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Washington, DC - Rep. Frank, Chairman of the House Committee on Financial Services today delivered the following opening remarks at the Financial Services Committee hearing, “Accelerating Loan Modifications, Improving Foreclosure Prevention and Enhancing Enforcement”:
“This hearing was called prior to the recent announcement by the Secretary of the Treasury and the President about a restructuring but it does seem to me that it is very relevant and becoming even more relevant to that now. We did call the hearing to specifically talk about further legislation regarding our bill on subprime and that is a complex and ongoing subject and I will say that the Senate obviously is not going to act this year. We will have time to talk about further modifications that could be included in conference. It would be my intention to have the committee act on some of those before we did do anything, if we were to do anything. Our colleague from Delaware, Mr. Castle had a very interesting bill that we thought about in conjunction to subprime and didn’t have enough time and, on the other hand, although many of us believe we need to do a little but more, maybe a moderate amount more in enforcement of the restrictions on inappropriate mortgages and that is before in general there are the pattern and practices, is one possible view but we are open-eyed – many of us, certainly my two colleagues from North Carolina and many others to improving this. I should also say that people raise a question about some ambiguity in the language by which we seek to prevent people from being compensated for getting people into higher interest rate loans than they otherwise could have. That was certainly our intention. People think there is some ambiguity and I always prefer redundancy to ambiguity and in consultation with the gentleman from North Carolina, Mr. Miller, we have been working on it and if we get to it we will have language that makes it very clear that there will be no such possibility.
“I do then want to make two points today. One is a general point and what’s been striking about the subprime crisis is not just simply the subprime crisis but the extent to which it has spread to be the most significant financial problem in the world since it seems since the Asian financial crisis. And as I think about it, it does seem to me there is a problem intellectually and then ultimately politically that we in the executive branch, in the legislative branch, and in the private sector all working together have to solve and that is we need to find a substitute, and it is the substitute for – and the bank regulators are here and I have always been told by bankers that the prime rule of banking was ‘know your borrower.’ And what has happened is that we have created through a whole group of new methods a situation in which you not only don’t know your borrower, you have no idea who your borrower’s borrowers’ were or are. The nexus between the barrower and the lender, I believe turns out to have been a more important safeguard than we thought and we have been trying very hard, the private sector has, and some of us the regulatory field have been trying to find a substitute for the borrower-lender relationship and we have as it turns out have been less successful than we thought. That is what risk management is. It is a substitute it seems to me for trying to know whether the person you lent the money to can pay you back. And what we need to do is to figure out in not just subprime but in general how to deal with that, and that will be the subject of further hearings. How do you keep the benefits of this increased liquidity and find some way to preserve again what has been the great safeguard of not lending money to people who you didn’t think can pay you back. When you don’t have to worry about whether they pay you back, and when the people who now own the loans don’t know who in effect they lent it to ultimately, we have problems.
“With regard to the proposal that the Administration has put forward, I welcome it, it is a recognition that the increase in the rates would cause serious problems and that some public sector concern with that is appropriate, that the market cannot be left entirely on its own, although there is no violations by these legal rights. But I did tell Secretary Paulson in a conversation this morning in fact that there are a couple of problems that I have with this. First of all, I think it is a grave error to say as I understand the proposal does that there is a cutoff at a 660 FICO score. Apparently people have thought that a FICO score credit rating was a good proxy for income. I don’t think it is and I think we would be making a great mistake frankly, morally and also politically if we tell two people who are otherwise similarly situated that the one who has been more careful about his or her credit is not going to get the benefit that people who have been more/less careful will. I think the 660 FICO score is a great mistake. I understand that there needs to be some kind of screen but I think all of us, literally all of us – conservative, liberal, Democrat, Republican, etc, we have all been telling people, “Please don’t get into debt beyond what you can handle. Try and keep your credit score up.” We have all be telling people to keep their credit scores up, now we have a situation where people listened to us who got their credit scores up are now going to be worse off vis-a-vis than other people who didn’t keep their credit scores up is a great mistake. The other flaw I think from the standpoint of someone supportive of the general idea, and I welcome it and I appreciate the initiative and I appreciate what Chairwoman Bair and others have done to urge its adoption, is the failure to do anything about a pre-payment penalty. It seems to me that if you delay this for five years that is a good thing because the hope is that during that period people can find some way to refinance and avoid the reset, but if they still face the prepayment penalty as I understand from Secretary Paulson, nothing in this proposal does anything about the pre-pay penalty except in effect to “toll it” as lawyer would say, just push it down the road, but not having the prepayment penalty addressed, I think is a flaw.
“Finally, there is one where I do think there is a problem but it is not the Administration’s fall back. Now let me say here, I am going to say this later, and I, it is not comity, it goes against a lot of the norms, but I have to say that the increasing inability of the United States Senate to function is becoming a threat to governance. And that is not partisan; I know my Republican colleagues felt it when they were in the majority in the House and the Senate. We feel it today. Senate norms beyond partisanship have evolved to that point and I say that because one of the things that we would hope you would do with the time that is being bought by the five years is to help people get alternative financing. That means among other things, obviously not entirely, full use of the FHA for subprime borrowers and full use of Fannie Mae and Freddie Mac. This House has passed with a great deal of bipartisan support, difference about some aspects, but a good deal of bipartisan support on core principles for having the FHA and Fannie Mae and Freddie Mac more able to do this. They have been languishing in the Senate for a whole variety of reasons. And I hope that we will go forward, I believe it is a mistake to use that FICO score screen. I hope they will recognize that you need to do something about prepayment penalties, but I also hope that the Senate will act on the FHA, and Fannie-Freddie --the GSE bills so we can move forward. The last point is just a question, and my staff has raised it with me and I forgot to ask it and that is: does this allow for, or does not allow for because people can do what they want in the private sector, but does it contemplate negative amortization? If it does that would be another grave error. Putting off this reset and then having people get further into actual debt during that period which seems to be counter productive and we have not been able to determine whether that does or doesn’t contemplate not doing any negative amortization.”
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