Good morning, Chairman Sarbanes, Ranking Member Gramm, and members of the Senate Banking, Housing and Urban Affairs Committee. My name is Esther "Tess" Canja. I live in Port Charlotte, Florida, and I serve as President of AARP.
AARP is actively engaged in efforts to protect consumer rights and interests. The Association has been directly involved since the early 1990s in researching issues, litigating cases, and working with federal and state regulatory agencies and legislative bodies to expose, hold accountable and seek redress from those who are responsible for a wide range of exploitive financial practices.
AARP appreciates this opportunity to bring into greater focus one of the most troubling forms of these exploitive financial practices – which is making unjustifiable high cost home equity loans to older Americans. For most Americans, home equity accumulation is a factor of time (for many a "working lifetime"), and therefore is highly correlated with age. For older Americans, the most abusive loans are often the refinancing and equity-based home modification loans because they target the value of the home – frequently the owner’s largest financial asset. These forms of abusive lending are particularly devastating when the older homeowner is living on a modest or fixed income.
It has been AARP's long-standing view that loans become predatory when they:
• take advantage of a borrower's inexperience, vulnerabilities and/or lack of information;
• are priced at an interest rate and contain fees that cannot be justified by credit risk;
• manipulate a borrower to obtain a loan that the borrower cannot afford to repay; and/or
• defraud the borrower.
The investment in homeownership among older Americans is substantial. For example, based on American Housing Survey data for 1999, the median mortgage loan-to-value ratios (LTVs) steadily decrease from 74.8 for those under 35 years of age, to 31.7 for those age 65 and older. That is to say, the median homeowner’s equity increases by more than two-and-one-half times by age 65+. The U.S. Census reports that American homeownership averaged an all-time high of 67.4 percent for the year 2000.
What is it about older American homeowners that makes them particularly attractive to predatory lenders? Older homeowners are often targeted for mortgage refinancing and home equity loans because they are more likely to live in older homes in need of repair, less likely to perform repairs themselves, and are likely to have substantial equity in their homes to draw on. Many of them are nearing or are in retirement, and therefore are more likely to be living -- or are preparing to live -- on a reduced or fixed income. In this context, some of AARP's most recent research, litigation, and advocacy activities focus on abuses found in home repair and modification loans.
With some obvious qualifications, this means that the longer a homeowner lives in his or her home, building up equity as they pay down their mortgages, the greater the risk that they will be subject to lenders seeking excessive financial advantage through one of these loans. AARP has worked to educate its members as well as the public-at-large about how consumers can better protect themselves against such financial risks. We believe consumer education to be a necessary part of a multi-level approach.
AARP also recognizes that the damage done by predatory practices is not limited to those who have lost, or are at risk of losing their home – as devastating as these losses clearly are. It also includes those older Americans who need and desire access to competitive, realistic risk-based home loans, but are reluctant or unwilling to pursue financial services and products due to their fear of potential exploitation. Ultimately, all forms of commerce – including financial services -- are based on trust that each party to a transaction has been treated fairly, and disagreements resolved equitably. Whenever it occurs, predatory home lending undercuts the very essence of this basic tenet of commerce.
Consider these findings from an AARP-sponsored study, released in May of 2000, entitled "Fixing to Stay". For Americans age 45 and over:
When asked why they have not modified their home, or have not modified as much as they would have liked, respondents cited a number or reasons, including:
In most areas, the results of this national survey, when compared to its sample of minority individuals (that is, African Americans and Hispanics) were similar. However, there were a few important differences:
AARP's efforts to address these problems--whether through the sentinel effects of its litigation, its legislative and regulatory advocacy, or its counseling and education programs--are directed at improving credit market performance, not limiting consumer access to credit for those with a less-than-perfect credit history. AARP believes that our – and other – consumer financial literacy campaigns are an important and necessary component of public and private sector efforts to make consumers their own first line of defense. However, while consumer education and counseling programs are necessary, they are not sufficient.
AARP submitted comments on March 9, 2001, supporting the Federal Reserve Board’s (the Board) proposal to strengthen the Home Ownership and Equity Protection Act (HOEPA) regulations in an effort to reduce abusive lending practices targeted at the most vulnerable borrowers. In its comments on the proposed regulatory amendments, AARP suggests that the Board use its current statutory authority to:
In addition, the Board solicited proposals for making legislative changes that address predatory lending practices. AARP recommended three statutory amendments to HOEPA that we believe are worthy of consideration by the Board for submission to the Congress. We recommended:
AARP agrees with the Board’s assessment of the beneficial impact of its proposed amendment, that by expanding the coverage to an additional group of high cost loans it will "ensure that the need for credit by subprime borrowers will be fulfilled more often by loans that are subject to HOEPA’s protections against predatory practices." AARP believes that the Board should issue the final HOEPA amendment as soon as prudently possible.
Chairman Sarbanes, and members of the Committee, the problems associated with abusive home equity-related lending practices are complex. To date, agreement on a comprehensive reform of the mortgage finance system to address these problems has proven elusive. Therefore, we are encouraged by the Committee’s continued efforts to call attention to predatory mortgage lending and to establish effective deterrents. AARP is committed to working with this Committee, the Congress and the Bush Administration to address the problems posed to the elderly by these devastating lending practices.
Thank you. I will try to answer any questions you may have.
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