Mr. Goldstein, your testimony for me was quite informative and instructive.
In it you've 111 12/11/00 - PUBLIC HEALTH - BILL 000715 mentioned a number of facts, trends, and characteristics. Councilman Rizzo discussed one avenue for a remedy. Have these facts, these trends, these characteristics been shared either formally or informally with the parties on the other side of the equation?
Part of the research process has been to gather information with the trade associations, with the brokers themselves, with title people, with people who are involved not from the borrowing side but from the lending and facilitating side. And some of the things that I described in my testimony literally were told to us by people on that side of the fence. And we approached this by saying we were not going to get a full and complete picture unless we understood sort of the supply side of this credit. So everything in here has been shared and will be continued to be shared going forward as we come to closure on the research.
I sort of view that as Step 1. Step 2 is discussion of remedies or a way to fix the problem. Has that happened as of yet with the parties, again, who can most 112 12/11/00 - PUBLIC HEALTH - BILL 000715 make a difference in fixing this?
We're more in the sort of information-gathering phase, but I will say that we've had discussions with various associations involving brokers and mortgage bankers to discuss issues about raising threshold for entrance into that profession, making it a little difficult to get the license and hold the license so that there are real meaningful continuing education sorts of things and real enforcement for those who are acting in an unethical and an illegal manner. And presumably, some of the people that we've spoken with are here today and you'll hear from them on that very same topic.
I would also like to address that in terms of part of some of the work that we do at ACORN hasn't only been with the victims of predatory lending, we have also spoken to some of the lenders. Personally, I've been involved in meetings with some of the biggest lenders in this country that are involved in sub-prime lending and certainly do some of the 113 12/11/00 - PUBLIC HEALTH - BILL 000715 practices that we talk about that are predatory practices to have them look at how they go about doing business and also with suggestions ACORN has certainly came up with suggestions about changing some of those things. A lot of lenders have said "Oh, yes, these things are bad. I do three, but I don't do the other two so I'm not all bad." Other lenders have -- one of the lenders, and I will talk about them, AmeriQuest who is one of the largest lenders in this country, sub-prime lenders, has taken on changing some of the ways that they have done business. Actually, they are up now to do a pilot program here in Philadelphia that will address some of the very factors that make these practices predatory. So what I'm saying is that I think the Industry itself is looking at this, but the whole problem with that is that we don't feel no 22 changes down in my community, okay? So until that happens, I think that the pressure has to be on them. And certainly, Philadelphia is in a position to say, "Not here you will not do that." 114 12/11/00 - PUBLIC HEALTH - BILL 000715 And so I think that that's the important issue that this bill will send out that message.
Thank you. Finally, Mr. Goldstein, on your testimony, the second paragraph, you mentioned that -- you had mentioned that you are conducting interviews and you mentioned a number of parties here.
Borrowers, lenders, brokers, title and settlement attorneys, appraisers, trade associations, and state regulators. What's the status of that? I mean, what's the status?
All of these representatives of each of these groups have in fact already been interviewed.
To write it up into a report and incorporate probably a develop set of recommendations and things like that which we believe, you know, will sort of poke into the various places that this is a problem. 115 12/11/00 - PUBLIC HEALTH - BILL 000715
Are you at liberty to say when that report might be finished?
I would say probably within the next 30 to 60 days, for sure.
Thank you. Before you leave the table, I'm looking at this form that I think you said Miss Floyd signed, this fee. This has U.S. Department of Housing and Urban Development. She was seeking a -- I guess she thought maybe a consumer loan for $1500?
No. The reason why it says HUD is that is a form that HUD requires to be used in all mortgage settlements of any sort in the nation. This is called a HUD-1 form. HUD is not involved in this transaction at all.
But one would think they were if they are not aware of that, right?
And the other thing, she was trying to get $1500 and this is a home mortgage loan she got?
No, it's a first mortgage. It ended up being a first mortgage. She had two mortgages, but what they fooled her into doing was to refinance those mortgages. See, the reason for that is that the companies can get the benefit of certain preemption. There are no usury laws are in effect if you get into first position, so that's what they're trying to do; they're trying to get into first position. That's a matter of federal law that if you get into first position there's no usury. So by fooling her into refinancing everything, they were able to charge her $9,000 in fees. We calculated that this was about a 17-point loan. And if you call the insurance, really just points in another -- I mean, she said she didn't even need insurance. Then it really ends up being about a 22-point loan that's financed at 13 percent. So in other words, you're paying two 117 12/11/00 - PUBLIC HEALTH - BILL 000715 ways: You're paying in the principal, the principal of the loan itself including very large fees. And then those fees end up getting financed over years at 13 percent. 6
Okay, thank you 7 very much. 8 Any other questions? 9 (No further questions.) 10
Thank you. 11 Mr. Kromer's next, and then we'll 12 have the lending institutions. We promised him 13 12:30. 14 (Witness comes forward.) 15
Good afternoon. 16 Would you identify yourself for the record? 17
Good afternoon. I'm 18 John Kromer, I'm director the City of 19 Philadelphia's Office of Housing and Community 20 Development. I appreciate the opportunity to 21 testify on this measure, and I want to thank you, 22 Councilwoman Tasco, for taking the initiative to 23 launch this measure last spring and to thank 24 ACORN and Northwest Counseling Service and the 25 other advocates and counselors and agencies that 118 12/11/00 - PUBLIC HEALTH - BILL 000715 participated in the ad hoc committee and the task force. During the months that have passed since the time when you originally proposed this, in my view, the legislation has improved tremendously and I think that the result is something that we can be very proud of. A few comments just off the top. There's been a lot of discussion in the past year about neighborhoods and Philadelphia neighborhoods and how much we want to do for our neighborhoods. If we're serious about that, we've got to give priority to fighting predatory lending. This issue couldn't be more serious and -- (Applause.)
The testimony has made that clearer than I could state it. No matter how wonderful our new housing construction programs may be or our vacant house rehab or open space, if people are losing their homes or their equity or their net worth, we've got a terrible problem and so this couldn't be more appropriate. Secondly, I think we'd all be delighted if someone else were taking care of the 119 12/11/00 - PUBLIC HEALTH - BILL 000715 problem, but the people who may be in a position to take care of the problem are not doing so, Congress, the General Assembly, the lending industry, the regulators. At some point, perhaps they'll take action and perhaps the action and perhaps the action they take will be appropriate, but it's not happening now and we've got to do something now to deal with the situation here in Philadelphia. (Applause.)
Finally, again others have said this much more effectively than I could. We're really up against a very effective marketing and promoting system that's worked to the detriment of many families and individuals in Philadelphia. I live in West Mt. Airy and I will come home in West Mt. Airy and there will be a leaflet through my mail slot from a company with a 1-800 number telling me about a great deal that I can get. There will be a letter for me with a postage stamp on it, first class, from a home improvement company with another great deal for me. The phone will ring, there will be a recorded message or a live message from someone 120 12/11/00 - PUBLIC HEALTH - BILL 000715 congratulating me for the financing for which I've been pre-approved. And, of course, the TV is filled with promotions and advertisements. So that marketing clearly is ongoing, it's comprehensive and, unfortunately, it's very, very effective. I'm very pleased that a role is being proposed in this legislation for the Office of Housing and Community Development. In the other cities which familiar with community development agency does not play such a significant role, and I appreciate the opportunity to take some responsibility for implement this measure. It's a privilege to have that responsibility. I have a few comments about the amended legislation which I saw for the first time this morning but which I believe addresses a lot of the concerns that I came into this room 20 with. Just two issues that may involve a change. One is a minor issue that relates to the reference to the Office of Housing and Community Development and responsibilities. I guess it's on . My understanding is that in Section 25 9-2405, Subsection on the last line, that we're 121 1 12/11/00 - PUBLIC HEALTH - BILL 000715 currently reads Subsections 9-2401 that the intent was that to be 9-2402.
So with that clarification, I think we're fine. The other issue in that same paragraph, with regard to the phrase "but not limited to," and that creates an ambiguity that perhaps would be helpful for us to resolve now. If the option to do more is up to the Office of Housing and Community Development, then it seems to me that phrase "but not limited to" is not necessary. If on the other hand it's Council's intent to require the Office of Housing of Community Development to do more, it would be helpful to me to have that clearly specified or just to have the phrase deleted in the interest of clarification. That would certainly be helpful.
As I understand 122 12/11/00 - PUBLIC HEALTH - BILL 000715 it, my technician here, my lawyer, "but not limited to" means it gives you more power. Is that the question?
Well, if that's the case, I think the phrase is unnecessary. The office could simply do more over and above the provisions of the ordinance, but I'm concerned about the ambiguity of the phrase and the possibility that others would interpret as on their own rather than leaving that to the Office of Housing and Community Development, so I'd recommend just deleting that "but not limited to."
As I interpret it, it seems that you are going to be this in charge of the enforcement and it says that you will promulgate rules and regulations and such rules and regulations shall include, this is one example but they're not limited to these regulations. If you want another rule, you can do it, too.
Such rules and regulations shall include but not limited to 123 12/11/00 - PUBLIC HEALTH - BILL 000715 means that the standards, guidelines, and procedures for the approval of plans pursuant to subsection --
-- means that you can do more. It's just not limited to those areas.
If the discretion is up to the OHCD director, then I would suggest that that phrase "but not limited to" is not necessary because the OHCD director could do that without the mandate. I'm just concerned that this "but not limited to" would be interpreted differently by different parties and it is not clear that the discretion is not OHCD and not some other parties with another interpretation of the legislation.
Except that if take that out it says "Such rules and regulations shall include the standards, guidelines, and procedures for the approval of plans pursuant to subsection..." Blah-blah-blah.
You don't see that limiting you to just those things? 124 12/11/00 - PUBLIC HEALTH - BILL 000715
I think that should stand. Perhaps we could all be satisfied with an addition to the sentence which would say "and other such standards, guidelines, and procedures as OHCD may deem appropriate." It seems to me that would give all of us what we want.
We'll get rid of the language and then we'll add it on the amendment.
I have two comments with regard to housing counseling, and these are not proposals to change the legislation but simply comments on the process. I think Philadelphia really has an advantage over other cities that are wrestling with this issue in that we have a citywide network of housing counseling agencies, some of which like Urban League are very well qualified to deal with this issue, others of which need a little bit of training but a limited amount but could be up to speed and very well 125 12/11/00 - PUBLIC HEALTH - BILL 000715 prepared to deal with this issue in short order. So I think this is a golden opportunity for the OHCD-funded counseling agencies. Clearly, some education and training will be required. One of the problems that we will face is that none of in us this room know what the demand for service will be that results from the enactment of this legislation. This is not a reason to stall the legislation, but in one case, a fairly cursory review may be appropriate or a group counseling session. In another case, we may need to have the four-hour phone call that the witnesses described earlier or several four-hour phone calls. So I will ask the counseling agencies and the professionals, representatives nonprofit agencies in the room today to work with my office and to work together to develop the right approach first for training the counseling agencies and then for determining how best to accommodate that demand. Certainly, we could do that. The capacity is there. That's the good news. But I will look forward to working with all of you in developing this approach to make sure that it is as effective as it can be. 126 12/11/00 - PUBLIC HEALTH - BILL 000715 There is one other related issue that is a certain concern, but I think at this point not a significant concern. All of the counseling agencies that OHCD currently funds are funded with federal money through the Community Development Block Grant. Clearly, some significant number of people who may be considering sub-prime loans or high-cost loans will have incomes that exceed the federal income standards that are associated with the Community Development Block Grant. Again, we don't know how many there may be or how big an issue that might be, but that's an issue that we'll have to monitor and we will monitor that through the counseling agencies and report back to Council. But there's a potential cost issue that we'll have to deal with. Again, I don't think we need to change the legislation. We'll just have to be aware of this down the line and work to provide the appropriate resource if that's needed. I want to mention that the City Solicitor is not able to be here today to testify but has reviewed the legislation, is interested in having the Law Department play a major role in 127 12/11/00 - PUBLIC HEALTH - BILL 000715 addressing this issue. The Law Department has been represented in the planning that's gone on during the past months, and the Solicitor is very interested in exploring the possibility that in some of these instances that have been described here, the City might enter as a plaintiff and take action proactively. So that is an active issue for the Law Department.
Again, this ordinance, as amended, was something I just saw this morning, I don't know how the mechanics of the Council review and approval have to work, but if we could have an opportunity for the Law Department to look through this and the Mayor's staff to go through this before committee approval, I think we could do that in short order and get back to you so that we could have a piece of legislation that we're all ready to move on. Thank you very much .
Thank you. We appreciate your testimony. (Applause.) 128 12/11/00 - PUBLIC HEALTH - BILL 000715
Good afternoon, Mr. Kromer. Since we know this to be a national problem, do you know if any other municipalities across the country have, A, tackled it; B, come up with legislation at the local level to deal with it or does Philadelphia stand to be a ground-breaker trendsetter in this area? Do you know?
I know that those who have been involved in planning for this legislation and drafting and redrafting a legislation looked very closely at the City of Chicago which has passed some local legislation and there's some similarities between this an Chicago's, but significant differences as well. And others more involved speak more on that.
I have a second question, put it in context. And the context is so often folks are held responsible for that which the know nothing about. Now, I asked Ms. Hemingway the question has a reach been made to the members on the other side of the equation to 129 12/11/00 - PUBLIC HEALTH - BILL 000715 enlighten them, get some acknowledgment that there is a problem and/or some indication of a willingness to remedy the problem. Has the City or you on behalf of the City reached to the lender community, the banking community to state what appears to be very much the obvious.
Yes, but it certainly hasn't been enough, and the power of local legislation certainly strengthens the message and elicits a response that a friendly conversation would not elicit, so I'm pleased that this is happening. It's certainly going to attract some attention and some responsiveness.
We just want to say that this bill is the City's effort to protect its citizens here in Philadelphia. As I said earlier, I've been conversation with my State rep to begin to take action on the State level to see if we can strengthen the laws on the 130 12/11/00 - PUBLIC HEALTH - BILL 000715 State level and that will be done through our task force that we have. They are looking at additional legislation, and once that is done, we will move to the State to see what we can do to protect the citizens across the State. And certainly, the State can levy higher fines than the City can levy. We'd now like to call on representatives from the lending community. The Joint Council of Mortgage And Mortgage Brokers. (Witnesses come forward.) (Break taken.) - - - (Proceedings resume.)
Okay, we're ready to begin. Could we have your continuing, please. Good afternoon.
Thank you for waiting. I think part of your staying here or being here was an education process for you. And certainly, we've heard some pretty bad stories that just reflect a small example of what's going 131 12/11/00 - PUBLIC HEALTH - BILL 000715 on here in Philadelphia and particularly across this country. So we appreciate your coming forth to testify this afternoon. Who's going first?
Thank you Madam Chair. E. Robert Levy, I'm the Legislative Regulatory Counsel for both the Pennsylvania Association of Mortgage Brokers and the Mortgage Bankers Association of Pennsylvania. I have Michael Golonzo (ph) and Sam Marelli (ph) with me.
Mr. Golonzo is president of the Pennsylvania Association of Mortgage Brokers. Mr. Morelli is the president-elect of the Mortgage Bankers Association of Pennsylvania.
A lot was said here today and, of course, we have a lot to address. I want to start by saying that let there be no mistake but that our industry, our joint council, as we call it, the two organizations that represent the mortgage lenders making approximately 70 percent of the mortgage loans in the Commonwealth of Pennsylvania, as our industry does around the country today, is totally and very passionately against predatory lending. Predatory lending is not something that we in any way sanction. We do not want any of our lenders involved in it. And we do not want any of those stories that represent true predatory lending activities to continued; we want it stopped. In fact, we very recently met with the Department of Banking that regulates our industry here in Pennsylvania and urged the department to involve themselves in great enforcement against those mortgage lenders, 133 12/11/00 - PUBLIC HEALTH - BILL 000715 that is mortgage bankers and mortgage brokers as long well as any financial institutions that they regulate, against any predatory lending activities. We also told the department that to the extent necessary, and we do recognize that there is a staff limitation and a monetary limitation in terms of their capability to enforce as fully as everybody would like, that we would fully support bringing more financial capability to the department to make sure that enforcement is as strong as it can be to put these predatory lenders out of business. So we're all on the same wave length in terms of that kind of a problem. I will say that the problem that we face in a hearing of this nature is that it becomes overwhelmingly a process whereby -- and I understand that that's the process -- whereby you will hear only the negatives that occur as a result of the activities of some lenders. And some of those, I'm glad to say, are out of business and justifiably so. Some of the others will be out or change their tactics in the future. We have been very successful, 134 12/11/00 - PUBLIC HEALTH - BILL 000715 incidentally, in dealing with a number of predatory lenders that are now out of business and others that have been dealt with both on a State level and by the Department of Justice and others that have jurisdiction over them, unfair lending activities and other reasons, so we have had a good deal of success and that success is continuing in terms of dealing with these kinds of companies. The main problem, as I started to say, is when all of hearing where you bring together, select out of a community or a state or a nation, as it were, because we have to have hearings on many levels around the country, as you're probably aware quite recently, what happens is you fill the air with the negative stories and then you have to sit and listen to testimony concerning a very specific piece of legislation which is really what we're here to deal with. We came here today because there's a very specific bill that is being presented that we have some real problems with, not because, as I said, we're in favor in any way, shape, or form of assisting companies to engage in predatory 135 12/11/00 - PUBLIC HEALTH - BILL 000715 lending, but because we're very, very concerned about the impact of a bill that is a very, very broad bill and the most unique that we've seen around the United States in this area and probably the most dangerous in terms of precluding the kind of lending that we all want to see in Philadelphia for people most in need. It's interesting that just very recently Governor Ed Gramlich of the Federal Reserve was here in Philadelphia and testified with regard to what they were doing at the Federal Reserve level. Now, bear in mind that we have today on the books a federal law which is called The Home Ownership Equity Protection Act. We are subject to that.
Our membership is subject to that statute as it is, by the way, with regard to many other laws that regulate this industry including the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, The Home Mortgage Disclosure Act and others and, of course, on a State level we are regulated thoroughly and totally by the Department of Banking here in Pennsylvania. I would add also that that department 136 12/11/00 - PUBLIC HEALTH - BILL 000715 certainly watches over its constituency, namely, the lenders, closely. We have net worth requirements, we have bonding requirements, and we are presently in the process with our full support of trying to finalize some regulations for continuing education for mortgage bankers and mortgage brokers for the first time in Pennsylvania. That's something that we're working on very closely. I think the regs are now at the Attorney General's Office and we're satisfied that, hopefully, within the next year they will come to fruition and a continuing ed program will be started whereby one person at every office and every company will have to go through that education each year. We are also currently talking amongst ourselves within our own organizations, the joint council about the possibility of furthering the education requirements and perhaps even licensure of loan officers in connection with that because we want to be sure that the people are out there talking to the potential borrowers are well educated and well trained. So there's an awful lot going on and you, Madam Chairperson, 137 12/11/00 - PUBLIC HEALTH - BILL 000715 mentioned earlier that you're even thinking about doing something on a State level which is something that, of course, we would be very interested in looking at with you to make sure, as we did in this case and we did -- I should forward a memorandum to the Council with some significant problems that we saw within the existing bill and some of those have already been changed which we are pleased with to the extent that our concerns were recognized and some changes made, but also I think that indicates and we just got the amendments a couple of hours ago, and because we were listening to testimony, didn't even have a chance to really read through them in any detail. So I can't even comment with any intelligence about them. But suffice it to say that something as fresh as this, as new as this which already has gone through a proposed amendment that's sitting on everyone's desk today would indicate the need for a little more deliberation and careful consideration rather than rushing into amendatory language with a bill 24 that is this new with that many changes already. I think -- we believe that there's a need for a 138 12/11/00 - PUBLIC HEALTH - BILL 000715 much more careful consideration of the bill, and I'll get into that in a minute. In any event, I thought that Governor Gramlich's comments were better coming from myself, obviously, because not only would my comments be viewed as biased because I represent the industry, and that's a fair statement. Obviously I do care about the industry. But as I've always said in representing industry, we are really here on behalf of the consumers, and I say that without any concern whatsoever or fear of criticism. And why do I say we represent the consumers? Because our industry is one that operates in a competitive marketplace where if competitive environment is free of restrictions, we do more for the consumers than we would ever do if there are restrictions placed on the Industry. Evidence of that is in 1980 when we passed the Depository Institution Deregulation and Monetary Control Act of 1980, we removed interest rates ceilings and points ceilings around the country.
" Well, not only didn't it harm the consumer, but if you 139 12/11/00 - PUBLIC HEALTH - BILL 000715 recall, I'm sure you've all had the experience by now of watched rates drop dramatically over that period of time since then down to 30-year lows when consumers in the country as a result of the free competitive marketplace and the fact that our industry was flexible and able to meet the demands of that marketplace, consumers were getting fantastically low rates. They were down to around the 6 percent level. They were refinancing homes, they were dropping their rates dramatically. 5 trillion in the United States. And all of this enabled consumers to take more money out of their homes and use that discretionary money in any way, shape, or form to purchase other products and the like. Alan Greenspan in a speech I heard in Washington, DC -- we're active with the National Association of Mortgage Brokers and the Mortgage Bankers of America and I sit on several committees with them and the like. Alan Greenspan in a speech to us in Washington as one small part of the speech, and it wasn't the major part of the speech, said how important our 140 12/11/00 - PUBLIC HEALTH - BILL 000715 industry was in the good economy the company was enjoying because of the tremendous amount of mortgage product that was out there and how that mortgage product brought -- not home improvement contractors, the ones we're talking about in any event -- but brought in contracting, brought in furniture purchases and drapes and kitchen appliances the like, all of which brought to bear upon the economy and increased and enhanced it to a point where we were one of the major factors that has made it as good as it has been through the number of years recently. So our industry has a lot to do with what this country is very positive about and we've gotten to the point now where we have the highest home ownership rate we ever had in the United States, 67 percent, and we're looking to go to 70 percent. We work very closely, by the way, with housing and urban development, Fannie Mae, Freddie Mac in efforts to bring affordable housing to the consumers of this country. In fact, I sit on an advisory committee for Fannie Mae, a partnership office where we sit and all we do devote our time to is 141 12/11/00 - PUBLIC HEALTH - BILL 000715 bringing affordable housing to the consumers of this country and into this area and into this region and into Pennsylvania and Philadelphia and elsewhere. We spent tremendous amount of time on that. We're busy with the Habitat for Humanity building homes. We just donated $10,000 to Habitat for Humanity for homes in Philadelphia. So point being that we really are very, very much involved and on the side of the consumer. And bear in mind that we do not rates higher. When rates go up, we don't cheer, we're upset. Why? Because we make less money. The volume is less. We work on lower rates, greater volume, and that's when our industry thrives. And so our industry and the consumer have exactly the same interest. But the point that has to be made is if you start to in any way disrupt the competitive ability of our industry to compete within the national system, because we compete not on a local level, we have national rates. The rates are set nationally. We don't set interest rates here. We have to comply with the demands of secondary market. We have to comply with what we can sell loans to Fannie Mae and 142 12/11/00 - PUBLIC HEALTH - BILL 000715 Freddie Mac and securitize and the like, so we are subject to all of that in terms of rates. We want rates lower, we want volumes higher, and that's what the consumer wants. So you don't even have to magnanimous to be on the side of the consumer when you're in our industry because everybody's interest is the same. In any event, as I said, coming from me it's one thing, but I thought it was very important to look at the remarks by Governor Gramlich.
Governor Gramlich just had completed some five hearings and the country on the very subject of predatory lending. And the reason he did so was because he was criticized by Congress in May at a meeting I was at, at a hearing, where they felt that the Federal Reserve was not doing enough. And bear in mine, the Federal Reserve has a lot of authority under the Homeownership Equity Protection Act. S. Treasury, they can drop that down by 2 percent, down from 10 to 8. They can also add fees an charges to bring in more loans under 143 12/11/00 - PUBLIC HEALTH - BILL 000715 ^ CK ^ CK something. So here's the one agency and the one law that has been operative in the high-cost mortgage loan area for a number of years since 1994 where we've had actual experience. So it's very important to know what Gramlich said because this is a person who's a regulator who is reasonably objective, I would imagine from everything I've seen or heard. The Federal Reserve is the one agency that, I think, no one can say is not objective. And here's just a few tidbits of what he said: He said among the concerns is the overgeneralization that sometimes occurs when the term sub-prime lending and predatory lending are equated. And he explained that conventional home purchase mortgage lending to low income borrowers increased nearly 75 percent between 1993 and 1998, compared with 52 percent rise for upper-income borrowers. During this time, conventional mortgages to African-Americans increased 95 percent and Hispanics 78 percent, compared with the 40 percent increase in all conventional borrowing. Much of this increase lending can be attributed to the development of 144 12/11/00 - PUBLIC HEALTH - BILL 000715 the sub-prime mortgage market. So this is a positive thing. The sub-prime mortgage market was a positive vehicle whereby consumers who previously would not have been able to get the loans were able to get loans and that's why they purchased homes and that's why home ownership is high as up as it is. He goes on to talk about the number of loans and rapid growth in the market. He says, "This access gives people from all walks of life a shot at the American dream, owning a home, and getting capital gains. He goes on to note that predatory lending, and we said this here today and Madam Chairperson I was interested in your comment that the term "predatory lending" is elusive and you compare it to the statement by one of the justices of the Supreme Court who said it's elusive, you know it when you see it and we see to much of it. The problem with that is, and I agree with you and you stated very succinctly and correctly, the problem with it is, as we all agree, that elusiveness translates into ambiguity and ambiguity translates into too much risk for lenders, and too much risk for lenders translates 145 12/11/00 - PUBLIC HEALTH - BILL 000715 into pulling out of the markets and not making loans. And so this elusiveness that you describe really is a problem if you bring it to bear in some kind of legislation which then creates ambiguous standards that leave lenders in a position where they don't know from day to day whether the loans they're making are going to be criticized, whether they're going to be subject to litigation as this bill would subject them to, whether they're going to be subject to severe penalties which this bill would subject them to. And so what happens is, if the loans get too risky, the lenders simply can't make the loans, they can't afford to make the loans. Let me just go on for a moment. Gramlich also points out -- for example, in your bill you prohibit balloon mortgages.
Now balloons, can on the surface sound very negative, but balloon payments if they're made properly and, again, if you excise for a moment these bad actors, and there are bad actors in every endeavor of every walk of life, and if you excise this very small number of bad actors, some of whom who have already been excised permanently 146 12/11/00 - PUBLIC HEALTH - BILL 000715 because they're not in business anymore, and you general marketplace, a balloon loan made by a competent lender with integrity can be very good for a consumer. For example, a consumer maybe far better off with a 15-year 30-year payout loan on a balloon basis where the payments is exactly the same as on a 30-year loan, but the cost that have loan is reduced because it's years. So 10 the percentage of interest reduces as a result of 11 that and makes a loan affordable that otherwise 12 would not have been affordable. So for some 13 consumers, it's a very good product. Why would 14 you eradicate it? Just eradicating it across the 15 board creates a very negative situation for a significant group of individuals who would benefit by that. And I should add that loans today pay off in a five- to seven-year period. That's roughly about what it is. So a 15-year loan is not a 15-year loan; a 30-year loan is not a 30-year loan. In most instances, it's going to pay off way before that, either by way of refire because of move and a sale of a home or whatever. So a balloon payment is an example of one of the issues in the specific bill that is of great 147 12/11/00 - PUBLIC HEALTH - BILL 000715 concern. The same with prepayment penalty. You know, a prepayment penalty reduces the rate of interest that a consumer pays. Why does it reduce that? Because a prepayment penalty literally in many cases stops churning of a loan, stops loan flipping, stops the very thing that we're concerned about so that where somebody wouldn't induce to flip a loan, to refinance it quickly. A prepayment penalty in many instances can stop that. Can it be abused? Yes. Is it always abused? No. So you take something that can be very good and very positive and you delete it, you excise it because you see it in one context where bad. That's the danger we face with this kind of bill. We've been there this before. We've seen this kind of thing before and we know the dangers in it. And in fact, we believe, and we don't have any hard data yet, but we believe we will have in the near future that North Carolina that passed a harsh statute and passed New York that passed a harsh regulation are beginning to see lenders leave the market. And so the 148 12/11/00 - PUBLIC HEALTH - BILL 000715 consumers that we're concerned about, the people sitting in back of me here who are looking for lenders to come into the community and make these kinds of loans where some of the credit is impaired and so on may fine that it's going to be harder and harder to get a loan as a result of these kinds of activities. Even advertising Gramlich says generally advertising enhances information but sometimes it's deceptive. So he then talks about HOEPA and he talks about the trigger for HOEPA where it is. And basically what he decides to do at this point is he says we're not ready to reduce our triggers, we're not ready to bring them down even from 10 and 8. Now, that may sound high, but think about how far below we've come here in Philadelphia in this proposal, way below anything existing in the country that we're aware of below Chicago, certainly. And I'll get to that in a minute. So what Gramlich is saying is we need more hard info, information. We don't have it now. We need to get more data. We need to find out how many loans fall within HOEPA now. We 149 12/11/00 - PUBLIC HEALTH - BILL 000715 need to find out how many loans would fall within HOEPA if we lowered the triggers. We need to find out whether it's significant and whether it's going to help the consumer.
And what he comes down to is what we believe, and that is what you have to do is educate the consumer. That's where we are most lacking. We believe education is the most significant thing that we can do to correct this predatory lending problem and that's where we would work very closely with your Council. We'll work with you on any proposition, but that in particular is an area that we need to work on very desperately because consumers need to be educated so that they can't be fooled and they can't be tricked by some of these lenders when they do pop up from time to time. So we believe between education and enforcement -- and by the way, if you listen to testimony as you did, I know you heard a lot about fraud. We can deal with fraud today. We can deal with it criminally. We can deal with it civilly. The banking department has authority to put a lender out of business if they're engaged in fraud and fraudulent activity. 150 12/11/00 - PUBLIC HEALTH - BILL 000715 So we have all of tools we need if push for strong enforcement, and that's the message that has to out. We need to enforce, not to enact, other laws.
I want to thank all of you for coming here today to help us deal with this, but I have a question.
You talk about education. Is your organization industry prepared to have a phone number where people can call to check out a person that is a predator? One of these companies that we don't -- one out there? We'd appreciate, because I'll be honest, I wouldn't know whether I'm dealing with a good guy or a bad guy. So if you're wanting to keep your industry up here, then why don't you help us by sharing a list of people that you know of that are out there that we shouldn't deal with.
We have that 151 12/11/00 - PUBLIC HEALTH - BILL 000715 information, Councilman.
I'm sorry. My name is Sam Morelli. I am the president-elect of the Pennsylvania Association of Mortgage Bankers.
We have a list of lenders that are the good guys. (Laughter.)
If you're not on the good-guy list, then I guess you don't want to deal with that particular individual. However --
So you're saying today for the record that if your not --
For the record, we can provide you with lists on both the mortgage bankers and I believe the mortgage brokers side.
Could you explain the difference? 152 12/11/00 - PUBLIC HEALTH - BILL 000715
Yes. Mortgage bankers, for the most part, are the lenders. We represent most of the area banks. Beneficial Savings Bank was mentioned here earlier. First Union was mentioned here earlier. We represent a lot of mortgage companies. What happens is we use our funds to close a loan. When you go to a broker, and I should defer to Michael to explain that and I will do that.
I'm Mike Delonzo. I'm the President of the Pennsylvania Association of Mortgage Brokers. Sam is correct. The main difference between a banker and a broker is a broker does not fund its own loan transactions. So in other words, a broker does not close in its name whereas a banker will not close in its name. Both organizations basically do same exactly thing. One closes in its own name, one doesn't.
How do you know -- just quickly, how do you know when take out a mortgage -- give you a personal experience. I 153 12/11/00 - PUBLIC HEALTH - BILL 000715 wanted to refinance my mortgage and I listened very carefully to experts on the radio and they said come in and recast your mortgage. That mean come in and sit down and negotiate a new rate. Well, when I walked in, they said, "Well, you can't do that because we sold your mortgage to Fannie Mae. We don't have it in our own portfolio." Is that what you do?
No, as a broker we don't service loans so -- and basically, bankers and brokers for the most part -- well, brokers do not service any loans. And bankers, the neighborhoods bank will also sell the servicing of loans. So servicing is very seldom kept by a banker or a broker. Is that what you're asking?
No. I found a bank that has my loan in their file which when I want to -- the interest rates come down, I go in and just negotiate the new number and it's done. There are banks out there or lending institutions that don't sell their loan to Fannie Mae; am I right?
That is correct. Most 154 12/11/00 - PUBLIC HEALTH - BILL 000715 of those are local banks and they hold their loans in their own portfolio. If that is the case, Councilman Rizzo, then you do have an opportunity to recast that loan. That's a term that is not used much so you must be an old fellow.
In any event, the recasting is simply the renegotiation of the interest rate and remaining term of a loan with the borrower who originated the loan -- with the lender, I'm sorry, which originated the loan. Most of us in the marketplace today, whether it's you, me, or anyone else, we do not have the ability to recast loans. If we're desiring to change anything with our mortgage loan our normal process is to refinance that loan and that's because of the marketplace. The principal amount of the loans are sold, that's one portion of the loan; and servicing rights of the loan are sold, that's another portioning of the loan. So when a consumer goes and gets a mortgage, there's two portions to that mortgage. One portion may be 155 12/11/00 - PUBLIC HEALTH - BILL 000715 retained by the lender or may be sold to another lender or to Fannie Mae or Freddie Mac, whatever the case maybe. And the other portion, the servicing portion may be retained and serviced by that original lender or may be sold by that original lender, and sold many times thereafter.
One of things, by the way, Councilman, I want to point out, too, and I'm glad you asked the question is that by virtue of this process, we as lenders and brokers bring mortgage financing into Philadelphia and into the State that is out of State money. And that's one of the big features of this industry is that through securitization and through sale to investors out of State and the like, money is brought in from out of State and we constantly replenish money so that when we sell a loan, that replenishes our ability through warehouse lines of credit and the like to make new loans. So we're constantly able to make new loans, sell them and bring more money in.
Since you're able to provide a list of the appropriate people that we should be doing business with, our 156 12/11/00 - PUBLIC HEALTH - BILL 000715 constituents, could you explain is the Better Business Bureau also able to be involved in this? If one of my constituents, if I called the Better Business Bureau and gave the name of the lending group that we heard about today, would they have a record? Does the Better Business Bureau involve themselves in this? Maybe they should.
Probably not. All of the lenders in the State -- in the Commonwealth of Pennsylvania are regulated through the Department of Banking. The Department of Banking has a consumer affairs hotline. I don't have that phone number with me, but it IS available, and that would be my first -- first probably question to find out -- if I am a consumer and I'm dealing with ABC Mortgage Company, does that mortgage company have any complaints against it with the Department of Banking. So that would probably be my first phone call.
Also, there's something going on on a national level very important along the lines that you were talking about, and that is there's a registry being proposed and it's well along the way right now for mortgage brokers 157 12/11/00 - PUBLIC HEALTH - BILL 000715 whereby -- all mortgage originators, I think, actually. And both the Mortgage Bankers of America and National Association of Mortgage Brokers are involved in this process whereby there's going to be a listing, literally, a listing that you can access which will show of all of the originators in the united, including obviously those in Philadelphia, which ones have loans, for example, that were too many early defaults and, you know, all of the triggers that would indicate that this broker is doing something wrong. And so what's going to happen as a result of this -- this is all brand-new. It's just happening, but I think they've been working on that for a couple of years now and it's very, very close to fruition. So we are very close to having a situation where you will be able to literally check and see whether a particular broker is one that you'd be interested in using or not as a result of the past experience. I think, in my judgment, I think it's going to put a lot of brokers out of business and a lot of originators out of the business that shouldn't be in the business. So 158 12/11/00 - PUBLIC HEALTH - BILL 000715 here again, it's evidence our industry cares about the consumer. We don't want these people in the business and we're going to get rid of them.
One quick point as well. The Pennsylvania Association of Mortgage Brokers as well as the bankers, we instituted an ethics committee. We launched it just last year, and we have an 800-number that a consumer can call if they have any questions about a loan product or about a transaction that they're involved in or if they have a complaint. So our industry wants to educate the consumer and also wants to police our own.
I appreciate that and I would hope you'd make that number available. Certainly our media would pick up on that and publish that because it would be very helpful if our constituents had a place to turn to to be able to find out some information about the people that they plan to do business with. Thank you very much. 159 12/11/00 - PUBLIC HEALTH - BILL 000715 Thank you Madam Chair.
Having said all of that and having, I think, shown the sincerity of our desire to get the bad people out of the business, I just want to address what we're really here to do and that is the proposal.
Berg. He built some houses in my district, and through a whole scenario of fraud and deception, caused people -- people bought those homes and they lost them. And right now I understand there's a lawsuit against him. And you spoke earlier about all of these agencies and rules and regulations that are set up to protect the homeowners. None of that protected those people. 160 12/11/00 - PUBLIC HEALTH - BILL 000715
You know, I agree with you to this extent. We are not happy. I'll state it for the record. We are not happy with the enforcement that's taking place anywhere in the country, and we believe it's not a lack of desire. We know in Pennsylvania it's not a lack of desire. The problem, I believe, that exists in Pennsylvania right now is that the Department of Banking which has the desire and the willingness to move against some of these folks that they have jurisdiction over doesn't have the capacity either financially or through its staff and we need to support them and make a real effort to get the kind of staffing and the kind of financial capacity that they need to enforce. They the tools. We have a Mortgage Bankers and Brokers Act, that I'm sorry to say I helped write. It was many years ago in 1985 we started on it. We enacted it in 1989. It became effective in 1990. We just did amendments to that Act recently. We've got, as I said, the continuing education regs. We're trying like crazy to get this thing up to speed, but yet you have a department that has an employment of staff 161 12/11/00 - PUBLIC HEALTH - BILL 000715 that's really not at a level, despite their desires, to really do the job.
If you all care about the consumer, are you lobbying the State Legislature to fund the Banking Department so they can protect the consumer?
The answer is yes, we intend to, but with the permission of the banking department. I mean, we're not going to go to the Legislature unless the department itself says, yes, we would support you in requesting additional funding. We mentioned that to Jim Kauffman who is the acting Secretary of Banking. The prior secretary has left. And he hopefully will be nominated so that we'll have a permanent secretary. And it was -- in September we met with Secretary Kauffman and that was one of the things that we talked to him about. And we believe that he is interested in stronger enforcement. I believe we need the same on the Federal level as well. HOEPA, Home Ownership Equity Protection Act, you've got statute, you've got enforceability, and we think the Federal Reserve needed what it got when it appeared 162 12/11/00 - PUBLIC HEALTH - BILL 000715 before Chairman Leach in May of 2000, which was it got a boot in the rear-end. They said, "You better get to work and you better start enforcing and you better start dealing with this law. And that's the kind of thing that has to happen under the Real Estate Settlement Procedures Act and the Fair Credit Reporting Act. We need, you know, if we spent the kind of time we spend on some of these things and really pushed for money and enforcement at both the State and Federal lever, I think we'd go along way in stopping this problem. So I agree with you, I don't think that we have the kind of enforcement -- and by the way, I have to say with all due respect, and I know that this is all motivated and despite our problems with, you know, the specifics that cause for problems for us and for the consumer, you know, just passing more regulations and more laws, especially where you necessarily have to be ambiguous and where you have other regulators involved with the same industry such as you would have here where you would have the City of Philadelphia and then you would have the Department of Banking and you would have 163 12/11/00 - PUBLIC HEALTH - BILL 000715 confusion because really you'd wind up with two regulators.
Well, since the State Banking Office is not working, we need something in Philadelphia to protect our people until they start acting. (Applause.)
We don't know when they are going to take action. (Applause.)
It's working, but we need to enhance its staff. And I think that rather than put into place, assuming you had jurisdiction to do that, some additional regulation over the same industry that's already regulated under one comprehensive set of rules and regulations, I think, would be a problem. And in fairness --
Well, that legislation, if they every get it together, could always supercede Philadelphia. It doesn't stop us from regulating.
Well, for example, we have -- one of the problems here i the sub-prime 164 12/11/00 - PUBLIC HEALTH - BILL 000715 loan. There's no -- to my knowledge, there's no 3 statute ordinance or anything in the country where they define the sub-prime loan and then make a sub-prime loan, any sub-prime loan if in fact there was to percent over the treasury, now I think it's up to 4 1/2 to 6 percent, something like that, and make that sub-prime loan which is not a high-cost loan, put it in the same category as a high-cost loan and then say, you know, if you do these things you're subject to fines and penalties and lawsuits and everything else. That's unheard of. It's something that would cause a major problem in the industry. If you talk about something that's going to keep people from doing business here, that will do it. I mean, you're telling sub-prime lenders who are not high-cost lenders that they're going to be subject to all of these same provisions. Well, why not subject every single lender --
I don't see the 165 12/11/00 - PUBLIC HEALTH - BILL 000715 bogeyman. How many reputable lenders left Chicago when they passed their bill?
We don't know, but I wouldn't be surprised if a lot left. And I don't know that Chicago -- I still have a problem. I think Chicago's mainly focused on just the depositories and others that they actually do business with. There is some language in there that might indicate otherwise, but the Chicago ordinances really focused primarily on those that they do business with and this does not do that. This -- I mean, this ordinance has to segments to it. One is segment a total regulatory scheme of mortgage lenders similar to the Mortgage Bankers and Brokers Act of Pennsylvania, and that's a real problem in terms of, A, the jurisdiction, whether the City ought to be involved in that kind of thing. But more than that is you've got unique provisions here which are very harmful. Why would we make a sub-prime loan that's not a high-cost loan subject to all of these restrictive provisions because the problem again is, Madam Chairperson, and this I have to 166 12/11/00 - PUBLIC HEALTH - BILL 000715 be clear on, by its nature by what you said about the elusiveness by what everybody said, what happens when put regulations or what-have-you into affect, you create ambiguities necessarily that mean that lenders really don't know until after the fact that they may have a severe problem. And when lenders get into the marketplace where you're talking about impaired credit and therefore they're taking higher risk, okay, what happens under those circumstances is if you make the risk too great, in other words, if you add to the already existing risk of making a high-cost loan which is more likely to go into foreclosure which the lenders do not want, and that's risk for them because they lose money when the foreclose. So they look at those types of loans, and then you say on top of that, Mr. Lender, not only are you going to take all of that risk, but once you get over this percentage then you're going to be subjected to all of these things, fines, penalties, and by the way, citizen lawsuits. And do you know what happens to those citizen lawsuits? What happens is what happened with the other cases, the 167 12/11/00 - PUBLIC HEALTH - BILL 000715 attorneys get involved and they file class-action lawsuits and they pretty much drive everybody out of the market. And you know who gets the money? The attorneys because by the time you divide up what's left after the legal fees in these class action lawsuits, it's very little left for the consumer. And when you put something into a regulation like this as you have where you specifically give the citizens the right -- and I know again I have the greatest respect for your desires and intentions. I know you mean very well with this, but when you do that, I will guarantee you that the day that anything like this comes into effect, you're going to start to see citizen suits. But it's not going benefit the citizen, it's going to be the plaintiffs' class-action attorneys that are going jump all over this. And, boy, are we going to have a problem in this city and then you're going to see fewer loans and then you're going to see people who need the loans who are going to be foreclosed on because they can't refinance and then you're going to lose tax money and everything else. And I would really caution that this business is so 168 12/11/00 - PUBLIC HEALTH - BILL 000715 sensitive that when you put provisions like that into regulation, it causes severe problems for the consumer as well as the industry. And that's only a part of it. I mean, I could go through and my -- I would recommend, by the way, I don't know that this is the best way to analyze a new law and it's certainly not the best way to analyze an amendment we saw two hours ago.
What I would strongly recommend and request is that before any precipitous action is taken that could result in some real problems that we would be more than happy -- and we do this on a State level as well and we do it on a Federal level as well, that we sit down and meet and talk about some of these issues in a forum where we could spend some time on the specifics because it requires some analysis, each of these provisions. For example, if we wanted to talk about, you know, points and fees, you know, not allowing somebody to, for example, to finance points or fees and charges, well, again, as Gramlich said, does it have a positive; yeah. Those who are abusing it, you've done something good. But those who aren't 169 12/11/00 - PUBLIC HEALTH - BILL 000715 abusing it, you've removed from the marketplace those people who do not have the upfront money. You're saying you can't finance it and so when they come into our offices, you're sitting with that poor person, and that person says, "Gee, well, I don't have that kind of upfront money to put up where you could have financed it. And he said, "Well, Philadelphia passed this ordinance, I cannot finance those fees. " And so again, you take whatever segment that is, whether it's a percentage or 10 percent or 20 percent of the people are now without the loan that they could have had. And what you're going to see is this home ownership rate that we're trying so hard to bring up to 70 percent from 67 percent starts to diminish. And then finally, the consumers will be here knocking on the door saying, "You know what? We've created an onerous situation here. We've got to correct it. " So, you know, I would just caution and I would, again, make the request with all 170 12/11/00 - PUBLIC HEALTH - BILL 000715 sincerity we are available, we will spend the time. We did the other day. We would spend whatever time is necessary because we think it's that important to sit down with you and your staff and whoever you would like us to and go over the detail of this. And I would also caution against relying on any other city. I know Chicago is a big part of this, because we haven't had enough time to have any real experience there. And by the way, a lot of the lenders, it was interesting, the City Councilmembers I read in the paper when this thing actually was first put up said, you know, we're regulating the depository institutions telling them they can't involve themselves in predatory lending, but as far as we know, none of them are involved in predatory lending. So it was even questionable as to what the incentive was to put it forth in the first place, but at the very least, we have to be very careful and see what's going on out there because if, in fact, Chicago and North Carolina and New York, which are the few that have actually finally enacted something, are 171 12/11/00 - PUBLIC HEALTH - BILL 000715 having real problems and we believe -- we certainly know New York and North Carolina are, then it wouldn't surprise us at all if Chicago was also experiencing some severe problems. We don't want to bring those to Philadelphia.
You heard the lady who talked about the fact that she only need $1500 for a heater. She ended up with a $33,000, $50,000 mortgage. Tell me, how do you protect her? What would you do to protect her? That's what we want. We want to protect those people who get ripped off. MR. LEVY I wish I could tell you that there was a way to protect everybody, but I will tell you without equivocation that neither would this nor anything else will you ever protect everybody. However, I will say this, I believe, I have a very strong belief that with strong enforcement, those involved in this process -- because it's a deterrent. When you see that it's very likely that if I do this, I'm going to get caught and I'm going to be prosecuted and I'm going to lose license and I may go to jail or whatever else, that's the greatest incentive to 172 12/11/00 - PUBLIC HEALTH - BILL 000715 not doing it because no matter what provisions you put into place, somebody who's willing to defraud and be predatory is going to just find a way around, go around, take risks. That's what it's all about. And that, interestingly enough, raises the very point I'm concerned about because you know what laws do that impose restrictions like these? The good lenders that don't want to take the risk and are not willing to just ignore the law go out of the market. And what you have left are the very ones that you want to get out because they don't care. They're the ones that are willing to say, you know, I'm going take a shot and make this loan anyway, because they know today that they're in jeopardy. They know darn well that a loan like that, I mean, that description, that person should not --
So raising the fees and charging high interest rates justifies lending money to people who are high-risk, so you can make money if they're high risk?
No, no, no, no. I'm not saying that to that level. What we're saying is it's like anything else, if I come to you say and 173 12/11/00 - PUBLIC HEALTH - BILL 000715 I say, "I need a loan, but let me tell you a little about my background. I've had a lot of problems in making payments on time for whatever reason" -- now, I'm not talking about people that are ill or, you know, have problems; just somebody who just doesn't do it very well. "And I have had problems and I was in bankruptcy for a while and I'm not working regularly," and what have you. And then pull up a credit score, and the credit scores today make it even more difficult for consumers because they are based upon literally an analysis of millions, millions, I'm not overemphasizing exaggerating, millions of files that have been analyzed and they have come up with criteria. They say if a person has this, this, and this in their background, they're more likely to default on this loan. So in essence, you're coming the a lender and saying, "Look, here's a loan that is more likely to be defaulted than this loan, so if there is a default, you know, here's what you have to go through to try and you're going to have to go after the consumer, you may have to file suit. You may have to foreclose, you have to do this, you may 174 12/11/00 - PUBLIC HEALTH - BILL 000715 have to do that." Well, are you going make that loan for the same money and take that risk when, theoretically, there were other loans that you could make that are of better loan quality. And you would say, "No, I've got to earn a little more on that loan." Now, to feed on this poor person inappropriately and improperly to say, "Well, now that I've got you, you know, I'm going get every nickel out of you I can and just, you know." That's where the horror stories -- those people have to be put out of business, and that's why I say to put them out, the way to do it is to create an enforcement mechanism that is strong. And I'm telling you, I mean, we would fight tooth and nail for the strongest kind of potential enforcement that we could get. Our industry would fight for that, with you, together with you and anyone else to get these people out of business. That's with what we need to do. And we have to publicize it. These people have to know that, you know, you come into the City of Philadelphia and you make one of these loans and you defraud somebody, you're in 175 12/11/00 - PUBLIC HEALTH - BILL 000715 deep trouble and we're going to get you. And that's what we need to do.
You mentioned something that got my attention. Most people in this room, and I don't want to be disrespectful, including me, you don't have the clue what's on your credit report.
You make an application for a loan and all of a sudden what you just described because there's a flaw on the credit. I mean, they had me hooked up with some guy that lived in Chicago. I mean, this guy, I hope he changes his name. But no one brought that to my attention. They presented the rate to me based on my credit history. You mean to say that a potential lender doesn't sit down with a person and say, "Look, here's a problem. Could you explain it?" If it's in error, can't we go back to Transunion or whatever the company is that manages these documents, this data? I don't see a real true effort to try to be helpful to the lender when there are problems associated 176 12/11/00 - PUBLIC HEALTH - BILL 000715 with the credit report.
It's a good point, Councilman. And, in fact, it just so happens that this whole thing has turned around pretty much completely very, very recently in the last six months, eight months, a year.
Yeah, I know. I haven't had lunch either. I figured that's the way to keep you short, don't give you lunch. Only being facetious. I'm sure we're all hungry at this point. In any event, what's happening with the credit reports is -- just a quick history on it. At one point, that was all deemed to be totally proprietary to the repositories that hold that credit information and to Fair Isaac who created it in the first place and then there are 177 12/11/00 - PUBLIC HEALTH - BILL 000715 others that have been created since then. And you couldn't get at all to a consumer. They didn't want you to give it to a consumer. We thought it was ridiculous that a consumer couldn't even know the number at one point. Well, what's happened since then, in addition to laws that have been enacted and so on, the companies themselves have finally turned around. Fannie Mae and Freddie Mac and Transunion among them and have said now all of a sudden it's great, give it to the consumer, explain it to the consumer, and so on. So it is no longer proprietary information. In essence, the kind of thing you're asking for now is given to the consumer regularly and you can discuss -- there are also, by the way, modifying it in a way in which you can make a quick change so that if you're sitting there and you're trying to make a loan and you've got a 580 credit scoring, you need a 620 to get that particular loan at the right price, you can show that, oh, we have to change this on the credit report because this in error, it's the wrong name or whatever and you make a fast change now. 178 12/11/00 - PUBLIC HEALTH - BILL 000715
Again, part of the education process, I believe that most of us sitting in this room are entitled to a free credit report. Maybe you can clarify that. I believe if anyone here wanted, because of a court decision again, some problem developed that most people are entitled to view that credit report.
Councilman, most of the lenders that are members of our organizations, both of our organizations, provide free credit counseling and free credit reports for each of their applicants or proposed applicants at the time that their meeting has taken place.
I don't believe you have to wait for a loan application. I believe anyone in this room could call --
They can do that on the outside, but talking about the mortgage industry.
If you want to keep the subject within our universe, then each one of the people in our organizations have a responsibility, that's part of our ethics and our pledge and we sit with our consumers to review 179 12/11/00 - PUBLIC HEALTH - BILL 000715 their credit scenario if there is a problem.
I appreciate that. But also I think it's also good for people to hear and know that they can call Transunion. I believe they're one of the organizations.
And request a copy of their credit report if they want one.
You can get them now that way, but there might be a moderate charge, I don't know.
Nor would I have any problem, and I don't think the industry would, if there were -- if we legislated that and said that you have to give them free credit report once a year or whatever?
It would save a lot of headaches if people knew prior to coming to visiting you the status of their thank you so that they could deal with that and not delay the process. Thank you, Madam Chair. 180 12/11/00 - PUBLIC HEALTH - BILL 000715
Councilman, that's only one of the issues that is involved with the lending or borrowing scenario. You listen to a lot of your themes today, and a lot of your themes had to do with home improvements, contractors, and the like. And people signing things without reading them or knowing what they're signing. I mean, we have to somehow or another -- sure, individuals take responsibility for what they do, but you can't go out and you can't be signing papers, you can't be signing documents, you can't be entering into agreements of sale unless you are respected and you know what you're doing. So I think education is the primary issue that's come out of these sessions or issues that is we looked at today.
How much information do you think a person who wants to buy a house should know? The young lady who sat there and talked about that her mortgage was sold three or four times. It may be in the sale document, but it's probably in fine print and she can't read it. How much upfront information would you 181 12/11/00 - PUBLIC HEALTH - BILL 000715 support giving to people who want to buy a house, your mortgage may be sold and if it is sold you have this right or it may go up. And, you know, we can get into the whole details of her case and why every time it was sold to someone, it went up. Why did it do that. I mean, how much information do you believe a consumer should have in a home transaction to protect him or herself? Because we know people get real excited. We have to put allowances in for being human. And people want a home and sometimes they don't always -- they get rose-colored glasses while they're going out to bite house and they don't have the ability to read the fine print. Some of us who may have a college degree can't read the fine print and we have to get lawyers to do it. So you're asking someone who may be a senior citizen who just don't have the wherewithal to do that needs this information upfront, the rate upfront in bold print so they can read it, so they don't have to have a magnifying glass to see it. All the terms are -- what are they getting into? What does your industry propose to do to help them ?
All of the initial 182 12/11/00 - PUBLIC HEALTH - BILL 000715 disclosures are provided on the test application. However, let's step back just a little bit. Let's say an applicant goes through the process and then gets to the closing table and all of the situations that you looked at today were refinanced situations except for one. So let's just stay on the refinance situations for a second. So now we go to the closing table where the attorney comes to the kitchen table to settle the loan. From that point on, there are two things that happen. First of all, in a normal scenario, there's a three-day rescission period. So if I'm not happy with my transaction, I have the right as a borrower to cancel that transaction within three days from the time I go to closing, so this is after the closing. So if something happens, you go back home, you say, "You know what? I was supposed to get 8 percent and I'm paying 13 percent. My payment was supposed to be $400 and now we're paying $700." You have the right to cancel that transaction right then and there. In addition, if it is a --
That's a Federal law 183 12/11/00 - PUBLIC HEALTH - BILL 000715 requirement.
In addition, if it is a high-cost loan, there is also a disclosure, the Section 32 disclosure which details all of the costs involved with the transaction and, again, these deal only with refinanced loans; and if it is a high-cost loan, those figures are supposed to be disclosed and, again, the consumer has the right to cancel the transaction with absolutely no cost to the consumer within 72 hours after the closing.
A consumer gets every dollar back that they put up if they rescind under the Truth in Lending Act on the three-day period. They get every single penny back. In fact, not only will they get back what the broker or the lender paid, took in, but they actually get back credit report fees and appraisals. So that it actually --
I'm saying if you want to see how strong that law is, when you rescind during three-day period, what you get back is not only the fees that the lender took, but you get 184 12/11/00 - PUBLIC HEALTH - BILL 000715 back if the lender took, let's say, he charged you X dollars to pay for the appraisal and the credit, you get that back too. So the lender is now out of pocket. The lender actually loses that money because the appraiser and the credit report agency has to be paid. So all that money goes back to the borrower, the borrower is back exactly where they started. But I wanted to add that something else that's been worked on now for we're into the second or third year of real effort on it is what we call mortgage reform. Now, we're doing that on a national level. It's the Mortgage Bankers of America and the National Association Mortgage Brokers has a mortgage reform package that is exactly designed to help on the mortgage side, obviously, to give better clarifying disclosures earlier to a consumer. And the idea is if you give a consumer more clear disclosures early enough, they can use those disclosures to shop other lenders so they're much less likely to get caught up with a predatory lender because now they'll be able to walk away with this mortgage reform package and see the numbers very clearly. 185 12/11/00 - PUBLIC HEALTH - BILL 000715 One of the things being proposed, for example, is what they call packet services where right now you can have each service separately, appraisal and credit and this fee and that fee and title and what-have-you. They're trying to come to a point where you'll get one cost. So you'll have the rate, the points, and cost. And that cost will incorporate everything, title and so on. And so now, the consumer has these three numbers, and theoretically, at least, they get them early and they can then go from lender to lender and say "Well, all right, this loan is 8 percent, 1 point, and the package cost is $900. What do you have?" You have three numbers and that's it. So that's the kind of thing we're working on. And this mortgage reform package is going to be put into bill form, I understand, in 2001 and put into the legislative hopper and it's being worked on and pushed very, very hard right at the present time as we speak so...
Good afternoon, gentlemen. You mentioned that enforcement, once you create an enforcement mechanism, who do you 186 12/11/00 - PUBLIC HEALTH - BILL 000715 believe in your judgment is in the best position to enforce any kind of penalties or whatever?
Well, my belief is that you need someone to enforce that has the most expertise with respect to the industry that's being enforced against because otherwise you run into the danger of being involved with situations where you're going to try to enforce and you're going lose cases and you're going to have problems. And obviously, we have an agency that's expert within the Commonwealth which is the Department of Banking which has the regulatory authority now over the mortgage bankers and mortgage brokers and has had the opportunity to work with us since, as I said, 1989, 1990 to understand the industry which is very complex. I mean, it's not a simple industry to comprehend in terms of the way it operate and that's why you have to be so careful in regulating it because we're not on institution that takes a deposit and then makes a loan. We're people who have what we call, for example, just to give you a little bit of difference, you have with table funding parties. In other words, 187 12/11/00 - PUBLIC HEALTH - BILL 000715 somebody will table-fund the loan. So what does that mean? It means that I make a loan with your money. Your money's being used at the table. You're not lending it to me, it's actually your money. That loan may close in my name and be simultaneously assigned to you. It may close in your name or I may be a lender that works with a warehouse line of credit and I have your whole line of credit and I make the loan with line of credit, the funds from the line of credit, then I pay off the line of credit when I sell the loan and then start all over again and make more loans. So even those two scenarios -- Then you've got the scenario of securitization where I take all these loans that I'm making and I put them in a portfolios of varying types and I sell in the securities market, then I sell to Fannie and I sell to Freddie and I have to comply with all of their requirements. I have to comply -- with FHA, I've got a tremendous regulatory authority there. I mean, you've got Federal Housing Administration, when you make an FHA loan, you've got a whole plethora of regulatory information that you've 188 12/11/00 - PUBLIC HEALTH - BILL 000715 got to comply with, mortgagee letters and everything else. And they do have strong enforcement, and Cuomo has really pushed the enforcement side on FHA lending and they're getting tough. So to that extent, that's a good thing.
To hear that then supports the intention that there has to be some legislation at the State level to ensure that little people don't continue to be burdened with this kind of --
If needed, I would say yes. I mean, that's the place to do it. What you do is another issue and that's why we discussed the kind of problems we have here. If we were going to do something on the State level, I would like to see something that requires education in the schools, number one. I think that's important. We've got to take on that obligation, and that's not easy to do because 189 12/11/00 - PUBLIC HEALTH - BILL 000715 there are parties that are going to oppose you. But we need financial education in our school systems and we can't be afraid to fight for it and we can't be afraid to do it because that's the way you make a major impact going forward is education on financial issues then enforcement, enhancing the enforcement capability of the department, and it take legislation to increase funding and to give them the kind of staffing that they need to really make a difference. But those are the folks that would have the expertise in all of these areas that are necessary to understand these transactions.
Either fortunately or unfortunately, depending upon which side talking to, we, the City, is now in a position where we are forced to reckon with the issue. You are a member of Professional Bankers Association, you mentioned?
Has this issue ever been an agenda item at any of those meetings? 190 12/11/00 - PUBLIC HEALTH - BILL 000715
What was the reaction or the intent knowing that at some juncture members of your group would be looking at this legislation in their face?
Well, as we said, we're doing a couple things. Number one, and this is very, very current, we're looking at strengthening educational requirements and possibly adding some licensure requirements with regard to the people who are out there actually meeting with the consumers. Those are what we call loan officers. And we feel that we need to educate those folks, and we're talking very seriously about creating educational requirements addressing them in particular because they're the people out there meeting with the consumer and selling the product.
What about the flip side for those in the industry who are engaging in these unethical practices, what kind of remedies or ideas have been expressed amongst your group to deal with your colleagues and your 191 12/11/00 - PUBLIC HEALTH - BILL 000715 comrades who are engaging in this?
That's enforcement issue and that's what we brought to the attention of the department. We talked about that. As I said in September directly with the acting secretary, the banking, who indicated he was in favor of stronger enforcement and talked about it with some of the deputy secretaries and it's something we're pushing we are asking them to enforce the existing laws against fraud and against the kind of manipulation that was taking place as described here today in a much stronger way than it ever done it in the past. So that's a major effort on our part. Then we have the mortgage reform effort on a National level. We have the registry on a National level. The mortgage brokers, I don't know if you were here when we were talking about that, but creating mechanisms where you can tell a good broker from a bad broker to make it simple.
So you create the mechanism. What happens after that point in terms of informing consumers, if you will, of 192 12/11/00 - PUBLIC HEALTH - BILL 000715 that reality, of that fact, because you in the industry may very well know that, but it means absolutely nothing to individuals who are most impacted by this. It means nothing.
It's a good question. What we would be doing -- a twofold basis, number one, what would happen is a broker, let's say, for example, if it were a broker would basically go out of business ultimately because the lenders in dealing with the brokers would have a mechanism they don't have now. See, we don't have a way to check on a broker right now or somebody doing business as a broker because most of our brokers are very good people and do a good job. So the ones that are not, we don't have a way to know that offhand. A broker may walk into a lender's office and say "I'd like to do business," and they may seem fine, but they may have a bad history. We're going to create that history in a way that you can access it. So lenders are going to stop doing business with the brokers that aren't doing a good job. If their loans are constantly going into default where people constantly complaining about predatory 193 12/11/00 - PUBLIC HEALTH - BILL 000715 lending and that kind of thing, they're going to be out of business.
So then the responsibility falls on the back of the lender to inform the consumer, that XYZ Broker is the wrong way to go?
Well, the broker wouldn't do business with you. The broker couldn't get a loan because the broker wouldn't be able to get a loan.
For that consumer. They'd go out of business, they couldn't exist. So that's one way we're trying to stop them, that end of it and then education of the consumer at the same time and reforming our disclosure laws on a Federal level so that you get this package of information early enough so you can shop among lenders. The best way to stop it, obviously, is to let somebody shop. If you go to two or three lenders and one says, "I'm going to charge you 22 points and, you know, 18 percent," another lender says, "I'm going to charge you percent and 1.8 25 and a half percent," I mean, that's pretty simple 194 1 12/11/00 - PUBLIC HEALTH - BILL 000715 and your just not going to do business with that 22-point lender. So with that kind of information, but it's got to be clear and unequivocal and presented in a way so that anybody can easily understand it. If you come up with this three-number system, that might do it.
My final question is, so in your best estimation you do believe that the State regulatory agency is the best one to enforce?
Is that to suggest implicitly that we may be limited in what we can do at the local level for enforcement?
Well, I think it's -- yes, I think you may be limited, number one. Number two, I don't know that this kind of thing would add much in the way of actually accomplishing your goals. I think you'd accomplish it much more completely and quicker and more efficiently by working with the State and getting the State agency to do what it should do because they regulate already. I mean, they've got all the power that's already existing, plus the dangers 195 12/11/00 - PUBLIC HEALTH - BILL 000715 inherent in now imposing additional regulation that don't exist on a State level upon people that now have to confront this and may say, you know, "This is too much for me. I'd rather do business in Pittsburgh and here and there and I'm just not going to do it in Philly because it's just too much."
That begs me to ask the worst-case scenario. We know the State agencies may not see this as a priority. It doesn't affect their bottom line so they would never make this a priority. (Applause.)
We see that happening today with matters that matter to us in the City simply never make the radar screen at the State level. So given that potential reality, might you entertain sitting down with members of this legislative body to put in place enforcement avenues, since we know already that the State oftentimes doesn't see -- their priorities are not our priorities.
We'd work with you on that, sure. 196 12/11/00 - PUBLIC HEALTH - BILL 000715
I believe Councilman Cohen had a question for you but, he had to...