FROM THE OFFICE OF PUBLIC AFFAIRS

Good morning afternoon and thank you for this opportunity to speak before you today about our ideas for addressing predatory lending. Assistant Secretary Bair asked me to speak on her behalf, as she has lost her voice to a bout of laryngitis. Let this demonstrate her personal commitment to fighting predatory lending, even when her voice will not cooperate.

We should all be proud of the positive developments in mortgage and housing markets that have taken place during the last decade. During the last decade, the percentage of Americans who have achieved the dream of home ownership has increased significantly. This increase in home ownership has, in part, been fueled by the broader availability of mortgage-related credit to all types of borrowers. This increase in credit availability has been most evident in the subprime market, which primarily serves borrowers with past credit problems. As noted recently by Governor Gramlich, from 1993 to 2000, the number of subprime loans to purchase homes increased from 19,000 to 306,000. The number of subprime home equity loans increased from 66,000 to 658,000 during that same time period.

Clearly much has been done to improve home ownership opportunities and expand access to credit. However, as President Bush noted in the State of the Union speech, "broader home ownership, especially among minorities," remains a priority. While the Administration has set forth an aggressive program for further increasing home ownership opportunities, we are also focused on preserving those opportunities by keeping people in their homes and protecting them from unscrupulous lenders. A key component of that goal is eliminating what has come to be known as predatory lending.

We all know that predatory lending is difficult to clearly define. Predatory lending is generally characterized by abusive lending practices that include deception, fraud, and other practices that are unfair to borrowers. In the most egregious cases, lenders have made loans with little or no regard for a borrower's ability to repay, and have engaged in multiple refinance transactions that result in little or no benefit to a borrower. These types of abusive lending practices can result in the stripping of borrowers' equity and, in the worst case, borrowers losing their homes. The result is not only devastating to the borrower, but it also can contribute to a general decline in the conditions of the surrounding neighborhood.

As different methods for combating predatory lending are considered, we must be careful not to damage what has generally been a positive development - the expansion of the availability of credit through the subprime market. Responsible providers of subprime credit provide an important source of credit to borrowers with damaged credit histories. The current services of responsible subprime lenders will not be easily replaced by government programs or through the activities of other lending institutions.

Let me now briefly describe recent and current activities underway in the Administrative Branch that should be beneficial in combating predatory lending, and some ideas for additional initiatives that we have been considering at Treasury.

The Federal government has recently or is currently undertaking a number of efforts related to disclosures and enforcement that should contribute to a reduction in predatory lending.

First, the Department of Housing and Urban Development (HUD) is taking a new look at improving mortgage disclosures. In particular, HUD is considering ways to improve disclosures of mortgage yield spread premiums. High levels of broker compensation are often associated with predatory lending, and to the extent that improved disclosures can better inform consumers about broker compensation, some abusive lending practices could be stopped by consumers.

HUD is also considering ways to address predatory lending within its own mortgage programs. Secretary Martinez has stated his intention to improve accountability within Federal Housing Administration loan programs by considering rules that that would specify lenders' responsibilities for the actions of mortgage brokers and appraisers.

Second, the Board of Governors of the Federal Reserve System has recently finalized revisions to its regulations under the Home Ownership and Equity Protection Act (HOEPA) and the Home Mortgage Disclosure Act (HMDA). The new HOEPA regulations will expand the protections available under HOEPA to a broader group of borrowers by reducing the annual percentage rate threshold for coverage from 10 percent (above the rate on a comparable maturity Treasury bond) to 8 percent for first-lien mortgages. The Board estimates that this change alone could triple the amount of first-lien mortgages covered by HOEPA.

Other revisions include: adding fees paid for single premium credit insurance to the HOEPA points and fees trigger; prohibiting the original lender from refinancing a HOEPA loan within twelve months of origination unless it is clearly in the borrower's interest; and requiring lenders to verify and document borrowers' repayment ability.

Third, the Justice Department and the Federal Trade Commission (FTC) have taken aggressive steps in recent years to crack down on abusive lending. The FTC has undertaken several high profile cases that could mean broad redress for many consumers. The FTC also devotes resources to consumer education and the Commission goes on record with its views on legislative and regulatory proposals in this field. Because many of the practices associated with predatory lending are already illegal, stronger enforcement is a key component of any solution to the problem. In addition to stronger enforcement at the Federal level, increased enforcement activity at the state level is also needed.

While these recent Federal actions should be useful in reducing abusive lending practices associated with predatory lending, is there more that we can do? At least two areas have stood out to us - improved consumer education and encouraging greater mortgage industry responsibility.

We must do more to educate borrowers so they are in a better position to provide a first line of defense against abusive lending practices. To better prepare consumers for this task, the Federal government should take a leadership role in educational efforts. My office is working with others in the Administration and with industry, education, and non-profit groups to enhance financial literacy. In addition, the Community Development Financial Institutions Fund - also a part of my office - is increasingly building financial literacy programs into its award-making process.

There is a lot of great work being done by the private sector - including many of the institutions and groups that are members of the National Association of Affordable Housing Lenders - to educate consumers about the mortgage process, and the financial responsibilities of home ownership, and general principles of consumer finance. Members of the Consumer Bankers Association have made important contributions toward improving financial literacy. We applaud those efforts and hope to continue working with the financial institutions mortgage industry and consumer groups to improve borrower education.

The second area we have been considering is what the Federal government can do to encourage private sector efforts to eliminate abusive lending practices. One area we have been examining is whether it would be useful for the Federal government to play a role in developing a national code of best practices that address predatory lending.

Many key players in the prime and subprime mortgage industry - including members of the Consumer Bankers Association again with the leadership of many of the institutions and groups that are members of the National Association of Affordable Housing Lenders - have implemented best practices or lending guidelines to address predatory lending. Many of these lending guidelines were developed with active participation of consumer groups.

Some of the practices addressed in current lending guidelines include: prohibiting the sale and financing of single premium credit life insurance; limiting or prohibiting loans with balloon terms or negative amortization features; limiting prepayment penalties and providing borrowers the option of a loan without a prepayment penalty; requiring full credit bureau reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to prevent loan "flipping";" and requiring that borrowers be given fair access to prime credit. Many such codes also address developing standards for third party relationships; implementing procedures to mitigate foreclosures; restricting charges for points and fees; and requiring fair and less burdensome arbitration procedures. We have been taking a detailed look at these lending guidelines and there appears to be a fair amount of agreement in a number of areas.

Given that there is a fair amount of agreement among individual institutions' best practices and lending guidelines, it seems that it might be possible to build off of what has already been implemented to develop a national code of best practices to address predatory lending. We would see such a code as being voluntary, and hopefully a significant number of institutions would agree to adopt the code. Institutions that made representations to consumers that they abided by the national code of best practices, agreed to abide by the code and then failed to do so, could be subject to enforcement actions by the FTC. Though we would view the code as voluntary, we would hope to significantly expand the number of lenders adhering to best practices through the participation of the secondary mortgage market. Even though such a code of best practices would be voluntary, the actual code and the dialogue associated with developing the code would be useful in formulating the Administration's views on the contents of potential Federal legislation. The process of developing the code could also prove useful in efforts to reach agreement on key features of any potential Federal legislation.

The development of a national code of best practices could help promote consistency and uniformity among state and local predatory lending laws. By setting national standards for good lending practices, a code of industry best practices might provide a helpful model for the efforts of state and local leaders in this area.

A code of best practices could also help consumers navigate the complex mortgage financing process by giving them some assurance that the lender with whom they are dealing adheres to certain core standards. I am strongly committed to an aggressive program of financial education to help consumers better protect themselves against abusive lending practices. The reality is, however, that home financing is exceedingly complex - I would venture to guess that many of the homeowners in this room didn't fully understand the documents they signed at their closing - if you even bothered to read them all. Through a well-publicized national code of best practices, we could empower consumers with the ability to ask their lender a single question "Do you adhere to the code?" If the lender said, yes, the consumer would know that they would receive key protections for which theirre existed a federal enforcement mechanism. If the lender said no, the consumer could then consider whether they wanted to look elsewhere for credit.

I believe that a national code of best practices for lenders has the potential to reduce abusive lending practices and to provide real value to consumers. However, in today's mortgage market lenders are only one part of the mortgage process.

In many cases the first contact a consumer makes in the mortgage process is with a mortgage broker. Mortgage brokers serve an important function of providing borrowers with a wide array of loan products and generally increasing credit availability throughout the country. While the majority of mortgage brokers follow responsible business practices, some abusive lending practices - such as loan flipping - are often linked to brokers. Regulation and licensing of mortgage brokers is done to varying degrees at the state level. State law enforcement and regulatory agencies need to be vigilant in monitoring mortgage brokers and enforcing existing laws, and consideration of new requirements may be necessary to ensure that a few irresponsible brokers do not damage the positive role played by mortgage brokers. However, all responsibility for monitoring mortgage brokers can not rest only with state enforcement and regulatory agencies. Lenders should also carefully monitor the performance of mortgage brokers that they do business with to ensure that those brokers are following prescribed lending guidelines and not engaging in abusive lending practices.

Another piece of the mortgage process that could contribute to combating predatory lending is the secondary mortgage market. The secondary mortgage market - either through the housing GSEs or Wall Street investment banks - provides a link between capital market funding and mortgage finance to consumers. While clearly these firms do not have a direct relationship to the consumer in the same way as mortgage brokers or lenders, secondary market firms do have a responsibility to play as good corporate citizens. As good corporate citizens, secondary mortgage market firms should seek to work with lenders and mortgage companies that are also good corporate citizens. In that regard, a national code of code of best practices could provide important information to secondary market firms. We would hope to significantly expand the number of lenders adhering to a code of best practices through the active participation of the secondary mortgage market.

While a code of best practices is typically thought of as a private sector initiative, the Federal government could play a leadership role in coordinating and encouraging the development of a national code of best practices. In my view, the key components of that leadership role would be: evaluating best practices and lending guidelines that are already in place; considering the views of all stakeholders - brokers, lenders, consumer groups, secondary market participants, and government regulators; and working with stakeholders to develop a national code of best practices that could be broadly adopted.

Some stakeholders have raised concerns over the concept of a national code of best practices. There is concern that code will not provide consumers with strong enough protection and that the code will take pressure off of legislative efforts. We have started In the coming weeks I hope to evaluate these issues more closely, and in the coming weeks I hope to further consider what role if any the Federal government should take in encouraging the development of a national code of best practices. The goal of this potential initiative would be to strengthen consumer protections by building upon the work already done by a number of lenders in collaboration with consumer groups. In evaluating the merits of a national code, the key issue is whether there would be value added to consumers.

I would greatly appreciate the thoughts and input of the members of this well-respected organization on developing a national code of best practices and other steps the Federal government can take to combat predatory lending. There is a tremendous amount of expertise in this room, and I look forward to the opportunity to work with you in tackling this important issue.

In closing, I would like to thank the Consumer Bankers Association National Association of Affordable Housing Lenders for inviting me to speak here todayat your annual meeting.