TESTIMONY OF NEILL FENDLY, PRESIDENT-ELECT,
NATIONAL ASSOCIATION OF MORTGAGE BROKERS
BEFORE THE U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING AND
MAY 24, 2000
Good morning, Mr. Chairman and other members of the Committee, my name is Neill Fendly. I am President-Elect of the National Association of Mortgage Brokers (NAMB), the nations largest organization exclusively representing the interests of the mortgage brokerage industry. We appreciate the opportunity to address you today on the subject of abusive mortgage lending practices.
NAMB currently has over 14,000 members and 39 state affiliate associations nationwide.NAMB provides education, certification, industry representation, and publications for the mortgage broker industry. NAMB members subscribe to a strict code of ethics and a set of best business practices that promote integrity, confidentiality, and above all, the highest levels of professional service to the consumer.
Today, the nation enjoys an all-time record rate of homeownership. While many factors have contributed to this record of success, one of the principal factors has been the rise of wholesale lending through mortgage brokers. Mortgage brokers have brought consumers more choices in loan programs and products than they can obtain from a branch office of even the largest national retail lender. Brokers also offer consumers superior expertise and assistance in getting through the tedious and complicated loan process, often finding loans for borrowers that may have been turned down by other lenders. Meanwhile, mortgage brokers offer lenders a far less expensive alternative for nationwide product distribution without huge investments in "brick and mortar."
In light of these realities, it is no surprise that consumers have increasingly turned to mortgage brokers. Today, mortgage brokers originate more than sixty percent of all residential mortgages in America. The rise of the mortgage broker has been accompanied by a decline in mortgage interest rates and closing costs, an increase in the homeownership rate, and an explosion in the number of mortgage products available to consumers. These positive developments are not mere coincidences. They would not have been possible without the advent of wholesale lending through mortgage brokers.
NAMB has been engaged from the beginning in efforts to reform the laws regulating mortgage originations. We participated in the Negotiated Rulemaking convened by HUD in 1995, which sought to resolve the issues surrounding mortgage broker compensation under RESPA. We participated in the Mortgage Reform Working Group in 1997 and 98, which sought to reach a consensus on how to reform RESPA and TILA. We participated in HUDs initiative that yielded Policy Statement 1999-1 on mortgage broker compensation. And we are participating in HUDs and the Treasury Departments current joint task force.
We have been engaged in HUDs every effort to pursue a consensus on comprehensive reform. Although there is no consensus to date, we remain committed to the process. We have a high regard for the representatives of the Department, consumer advocates, and other industry groups who have participated, and we encourage HUD, under Secretary Cuomos leadership and through his dedicated staff, to continue pursuing this worthwhile objective.
NAMB and its members are proud of the foregoing record of accomplishment and our contribution toward consumers greater access to mortgage finance and homeownership opportunity. Consequently, we are in no way here to serve as apologists for those in the industry that commit abuse in their dealings with consumers. Rather, we believe the abusers generally are non-mainstream companies and individuals that ignore the laws that apply to them. They routinely ignore state licensing and consumer protection laws, and they routinely flout the federal Home Ownership and Equity Protection Act (HOEPA), all of which apply to them. We therefore believe that the best solution is twofold: increased enforcement of existing laws and industry self-regulation.
That being said, we are aware that many have voiced support for additional legislation to address mortgage market abuses. To the extent Congress agrees, we would hope to participate, as we are today, in the process that develops any such legislation. Our chief concern is that any new legislative remedy be finely tuned to address specific problems as narrowly as possible. Further law in this area, such as overly expansive restrictions on certain types of loan terms and burdensome disclosure and other affirmative obligations, can have unintended consequences. These include reducing competition in the marketplace by driving participants and investors away and elimination of consumer access to mortgage financing, both because of reduced capital in the market and through reduction in available loan feature and product options. We caution this Committee and Congress against acting too hastily with additional legislation, without considering the twin alternatives of increased enforcement and self-regulation we propose.
Chairman Leachs letter of invitation to NAMB to testify here today set forth six questions. Following are our specific responses to each of those questions.
"Predatory lending" is inherently abusive and, by design, takes advantage of vulnerable consumers. The result is inordinate profits at the expense of those consumers, with no corresponding benefit to them. Subprime lending, on the other hand, has created beneficial access to credit for many people who otherwise would have none. Consumers with blemished credit who cannot qualify for conventional, "prime" market loans still deserve the opportunity to borrow and work their credit records back up to "A" levels. The legitimate subprime market makes that possible, as Federal Reserve Governor Edward Gramlich, HUD Secretary Andrew Cuomo, and Leadership Conference on Civil Rights Executive Director Wade Henderson all recently have acknowledged.
Most, though perhaps not all, abusive practices occur in the subprime market. At the same time, however, only a tiny percentage of the subprime loans made are abusive. The great majority of subprime lending in the nation today results in benefits to consumers at reasonable, appropriately risk-based prices. These consumers understand what they are getting and choose the products they do, with the loan terms and features that they have, because they have examined the options and, often, received the advice of knowledgeable loan originators.
Still, it is difficult to delineate in practice what is easy to distinguish in principle. In some rare cases, for instance, a balloon term in a given loan is abusive because the borrower has not been advised that the loan contains such a feature and is not prepared for the practical ramifications. Further, it may be that the borrowers situation does not make such a feature appropriate. Yet, very often, a balloon is a valuable tool to help a borrower obtain a lower interest rate; if the borrowers circumstances are such that a refinance loan should be reasonably feasible at some time in the future, and possibly even at a better rate because the borrower has improved his or her credit standing in the meanwhile, then a balloon term can be a desirable feature.
Similar ambiguity exists for many loan terms or conditions associated with subprime loans that frequently are decried as abusive, including negative amortization, prepayment penalties, financing of closing costs, and even arbitration clauses. In certain circumstances each of these may be abusive, but in the majority of cases they provide the consumer with a feature that especially fits his or her unique circumstances, offers a reduced interest rate, or both.
For this reason, few loan terms are always abusive. Rather, whether they are abusive is a question that turns on context and circumstances, from case to case. We discuss below the reasons why we do not favor extensive new legislation to expand the body of law governing our industry, including the danger of overly broad restrictions that may prevent a few abuses but also would prevent many beneficial transactions for consumers. Instead, we support enhanced enforcement of existing law and the further development of industry self-regulation efforts.
Nevertheless, if there is to be legislation despite our views, we support certain targeted restrictions on certain types of loan terms. For instance, we would support elimination of HOEPAs current pattern or practice requirement for actions alleging the making of a loan without regard to repayment ability. We also would support new restrictions on charging of closing costs on HOEPA-to-HOEPA refinancings, within a certain intitial period after the origination of the first HOEPA loan, unless the new loan has a substantially reduced rate. We would support a flat prohibition of selling single-premium credit life insurance policies, which is not addressed at all under current HOEPA. And we would support prohibiting entirely prepaid installments on HOEPA loans, instead of the current limit of two. Each of these steps would be an example of what we urge in addressing loan terms that sometimes may be abusive but usually are not: narrowly targeted restrictions that address specific terms or behaviors under well defined circumstances. Each of these examples may be found in the provisions of Congressman Neys bill, H.R. 4213, and for that reason we support it.
We are aware that there is a dramatic increase in the attention paid to the issue of abusive mortgage lending practices. At least ten state legislatures have taken up the issue by considering bills this past year. There have been three bills introduced in Congress. The Office of Thrift Supervision (OTS) has published an Advance Notice of Proposed Rulemaking (ANPR), which proposes to examine the issue in the context of the implementing regulations under the Alternative Mortgage Transactions Parity Act of 1982 (AMTPA, or the Parity Act). Freddie Mac and Fannie Mae have written to their approved seller-servicers regarding the issue. And currently, the U.S. Departments of Treasury and Housing and Urban Development are conducting a joint task force on the issue, in which NAMB is participating.
We also are aware that the subprime lending market has grown substantially in recent years, which in a number of ways is a positive development. As discussed above, however, there is a difference between subprime lending and abuse.
The issue has been a constant part of the broader discussions of mortgage reform throughout the process. When the mortgage industry first began discussions of pursuing comprehensive reform, we knew that the full involvement and cooperation of various consumer advocacy groups would be critical to a successful effort. Those groups indicated that a necessary part of any such reform agenda would be substantive consumer protections against abusive lending practices, and industry agreed.
We agreed, however, despite our belief that such abuses are relatively rare in the industry at large. For the reasons discussed above, we felt that those of us in the industry that play by the rules and do not take advantage of vulnerable consumers are well served by all attempts to stop the minority that do otherwise. Although the incidence of abuse is small relative to the whole industry, we believe that any abuse committed against mortgage consumers, however rare, is too much. We therefore support efforts to address the bad acts of our unfair competitors, even though we see no evidence that their numbers are growing or that their abuse is expanding.
All types of institutions have bad actors among their ranks. This is not an issue that is confined to lenders, home improvement contractors, manufactured home sellers, or mortgage brokers, nor to depository institutions or independent companies. Although, as discussed above, the abuses are committed by a tiny minority, we believe they are found among all of these types of entities. We wish to emphasize in particular that mortgage brokers are not the only ones involved; we have observed that many have blurred the distinction between mortgage brokers and various other types of companies, such as home improvement contractors. NAMB would urge all participants in this discussion to keep in mind that not all abusers are mortgage brokers. We believe that types of behavior, not types of institutions, should be the subject of regulation.
Another misconception we would dispel is the belief that those committing the abuses operate outside existing regulatory frameworks. To the extent this is true, it is not because they are not subject to existing laws. Rather, they choose to ignore laws that properly apply to them. There is a small minority of institutions that do not obtain state licensure as required. They ignore state consumer protection laws. They do not observe the existing restrictions in the federal HOEPA. And, in general, they do not join industry groups such as NAMB or the comparable organizations for their respective industries.
These renegade institutions routinely flout the rules and conventions of their industries and the laws to which they are properly subject. They represent unfair competition to those that obey the rules, and we would encourage much stronger enforcement efforts against them. When we urge increased enforcement, however, we do not intend to suggest that those making a good faith effort to comply with all the rules deserve still greater regulatory scrutiny than they already are bearing. We as an industry already are regulated very thoroughly. Rather, we mean increased enforcement against those that choose consciously to evade existing laws, because they clearly have decided that the attendant risk is slight while the potential gain in unfair profits is great. They should be brought to task and shown that their risk assessment is wrong.
As a companion to increased enforcement of existing law, we strongly believe in the power of industry self-regulation. NAMB has pursued its Best Business Practices (BBP) initiative since 1997, when we worked together with the Mortgage Bankers Association of America (MBA) to develop the Model Loan Origination Agreement. This disclosure, designed to be delivered to consumers right at the beginning of the loan application process, explains how mortgage brokers work, how they are compensated, and whose interests they represent. Today, the MBA/NAMB disclosure is in fairly widespread use. In its Statement of Policy 1999-1, concerning mortgage broker compensation under RESPA, HUD commended MBA and NAMB for their efforts through the development of the Model Agreement to dispel consumer misconceptions about how the wholesale mortgage industry operates.
Not content to stop there, however, NAMB has continued with "Phase Two" of BBP. Phase Two envisions a universal registry of individual loan originators and companies, each uniquely identified by a permanent registration number. Over time, we hope for the initiative to gain acceptance throughout the industry, so that all individuals and companies will be registered. Participants will report the unscrupulous acts of any individual or company, and the database soon will identify all such bad actors. This approach will reach even those that do not care to join NAMB or any other organization. And it will reach those that currently evade existing laws. Legitimate industrys own self-interest will ensure that violators are reported and that the database is consulted when deciding whether to hire individuals and whether to do business with companies. Soon enough, because bona fide companies will regard the registry as a valuable tool for identifying undesirable employees and business partners, they will be unable to work in the industry. Thus, BBP uses the natural business interests of legitimate companies to achieve effective policing of the industry.
For the reasons discussed above, we do not believe that new laws are the best answer. Rather, we urge increased enforcement of existing laws, and industry self-regulation along the lines of NAMBs BBP initiative. For those that already work hard to comply with existing laws at the state and federal level, additional legislation will represent increased regulatory burden. For those that do not, however, it will represent only new restrictions and requirements to be ignored, along with what is already in place.
Existing laws, at the state and federal levels, already provide enough protection against abuse by unfair loan originators. What they do not provide is automatic enforcement. It still remains up to those charged with enforcement to ensure that abusive operators are brought to justice under existing laws. We have discussed already how abuses are perpetrated by individuals and companies that ignore existing laws and get away with it. We urge enforcement agencies to bring much needed scrutiny to bear on these bad actors. We also note that certain private actions have been successful in blunting the impact of the abusers.
The civil action arena, however, also has spawned its own form of abuse: A cottage industry has arisen, consisting of plaintiffs lawyers that seek only to churn out lucrative class actions against our industry, enriching themselves with little or no benefit to consumers. These lawyers prey on bona fide brokers, lenders, and servicers, taking advantage of the complexity and compliance burden of existing consumer protection laws. Many legislative proposals would expand restrictions in a way that limits various types of loan provisions even when they are beneficial to consumers. More such overly broad laws would make our legitimate industry that much more vulnerable to class action abuse. NAMB naturally is just as concerned about this form of abuse as about the abuse of consumers.
Consequently, to the extent Congress deems additional legislation necessary, we support an approach that would limit new regulation to specific, abusive behaviors. We believe H.R. 4213, as discussed above, is the bill most suited to this ideal. It takes a balanced approach, focusing primarily on narrowly defined, concrete behaviors that all parties can agree are abusive in the circumstances defined. We think it would expand necessary protections where appropriate, without risking the unintended consequences of exposing reputable mortgage companies to more class actions and limiting consumers access to legitimate credit products.
Mortgage brokers have little direct interaction with the secondary market. We originate loans for the wholesale mortgage market, and it is wholesale lenders who then sell such loans into the secondary market. Accordingly, we have little basis in our own direct experience, and it is fair to say less standing than many others, to comment on the impact of the secondary market on abuses in the consumer mortgage marketplace. Accordingly, we will defer to the views of others on this question.
That being said, we note that a certain correlation does exist: As stated above, most abuses appear to take place in the subprime market, even though most of the subprime market is legitimate and beneficial to consumers with impaired credit records. It is the prime mortgage market that has the best established secondary market, where government sponsored enterprises provide liquidity, stability, and pricing discipline. There seems to be, therefore, a strong correlation between the absence of these factors and the overwhelming prevalence of consumer abuse in the subprime market.
Certain state restrictions on balloon payment and prepayment penalty provisions are preempted by the AMTPA. The purpose of the Parity Act, however, was to eliminate overly broad state restrictions on certain "alternative mortgage" products that are beneficial to consumers. When applied correctly, balloon payments and prepayment penalties benefit consumers through wider and more flexible loan product availability and lower interest rates. We therefore hope the OTS will exercise caution in its proposed revisiting of the implementing regulations under the Parity Act.
Because not all balloon payment and prepayment penalty provisions are abusive per se, we believe it is simplistic to say that all state laws that restrict such provisions necessarily "address predatory lending practices." Such state laws should be preempted, for the reasons that underlay the Parity Act in the first place. That is, many such state laws do not address abuse so much as they restrict the efficient operation of the legitimate mortgage credit market. This was the considered judgment of Congress in 1982, and we believe it remains correct today.
This does not mean that consumers are defenseless against abuse. The OTSs regulations, and for depository institutions the regulations of the other federal banking regulators, provide appropriate protections. Moreover, the HOEPA expressly regulates both balloon loans and prepayment penalties. As a federal law, the HOEPA is not preempted by the Parity Act. We believe these existing protections are adequate. To the extent Congress feels otherwise, we urge it to consider the revisions afforded under H.R. 4213. That bill would modify the prepayment penalty restrictions of HOEPA so that they are permitted only during the first three years of a loans life, instead of the current five years. In addition, under H.R. 4213, the exception allowing such penalties would turn on the amount of the penalty, rather than the currently applicable debt-to-income ratio test, which is irrelevant to whether a prepayment penalty is abusive. This is an example of why we support H.R. 4213, which we consider to be a balanced and appropriate approach to the issues before the Committee today.
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Thank you again, Mr. Chairman and other members of the Committee, for the opportunity to testify today. NAMB has participated throughout the mortgage reform process, including efforts to address consumer abuses. We have appreciated being involved, and we intend to stay involved as long as others also see fit to pursue this worthwhile objective.
We continue to believe that current law is adequate, although we would urge regulators to bring greater enforcement to bear on those that ignore current law. We also believe that industry self-regulation of the type envisioned by NAMBs BBP initiative will add a great deal to this effort, and we hope to see the industry embrace it. Finally, in the event Congress feels legislation is necessary, we endorse H.R. 4213 as the most balanced and properly focused approach among those introduced to date.