Home Ownership
Building Sustainable Homeownership: Responsible Lending and Informed Consumer Choice
June 9, 2006--Federal Reserve Bank of Philadelphia ---Transcript
"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 Philadelphia 10 Independence Mall, Philadelphia, Pennsylvania 19106 June 9, 2006
Transcript:
(Whereupon, the proceedings commenced at 8:30 a.m.)
GOVERNOR OLSON: We will begin. We have all but one of our panelists. I understand one of the panelists, Ira Goldstein, is in route, and we have two of the four representatives from the Fed system. I'm sure the other two will be here shortly.
Let me, first of all, thank Philadelphia Fed for hosting these meetings this morning and providing us with the facilities. These are extraordinarily useful sessions. We finished the session in Chicago on Wednesday, and we're happy to be here today.
We've got -- just to talk through, if I can, in order to make the best use of the time, we've asked each of the panelists to give us a five-minute opening statement, and after the five-minute statement, what you will get, and would you show them the signs, so that they know. The first is one minute, the second is, time is up. There's not a lot of ambiguity in those, and we tend to enforce those pretty rigorously, and because of that fact, what we've discovered is that we still, with an hour and a half on this panel, have ample time for discussion and ample time for dialogue.
This panel will go until 10:30. We will take a break and come back and have a panel from 10:30 to noon. We'll break for lunch. And then other another panel and, very importantly,beginning at 3 o'clock, we have what we call an open mike, and people can, who would care to do so, who have a statement they would like to make, are invited to participate at that time, and people will have a three-minute opportunity to speak if they would like to.
Also, for everybody, panelists and open mike participants, if they would like, they have up to August 15th, a time allotted to them, to give an additional written statement that will become part of the permanent record. And we look forward to a very full exchange.
This is part of a -- this is a -- I think it was 2000, Sandy, that we did the first HOEPA hearings. After, it was determined -- and of course those hearings resulted in the HOEPA regs that were implemented in 2002. A tremendous amount of change has taken place in the mortgage industry since that time. And as a result, we have a number of reasons for holding the hearings today.
Number one, is that we want to examine the extent to which the 2002 HOEPA regs are adequate, are appropriate, or should they be revised. We also are going to use these hearings to determine the extent to which the channels which mortgages come through are impacting the mortgage process. It is our intent to look and to use these hearings to determine whether or not there ought to be an amendment for Reg Z as part of this. And the more soft results we hope to come out of this would be the -- we would look for areas where -- we, the Federal Reserve, could provide additional education, or, if necessary, additional study.
From the Federal Reserve we have a couple people here, Sandy Braunstein, Director of Consumer and Community Affairs; Leonard Chanin, who is the Associate Director of Consumer and Community Affairs; and Mike Collins is with us, from the Philadelphia Fed.
We identify, or at least I identify, four separate important groups that have ownership in this process and are important to the entire mortgage industry, and to the economy for that matter. Number one, very importantly, is the consumer. In a free society, in a free economy, there's an underlying presumption that the consumer is responsible for their actions, and the consumer undoubtedly, unquestionably, has been the beneficiary of many of the changes, many of the improvements, that have been taking place in this industry. It is remarkable, not simply in the mortgage industry, but all credit products for that matter, all financial products, the consumer has benefited enormously by the improvements and the access, but it has been a mixed blessing.
Another group that has a responsibility of course, is the providers and the contacts to this meeting, that would be the mortgage providers. I have told this story other times; let me tell it again, because I think it brings home, to me, at least, an important point. Some of you know I spent a good share of my life in the banking industry. At no point was I primarily a mortgage lender, but I think that over the course of a 16-year banking career I think I was involved in closing more than a hundred mortgage loans, and yet, even with that background, I have never been involved in the closing of my own loan where I haven't felt, somewhat, at a knowledge disadvantage, with respect to the process, because it was a very daunting process. It requires a lot of paperwork, a lot of signatures, a lot of documentation, and there is an extraordinary knowledge asymmetry. I think that what that means, is that there is a very significant responsibility that the mortgage lenders have to not take advantage of that knowledge asymmetry and all of us to try to work to find ways to reduce that, or, at least, deal with that. I don't think that there is a way; it is impossible that you would ever close that gap entirely, but there is a recognition that that gap exists and we need to deal with it.
The third group that I think has a very important role and interest are the community groups and consumer advisory groups. We have noted, and many of the people involved in mortgage lending have noted, that the best access to the minority communes are through the community activists and through the community organizers. That group provides an access that provides the ability to help close that information gap and make us aware of where there are individuals or institutions, at times, who are taking advantage of that knowledge asymmetry, and so I think that that partnership is an important one.
The fourth group, of course, is the regulators and that's why we're here. I have said at one point in my life I, also, was involved in advising financial institutions on regulatory affairs and I know from that long experience that there was no group that was more at the forefront of both developing the education and the regulatory construct as was the Federal Reserve. And some of my colleagues, Sandy, in particular, who has been doing it for many, many years, take that role very seriously.
Because we still have one chair empty, we will go counter-clockwise in this meeting. We'll ask you to begin, introduce yourself, introduce your group, speak for five minutes, be mindful of the time, and don't worry, we'll help you if you go over.
Peter Zorn.
MR. ZORN: I'm Peter Zorn. My background, to be explicit, is, I'm an economist and researcher. My experience that I'm speaking from is from years of looking at the HMDA data as well as detailed underwriting data, in terms of credit modeling. Also, surveys that we have taken for impaired credit and focus groups associated with the surveys and just being in the industry, as it were, in the secondary industry for the last 15 years or so.
I'd like to make just a couple of brief observations. I guess the first, with regards to things that I observe, hypotheses of why they are what they are. The first is minority borrowers, I guess, stating a point that's well-known, are more likely to pay more for mortgages. What do I mean when I say that? One way of characterizing that more explicitly, is that if you look at APR distributions about minority borrowers, you will see that that distribution is shifted to the higher APR for minorities as compared to non minorities.
So, then, the next point I would make would be that differences in those prices, those APRs are greater across markets than within markets. So another way of making that point is, if you look at subprime borrowers in the APR distribution of subprime borrowers, you would see a difference in those distributions for minorities and non minorities. That is, in general, minorities would have a slightly higher set distribution of APRs than non minorities.
But if you made a different -- looked at different distributions, if you look, instead, at the APR distributions of minority borrowers in the prime market versus the subprime market, you'd see a much -- substantially larger difference in distributions. That is, there's a much bigger difference -- the difference between minority borrowers in the prime markets and the subprime market, minority borrowers, in the subprime market, pay substantially more than in the prime market, and that difference between minority borrowers in general, the bigger difference, would be in the subprime market between minorities and non-minority borrowers.
So that leads to, sort of, another observation, which is the, sort of, market segmentation matters. Does it matter whether your in a prime market or a subprime market, which leads to my next observation, which is that risk explains a lot, but certainly not all of those differences. And by "risk" I mean, all the risk, credit risk, interest rate risk, prepayment risk, associated with mortgage lending. One way to put a little more explicit flavor to that observation is that if you do statistical estimations of APR -- I try to explain APR as a function of a lot of variables, product characteristics, borrower characteristics, underwriting characteristics -- what you end up with is, explaining much, again, but not all, of the differences in APRs, so that there is an unexplained difference between minorities and non minorities, but it is dramatically reduced.
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