TESTIMONY OF PROFESSOR CATHY LESSER MANSFIELD
BEFORE THE COMMITTEE ON BANKING AND FINACIAL SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
May 24, 2000
Rayburn House Office Building
I am Cathy Lesser Mansfield. I am an Associate Professor of Law at Drake University Law School in Des Moines, Iowa, where I teach, among other things, consumer law and contracts. In the last year I have studied and written about subprime mortgage lending. My testimony today will focus on these studies.
I want to start out by saying that predatory home equity lending is a multifaceted problem. As you listen to the testimony given today and other days by consumer advocates, each of whom may focus on various aspects of this problem, I hope you will keep in mind that each of us is not describing the problem differently, but describing different aspects of the same problem.
For my part, I felt that my testimony should focus on what I have learned in my research about subprime mortgage lending. This means that my testimony today will focus on rates and points in the subprime home equity industry, and how they relate to risk; foreclosure rates and how they relate to risk; data collection about the subprime home equity industry; and why I believe the current subprime market is not meeting the credit needs of lower-income neighborhoods and minority communities. Although my testimony today will focus on these few things, I will be putting into the record a full law review article I authored entitled "The Road to Subprime HEL Was Paved with Good Congressional Intentions: Usury Deregulation and the Subprime Home Equity Market." The article will appear in volume 51 of the South Carolina Law Review, which should be out in the next few weeks. In the article, I trace the development of the subprime market that exists today from Congress's adoption of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMCA") and the Alternative Mortgage Transaction Parity Act ("AMTPA"), in the early 1980's, through the present. The article includes a detailed description of Congressional consideration of DIDMCA, which preempted state mandated first lien mortgage rate caps, and demonstrates that the Congress that adopted DIDMCA did not have in mind the sort of lending that has developed in DIDMCA's wake, but rather was attempting to rescue the faltering savings and loan industry. Indeed, the article points out that Congress did not consider the utility of interest rate caps in controlling abusive lending practices, and suggests that Congress take the time now to consider rate caps in light of the predatory lending that exists today. The article also discusses in more depth the development of today's subprime market, the profitability of today's subprime market, and various other abuses in the subprime market that I will not focus on in my testimony today.
The Subprime Credit Product
As I have discussed subprime mortgage lending with various government officials and other interested persons, I am constantly struck by the perception many people have that the subprime mortgage market fills the credit needs of individual borrowers not adequately served by conventional lenders. This notion is even reflected in the letter that invited me to come testify today, which said, "An essential element of the continued growth of the U.S. economy is the democratization of credit of which subprime lending is an important part. Subprime lenders provide credit to borrowers who do not qualify for a prime rate due to poor credit history or low incomes." These discussions and comments about subprime mortgage lending start with the assumption that the credit product being discussed is one of two kinds: the subprime purchase money loan - in other words a loan used by the borrower to become a homeowner; or the second mortgage used primarily for needed home repairs. These are most certainly the credit products needed by lower-income borrowers. Unfortunately, neither of these products is the primary product being offered by subprime mortgage lenders.
The primary credit product being offered by subprime mortgage lenders today is the one-size-fits-all refinance loan. In the most common subprime home equity loan transaction, a borrower who already owns his/her home is contacted by or contacts a subprime home equity lender for a loan that one would traditionally think of as a second mortgage loan. The borrower needs money for (or is sold on the idea that he/she needs money for) home repairs, needs cash, or needs to decrease the interest rate on accumulated high rate consumer debt, such as credit card debt. The product this borrower needs is likely to be small in size compared to the size loan it would take to purchase a home. But this is not the product the consumer ends up getting.
In most subprime home equity transactions, the product the consumer ends up with is primarily a refinancing loan in which the first mortgage is paid off (although some subprime loans are made to individuals who have no existing mortgage). Any other loan proceeds are purely incidental, although the consumer's sole purpose for getting the loan was probably to fund what has now become the incidental purpose for the loan. The reason this product is by its very nature predatory is that it does not meet the borrowers credit needs. The loan is much larger than the loan the borrower needs, and its high interest rates, high points and fees, and high risk of default and foreclosure are augmented and made more predatory by the size and characteristics of the loan.
The high rates aspect of the loan is predatory because often the refinanced subprime loan is at a higher rate that the loan being refinanced. The consumer has no choice but to take this loan if the consumer has or is convinced he has credit needs, because the only product being offered by the subprime industry is the refinance loan. Thus any consumer who wants or needs or can be sold a cash out, home repair or debt consolidation loan ends up with a much larger loan that pays off the current first lien, and saddles the consumer with a higher interest rate than the rate on the paid off loan. This abusive practice can range from paying off an existing loan with a slightly higher rate loan, to paying off an existing no-interest or low-interest loan, such as a Habitat for Humanity loan, with a high rate loan. No financial advisor would ever advise a borrower to refinance his/her current first lien loan at a higher rate, and yet this is the standard loan being made today by the subprime mortgage industry.
The refinance subprime loan is also predatory by its very nature because by including the existing mortgage in the proceeds of the loan the lender increases the amount of money needed to pay points and fees. Ten points on a $3,000 second mortgage loan costs the consumer/borrower $300. Ten points on the same $3,000 loan, if it is tacked on to a refinancing of the first mortgage, costs the borrower much, much more. Given that these points and fees are financed by the borrower, the combination of high points and fees in a refinance loan and high rates translate into exorbitantly higher costs for the borrower - much higher than they would be if the borrower were lent the second mortgage or unsecured credit product he/she sought in the first place. These points and fees also make a refinance loan a poor choice even for borrowers who will receive a slight reduction in the interest rate after taking the subprime refinance loan. No financial advisor would ever advise a borrower to agree to pay points and fees on a new loan with a balance artificially inflated by the disadvantageous payoff of the borrower's existing mortgage, and yet this is the standard loan being made today by the subprime mortgage industry.
The risk of foreclosure in a subprime loan, which based on our data might be as high as a one in four chance of foreclosure, also makes the subprime refinance loan predatory by its nature. Suddenly unpaid small-scale bills turn into debt that can force the consumer out of his/her home.
As Congress discusses the utility of the subprime mortgage market and what controls are appropriate and needed, it is essential to remember that the one-size-fits-all refinance loan is the credit product being offered by subprime lenders today. As I discuss the research I have done on these loans about rates, it is important to remember that these are not rates charged to high risk borrowers so they could purchase their home, or on a small second mortgage. As I discuss the research I have done on foreclosure rates, it is important to remember, and I will again point out, that the majority of borrowers who end up in foreclosure were already in their home when they took out the loan that ends in foreclosure, and that they were refinanced into their subprime loan.
I have completed two analyses of the home equity industry in the last year. In the first, I attempted to look at subprime mortgage loan interest rates. In the second, a colleague and I attempted to look at subprime mortgage loan default and foreclosure rates. I think it is valuable to start out by describing how difficult it was to get information in order to make any conclusions about the industry.
It is impossible to determine or describe with accuracy the rates, points and fees charged by the subprime home equity industry as a whole, because pricing information is not collected by any public source, and is not advertised with specificity by the industry. The only large-scale source for loan rate information comes from subprime company filings with the Securities and Exchange Commission ("SEC"). Many subprime loans are grouped with other loans in pools of loans and securities are then sold in the pools of loans. When a lender places loans in a securitized pool and sells securities in the pool of loans, the lender must issue a prospectus which is filed with the SEC. Each prospectus describes the loans pooled into a given securities offering. These prospectuses taken together provide the only public source of rate information for subprime loans.
The SEC filings are not an easy data source to use. In order to come up with some sort of comprehensive look at loan rates I had four law students pull SEC prospectuses one at a time off of the EDGAR data base, pull out of those prospectuses the sections on loan interest rates for loans in the pool, and then compile that data into usable form. It took these students the better part of a month to do their work, and they were only looking at the SEC filings for a few lenders. These prospectuses provided no information about points and fees, nor is there any place to get such information.
Similarly, default and foreclosure information is not publicly collected anywhere. In order to prepare a foreclosure report for use by the Department of Housing and Urban Development's Joint Task Force on Predatory Lending, my colleague and I spent approximately 50 hours looking through SEC filings for descriptions of loan performance. Once again, the process entailed searching through numerous SEC filings for information on defaults and foreclosures. In most cases we were able to find the information we sought, but it was in differing formats and often required extensive deduction in order to answer our simple question: how many people are losing their home because of a subprime loan?
Information such as interest rates and foreclosure data is essential to debate about subprime mortgage lending, and yet it is next to impossible to collect such data. Collection of and easier access to such important data must be one of the reforms adopted by Congress. Without information no one can know just how predatory subprime loans are, and no one can know what sorts of risks such loans pose to individuals (including risks of foreclosure and investment losses) and to society at large (including risks to urban housing infrastructures and the soundness of the financial institutions that provide credit lines to subprime lenders). Given the dominance of the refinance loan, the information required to be reported must include rates, points and fees, default and foreclosure statistics, and whether individual loans increase the rate paid by the borrower.
Although not comprehensive, and not necessarily representative of loans that are not securitized, the study I conducted of subprime interest rates, the results of which are reported in full in the South Carolina Law Review article referenced earlier, provides a very good picture of loan rates being charged in a large portion of the subprime home equity market.
My research assistants and I looked at the 424b5 SEC Filings for the 14 top subprime home equity lenders (chosen based on their ranking by the National Mortgage News Quarterly Data report in the 4th Quarter of 1998). These 14 top subprime lenders together originated just over 50% of the subprime home equity loans originated by the top 100 subprime lenders in the 4th quarter of 1998.
Only 6 of these 14 lenders (Green Tree Financial, Equicredit Corporation, Amresco, Option One Mortgage Corp., Impac and Residential Funding/GMAC) had made regular filings with the SEC. Furthermore, it is likely that not all of these six lenders securitize all of the loans they originate. Nevertheless, the SEC filings allowed us to look at loan rates for 1,065,753 loans that had been placed in securitized pools between 1995 and 1999.
The rate range for the subprime loans we looked at increased between 1995 and 1999, with a range in 1995 between 5.00 and 17.99%, and a range in 1999 between 3.00 and 19.99%. For Green Tree Financial, one of the lenders we looked at, the range of rates in 1999 alone was between 4.00% and 19.99%. By contrast, the range of rates in the conventional market was never more than 2 percentage points.
The median interest rate for the loans we looked at was between 10% and 10.99% in 1996 and 1997, and between 11% and 11.99% in 1995, 1998 and 1999. During those same years, the annualized rate on conventional 30-year mortgages was 7.95% (1995), 7.80% (1996), 7.60% (1997), 6.94% (1998), and 7.43% (1999). Therefore, the median subprime interest rate for the loans we looked at was at least 2.2 percentage points, and as much as 4.06 percentage points, higher than the conventional annualized rate.
The full rate distribution on these loans is shown in Table 1, set forth as appendix 1 to this statement. Appendix 2 to this statement shows the rate distribution for all of the loans we looked at by year in graph format. Appendices 3 through 12 to this statement show the rate distribution for each year between 1995 and 1999 both in tabular format, divided by lender, and in graph format. Each graph also shows the conventional rate for each year.
This data demonstrates the very high cost of subprime home equity loans. What the data cannot show is how many of these high rate borrowers sacrificed a lower rate mortgage in taking out their high rate loan. Given the prevalence of the refinance loan in the subprime market, it is extremely likely that many of these high rate borrowers refinanced lower rate loans when they took out their high rate subprime loan.
Other recent studies have also looked at non-statistical samplings of interest rates. For example, a study by the Chicago-based National Training and Information Center entitled Preying on Neighborhoods: Subprime Mortgage Lenders and Chicagoland Foreclosure (September 21, 1999) looked at the records for 2,074 properties sold at foreclosure sale in 1993, and for 3,964 properties sold at foreclosure sale in 1998 in the Chicago area. Based on the rate information available in that group of loans, the study determined that with the advent of subprime lending, the average interest rate on foreclosed loans began to move up, rising higher and higher above the 30 year Treasury rate, whereas in the past the average rate on foreclosed loans had stayed in relative step with 30 year Treasury rates. The study also determined that of the loans foreclosed in 1993 and 1998, there was a 43.4% rise in loans with a rate of 0 to 2 points above the 30 year Treasury rate, an 8.7% rise in loans with a rate of 2 to 4 points above the 30 year Treasury rate, a 521.1% rise in loans with a rate of 4 to 6 points above the 30 year Treasury rate, a 316.3% rise in loans with a rate of 6 to 8 points above the 30 year Treasury rate, and a 56% rise in loans with a rate of more than 8 points above the 30 year Treasury rate. Loans with rates of 4 to 8 points over the 30-year Treasury rate made up 6.5% of foreclosures in 1993, and 22% of foreclosures in 1998
By contrast, conventional 30-year mortgage rates have stayed between 6.71%-8.32% since the end of 1996, and have not gone above 7.94% in the last two years (1998 and 1999).
High rates have real consequences for borrowers. While the difference between a 12% subprime and an 8% prime mortgage rate may seem small, the cost to a low or moderate-income homeowner is large. On a typical $50,000 mortgage, for example, over 30 years the interest payments at 8% would be $82,079.97, while at 12% they would be $135,138.78, or $53,058.81 more. The monthly payment would be $366.88 at 8%, and $514.31 at 12%. These payments would represent 31% of a $1,200 monthly income at the conventional interest, but over 43% of the same income at the subprime interest rate. Thus, for the homeowner-borrower, the costs of taking a subprime loan are large (even without regard to the points and fees) and the higher rate also increases the risk of default, because it increases the burden on the homeowners budget.
Subprime Loan Delinquency, Default and Foreclosure Rates
With the advent of the subprime home equity market, loan defaults and foreclosures appear to be increasing at an almost frightening rate. Once again, there is a paucity of data from which to make any sort of comprehensive conclusions. Nevertheless, a colleague of mine (Alan M. White of Community Legal Services in Philadelphia, PA) and I were able to look at default rates for 16 of the top subprime lenders based on SEC filings. This data indicates very disturbing default and foreclosure rates on subprime loans.
We looked at SEC filings for 16 lenders currently servicing over $150 billion in subprime home equity debt to determine default and foreclosure rates (including Associates, Aames, Amresco, Contimortgage, Equicredit, Green Tree, IMC/Citifinancial, the Money Store D.C. Inc., New Century, UC Lending, Option One, Advanta, Delta, WMC, Banc One and GE Capital Mortgage Services). Taken together, this data provides a picture of a little less than half of the outstanding subprime home equity debt. The data we collected can be found at appendix 13 to this testimony.
We found that of $163,369,070,000 in loans serviced, approximately 4.65% were in serious delinquency (more than 90 days late), foreclosure, or completed foreclosure. In terms of families affected, we estimated that over 72,000 families were included in these numbers. By comparison, the default and foreclosure rate on all mortgages for the 4th quarter of 1999 was a much lower 1.54%. See attached appendix 14. Also by comparison, the default and foreclosure rates for higher risk VA loans and FHA loans were also much lower, at 2.27% and 2.57% respectively. See attached appendix 15. Clearly, serious default and foreclosure rates are much higher for subprime loans.
Default rates for individual lenders also appear to be rising as lenders make more and more loans and their loan portfolios age. We looked at delinquency rates for one company, Equicredit, and found that its total default rate climbed from 5.58% in 1996, to 6.81% in 1997, to 8.27% in 1998. Within those total delinquency numbers, the largest increase was in loans delinquent for 90 days or longer. In 1996, 2.8% of the loans were 90 or more days delinquent. In 1997, 3.57% of the loans were 90 or more days delinquent. In 1998, 4.56% of the loans were 90 or more days delinquent. See attached appendix 16. According to its10Q form filed with the SEC on November 15, 1999, ContiMortgage, which just last week filed for bankruptcy, had delinquencies of 2.81% and defaults (foreclosures and bankruptcies) of 7.51% as of September 30, 1999, in its $12 billion portfolio. The defaults rose from 5.32% at September 30, 1998, to 6.22% at March 31, 1999, to 7.51% at September 30, 1999. Similarly, in its 10Q filed with the SEC on February 22, 1999 Aames Financial Corp. reported delinquencies and defaults of 16.3% at December, 1998 and predicted that "[t]he seasoning of the old portfolio without the addition of new loans could cause delinquency rates to rise."
Defaults for static pools of loans present some of the most disturbing figures. We looked at the default performance for a single pool of loans made by WMC. The pool of loans was made in 1998. By December 21, 1999, of the 5610 loans in the pool 4.26% had been foreclosed upon with the property not yet sold (REO), another 14.32% were in foreclosure, and another 6.01% were in bankruptcy. See attached appendices 17 and 18. A full 24.75% of the loans in the pool were in 90+ delinquency, foreclosure, bankruptcy, or already foreclosed. With 30 and 60 day delinquencies added to that, the total default and foreclosure rate on the pool was 27.93%. These numbers indicate that one in four borrowers taking a subprime loan will lose or will be in serious danger of losing their home.
The image that these default and foreclosure numbers seem to conjure in the minds of many I have spoken to is that of the home purchaser who couldnt make it as a homeowner and ended up losing the home to foreclosure. But we determined that it is likely that 90% of the homeowners who were foreclosed upon or were headed for foreclosure by the 16 lenders we looked at owned their home before they took the loan that ended in or was headed toward foreclosure. This means that for most borrowers in foreclosure, but for the relationship with the subprime lender the homeowner might not have lost the home to foreclosure. (We reached this conclusion by looking at how many purchase money loans the 16 lenders made in 1996, the last year for which such Home Mortgage Disclosure Act ("HMDA") data was available on a nationwide basis from the Right-to-Know network (www.rtk.net) which compiles HMDA data. In total, only 10% of the loans made by the lenders we looked at and for whom we could get data were purchase money loans. )
Other studies published in the late 1990's suggest that there has been a marked and tragic increase in the number of home foreclosures as the result of subprime home equity lending.
For example, a Federal Reserve report in 1998 showed average delinquency rates on all traditional home equity loans to be around 1.25 percent of all home equity loans made and about 1.25 percent of all home equity dollars lent. See, Glenn B. Canner, Thomas A. Durkin & Charles A. Luckett, Recent Developments in Home Equity Lending, 84 Fed. Res. Bull. 241, 247 (April 1998). However, home equity loans in securitized pools had a delinquency rate generally ranging between 6 and 9 percent. Id. at 249. A study released in September, 1999 by the National Training and Information Center (NTIC) in Chicago, entitled Preying on Neighborhoods: Subprime Mortgage Lenders and Chicagoland Foreclosure (September 21, 1999), found that completed foreclosures of all mortgage loans in the Chicago area went from 2,074 in 1993 to 3,964 in 1998, which was a 91% increase. Subprime lenders and servicers foreclosed 30 loans in the Chicago region in 1993, which was 1.4% of all loan foreclosures that year, and foreclosed on 1,417 loans in 1998, which was 35.7% of total foreclosures for that year. This was a 4,623% increase in subprime foreclosures between 1993 and 1998, in a time when all foreclosures increased by 91%. Within a defined 36 block area in Chicago, 73 of the foreclosures filed in 1998 were on loans originated since 1990, and 69 of the loans had been originated since 1993. Of the 73 loans foreclosed, 40 of the 73 foreclosures were initiated by subprime lenders. Another 21 loans foreclosed were FHA insured loans, of which 14 had been originated by subprime lenders.
Thus, it appears that subprime mortgage loans have very high delinquency rates, especially when one looks at more serious delinquencies and foreclosures. The costs to a borrower of losing his or her home in a foreclosure are obvious and tragic. The foreclosure becomes even more tragic in cases where the borrower owned the home for a long time, sometimes generations, before a subprime home equity loan led to foreclosure. In these cases, but for the encounter with the subprime lender, the borrower would most likely still own and live in the home.
There are other costs of delinquency and foreclosure as well. It is not at all clear how much loss is caused to lenders and investors because of foreclosures. There have been some companies which continue to operate profitably despite any foreclosure issues. There are others which have gone out of business.
A final cost of high foreclosures is the devastation of America's housing infrastructure. As more and more homes go into foreclosure, and homes lay vacant until they can be resold, neighborhoods suffer. For example, the NTIC study showed that in a 36 block area of Chicago's south side an average of 2 properties per block were in foreclosure in 1998. The study further found that "[a] third of the properties in foreclosure that were secured by loans originated after 1990 were abandoned. Sixty-four percent of these abandoned properties were originated by subprime lenders or were high interest rate loans." Oddly enough, this is the same concern which led Congress into the home mortgage market during the Great Depression, and the opposite result of what was intended when DIDMCA and AMTPA were passed.
It is quite clear that subprime loans carry a high risk of default and foreclosure. What is not clear is whether these risks are caused by the credit condition of the borrower before the loan is made, or by the loans themselves. Lenders argue that subprime borrowers are a risky bunch, and that this causes high delinquency and default rates, and also dictates the high cost of subprime loans. But the tremendously inflated costs of subprime loans, the fact that most borrowers who lose or are headed toward losing their home to a subprime lender already owned their home before taking the subprime loan, and the fact that the subprime credit product in the market is the refinance loan, suggest that the loans themselves create the most risk of default, foreclosure, and the attendant individual and societal costs.
Federal controls on predatory lending practices, including, among other things, restricting refinancing existing mortgages at a higher rate, limiting points and financing of points, limiting interest rates, and prohibiting the sale of single premium insurance and financing the premium, will go a long way in reducing predatory lending and might lead lenders to offer the credit products most subprime borrowers really need, rather than offering a product that increases costs to consumer and drains home ownership. In regard to the issues I have addressed here - rates and points in the subprime home equity industry, foreclosure rates, and data collection about the subprime home equity industry - I make the following suggestions.
A. Better Data Collection and The Home Mortgage Disclosure Act, HMDA
The information necessary to fully understand the problem of predatory home equity lending is currently not collected anywhere, and is not required to be reported anywhere. The Home Mortgage Disclosure Act should be amended and enforced so that all subprime mortgage lenders are required to report information such as loan interest rate and APR, points and fees, the loan-to-value ratio, the borrower's debt-to-income ratio (determined by a national standard), whether the loan is deemed by the lender to be subprime, what category loan the borrower was deemed by the lender to be and why, whether the loan is a refinance of an existing mortgage, regardless of the "purpose" for the loan, the rate on any loan being refinanced, how many times the lender and/or affiliated lenders have made a loan to the same borrower, all fees charged in the loan, and the cost and type of any insurance included in the loan.
B. Increased Information in the Market
All efforts thus far at increasing the information in the market in order to make it work more efficiently have been at the individual level. Thus, the Truth in Lending Act and the Real Estate Settlement Procedures Act both dictate certain information that must be disclosed to individual borrowers before consummation of the loan transaction. The Truth in Lending Act does not mandate disclosure of rates and terms in the market except through these disclosures on the individual level. The only regulation of advertising contained in the Truth in Lending Act is set up as trigger term regulation. This means that if a lender chooses to advertise one of several rate "trigger terms" it must also advertise other relevant terms. In this way, the current regulation of advertising of rates and terms is woefully inadequate.
In order for consumers to know what they are looking at before they decide to buy, lenders should be required to advertise rates and fees. If this were the case, borrowers would know long before they entered into a relationship with a potential lender whether they were interested in taking a loan from the lender. This would further protect borrowers from becoming unsuspecting victims of predatory lending practices, and would help the market work more efficiently. Lenders should also be required to inform borrowers long before the transaction is consummated as to what credit category the borrower was placed in by the lender (A, A-, B, etc.) and told why this is the case. This would help the problem of borrowers being "upsold" into credit risk categories into which they do not belong, and help them to avoid being charged the attendant higher rates and fees.
Still, increasing the information provided to borrowers probably cannot, on its own, solve the problems faced by subprime home equity borrowers.
C. Rate and Fee Regulation
During the process of adopting HOEPA, it became clear that setting usury limits at the federal level, or eliminating the federal preemption contained in DIDMCA for purposes of non-purchase money first lien loans was not considered to be an option. This, I believe was a mistake.
Rate regulation has historically served, and in all areas except first lien mortgage lending continues to serve, several important public functions. First, usury limits and caps on points and fees protect the borrower from overreaching and fraud by setting a maximum charge that can be imposed by lenders, good and bad alike. These maximum limits also set a societal cap on the value of use of another's money, thereby preventing over-compensation for lenders with control over lent assets and setting moral limits on the amount one segment of society should be able to profit from another, less/privileged segment of society.
Usury and fee limits also protect the borrower from his/her own inability to understand complex financial transactions and from making poor financial decisions with stakes that are unacceptably high, such as eviction from and foreclosure of the borrower's home. This protective function is served by much legislation that governs our society. For example, we require the use of seat belts because it protects the driver and occupants from serious injury in the event of an accident. Similarly, we should protect borrowers from the loss of their home through setting maximum rates and fees that can be charged by lenders, and by requiring lenders to take into account each individual borrowers ability to pay. In some cases, borrowers simply should not have access to credit because they cannot pay for the credit without losing their home.
Finally, usury limits protect loan source funds, whether supplied by depositors or Wall Street investors. Usury limits do this by recognizing that lending beyond a certain maximum limit causes extremely high risks of loss of the invested capital, whether the risk is generated by the borrower or caused by the loan. This sort of protection compensates for the fact that the parties making decisions about which individuals will get loans from a pool of assets sometimes are more concerned with personal profit through commission and fees than with the security of investors or depositors assets.
This does not necessarily mean that Congress has to set an ironclad limit that cannot adjust to an increase in market interest rates. It is just as plausible for Congress to adopt a floating maximum rate, as it did in its definition of a high rate loan under HOEPA. There also must be regulation of points and fees that can be charged by home equity lenders. Finally, no lender should be permitted to refinance an existing mortgage at a significantly higher rate to the borrower. This can only serve to increase risk, and I can think of no situation in which this is advantageous to the borrower.
The subprime home equity market that has developed in the absence of rate regulation demonstrates that justifications for rate limits still apply today, and that fees and rates in the market need to be regulated.
I hope that the data, analysis and suggestions I have provided here will be helpful as Congress addresses the issue of predatory home mortgage lending. Thank you.