“Preserving the American Dream: Predatory Lending Practices and Home Foreclosures.”  
Senate Committee on Banking, Housing and Urban Affairs, headed by new chairman Chris Dodd, held a hearing on “Preserving the American Dream: Predatory Lending Practices and Home Foreclosures.”  The panel of witnesses included two consumers, Delores King and Amy Womble, who testified about their own home purchase and refinance experiences that have now left them facing foreclosure. Rev. Jesse Jackson of the RainbowPUSH Coalition and Hilary Shelton of the NAACP testified on behalf of minority homebuyers who they said populate the subprime market in greater numbers and are unfairly targeted by predatory lenders. 
On the industry side, NAMB President Harry Dinham spoke for mortgage brokers, while MBA Chief Economist Doug Duncan represented lenders. 
Witnesses for the consumer advocacy side were Martin Eakes, CEO of the Self-Help Credit Union and Center for Responsible Lending (CRL), and Jean Constantine-Davis, senior attorney for the AARP. 
NAMB’s perspective Dinham told the Committee that improved disclosures and an independent government study could help address the “disturbing increase” in foreclosures.  “Consumers may lose their homes,” said Dinham. “No one questions the tragedy of this possibility, and until we understand all the contributing factors, we need new disclosures that help homebuyers better understand their loans.”  Dinham said there are too many consumers who do not understand the loan they have chosen because of inadequate disclosures. Borrowers can be shocked when their rates change or payments escalate rapidly over time. In severe cases, this lack of understanding can lead to foreclosure. To avoid this “payment shock,” Dinham and NAMB are pushing for new disclosure requirements.  “It is time to update the information included on the good faith estimate and the truth in lending statements. There should be a disclosure used for all variable rate loan programs detailing how rates may change.” Dinham noted that NAMB has already proposed a simplified good faith estimate, which they submitted to HUD during the RESPA reform roundtables in 2005.  He also told the Senate Committee that a comprehensive, independent, government-sponsored study of the rising foreclosure rate is the only way to provide a better picture of the factors fueling current challenges.  “If we begin creating new policies to address this problem without a better understanding of its cause then we are essentially employing a trial-and-error approach. We think that consumers deserve a more thoughtful solution, and this study is the best path forward,” said Dinham.  In addition to improved disclosures and a government study, Dinham noted that NAMB continues to advocate for education standards for all mortgage originators and required criminal background checks prior to entry into the industry. “We have achieved record rates of homeownership in this country,” said Dinham. “It is now up to government, our industry and consumers to work together and ensure that Americans are able to hold onto the homes that they have worked so hard to purchase.” 
MBA: Don’t stifle innovation 
Duncan, meanwhile, expressed concern that “approaches such as rigid, new underwriting standards and the imposition of suitability requirements will roll back hard-fought homeownership and fair lending gains and will stifle innovation and take good financing options out of the hands homeowners, limiting consumer choice.  The effect will be to reduce available and affordable credit, undermining our mutual goal of putting Americans in homes and keeping them there.  The mortgage market has performed well for consumers and for the larger economy and any policy that is not based on sound facts has the potential to undermine these benefits." Duncan also addressed concerns about the connection between industry practices and failed loans. "Abusive lending is a stain on the mortgage industry, and MBA is committed to finding solutions to help weed out bad actors," said Duncan.  "Nationally representative data show that current foreclosure rates are within normal historical ranges and that the incident of foreclosure is largely driven by loss of employment, illness and other life events, and not by specific mortgage products.  Nobody wins when homes are lost to foreclosure.  The process can have a devastating affect on consumers and communities as well as lenders and their investors." Duncan also shared MBA's perspective on what steps Congress can take to help protect consumers from abusive lending practices. "First, make financial education a priority for all Americans, empowering them with knowledge and giving consumers the tools to make good decisions," said Duncan.  "Second, simplify the mortgage process and make it more transparent so consumers can better understand the details of the transaction and so they can more easily shop for their loan from different lenders.  And finally, Congress should pass a strong and balanced uniform national standard for home loan lending with increased consumer protections."  Brokers:  Trusted advisors or not? During the question period, Dinham was grilled by Dodd over whether there is a conflict between how brokers represent themselves to consumers and what they actually do.  The keyword was “fiduciary duty,” and it seems that this is an issue that will not be going away anytime soon. Dodd said, “You say that brokers have no fiduciary responsibility to the borrowers and that brokers are independent contractors.  But in advertising materials, brokers market themselves on the basis that they will then shop for consumers and act on their behalf to get the best loan.  That the broker is their personal advisor and is in this to help them.  Do you believe that the brokers are or market themselves as trusted advisors to borrowers?” Dinham denied that brokers act or portray themselves as acting in an advisory or fiduciary capacity, saying, “The thing we offer is consumer choice and a variety of loan products for borrowers.  What we are is a funnel to offer a consumer choices as to where he wants to go.  We’re not operating as a fiduciary because we don’t have every product that is available in the marketplace. We can only offer the products we have.” 
Dodd, however responded that brokers do represent themselves in an advisory capacity and cited the homebuyer FAQ section of the NAMB Web site which answers the question of “Why choose a mortgage broker?” by saying, “The consumer receives an expert mentor through the complex mortgage lending process. The broker offers the consumer extensive choices and access to affordable home loans while balancing the consumer's financial interests and goals.” “So even on your association’s own Web site, you’re holding yourselves out as mentors,” Dodd said. Dinham responded that “maybe we do have a conflict there,” but reiterated the point that brokers offer consumers a lot of choices. Dodd later said that he appreciated Dinham’s “honesty” in answering that question, noting that the Committee doesn’t often hear such an honest response to a question at their hearings. 
Market correction: A question of speed Sen. Mike Crapo referred to the testimony of the two consumers when he said to Dinham, “I don’t think anyone can disagree with the fact that when we hear these consumer stories, we ask ourselves, ‘How can that happen?’  What kind of market discipline is there in the subprime lending market today?  How do these kinds of things happen?” Dinham affirmed that there are safeguards in the market and said that some discipline is already taking place, and spoke about the numerous different kinds of loan products that had been introduced over the years, noting how the ones that didn’t perform well were eventually done away with. “I really believe that if these loans continue to create foreclosures and defaults then they will go away,” he said.  “We’ve had a lot of loan products come through over the years. If lenders face a default, then they’ll have to pay a penalty. To me, the market will correct in the end.” Eakes agreed with Dinham that the market does correct itself, but said, “The problem with waiting for the market to correct — and it is correcting right now — is that the market correction has a lag of several years.” Eakes spoke about Ownit Mortgage, the lender that shut down abruptly at the end of 2006. “When Ownit went out, it had no way to reimburse the borrowers whose loans were caught up in this.  Those borrowers have no recourse.” Crapo then noted that “it seems there is a market discipline in place and that it is working.  But there is a question of if it is working fast enough.” 
The blame game A bit of a blame game was also played regarding who is ultimately responsible for the bad loans.  Mortgage brokers took the brunt of it, as several witnesses noted that they aren’t as closely regulated as banks and lenders. Duncan pointed out that Fremont Home Loans had recently cut ties with 8,000 brokers who were submitting bad loans, but noted that as there is currently no national database for keeping track of these brokers, they could easily start operating again with a different lender or in a different state. Jackson also noted that in further discussions or hearings, it would he helpful to get all sides represented at the table because if each side was blaming a party who wasn’t there for something that was going on, the discussion would never get anywhere. On behalf of the CRL, Eakes also made several recommendations of what should be done to address the problems of predatory lending now: 
1.       Restore safety to the subprime market by imposing a borrower ‘ability to repay’ standard for all subprime loans.
2.       Require mortgage brokers to have a fiduciary duty to their clients.
3.       Require the Federal Reserve to act, or address abuses through the Federal Trade Commission.
4.       Require the GSEs to stop supporting abusive subprime loans.
5.       Strengthen protections against destructive home lending by passing a strong national anti-predatory lending bill. 
Senator from Florida Martinez speaks An interesting part of the hearing took place when Sen. Mel Martinez, the former HUD secretary, spoke his piece about the issues under discussion. Martinez talked about RESPA reform and his efforts to do something in that line while he was at HUD. “[RESPA reform] didn’t make me popular with a lot of people in this room, but one of the issues I attempted to tackle was what I saw in Ms. Womble’s testimony, where from the time she got her good faith estimate to the time she closed the loan, her closing costs had doubled. We have to have the same costs carried over from the GFE to the closing table,” he said.  “Maybe leave a little room for some changes, but they should be about the same.”Martinez advocated for imposing fiduciary duty on mortgage brokers, and took aim at yield spread premiums, saying, “How do you have a broker that is arguably in a fiduciary arrangement that is attempting to get a higher interest rate so they can get higher commission?” He continued, “I think these are things we can fix through regulatory reform and whatever statutory changes are necessary to protect borrowers.  I believe it is time we try to tackle some of these issues.” 
Bringing in the regulators
Sen. Richard Shelby, the ranking member of the Committee, summed up the situation by saying, “In our marketplace, there shouldn’t be any place for fraud or exploitation. Risk-based pricing has brought a lot of good things. It has brought credit, but it has also brought problems, and we need to eradicate them as best we can. I hope that in this committee we can get the regulators up to talk about what they’re doing. These kinds of situations will destroy our risk-based credit system and we don’t want to do that.” By the end of the hearing, it was clear that Dodd was fired-up about making some changes in the home mortgage market, as he said emphatically, “We are going to get the regulators in here.  Frankly, I’m annoyed that two weeks have gone by with no response from them.”  He spoke to the camera as if addressing the regulators, saying, “If you’re listening, you can expect to be here in a couple of weeks.” Dodd added, “We’re going to follow-up on this.  This isn’t just a one-time hearing.  We’re going to address this, because homeownership is important and we have to make sure the market is going to work right.”

 TILA tweaked by Congress

H.R. 480, a bill recently introduced in the 110th Congress, would amend the Truth in Lending Act (TILA) to prohibit the issuance of mortgages to any individual who lacks a Social Security number. The bill was introduced Jan. 16 by Rep. John Dolittle, R-Calif. It has been referred to the House Financial Services Committee. TILA was originally enacted by Congress in 1968 as a part of the Consumer Protection Act. The law is designed to protect consumers in credit transactions by requiring clear disclosure of key terms of the lending arrangement and all costs. The law was simplified and reformed as a part the Depository Institutions Deregulations and Monetary Control Act of 1980.