<DOC> [110th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:40152.wais] FORECLOSURES AT THE FRONT STEP OF THE FEDERAL RESERVE BANK OF CLEVELAND ======================================================================= HEARING before the SUBCOMMITTEE ON DOMESTIC POLICY of the COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED TENTH CONGRESS FIRST SESSION __________ MAY 21, 2007 __________ Serial No. 110-36 __________ Printed for the use of the Committee on Oversight and Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.oversight.house.gov ______ U.S. GOVERNMENT PRINTING OFFICE 40-152 WASHINGTON : 2008 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092104 Mail: Stop IDCC, Washington, DC 20402ÿ090001 COMMITTEE ON OVERSISGHT AND GOVERNMENT REFORM HENRY A. WAXMAN, California, Chairman TOM LANTOS, California TOM DAVIS, Virginia EDOLPHUS TOWNS, New York DAN BURTON, Indiana PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California BRIAN HIGGINS, New York KENNY MARCHANT, Texas JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina Columbia BRIAN P. BILBRAY, California BETTY McCOLLUM, Minnesota BILL SALI, Idaho JIM COOPER, Tennessee JIM JORDAN, Ohio CHRIS VAN HOLLEN, Maryland PAUL W. HODES, New Hampshire CHRISTOPHER S. MURPHY, Connecticut JOHN P. SARBANES, Maryland PETER WELCH, Vermont Phil Schiliro, Chief of Staff Phil Barnett, Staff Director Earley Green, Chief Clerk David Marin, Minority Staff Director Subcommittee on Domestic Policy DENNIS J. KUCINICH, Ohio, Chairman TOM LANTOS, California DARRELL E. ISSA, California ELIJAH E. CUMMINGS, Maryland DAN BURTON, Indiana DIANE E. WATSON, California CHRISTOPHER SHAYS, Connecticut CHRISTOPHER S. MURPHY, Connecticut JOHN L. MICA, Florida DANNY K. DAVIS, Illinois MARK E. SOUDER, Indiana JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah BRIAN HIGGINS, New York BRIAN P. BILBRAY, California BRUCE L. BRALEY, Iowa Jaron R. Bourke, Staff Director C O N T E N T S ---------- Page Hearing held on May 21, 2007..................................... 1 Statement of: Anderson, Barbara, treasurer, Empowering & Strengthening Ohio's People.............................................. 28 Braunstein, Sandra, Director, Division of Consumer and Community Affairs, Federal Reserve System.................. 55 Bromley, Charles, adjunct faculty, Levin College of Urban Affairs.................................................... 38 Engel, Kathleen, professor, Marshall School of Law........... 190 McCarty-Collins, Marianne, senior vice president, Insight Bank....................................................... 215 Pianka, Raymond, judge, Cleveland Municipal Housing Court.... 90 Pollock, Alex, resident fellow, American Enterprise Institute 196 Rokakis, James, treasurer of Cuyahoga County................. 17 Letters, statements, etc., submitted for the record by: Anderson, Barbara, treasurer, Empowering & Strengthening Ohio's People, prepared statement of....................... 30 Braunstein, Sandra, Director, Division of Consumer and Community Affairs, Federal Reserve System, prepared statement of............................................... 57 Bromley, Charles, adjunct faculty, Levin College of Urban Affairs, prepared statement of............................. 41 Engel, Kathleen, professor, Marshall School of Law, prepared statement of............................................... 192 Kucinich, Hon. Dennis J., a Representative in Congress from the State of Ohio: Followup questions and responses............................. 86 Prepared statement of........................................ 5 McCarty-Collins, Marianne, senior vice president, Insight Bank, prepared statement of................................ 217 Pianka, Raymond, judge, Cleveland Municipal Housing Court, prepared statement of...................................... 93 Pollock, Alex, resident fellow, American Enterprise Institute, prepared statement of........................... 198 Rokakis, James, treasurer of Cuyahoga County, prepared statement of............................................... 20 FORECLOSURES AT THE FRONT STEP OF THE FEDERAL RESERVE BANK OF CLEVELAND ---------- MONDAY, MAY 21, 2007 House of Representatives, Subcommittee on Domestic Policy, Committee on Oversight and Government Reform, Cleveland, OH. The subcommittee met, pursuant to notice, at 10:30 a.m., at the Carl B. Stokes Federal Court House, 801 West Superior Avenue, Cleveland, OH, Hon. Dennis J. Kucinich (chairman of the subcommittee) presiding. Present: Representatives Kucinich and Issa. Staff present from the Subcommittee on Domestic Policy: Jean Gosa, clerk; and Jaron R. Bourke, staff director. Present from the Office of Mr. Kucinich: Joseph Benny, district director; Marty Gelfand, JD, staff counsel; Marian Carey, MBA, deputy district director; Patricia Vecchio, MSN, Steve Inchak, MSSA, Luis Gomez, Laurie Rokakis, MSW, Christine Miles, Betty Rodes, and Lynn Vittardi, congressional staff; and Lisa Casini, scheduler. Mr. Kucinich. The committee will come to order. Good morning. I'm Dennis Kucinich, chairman of the Subcommittee on Domestic Policy of the Committee on Oversight and Government Reform, and with me today is the ranking member of the committee, Mr. Issa. Mr. Issa, by the way, is a native Clevelander, and it's particularly meaningful to have him here today to join in co-chairing this committee. I want to say that we would be joined by Congresswoman Stephanie Tubbs Jones, but, unfortunately, Congresswoman Jones' father passed away. The funeral is today. My wife and I just returned from the wake, and Congresswoman Tubbs Jones has a representative here, I believe, or will have a representative from her office here, and she is, therefore, represented. I just want to make that a matter on the record. I also want to say, before I begin, that we're very pleased to have had the cooperation of the chief judge of the Federal court here from the Northeastern Ohio District, Judge Carr, and creating the opportunity for us to have these facilities. So, I just want to express the gratitude of the committee for Judge Carr making available what is a beautiful hearing room. And in addition to that, for me it's an honor to be here in a building that is named after someone who was a very dear friend of mine, and someone who gave outstanding service to this committee on so many different levels, legislative, executive and judicial, Judge Carl Stokes. The memory of Carl Stokes, a very powerful force in this community and this country, and to be in a Federal court house that's named after him is certainly an honor. Today's hearing is going to examine the subprime mortgage industry and the problem of foreclosure, the pay day lending industry and the enforcement of the Community Reinvestment Act. The hearing will also examine alternatives to foreclosures and to pay day lending. Now, without objection, the chair and the ranking minority member will have 5 minutes to make opening statements followed by opening statements not to exceed 3 minutes by any other Members who may join us. Without objection, Members and witnesses may have 5 legislative days to submit a written statement or extraneous materials for the record. Our first panel today, which we'll get to in a minute, but I want to acknowledge their presence, includes Charles Bromley, an adjunct faculty member of the Levin College of Urban Affairs. Jim Rokakis, the treasurer of Cuyahoga County and Barbara Anderson, as a member of the Eastside Organizing Project. Yesterday my wife and I and Councilman Santiago and other members of the community went throughout a neighborhood on the southeast side around our Lady of Lourdes Parish, and we went up and down streets, and what we saw was something that really is heartbreaking because there was street after street, row after row of boarded up houses. Many of them representing the shattering of a dream. Many people bought these homes with the full intention of being able to meet the mortgages but ended up in conditions and payments that were onerous and lost the house. And, of course, the community has lost an opportunity for productive citizens to participate in not just home ownership, but participate in this process of community. It turns out that Cleveland is at the epicenter of the Nation's foreclosure problem. Major American cities are bracing themselves for a wave of foreclosures. The Center for Responsible Lending projects that one out of every five subprime mortgages that originated during the past 2 years will end in foreclosure. These foreclosures will cost homeowners as much as $164 billion, the exact cost of urban America is unknown. And when you look at this map that we've prepared, and Gelfand, our chief counsel, will have the opportunity to, perhaps, demonstrate it, you will see a sideways V that is highlighted in light green. Let me tell you what the geographical area represents. It is the area in the city where depository banks made very few prime loans. And if you look at the next map highlighted in reds and oranges, if you look at the same V in the same place, this geographical area represents where the highest number of subprime mortgage loans were made during the same year. And if you look at the following map, again, the same V pattern and the same place, here the red dots indicate the number of foreclosures. These maps tell you there is a clear and self-enforcing correlation between the low number of prime loans, the high number of subprime loans and the high number of foreclosures. Now, finally, the last map, again, the familiar sideways line V shape. For here, the foreclosures indicated by blue dots are superimposed on the neighborhoods, red, indicates predominantly African American neighborhoods, again, a perfect match. Lack of access to prime loans, high frequency of subprime loans and a high rate of foreclosures, are by no means specific to any racial group, but the pattern certainly carries a whiff of America's dark past. Now, how did our city get to this point? The Domestic Policy Subcommittee initiated an examination of the predatory mortgage and subprime lending industries and the Federal regulators overseeing the Nation's banking industry. As part of that effort, we held a hearing on March 21, 2007, in which we heard from Leading Consumer on academic and industry representatives. The very next day the Domestic Policy Subcommittee wrote a letter to the Cleveland Fed in reference to the proposed merger of Huntington Bank and Sky Financial. We asked the Cleveland Fed to extend the public comment period and to hold a public hearing. And the public hearing-- and in view of the--to hold a hearing in view of the lack of the depository lending and the explosion of subprime lending and foreclosures. The Fed wrote back a letter, and I believe we have it here, and their response was, no, they will not extend the public comment period, and, no, they would not give a commitment to holding a public hearing. They only said that they would consider doing so. Now, I have wondered how serious--and without objection, I would like to submit this letter for the record. I wondered how serious is the consideration given to holding public hearings. According to one of our witnesses today, the last time the Cleveland Fed held a public hearing in a bank merger case was nearing 30 years ago. I will say at the outset that this hearing will not delve into the details of the Huntington/Sky merger because it is a pending matter before the Fed. And I ask that members of the subcommittee understand that we shall not influence any particular outcome of the proposed merger, nor will we pursue any questioning about it, or the Fed to hold a public hearing itself. The matter could be fully discussed by all stakeholders. However, unless the Cleveland Fed holds a public hearing, that conversation will not take place as is beyond the scope of today's congressional hearing. The purpose of today's hearing is to examine the situation facing Cleveland, specifically Cleveland, but Ohio generally, and to hear from the chief regulator of banking mergers in this region, Cleveland Fed. Ohio leads the Nation in the rate of foreclosures. Ohio's foreclosure rate, 3.3 percent, is about three times the national rate and has the second highest percentage of loans and serious delinquencies according to the Mortgage Bankers Association. Cuyahoga County, which includes Cleveland, had 11,000 foreclosures in 2005, more than tripled the number a decade ago and 13,610 foreclosures in 2006. Subprime lending is associated with significantly higher levels of foreclosure than prime lending. Foreclosure rates are 20 to 30 times greater than subprime loans. This finding is reflected in Cleveland's experience with a rapid growth in the subprime lending market in the rising number of the foreclosures. In Cleveland, in 1995, the local depositories were about 60 percent of the market share of mortgages. By 2005 that number dropped to 20 percent. The Federal Reserve of Cleveland oversees the Fourth Federal Reserve District, which comprises Ohio, Kentucky and northern West Virginia and western Pennsylvania. It is one of 12 regional reserve banks that, in conjunction with the Board of Governors in Washington, DC, make up the Federal Reserve System. The Fed has the primary responsibility of supervising and regulating the activities of State and local banks and bank holding companies. In the case of an acquisition, the Fed is required to take into account the likely effects of acquisition on competition, the convenience and needs of the communities to be served, the financial and managerial resources and future prospects of the companies and banks involved, and the effectiveness of the companies' policies to combat money laundering. I think one question, the maps I referred to a moment ago, raises this: How well have the convenience and the needs of the communities been served over the last 30 years, especially in the last 10 years as the predatory lending and foreclosure problems have exploded? I think one of the few questions raised by the magnitude of the foreclosure crisis in Ohio includes: What was the Cleveland Fed doing to lessen the problem? What enforcement tools were the Cleveland Fed advocating for? Was the Cleveland Fed acting proportionately with the foreclosure problem? What recognition did the Cleveland Fed show that it had a foreclosure crisis at its front step? Did the Fed adequately use its considerable power to curve an industry that preyed upon borrowers, distort the market and reeked havoc not just on borrowers but on their neighborhoods, cities and regions. I hope that we may begin to get answers to that and other questions today. At this point I would like to--at this point I would like to recognize the ranking member of the committee, Darrel Issa of California. I want to thank Mr. Issa for being with me this morning as we conduct this hearing. The chair recognizes Mr. Issa. [The prepared statement of Hon. Dennis J. Kucinich follows:] [GRAPHIC] [TIFF OMITTED] T0152.001 [GRAPHIC] [TIFF OMITTED] T0152.002 [GRAPHIC] [TIFF OMITTED] T0152.003 [GRAPHIC] [TIFF OMITTED] T0152.004 [GRAPHIC] [TIFF OMITTED] T0152.005 [GRAPHIC] [TIFF OMITTED] T0152.006 [GRAPHIC] [TIFF OMITTED] T0152.007 [GRAPHIC] [TIFF OMITTED] T0152.008 [GRAPHIC] [TIFF OMITTED] T0152.009 [GRAPHIC] [TIFF OMITTED] T0152.010 Mr. Issa. Thank you for holding this very important hearing as a followup to what we've already done in Washington. I am fortunate to serve. This is the second go-around. In the last Congress we did a lot of hearings that we did together on a bipartisan basis and are continuing to. And I hope that everyone here today understands that's a spirit in which we come here, that when you look at the numbers, you look at Cuyahoga County, OH as a whole versus the Nation. There's clearly a problem in this region, and understanding the problem of this region before it spreads or to discover whether it will spread to other parts of the country, will certainly, for me, be part of the focus here today. As the chairman very much said, we're not here to discuss a pending merger, but I think we will be listening appropriately to some of the concerns that Chairman Kucinich raised about competition. I, for one, come from California now, even though I'm a native of Cleveland. As a result, I come from an area that has almost the reverse of what's going on here in Ohio. Unemployment is at a historic low. Home prices have risen more than double on the average in California in the same period in which they were pretty flat here in Ohio. As a result, if you had a subprime loan and still have one in California, but you didn't refinance, you probably have 50 percent plus equity in your home in California. Well, here you may have exactly the same equity that you originally bought your house with. So, there are things that are different. Certainly, I believe that we're going to look at that today. We're going to look at whether the Fed exercised what it could exercise under the HOEPA, the Home Ownership Protection Act, which as I understand and we'll hear more today, gives authority, but limited enforcement, and that's something, perhaps, that we'll see and hear more when the Fed has their chance. I must admit, I took a little nostalgic tour of Cleveland, Cleveland Heights, Shaker, the whole east side yesterday, and perhaps because I haven't been here much longer than the chairman, I saw the part of the cup that was half full. I saw the areas of Hough and going up Chester and Carnegie. I saw brand new homes where I remember only, to be honest, ancient homes that were boarded up. I still saw some boarded up homes. But I see the promise for Ohio if, in fact, we can keep home ownership alive. I think the chairman and I will work together in Washington to take what we learn here today and make sure that, at a minimum, Congress is doing what it can to continue promoting home ownership. I also think that we're going to have to look beyond banks, and beyond banks, the regulatory authority of banks. As a Californian, where California has the right, as Ohio has the right to regulate mortgage brokers, I believe that both States have done, at best, a limited job of doing so. As I'm sure the chairman and those testifying today will agree, mortgage brokers are the people that actually talk the consumer into making that loan. It is very seldom, if ever, a federally regulated bank. As Members of Congress, we, in fact, zealously guard our oversight ability, and I believe today is just a splendid example of good oversight, coming out here and looking beyond what we would normally see in Washington and with constituents to have an opportunity to see that Washington is not all about Washington. My hope today is that we cannot only get to the root of many of the problems that plague the subprime industry nationally, but that we can effectively differentiate what's going on nationally from regional and local problems. This is particularly important because, we as Federal regulators, have limited authority, but we can grant additional authority to ourselves as we see fit. But often the thing we need to do most is to say, what are we doing? Are we doing enough. Should we do more? And if the answer is, we are doing enough, then the next question is are the State and local areas empowered to do enough? Is it clear that, for example, mortgage brokers are the responsibility of the States, and if, in fact, they are untruthful or predatory in their lending practices, no amount of enforcement directly from the Fed is going to have the same effect as the State attorney general and the State legislature. So, Mr. Chairman, I want to once again thank you for holding this important hearing. I think I've contrasted a little bit of what I'm hoping to see here today, but I think at the end of the day it's what we both want to see that's going to make us effective when we return to Washington, and I yield back. Mr. Kucinich. I thank the gentleman from California. Without objection, the members of this committee will have 5 legislative days to submit a written statement or extraneous materials for the record. Without objection, the members of the Ohio Delegation who have the desire to submit a written statement or extraneous materials for the record, will be able to do so. Without objection, the public officials who are here today who will not be testifying, but, nevertheless, represent constituencies such as a Councilman Brancatelli, Councilman Santiago and others, will be able to submit written statements and extraneous materials. And the community groups, including those from Slavic Village who were able to walk with us yesterday and from North East Side Community, will be able to submit written statements and provide extraneous materials for the record, Mr. Issa. OK. So, at this point we are now going to be hearing from the witnesses, and I want to start by introducing our first panel. I'll begin by introducing Mr. Rokakis. Now, Mr. Rokakis took office as the Cuyahoga County treasurer in March 1997 after serving for over 19 years on the Cleveland City Council, and I had the honor in serving with Mr. Rokakis. Mr. Rokakis brought sweeping reform to the treasurer's office. He spearheaded House Bill 294, which streamlines foreclosure process for abandoned properties. He was instrumental in creating Cuyahoga County's Don't Borrow Trouble Prevention Foreclosure Program. Mr. Rokakis developed nationally recognized link deposit loan programs to help revitalize the county's housing stock. Additionally working past Ohio House Bill 293, that allowed senior citizens to defer property tax payments. Governor Ted Strickland has appointed Mr. Rokakis to Ohio's recently formed task force on foreclosures in Ohio. And I just wanted said, Mr. Issa, that Mr. Rokakis has really been an important leader on this issue, and we're very grateful for his presence here today. Ms. Barbara Anderson is the treasurer of the Predatory Lending Action Committee of ESOP, Empowering and Strengthening Ohio's People. ESOP was founded in 1993 to create organized leadership around issues that impact neighborhood life in Cleveland. Ms. Anderson is a long-time community leader in Cleveland's Slavic Village. And, finally, the last witness of our first panel will be Mr. Charles Bromley, who is an adjunct faculty member at the Levin College of Urban Affairs. He is a Presidential scholar in the SAGES Program at Case Western Reserve University and chair of the Ohio Fair Lending Coalition. He's led the first organizations to document the relationship between foreclosures and predatory lending and unfair lending practices and their impact on Greater Cleveland neighborhoods. I want to thank the witnesses for appearing before the subcommittee. It is the policy of the committee on Oversight and Government Reform to swear in all witnesses before they testify. I'm going to ask that the witnesses rise and raise your right hands. [Witnesses sworn.] Mr. Kucinich. Thank you. Let the record reflect that the witnesses answered in the affirmative. Now, I'm going to ask each of the witnesses to now give a brief statement, a brief summary of their testimony and to keep this summary under 5 minutes in duration. I want you to bear in mind that your complete written statement will be included in the hearing record. I'd like to begin and have the chair recognize Mr. Rokakis, the treasurer of Cuyahoga County. Welcome. Please proceed. STATEMENT OF JAMES ROKAKIS, TREASURER OF CUYAHOGA COUNTY Mr. Rokakis. Thank you, Chairman Kucinich. And Congressman Issa, welcome home. Our baseball team is better than it was when you left, but I'm afraid to say that our football team may be worse. Mr. Issa. But we got rid of Modell, didn't we? Mr. Rokakis. Thank you, Mr. Chairman and members of this committee for allowing me the opportunity to speak here today. The crisis of foreclosures and the meltdown in the subprime lending market has dominated the news the past 6 months, but is a problem we have been struggling within northeast Ohio and Cleveland, in particular, since the mid 1990's when our foreclosure rate took off here. From a low of 3,500 private mortgage foreclosures in 1995, our foreclosure rate climbed steadily in the 90's to over 7,000 foreclosures filed by 2000. Undoubtedly, a weak economy played a role in the doubling of the foreclosure rate, but other forces were at work. The development of the secondary mortgage market and great access to capital markets had created an insatiable demand for mortgages and an increase in reckless lending practices, local governments struggling to deal when this explosion cried out for help. In March 2001, my office co-hosted, along with CSU School of Urban Affairs, a conference at the Cleveland Federal Reserve Bank on the topic of foreclosures. In 2002, three Ohio cities, Cleveland, Toledo and Dayton, passed anti-predatory lending ordinances in an attempt to fill the void created by an oblivious State government and a Federal reserve that failed to recognize the crisis. These local laws were preempted by State laws passed by the Ohio Legislature within 60 days of their package. An especially bold industry became even greedier and more reckless, and our foreclosure rate continued to climb to over 13,000 private mortgage foreclosures filed last year. And sadly we predict, based on first-quarter filings in 2007, to over 16,000 foreclosures this year, the equivalent of foreclosing on every owner-occupied unit in the cities of Garfield Heights, Middleburg Heights and Olmsted Falls. The Federal Reserve Bank has the authority under the Truth in Lending Act and the Home Ownership Protection Act to ban all of the practices that have fed this mortgage craze and led to this foreclosure frenzy. They can ban no-document loans, but have not. They can ban loans that are not fully indexed to a borrower's income, but have not. They can ban the practice known as risk layering where borrowers with the weakest credit are offered multiple gimmicks to qualify them for a loan, but they have not. They can require that all subprime loans provide for the escrow of taxes and insurance in their payments, but they do not. They continue to hide behind the need to protect the subprime industry, but this argument fails to recognize that almost 90 percent of subprime loans are financed and nearly all of those are adjustable rate mortgages that will, with a considerable degree of certainty, double the payment within 5 years and cost that borrower their home. I am stunned at the number of elderly homeowners who have refinanced their homes late in life, stripping their equity out of the property and saddling them with a debt level they cannot afford. In 1983, the average 65-year-old homeowner had $11,000 in debt on their primary residence. By 2004, that number had climbed to 47,000. Yesterday's New York Times had an article that zeroed in on unscrupulous telemarketers, people who focus their efforts on the elderly and target them for products they don't need and can ill afford. This practice has been going on in the mortgage refinance business for years. We see evidence of it on people who have been refinanced and promised that their property taxes were part of their monthly payment, only to find out they had been lied to, and they found their names in the newspaper because they had failed to pay their property taxes. Last week, Federal Reserve Chairman Ben Bernanke, spoke to an audience in Chicago on the topic of the subprime mortgage market. He spoke of a foreclosure and/or delinquency rates of more than 60 days as approaching 11 percent in the subprime market. I wish that were the case in Cleveland. In January, Larry Litton, CEO of Litton Loan Servicing, shared his Cleveland numbers with me, 11.41 percent already foreclosed in their portfolio, 16 percent in foreclosure for a total of 27.41 percent. If you add their loans that were 30 days late, which were another 18.5 percent, a stunning 46 percent of their loans in Cleveland were underwater or sinking fast, 46 percent. Let me read from Chairman Bernanke's conclusion in Chicago last week: ``Markets can overshoot, but ultimately, market forces also work to rein in excesses. For some, the self-correcting pull back may seem too late and too severe, but I believe the long-run markets are better than regulators at allocating credit. We must be careful not to express responsible lending or eliminate refinancing opportunities for subprime borrowers.'' In the mid 1970's, New York City was facing a bankruptcy and looked to the Federal Government for a bailout. Gerald Ford was President and said no. New York Daily News headline read, ``Ford to NYC: Drop dead.'' The position of the Fed on this issue, their failure to regulate their unwillingness to recognize the severity of this crisis should elicit a new headline: Fed to Cleveland: Drop dead. Fed to Dayton, Toledo, Detroit, Buffalo, Cincinnati: Drop dead. Members of this committee, I don't believe the Federal Reserve Bank will take the measures they need to take. Frankly, you could argue it's too late. Congress must act on the various measures under consideration in the house and Cincinnati to rein in the excesses of the mortgage industry, because the market has proven itself to be greedy and unreliable in protecting the assets of its investors and willing to destroy cities like Cleveland. Act now. [The prepared statement of Mr. Rokakis follows:] [GRAPHIC] [TIFF OMITTED] T0152.011 [GRAPHIC] [TIFF OMITTED] T0152.012 [GRAPHIC] [TIFF OMITTED] T0152.013 [GRAPHIC] [TIFF OMITTED] T0152.014 [GRAPHIC] [TIFF OMITTED] T0152.015 [GRAPHIC] [TIFF OMITTED] T0152.016 [GRAPHIC] [TIFF OMITTED] T0152.017 [GRAPHIC] [TIFF OMITTED] T0152.018 Mr. Kucinich. Thank you very much, Mr. Rokakis. Next we're going to hear from Ms. Barbara Anderson. You may proceed. STATEMENT OF BARBARA ANDERSON, TREASURER, EMPOWERING & STRENGTHENING OHIO'S PEOPLE Ms. Anderson. Thank you, Mr. Chairman, and certainly, thank you, Mr. Issa, and members and representatives of this committee. Good morning, my name is Barbara Anderson, and I appear before you today as the treasurer and member of the Predatory Lending Action Committee of the Empowering and Strengthening Ohio's People [ESOP]. ESOP was formerly known as the East Side Organizing Project. ESOP is a community organization whose roots are in the southeast side of Cleveland, OH, but whose growth has been fueled by abusive lending and now includes the entire northeast Ohio region, as ESOP's work is widely recognized and requested. I also serve as the treasurer of the Empowerment Center of Greater Cleveland, president of the Bring Back the 70's Street Club. I'm the past president of Community Assessment and Treatment Services and serve on the boards of the Ohio State University Extension Program, Vision Advocacy Council of MetroHealth Center for Community Health and Co-chair of MetroHealth Center for Community Health and Co-chair of the Slavic Village Development Abandoned and Vacant Housing Committee. I could give you documentation regarding the devastating impact of predatory lending and foreclosure, however, that's included in my full statement. I'm a survivor of personal predatory lending in the past. I am yet a victim of predatory lending as is my entire neighborhood. I have lived at 3435 East 76th Street for over 25 years. That address is in the Slavic Village neighborhood. That is today widely seen as the epicenter of the foreclosure crisis facing Cleveland and the Nation. I want to thank you, Mr. Kucinich, for holding this hearing as the city of Cleveland is now experiencing a crisis as a result of years of neglect by local banks and regulators. Without question, cities like Cleveland were ripe for the picking. The steel industry was leaving, their secondary industries went belly up and we continue to have brain drain. While these facts are staggering, what I see in my neighborhood is even more tragic. There are ten houses on my street. Five of them are currently vacant, and in most cases are owned by a lender who made an abusive loan that the homeowner could not afford. My street is not unusual. You can walk up and down virtually any street in my neighborhood, as you did yesterday, Mr. Kucinich, and you will find a similar situation. In our street club's targeted area, which includes the streets from East 70th to East 78th, south to Edna Avenue and north of Morgan, there are over 100 vacant, abandoned or condemned homes. Obviously, this scenery has reduced the value of my own home. While that is devastating by itself, what is most devastating is that I cannot allow my grandchildren to play outside because of squatters, usually high on drugs, are now occupying some of those houses as they sit wide open. Today organizations like ESOP are fighting an uphill battle to clean up these costly measures. We have written agreements with about a dozen lenders and services that allow us to serve as the middle person between the homeowner and lender in order to help negotiate a workout to their problem loan. This year ESOP is projected to assist about several hundred families get out of foreclosure. While we are proud of our efforts, Cuyahoga is expected to see upwards of 15,000 foreclosures in 2001. While some of these foreclosures are due to unforeseen, economic hardships, the vast majority are the results of abusive lending. I take this personally. Irresponsible lenders preying on unsophisticated borrowers is a match made in financial hell. It is the residents that are left behind that must shoulder the burden of the potential health, crime and nuisance of these properties. Once left vacant, they become an eyesore. No one comes to clean or to maintain the property. It is simply left alone and continues its almost certain decline. The banks and the lobbiests will tell you that the problem is a lack of financial education on the part of the consumer. While, actually, it's a lack of accountability by the lender and greed to increase revenue on the backs of those that can least afford and have very few options. ESOP sees this hearing as an important first step to changing the job description of the regulators, and I wish to conclude by thanking you again, Congressman Kucinich, for your leadership on this issue and would be happy to take any questions. [The prepared statement of Ms. Anderson follows:] [GRAPHIC] [TIFF OMITTED] T0152.019 [GRAPHIC] [TIFF OMITTED] T0152.020 [GRAPHIC] [TIFF OMITTED] T0152.021 [GRAPHIC] [TIFF OMITTED] T0152.022 [GRAPHIC] [TIFF OMITTED] T0152.023 [GRAPHIC] [TIFF OMITTED] T0152.024 [GRAPHIC] [TIFF OMITTED] T0152.025 [GRAPHIC] [TIFF OMITTED] T0152.026 Mr. Kucinich. Thank you very much for your testimony, Ms. Anderson. Mr. Bromley. STATEMENT OF CHARLES BROMLEY, ADJUNCT FACULTY, LEVIN COLLEGE OF URBAN AFFAIRS Mr. Bromley. My name is Charles Bromley. I've had an extensive, professional career including advocacy, research, and organizing on the issue of fair lending, and I'm presently serving as adjunct faculty at the Levin College of Urban Affairs, and I hope to contribute to the knowledge and academic role of regarding urban diversity and creating learning opportunities for those of us who seek a stronger and more vital community. Several weeks ago, the Ohio Fair Lending Coalition brought a challenge regarding the merger of the Huntington and Sky Banks, both Ohio lenders. The community awaits a response to challenge the Federal Reserve Bank, with a significant physical presence in Cleveland, housed on two city blocks in the heart of Cleveland's financial district is reviewing the challenge. The Federal Reserve Bank, is a formidable national historic landmark with an impressive pink and sienna marble facade within its hollowed walls has a 100- ton vault door, the largest in the world, which protects the massive bank vault. Cleveland is fortunate to have one of the regional Federal Reserve Banks. Unfortunately, the political presence of the Federal Reserve Bank has not matched its physical presence in tackling the persistent problems of discrimination and lending, and the most recent crisis is predatory lending that has affected every community in Cuyahoga County. The rich history of the Federal Reserve Bank and the Renaissance architecture remind life-long Clevelanders of one of its many jewels. In 1973, having graduated from the Levin College of Urban Affairs with a masters degree and working with the Cleveland Heights Community Congress, I embarked on a community research project with the League of Women Voters Community. We documented, by hand, and tracked and compared disparate lending patterns that exist between the city of Lakewood and the city of Cleveland Heights. Our research findings were substantial, and we submitted our study results to the Senate Banking Committee chaired by William Proxmire. Other researchers and community-minded individuals submitted similar study results, which led to the passage of the Home Mortgage Disclosure Act of 1975 and ultimately the Community Reinvestment Act of 1977. The Ohio Fair Lending Coalition filed the action against Huntington/Sky Bank's merger and many colleagues said to us, why bother? The Federal Reserve Bank will do anything for the community. We reminded them that following the passage of the 14th amendment after the Civil War, it took our country until 1954, in the Brown decision, to recognize the importance of the equal protection clause. Similar issues and obstacles presented themselves relative to the Home Mortgage Disclosure Act and the Community Reinvestment Act. Now, these acts represent important tools for our communities and cannot be dismissed as unimportant. HMDA data that was once transparent has been transformed into an online nightmare that no individual citizen can easily comprehend. It's imperative that the Federal Reserve Bank make this data transparent and easily available to community groups who would use this data. The Federal Reserve Bank has only conducted one study in 1992, conducted by the Federal Reserve Bank of Boston, to examine the relationship between race and credit scores. It is time for the Federal Reserve Bank of Cleveland to undertake such a study and determine what role race plays in the declination of prime credit. They have the resources, the knowledge and data to carry this out expeditiously. It has been over 30 years since the Federal Reserve Bank held a public hearing in Cleveland. The wealth-robbing activities of lenders has exacerbated predatory lending problems in communities, not only in historically underserved city neighborhoods, but in encroaching first-ring suburbs, which leaves a trail of impoverishment and debt. During the years since the last public hearing, Greater Cleveland has been devastated by high-cost loans and predatory lending. At each hearing on proposed legislation to curb the effects of predatory loans at the State level, and the multitudes of meetings that occurred in Greater Cleveland, the important leadership of the Federal Reserve Bank has been missing. The President of the Federal Reserve Bank of Cleveland has been absent from all public discourse on this issue. At the hearings on anti-predatory lending law in Columbus, OH, at the countless summits on predatory lending, and the numerous meetings leading up to creation of the Cuyahoga County Foreclosure Prevention Program, the highest office of the Federal Reserve Bank was absent. It is significant that in the 2006 Annual Report, the current president of the Federal Reserve Bank of Cleveland highlighted the immense cost that concentrated poverty has placed on this community. There is little doubt that predatory lending has put at risk billions of dollars of real estate for Greater Clevelanders. For more than a decade many civil rights advocates pressed for changes in lending practices that would have been an antidote to the explosion of predatory lending. The Metropolitan Strategy Group, a nonprofit which I led, documented this and presented this information. A proposed statement on subprime lending. For the last decade, the Federal Reserve Bank in Cleveland has not been at home. The private dining rooms of the Federal Reserve Bank have been filled with lenders while the community has been outside, looking in, trying to determine if someone will open the door to hear from those among us who have been devastated in the community. The litany of abuse is well documented. First and foremost, there must be a discussion of no document loans or liar loans. The Federal Reserve Bank regulators had a moral and legal responsibility to stop this behavior the second that these indiscretions were documented, along with other loan products that damage communities, and they should not have waited until, ``a crisis in mortgage markets.'' It's well known that the Federal Reserve Bank holds the highest regard for its examiners who review safety and soundness. These values are represented for all to see with two larger-than-life statues, one entitled Security and the other entitled Integrity. Sculpted in New York City, they guard the main entrance of the Federal Reserve Bank on East 6th and Superior. These statues are a symbol of trust that the community instills in the Federal Reserve Bank. One commentator, Eddy Ross, said recently in the Dayton Daily News, these agencies, bank regulatory agencies, have enormous power, direct and indirect, over the financial services market. They could set the tone. By aggressively and creatively pushing lending institutions to offer credit in lower and middle-income communities--including by enforcing the Community Redevelopment Act--they could have given consumers a reasonable alternative to the predators by beefing up the Home Mortgage Disclosure Act, regulators, could have given policymakers and police agencies real-time data about who was making predatory loans and where and what actions could be taken. It's time to revive an honest debate about these issues as the Greater Cleveland community attempts to resurrect its housing market and its financial institutions. The mighty facade of the Federal Reserve Bank needs to be matched with a new political will to take on difficult issues related to disinvestment and predatory lending in Cuyahoga County. It's time to knock on the door and find out that somebody is home and that public hearings will occur. Thirty years is too long to wait. It is now time to act. William Proxmire was fond of saying about lenders, he said, the former chairman said, I asked myself how is it that so many neighborhoods are continuing to fail while so many lending institutions are continuing to pass. I hope that we can move ahead and have a hearing in Cleveland and get the truth out about lending. [The prepared statement of Mr. Bromley follows:] [GRAPHIC] [TIFF OMITTED] T0152.027 [GRAPHIC] [TIFF OMITTED] T0152.028 [GRAPHIC] [TIFF OMITTED] T0152.029 [GRAPHIC] [TIFF OMITTED] T0152.030 [GRAPHIC] [TIFF OMITTED] T0152.031 [GRAPHIC] [TIFF OMITTED] T0152.032 [GRAPHIC] [TIFF OMITTED] T0152.033 [GRAPHIC] [TIFF OMITTED] T0152.034 Mr. Kucinich. Thank you very much, Mr. Bromley. We'll be moving quickly to questions of the first panel. For those who have just joined us, the definition of terms is very important here. We're talking about prime loans. We're talking about the standard loan given to a borrower with a good to excellent credit rating. Subprime loans are higher interest rates often with financial penalties and are made for people who are often deemed to be higher risk. Also, there's evidence that this committee is looking at that African Americans are more likely to have subprime loans even if their financial information would justify a prime loan. These loans are often made by affiliates of banks specializing in subprime loans, and there are frequently abusive practices associated with these loans and including at the appraisal level or no-document loans. I just want to make sure that as we proceed here, that everyone understands the terms of the discussion. Let's begin with questions of the first panel. Would Mr. Issa like to ask the questions first. Mr. Issa. I'd be glad to. Mr. Kucinich. Thank you. Please go ahead. Mr. Issa. Thank you, Mr. Chairman. This is sort of--when you see bipartisan, this is a great example of it. Well, you covered a lot, and I appreciate you doing it. Ms. Anderson, you've been nationally--your organization has been nationally recognized for intervening in the process in order to renegotiate or to save failing loans. Could you tell us, in a sense, how many loans that you discover are savable through intervention out of the total? In other words, we look at the failed rate in Cleveland, which you've helped reduce, but when we're looking at intervention--and to be honest, grants and funding for organizations to help with people who have gotten over their head, what percentage can you say in your experience? Ms. Anderson. Well, let me answer a couple ways. First of all, it's been very successful, and one of the reasons has been because of the relationship that develops after the partnership is made. ESOP has been able to, as I've said before, go into partnerships with the ones that we deal with such as a Litton, such as an Aquin [phonetic]. Because of that partnership and the relationship, they are more willing to negotiate or to help, not just predatory loans, but also hardship loans. And, so, yes, well over 70 percent are able to be negotiated, some kind of negotiation where it is possible to save. Mr. Issa. And you brought up a good point that I'd like to followup on. Because of Cleveland's economy, when you break those down, can you give us a feeling for how many, that you may recall, is the direct result of predatory lending and how many you would say are hardship? People have lost their jobs or they've lost a good-paying job, and now one or both members are working for less. Ms. Anderson. I would say that the impact of losing jobs has had a devastating effect, which you well know. And if you're already in a predatory loan, even that predatory loan that you may have been able to afford while you had that good job by making other sacrifices, that once you get into a predatory loan and lose your job, then it becomes even more complicated. There is--depending on the lender, there is a higher amount with some lenders, maybe even of 50 percent, 60 percent, are hardship loans. While some lenders, 80 and 90 percent of them are predatory lending. Mr. Issa. It pretty much depends on how aggressive the broker was that sold the packages? Ms. Anderson. Yes, it does. Mr. Issa. Mr. Bromley, HB185, which has now been signed into law, how much of an effect do you believe it will have in the future, stemming future incidents the way we're seeing here? Mr. Bromley. Well, I think all laws--I mean, it's like the Community Reinvestment Act. It depends upon how well it's enforced, how effectively, how comprehensively. You know, we have a State law here to prevent, you know, predatory activity. And I have found over the years that when you put a law in a book, you better be sure that you're going to enforce the law and make sure that it occurs. We have had some wonderful things, and we documented early on in this crisis that 70 percent of the people going in foreclosures had problems with predatory characteristics in their mortgages. It was well known, well documented. There are an abundance of laws. I mean, it's a question of enforcing those laws and speaking out in a way that makes sure that these laws are effectively enforced throughout the community. Mr. Issa. I guess I'll switch to one of the authors of the bill. I was interested because HB185, if enforced, Mr. Rokakis, I assume you believe will dramatically reduce this. Mr. Rokakis. It will. As you know though, 185 is the lame duck session between the election of the new Governor and the end of that term was, in my opinion, gutted by 117. But the damage provision was limited so substantially, that I really feel it took away from the enforceability of the strength that 185 might have had. Certainly, putting fiduciary duties on brokers and licensing, all very important, but what was so unsettling to us is that 117, we really feel gutted it, and, of course, it's in limbo now because there was that period of time this Governor vetoed this. It was a 10-day layover. They've sued it for the Ohio Supreme Court. So, it's unclear as to what 185's standards are, though the attorney general is going forward as if it's in full effect. Mr. Issa. And the followup, and sometimes we call this the punch, assuming that 185, if left ungutted and implemented, would have really changed the lay of the land going forward, particularly as to enforcement of mortgage brokers, lending policies, criminal sanctions and so on, assuming that's all true, then when we're weighing--I'll just be a second, Mr. Chairman. Thank you. If we're weighing the Fed, who will be up here next, and what we expect them to do, and Ohio's effective or ineffective, but belief that they can respond, they can regulate as Federal officers, wouldn't it be reasonable to say that you should send 185 back through, put the teeth in it, enforce it and clean up the act unique to Ohio's problems so that you will not be in a catchall of what works in California being what you get told to do here in Ohio, which, by the way, as now a Californian, I know won't work. The regulatory needs are undoubtedly different here in Ohio. I don't believe you have walk-away loans. In California you can walk away from your mortgage, not go bankrupt and no one chases you. We have non-recourse loans. And so as an Ohioan moved to California, I'll close and say, in a sense, isn't it the important thing to come out of this hearing, that if Ohio can't make 185 a proper enforcement reality, that your legislation needs to pick it back up, put teeth in it and bring it back through if Ohio's going to have a custom solution for themselves? Mr. Rokakis. I agree. I think we have to partner in this. And as you know, one of the comments made by Chairman Bernanke was that unfortunately this is a patchwork quilt. So, we can't do this alone. Clearly, we can't expect the Fed to do all of this. But, unfortunately, and I hate to be such a cynic, I've spent many an afternoon traveling to the Ohio Legislature. The power of the mortgage broker industry, the power of the mortgage bankers, the appraisers, the people that are all integral parts of this not so pleasant situation have incredible power at that legislature, and I've watched them-- and time after time--2002 is a good example. Cleveland, Dayton and Toledo said nobody is going to help us. We'll do it on our own. You know, within 60 days they preempted those three cities, they promised action, 11 meetings, 63 witnesses, no action came until 2006 only because it was an election year, then they started to gut it 3 months later. Forgive me for being a cynic, but I've spent too much time in Columbus. Mr. Issa. Thank you, Mr. Chairman. Mr. Kucinich. Thank you very much, Mr. Issa, my colleague from California. This discussion that you're having with Mr. Rokakis, since we do have a member of the legislature in the audience, State Representative Foley, and if there's any other members of the legislature in the audience, I would ask that you let the staff know, because this is certainly a discussion that is relative to your level. We've also been joined by Congresswoman Tubbs Jones' representative, Mr. Taylor. Would you stand and be recognized. Let Congresswoman Tubbs Jones know that she has our love and support at this time. We know that she would be here except for this tragedy in her family. So, thank you, Michael Taylor, for being able to represent Congresswoman Tubbs Jones. And, finally, I want to acknowledge the presence of another mayor that's in the room, Mayor Thomas O'Grady, of North Olmsted. I'd like to move on to questions, and I'd like to go to this question of public hearing, Mr. Bromley, that you raised. What's your understanding of the purpose of holding public hearings? And, generally speaking, I'm not talking about a specific case now with respect to merger reviews. Mr. Bromley. Well, it's an opportunity. The Community Reinvestment Act has a mechanism that allows the public to comment on a proposed merger of lenders, and the public hearing is part of that process where the public, meaning individuals, community groups such as Barbara's, can comment on the impact of a merger on a community. Mr. Kucinich. And when was the last time a hearing was held by the Cleveland Fed. Mr. Bromley. 30 years ago. Mr. Kucinich. How would you explain that 30 years have passed without a public hearing. Mr. Bromley. I think that this Federal Reserve Bank decided after one hearing that they were never going to have another hearing in Greater Cleveland, that it was unfortunate, and that the weight, as Jim has indicated, the weight of the lenders weighed in and said we are not going to have any more public exposure to these kind of issues. And the result has been 30 years of silence in the public square, and the public square needs to have a vigorous dialog in the Democratic institution. Mr. Kucinich. Mr. Rokakis, you quoted from Chairman Bernanke, and, of course, you're aware that last week he promised that the Fed is going to do all, ``We'll do all we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices.'' Now, preventing a reoccurrence of the problem is very important, but what efforts should be made and what role will the Fed play in solving the problem of foreclosures for existing homeowners. Mr. Rokakis. Mr. Chairman, I also read their statements urging banks and mortgage companies throughout the company to cooperate in workout efforts. I'm a part of the Governor's task force that's putting together a State-wide network to help try to work through this foreclosure morass. As you know, September of this year and next year we're going to see an explosion of these subprime ARMS resetting, about $20 billion worth in this State. So, we're going to see more foreclosures than we've already seen, which is hard to believe. But I think what's important is that we must find a way, the Fed, the Congress, we have to bring these lenders to the table early. They say they want to work out these loans, and I know they have with ESOP and we have a foreclosure effort here, but until, as an industry, they set up practices that offer uniform solutions, it's going to be a one by one by one by one hand-to-hand combat on renegotiating millions of mortgages. Mr. Kucinich. Well, since you're on the Governor's task force, of course, you know the stock market has taken a notice of the rising in cost in subprime loans has helped to reduce the amount of capital available for future predatory lending. Of all the conferences and guidance from the Fed, can you point to anything that the Fed has done to prevent the bad loans from being made? Are you aware of any? Mr. Rokakis. No. Other than the statement of those last week urging the banks to cooperate on workout efforts, but it was nothing more than an invitation to do so. Mr. Kucinich. Mr. Bromley, are you aware of any of this. Mr. Bromley. I'm not aware of any, and at this level of the crisis--that's the point about the Cleveland Fed. The Cleveland Fed is very aware of what's been going on in Ohio and specifically here in Greater Cleveland. I think they have played a very important role in lifting this issue up. Mr. Kucinich. Thank you. I'd like to ask Ms. Anderson, because you're working at the community level, tell this committee about the impact of people in the neighborhood where you have all these homes boarded up--and you're still living there and you have a home there. Ms. Anderson. That's right. Mr. Kucinich. I talked to some people yesterday, but I'd like you to tell the committee, how does this affect people. People put time and effort into their property to try to keep it up, and, all of a sudden, a house gets boarded on the street. Ms. Anderson. It's not just devastating to just the people who live there, but especially to the children. I mean, you play with these people, you work with people, you talk with people. They become your neighbors, and then, all of a sudden, in the middle of the night they're gone, and several days later the house is boarded up, trash is sitting outside and it's not as though it's moved. This is your window every day, is that you go out to see these vacant, abandoned, boarded-off homes that just devastates the entire community. It's heart breaking. It's an uphill battle. We have had many community groups go door to door to try to make a difference with our painting on the houses, as you saw yesterday, Mr. Kucinich. We have people there now who are cleaning up the property, who are sweeping. We have people from Habitat who volunteered their time today who are doing that. It is a never-ending battle. You can only clean up so much. It's like trying to clean up America and all you have is a staff of four. Mr. Kucinich. I want to thank the members of the panel, and just ask my colleague, Mr. Issa, when we look at California, and your having an understanding of both Cleveland and California, is it possible that it's only working in California because the housing level right now, and that might also be related to the lending practices and also--you know, yesterday over on, I think, it was Blanche Avenue I saw a house that was appraised for like $68,000, and there's no way that this house was worth that much. Now, it's boarded up, but when it was first bought, it was $68,000. And I'm wondering, you know, when you have an economic decline that's undercut, does that have an impact. And could it be that there's a housing level in California that's not here?. Mr. Issa. Mr. Chairman, you're exactly right. Actually, if anything, we probably have more predatory loans in California because you buy a house, you pay $300,000 for a starter home in some California communities, and 2 years later you take another $100,000, $150,000 out in a second because the appreciation has been that great. A typical capital investment in 2000 in California doubled by 2005, doubled. So--and when you start with a base of $2, $3, $4, $500,000 on what we as Clevelanders would call a middle class home, and $190 to $200 for that base housing, just for what we would call affordable housing, and then it doubles. What happens is the mischief that these mortgage brokers--and they sprung up out of nowhere unregulated in California--were able to do was amazing. The only thing keeping California going is, first of all, you can sell your house and get out today because they still appreciated it, and, two, to be quite candid, we have an incredibly low unemployment rate in most of California that is holding it up. It's not that we don't have some cracks in the subprime mortgage programs. It's just that it's so much smaller because we have full employment. Mr. Kucinich. And I suppose it's fair to say that, you know, God forbid that there was an economic decline in California, but if there was an economic decline, you would probably see some problems. Mr. Issa. The financial landslide, when you're looking at homes that cost so much more, will ripple throughout the country. It's one of the reasons that your hearing here is so important, is as does Cleveland, maybe not so goes the rest of the country. But if what we see here, because of a doubling or so of a historically low unemployment were to happen in California, the default rate would be in the hundreds of billions of dollars, and it clearly would have an effect on the national economy. Mr. Kucinich. See, I think that having Congressman Issa here is so important because we're looking at kind of the parentheses of this matter. You know, Cleveland, with a tremendous wave of foreclosures, State of Ohio, with the economic decline, California with a housing bubble, crisis rising, it's really great that we can do this together. We want to thank the first panel for testifying. Any additional statements that you have or information by the unanimous consent of the committee is able to be submitted to the record. Thank you for being here, and we're now going to move to the second panel, Ms. Sandra Braunstein, who is the Director of the Division of Consumer and Community Affairs for the Federal Reserve. I want to thank her for being here. Ms. Braunstein, good morning. Ms. Braunstein. Thank you. Mr. Kucinich. I want to thank you very much for being here. I want to introduce, to those who are in attendance, Ms. Sandra Braunstein. She is the Director of the Division of Consumer and Community Affairs at the Board of Governors of the Federal Reserve System. She supervises the board's Community Reinvestment Act Examination Program and coordinates the development of policy recommendations relating to consumer protection including the Community Reinvestment Act. She also plays a significant role in analysis and merger and acquisition applications. She was appointed in March 2004 and joined the Federal Reserve Board in 1987. Ms. Braunstein, it is the policy of the Committee on Oversight and Government Reform to swear in all witnesses before they testify, and I would ask you at this moment to rise and to raise your right hand. [Witness sworn.] Mr. Kucinich. Thank you, witness. Let the record reflect that the witness answered in the affirmative. Now, as panel 1, I'm going to ask Ms. Braunstein to give an oral summary of her testimony, to keep this summary under 5 minutes in duration, and I want you to bear in mind that your written statement will be included in the hearing record. So, at this point, the floor is yours, and I want to welcome you to this subcommittee hearing. STATEMENT OF SANDRA BRAUNSTEIN, DIRECTOR, DIVISION OF CONSUMER AND COMMUNITY AFFAIRS, FEDERAL RESERVE SYSTEM Ms. Braunstein. Thank you. Chairman Kucinich, Ranking Member Issa, I appreciate this opportunity to appear in Cleveland to address a number of issues that are of interest to you and your constituents. My written testimony describes the Federal Reserve System's role in evaluating the bank's performance under the Community Reinvestment Act, how the Federal Reserve analyzes applications from banking organizations proposing mergers or acquisition and discusses a number of matters relating to subprime mortgage lending. I would now like to make a few major points on these issues. As you may know, the Federal Reserve has supervisory authority for State-chartered banks that are members of the Federal Reserve System. These institutions total approximately 900 banks and represent 12.4 percent of total domestic assets of all U.S. banks and thrift. In Ohio, the Federal Reserve has supervisory authority, including conducting examinations for CRA for 33 banks comprising of only 6 percent of banking assets in Ohio. The Federal Reserve also has responsibility for expansion applications for State-member banks and banking financial holding companies. During our analysis, we review the competitive effects of the proposal in the relevant markets, the financial and managerial resources and future prospects of the bank holding company, and its banking subsidiaries, the convenience and needs of the communities affected. The public is notified when applications are filed and interested parties may comment on any of the statutory factors. Promoting the availability of credit through the banking system and protecting consumers are important roles for the Federal Reserve. In regards to these objectives, I will address the subprime mortgage lending. The subprime market has grown dramatically over the past decade. In 1994, subprime loans accounted for fewer than 5 percent of mortgage originations, but by 2006 about 20 percent of new mortgage loans were subprime. While the expansion of the subprime mortgage market over the last decade has increased access to credit, the market has more recently seen increased delinquencies and foreclosures. The board is troubled by these performance issues and understands the significance of the matter to regional markets, communities and families. The board believes that mortgage market problems need to be addressed in a matter that curves unfair and abusive practices while preserving incentives for responsible subprime lenders. Accordingly, it is important that any actions we take are well calibrated and do not have the unintended consequences. We want to encourage, not limit, mortgage lending to qualified borrowers our responsible lenders. I will briefly touch on several means we have used and are using to address subprime lending issues. First, over the past several years the Federal Reserve System has monitored development in the subprime lending industry and has taken steps to address emerging problems. In response to weaknesses in underwriting and risk management at the institutions we supervise, we have issued guidance in concert with other Federal banking agencies. This includes the recent proposed guidance on subprime lending. Second, in 2001 the board revised the HOEPA rule in response to renewed concerns about predatory lending. In this rulemaking, the board utilized its authority to prohibit unfair and deceptive practices for high-cost loans. For example, the board issued rules that prohibit a HOEPA lender from refinancing one of its own loans with another HOEPA loan, or flipping, within the first year unless the new loan is within the borrower's interest. At the same time the board revised the rules implementing the Home Mortgage Disclosure Act to better track developments in the higher-priced market. The board is currently conducting a major review of Regulation Z, which implements the Truth in Lending Act of which HOEPA is a part. The board held four public hearings in 2006 on home equity lending and mortgage markets. On June 14th the board will hold a fifth public hearing focussed on how the board might use its rulemaking authority to curve abusive lending practices in the home mortgage market, including the subprime sector. Third, the board is actively engaging representatives from the mortgage lending, servicing and capitalization arena as well as from borrower and community support organizations to learn about opportunities for borrower intervention and foreclosure mitigation. And, fourth, collaborations to further community development. Consumer and financial education have long been a part of the Federal Reserve System's approach to facilitate solutions to matters that may be most effectively addressed in a local or regional level. In my written testimony, I discuss some of the efforts of the Federal Bank of Cleveland in this regard. The impact of mortgage delinquency and foreclosure on consumers and communities is of great concern to the Federal Reserve, and we have worked to respond to the issue in both the national and regional levels. We will continue to pursue opportunities to help borrowers and to preserve the access to responsible lending. [The prepared statement of Ms. Braunstein follows:] [GRAPHIC] [TIFF OMITTED] T0152.035 [GRAPHIC] [TIFF OMITTED] T0152.036 [GRAPHIC] [TIFF OMITTED] T0152.037 [GRAPHIC] [TIFF OMITTED] T0152.038 [GRAPHIC] [TIFF OMITTED] T0152.039 [GRAPHIC] [TIFF OMITTED] T0152.040 [GRAPHIC] [TIFF OMITTED] T0152.041 [GRAPHIC] [TIFF OMITTED] T0152.042 [GRAPHIC] [TIFF OMITTED] T0152.043 [GRAPHIC] [TIFF OMITTED] T0152.044 [GRAPHIC] [TIFF OMITTED] T0152.045 [GRAPHIC] [TIFF OMITTED] T0152.046 [GRAPHIC] [TIFF OMITTED] T0152.047 [GRAPHIC] [TIFF OMITTED] T0152.048 [GRAPHIC] [TIFF OMITTED] T0152.049 [GRAPHIC] [TIFF OMITTED] T0152.050 [GRAPHIC] [TIFF OMITTED] T0152.051 [GRAPHIC] [TIFF OMITTED] T0152.052 [GRAPHIC] [TIFF OMITTED] T0152.053 [GRAPHIC] [TIFF OMITTED] T0152.054 [GRAPHIC] [TIFF OMITTED] T0152.055 [GRAPHIC] [TIFF OMITTED] T0152.056 Mr. Kucinich. I want to thank you, Ms. Braunstein, for being here to represent the Fed. Now, in your testimony you cite two public hearings. In your prepared testimony you cite two public hearings involving Ohio banks in the last 10 years. Now, for the record, will you state which Federal Reserve Bank convened those hearings? Ms. Braunstein. Those hearings--actually, public hearings are convened by the board, and that's one of the things that I wanted to correct a bit. There are a number of items you discussed in the first panel where the actual decisionmaking is in Washington as a board, not in the local Federal Reserve Bank. Mr. Kucinich. Weren't those hearings held by the Federal Reserve Bank that came out of Chicago. Ms. Braunstein. Those hearings were held in Chicago, yes. Mr. Kucinich. Thank you. Now, for the record, will you state the last time the Cleveland Fed held a public hearing on---- Ms. Braunstein. The last time we held a public hearing in Cleveland, it was in 1981. Mr. Kucinich. Would the staff correct the record? Is it not 1979 or 1981? OK. Our information shows 1979. So, if you could provide this committee with information on the year, we would appreciate it. Now, can you explain, in any event, why so much time has passed without another public hearing? Ms. Braunstein. Well, first of all, we make decisions, the board makes decisions on public hearings, and there have been-- since 1990, there have been 13 public meetings related to applications. Mr. Kucinich. Not in the Cleveland area, though, right. Ms. Braunstein. Not in the Cleveland area. There's been two in the Cleveland area, the one you keep referring to in 1979 and one in 1981. There have been--when we decide to hold a public meeting on an application, the reason we do that is because we cannot get sufficient information to make a decision on a case without holding the public meeting. Every application has a public comment process, and it's not unusual for us to receive hundreds of comments. Mr. Kucinich. In other words, if you feel you have sufficient information, you don't hold a public hearing. Ms. Braunstein. Correct. That is correct. Mr. Kucinich. So, all of these other mergers have taken place over the past 25 or so years, 27 to 30 years. You just didn't need the extra information; is that what your position is. Ms. Braunstein. We did not feel we needed--in order to get what information we needed to make a decision, it was not necessary to hold a public meeting. Mr. Kucinich. Now, we've been hearing that important data maintained by the Fed pursuant to the Home Mortgage Disclosure Act is not easily useable even by skilled researchers. Is the Fed aware of the difficulties experienced by users of the Home Mortgage Disclosure Act data, and when can we expect the Fed to include the usability of this data. Ms. Braunstein. I know that the people who are in charge of the HMDA data work with consumers and community groups all the time to try to help them with this data. If there are specific problems associated with that, we would like to know about them, and we will see what we can do to address them. I'm not aware of specific problems. Mr. Kucinich. Will you explain how such a high percentage of banks are receiving passing Community Reinvestment Act rates, maybe 97, 99 percent at the same time that one out of every five subprime mortgages originated in the past 2 years will end up in foreclosure? How can that happen. Ms. Braunstein. Well, first of all, over 50 percent of the subprime mortgages that are made, and even higher in Ohio, it's in the 60 percent range, are made by independent mortgage companies that are not federally regulated and, therefore, not subject to CRA, so that is one part of it. Mr. Kucinich. Have you---- Ms. Braunstein. And I know for the banks--I can only speak to the banks that we supervise. We have, as I mentioned, 33 banks, and in 2005 HMDA data our State-member banks made 17 high-cost loans. So, they are not engaged in subprime lending. Mr. Kucinich. Now, we know that there are financial institutions who have created secondary products in the subprime markets, correct. Ms. Braunstein. Yes. Mr. Kucinich. So, if these financial institutions, you know, with whom you have oversight create those products, what stops the Fed from being able to monitor the creations of these financial institutions? Why would you not be able to do that. Ms. Braunstein. Well, it's likely that the secondary market products may be created at the cooperate holding company level, and our responsibilities with regard to that are to make sure that those companies are safe and sound, and that is what we do. Mr. Kucinich. You don't look at their practices. You don't look at whether they're---- Ms. Braunstein. Well, an affiliate of a holding company would not be subject to CRA, just the deposit. CRA applies to depository institutions only. And those are State-member banks, and, as I said, our State-member banks are not---- Mr. Kucinich. Here's what I don't get. You at the Fed, you've just told me that you don't need to have these community hearings as long as you get sufficient information. That's on one hand. On the other hand, you see an avalanche of defaults in the subprime housing market. Are you aware that's happening? Are you aware of the level of defaults? Ms. Braunstein. We certainly are, and we're taking, as I mentioned, a number of steps to address that. Those--our applications process is somewhat separate and apart from what we're doing in terms of foreclosures. Mr. Kucinich. Are you helpless to do anything about this avalanche of defaults? Because, see, here's the problem that I have--and, Mr. Issa, this is something that motivates the cause of this hearing. We have people in the community who are really screaming out, crying out for help in getting recognition of the problem. If the Fed won't hold hearings--and on the other hand you say, well, we have sufficient information. We don't have to hold a hearings. If you do not take responsibility for monitoring the activities of the subprime one way or another and you don't hear from the people, you will not hear from the people because you say you have sufficient information, then how in the world, other than a hearing like this, would you ever get an opportunity? Will the people ever get an opportunity to be heard in neighborhoods that are falling apart because of this avalanche of foreclosures? Can you help us with that? Ms. Braunstein. We are monitoring the circumstances of foreclosures around the country, and we have taken several steps in that regard. We have issued guidance on non- traditional mortgages. We have issued guidance on subprime lending. We have issued guidance to lenders in terms of doing workouts. We are heavily engaged in meeting with people both in consumer groups and industry people to talk about the problems that exist and how workouts can be done and how people can keep their homes. We are heavily engaged in a number of activities. And here locally the Federal Reserve Bank of Cleveland is heavily engaged in the community. They held a foreclosure summit in 2005 and 2006 on a local basis, and they're working in partnership with a lot of local community organizations on foreclosure mitigation and education projects. So, we are heavily involved in activities around foreclosure, and it is a huge concern for us. We are doing what we can. We are examining our rulemaking to see if we can do something under HOEPA. We have already held four public hearings on this matter, and we are holding a fifth one on June 14th in Washington, as I said, in particular to focus on unfair and deceptive borrowing. Mr. Kucinich. And are you also looking at these deceptive and sharp lending practices in the subprime mortgage industry so that neighborhoods, such as in Cleveland, OH, are not going to be crushed by these unfair practices? Are you looking at that. Ms. Braunstein. Yes. We definitely are looking at that, but the one thing that we all have to keep in mind is that we can write rules that can address some of these practices, but we are not the enforcement agency for most of the lenders. In fact, we have very little subprime lenders under our direct enforcement. That is done by other regulators. Mr. Kucinich. I want to go to Mr. Issa after this question. One of our witnesses today remarked that one of the failings of the Community Reinvestment Act is this, and this is a quote. If a bank purchases predatory loans, it may be fulfilling its obligation under the lending test. Similarly, a bank that purchases securities backed by predatory loans may be able to claim credit under the investment test. In other words, the quality of a loan is not considered in the Community Reinvestment Act examination. Only where the loan was made large banks can own subprime lending affiliates to make predatory loans in low-income minority areas, and the bank can get rewarded under the Community Reinvestment Act. And in connection with the statement that you just made, how long is the Fed going to allow this twisting of the intent of the Community Reinvestment Act, and when is the Fed going to issue new regulations denying Community Reinvestment Act credits for financing predatory loans and lenders? I would appreciate your answer. Ms. Braunstein. If we know that a bank is making loans that are predatory in nature, there will not be Community Reinvestment Act credit for those, and, in fact, we would look further into that. Mr. Kucinich. Mr. Issa, thank you very much. Mr. Issa. Thank, Mr. Chairman. I think you've gotten us off to a good start. I want to sort of stay on that same line. Let me characterize a little bit of what I'm hearing. Basically, you're damned if you do and you're damned if you don't. If you, in fact, have to make these loans, but if you make these loans and they're high risk and they default, then it's your fault. And in your case, if I understand, Ms. Braunstein, that banks are not doing it directly. They're doing it by impact. As you said, there were only 17 loans made by banks in a direct relationship. But to the extent that we are holding both of these, I want to followup on something the previous panel, Ms. Anderson, said when a home is boarded up and the neighborhood goes down and there are one after another, these homes are owned by banks, and the bank is getting zero on them. So, I'm trying to understand, because you oversee banks, this is a huge hit to the banks who own these portfolios of non-performing purchases of portfolio, and, in fact, can't even liquidate the underlying assets in some cases. So, on that $68,000 home that wasn't worth $68,000, they get a goose egg, isn't that, right? Ms. Braunstein. Yes. That would be--absolutely. I mean in our safety and sound examinations, if banks have large portfolios of loans that are defaulted, that is certainly going to impact them. Mr. Issa. The earlier panel, one of the things I didn't followup with them, but it stuck in my mind, is that the vast majority of defaults are refies. So, it's not the original mortgage on the home, but, in fact, a refinancing. Is that your understanding also? Ms. Braunstein. I think it's more than half. My--I think my statistics are not quite what the panel had before. What we've heard in Ohio, I think from the HMDA data, it's more like 60 percent are revised versus about 40 percent are purchase money in Ohio. Mr. Issa. So, I'm trying to understand this specifically for Ohio because, as you know, my heart is here even though my car is out in California. Now, it just works that way, everyone has to have cars in California. I find this interesting because if, in fact, you make these loans and then you have refies, then that means there was money taken out. Where did the money go? In other words, you had a performing loan and a loan that, when we're looking back, went to being predatory, to use the term. I don't like the term because the truth is some of these are high risk and some may be predatory, but when they went from being purchase money to being recollateralized as a second, is probably when these things tipped over. At least 60 percent of them might have tipped over being what the consumer couldn't afford. But my question to you is, where did the money go? Where does typically that money go when they take it out? Does it go into the stock market? Does it go into other areas or is it a result of consumer debt and other signs that when we look at the Fed chairman's role, he often speaks on. Ms. Braunstein. I don't have statistics on that, but my guess would be that often times people are venerable and put into a position of refinancing because they have other obligations. Mr. Issa. So---- Ms. Braunstein. I doubt that people are doing this to invest in the stock market. It would be my gut feelings. I think it's more likely that they have other debts that they're trying to pay off. Mr. Issa. So, the 60 percent would be people who are in trouble, and in a sense it's predatory, but it's predatory on both sides. They're slipping in toward bankruptcy. A refy lets them get some cooling off space for making a whole bunch of credit card loans, but, ultimately, they slip right back into it. Where would we get an understanding of that? Because obviously, you know, earlier they talked about liar's loans. I've always had a problem with calling liar's loans predatory because I'm saying, wait a second. If you lie to get a loan, then who's the victim when it goes into default? I've always felt that a liar's loan was sort of over here with, wait a second, if you lie to get a loan, and then eventually you're out of a house, and I've got a house that is upside down, and if I were a banker, I'm wondering who's the victim here, and I think the bank is the victim in the case of liar's loans. Ms. Braunstein. Those can go two ways. I will tell you one of the ways we can get information about questions you've asked are the four hearings that we held last year in 2006. And one of the things that we heard over and over again anecdotally was that the stated income loans--they can go two ways. It could be that a borrower will overinflate their income. Yeah. They don't have to document their income. It's also where the broker or the lender may put the wrong number in, and so in that case a borrower would be a victim. And we have heard anecdotally a lot of stories about the case where the borrower did not even realize the number that the lender was putting into the application. Mr. Issa. I know it may be a lot of work, but to the extent that you can, would you provide this committee with information you've gotten from those hearings that you think would be appropriate for our continued followup and also from your public comments? Because as I understand, your public comments in a sense are open forum hearings. You can take 200, 300, 400 comments, where in a hearing like this today as we can all see, you're only going to get a few people into a speech into an hour or 2-hour period. Ms. Braunstein. Absolutely. For each of the four hearings, as well as the fifth one on June 14th, there is a public comment process attached to that where we encourage people to write us and tell us comments on the issues. Mr. Issa. Now, I'm going to close out with one that is near and dear to my heart. When I came to Congress, I came to one of my other committees, the Judiciary Committee, and we worked on bankruptcy reform my first, second and third term, and, finally, got it passed. And I think all of us know that anything that's that hard to get passed, you didn't get it all in. When it comes to how the Fed--and I realize you probably won't be able to give us a full answer today, but I would appreciate a supplement from your board and others that may be able to comment. In bankruptcy reform we really didn't deal, if you will, with home ownership. In California, we call them cram downs. When, in fact, in a bankruptcy it is determined that a mortgage is not payable, the authority of the bankruptcy judge to view that and to view, for example, that a predatory event occurred, an event occurred that may have led to the inability to pay, etc., we didn't deal with that. We sort of left the case law where it was to a great extent. Well, at the same time we may be individual if they have the ability to pay for future revenues. So, when we looked at specifically, bankruptcy, if a bankruptcy event occurs, can you give us your comments on things that maybe we should pick up legislatively that may empower the courts who ultimately, if they give debt relief and someone comes out of a bankruptcy still owning their home but at a different mortgage rate, etc., it tips the balance as to your institutions, could you give us whatever followup comments you feel are appropriate because I believe in light of a lot of what we're seeing here, that we may be looking on the other comment at a bankruptcy reform affecting what happens to somebody that's been a victim of predatory lending? Ms. Braunstein. We'll have to get back to you on that because, frankly, I'm not prepared to discuss that at this point in time. Mr. Issa. I understand. Thank you, Mr. Chairman. I yield back. Mr. Kucinich. I want to thank Mr. Issa. You know, in your discussion you raised a couple of questions, and what I'd like to do is have a very short second round here. Mr. Issa. I love second rounds. Mr. Kucinich. If we may proceed. Do you think, Ms. Braunstein, that the guidance the Fed has issued has been adequate to the magnitude of the predatory lending crisis. Ms. Braunstein. I think that we still--it is too early. First of all, the non-traditional mortgage guidance has only been in effect for a few months, and the subprime guidance has not been finalized yet, so I think it's too early to make that judgment. However, I will say that we have seen signs that even without final guidance, the markets are starting to self- correct in that we hear that underwriting is being tightened. Ms. Braunstein. Well, it took a long time in the sense that there were a lot of people hurt, but most of the people who are having problems now received their loans in, some in 2005 and most in 2006. Mr. Kucinich. OK. Ms. Braunstein. So, if you look at it that way, it's not been a problem for years and years and years. Mr. Kucinich. Mr. Rokakis said something when he was testifying. Did you hear his testimony? Ms. Braunstein. Yes, I did. Mr. Kucinich. He raised some questions. He said that the Fed can ban no-document loans, but they have not. Is that true. Ms. Braunstein. I think what Mr. Rokakis was referring to was our authority under HOEPA, and that is what we are looking at at this hearing. Mr. Kucinich. Is that true though, that you can ban no- document loans? Is that true. Ms. Braunstein. I guess technically we could, but I do need to qualify that, that in exercising our authority for unfair and deceptive or banning practices, we are going to have to do some very careful study to look at the wider effects that we need to be well calibrated, so that we don't end up in a situation where we're restricting or constraining credit. Mr. Kucinich. He also said that you can ban loans that are not fully indexed to a borrower's income. Is that true. Ms. Braunstein. Again, that would probably fall under--if it meets the definitions of unfair and deceptive, then that's another part of the law that we are doing an analysis of, and so I don't know if we could ban that or not. Mr. Kucinich. Well, he says that you can ban the practice known as risk layering where borrowers with the weakest credit are offered gimmicks to qualify them for loans, but you have not. Is that true. Ms. Braunstein. Again, we are looking at that, and I am not sure because in addition to wanting to be careful about how we calibrate bans or practices, the way the law is written, they need to meet the definition of unfair and deceptive, and these may not meet that definition. So, I can't answer that at this point. These are things that we are looking at. Mr. Kucinich. Well, what I'd like you to do, I mean, in a followup, written answers to these questions. If you can't answer them and elaborate right now, I can understand that because there's a lot of things that are apparently in flux at the Fed relative to these questions. But Mr. Rokakis also said that you can require that all subprime loans provide for escrow taxes and insurance in their payments, but that you don't. Is that true. Ms. Braunstein. Same answer as---- [The information referred to follows:] [GRAPHIC] [TIFF OMITTED] T0152.057 [GRAPHIC] [TIFF OMITTED] T0152.058 Mr. Kucinich. OK. Well, I think that this is a productive hearing if we can open up a discussion here with the Fed about the direction that you need to take, because we're not only looking at the forensics of this. We're looking at where we are headed for the future. Ms. Braunstein. And can I say this. Mr. Kucinich. Sure. Ms. Braunstein. These were already things we are looking at under this authority. Some of those things, it may end up are better dealt with through guidance, and we have dealt with those issues in the subprime guidance that we have now out and that we're finalizing. So, there's a big difference between dealing with something in guidance and dealing with it in the rule. Mr. Kucinich. I understand that, and I also ask you to take note that while you're calibrating these things, neighborhoods are falling apart. We really need your help. And the one final question I have before I go back to Mr. Issa is this. Again, in your statement about public hearings, which, you know, there was an aspect of it that I found very troubling, you said, you know, you could get sufficient information. Mr. Issa pointed out that you solicit comments. That's good. But you still don't have these public hearings for people here in the community. My question to you is, do you meet with bankers to discuss these issues? Ms. Braunstein. Are you talking about applications issues. Mr. Kucinich. No. I'm talking about the issues that you wouldn't hold in a public hearing to talk to people in the community. Do you have meetings with bankers? Ms. Braunstein. We meet with a wide range of people. We meet with people from the industry. We meet with bankers. We meet with community organizations on a regular basis. Mr. Kucinich. The obvious reason why I raise that question is, I mean, people in the community would feel hurt if they felt that you wouldn't meet with them, but you would meet with the bankers. And so I just want to appeal to the fairness of this process as we move forward. I thank you very much, by the way, for your testimony and now to Mr. Issa. Mr. Issa. Working with the chairman is a great deal of fun, and I've always liked his insight. Once in a while he gets mine and wonders where it came from. But, you know, the interesting thing is that I meet with the NRA and I meet with the Brady organization. I don't hold a public hearing to see all the gunners come in and anti-gunners come in to tell me what they think. And, perhaps, I should, but I've had some pretty lively town hall meetings, so I try to stay off of some subjects. Mr. Kucinich. Maybe you should have that sign and say that you will check your guns at the door. Mr. Issa. I once had to have SWAT because I did an immigration reform hearing, and I now do those telephonically. But I want to close out my questioning for something that I hope the Fed can take an active role in, and that is modelling the question of the 80 versus the 20. Today in this hearing so far what we've seen is that in the worst case, you're going to have about 20 percent of these loans go south, at least, based on all the worst case problems we've seen so far. That means 80 percent of the people who take these high-risk or subprime loans perform under the--perhaps convert them in time to conforming loans. And I'm concerned that 80 percent and, perhaps, the others, certainly the 80 percent, might not have gotten a loan, might not have owned a home. And so as you're doing this, I hope that you're going to be able to supply this committee and the public with some modelling of the what if. What if we tighten this up a little? Do 79 percent of the 80 percent still get their homes? Well, a big chunk of the misery factor goes away or is it one of those things where half the people who got these loans, and as a result, are enjoying home ownership around the country, will be denied? And that's going to be very important to me, that as much as I don't want to see boarded up homes, I don't want to see--quite frankly, I don't want to see banks making loans that ultimately lead to defaults. At the same time, as Members of Congress, the one thing that we've got a very bipartisan basis and President after President has stated, is home ownership is a big part of what America is all about. And moving that number up as we've done as a society over the last few years continues to be important, so I'm hoping that you can give us insight on that. Because as much as we want you to reduce this pain factor--as a homeowner who was lucky enough to get a VA loan the first time, I realized I was a bit of a stretch starting a business here in Cleveland and getting my VA loan with no qualification necessary other than an honorable discharge. So, if you would respond to us in writing for that, and obviously we're hoping for leadership from the Fed, and I'm happy that you were able to be here today. We talk about the Federal Reserve Bank of Cleveland, and it is a noble institution, but I appreciate the fact that, as I understand, you just came from Washington to make this happen for us. Ms. Braunstein. Thank you very much, and I agree with you, Congressman, and that's what we're trying to do, is achieve the right balance, and we would be happy to get to you on that. Mr. Issa. Thank you, Mr. Chairman. I yield back. Mr. Kucinich. The chair is going to declare a 5-minute recess. We'll come back in 5 minutes. We intend to complete this hearing by 1. I would ask the next panel to stay close. If you're going to leave the room, please know that we're starting again in 5 minutes. [Recess.] Mr. Kucinich. The committee will come to order. The committee will come to order. If you have any conversations, please take them outside the room. I want to make sure that anyone who has participated here signs the sign-in list so that as the work of this committee continues, we can keep you posted of any further discussions or hearings on the subcommittee relative to these questions. We now are about to begin the third panel. And I would like to make the following introductions: Judge Raymond Pianka is presiding as administrative judge in the Cleveland Municipal Housing Courts. A division he has served as such since his election in 1996. Previously, Judge Pianka served on the Cleveland City Council where he chaired the Community and Economic Development Committee and the legislative committee. Judge Pianka received his jurist doctorate from Cleveland Marshall College of Law in 1977. Professor Kathleen Engel is a professor at the Cleveland Marshal College of Law. Her research focuses on predatory lending, housing discrimination and the Community Reinvestment Act. She's published a long list of law review articles on the topic and teaches a seminar at the law school on predatory lending. A recent article was entitled, ``Do cities have standing? Redressing the externalities of predatory lending.'' Professor Engel received her AB, cum laude from Smith College and her JD, cum laude from the University of Texas School of Law. Mr. Alex Pollock has been a resident fellow at the America, Enterprise Institute since 2004 focussing on financial policy issues among other related issues. Previously he has spent 35 years in banking, including 12 years as president chief executive of the Federal Home Loan Bank of Ohio. He's director of the Allied Capital Corp., the Chicago Mercantile Exchange, the Great Lakes Higher Education Corp., the International Union for Housing Finance and chairman of the Board of Great Books Foundation. Ms. Marianne McCarty-Collins is the senior vice president of Insight Bank, past president of both the Columbus and Ohio Mortgage Bankers Association. At the Mortgage Bankers Association, the National Association for the Industry, she serves on the Board of Directors and Board of Governors. She's a former trustee for the Columbus Board of Realtors, chairs the Government Financing Subcommittee as former affiliate of the year for the association. She's also a former trustee of the building industry of central Ohio. Ms. McCarty-Collins has served on the Fannie Mae National Advisory Council in Washington, DC, in 1996 and 1997. I want to thank this distinguished panel of witnesses for being here. It is the policy of the Committee on Oversight and Government Reform to swear in all witnesses before they testify. I'm going to ask you now to rise and to raise your right hands. [Witnesses sworn.] Mr. Kucinich. Thank you. Let the record reflect that all of the witnesses answered in the affirmative. As with panel 2, I ask that each witness give an oral summary of his or her testimony, and to keep in mind that you should keep that summary under 5 minutes in duration. Your written statement will be included in the hearing record. I'd like to start with Judge Pianka. Thank you very much for being here. Please proceed. STATEMENT OF RAYMOND PIANKA, JUDGE, CLEVELAND MUNICIPAL HOUSING COURT Judge Pianka. Thank you for the opportunity to be here. The Cleveland Housing Court has been described by Chief Justice Moyer as emergency room for housing conditions in Cleveland. We are a problem solving and therapeutic court. As judge of the housing court, the sole judge of the housing court, I observe daily in the cases before me the impact of the banking industry and the lack of regulation on it in our homes and our neighborhoods. There are nine points briefly. First of all, the lack of regulation has reduced our neighborhoods to financial wild wests with homeowners left to fend for themselves with an attempt to survive in those neighborhoods. Cleveland is experiencing a record number of home mortgage defaults, foreclosures, bankruptcies and failed financial deals. The primary impact of the financial crisis is, of course, on the property owner. The homeowners, however, are not the only ones who are suffering as result of the increased number of defaults and foreclosures. The collateral damage from this financial decline is felt worse in our neighborhoods as the committee saw yesterday in its tour of the Cleveland neighborhood. Each day I see property owners who were told by banks and mortgage companies to vacate their properties at the commencement of the foreclosure actions leaving the properties empty and unattended. Their neighborhoods are forced to live next door to that vacant, boarded property with high grass and weeds stripped of siding and they contact the court about their options to combat these living conditions. These homeowners not only suffer the effects of living next door to the blight, they suffer financial loss as well as their own properties are devalued as a result. The frustrated city council representatives contact the court, are concerned about the abandoned property that are magnets for criminal activity, and they produce a domino effect as poorly maintained properties lead to more poorly maintained and properties in default. And there are discouraged community groups who are trying to help but cannot as they attempt to determine who, if anyone, has authority and responsibility for the properties. I've been with the housing court for over 10 years, and the negative impact of the mortgage defaults, foreclosures, and conduct of the banking industry upon our neighborhoods has never been greater than it is today. Certainly, the banks and other lending institutions have a right and even an obligation to initiate foreclosure actions when mortgages go unpaid. However, the non-regulation of the industry has led to a lack of enforcement of basic fiduciary duties of banks and other lending institutions. The banks and other lenders must be called on to act responsibly in both lending and collection processes to minimize the destructive effect on our neighborhoods. Reduced lending by the regulated banks has created a vacuum which is being filled by less reputable lenders. Lending in Cleveland by regulated banks has dropped sharply since 1995. The refusal of regulated banks to lend in Cleveland has created a vacuum, which is being filled in part by unscrupulous, subprime lenders, perpetrators of mortgage fraud and irresponsible investors. Each day in court I'm told stories by property owners with little incomes who have fallen prey to schemes involving purchase of multiple properties as investment opportunities. The schemes seem to thrive in the current, unregulated lending atmosphere of Greater Cleveland. And while there are laws against fraudulent applications, waste, false statements of income and deceitful appraisals, those laws go largely unenforced. And I'm heartened to see the current efforts to prosecute some of the perpetrators of these schemes, but the prosecutions are small in numbers and slow. And because of the time needed to investigate and pursue these cases, it's unrealistic to view prosecution as a cure. Reputable lenders must encourage and encourage to occupy their place to lend money to people who purchase homes and refinance homes in Cleveland. Lenders must be accessible to borrowers and other interested parties and be responsible in their actions toward borrowers. One of the primary problems that we face in a housing court is our inability to reach someone in the bank or lending institution who is able and willing to discuss the property with the defaulting property owner or the court. It's difficult to find a contact person who can negotiate a deed in lieu of foreclosure or short sale that would transfer that property to a beneficial loaner. And this inability to contact the financial institution coupled with a fact that a number of the banks are avoiding service of process in the--is that my time. Mr. Kucinich. Yeah. What I want you to know, Your Honor, is that you have an extensive statement here that is actually quite helpful to this committee. Your entire statement will be included in the record, and I think that you'll be able to get to some of these areas in the question and answer period. Judge Pianka. Mr. Chairman---- Mr. Kucinich. But you may wrap it up. Judge Pianka. The court every day has to deal with banks who have failed to file the deeds, trying to help people who are in default get out of the loans, toxic titles where the banks have dropped foreclosures and have left the liens on the properties, and it is going to take years for us to dig out from underneath these problems in Cleveland. And I found out today that these are unattended consequences, but they are consequences nonetheless that we face every year in Cleveland. 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Thank you, Judge Pianka. And I want to thank you for the dedicated service that you've given in the housing court. I had the chance to serve with Judge Pianka and you really have done an outstanding job. Your entire testimony will be included in the record, and at this point we'll go to our next witness. Next we're going to hear from Professor Engel, a professor from the Marshall School of Law. STATEMENT OF KATHLEEN ENGEL, PROFESSOR, MARSHALL SCHOOL OF LAW Ms. Engel. Thank you. I think it's an honor and a privilege to---- Mr. Kucinich. Is your mic on, please?. Mr. Issa. Little green light. Ms. Engel. Can you hear me now? It's an honor and a privilege to testify today on this critically important issue. My name is Kathleen Engel and together with my co-author, Patricia McCoy, I've been engaged in extensive research on issues related to predatory lending. I was asked today to briefly discuss three issues. First, the emergence of predatory lending in underserved neighborhoods. Second, the targeting of borrowers of color with abusive loans, and, last, the role that CRA can play in enabling and curtailing predatory lending. I'll turn first to the growth of abusive lending in low and moderate income neighborhoods. Historically, people with weak or a blemished credit history were ineligible for credit. The development of the securitization of home mortgages and the deregulation of lenders in the 1990's ushered in a new home- lending market, making credit available for low and moderate- income borrowers. The same forces led to the appearance of a new breed of unregulated lenders offering an array of subprime loan products. These lenders market their products in areas with the highest levels of pent-up demand for loan. That is neighborhoods that have not had access to credit in the past. Making credit available to borrowers in these areas is not a bad thing. The problem is that some of these lenders are making loans on terms that are, per se, harmful. These loan terms are harmful not only to the borrowers but to the community as you've observed in Slavic Village. Too often lenders are making loans knowing that borrowers ultimately will not be able to afford the repayments. We would expect that banks would enter the subprime loan market and undercut the abusive lenders with competitive products that don't contain abusive terms, thus, driving the worst lenders out of the market. This has not happened. There are many explanations for why banks might be reluctant to enter the subprime market directly, and why banks more generally may choose to leave lower-income neighborhoods. Those explanations are beyond the scope of my testimony today. What is important is that because banks have little or no presence in these communities, abusive lenders can proliferate and exploit venerable borrowers. This leads me to my second point. The marketing of the most abusive loans are to people of color. There is increasing evidence that, on the whole, people of color pay more for mortgage loans than Whites with similar incomes and credit histories. This is adding insult to injury. For centuries, this country engaged in de jure discrimination that prevented Blacks and Hispanics from owning homes. Laws prohibiting discrimination and programs aimed at increasing home ownership has changed the tide and led to increased rates of home ownership among people of color. Now, abusive lenders are taking these homeowners' hard-fought gains in equity. The impact of lending abuse is not limited to people losing their homes. When neighborhoods experience decline because of foreclosure and property abandonment, all homeowners, even though without mortgages, see declines in their property values. Crime rates increase, cities lose tax revenues and cities find themselves spending money boarding up houses, money that could be used to invest in these very fragile neighborhoods. My final point addresses CRA's role in predatory lending. This is also the topic of an article that I have attached to my testimony. The two important questions on this topic are, does CRA credit incentives for predatory lending and could CRA serve as a tool to combat predatory lending? I contend that the answer to both questions is yes. An unintended consequence of CRA is that it permits banks to earn CRA credit for financing predatory loans. For example, the bank purchases loans, it may be fulfilling its obligations under the lending test. Similarly, a bank that purchases securities backed by predatory loans may be able to claim credit under the investment test if the investments fall within CRA guidelines. Banks can also directly finance lenders, predatory lenders, through warehouse lines of credit and loan guarantees. In thinking about how regulators can employ CRA to combat predatory lending, the minimum first step is to increase that lenders are not receiving CRA credits for financing predatory loans and predatory lenders and sanctioning banks that are engaging in such activities. In addition, CRA exams should include bank affiliates and subsidiaries, which are vehicles through which banks can engage in predatory lending without sanction. Last, regulators need to actively encourage and reward banks that develop loan products designed to compete with abusive lenders in underserved neighbors. These loan products should include vehicles through which borrowers can refinance predatory loans. CRA is a powerful tool that if employed more aggressively, could help deter predatory lending and help communities like ours recover by infusing neighborhoods with good credit products. Thank you again for the opportunity to present this testimony. [The prepared statement of Ms. Engel follows:] [GRAPHIC] [TIFF OMITTED] T0152.156 [GRAPHIC] [TIFF OMITTED] T0152.157 [GRAPHIC] [TIFF OMITTED] T0152.158 [GRAPHIC] [TIFF OMITTED] T0152.159 Chairman Kucinich. Thank you very much for your testimony. And the Chair wishes to acknowledge the presence in the audience of Federal Judge Polster. Thank you, Your Honor, for being here. We're going to move to the next member of the panel, Mr. Pollock from the American Enterprise Institute. Thank you so much for being here today. STATEMENT OF ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE Mr. Pollock. Mr. Chairman and Ranking Member Issa, thank you very much for the chance to be here. We heard some really interesting discussion of the difference between Ohio and California a little earlier. I'm trying to, in my testimony, to set all of these discussions in the national and historical context, the written testimony, which I'll say a word or two about, covers five issues. The evolution of the American banking structure, as we begin, that's talking about the bank mergers. The context for the subprime mortgage market, delinquencies in Ohio in particular, the general topic of information asymmetries and, finally, my proposal for a one- page mortgage disclosure document, which, I believe, if we don't do anything else or even if we do other things, we ought to do that. First, American banking structure briefly, in 1970 when I was new in the banking business, there were about 13\1/2\ thousand banks in the United States. Now, there are about half that many, so we've had a consolidation. But they, at the same time, have about doubled the amount of banking offices. And relative of the population, the density, if you want to think about it, that way has increased by about 60 percent in addition, of course, to building an amazingly, global network, ATM network and the provision of debit cards, which are checking accounts in your pockets. So, the banking consolidation on average has been accompanied by much greater convenience and access to the payment systems, the banking system. On a subprime mortgage market, let me say we all know that there was an unsustainable expansion of subprime mortgage credit along with an unsustainable house price inflation. That's now been reversed. We've had large financial losses suffered by lenders of investors, layoffs, bankruptcy and subprime lenders. The accelerating delinquencies and foreclosures we discussed here this morning, the recession in home building, tightening liquidity, recriminations. As a student of financial history and one whose lived about close to four decades of financial history, this strikes me as displaying the classic patterns of credit overexpansions and ensuing busts. I will say one point, expansions and busts is emergency housing acts. We've had, since 1974, emergency housing acts, not counting the one for Katrina, which is an act of nature and not an act of finance. Subprime mortgages grew from about 2\1/2\ percent to 13\1/ 2\ percent of total mortgage loans, but over the last several years interestingly prime loans also increased their share. So, one might ask how can--these are numbers of the Mortgage Bankers Association I'm using here. How can the prime loans have the same increase at the same time as subprime? The answer is subprime basically misplaced the government programs, the FHA and VA programs, which are also non-prime lending programs. If you look at the sum of subprime and the non-prime government programs at stake, more or less the same. One of the things that happened, as Ranking Member Issa pointed out, a lot of people experience success. If you took an extremely risky loan, and, let's say, 100 percent loan with an adjustable rate, you've bought a house that went up a lot and in the house boom, you experience success. And it is success always that sets up the boom that sets up the bust. The question I wish to pose is, should you be able to take a chance, as a borrower, if you want to? Should you be able to take a chance as a lender, and the answer is, yes, you should, but we need to have a reasonability of what you're doing. On Ohio, just briefly, it's interesting to me, that if we look at all the classes of loans in Ohio, Ohio's serious delinquency rate, which means loan 90 days in arrears or in foreclosure, are roughly twice the national averages in all categories. That's true for prime and fixed rate loans or prime floating rate loans or FHA loans, and for subprime fixed rate loans. So, there's something broader going on in Ohio as we've discussed its economic problems, problems like unemployment rate, low employment growth, which is equally as important as unemployment, and obviously the structural changes that we're aware of. I want to say how much I agree with Ranking Member Issa's view, that if you buy with the proper income, you get a loan, and you don't qualify as a victim. And the liar's loans, no-doc loans have a long history of performing poorly in credit. We've just reinvented and rediscovered that history, and it's a good example of what economists call information asymmetry--may I have 30 more seconds, Mr. Chairman? Mr. Kucinich. Sure. Mr. Pollock. And my view is that the nature of the loan and its relationship to the borrower's income, both for the borrower and the lender, need to be clearly and easily accelerized in a one-page form, which I have designed and included in my testimony. When we have extremely complex disclosures, which we have, they fail. They fail to deliver any meaningful information to the borrower in the result of confusion. And as I say, whatever else we may do, we ought to insure a really simple, clear disclosure to all borrowers, subprime and prime, which includes their income so they can really see it, the relationship of the payments on this loan to their income. The fully indexed payments on this loan, once the rates reset and its the relationship to their income, I think if we do that, that's one step that will be very good for the country and also for Ohio. Mr. Kucinich. I certainly appreciate your testimony. [The prepared statement of Mr. Pollock follows:] [GRAPHIC] [TIFF OMITTED] T0152.162 [GRAPHIC] [TIFF OMITTED] T0152.163 [GRAPHIC] [TIFF OMITTED] T0152.164 [GRAPHIC] [TIFF OMITTED] T0152.165 [GRAPHIC] [TIFF OMITTED] T0152.166 [GRAPHIC] [TIFF OMITTED] T0152.167 [GRAPHIC] [TIFF OMITTED] T0152.168 [GRAPHIC] [TIFF OMITTED] T0152.169 [GRAPHIC] [TIFF OMITTED] T0152.170 [GRAPHIC] [TIFF OMITTED] T0152.171 [GRAPHIC] [TIFF OMITTED] T0152.172 [GRAPHIC] [TIFF OMITTED] T0152.173 [GRAPHIC] [TIFF OMITTED] T0152.174 [GRAPHIC] [TIFF OMITTED] T0152.175 [GRAPHIC] [TIFF OMITTED] T0152.176 [GRAPHIC] [TIFF OMITTED] T0152.177 [GRAPHIC] [TIFF OMITTED] T0152.178 Mr. Kucinich. Ms. McCarty-Collins, please proceed. STATEMENT OF MARIANNE MCCARTY-COLLINS, SENIOR VICE PRESIDENT, INSIGHT BANK Ms. McCarty-Collins. Thank you, Chairman Kucinich, Ranking Member Issa and members of the subcommittee. Thank you for the opportunity to speak about issues that have captured the attention of this committee and the financial services industry. I am Marianne McCarty-Collins, senior vice president for Insight Bank of Columbus and here representing the Mortgage Bankers Association. I would like to focus my remarks on the Association's views on subprime lending and the industry's efforts to mitigate the delinquency and foreclosure rates here in Cuyahoga County and across the Nation. The Association's statistics show delinquencies and foreclosures have risen over the past 6 months, particularly in the subprime market. In response, regulators have established new standards. Investors have punished companies that made bad loans, and I'm here to answer your questions about the effect it is having on consumers. I believe the delinquency and foreclosure data in MBA's written statement is both objective and comprehensive, and I am confident that it is the most authoritative to date because it includes 86 percent of all outstanding mortgages. Economics aside, I want to speak as someone with 30 years of experience in mortgage lending. What I have seen of late troubles me deeply. Responsible lenders only extend credit to borrowers who are willing and able to make a mortgage payment. They do not trick borrowers into loans that are unsuitable, and they do not hold out something that is only a mirage of the American dream. I have conducted my professional life according to these standards and have most members of the Mortgage Bankers Association, yet, bad loans were made. They were not made responsibly or with the best interest of consumers in mind. For the most part, those making those poor loans have been punished by Wall Street and restrained by regulators. And while we must ask what lessons we should learn from these mistakes, it is equally important for those in positions of authority to help current homeowners stay in their homes. Working together, I suggest that we must accomplish three things: Stabilize the subprime mortgage credit system, provide assistance for homeowners facing foreclosure, and, finally, prevent this from ever occurring again. First, reaction from Wall Street has been swift. Already nearly three subprime lenders, three dozen subprime lenders have closed their doors. As we watch this, we must remind people not to confuse subprime with predatory. And we must reiterate that while subprime foreclosures are high at 4\1/2\ percent, they remain below their historic peek of nearly 10 percent. Sound perspective and approved regulatory hand will soothe investors, calm editorial writers and help consumers. Second, the subprime borrowers who are facing foreclosure, industry and policymakers must partner to help provide options so that as many as possible are able to remain in their homes. Further, we at MBA strongly encourage all borrowers that find themselves unable to continue making payments, to contact their lenders immediately. Lenders lose money in foreclosure and have a strong desire to make any number of arrangements that will allow a borrower to start making payments again and keep his or her home. For those who might not be comfortable calling their lenders, MBA and many of our members have partnered with NeighborWorks America and the Home Ownership Preservation Foundation to provide free mortgage counseling via a toll-free phone number, 1-888-995-HOPE and a Web site. Third, lawmakers, regulators and industry must work to insure that this situation does not occur in the future. Borrowers are smart. When given good information, they make good decisions, but the opposite is also true. An absence of pricing transparency coupled with a daunting and complicated closing process has permitted certain actors to prey on the unsophisticated. But, frankly, every person from the subprime to jumbo borrower is susceptible when even the CEO of Fannie Mae and the Secretary of HUD, by their own admission, cannot understand all the documents on a mortgage closing. The mortgage market is desperate for a rewrite of the Nation's settlement laws and its strong uniform lending standard to trap predators and bring them to justice. In conclusion, MBA stands ready to work with members of this subcommittee as well as the entire Congress to accomplish these goals. Together we can insure that predatory lenders don't foreclose on the American dream. Thank you. [The prepared statement of Ms. McCarty-Collins follows:] [GRAPHIC] [TIFF OMITTED] T0152.179 [GRAPHIC] [TIFF OMITTED] T0152.180 [GRAPHIC] [TIFF OMITTED] T0152.181 [GRAPHIC] [TIFF OMITTED] T0152.182 [GRAPHIC] [TIFF OMITTED] T0152.183 [GRAPHIC] [TIFF OMITTED] T0152.184 [GRAPHIC] [TIFF OMITTED] T0152.185 [GRAPHIC] [TIFF OMITTED] T0152.186 [GRAPHIC] [TIFF OMITTED] T0152.187 [GRAPHIC] [TIFF OMITTED] T0152.188 [GRAPHIC] [TIFF OMITTED] T0152.189 [GRAPHIC] [TIFF OMITTED] T0152.190 [GRAPHIC] [TIFF OMITTED] T0152.191 [GRAPHIC] [TIFF OMITTED] T0152.192 [GRAPHIC] [TIFF OMITTED] T0152.193 [GRAPHIC] [TIFF OMITTED] T0152.194 [GRAPHIC] [TIFF OMITTED] T0152.195 [GRAPHIC] [TIFF OMITTED] T0152.196 [GRAPHIC] [TIFF OMITTED] T0152.197 [GRAPHIC] [TIFF OMITTED] T0152.198 [GRAPHIC] [TIFF OMITTED] T0152.199 [GRAPHIC] [TIFF OMITTED] T0152.200 [GRAPHIC] [TIFF OMITTED] T0152.201 [GRAPHIC] [TIFF OMITTED] T0152.202 [GRAPHIC] [TIFF OMITTED] T0152.203 [GRAPHIC] [TIFF OMITTED] T0152.204 [GRAPHIC] [TIFF OMITTED] T0152.205 [GRAPHIC] [TIFF OMITTED] T0152.206 [GRAPHIC] [TIFF OMITTED] T0152.207 [GRAPHIC] [TIFF OMITTED] T0152.208 [GRAPHIC] [TIFF OMITTED] T0152.209 [GRAPHIC] [TIFF OMITTED] T0152.210 [GRAPHIC] [TIFF OMITTED] T0152.211 [GRAPHIC] [TIFF OMITTED] T0152.212 Mr. Kucinich. Thank you very much. I'd like to give--Mr. Issa, if you would like to go first with the questions. Mr. Issa. Thank you, Mr. Chairman. I'm going to ask some hypothetical questions. I think the first couple of panelists have done us a lot of good. Ms. McCarty-Collins, have you looked at Mr. Pollock's one- pager? Ms. McCarty-Collins. I have not personally. I'm not sure if the association has that. Mr. Issa. I have, and perhaps you can leave with one today. I did find it interesting that I, too, have gone through the mortgage process multiple times and you get to where you're signing and initialing and signing and initialing so many times. And by the way, that's after you did the realtor part of it, which seems to grow by several pages a year. And I really do think that one of the things that your association needs to look at, is you need to look at how to meet all legal requirements that people are putting on you, but also give somebody something that they can understand that says it very clearly. But let me ask you the second rhetorical question, and, perhaps, since we have two Federal judges in the room, you couldn't have a better time. If the Federal Government acted to create a tort balance that would say that if a Federal judge found, let's say, in the Federal class action or a State, if appropriate, that, in fact, the portfolio in the hands of whoever had it was tainted by predatory practices, and that portfolio's value could represent, if you will, the liquidated damages, would that change how the oversight would occur without us passing a separate law, but simply shifting the financial outcome if, in fact, in a court it was found that the, that it was part of a portfolio that had damaged people through--and I don't use the word predatory all the time. I don't think all subprime, certainly VA, FHA are not predatory. But assuming for a moment that there's a finding in court, would you think that would change the way that you would evaluate portfolios and the way that you would be held to deliver them? Ms. McCarty-Collins. You're talking basically assigning liability. Mr. Issa. Yes. Ms. McCarty-Collins. OK. I think that's a yes and no answer. Mr. Issa. I'll just take a yes. Ms. McCarty-Collins. Well, the only problem with assigning liability is that when the secondary market view that as such a--what word do I want to use? Mr. Issa. I'm going to assume it would be less assigning. Ms. McCarty-Collins. And you have to have it. You have to be able to--you have to have a secondary market for those mortgages. Mr. Issa. I totally agree with you that you would have to, but I just want to followup. You know, when those subprime companies went out of business, they didn't go out of business with portfolios in their hand. They simply closed their doors, sold off their desk. For the most part, a lot of them had been transactional in nature, and the fact is somebody else is holding the portfolio. Ms. McCarty-Collins. But as a lender and speaking of--when we're talking mortgage bankers, we are the lenders. We are not mortgage brokers. We are not a pass through. So, as the lenders, these subprime companies had a duty to the secondary market in that they had to buy back its mortgages if there was fraud, if there was predatory problems. So--and we all have those buy-back agreements in the loans that we sell in the market. So, what happens is as a result of those buy backs, this is what has bankrupted most of those companies, not the fact that they made the subprime or predatory loans, but the fact that they were found to be predatory and/or fraudulent, and they had to buy these loans back. Mr. Issa. Or close their doors because they had not reserved---- Ms. McCarty-Collins. They did not have the capital to buy them back. Mr. Issa. So, that was my point in saying that they were transactional in nature. They were doing this, but ultimately without an underlying separate insurance they were in a position to issue dividends or disperse profits in the good times and then close their doors in the bad times. Ms. McCarty-Collins. That is probably true. Mr. Issa. Mr. Pollock, I've teed up the question for you. I'm intrigued at the reception you've been getting when you've said--you know, because we all grew up with Truth in--well, I'm afraid that's us old guys today. I remember when Truth in Lending came out, and I remember when we tried to simplify the understanding so that you wouldn't think you were paying 6 percent when the annual rate ended up being 35 or whatever it compounded to. Why is it we're back to that exact same point? How is it that we lost track of simplicity? Mr. Pollock. Thank you, Congressman. One of the fans of this who has been helping me, was a staffer on Capitol Hill in Truth in Lending was---- Mr. Issa. Even I get the bell, too. Mr. Pollock. And he told me you should call this Truth in Mortgage Lending, and I said, no, because I don't want to repeat what happened to Truth in Lending, was you started off with a simple idea and made it incomprehensible. That's why I have this insistence on a one page and regular-sized type. That's the another thing. I don't think you should allow little type, which confuses people. I'm not suggesting that all of the other stack of things you get could be taken away or this is just something you get on top, but for the first time---- Mr. Issa. This is like the Ditech commercial though, except you're putting one more on and not taking one off. Mr. Pollock. That's it. Mr. Issa. OK. Mr. Pollock. Exactly. I believe it's the first time, I believe, that in the American mortgage system we've ever talked about disclosures that disclose the relationship of you, the borrower, and your income to the loan, as opposed to telling you a vast detail about the loan itself and leaving it to you to figure out if you can even understand that, how it applies to your own personal situation. Mr. Issa. OK. I appreciate your indulgence. Professor, I was intrigued by the fact that you've studied this both as a subprime and looking at conforming loans, as we call them, in California. From a practical standpoint, and we've dealt with this on the earlier panel, is there sort of the elasticity of demand? If we crank down and reduce some of these subprime loans, how much are we going to crank down the opportunity for home ownership? How elastic is that market, and can we make some reforms? At what point do we begin to reverse a trend of greater home? Ms. Engel. I think this is a fundamental question in any type of credit regulation. How do you find that balance between making good credit available to people who otherwise wouldn't obtain credit, and how do you also protect people from the worst abuses in the market? One of the really nice things that's happened from a research standpoint is that over the last 10 years a number of States have passed anti-predatory lending laws, North Carolina being at the vanguard and the most well known. And one thing that's not on my resume, but it will be shortly is that---- Mr. Issa. You have an awfully good resume for having something left off. Ms. Engel. Well, you don't put things on until you know they're going to get published. Together a group of economists and my co-author, Pat McCoy, we've been looking at every State and local effort to regulate predatory lending, and we have coded all of those laws and looked to see what impact the laws have had on loan applications, loan rejections and loan originations. And interestingly in the States with the strongest laws, the loan applications and originations have gone up. And there are many different conclusions you could draw from this, but one possible explanation is that the really good subprime borrowers were afraid of taking out loans because they heard about all the abuses in the market. And when the State stepped in and said we're going to regulate the worst abuses, they said, I feel safe and I feel protected by the State. It's hard--you know, I'm not going to say I know that's the causality, but what I do know is that in the States with the strongest regulations, we're seeing stable or increased subprime lending. And the other point, I think, that's very important, is this whole issue of assigning liability. And any regulation or laws that we have in this country have to be very careful in terms of assigning liability. We can't have open-ended assigning liability for punitive damages. But if it's predictable in assigning liability in a liquidated amount, which many of these State laws have, then we can hold people to lead to the fire in terms of having a secondary market, police, as it were, the lenders without drawing on credit. Mr. Issa. Mr. Chairman, one thing you have to know in this business is when to quit on a high note. Thank you. Great answer. Mr. Kucinich. I want to say, Mr. Issa, the question that Professor Engel acknowledged in terms of what about home ownership, how do people who don't have the best of credit get home ownership? What happens? That's a key question here. And I think that one of the areas that this committee may, in our continuing work may inevitably look at, you know, are their questions relating to home ownership availability, availability to credit and also the underlying monetary process. There's a real serious question here about monitoring policy that seldom gets looked at, and bringing the Fed into this discussion for the first time enables us to move into that question. I want to, again, tell Judge Pianka that I looked at your whole statement, and it's quite significant, and I want to ask you, without significant new regulatory enforcement from the Fed and other agencies, what do you predict for cities like Cleveland and neighborhoods with significant foreclosure problems? Judge Pianka. The prediction by Treasurer Rokakis, that it's only going to get worse, I think, is absolutely true. And, unfortunately, the collateral damage that affects the streets and the neighborhoods just compounds. In addition, no more--there has never been greater time in our history of the city of Cleveland when there have been more properties owned by banks and mortgage companies. Mr. Kucinich. You know, Mr. Pollock said something, and, Mr. Issa, this is something that in your testimony you pointed out that this phenomenon that has hit low-income areas now, the subprime mortgage is shifting away from lower-income areas and going into middle and higher income areas; is that right. Mr. Pollock. I pointed out this interesting study by COHHIO is the fact that subprime lending is principally a middle and higher-income activity. Mr. Kucinich. That jumped out at me because what it says is that the--it may be that the subprime business has more or less maxed out in some of these communities, and now we're seeing all the boarded up homes. But then, if you have that core, as we have in Cleveland, which is already beginning to be hollowed out, and now there's a shift to the middle-income and even upper-income areas. It's possible we may, absent any kind of new regulatory or legislative authority, we may see this spread like a cancer. How do you respond to that? Judge Pianka. Mr. Chairman, it's spreading out to inner ring suburbs and to the outer ring suburbs as well. Mr. Kucinich. We have the map here. Did we put the map away? We saw them. We saw the kind of spread starting to occur. Judge Pianka. Unfortunately, what we've seen in the urban areas in Cleveland, many times the financial institution will abandon the property but keep a lien on the property and it becomes a toxic lien. And that property cannot be transferred, and then the cities and the neighbors are held hostage to those properties. Every boarded up property in the city of Cleveland sends a signal that mortgage amount is greater than what the value of that property is, and there are thousands of properties. Mr. Kucinich. So, judge, you know, can the city make a comeback if you, as a housing court judge, cannot properly transfer title to the foreclosed houses. Judge Pianka. Well, there can't be progress because they sit there, and then it has a domino effect on people's decision whether they stay in a neighborhood or invest in a neighborhood. Mr. Kucinich. Thank you, your Honor. To Ms. Engel, what specifically should the Fed do to put a stop to the coincidence of banks receiving credit for their CRA exams for predatory loans made by their affiliates who are invested in them for their portfolios, and how should the Federal bank regulators assess a value on the quality of loans? Ms. Engel. I think that the first thing is that the regulators need to start taking into account the activities of the affiliates and the subsidiaries, because by limiting the exams to just the banks, it is really giving the subsidiaries and the affiliates cart blanche to engage in wrongdoing without it coming to the attention of the regulators. The banks can voluntarily have a more expansive CRA exam, but I don't think I know of any situations where a bank has said, oh, yes, please come and look at our subsidiaries and our affiliates. It's, you know, not likely that they're going to do that. So, I think that's a key thing. I think that CRA also could take a stronger position in terms of what's getting disclosed in the HMDA data. We need to have credit score information in the HMDA data. We need information about fees. It's just insufficient. Even when the Federal Reserve Bank is doing its own HMDA analysis, it's finding itself with its hands tied in terms of the ability of the data to really generate a meaningful analysis. Mr. Kucinich. Thank you. And I just have one more question for Ms. McCarty-Collins. For borrowers who contact groups like NeighborWorks America or other consumer credit counseling groups, does this effect their credit scores just by making a contact. Ms. McCarty-Collins. No. Not by making a contact. And those agencies work with the lenders to try and work out modifications and repayment schedules for them. At this point, I would say that their credit is probably already harmed by the time they call. The biggest problem that we find is that people that become delinquent on their mortgage are afraid to call their lender, and then it really becomes too late, and so we're trying to get some early intervention for them. Mr. Kucinich. I want to thank the members of the panel. This has been a very good panel and just the testimony that we've read would be the basis for a lengthy hearing in and of itself, but your testimony will be included in the record and will be available for review as we continue to move forward with this topic. It's very helpful. I want to thank Chief Judge Carr for making this facility available and all Federal judges for their indulgence for having this meeting in this building. I want to thank the staff, both of our majority and minority staff, because you made it possible for us to come together to have this hearing, as well as the court stenographer. I want to thank all of the public officials who have attended and whose cooperation we will need as we move forward on the community groups represented here. This has been a hearing of the Domestic Policy Subcommittee of the Government Oversight and Reform Committee. The topic of the hearing has been Foreclosure and the Federal Reserve Bank of Cleveland. I want to thank all of you for attending. This committee is in adjournment. 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