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Good morning morning and thank you for this opportunity to speak before you today about predatory lending.
We should all be proud of the positive developments in mortgage and housing markets that have taken place during the last decade. During the last decade, the percentage of Americans who have achieved the dream of home ownership has increased significantly. This increase in home ownership has, in part, been fueled by the broader availability of mortgage-related credit to all types of borrowers. This increase in credit availability has been most evident in the subprime market, which primarily serves borrowers with past credit problems.
Mortgage brokers have played an important role in expanding credit availability and they will continue to do so in the future. Mortgage brokers provide borrowers with an important service by making a wide array of loan products available. Mortgage brokers also have the ability - through a lower cost structure - to make their services available to residents of communities that have been overlooked by traditional financial institutions.
While clearly much has been done to improve home ownership opportunities and expand access to credit, we must also focus on preserving those opportunities by keeping people in their homes and protecting them from unscrupulous mortgage market participants. A key component of that goal is eliminating what has come to be known as predatory lending.
We all know that predatory lending is difficult to clearly define. Predatory lending is generally characterized by abusive lending practices that include deception, fraud, and other practices that are unfair to borrowers. In the most egregious cases, loans have been made with little or no regard for a borrower's ability to repay, and borrowers have engaged in multiple refinance transactions that provide little or no benefit to a borrower. These types of abusive lending practices can result in the stripping of borrowers' equity and, in the worst case, borrowers losing their homes. The result is not only devastating to the borrower, but it also can contribute to a general decline in the conditions of the surrounding neighborhood.
As different methods for combating predatory lending are considered, we must be careful not to damage what has generally been a positive development - the expansion of the availability of credit through the subprime market. Responsible providers of subprime credit provide an important source of credit to borrowers with damaged credit histories. The current services of responsible subprime credit providers will not be easily replaced by government programs or through the activities of other lending institutions.
The Federal government has recently or is currently undertaking a number of efforts related to disclosures and enforcement that should contribute to a reduction in predatory lending.
First, the Department of Housing and Urban Development is taking a new look at improving mortgage disclosures and considering ways to improve accountability within Federal Housing Administration loan programs. Improved mortgage disclosures could help to combat predatory lending by providing better information to borrowers on the cost of a loan. I understand that this is an important issue to mortgage brokers, and I trust that you have made your views known to HUD.
Second, the Board of Governors of the Federal Reserve System has recently finalized revisions to its regulations under the Home Ownership and Equity Protection Act (HOEPA) and the Home Mortgage Disclosure Act (HMDA). The new HOEPA regulations will expand the protections available under HOEPA to a broader group of borrowers and the HMDA regulations will increase the amount of information on subprime lending activities.
Third, the Justice Department and the Federal Trade Commission have taken aggressive steps in recent years to crack down on abusive lending through several high profile cases that could mean broad redress for many consumers. Because many of the practices associated with predatory lending are already illegal, stronger enforcement is a key component of any solution to the problem. In addition to stronger enforcement at the Federal level, increased enforcement activity at the state level is also needed.
Treasury's Ideas for Combating Predatory Lending
While these recent Federal actions should be useful in reducing abusive lending practices associated with predatory lending, is there more that we can do? At least two areas have stood out to us - improved consumer education and encouraging greater mortgage industry responsibility.
We must do more to educate borrowers so they are in a better position to provide a first line of defense against abusive lending practices. To better prepare consumers for this task, the Federal government should take a leadership role in educational efforts. My office is working with others in the Administration and with industry, education, and non-profit groups to enhance financial literacy. In addition, the Community Development Financial Institutions Fund - also a part of my office - is increasingly building financial literacy programs into its award-making process.
There is a lot of great work being done by the private sector - including many of the institutions and groups that are members of the National Association of Affordable Housing Lenders - to educate consumers about the mortgage process, and the financial responsibilities of home ownership, and general principles of consumer finance. Educational resources provided through the private sector - such as Mortgage 101 on the National Association of Mortgage Brokers website - provide consumers the ability to better understand the mortgage process and choices that they have regarding their mortgage. We applaud those efforts and hope to continue working with financial institutions, mortgage market participants,mortgage industry and consumer groups to improve borrower education.
The second area we have been considering is what the Federal government can do to encourage private sector efforts to eliminate abusive lending practices. One area we have been examining is whether it would be useful for the Federal government to play a role in encouraging continued debate, discussion, and implementation of best practices as a means of combating predatory lending.
Best practices could help consumers navigate the complex mortgage financing process by giving them some assurance that the mortgage market participant with whom they are dealing adheres to certain core standards. I am strongly committed to an aggressive program of financial education to help consumers better protect themselves against abusive lending practices. The reality is, however, that home financing is exceedingly complex and many homeowners do not fully understand the documents they sign at closing if they bother to read them at all. Community groups can also play an important role by encouraging their constituents to deal with mortgage market participants that adhere to a responsible code of best practices.
All components of the mortgage market - brokers, lenders, and secondary market institutions - have a role to play in combating predatory lending.
Many prime and subprime mortgage lenders have implemented best practices or lending guidelines to address predatory lending. Many of these lending guidelines were developed with active participation of community groups.
Some of the practices addressed in current lending guidelines include: prohibiting the sale and financing of single premium credit life insurance; limiting or prohibiting loans with balloon terms or negative amortization features; limiting prepayment penalties and providing borrowers the option of a loan without a prepayment penalty; requiring full credit bureau reporting; requiring documentation of a borrower's ability to repay; limiting refinancing to prevent loan flipping; and requiring that borrowers be given fair access to prime credit.
Many such guidelines also address developing standards for third party relationships; implementing procedures to mitigate foreclosures; restricting charges for points and fees; and requiring fair and less burdensome arbitration procedures.
We have been taking a detailed look at these lending guidelines and there appears to be a fair amount of agreement in a number of areas. Given that there is a fair amount of agreement among individual institutions' best practices and lending guidelines, it seems that it might be possible to encourage wider adoption of best practices throughout the mortgage industry.
I believe that wider adoption of best practices by lenders has the potential to reduce abusive lending practices and to provide real value to consumers. However, in today's mortgage market lenders are only one part of the mortgage process.
In many cases the first contact a consumer makes in the mortgage process is with a mortgage broker. As I noted at the outset, mortgage brokers have played and will continue to play an important role in expanding access to credit. While the majority of mortgage brokers follow responsible business practices, some abusive lending practices - such as loan flipping - are often linked to brokers. It is in your best interest and in our interest, and most importantly in consumers' best interest, that mortgage brokers take steps to eliminate bad actors from your industry.
As you all know, lenders are not alone in adopting best practices to combat predatory lending. The National Association of Mortgage Brokers has also developed a code of ethics and best business practices guidelines. We appreciate the willingness of the National Association of Mortgage Brokers to participate with us in seeking to expand and strengthen best practices for the mortgage industry.
Is there more that mortgage brokers can do to combat predatory lending? One weakness appears to be that regulation and licensing of mortgage brokers is done very inconsistently at the state level. Some states have no or minimal licensing requirements and state law enforcement agencies often lack resources to enforce existing laws. It is clearly in the interest of this organization to work toward eliminating the irresponsible brokers that detract from the positive role played by mortgage brokers. I would urge your organization to play a pro-active role in improving the licensing requirements at the state level as a way toward eliminating irresponsible brokers.
Another group of participants in the mortgage process that could contribute to combating predatory lending is the secondary mortgage market. The secondary mortgage market - either through the housing GSEs or Wall Street investment banks - provides a link between capital market funding and mortgage finance to consumers. While clearly these firms do not have a direct relationship to the consumer in the same way as mortgage brokers or lenders, secondary market firms do have a responsibility to ensure that the lenders to whom they provide funding adhere to high standards of professionalism and corporate citizenship.
I encourage Wall Street firms, in particular, to undertake development of more formal standards of conduct for the lenders with whom they do business. It is in the reputational as well as financial interest of Wall Street firms to take steps to ensure that the mortgages they securitize are issued in accordance with sound underwriting standards and that the consumers who have received such mortgages have the ability to repay them. The number of lenders adhering to responsible best practices could be expanded significantly if the secondary mortgage market made this issue a high priority.
I would greatly appreciate the thoughts and input of the members of this organization on encouraging adoption of best practices and other steps the Federal government can take to combat predatory lending. There is a tremendous amount of expertise in this room, and I look forward to the opportunity to work with you in tackling this important issue.
In closing, I would like to thank the National Association of Mortgage Brokers for inviting me to speak here today.