Building Sustainable Homeownership
The Agenda For July 11
"The Board will hold public hearings as required by the Home Ownership and Equity Protection Act (HOEPA) to examine the home equity lending market, and to assess the effectiveness of existing regulatory and legislative provisions (including HOEPA) in protecting the interests of consumers"
Federal Reserve Bank of Atlanta 1000 Peachtree Street N.E., Atlanta, Georgia 30309 July 11, 2006
July 11, 2006--Federal Reserve Bank of Atlanta ------Transcript
P R O C E E D I N G S
8:46 a.m. MS. BRAUNSTEIN: Good morning, everybody. I think we're going to get started. And I'd like to welcome you to what is the final public hearing under the Home Ownership and Equity Protection Act or HOEPA as it's known. We have held three previous hearings: one in Chicago, one in Philadelphia, and one in San Francisco. And they've all been extremely helpful and extremely enlightening for us.
And we're looking forward to today's hearing because we have a lot of very good panelists that will be joining us during the day. And the purpose of these hearings is to really look at the home equity lending markets and the adequacy of existing regulatory and legislative provisions for protecting the interests of consumers, in particular, low and moderate income consumers.
What we've done through these hearings is really explore three major topics. We have been looking at the impact of the HOEPA rules, and that's both the federal HOEPA rules that we have, as well as other predatory lending laws that have been enacted on state and local levels. We've also been looking at non-traditional products. And as we know, there's been a real boom in the existence of non-traditional mortgage products, things like interest only loans, option ARMs, and other kinds of variations on those themes and an emergence -- a strong emergence of reverse mortgages.
And we've been looking at those products, too, and in particular, is there adequate information out there for consumers and do they understand the implications of these products. And we've also been looking at how consumers select lenders and products, especially in the subprime markets, how they go about shopping, if they shop, push marketing issues, and other issues around the whole issue of selection of products and services.
For these hearings we basically have four objectives. We want to try to assess the effectiveness of changes that we made to the HOEPA rules in 2002. We are required by statute to conduct these hearings on a regular basis. And frankly, the last time we did them was in 2000, and we purposely waited six years to do this because we wanted to wait to give time for the changes that we made in 2002 to take effect and to see if there's been any impact, either on the availability of credit to consumers or if there's been an impact on the lessening of abusive practices. And we've been talking about those issues.
We're also gathering information for a pending review that we are planning of regulation Z, in particular, the closed-end credit rules around mortgage disclosures. And we want to -- Through these hearings, another objective of ours is to determine where additional education, information, both materials, activities are needed and what those might be for consumers. And then also we're trying to identify where there are mortgage lending issues that would lend themselves to additional research and to try and encourage that research, possibly internally through the Fed or externally through other organizations. And I know today we're going to be spending quite a bit of time talking about research around consumer behaviors in our third panel.
These hearings are particularly important right now because of the development over the last years of extremely complex products. And on the one hand, that's been a positive development because certainly more people are getting credit and have access to credit than ever have before in history. However, we also know that if those products are not utilized appropriately, they can be fraught with problems for consumers and can have some bad results. So we really want to look at these issues and try to figure out, you know, what is best going forward and what we can do in terms of our authority as regulators.
This -- The whole mortgage lending process really has shared responsibilities. And there are roles obviously for the consumers through consumer education, through shopping, through finding out as much information as they can, through taking care of their personal finances and making sure that their credit records are the best that they can be, through the lenders for acting responsibly, for not abusing vulnerable consumers, for presenting information as clearly and as accurately as possible for consumers. There's also roles for consumer and community groups who have access to consumers and certainly present a lot of services to those consumers.
And then there's a role for the regulators. And that's what we're looking at, especially now is what our role is in terms of our rules and guidance and other kinds of things to help the markets run more efficiently.
So with that, I would like to introduce the panelists and talk a little bit about the procedures for today's hearing. My name is Sandy Braunstein. I am the director of the Division of Consumer and Community Affairs at the Federal Reserve Board in Washington, D.C. I will be chairing the hearing today.
With me from Washington from the Federal Reserve Board is Leonard Chanin who is the associate director of the Division of Consumer and Community Affairs, and he is associate director for the regulations area. And also with us is Jim Michaels, who is the assistant director for regulations in the Division of Consumer and Community Affairs. We are also joined by Joan Buchanan from the Federal Reserve Bank of Atlanta, and we're really pleased to have her here. And she's an assistant vice president and is over the consumer compliance area here at the Federal Reserve Bank of Atlanta. And let me just say that we want to thank the Federal Reserve Bank of Atlanta and all its staff for the excellent job they're doing of hosting us today and for allowing us to come here and have this hearing.
he way we're going to conduct this hearing is that we will go into our first panel and we -- each panelist will have five minutes for opening statements. We do have a time keeper. I want to alert the panelists to our time keeper, who's sitting right there with the box with the big light bulbs on top, should be very visible.
We are going to stick to the time table of five minutes for your opening. If you go past that, I will cut you off. But you can -- If you want to submit longer comments for the record, you can feel free to do so. And also, I want to let the public know that we're accepting public comments of any length -- public, written comments. You can feel free to submit those until August 15th is the deadline for that, and those can be any length you want.
So the panelists will have five minutes. The time keeper, Wayne, will give a yellow light at four minutes, when you have one minute left and then the red light when your time is up. And so I would ask you to kind of, as you're doing your remarks, keep an eye on the box.
We will have three panels today. And the topics that we're going to be discussing today are the first panel we're going to be talking about the HOEPA rules and other predatory lending laws, state and local, and the effectiveness and where we may need to do some other kinds of things and what else is needed in the markets. We're going -- The second panel will deal with the non-traditional mortgage products. And the third panel is going to be discussing research on consumer behavior research.
At 3:00 o'clock today we will have an open mike session. And there is a sign-up sheet outside in the hallway for that. If you want to speak, anyone who wants to can speak during the open mike session, but you need to sign up on the sign-up sheet.
Each speaker will have three minutes for their remarks. And there again, if you have longer remarks, you're welcome to submit them in writing for the record and we will accept those until August 15th. But I will remind -- make periodic reminders during the day about the open mike sign-up sheet, so feel free to sign up.
And with that, I think we're going to start. What I would ask is for each panelist to introduce themselves. We're going to start from this end. Margot, you're going to go first. To introduce yourself and your organization for the record.
We also, by the way, have a court reporter here who's over there talking into the horn. And just also for the public to know that these transcripts, we are going to have transcripts of each of the four hearings. The transcripts will be public documents. We will be making them available on our website -- on the Federal Reserve website. So you're free to access those. It takes a few weeks to get them up and running. But we will have transcripts of all four hearings.
So for the record, I would ask that you state your name and your organization and then go into your opening remarks, and we'll start. Margot?
MS. SAUNDERS: Thank you, Sandy. It's nice to be here. I'm Margot Saunders from the National Consumer Law Center. There are piles of consumer loan documents on my desk and the shelves surrounding it in my little office. In the past few months alone I have closely examined the microscopic details of mortgage transactions from Pennsylvania, New Jersey, Georgia, West Virginia, Missouri, Ohio, Texas, Illinois, Virginia, Florida, as well as other states. So I feel like I have a pretty good hold on what's going on in the country in subprime mortgage lending, just from what comes across my desk.
These detailed analyses of dozens of home loans illustrate to me and to the National Consumer Law Center one overwhelming fact. The mortgage system in this nation is irretrievably broken. While the people sitting around this room may be able to obtain truly inexpensive non-abusive mortgage loans, that's not the case for the tens of thousands of subprime borrowers who are provided high cost loans for amounts they do not need stripped -- which strip precious equity from their homes to pay exorbitant fees and costs, secured by loans on homes which are not worth the amount of the loan.
The loans are generally priced much higher than equivalent mortgages in the prime market, but they're not priced this high because of the increased risk of the loan. They are priced higher because the originator can exact this extra amount from the homeowner. The price is not commensurate with the risk. The price too often creates the risk.
Consider these sad statistics. Of low income households who became homeowners, 64 percent remained after two years, compared with 88 percent of high income homeowners. Over five years 47 percent of low income homeowners remained in their homes compared with 77 percent of high income. Compare this information with facts we're all to familiar with, the scary increase in the raw number of foreclosures for all types of homeowners, and we're met with a new truth. Something new and different must be done to preserve home ownership.
The entire mortgage industry has figured out ingenious ways to make healthy profits from mortgage lending without suffering a risk of loss. We think that the subprime mortgage industry anticipates that there will be defaults and forced refinancings and foreclosures and that these anticipated losses are built into the cost of doing business. The industry then protects itself from the overall loss by charging everyone more. This means that the industry is deliberately making loans, knowing that one in eight, or thereabouts, of these loans will be headed to foreclosure.
The ability of the mortgage industry to protect itself from anticipated defaults and foreclosures by charging everyone a higher price creates a marketplace where the risks to homeowners are no longer parallel to the risks to the lenders. The losses caused by defaults and foreclosures to the industry are guarded against by simply charging more. But the losses to the homeowner, the family, and the community from these foreclosures is simply devastating. This is fine as a business model, but it's bad policy for the nation to allow it and facilitate it.
The mortgage industry uses deregulation, preemption of state consumer protection laws, the holder in due course doctrine, to evade responsibility for making these bad loans. But the prime rationale for the continued lack of regulation of mortgage lending is that we don't want to hamper the healthy mortgage market in this nation. We're here to tell you today that that's just what we want to do.
June 7, 2006 --Federal Reserve Bank of Chicago
June 9, 2006--Federal Reserve Bank of Philadelphia
June 16, 2006--Federal Reserve Bank of San Francisco
July 11, 2006--Federal Reserve Bank of Atlanta