SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 829 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: PHIL GRAMM, SENATOR

BODY:
July 26, 2001

GRAMM DEFENDS SUBPRIME BORROWERS, ACCESS TO CREDIT

Senator Phil Gramm, ranking member of the Committee on Banking, Housing and Urban Affairs, made the following statement today at a Banking Committee hearing on predatory mortgage lending:

"Mr. Chairman, thank you for this hearing.

"Let me say that one of the blessings of living in a strong economy with a healthy savings rate, that is made substantially better by the federal government running a surplus, is that for the first time in American history we have an active out reach program by private lenders to lend to people who under ordinary circumstances would have a very difficult time borrowing money, people who would end up borrowing money from other sources such as kinfolks or in the sort of back street market where abuses would be substantial.

"Let me assure you, Mr. Chairman, that I am committed to cracking down on crooks and people who abuse the system, and who abuse borrowers. I want to be sure though, that in trying to get at the bad guys we don't put into place policies that destroy a market that is serving an increasing number of people. We will hear later today that the default rate in some areas of subprime lending is as much as 23 percent, That is a massive default rate, but the good news is that 77 percent of those borrowers did pay the loan back, and in doing' so established good credit. This is something that I feel very strongly about_ That is the success story.

"52 years ago my momma bought a house. She had three children and no husband. She was a practical nurse who worked in a -system where you worked when your number carne up, and when your number came up you got to take the job. And so she did not have, for all practical purposes, a full time job. She borrowed for a house that cost $9200. She borrowed this money from a finance company, and she paid 50 percent more than the market rate for that loan. Now some people would say that was an abusive loan, that it was predatory lending. I would beg to differ_

"First of all my mother was the first person that I am aware of since Adam and Eve, in our branch of the human family, who ever owned a dwelling where she lived. She paid off that loan, and 52 years later her credit is golden. Any bank in Columbus, Georgia, would loan my mother money, because in all her 52 years of record there was never a time when she has ever borrowed a penny she has not paid back

"Now my point is the following. We have to be very careful in trying to deal with an abuse that exists, that we don't create a situation where credible lenders, non-abusive lenders, good lenders, will get out of the subprime market. If we end up doing that, if we end up falling victim to this rule or law of unintended consequences, the problem will be that the 77 percent of the people who are paying these loans back, won't get the loans. People will end up being forced to borrow in a more informal market. People won't be able to buy their own homes, and I think this is something that we have to measure. I think all good public policy is based on cost and benefits, the unintended consequence versus the intended consequence. This is something that I am going to try and watch very carefully, because again, subprime lending is something that I view as a very good thing.

"I will never forget when I was a member of the House of Representatives, and someone came up to me who said, don't you think that 6 percent is a fair interest rate'? And I said, fair to whom? And he said fair to the borrower and fair to the lender T- don't you think we ought to have a law that says interest rates are set at 6 percent? Well, I said, that would be great, but if the market didn't produce more than a 6 percent interest rate then you would have massive shortages of credit, and you would disrupt the credit markets. Yes, I think zero interest would be a great rate - I would borrow a lot of money at that rate, but nobody would lend me the money.

"I think we have to be sure we know what we axe doing, not just focusing ou the evil we hope to drive out of the system, but also take care that the good is not driven out of the system. It is hard to define many things in the world, hard to define pornography as they say, but I agree with the old saying, I know it when I see it_ But I think that when you are making law it is important to try and define what you are doing. My guess is, if you ask a hundred people in America to define what predatory lending is, you are going to get a hundred different definitions of what we are talking about. Many people define predatory lending as lending at above prime. I am sure that what predatory lending is to one person is not the same thing as to another. But I think that it is important that we know what we are doing and that we know what we are trying to eliminate, and that we are aware of what the unintended consequences might be.

"Thank you Mr. Chairman.



LOAD-DATE: July 30, 2001