NAMB and other major mortgage lending organizations have adopted Codes of Ethics and Best Business Practices guidelines, and we all encourage consumers to make sure that their lender or broker is a member of one of these national organizations.

Another unacceptable practice is loan flipping. NAMB supports reasonable measures that would stop this kind of abusive practice, but still allow people to refinance their loans when they need to. For example, we support the proposal by the Federal Reserve to limit the amount of fees that can be charged in a refinance of a HOEPA loan by the existing lender to the new money financed. Some subprime lenders are addressing this practice by discouraging frequent refinancing of their existing customers. One major subprime lender just this week announced new measures to ensure that refinances truly benefit the borrower. We think this is a great step that other lenders should and will soon follow. Many of the consumer groups here today are working with major lenders on these industry initiatives.

Consumer Education

The second part of addressing predatory lending is improving consumer awareness. An informed consumer is almost never a victim of a predatory loan. Every organization coming before the Committee today is involved in some way with consumer education. NAMB encourages its members to never originate a loan to an uninformed consumer. NAMB's website includes extensive consumer information and links to sites that provide consumers a wealth of information they can use to make informed mortgage choices. The NAMB Mortgage 101 Center provides consumers with information from one of the mortgage industry's most popular and reliable online resources. The website provides consumers with information, in an unbiased manner, about completing applications, the purpose of an appraisal, bankruptcy and its alternatives, mortgage calculators, down payments, FHA loans, loan programs, refinancing, relocation, second mortgages, VA loans and many other topics. This website provides consumers with unbiased answers to many basic questions and many more specific issues.

Fannie Mae, with its "Consumer Bill of Rights" campaign and Freddie Mac with its "Don't Borrow Trouble" campaign are putting millions of dollars into educating people about how to choose a good mortgage loan and avoid being victims of predatory lending. AARP has launched a great education campaign aimed at seniors, who are often the target of predatory lenders. NAMB supports these efforts.

It is also important for consumers to understand how to use credit, and the impact of their credit on their ability to obtain a mortgage at the lowest cost. There are also industry efforts underway in this area, and we understand Senator Corzine and others on this Committee are looking at ways to use federal education programs and dollars to promote financial education in the public schools. NAMB supports the education of consumers in broader financial issues, such as managing money, managing credit card debt, and other important issues. Ideally, these areas should be taught routinely as part of the standard junior high school or high school curricula in schools. NAMB has also dramatically increased educational programs offered to its members, and revamped its certification program, to encourage all mortgage brokers to be well informed about current laws, regulations, and ethical business practices.

Comprehensive Mortgage Reform

The third part of the solution is one into which NAMB has put a tremendous amount of effort. That is a comprehensive overhaul of the statutory framework governing mortgage lending. We cannot emphasize enough to this Committee how badly this framework needs to be changed, and how important this is to curtailing abusive lending.

The two major statutes governing mortgage lending were enacted in 1968 and 1974. The disclosures required under these laws are confusing and overlapping. The laws actually prevent consumers from being as well informed as they could be, and put consumers at a decided disadvantage in the mortgage process. For example, in most cases the borrower does not know the exact amount of the closing costs until he/she arrives at the closing, because the law requires only that costs be estimated early in the process. The way the interest rate, terms, and monthly payments on a mortgage are calculated and disclosed is confusing and makes it impossible for consumers to effectively compare different types of mortgage products. Mortgage brokers are required to itemize their profit on each loan, but retail lenders are not.

This is all terribly confusing to consumers. The entire process is much too complicated in a modern world of instant communications and one-click transactions. Mortgage brokers are confronted every day with the frustrations of our customers about the many confusing, and largely useless, disclosures and paperwork. And we know better than anyone that unscrupulous lenders take advantage of this complexity and confusion to deceive and mislead borrowers, hide onerous loan terms in pages of fine print, and load up unnecessary fees at closing when the borrower feels pressured and unable to walk away. Confused consumers, oftentimes desperate for cash or credit, are more likely to simply rely on the word of an unscrupulous loan officer and not question their loan terms, rates, or fees.

If the mortgage process were simplified, as we have proposed, consumers could more effectively shop for loans. They could easily compare fixed-rate, adjustable-rate, balloon loans, etc. They would have simple disclosures without a lot of fine print that can hide deceptive fees or onerous loan terms. They would easily be able to question and change terms and fees with which they do not agree, well before closing. In addition, a simplified process would reduce costs for originators, and the savings would be passed on to consumers. These changes would put the consumer in a stronger position with more information, thereby drastically decreasing the opportunities for abusive lending.

NAMB has been engaged from the beginning in efforts to reform the laws regulating mortgage originations. We participated in the Negotiated Rulemaking convened by HUD in 1995, which sought to resolve the issues surrounding mortgage broker compensation under RESPA. Following that effort, it became apparent to NAMB that the entire statutory framework governing mortgage lending needed an overhaul. In 1996, NAMB was the first major industry group to form an internal task force on mortgage reform and begin developing a proposal for comprehensive reform of RESPA and TILA. We participated in the Mortgage Reform Working Group in 1997 and 1998, which sought to reach a consensus among industry and consumer advocates on how to reform RESPA and TILA. And we participated in the HUD-Treasury Department joint task force on predatory lending convened by the previous Secretaries of HUD and Treasury, in which we continued to press the case for comprehensive reform.

NAMB remains committed to the goal of comprehensive mortgage reform and simplification. We urge this Committee in the strongest terms to work with our industry on reform legislation. We ask the consumer advocates here to re-engage with us in developing a reform proposal. Without comprehensive statutory reform and simplification of the entire process, consumers will still be too confused and too vulnerable to deceptive disclosures and unnecessary fees at closing. Legislation that seeks only to restrict or prohibit certain loan terms or pricing will only add to the complexity of the process and reduce the availability of credit.

In conclusion, I want to reiterate that NAMB supports measures by the industry and regulators to curb abusive practices, punish those who do abuse consumers, and promote good lending practices. We support legislation that would reform and simplify the mortgage process, and believe this is the legislation that is most needed to empower consumers. We believe the problem of predatory lending can only be solved through a three-pronged approach of enforcing existing laws and targeting bad actors; educating consumers; and reforming and simplifying the mortgage process. In considering any new legislation, we urge Congress to apply this fundamental principle:

Expanding consumer awareness and consumer power, rather than restricting consumer choice and product diversity, should be the goal of any new legislation affecting the mortgage process.

Thank you for this opportunity to express our views. We look forward to working with the Committee in the future.



LOAD-DATE: July 31, 2001