SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 1966 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: GEORGE J. WALLACE

BODY:
July 27,2001

TESTIMONY OF GEORGE J. WALLACE

BEFORE THE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE ON BEHALF OF THE AMERICAN FINANCIAL SERVICES ASSOCIATION

Good morning. I represent the American Financial Services Association ("AFSA"). AFSA is a trade association for a wide variety of market-funded lenders, many of whom make both prime and subprime loans to American consumers. AFSA looks forward to working with the Committee to examine the issues raised by the hearings held yesterday and today.

Allegations of predatory lending, particularly in the subprime mortgage market, have received a significant level of attention in recent months. Advocates of increased regulation have claimed that stepped up fraudulent or "predatory" marketing practices have persuaded vulnerable consumers to mortgage their homes in unwise loan transactions. Some consumer advocates have gone considerably farther and asserted that various loan products and features common to the mortgage market are "predatory" and should be outlawed. Most of the regulatory changes sought have a common, very troubling, approach. They impose significantly restrictive new regulation on all mortgage loans, or all loans over a designated interest rate or points threshold, even if there is no evidence of fraudulent marketing. This approach confuses the symptoms with the causes and its adoption would be a serious mistake, because it fails to recognize or address the real causes of the problem, and would seriously undercut the important goal of maintaining the availability of credit for working American families.

Much of this proposed regulation seeks to control credit prices, directly or indirectly, by limiting or discouraging points, fees, and higher interest rates. Some proposals also restrict credit terms or require burdensome new compliance steps, such as extended new disclosures. Several others aim at restricting marketing methods, particularly when refinancing is involved. Finally, several proposals have urged turning the already strong remedial and penalty provisions of present law into extremely broad punitive provisions.

These proposals, taken as a whole, would dramatically reduce loan revenue, increase the risk, and/or increase costs the lender must bear. While initially the resulting burdens fall on the lenders who continue to make loans subject to new regulation, in the long term, the effects will almost always be felt directly by working American families, either because of decreased loan availability, higher credit prices or less flexible loan administration.

Thus this call for increased regulation, well intended as it undoubtedly is, strikes at the very heart of the efforts over the last quarter Century of Congress, many States, consumer advocacy groups and the lending industry to make efficiently priced consumer credit available to working American families, including minorities, single parent families, and others who for so long were unable to obtain credit. In testimony before this Committee in 1993, Deepak Bhargava, Legislative Director for ACORN, spoke of "a credit famine in low- and moderate-income and minority communities in urban and rural areas" demonstrated by "[a]bundant anecdotal and statistical evidence [pointing to] "massive problems of credit access in many communities around the country, particularly in minority and low-income areas".' He also pointed out that "[I]ack of access to credit thwarts community development efforts, and the creation of employment and housing opportunities for millions of American families. ,2

In 1993, subprime credit was a very small part of the credit market. Today, subprime credit is approximately 25% of home equity credit outstanding, and a very significant part of purchase money credit. Yet some of the legislative proposals advanced by consumer advocates this year would unwisely impose stringent new regulations and disclosures, including what amounts to strict price and terms limitations, on virtually all of that credit. Even the pending Federal Reserve Board proposals would impose heavy additional regulatory burdens. A study of AFSA member loans originated over the last 5 years suggests that the pending Federal Reserve Board proposal would increase the number of first mortgages covered by HOEPA from 12.4% today to 37.6%, and second mortgages from 49.6% to 81 .1%..3 The effect, if not the goal, of these proposals will likely be to substantially shrink the subprime mortgage market, a point underlined by Freddie Mac's announcement in the Spring of 2000 that it would not purchase any HOEPA loan, a policy now mirrored by Fannie Mae. 4,5

Subprime lenders, spurred on by Congress, have been enormously successful in delivering efficiently priced consumer credit to working American families, regardless of race, ethnicity or background. Such families use mortgage credit for many purposes, among them acquiring homes, working their way out of credit difficulty by consolidation and refinancing, making home improvements, and college education. We are proud to report that during the last five years, 96% of those who have borrowed from AFSA members using subprime mortgage loans have used the credit successfully. 85% of those subprime borrowers paid in full and on time. The remaining I I%, in varying degree, may have missed a payment here and there, but ultimately used the credit successfully. 6 It is true, of course, that subprime lending does experience higher losses than conventional lending. That is why it is priced as it is. But the basic point is that most Americans who use subprime credit use it successfully. Under what policy prescription would government deny to Americans with less than first class credit access to all the benefits of credit that middle class Americans enjoy? The 96% of Americans who use the credit extended by AFSA members successfully are not asking for that interference.

There are some people who have been the victims of fraudulent, deceptive, illegal and unfair practices in the marketing of mortgage loans. Advocates have mistakenly focused on loan products and features as the reason why these victims experienced such adverse outcomes, and reached the faulty conclusion that if regulation just barred certain loan features, the harm would have been avoided. Pursuing that mistaken reasoning, they have tried to label as "predatory," highly regulated loan products and features, which are entirely legal (such as credit insurance, prepayment penalties, balloon payments, arbitration, and higher rates and fees). However, most of the loan features called "predatory" are not generally known as "predatory" practices - they are legitimate, legal, and common in mainstream prime and subprime lending. Any legitimate consumer good or service can be marketed fraudulently. Indeed, the scam artist prefers to use legitimate products, like loans, as a cover because consumers want and need the product. The illegality comes in the fraudulent marketing of the good or service, not in the good or service itself.

We urge that Congress not confuse the loan products that consumers want and need, with the fraudulent marketing practices that a few isolated operators have used to prey upon the unfortunate. Predatory lending is fundamentally the result of misleading and fraudulent sales practices already prohibited by a formidable array of federal and state law, including section 5 of the Federal Trade Commission Act, criminal fraud statutes, state deceptive practices statutes, and civil rights laws. Aggressive enforcement efforts by the FTC, HUD and the Civil Rights Division of the Justice Department, as well as by the States'Attomey Generals are underway. The existing array of state and federal regulation of fraudulent practices is already sufficient to deal with the deceptive, fraudulent and unfair practices that make up "predatory lending", and we suggest that there is no better deterrent to this type of behavior than successful prosecution. On the other hand, the subprime market is already very heavily burdened with restrictions and requirements imposed at the State and federal levels. Additional regulation of the type advocates have proposed will hurt the vast majority of working American families by raising credit prices and reducing credit availability. That is simply not a desirable policy outcome, particularly when it is not likely to deal with the real problem.

If fraudulent and deceptive practices are the root of the problem, what is the appropriate policy to address predatory lending?

First, Congress should do no harm to the present system which has been extremely successful in delivering consumer credit to America's working families. As said before, more restrictions on credit prices, terms and practices does not address the fraud which is the root of the problem, and it results in taking away from working American families the lending products they desire and it has been the goal of Congress to provide. Remember that over a 5 year period, 96% of those who used subprime lending from AFSA members did so successfully. Such policy prescriptions as lowering HOEPA thresholds and forbidding such features as balloon payments, financed single premium life, accident and health insurance and prepayment fees in more and more loans is not appropriate policy, because it takes away legitimate tools to shape credit to the needs of America's working families.

AFSA has been a leader in developing educational programs to help meet the enormous need American consumers have for greater financial literacy. As a founding member of the Jump Start Coalition, a coalition of industry, government and private groups dedicated to increasing financial literacy, it has for several years pushed strongly for increased efforts to educate Americans about credit. We urge Congress to support these and other efforts, because they hold the greatest promise to help over the long run. As we all know, the best defense against fraudulent sales practices is the informed consumer, and informed consumers can best evaluate whether they want or can afford to borrow more.

Industry self regulation likewise plays an important role. AFSA has developed "Best Practices" which its member companies have voluntarily adopted. They address the controversial terms which consumer advocates have often targeted, and they strike a balance between reasonable limits and providing legitimate consumer benefits in appropriate circumstances. Other associations of lenders, including the Mortgage Bankers Association, have adopted "Best Practices" as well, and they hold a great deal of promise. A copy of AFSA's best practices on home equity lending (Statement of Voluntary Standards for Consumer Mortgage Lending) is attached as Appendix A.

Government's role is appropriately the vigorous enforcement of the deceptive practices and civil rights laws. Any objective analysis of these laws must reach the conclusion that they provide powerful tools to address both fraudulent sales practices and discrimination. Strong enforcement is appropriate because it addresses the real problem, the fraudulent and discriminatory practices that make an otherwise legitimate loan "predatory", without affecting the overall ability of lenders to make loans available to working American families with less than perfect credit. That is the appropriate policy balance between dealing with the real misfortunes which a few borrowers have experienced and the continued availability of credit to working American families. We urge Congress to encourage that an appropriate balance be maintained.

Thank you for the opportunity to address the Committee, and I look forward to any questions you may have.



LOAD-DATE: July 31, 2001