Good morning Mr. Chairman and members of the Committee. My name is John Courson, and I am President and CEO of Central Pacific Mortgage Company, headquartered in Folsom, CA. I am also Vice President of the Mortgage Bankers Association of America (MBA), and it is in that capacity that I appear before you today. This morning I have been asked to testify before your Committee to present MBA’s views on the very serious issue of predatory mortgage lending.
First, I want to thank you for inviting the MBA into this very important discussion on a very urgent matter. I commend the Committee’s leadership in calling for these hearings, as we believe that a full understanding of the issues is the only responsible way to finding solutions to the scourge of abusive mortgage lending.
As Vice President of the trade association that represents the real estate finance industry, and as President of a mortgage company, I am deeply troubled by the continuing reports of predatory and abusive lending practices that persist in our industry. It is imperative that you know, from the outset, where MBA stands on this issue. We condemn these practices in the strongest possible terms. The MBA recognizes that this is a problem that is real, and one that carries real repercussions for those communities that are affected. Although so-called predatory lending practices are difficult to measure and quantify, there is no hiding from the fact that certain rogue lenders and certain unscrupulous brokers continue to prey on our most vulnerable populations. Nor can we hide from our responsibility—as members of the finance industry—to act in the face of this continuing problem.
For over eighty years, the MBA has stood for integrity and fairness in mortgage lending. Our members have helped millions of Americans achieve the dream of homeownership. In so doing, we have established a tradition of encouraging the highest standards of responsible lending.
We therefore want to make clear that ending unfair lending practices is a major priority for our Association. We have devoted substantial amounts of attention and time to this issue. We want to state in no uncertain terms that it is time to address the problems of predatory lending head-on, and in a way that does not constrict the flow of capital to credit-starved communities. Today, I will address the MBA’s views on what needs to be accomplished to bring lasting and effective solutions to these abuses.
Before I do so, however, I think it is important to set forth some background on the nature and recent growth of the so-called "subprime" lending, since most of the reports of mortgage abuse appear to stem from this segment of the market. In general terms, that sector of the mortgage market that has become known as the "subprime market" serves customers that do not qualify for conventional, prime rate loans. The reasons why such consumers do not qualify are varied, but generally, these borrowers may have blemished credit records, or perhaps unproven credit or income histories.
A further element of this market, and of subprime loans generally, is that they tend to be more expensive in terms of fees and rates. This is so because they generally carry extensive due diligence costs and require hands-on servicing, and because they are inherently riskier than loans made in the prime market.
It is imperative to note that subprime lending has been extremely beneficial to thousands of families in the last couple of years. Subprime lending has opened up new markets and helped many consumers that would not have received needed funds but for the special products available in this sector of the market. The subprime market provides a legitimate and much needed source of credit for many families. As the Department of Treasury and the Department of Housing and Urban Development acknowledged in a recent report, "[b]y providing loans to borrowers who do not meet the credit standards for borrowers in the prime market, subprime lending provides an important service, enabling such borrowers to buy new homes, improve their homes, or access the equity in their homes for other purposes."
Defining the Problem
It is unfortunate, however, that as the subprime market has expanded, the reports of predatory and abusive lending have apparently increased as well. We note that the problem of abusive lending is not really new nor limited to the subprime market alone. State regulators report that they have been dealing with these types of issues for a long time, and that what was once called "mortgage fraud" is now being dubbed "predatory lending." Regardless of the name, a major part of the challenge that we face in finding solutions to this problem is that it has proven quite difficult to answer the threshold question of how to define "predatory lending" or what constitutes "abuse" in the general context of mortgage lending. Surely we can identify examples of practices that everyone would agree are "abusive," but the problem we face is that these examples could be both under-inclusive and over-inclusive, depending upon the full circumstances of the loan transaction. Thus, often identified "predatory" practices could include the following: excessive fees and points that are often financed as part of the loan; loan "flipping" or "churning," in which a loan is repeatedly refinanced in a way that degrades the owner’s equity in the property; intentionally making a loan that exceeds the borrower’s ability to repay; and overly aggressive sales techniques that deliberately mislead the borrower.
It is important to note that in every example noted, the full context of the transaction must be analyzed to properly assess whether an abuse has occurred. It is impossible, for example, to identify "excessive" fees without knowing the nature and difficulty of the service provided in exchange for that fee. Nor can we recognize repeat refinances that are meant to strip equity without looking at the fee structure of the transaction and the equity of the consumer. In order to determine that a consumer has been "deliberately misled," we have to study the disclosures and the oral representations made in the context of the specific transaction at hand. Since every loan is unique and every transaction is tailored to specific needs and conditions, the answer of whether mortgage abuse has occurred in any given situation is dependent upon the totality of the circumstances of the borrower and the transaction. It is daunting, therefore, to isolate the specific "bad acts" that are employed by unscrupulous lenders in a way that allows for appropriate regulation.
We note that even those regulatory agencies with jurisdiction over mortgage credit practices have not provided any clear guidance on the topic. Those agencies that have attempted to provide a definition have uniformly avoided the real issue, opting instead to provide either "categories" under which the abuses "tend to fall," or simply advancing descriptive examples and anecdotes of the more common abuses that they may have observed in the market. Under either approach, the fundamental definitional issues are left unanswered. Sometimes the terms "predatory lending" and "subprime lending" are used interchangeably. This confusion and lack of adequate definitions at federal and state levels, and the problem of lack of organized and coordinated data on predatory lending, is confirmed and described at length in a recent report issued by the Senate Banking Committee Staff to Chairman Gramm, released in August 2000.
Source of Problem
MBA believes that predatory lending is a problem that has various sources. As we attempt to tackle this problem, it is necessary to isolate these sources, as they must be addressed individually before we can be successful in crafting lasting solutions. In short, the MBA believes that the three fundamental sources that need to be attacked jointly are the complexity of the laws, lack of education, and lack of enforcement.
Complexity of Mortgage Laws/Process
First and foremost, we believe that a fundamental root problem leading to abusive lending is the confusion created by the complexity of the mortgage process. Any consumer that has ever been through a settlement closing knows how confusing and cumbersome the process can be. Mortgage disclosures are voluminous and often cryptic, and consumers simply do not understand what they read nor what they sign. In addition, the mandated forms lack reliable cost disclosures, making it difficult for prospective borrowers to ascertain true total closing costs and renders comparison shopping virtually impossible.
There are various confirmations of this core problem. In a recent report prepared by the Federal Reserve Board and the Department of Housing and Urban Development, these federal agencies ascertained that most consumers do not understand the relation between the contract interest rate and the Annual Percentage Rate ("APR") listed in the Truth in Lending disclosures. The agencies explain that "the [consumers’] belief was based on misconceptions about what the disclosures represent. For example, consumers believed the APR represents the interest rate… and the amount financed represents the note amount… ." These are fundamental misunderstandings that can lead to very serious repercussions for unwary or unsophisticated shoppers. In fact, there are reports that these cryptic forms, and the public’s misunderstanding of them, make the federally-required Truth in Lending disclosures a very useful tool for predators to confuse and defraud consumers.
We can name a myriad of other examples, but simply put, the complexity of the current system is the camouflage that allows unscrupulous operators to hide altered terms and conceal crucial information without fear of the consumer discovering or even understanding the import of the masked or undisclosed items. In light of this complexity, confounded borrowers often have no choice but to turn to the loan officer for advice and explanation of the contents of the disclosures. In instances of abusive lenders, the consumer’s reliance closes the loop of deception—the victims of these scams are completely blinded to the realities and repercussions of the transaction. These problems are exacerbated ten-fold in instances of uneducated or illiterate consumers.
Lack of Consumer Awareness/Education
The complexity of the mortgage process leads directly to, and is intertwined with, the second source of predatory lending—lack of consumer awareness and education. It is a reality today that even well-educated consumers tend to lack basic understanding of the mortgage shopping and home buying processes. For example, the borrower surveys conducted by the Federal Reserve Board revealed that over 20 percent of those surveyed contacted only one single source of credit. I already mentioned that consumers do not understand the meaning and importance of the APR figure. Nor do mortgage shoppers entirely comprehend that the early Good Faith Estimate disclosures are not final. Often, home-buyers believe that "listing" real estate agents carry fiduciary responsibilities vis-à-vis the purchaser. They generally do not. Again, all these misperceptions have real repercussions in the market, and they all stem from basic misunderstandings of the real estate and mortgage finance market.
Lack of Enforcement
The third problem creating a favorable environment for abusive lenders is the general absence of real enforcement in this area. It is important to understand that the mortgage lending industry is one of the most heavily regulated industries today. Mortgage lending is subject to pervasive state regulation and must comply with a wide array of federal consumer protection laws including the Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Housing Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Home Mortgage Disclosure Act, Federal Trade Commission Act, and Fair Debt Collection Practices Act. Many of the "predatory" abuses reported today either violate current law or result from lack of disclosures that violate current laws. We note that in practically all instances, these predatory loans also involve outright fraud and deception. We have to set a new priority to aggressively enforce the multitude of existing laws.
MBA believes that these root causes must be addressed in order to fully erase the pernicious lending practices that are occurring today. Any approach that does not address these three basic prongs—simplification, education, and enforcement—will merely deal with the effects and not with the underlying causes of the problem. Anything short of this full approach will fail to resolve the crisis.
I reiterate that there is general agreement that there is a problem with abusive lending in many markets today. While there is some disagreement as to how to eliminate these practices, I believe that the mortgage industry, policy makers, and consumer representatives all share a sincere desire to end the abuses. I believe that we are all gathered here today to engage in a serious dialogue as to what needs to be done to advance real solutions to this problem.
Let me then address some steps we can all take to bring an end to this problem. As I mentioned before, we all share in the responsibility to ensure that predatory lending is eliminated.
First, as outlined above, education of consumers is a most basic step in the struggle to push predators out of our neighborhoods. MBA believes that an educated consumer is the best prophylactic to predatory abuse.
Presently, MBA is assembling a workgroup to develop a series of resources aimed specifically at consumers that believe that they are being victimized by predatory lenders. The objectives of this initiative is to develop advice and materials that can be accessed directly and immediately by consumers seeking protection from unfair activities. To this end, the workgroup is developing a full list of legal rights and ethical norms that all consumers should expect from honest and reputable lenders. This list will be made available to the general public and disseminated to government officials, consumer protection agencies, and consumer advocates to ensure that all prospective borrowers fully understand their rights in the transaction.
In connection with this document, the workgroup will also develop a system whereby affected consumers can obtain direct access to an enforcement agency or other source of immediate assistance on items pertaining to their loan situation. MBA believes that this direct access is crucial to protecting vulnerable borrowers. Again, the goal under this system is to provide immediate help to those consumers that feel they are being victimized by loan predators. This system would include a method for identifying "warning signs" of possible abuses that would alert consumers that they may be dealing with less than honest operators. Once a consumer identifies certain suspicious signs—i.e., aggressive solicitations, unexplained changes at the closing table, requests to leave line items blank on material forms—then that consumer would be empowered to seek further immediate advice from a trusted third party before completing the transaction. We note that there is no system today that effectively delivers help and useful information that a victim requires at the very point where the abuse is occurring. We are trying hard to create a structure of support that works effectively and that can be implemented immediately. We hope to report back to you very soon with good news on our advancements.
The MBA has always been proactive in the fight against "predatory" lending abuses. As lenders and brokers, we share a strong responsibility to fight predatory abuses on various fronts. I will outline some of the examples of positive industry activities that are making a difference in this endeavor.
First, our Association was the first, and remains the only national trade association to sign a "fair lending/best practices" agreement with HUD. This agreement was signed in 1994 and renewed in 1998. In this agreement, MBA committed to a number of steps that will promote fair lending and assist the industry in reaching underserved groups in our society.
Recently, MBA developed a set of "Best Practices" for our members. These Best Practices encourage members to conduct their business according to the standards contained therein and participate in periodic audits to test for compliance. These guidelines are designed to ensure that all customers are given fair and equitable treatment.
Further, MBA entered into a contractual relationship with the Mortgage Asset Research Institute (MARI) to create a national database of companies and individuals that have been identified by law enforcement or regulatory bodies as having engaged in illegal or improper behavior.
In 1998, MBA founded the Research Institute for Housing America (RIHA) and currently funds its projects, which support research and other activities to help determine how discrimination occurs in home buying process, and to eliminate discrimination. RIHA projects also endeavor to develop useful research on meeting consumer demand for mortgage financing in under-served markets and to measure the societal benefits and costs of homeownership.
As mentioned above, we believe that consumer awareness and education are among the most effective tools available for combating predatory lending practices. In this area, we think that industry participants can do much to develop educational tools and programs that will enable consumers to make more informed choices. For example, MBA is a founding and active member of the Board of the American Homeowner Education and Counseling Institute (AHECI). The purpose of AHECI is to provide training and certification to the homeownership counseling industry. As a founding member of this organization, MBA provided $100,000 in start-up funds.
MBA has worked with the National Council on Economic Education (NCEE) over the past several years to educate school children around the country in understanding the importance of good credit and the need for sound financial planning and management skills, as well as how to go about purchasing and financing a home. Recently, MBA partnered with NCEE with a donation of $130,000 to promote a program that will educate high school youth and adult consumers on the perils of abusive lending.
Lastly, MBA is currently engaged in discussions with lending organizations and other groups to determine how to best provide useful and complete information and education for homebuyers, with a special emphasis on subprime borrowers.
MBA believes that there is much that government can do to put an end to predatory lending abuses. First and foremost, MBA strongly believes that much more must be done to enforce the laws that are currently on the books. In the past quarter century, both federal and state governments have put in place a far-reaching body of laws designed to prevent abuse of consumers in credit transactions. Generally, there is a myriad of laws that exist in the different states that could effectively address the abuses that are occurring in the market today. These include prohibitions against unfair and deceptive trade practices; prohibitions against discrimination and redlining in finance transactions; limitations on specific terms of consumer and mortgage credit; limitations on insurance products; penalty provisions for non-compliance; prohibitions of deception misrepresentation, non-disclosure and concealment; and common law rules against fraud.
Before any additional laws are adopted, policy makers must realize that it does no good to legislate against practices that are already illegal in all jurisdictions. More laws will inevitably increase the complexity and costs of lending without a corresponding increase in consumer protection. Simply piling on more prohibitions will not resolve a crisis that today is caused by actors that operate at the outer fringes of the law. To be serious about solutions, we must pledge a full commitment to engage in serious enforcement of the laws.
MBA fully understands that enforcement actions are not an easy undertaking. They require much time, careful examinations, documentation of disclosures and documents, documentation of sales techniques, interviews with parties involved, among other things. In the end, however, this is the most effective way to stamp out these pernicious practices. To this end, MBA calls for increased funding of consumer protection agencies to accord them with all necessary resources so that we may begin to, once and for all, clamp down on unscrupulous actors in earnest.
Second, MBA believes that, in order to fight predatory lending, it is absolutely essential to enact comprehensive reform of the current mortgage lending laws. As mentioned above, predatory lending is in many ways a symptom of larger problems that have evolved from complicated and outdated mortgage laws. Without broad changes to existing laws and comprehensive reform of current cost disclosures, any efforts to address predatory lending will merely deal with the effects and not with the underlying causes of the problem. If the process remains confusing and perplexing, consumers will continue to be tricked and deceived. MBA has worked tirelessly to come up with a system that improves the consumer’s opportunities to shop and allows for timely and effective disclosure of settlement costs and vital information to consumers.
Under MBA’s comprehensive reform package, lenders would be allowed to provide mortgage applicants with an early price guarantee that permits consumers to effectively shop for mortgage products in the market. Under this plan, the closing cost guarantee to be provided to consumers would include all costs required by the lender to close the loan. This guaranteed disclosure system would let consumers know, early in the mortgage application process, the maximum settlement costs a lender could charge. Under MBA’s plan, the cost guarantee would be binding and enforceable.
MBA’s reform proposal also seeks to streamline all current federal loan disclosures so that they provide home shoppers with clearer and more concise information without the confusion inherent in the current forms. We envision a system where disclosures and educational materials, including advising consumers of the availability of counseling, would be provided to the consumer very early in the mortgage application process, in effect. We believe that these educational materials must be rewritten and restructured to make them more understandable and much friendlier to consumers. For example, MBA believes that interactive resources or the use of media other than booklets would go a long way in augmenting the accessibility and the use of these materials. And, unlike the current RESPA materials, these materials would contain full and comprehensive advice regarding mortgage abuse, including possible sources of counseling.
We note also that by streamlining the current legal and regulatory landscape, we also make it easier to identify abuses and prosecute unscrupulous players. If we remove all gray areas from the current process, and provide for clear penalties and remedies that punish violators, we will make it easier to regulate, examine, and enforce.
Lastly, and in connection with previous statements, MBA believes that governmental agencies everywhere must do more to promote consumer awareness and education. To this end, we support expanded funding for the development of counseling programs and counseling certification systems that assure that consumers receive all information they need to protect themselves in this very complex transaction.
In summary, the MBA believes that the continuing search for solutions to this problem must expand to comprehensively include all the underlying factors that allow predatory lending to flourish. We can no longer afford to focus on band-aids that merely cover up the harms. We must address predatory lending through direct attacks on three fronts—a commitment to full enforcement, robust education, and a simplification of existing laws. Nothing short of that will suffice.
Thank you for the opportunity to appear before the Committee. I look forward to answering your questions.
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