SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 6346 words

COMMITTEE: SENATE BANKING, HOUSING & URBAN AFFAIRS

HEADLINE: PREDATORY MORTGAGE LENDING

TESTIMONY-BY: JEFFREY ZELTZER, EXECUTIVE DIRECTOR,

AFFILIATION: NHEMA'S

BODY:
July 26, 2001

Statement On Behalf Of The National Home Equity Mortgage Association ("NHEMA")

By Jeffrey Zeltzer, NHEMA's Executive Director, NHEMA'S

To The Committee on Banking, Housing and Urban Affairs United States Senate For The Committee's

Hearings On "Predatory Mortgage Lending: The Problem, Impact, and Responses"

Chairman Sarbanes and Committee Members, I am Jeffrey Zeltzer, the Executive Director of The National Home Equity Mortgage Association ("NHEMA")1. I appreciate the opportunity to provide NHEMA's views on how to stop inappropriate mortgage lending practices that many now call "predatory lending." NHEMA abhors abusive lending and wants it stopped. We advocate a multi-track strategy for stopping these abuses: (1) tougher enforcement of existing laws; (2) voluntary industry self-policing by such things as adopting "Best Lending Practices" Guidelines; (3) greatly enhanced consumer education programs; (4) broad-based reform and simplification of RESPA and TILA requirements; and (5) targeted legislative reforms where appropriate to address specific abusive practices. Subsequently, we will comment further on each of these areas. Subprime consumer mortgage lenders are performing an extremely important service by making affordable credit available on reasonable terms to millions of Americans who otherwise could not easily meet their credit needs.Before the subprime market became well established over the past decade, consumers in many underserved markets often found it difficult, if not impossible to obtain credit. Today, virtually every American has the opportunity to obtain mortgage credit at fair and reasonable prices. We are very proud that our industry has played a key role in democratizing the mortgage credit markets and in helping so many consumers. We also are deeply troubled both by the continued existence of abusive lending practices in the subprime marketplace and by the unintended adverse consequences that are likely to arise if corrective measures are not drafted with extreme caret. NHEMA is committed to helping eradicate such lending abuses that are harming too many of our borrowers and undermining our industry's reputation. We commend Chairman Sarbanes and the Committee for focusing attention on this problem, and wepledge to work constructively with you to help stop the abuses.

Although there is little quantitative data to document the prevalence of such problems, we know that some abuses are occurring, and NHEMA believes that they must be stopped. None of our borrowers should be preyed upon and risk losing their homes by even a few unscrupulous mortgage brokers, lenders and home improvement contractors.Having devoted a great deal of time and resources to addressing these concerns, we are convinced that there is no single, simple "silver bullet" solution to prevent abusive or improper practices that some parties are perpetrating on unsuspecting and often unsophisticated borrowers. Before discussing our five part strategy for preventing mortgage lending abuses, we want to first share some general information and observations that we believe will be helpful to the Committee's understanding of the predatory lending issue and the subprime segment of the mortgage market.

Background

What is "Predatory Lending?" - While there is no precise definition of the term "predatory lending," it is generally recognized as a term that encompasses a variety of practices by home improvement contractors and mortgage brokers and lenders that are abusive, grossly unfair, deceptive and often fraudulent. These practices include such things as unreasonably high charges for interest rates, sales commissions (points) and closing costs, imposing loan terms that are unfair in particular situations, and outright fraudulent misrepresentations. In recent years, the label "predatory" has been used in recognition of the fact that some of the perpetrators literally prey upon the elderly, the less affluent, and more vulnerable homeowners, including in some cases, minorities.

"Subprime Lending" vs. "Predatory Lending" - While abusive practices do in fact occur to some extent in all types of consumer credit transactions, including the so-called "prime" or "conventional" mortgage market, it appears some abuses are concentrated more heavily in the subprime market segment. Regrettably, this occurrence has undoubtedly caused some people to confuse "subprime" and "predatory" lending. It is critically important that Congress fully understand that subprime mortgage lending should not be equated with "predatory." Subprime loans are a wholly legitimate and an absolutely vital segment of the broader mortgage market. Between 10% tol5% of all U.S. mortgages fall within the subprime category. Roughly 50% of subprime loans are originated through mortgage brokers, with the remainder coming from retail sales by lenders.

"Subprime" is the term that generally is used to refer to loan products that are offered to borrowers who do not qualify for what are called "prime" or conventional products. Prime mortgage borrowers have more pristine, "A" grade credit, are considered less risky and accordingly qualify for the lowest available rates. Borrowers whose qualifications are below the "prime" requirements are usually referred to as "subprime" and have to pay somewhat higher rates as they are viewed as being higher credit risks. Most subprime mortgage loans are made to people who have varying degrees of credit impairments. We want to emphasize, however, that many borrowers with "A" grade credit do not automatically qualify for prime mortgage rates because credit is not the only factor considered in underwriting a loan. Other issues, such as the amount of equity that the borrower has to invest in the property (the "loan to value ratio"), nonconforming property types, one's employment status or the lack of adequate loan documentation often prevent borrowers from qualifying for a prime mortgage product.

Unlike the relatively limited number of prime loan products, there are a wide variety of subprime products and rates, which reflect the more customized, risk-based pricing underwriting of the subprime market segment. Lenders in the subprime market usually offer mortgages in categories broadly described as "A- minus," "B," "C," and "D." (Many lenders have numerous subcategories with graduated prices within each of these general categories.) The majority of subprime loans, roughly 60%-65%, fall into the "A-minus" range and have interest rates only moderately higher than prime loans. Another 20%-25% qualify as "B", which have a few more credit impairments and slightly higher rates to reflect more risk. The remaining 10%-20% tend to be mostly "C" grade loans, which have substantially more credit defects, and a small percentage of "D" loans, which present the highest credit risks.

It is important to understand that while subprime borrowers present higher risks, and accordingly must be charged higher rates to reflect those risks, they still generally are good customers who remain current in their mortgage payments. They do, however, require a higher level of loan servicing work to help keep them on track, and this also entails higher costs to the lenders, which must be reflected in loan pricing.

Who are the subprime borrowers? - Many media stories relating to abuses in the subprime market have left people with a misimpression that most subprime borrowers are elderly, minorities, very poor and likely to be unable to repay their loans, and therefore are destined to lose their homes in foreclosure. In fact, the typical subprime customer is totally different from this stereotype. The overwhelming majority of subprime borrowers are white, not minorities. They are mostly in their 40s, with only a small percentage over 65 years old. And, their incomes typically range between $50,000 and $60,000 per year. Most repay in a timely manner, and the foreclosure rate is only somewhat higher than that for prime loans. The subprime borrower's profile is basically that of a "prime" borrower, and it is one's credit record, not age or race, that is the main distinguishing factor. NHEMA commissioned a study last year by SMR Research, which is one of the nation's leading independent mortgage market research and analysis firms, to review subprime lending. SMR's report, which we are providing to the Committee's staff, offers additional details regarding our market segment and customer characteristics.

Protecting Borrowers' Access to Credit

In sharp contrast to legitimate subprime or prime lending, some unethical loan originators do engage knowingly in abusive lending practices and many of these abuses are now often lumped together in the term "predatory lending." These abusive practices include a variety of improper marketing practices and inappropriate loan terms. Sometimes it is quite easy to identify predatory lending, but it often is much more difficult to determine whether abuses are occurring. Moreover, a number of the loan terms being attacked are not per se improper, but can sometimes be used improperly.

To illustrate this point, we want to highlight several loan terms typically help consumers and are not per se abusive, yet many consumer advocates now often seem to be alleging these terms are inherently predatory:

- Prepayment Fees - Many subprime loans contain terms that impose a prepayment fee or penalty if the borrower pays off the loan before the end of the agreed upon loan period. Some critics are strongly attacking prepayment fees as predatory and unfair, and some legislators have proposed prohibiting such fees. Are prepayment fees abusive? Most of the time, absolutely not. Prepayment fee clauses actually provide a major benefit to most consumers because they allow the borrower to get a significantly lower rate on the loan than they would get without the clause. Prepayment provisions are very important in keeping rates lower and helping make more credit available in the subprime market. Loans are priced based on the assumption that they will remain outstanding for some projected time period. If a loan is paid off earlier, the lenders or secondary market investors who may buy the loan cannot recover the up-front costs unless they address this issue in the terms of the loan. Instead of charging a higher interest rate or higher initial fees, lenders know it is usually fairer and better for the borrower to have an earlypayment fee to protect against losing these up-front costs. On the other hand, it is certainly possible to have an abusive prepayment clause that imposes too much of a penalty and/or that applies for too long a time. The point here is that most of the time the consumer benefits and the provision is not abusive. Sometimes, however, this otherwise wholly legitimate provision can be applied in an abusive manner. Again, the challenge for all of us is to find ways to prevent the abusive application of such provisions without denying the consumer the benefit of the provision, which applies in most cases.With regard to prepayment provisions, this benefit can be easily accomplished (e.g., requiring that the borrower be given an option of a product with and without the fee and limiting the fee amount and the time it is applicable).

Arbitration Clauses - Some parties contend that loan terms that require disputes between the lender and borrower to be arbitrated are inherently oppressive and abusive. We strongly disagree with such a general characterization of arbitration clauses. Yes, it is certainly possible to structure a clause so that it is unfair. For example, if a national lender operating in California required that the arbitration always be conducted at the lender's headquarters in New York, we think this is obviously unfair (and a court would probably not enforce such a loan clause). On the other hand, appropriately structured arbitration generally is recognized by courts as an acceptable, fair alternative dispute resolution procedure that frequently can benefit,all parties. Arbitration allows disputes to be resolved much more quickly and with less expense than litigation. Arbitration clauses that meet certain safeguards, such as restricting venue to where the property is located and compliance with the rules set forth by a nationally recognized arbitration organization, should not be deemed inherently abusive.

In addition to preserving such loan terms that are quite legitimate, NHEMA wishes to emphasize that attacks on certain lending practices are unjustified. In particular, some consumer advocates criticize the financing of points and fees by subprime lenders. We strongly believe that their criticisms are not valid. Most subprime borrowers do not have extra cash readily available to pay closing costs, so they voluntarily elect to finance them in connection with the loan. Prime borrowers often do the same thing. Subprime borrowers should not be discriminated against and should be allowed to continue to finance such costs. Why should they be forced to borrow money from other sources, typically at higher, unsecured rates, to pay such necessary costs? In many cases, it could prove very difficult, if not impossible, to obtain the funds needed to pay such costs.

Legislators and regulatory officials have a difficult task in balancing the competing and often conflicting considerations that arise in this area. While wanting abuses stopped, NHEMA cannot overemphasize the importance of moving very carefully and deliberately in addressing the abuses because there is a great danger that new restrictions would limit terms or practices that are generally helpful and desirable for most consumers.

NHEMA believes that this Committee can make a tremendous contribution by demonstrating how thoughtful legislators can sort through the complexities involved and develop truly workable provisions to the extent that additional legislation is needed as part of the overall solution.

How Best Can Abusive Lending Problems Be Addressed?

Although NHEMA does not believe that abusive or predatory practices are pervasive in the subprime mortgage sector, and we know that some alleged problems are not necessarily real abuses, we recognize that there are legitimate areas of concern. For example, "loan flipping," which involves repeated refinancing of a mortgage in a relatively brief period of time with little or no real economic benefit to the 'borrower, does occur to some degree, and it should be stopped. Likewise, far too many borrowers are victims of home improvement lending scams. Others are required to pay excessive loan origination fees to mortgage brokers or loan officers. Industry, regulators and legislators must work together to find effective ways to stop such abuses. In doing so, however, we must be very careful not to over-react and adopt inappropriate restrictions that raise the cost of subprime mortgage credit, or curtail credit availability to those who need it.

As mentioned earlier in our testimony, NHEMA believes that a multi-track strategy must be taken to deal with these questions:

(1) Greater Enforcement of Existing Laws and Regulations - A substantial portion of predatory lending abuses involve fraud and deception that are clearly already illegal. In many cases it also appears that some unscrupulous mortgage brokers and lenders are disregarding current laws such as the Real Estate Settlement Procedures Act ("RESPA"), the Home Ownership Equity Protection Act ("HOEPA"), the Equal Credit Opportunity Act ("ECOA"), and the Federal Trade Commission Act, which prohibits unfair and deceptive practices. First, and foremost, we feel that these laws, and related regulations, need to be enforced more vigorously. Many abuses could be handled quite effectively by better enforcement. The FTC has already brought a number of enforcement actions involving most of the recognized predatory lending practices under the existing HOEPA and the FTC Act, and has obtained a handful of settlements. Obviously, the FTC already has broad authority in this area. We hope that the FTC will do much more to enforce these current laws to curtail abuses. In addition, the Federal Reserve Board (FRB) is now in the process of issuing enhanced HOEPA regulations. NHEMA has provided information and comments to these and other regulatory bodies and will continue to work with regulators to help control abuses. NHEMA urges this Committee and the Congress generally to support making whatever additional appropriations are reasonably necessary to help federal agencies enforce the current laws and regulations more effectively. In addition, we encourage the agencies to request additional funds if they need them. It also is very important to remember that states have various laws and regulations that apply to many of the questionable practices. State regulatory officials and state legislators need to consider how existing state laws and regulations can be better enforced to prevent abusive lending practices.

(2) Consumer Education --- Helping Consumers to "BorrowSmart" - Obviously, a key element of the problem is that some borrowers, especially lower-income, less-educated people, do not understand their mortgage loan terms. NHEMA's number one priority is supporting the consumer's right of free and fair access to affordably priced credit. That priority is served by NHEMA's support of consumer education initiatives. Educated consumers are good borrowers. They know how to avoid unethical and abusive lending practices. They know how to get the loan terms that work best for them. And they know how to manage their money wisely and avoid running up new debt after taking out a home equity loan.To educate consumers, NHEMA created and supports the

BorrowSmart Public Education Foundation4, a separate organization, which is undertaking a number of education initiatives:

-BorrowSmart.org. This web site will show consumers how the home equity lending process works, offer tips for avoiding abusive practices, provide borrowers with resources they can turn to if they think they have been a victim of fraud of misrepresentation, educate borrowers about their rights and responsibilities and offer other valuable information.

Consumer Education Materials and Cooperation with Consumer Groups - NHEMA has produced consumer brochures for distribution by our member institutions to inform and educate borrowers about the loan process, and the importance of smart money management. We have distributed CD ROMs with consumer education materials to all our members so they can easily reproduce and distribute them to their customers. NHEMA also has worked to build education partnerships with consumer groups. For example, we have published a joint brochure with the Consumer Federation of America about the importance of keeping credit card debt in check after taking out a home equity loan to consolidate debt. The BorrowSmart Foundation is now taking over producing such educational materials and in working cooperatively with consumer groups.

In addition, NHEMA conferences, seminars and publications encourage association members to keep borrowers educated and informed. Our goal is to keep home equity loans available as a financial resource for all homeowners, while ensuring that every borrower understands how to use that resource wisely and effectively.

(3) Voluntary Actions - NHEMA has recognized that there is much that industry can do voluntarily to help raise industry standards and ensure that subprime mortgage lenders follow proper practices. We have taken a pro-active posture in this area. In 1998, NHEMA adopted a new, enhanced Code of Ethics to which our members subscribe. We also have adopted new Home Improvement Lending Guidelines (1998) and Credit Reporting Guidelines (2000). Last year, we adopted a particularly significant measure---new comprehensive Fair Lending and Best Practices Guidelines. These guidelines were the product of months of study and analysis, and reflect input from a broad cross-section of our membership. We believe that these guidelines will be very helpful in improving overall industry lending standards and practices. The guidelines provide a useful baseline of what generally should be considered to be appropriate lending practices and procedures.

(4) Comprehensive Legislative & Regulatory Reforms - NHEMA was an active participant in the so-called Mortgage Reform Working Group ("MRWG"), which began in the spring of 1997 and continued to 1999. This group came together at the urging of key Congressional leaders who wanted industry and consumer groups to try to reach consensus on how the mortgage lending process might be reformed. Participants spent literally thousands of hours considering how mortgage lending might be improved. MRWG participants included basically all relevant national trade organizations and many consumer groups. Representatives from HUD, the FTC and FRB participated in many of the sessions. Most MRWG participants agreed that there were various problems with the present statutory and regulatory structure as it applies to both prime and subprime mortgage lending. One of the biggest problems identified was that current laws and regulations are overly complex and often very confusing for both borrowers and lenders. This makes it very difficult for many consumers to understand what is occurring and to make proper shopping comparisons. It also poses a host of compliance burdens and uncertainties for lenders and mortgage brokers. A number of the participants, including NHEMA, put forth various reform concepts for discussion by the group, but no consensus was reached, and the process essentially ended without any resolution of the issues. Part of the reason that legislative reforms could not be agreed upon was, and is, that these are complex and difficult issues. For example, as noted earlier in my testimony, many of the loan terms that some parties object to are not necessarily abusive, and it is difficult to craft restrictions that do not do more harm than good. In any case, NHEMA believes that comprehensive reforms of current RESPA and TILA mortgage lending provisions should be seriously considered by Congress, and especially by this Committee. We are certain that changes can be made to encourage more informed comparison-shopping for home equity loans. Moreover, we believe that federal regulators can use their existing authorities to make significant improvements. In addition to the FRB's ongoing work regarding additional HOEPA regulations, we want to point out that HUD has authority to simplify and clarify many relevant policies and regulatory provisions. We urge this Committee to encourage HUD officials to utilize such authority, particularly as it relates to reducing some of RESPA's burdensome and confusing provisions.

(5) Carefully Crafted Legislation Targeted At Specific Abuses - NHEMA originally proposed new legislative safeguards to protect against particular abuses, such as loan flipping, as a part of its 1997 comprehensive legislative reform proposals. 6 We subsequently recognized that it might be easier to address many of these concerns in a narrower bill focused on particular practices. NHEMA has long said that new legislative safeguards appear to be merited in some cases. On the other hand, we have long voiced serious concern that many of the proposals put forward by legislators have been overly broad and would prohibit or unduly restrict perfectly legitimate lending practices while attempting to limit perceived abuses. The old saying that "the devil is in the details" is perhaps no place so appropriate as in the context of legislation intended to protect against predatory mortgage lending practices. We implore this Committee to be certain that any legislative proposals you may ultimately put forth have been carefully vetted to ensure that they are clear and do not have the unintended effect of curtailing legitimate lending practices instead of being targeted to stop only the abusive ones.

10 Key Issues for the Committee's Consideration

Given our ongoing efforts to stop abusive lending practices and our knowledge of the subprime marketplace, we believe it is helpful to highlight 10 key questions and considerations that Congress may wish to explore as you grapple with predatory lending concerns:

1) What loans should be made subject to special protections? - The present regulatory approach contained in the so-called HOEPA provisions of the TruthIn-Lending Act, essentially targets only the most costly loans made to higher risk borrowers. Under HOEPA, loans that have a rate that is more than 10% over a comparable Treasury bill rate, or that have certain loan fees and closing costs that exceed 8% of the loan amount or a minimum dollar amount, are subject to special protections. These enhanced safeguards include special disclosures and some specific substantive restrictions (e.g., no balloons less than 5 years in duration). Typically, most legislative proposals to address predatory lending, including that put forth earlier by Chairman Sarbanes, have proposed lowering the levels of both the rate and the point/fee triggers. In addition, proposals generally would change the definition of what items must be included in calculating the point/fee trigger amount. The effect of this computational change is to cause a dramatic increase in the number of loans that hit this second trigger level. NHEMA recognizes that Congress might conclude that some modest trigger reductions may be appropriate. However, we see no justification for sweeping in essentially all subprime loans (and many prime ones) as is frequently suggested in legislative proposals. Many lenders will not make HOEPA loans, which unfortunately have developed a very negative stigma, due to the very real reputational and legal risks involved. We fear that any significant expansion HOEPA's coverage will result in many lenders withdrawing from offering covered products and this will have a very negative impact on credit costs and availability. Moreover, we believe that abuses tend to be concentrated primarily in the highest risk grades which is where legislation should be targeted.

2) How might loan 'flipping" be prevented? - Without question, loan "flipping," which involves the frequent refinancing of a mortgage loan with the borrower receiving no meaningful benefit and typically having to pay significant refinancing fees, is one area where abuse does exist and where existing laws do not appear adequate to prevent it. Various approaches have been proposed to remedy this problem. Most suggestions have tended to apply special safeguards when a loan is refinanced within 12 months or some other relatively brief time period. The suggested restrictions include, for example: prohibiting or limiting the amount of sales commissions (points) that can be charged; requiring that the borrower receive a benefit from the refinancing; or allowing points to be charged only to the extent they reflect new money actually advanced to the borrower. NHEMA feels that when considering this issue, legislators need to recognize that many borrowers' views of what constitutes a benefit to them differs from what some of the industry's critics believe. Thus, most borrowers who obtain a loan for debt consolidation purposes consider it to be a very real and often critically important benefit to be able to lower their monthly payment even if they will have to pay more money over a longer period of time. Another important point to note is that some of the tests that have been proposed (i.e., requiring a "net tangible benefit") are hopelessly vague and certain to foster costly litigation. Legislators therefore need to develop simple, clear tests in any new provisions.

3) How should a provision be crafted to ensure a borrower's repayment ability is properly considered before a loan is made? - Lenders normally carefully review a borrower's credit record and economic situation to ensure that the borrower can repay the loan. In some instances, however, lenders may make the loan more on the basis of the value of the collateral property than on the borrower's ability to repay without reference to the underlying asset. Such asset based lending can lead to loan flipping and may eventually end in the borrower's losing his or her home in foreclosure. HOEPA currently contains a provision that prohibits lenders from engaging in a pattern and practice of lending without proper regard for repayment ability. If the Committee revises present law by removing the pattern and practice requirement, we urge that it do so in a simple and straightforward manner. Traditionally, many lenders have employed a 55% debt to income test, but if any such test is embodied in statute, it is important to make it clear that no presumption of a violation arises merely because such a test is not met. We also do not believe that it is necessary to try to employ some complex formula regarding residual income as some have suggested.

4) How should single premium credit insurance be treated? - Some lenders have offered customers various credit insurance products that are sold on a single premium basis where the cost is typically assessed at the time of loan closing and this cost is financed along with other closing costs.While those who sell such credit insurance generally have defended it as a valuable, fairly priced product, many consumer advocates strongly attack such single premium products. Recently several major lenders have announced that they are ceasing to offer such single pay products. Some have suggested that the continued sale of single premium insurance should be allowed, provided certain safeguards are met such as:requiring that the borrower be offered a choice of a monthly pay policy instead of a single pay product; requiring additional special disclosure notices relating to the product; and giving the borrower a right to cancel with a full refund for some period of time and thereafter the right to cancel with a refund based on an actuarial accounting method.Many companies believe that if additional restrictions are adopted they should, at a minimum, allow for the sale on credit insurance on a monthly pay basis.

5) How might safeguards be crafted to ensure certain legitimate loan terms are not misused? - Many predatory lending proposals would prohibit or severely restrict certain loan terms.Some of these terms, such as prepayment penalties, are not necessarily unfair or inappropriate. Quite to the contrary, some such terms are most often beneficial to the borrower. Therefore, it is critically important that any new limitations on loan terms be drafted so that legitimate uses of the terms are not prohibited. For example, prepayment penalties can be structured so that the borrower must be given a choice of a loan product with and without a penalty, and the amount of the penalty and the length of time it can apply also can be limited. By applying such balanced and carefully drafted provisions, the consumer can generally gain the significant benefit of lower rates by accepting a penalty provision, while the lender can be protected against loss of expected revenue on which the loan pricing is based. Certain other terms, like balloon payments, could be addressed with similar carefully crafted safeguards. Balloon mortgage payments usually are very helpful for consumers who need lower initial monthly payments for a period of time and who reasonably expect to have higher income to meet higher obligations later. A balloon provision allows many first-time homebuyers to acquire their home. There is nothing inherently wrong with using a balloon payment. On the other hand, an abusive mortgage originator can structure a mortgage with a balloon payment that some consumers can never expect to be able to meet. This could force the borrower to refinance one or more times, having the equity stripped out of his or her home, and ultimately being forced to sell the home, or face foreclosure. By contrast, still others, such as call provisions or accelerating interest upon default, might be appropriately prohibited outright.

6) Should restrictions be imposed on subprime borrowers' rights to finance loan closing costs? - Mortgage loan closing costs are usually substantial, amounting to several thousand dollars, and many borrowers, especially those in the subprime segment, do not have extra cash readily available to pay such costs. Borrowers therefore generally finance the closing costs and the amount of such costs are rolled into the loan and paid off over an extended period of time. Some parties who have sought to curtail subprime lending have proposed denying consumers' the right to finance their closing costs. NHEMA strongly objects to this unwarranted restriction. Subprime borrowers would be seriously harmed by such discriminatory treatment. Borrowers would have to obtain money to pay closing costs by borrowing from more expensive unsecured sources, or in some cases could not obtain the funds needed to close the loan.

7) Are more special disclosures needed? - Some have suggested adding to the disclosures that currently apply to HOEPA loans. NHEMA basically has no objection to enhancing some present disclosures. However, we do have concerns about continuing to flood the consumer with confusing, lengthy notices that most parties do not read, and would not understand if they did. Again, care must be taken in crafting any further notices (e.g., special foreclosure warnings) to ensure that they are clear, simple and actually helpful to borrowers.

8) Can home improvement lending scams be prevented? - It is well recognized that a great amount of the abuse in the subprime marketplace comes from home improvement lending scams. Vulnerable borrowers are suckered into loan transactions relating to home repairs and other improvements that are never made, or if made are not completed properly. HOEPA requires that home improvement loan disbursements must be made by checks that are payable to both the borrower and the contractor, or at the borrower's option to a third party escrow agent. NHEMA has also issued voluntary guidelines in this area. We urge the Committee to investigate whether there may be other viable restrictions that should be applied to prevent abuses in the home improvement area.

9) Should customers be forced to submit to mandatory credit counseling? - Some parties argue that all subprime customers should be required to submit to counseling sessions with a professional credit counselor. Although NHEMA strongly supports making counselors available to all customers and encouraging borrowers voluntarily to consider meeting both with a counselor, we do not support mandatory counseling in the case of all subprime loans. Mandatory counseling clearly is not necessary for most customers, and many would find it offensive to have to submit to counseling. Moreover, in many areas there is a serious shortage of qualified counselors, so such a requirement would unduly delay the loan process.

10) What must be done to achieve more uniform nationwide rules against abusive practices ?8 - Last, but certainly not least, is the issue of federal preemption. For most of NHEMA's members, the single biggest concern over predatory lending legislation arises because of the dozens of differing proposals that are constantly being put forth at the state and local levels. This year, we already have differing bills in thirty-odd jurisdictions. We believe that it is critical that Congress recognize that in today's nationwide credit markets, a uniform federal standard is needed for addressing predatory lending concerns. Compliance with scores of differing state and local rules in this area is impractical and unduly burdensome.

s Although this list is limited as a matter of priority and convenience to 10 items, certain other issues merit the Committee's consideration. For example, industry today typically already reports mortgage payment history data to credit bureaus. NHEMA thus supports requiring lenders to provide such data periodically to the major national consumer reporting agencies. We also have no problem with providing for a modest increase in penalties for violations of an amended HOEPA, but believe provisions should be added to allow lenders to correct unintentional errors. Another concern that the Committee might consider is the question of liability of secondary market participants. It is extremely difficult, and usually practically impossible, for secondary market participants to know if an abuse has occurred unless it happens to be evident on the face of the loan documents, which is rarely the case. An additional issue relates to the degree to which brokers' roles and compensation should be disclosed, and whether better licensing requirements are needed.

Federal preemption of differing state and local predatory lending measures is badly needed.

Mr. Chairman, these are difficult and complex issues. NHEMA trusts that this Committee and your House counterpart will give them very careful consideration, and we want to continue working in good faith with you to explore further how to stop abusive lending and related concerns. During this process, we encourage everyone to remember that the democratization of the credit markets that subprime mortgage lenders have helped achieve would be seriously undercut by most of the pending legislative proposals which are well-intended, but which have serious, unintended adverse consequences for needy borrowers. Ultimately, we hope that agreement can be reached on a package of reforms that will include workable provisions targeted to prevent particular abuses, together with some simplification and streamlining of current disclosure requirements and preemption of conflicting state and local laws

Thank you for this opportunity to present NHEMA's views.



LOAD-DATE: July 31, 2001