[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
HOME MORTGAGE DISCLOSURE ACT: NEWLY
COLLECTED DATA AND WHAT IT MEANS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
----------
JUNE 13, 2006
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Printed for the use of the Committee on Financial Services
Serial No. 109-99
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut JOSEPH CROWLEY, New York
VITO FOSSELLA, New York WM. LACY CLAY, Missouri
GARY G. MILLER, California STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota JOE BACA, California
TOM FEENEY, Florida JIM MATHESON, Utah
JEB HENSARLING, Texas STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida AL GREEN, Texas
RICK RENZI, Arizona EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin,
TOM PRICE, Georgia
MICHAEL G. FITZPATRICK, BERNARD SANDERS, Vermont
Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
WALTER B. JONES, Jr., North BERNARD SANDERS, Vermont
Carolina, Vice Chairman CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SUE W. KELLY, New York LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
VITO FOSSELLA, New York HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio JOSEPH CROWLEY, New York
TOM FEENEY, Florida STEVE ISRAEL, New York
JEB HENSARLING, Texas CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey JOE BACA, California
GINNY BROWN-WAITE, Florida AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina GWEN MOORE, Wisconsin
RICK RENZI, Arizona WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
June 13, 2006................................................ 1
Appendix:
June 13, 2006................................................ 61
WITNESSES
Tuesday, June 13, 2006
Bowdler, Janis, Housing Policy Analyst, National Council of La
Raza........................................................... 39
Bradford, Calvin, President, Calvin Bradford Associates, Ltd., on
behalf of the National Fair Housing Alliance................... 45
Duncan, Douglas G., Senior Vice President and Chief Economist,
Research and Business Development, Mortgage Bankers Association 38
Ernst, Keith, Senior Policy Counsel, Center for Responsible
Lending........................................................ 43
Himpler, Bill, Executive Vice President, Federal Affairs,
American Financial Services Association........................ 41
Olson, Hon. Mark W., Board of Governors, Federal Reserve System.. 13
Staten, Prof. Michael E., Director, Credit Research Center,
McDonough School of Business, Georgetown University............ 47
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 62
Clay, Hon. Wm. Lacy.......................................... 65
Bowdler, Janis............................................... 90
Bradford, Calvin............................................. 110
Duncan, Douglas G............................................ 78
Ernst, Keith................................................. 101
Himpler, Bill................................................ 96
Olson, Hon. Mark W........................................... 66
Staten, Prof. Michael E...................................... 128
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Written statement submitted by Consumer Mortgage Coalition... 228
Watt, Hon. Melvin L.:
Written statement submitted by ACORN......................... 139
Written statement submitted by Center for Responsible Lending 143
Written statement submitted by Consumer Federation of America
(CFA)...................................................... 193
Written statement submitted by Fair Housing Center of Greater
Boston..................................................... 262
Letter and 3 studies submitted by National Community
Reinvestment Coalition (NCRC).............................. 279
Written statement submitted by National Training and
Information Center (NTIC).................................. 445
Frank, Hon. Barney:
Letter from U.S. Department of Housing and Urban Development
(HUD)...................................................... 449
Letter from U.S. Department of Justice....................... 450
Letter from Comptroller of the Currency...................... 452
Letter from Office of Thrift Supervision, U.S. Department of
the Treasury............................................... 455
Letter from Federal Deposit Insurance Corporation............ 457
Letter from National Credit Union Administration............. 458
Letter from Federal Deposit Insurance Corporation............ 457
Moore, Hon. Gwen:
Viewpoints article by Gregory D. Squires..................... 459
HOME MORTGAGE DISCLOSURE ACT:
NEWLY COLLECTED DATA AND
WHAT IT MEANS
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Tuesday, June 13, 2006
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] presiding.
Present: Representatives Bachus, Baker, Garrett of New
Jersey, Pearce, Neugebauer, Price, McHenry, Maloney, Watt,
Meeks, Waters, Ford, Baca, Green, Clay, Matheson, and Frank (Ex
Officio).
Also present: Representatives Davis of Alabama, and Lee.
Chairman Bachus. Good morning. The committee will come to
order. Today's hearing, which was requested by Ranking Members
Frank and Sanders, Congresswomen Waters and Lee, and
Congressman Watt, will focus on the recently implemented
Federal Reserve Board regulation under the Home Mortgage
Disclosure Act that requires mortgage lenders to collect,
report, and make public new mortgage pricing data and what that
data means for consumers and lenders.
The possibility of racial discrimination is a serious issue
that deserves our attention. I am hopeful that today's hearing
will shed some light on this issue. Owning a home is part of
the American dream, and all Americans should be treated fairly
when they try to make that dream a reality.
The Home Mortgage Disclosure Act was enacted by Congress in
1975 to provide the public with information to determine
whether lenders are serving their communities to enhance
enforcement of laws prohibiting discrimination in lending, and
to provide private investors and public agencies with
information to guide investments in housing. The Act, which was
implemented by the Federal Reserve Board, requires most
mortgage lenders located in metropolitan areas to collect data
about their housing-related lending activity, report that data
annually to the government, and make the data publicly
available.
In 2002, the Federal Reserve Board required additional
information to be reported for its 2004 data collection in
order to improve the quality, consistency, and utility of the
data reported. Most importantly, lenders must now disclose
pricing, which includes interest rates and fees for higher-
priced loans. Other newly required information now being
reported includes whether the loan is a first lien, a junior
lien or unsecured, and whether it is secured by a manufactured
home and if it is subject to the protections of HOEPA.
However, it should be pointed out that the data does not
include or take into consideration certain risk evaluation
factors used by lenders in determining whether to make a loan
and at what price. Specifically, the data does not include the
borrower's asset level or credit score, the loan-to-value ratio
of the property, the borrower's debt to income ratio, or the
level of documentation submitted.
Because of the limitations of the data, I, along with many
members of the subcommittee, signed a letter requesting that
the Federal Reserve examine more comprehensive data to assess
the extent to which loan pricing is correlated with risk. With
this enhanced information, the Federal Reserve and the
Departments of Justice and HUD should be able to make a
determination as to whether any disparity in loan pricing is
based on discrimination or risk-based pricing.
Today's hearing will consist of two panels. First, we will
hear from Federal Reserve Board Governor Mark W. Olson. On the
second panel, we will hear from Dr. Douglas G. Duncan, senior
vice president and chief economist, research and business
development for the Mortgage Bankers Association; Ms. Janis
Bowdler, housing policy analyst, National Council of La Raza;
Mr. Bill Himpler, executive vice president, federal affairs,
American Financial Services Association; Mr. Keith Ernest,
senior policy counsel, Center for Responsible Lending; Mr.
Calvin Bradford, president, Calvin Bradford & Associates on
behalf of the National Fair Housing Alliance; and Dr. Michael
E. Staten, director, Credit Research Center, McDonough School
of Business, Georgetown University.
The reason for the second panel with six witnesses was to
accommodate several members who had specific requests.
I look forward to hearing from today's witnesses and thank
them for taking time from their busy schedules to join us.
In closing, I would like to thank Ranking Members Frank and
Sanders and their staffs for working with us on this hearing.
They are strongly committed to these issues, and I commend them
for their efforts to ensure that lenders comply with fair
lending laws and that discrimination does not occur in the
marketplace. Violations of our fair lending laws should not be
tolerated, and I look forward to working with them, with
Congresswomen Waters and Lee, and Congressman Watt, in assuring
that violations of our fair lending laws are exposed and
violators brought to responsibility. I look forward to working
with them and members of this subcommittee as we continue to
examine predatory lending practices.
The Chair now recognizes Mr. Watt for any opening statement
he would like to make.
Mr. Watt. Thank you, Mr. Chairman. Last week Representative
Kanjorski asked me to substitute for him as the ranking member
of the hearing because he was out of town, and today
Representative Sanders asked me to substitute for him as the
ranking member because he couldn't be here.
I think that there is a concerted effort to bring up the
minor league on our side, those of us who are in training
either for ranking member positions or chairmanships, we hope.
So here I am again substituting, and I appreciate the chairman
convening the hearing at our request.
I thank Ranking Member Frank and Representatives Sanders,
Waters, and Lee for joining in the request, along with myself,
that we have this hearing today.
The Equal Credit Opportunity Act prohibits, ``any creditor
to discriminate against any applicant with respect to any
aspect of a credit transaction on the basis of race, color,
religion, national origin, sex, or marital status or age.''
Title 8 of the Civil Rights Act, Fair Housing Act, as amended,
prohibits discrimination in the sale, rental, and financing of
dwellings and in other housing-related transactions based on
race, color, national origin, religion, sex, familial status,
including children under the age of 18 living with parents of
legal custodians, pregnant women, and people securing custody
of children under the age of 18, and handicap disability.
The Federal Reserve uses HMDA data as a screening tool to
identify disparities in mortgage lending that warrant closer
scrutiny. Based on a review of 2004 HMDA data, the Federal
Reserve reportedly identified about 200 lenders that
demonstrated statistically significant disparities in mortgage
lending. The Federal Reserve shared, on a confidential basis,
the results of this analysis of lenders' 2004 HMDA data with
other agencies that have supervisory or enforcement authority
over these lenders for use in those agencies' supervisory or
enforcement programs.
On March 17, 2006, in addition to requesting this hearing,
Mr. Chairman, Representative Frank wrote to HUD, DOJ, OCC,
FDIC, OTS, and NCUA requesting information about these
agencies' processes for assessing the lenders under their
authority that the Federal Reserve had flagged as having
demonstrated significantly significant disparities for
compliance with fair housing laws.
Let me just be clear, having given that framework. Ladies
and gentlemen, this issue is not going to go away.
Discrimination in lending has to stop. It has to stop for
several reasons. Number one, because it is against the law.
Number two, you can't look at us and say get equal education,
get equal loan scores, credit scores, get equal in every aspect
of your life, and then at the end of the day, make
statistically disparate impact loans that are explainable only
in racial terms. You factor out everything else. This has to
stop.
It has to stop because more than 70 percent of the assets
in the African American community are tied up in residences, in
equity in homes, and if we don't have that, we don't have
anything. You can't point to stocks and bonds and mutual funds
and retirement accounts; our equity is in our homes, and that
is the only source of wealth in our communities.
This has to stop, and we will continue to pursue it until
it does stop. You can't look at us and say well, it is a burden
to keep HMDA data when the data suggests that discrimination is
continuing. You get your house in order on that front, then you
can talk to us about stopping the burdensome aspects of these
regulations.
So there is a quid pro quo here. It has to stop. One-tenth
of a point, a quarter point, a half a point means thousands and
thousands of dollars over the life of a loan. And these
disparities have to stop.
I am talking to everybody in the audience, Mr. Chairman.
They know who I am talking to. We have to stop this practice.
Mr. Chairman, I would ask unanimous consent that since they
are not represented here today, although they are represented
indirectly, I suppose through other people, that the statements
of Acorn, NCRC, and the National Training and Information
Center, all be submitted for the record, and that we submit the
statements that we have gotten so far in response from HUD,
DOJ, OCC, FDIC, OTS, and NCUA because we will be pursuing those
inquiries until this stops.
I yield back.
Chairman Bachus. Without objection, and hearing none, those
statements will be in the record and become part of the hearing
record. Ranking Member Frank, would you like to train for the
chairman's job?
Mr. Frank. Yes, I would.
I want to begin by expressing the strongest possible
support for what my colleague from North Carolina has just
said. I am very proud of the good working relationships that we
on the Democratic side have had with our friends in the
financial services industry. We have had good relations with
the regulators, but I am very disappointed with the response
that we have seen to this HMDA data.
I do recall, since I was here at the time, that the
legislation that resulted in this data being made available was
adopted over the strong objections of many in the industry. Our
former colleague, Joe Kennedy, took the lead. Tough vote. It
was actually defeated in this committee and then won on the
Floor.
We have a record that shows that African Americans and
Hispanic people are less likely to get loans and will have to
pay more for the loans that they do get. All I read from the
regulators, frankly, and the financial services industry is
well, there are good reasons for it. It is not racism; it can
be explained here.
I understand that there are qualifications and explanations
that ought to be introduced in reacting to the data. The
problem is what I read gives us the explanations without the
reactions.
I would have hoped that people would have said that this is
a very bad situation, and we have to change it, as my friend
from North Carolina said. Instead, the overwhelming tone that
is it is not my fault, and that there is nothing you can do
about it, and that none of my institutions are doing it.
Race continues to be the most serious problem in America.
We have just gotten an indication here that when it comes to a
basic tenet of American capitalism, there is nothing remotely
radical about this, when it comes to a basic tenet of American
capitalism, there is significant discrimination, in fact,
according to racial and ethnic lines.
Now I don't believe that it is all racism, and I don't
believe that none of it is. Anybody who tells me in America
today, with our history, that racism and racial prejudice isn't
a part of it is kidding herself, but not me. That just can't be
the case.
But I also acknowledge that there are factors other than
simple racism or even sophisticated racism. But having denied
that it is racism doesn't mean that we don't have a problem.
Much of what I see here says look, it is not just racism, there
are all these other problems. If there are, let's talk about
how to solve them. Let's talk about what we do.
It is unacceptable, frankly, the tone of the responses and
testimony we have here. This kind of collective, ``Well, that
is the way the world works,'' isn't acceptable. I will continue
to work closely with people on the Financial Services
Committee. I think the function that banks and lenders play is
a critical one, but we cannot continue to ignore this racially
disparate impact, and people need to do a much better job than
they have in the testimony I have seen, even from the
regulators. So this one is not going away.
Now most of the regulators, we are told, are still studying
this, because the Federal Reserve itself said that in some
cases it would appear to be race. Most of the regulators say
that they are still working on it. I would like to see what is
happening. This has been out for a while now. We are not going
to be out-waited on this. We will continue to return to this.
So I really strongly urge my friends in the industry,
please, take this more seriously as a problem that has to be
alleviated than you have. We cannot continue in this country to
pretend that race is not still a problem in many ways. When
African Americans are significantly worse off when it comes to
getting a loan to buy a home, we need to figure out exactly why
that is and then try to deal with it. Simply saying, ``Well, it
is not a racial problem, and that is the end of it,'' is, one,
I think somewhat inaccurate, but, two, totally unacceptable.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Frank.
Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman. I certainly
appreciate you holding this hearing and look forward to the
testimony from our wonderful panel we have coming before us,
two separate panels. The Home Mortgage Disclosure Act
information that we are going to be discussing today is a very
important finding by the Federal Reserve, and it is important
that we, as a committee, consider all the factors related to
the cost of a mortgage on individual borrowers--their credit
rating, net worth, their personal debts, and the whole variety
of issues that are associated with it.
For a first-time home buyer, it is a daunting task to get
lending. I think it is important for us to have a fair and
balanced way of disclosure to individual borrowers but beyond
that, to make sure that the lending industry is competitive,
that free market principles reign, and that as a result of
that, individual borrowers will benefit.
The individuality of the borrower demands a wide array of
choices in the mortgage lending marketplace. For the home
mortgage lending market to evolve further, it must be free of
over burdensome regulation.
In the early 1990's, subprime mortgage lenders emerged
because market demand was not being met by prime mortgage
lenders. According to a study by a former member of the Federal
Reserve Board of Governors, from 1994 to 2003, subprime lending
went from $45 billion a year to over $330 billion a year, now
making up one in 10 mortgages. In that period, almost 9 million
Americans, more than half minorities, became first time home
buyers, pushing the homeownership rate to an all time high of
69 percent across America.
I think that is something we should be proud of as
policymakers and something we should be proud of as Americans.
It is clear that subprime lending has increased credit to
individuals who previously hadn't been afforded the
opportunity, given their credit rating, savings, or personal
income.
I look forward to the testimony from this panel and the
questions from fellow committee members about the HMDA data
and, as we review the findings, it is important that we
acknowledge that the nonprime lending marketplace has given
countless underserved Americans access to the dream of
homeownership. As public policymakers, we have to be sure this
is done free of discrimination in any way, shape, or form, and
that it is justified based on all the factors that the borrower
brings forward to the lender, including their credit rating,
their personal wealth, their personal ownership of assets and
their personal debt, and to ensure that the future
competitiveness of loans, we must allow the open competitive
market to thrive.
As policymakers, I think it should be our intent to make
sure that the free market system works, especially when it
comes to homeownership. We want to make sure that first time
home buyers are able to access the resources that they need to
actually purchase a home.
Thank you, Mr. Chairman, for hosting this hearing and I
look forward to the testimony.
Chairman Bachus. Thank you.
The gentleman from New York is recognized.
Mr. Meeks. Thank you, Mr. Chairman.
I think what we just heard is part of what the problem is
because this is not really a hearing on what the disinformation
of what the HMDA data shows, not talking about subprime lending
versus prime lending, it is not talking about the
homeownership. African Americans definitely, like anyone else,
want to own a home. They get it and they understand generally
that it is the best and most important investment they can make
in their lives and indeed as Mr. Watt indicated, it is their
biggest investment. Probably one of the largest investments
that most people, not only African Americans, but most people
make in their lives would be in their home.
And we preach and teach talking about the fact that we want
them to buy a home because it is an appreciating asset, as
opposed to a car. However, there still should be some equity in
getting a loan. So if you happen to go to a subprime and you
don't belong in a subprime, you should be told to go to a prime
and/or if you are two individuals that have the exact same
credit scores, have the exact same income, have the exact same
background, and the only difference is the color of your skin,
and so therefore, you pay more money than the other, there is
something wrong with that and that cannot be tolerated.
And this regulation with reference to HMDA, whatever it is
that say that is burdensome, well, until it is burdensome on a
whole group of people who have to pay thousands of extra
dollars over the course of the mortgage simply based upon the
color of their skin, it must change, as Mr. Watt said. It is
not acceptable.
You want to relieve the burden of having to go through the
paperwork with reference to HMDA data? The best way to relieve
the burden is to change and fix the problem so that individuals
who have the same scores can get the same rate, and it is not,
as reflected in here, based upon the color of your skin.
Now I know some argue that maybe it is a financial literacy
piece. Well, if that is what you are saying, then I would urge
you to get more involved in educating individuals in regard to
financial literacy. That helps relieve the burden. Then if we
can show that we have things on a level playing field now, then
we can talk about something else.
But until we can show that the playing field is level for
everybody, the burdens in the requirements of supplying the
HMDA data, I know, for my part, will never, ever change. It is
something that must happen, and simply to say I don't know how
it happened, or I don't know why the data is what it is, is not
acceptable.
So those who may be in institutions who say look at our
individual data, I would say, look at and talk to the others in
the same association as you are, and say we are in this thing
together and we have to figure out a fix if you don't want
collectively to have the requirements of coming up with HMDA
data.
So this has to stop. This is, after all, 2006, and we would
like to think that we have made, and we have made a lot of
progress, but obviously, from the data that we have seen here,
a lot has changed but there are a lot of other things that have
not changed, have yet to change, and we have to be sure that it
does begin to, otherwise we have to continue to stress this,
and I think there will be other consequences down the road.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Meeks.
Mr. Baca.
Mr. Baca. Thank you very much for having this hearing
today, and I also want to thank Representative Mel Watt.
Last week, I attended a hearing along with Representative
Clay and others to discuss concerns regarding mortgage
discriminations finding in a new report released by the Center
for Responsible Lending.
The report indicates that after controlling for risk
factors, minorities were more than 30 percent likely to receive
a higher rate than White borrowers. We have to ask ourselves
why there is a disparity. That is a question we have to ask
ourselves. The report has come out. Why is there a disparity?
It appears that the Federal Reserve found that Latinos are
2.3 times more likely to receive higher cost loans than Whites.
Why? We have to ask ourselves why. Blacks are 3.7 times more
likely. Why? Is there a disparity in how those loans are
distributed?
These price disparities should concern everyone in this
room because basically, what we all want, Black, White, Indian,
American Indian, all of us, all we want is respect, equal
treatment, and equality.
We don't want to go back to say that there are violations
of civil rights or discrimination. But we have to stop this
disparity that exists today. The data shows that minorities are
not getting equal treatment and are deliberately being steered
into high cost subprime loans. Why? Because they are
vulnerable, and don't have the education, they are easy prey.
We have the marketers that are out there.
It is like all of us, capital gives us asset. I know
because I remember the very first time that my parents bought a
home--we came from a large family of 15--having that home and
having roots. But you also know that you have to provide for a
family and so someone is preying and someone calls them and
they say all right, here is an easy fix. You need a loan, you
need capital, you have a mortgage, you have payments, you have
other responsibilities, here is an opportunity to prey into a
high subprime loan, an adjustable loan or whatever the case may
be.
These loans should be the last resort for all of us. While
subprime loans have helped many families get into their first
home, they are risky and high-priced and have foreclosure rates
twice that of prime loans.
Too many mortgage loans and brokers are taking advantage of
the low income minority borrowers by placing them in high-risk
mortgages which they cannot afford, and they know they can't
afford them, but they put them right into it. It is like the
old way that we used to have when this country was first
founded, many of us minorities owned land, we didn't have
stakes, and the White man came and all of a sudden developed
new laws and said these are the laws in place right now so if
you don't have papers we are taking over.
It is just a different form right now. It being done. Some
of the brokers are taking back their homes when individuals
can't afford these homes. We are seeing many minority families
being steered into nontraditional loans such as adjustable rate
mortgages and interest only loans that carry risky terms, and
that is what I was describing in terms of land claimers that we
used to have. Well, it is a different form of land claimer that
we have now.
As interest rates are rising, their monthly payments are
becoming too high and becoming vulnerable for foreclosure. We
see the cost of living going up but the adjustable costs in
terms of wages are not increasing. Many individuals can't
afford a home.
We have the largest growth, both minorities and others
moving from L.A., Orange County, who are buying homes, and then
all of a sudden, they are getting into these adjustable loans
or high-risk loans that they are giving them and then they are
foreclosing.
Some reports indicate that as many as 1.2 million families
may lose their homes to foreclose this year. That is
frightening when someone is going to lose their roots, their
homes that they have established. 1.2 million families may lose
their homes this year, nearly 3 times the amount in 2005.
These new products may be appropriate for some families,
but for others the abuse has become a very serious problem.
Hispanic families rely heavily on mortgage brokers, that is why
it is important to have education literacy both in Spanish and
English in the centers.
The industry lacks the accountability to consumers and too
many Latino families are falling through the cracks. Bad actors
must be held accountable, and I say bad actors, and there are
good actors out there. I want to state that, too, for the
record. There are good actors, but there are a lot of bad
actors as well. There should be a list of those bad actors to
ensure that home buyers have equal access to fairly priced
homes.
I look forward to continuing to work with this committee
and to look at developing legislation to address this issue. As
Representative Mel Watt indicated, we have to stop this type of
discrimination. All we want is equal respect, and equality for
all of us.
Thank you.
Chairman Bachus. Thank you, Mr. Baca.
Mr. Neugebauer.
Mr. Neugebauer. Mr. Chairman, I yield my time to the
distinguished chairman.
Chairman Bachus. I thank you.
Governor Olson, you have heard several opening statements,
and normally we have limited them to 5 minutes but some have
been longer than that. I think the reason for that is the
importance of this subject.
You are going to hear more opening statements before we
start, because members feel very strongly about this issue. I
think if there is anything that a member serving on the
Financial Services Committee comes to realize, it is the value
of homeownership. It is really economically and socially the
pathway to wealth accumulation, to a store of wealth. It is a
source of stability, not only for families, but also
communities. You can look at a community, look at the
percentage of homeownership, and you can--that is a predictor
of crime rates, educational progress, and advancement.
I said in my opening statement that homeownership is part
of the American dream. It is the greatest investment that most
families make, so it is absolutely important that we ensure and
that we take steps to stop discrimination in mortgage lending.
There will always be different treatment because there are
different incomes, and different documentation on loans. There
are always reasons for people to get different interest rates
and to be charged different fees, but one of the reasons can
never be racially motivated.
We talk about fair play, Mr. Meeks talked about a level
playing field. It is absolutely essential to our democracy if
it is to function well and accord equal opportunity that we do
not have racial discrimination in our mortgage lending. So this
is, in fact, a very important hearing.
I can't understate the effects that discrimination, the
consequences of discrimination in mortgage lending. If there is
significant racial discrimination, then it is of great
significance and importance to all of us.
With that said, our next speaker--I would like to ask
unanimous consent that the gentleman from Alabama, Mr. Davis,
who is not on this subcommittee, be allowed to make an opening
statement. Hearing no objection, Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman, for welcoming me back
to the subcommittee and giving me leave to make an opening
statement and to ask questions.
Mr. Baca asked the question, and a number of people have
asked the question, of why these disparities exist and why they
go on, and I agree with my good friend from New York, Mr.
Meeks, and I agree with my friend from Massachusetts, Mr.
Frank, that it is not just enough to throw up our hands and
say, ``Oh, these things happen, but I didn't do it.'' It is off
in the air somewhere.
Let me take a stab at why I think part of this happens.
What the mortgage industry does is fundamentally and
qualitatively different from what the legal profession does and
from what the medical profession does. I will tell you what I
mean when I say that.
I am a lawyer. I have had that license for 13 years now.
When I was practicing law and a client came to see me I had an
obligation to give that client the best representation I could
provide. I didn't get to say if you pay me ``X'' amount of
money, I will give you this amount of representation, but if
you pay me ``X'' amount of money, I will give you this amount
of representation. Once you sign the contract, you better give
that person the best of your intelligence about his or her
case.
Those of us who have been to see doctors, we understand
that once you walk in and the doctor takes on that case, you
don't get certain treatment based on whether you are a Medicare
patient or Medicaid patient. You get the best treatment that
can be provided by that doctor.
I would submit that is not the case when it comes to
someone who is engaging in a mortgage transaction. You don't
get the best service you can possibly get, you get the service
that is in the interest of the broker, you get the service that
is in the interest of the bank making the loan.
And think of what that would mean if a lawyer, Mr. Olson,
provided advice to clients based on what was in his or her best
interest financially. Think of what it would mean if the doctor
said I will encourage you to do whatever would get my Medicare
billing rates to the highest level. We call that fraud.
That is the root of the problem, in my opinion. There has
to be an ethic in this industry that is frankly as good as what
doctors and lawyers give out. We are not the most noble people
in the world and we still manage it.
There has to be an ethic that says that when you come in
here for a transaction, we are going to give you the best
information we can and the best advice that we can. We owe that
to you as part of our fiduciary relationship. That ought to be
the written ethic in the profession, that ought to be something
that we try to see if we can write into law, but more than
writing in law, it has to be written into practice.
Then I want to make this other point. What is amazing to
me, I remember when had a hearing in this very room, Mr. Olson,
and there was testimony from, I think, someone who was
president of the Mortgage Bankers or one of the groups and I
asked the question, do we think that this disparity in subprime
lending, do we think it is based purely on market-based
factors, and the chairman of the Mortgage Bankers said no, it
is not. Then other people from the industry and other various
lobbyists said no, it is not.
Can you imagine, Mr. Chairman, if the Speaker of the House
were to make a statement tomorrow that yes, some hiring in the
House of Representatives is based on race, or if the Chairman
of the Joint Chiefs were to say some promotions in the military
are based on race, I think we would worry about that.
We haven't had that kind of outcry over those kinds of
concessions from the industry, and it ought to move us. We have
a large number of people here today, and that is great to have
that many people, but I am reminded as I conclude today that
when Senator Robert Kennedy was being laid to rest, Larry
O'Brien, who became NBA Commissioner, has been Postmaster
General, run Bobby Kennedy's political operation, and he made
the comment what wonderful crowds. And then someone on the
train said yes, but what are they good for.
I close by saying, I see all these people from all sectors
of this argument who are here today and a higher than average
number of members here, but what good is it if we don't get as
worried and concerned about the industry coming into this room
and admitting part of the problem is race and not coming
forward with steps to deal with it, solutions.
This has to move us to action. If it doesn't, those of you
in the industry, I make this point to you, and I make it as a
friendly statement, the distrust you breed will cost you money.
The distrust you breed will cost you customers.
So we all have a stake in more transparency and
accountability here, and this ought to be the beginning of a
process and it ought to produce results before we leave here
for recess in August.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Davis.
Ms. Lee. Ms. Lee was one of the members who actually
requested this hearing. We welcome your opening statement.
Ms. Lee. Thank you, Mr. Chairman, I will try to be very
brief, but I want to thank you and our ranking member for this
hearing, and also just associate myself with probably all of
the remarks that have been made already, but add to that that
it is very clear to me that the American dream is becoming a
nightmare for so many Americans and in California, for example,
and I need to ask this question in advance of the testimony,
because I had been working with Mr. Greenspan on the CRA
ratings.
For example, the financial institutions, the majority of
them in California, the majority receive outstanding ``A''
grading scores as it relates to CRA ratings, when I looked at
the mortgage lending data as it relates to African Americans
and Latinos, they were, like, between 1 and 4 percent of
mortgage lending.
For the life of me, I never could, and Mr. Greenspan could
never explain why an institution could get an outstanding
rating, and yet be so dismal in their mortgage lending to
African Americans and Latinos. So I hope that will be addressed
at some point in this hearing.
Finally, let me just say, oftentimes, we are accused of
playing the race card. Well, I think this data, this
information really is an example though of when some of us talk
about institutional racism, how it has been institutionalized
and how, of course, people of color, communities of color end
up on the losing end.
I think when you look at the subprime lending, and I am
looking at Mr. Olson's--a couple of statements that you made on
page 9 of your testimony, indicating that some of the
segmentation of the market by race and ethnicity may reflect
objective differences in borrowers' preferences or differences
from credit risk indicators. I think the majority of borrowers
in our country, regardless of their race or ethnicity, want to
be treated fairly; do not want to be victim to predatory
lending; want to know what they are getting into; and want to
make sure that their loans are going to be loans that allow
them to realize the American dream in terms of acquiring the
equity that they need or they want, or that they deserve so
they can send their kids to college, start a small business or
whatever. But when we have such a large percentage of
minorities in the subprime market, it begs the question in
terms of just the advances we have made in racial
discrimination and institutional racism in our country.
So thank you, Mr. Chairman, for this hearing. I look
forward to the testimony.
Chairman Bachus. I thank the gentlelady from California.
The gentleman from Missouri, Mr. Clay, I recognize you for
your opening statement.
Mr. Clay. The statement is very brief. Good morning to all
and thank you for holding this hearing, Mr. Chairman. The Home
Mortgage Disclosure Act is an important tool for my district
and for most districts that are in metropolitan areas. The data
reported under HMDA includes information about denied home loan
application, race, sex, and income of the borrower.
Additionally, lenders have to report all first mortgages priced
3 percentage points above Treasury yield and all secondary
mortgages 5 percentage points over Treasury yield.
We need this tool in my district to combat predatory
lending, discrimination in lending, and many other ills
associated with obtaining affordable housing. I was disturbed
when proposals were made to eliminate the requirement that
intermediate small banks collect and disseminate CRA data on
small business, small firms, and community development lending.
The elimination of this data will eliminate the ability by
which communities themselves measure whether the bank is
meeting the small business needs of the community. There are no
adequate substitutes for this data. I understand that financial
institutions have concerns about the cost and efforts required
to produce and disseminate the data, however, the value of the
data to our districts far outweigh the cost associated with
this collection.
I am eager to hear what our panelists have to say on this
issue, and I yield back the balance of my time, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Clay.
That concludes the opening statements from the committee
members and at this time, we will recognize the Honorable Mark
Olson, Board of Governors, Federal Reserve System. Governor
Olson, welcome to the committee.
STATEMENT OF HON. MARK W. OLSON, BOARD OF GOVERNORS, FEDERAL
RESERVE SYSTEM
Mr. Olson. Thank you very much, Chairman Bachus, and
members of the committee. I have an opening statement, which I
would ask to be submitted for the record but, Mr. Chairman, you
and others have hit the highlights of what I have to say
regarding the intent of HMDA, the concern about racial
discrimination, and the evolution, if you will, of some of
HMDA, so I will just make a couple of points that were brought
up in the questions.
In your opening statement, you talked about the importance
of eliminating racial discrimination. What I heard from so many
of the members was the degree of frustration that we are
finding because of the persistence that we find in the studies.
It is a concern that we share.
Congressman Watt, in your testimony or your discussion, you
identified the laws, such as the Fair Housing Act, that really
are the core of fair lending, and I would remind the committee
that those laws have been on the books in some cases for 40
years, and in some cases for 30 years. We have been asking
banks to be in compliance with those laws for all those periods
of time.
When the HMDA information was first disclosed, and
Congressman Frank pointed out, initially it was by an amendment
to allow for that information to be made public. If we would
have had the discussion 15 years ago, not quite 15, 13 years
ago after the first reports had come out, I suspect that your
concern would have been about the approval-denial ratio because
that was our understanding of the racial component in lending a
number of years ago.
The dynamic changes that have taken place in the mortgage
market over that period of time have shifted our concern. We
still are concerned about approval-denial. But to a greater
extent, we are focused on the difference in pricing and to the
extent that those difference in prices are, in fact, race-
based, and that is, of course, disparate treatment and is the
violation of fair lending standards. We continue to examine
institutions for that purpose.
Now we are in the process of also holding hearings around
the country on the HOEPA legislation which is also focusing in
a significant way on the changes that we are seeing in the
marketplace. Several of you have alluded to the fact that in
the marketplace there is a tremendous amount of marketing
activity and a certain amount, perhaps, of steering activity
that is going on and the great concern is that equally situated
borrowers are not receiving equal treatment, which is the
essence of fair lending.
When we, as the Federal Reserve, look at the HMDA data,
that is not our first look at the lending activity of these
institutions. We examine all of these institutions on a routine
basis. In some of those institutions, we are physically in the
institution continuously, and have an opportunity to
continuously evaluate their compliance with fair lending laws.
Let me move forward to 2004. It was an initiation of the
Federal Reserve that we asked for pricing data, that is the
pricing data to be publicly released because the pricing data
is the point now where we are most likely to find the
opportunities for disparate treatment. But that is not the
first look that we, the Federal Reserve or the other
regulators, have had with respect to that issue. We have been
aware of that shift in the marketplace or that growing change
in the marketplace. As Congressman McHenry suggested, the
subprime markets has grown rapidly over the last number of
years, and the good part of that is there is enormous societal
value in providing additional mortgage activity to a wider
range of borrowers. The downside of that is that there are more
opportunities for mischief.
So when we go in and look at an institution and we have
been examining for those factors for many years, we start by
looking at the extent to which their policies and procedures
and their risk management tools examine for possible disparate
treatment or fair lending compliance. We then look at, for
example, the manner in which they monitor those who are buying
loans on behalf of the institution from brokers, the extent to
which they are evaluating these brokers, we look at the extent
to which individual borrowers with individual characteristics
are given the same treatment.
We have had a chance to look at the initial HMDA data in
the aggregate, and we are in the process of now looking at it
on an institution-by-institution basis.
Of the 200 institutions, as we have pointed out, that were
identified where there was some statistical disparity,
somewhere between 30 and 40, perhaps 35 of them are Federal
Reserve regulated institutions. In each of those instances, we
have initiated discussions, and in some cases, have been deep
into looking at and evaluating the extent to which that
additional information gives us a different prism to look at
the manner in which they are in compliance.
Mr. Chairman, we support the efforts of this committee, we
support certainly the efforts of Congress to address this
important subject, and I would be happy to answer any
questions.
[The prepared statement of Governor Olson can be found on
page 66 of the appendix.]
Chairman Bachus. Governor Olson, I very much appreciate
your testimony. I thought it was very to the point and valuable
to our committee as we explore this.
Let me ask you this, the Congress is presently considering
the Voting Rights Act. The 15th amendment was passed in 1870,
giving all of our citizens the right to vote, at least all
except women, who obtained that right later. But it wasn't
until the Voting Rights Act that really most of our citizens,
they had the constitutional right to vote, many of them were
denied that right, many votes weren't counted until we had a
Voting Rights Act some hundred years later.
We have all sorts of laws on the books which prohibit
racial discrimination in lending practices, and yet, in your
knowledge at least, there is an appearance that discrimination
may go on. Is there something else we need? I mean, do we need
further legislation; do we need to gather more data?
I said in my opening statement that at least with high cost
loans, since 2002, when the Federal Reserve started, I think it
was gathered in 2004 under HMDA the lenders had to first
disclose. But are there other things that we--do we need to
gather other information, do we need to gather what the
borrowers' asset level was and their credit scores, the loan-
to-bank ratio of the property, the borrowers' debt to income
ratio or the level of documentation submitted. Is there
something else we need to do, or the Federal Reserve needs to
do?
Mr. Olson. Let me separate the issue, because there are two
components to it.
The pricing data is not difficult for the regulators to get
at the pricing data, because we go in and examine an
institution's entire portfolio, and examiners, all of the bank
examiners from all agencies and all of the examiners of
mortgage lenders, have had the ability to look at that data and
examine that data very carefully. We have always had that
ability. Only recently, though, has that been included, as you
pointed out, in the public release of HMDA data.
Now that helps identify another issue that perhaps--but not
fully--HMDA data alone does not give you a complete picture of
the extent to which there might be discrimination in the
lending process.
Incrementally, if you were to add to that, it probably
would not also lead you to that final fundamental determination
of discrimination because discrimination now is usually not
overt, to the extent that it exists and it clearly does still
exist, it is very subtle. So you have to look very carefully at
all the data that you have available.
Also across institutions it is very difficult to make
comparisons. For example, if you were to add a credit score,
different organizations use different kinds of scores and,
increasingly, especially the largest institutions are now
building their own scoring models. So if you were to compare
across institutions, it is very difficult to make that
determination.
I would say, however, that we are in the process now in the
hearings that are going on, the HOEPA hearings--we have had
two. We have two more scheduled, one at the end of this week,
and one later on. We are discovering a great deal more about
the changing marketplace. Incidentally, the second panel that
you have coming on next, many of those people have been part of
the hearings that we have had. They have provided excellent
additional information as to the changes that have taken
places.
My suggestion would be, respectfully, that before Congress
would consider additional legislation, we understand fully the
extent to which we know the changes that are taking place in
the market and how best to address them.
Chairman Bachus. Thank you.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. Thank you, Mr. Olson.
Chairman Bachus. Actually--I'm sorry. It should be Mr.
Frank. I apologize.
Mr. Frank. I thank the gentleman, because we do have the
HUD Transportation Appropriations, so I am going to have to
leave.
Mr. Olson, you say we should not legislate until we get all
that done. When do you expect we will have it?
Mr. Olson. Well, there are no destinations, there are only
journeys.
Mr. Frank. Then that is the problem.
Mr. Olson. Our hearings will be complete by July. We will
have a chance to look at this initial round of disclosures.
This will be ongoing.
Mr. Frank. But if it is ongoing--excuse me. No, I'm sorry--
do not legislate until we have the information. But if there is
no destination, it is ongoing, and we will never get there. You
heard this from my colleagues. There is a crisis here. We do
very well in a lot of areas, but there is a crisis. You have
significant numbers of Americans who think they are getting
frozen out of the system. So we cannot wait that long.
I will be honest with you. I do not see, on the part of the
financial services industry or the regulators, the kind of
urgency that many of us think that this situation requires. If
the HMDA data alone isn't enough, then tell me what we need to
do to expand the data and collect it and analyze it. The
Federal Reserve is very good at all kinds of very sophisticated
analysis. Too much of this testimony is, we do not have enough,
we need more. This is an urgent issue. We can have--
Go ahead.
Mr. Olson. No, go ahead.
Mr. Frank. I do have to address--several of us talked about
it. I was struck by it. I know Ms. Lee mentioned it. On page 9,
you say, ``Black and Hispanic borrowers are more likely to
obtain mortgage loans from institutions that tend to specialize
in subprime lending. Now, at least part of this segmentation by
race and ethnicity may reflect objective differences in
borrowers' preferences.''
Would you tell me what it is of the psyche of Black and
Hispanic people that they would prefer to go to a subprime
lender rather than someone else? I know you say there are other
factors, but what are the factors?
Mr. Olson. I suspect it reflects what we see in the
marketplace now, which is push marketing.
Mr. Frank. Excuse me. You do talk about--you say steering,
etc. There are other factors. You did not say this is the only
factor; I acknowledge that. But you said part of it is that the
Blacks and Hispanics prefer to go to subprime lenders. Do you
really want to stick with that? I mean, you did say it may go
from being steered and there are different levels of literacy,
but you said a preference for subprime lenders. What kind of
people would prefer a subprime lender to a prime lender?
Mr. Olson. It may not have been as artfully worded as it
might have been, but the point that we are making is what we do
see is that there do seem to be a larger number of African
Americans in that community going to the subprime lenders.
Mr. Frank. I understand that. That is not the problem. Do
not blame the victim. That is exactly the problem. I know,
let's go to the subprime lender. To impute that as a preference
to the victims, frankly, makes people--the insensitivity sign
goes up. Please, do not say that again.
Mr. Olson. If I were wearing my sociological hat, I
probably would have worded it differently. I apologize. But
what we are doing is we are reflecting and describing the
preferences that are demonstrated not simply because they like
them better but the preferences that are demonstrated by the
number of applications.
Mr. Frank. But there are many reasons why, if you are an
African American, you would wind up there. Why dig up their own
preferences?
Mr. Olson. That is a better way to say it.
Mr. Frank. But, to be honest, that is what makes people
nervous. This is victim blaming and stereotyping, to be honest.
I know you do not believe this, but the fact that this gets
into the testimony--you know, you guys are pretty good at
vetting over there. When this slips through, that is what makes
us nervous.
Let me say finally this--yes, help us with the data, but I
do want to say to yourself and to all the other regulators, we
have data that shows significant disparities. We have the Feds
saying that while there are non-subjectively racist reasons for
many--not most--of the disparities, there is some prima facie
reason to believe that there is racism.
We live in America, where racism has been the curse of this
country, and while we are making progress we have not totally
eradicated it. If at the end of the analysis of this factual
data which shows a substantial disparity nobody is penalized
for engaging in racially discriminatory behavior, then the loss
of confidence on the part of many of us is going to be
overpowering.
Mr. Olson. Congressman, we did not expand the data
collection to pricing data to cover up the issue or to any way
diminish the issue. We expanded the collection of data and the
public distribution, or the public release of that information
in order to shed greater light because we agree with you.
Now we knew that that would invite analysis, and we knew
that it would perhaps invite criticism. Now even your
discussion that you just gave, you were giving the data in the
aggregate. You did not go--as did our initial report, which
discussed the differences when you get down to an institution-
by-institution basis which significantly eliminates or
accounts--
Mr. Frank. I appreciate that, and I acknowledge that many
of the disparities can be explained in other ways. But by the
Federal Reserve's own analysis of a number of institutions, it
is hard to think of an explanation other than race. And I am
saying this: If after we get this, in the end of the process,
nobody found anybody guilty of anything, I am going to be very
skeptical.
Mr. Olson. So will I, frankly. And I think as we have a
number of groups, we have a number of interested parties all
looking at the same data. We have the lenders. We have the
regulators. We have a number of community groups.
Independently, we have some law enforcement agencies. I would
agree with your conclusion.
Mr. Frank. Thank you.
Thank you for the courtesy, Mr. Chairman.
Chairman Bachus. Mr. McHenry.
Mr. McHenry. Thank you, Mr. Chairman. I certainly
appreciate it.
To the ranking Democrat's question, who would have a
preference for a subprime loan in the marketplace, there are
no-doc loans--no-documentation loans that you can get quickly.
And being involved in real estate investment, it is a good tool
to have so you can close quickly on a property and not have to
get a stack of paperwork to get the loan. Now you will be
charged a higher rate and additional fees to get it, but it is
a wonderful thing to access that capital so you can purchase a
property for investment purpose, and that is something that I
have seen utilized a number of times.
But, thank you, Mr. Olson, for being here today. You said
in your testimony that certainly the HMDA data, as it is
presented, the HMDA data tells a great deal about lending
patterns, but they do not tell the entire story. What would you
have say could be the rest of the story?
Mr. Olson. Well, there are a number of factors. The HMDA
data--the publicly released HMDA data tells part of the story.
If you are looking at all of the factors that go into the
mortgage decision, either the approval or the pricing, you take
into consideration a number of factors.
You just hit on a major one, which is the choice of
products. There is a wider range on the choice of products
depending whether somebody wants a low-doc or a no-doc or, for
example, if the product is what we have always called a
conforming product, which I am sure you are aware of which is a
Fannie Mae- and Freddie Mac-approved product. Each of those
contain different levels of documentation, different levels of
cost, and, therefore, there are different levels of pricing
involved. Also, the credit risks or the loan-to-value ratio of
an institution. Those are some of the notable characteristics
impacting pricing.
However, the people who are involved in fair lending or in
the fair lending area tell me you need to look at roughly 30
different data points in order to really determine if there is,
in fact, a disparity in treatment among borrowers.
Mr. McHenry. How many data points have you collected in
this HMDA data?
Mr. Olson. I think eight or nine. It is a relatively small
number, and they are not necessarily the key ones. But the key
ones are very sensitive--there are some privacy implications
for having any of those data released to the public.
Mr. McHenry. But perhaps you have 25 percent of the data,
maybe, for us to get a fair read on.
Mr. Olson. Yes, but that is done on a weighted basis. But,
yes, roughly.
Mr. McHenry. So it would be perhaps unfair for us to jump
to conclusions or to draw significant conclusions from the HMDA
data?
Mr. Olson. HMDA data are very valuable, but, as we have
stated, they are not definitive.
Mr. McHenry. So what would be one of the definitive ways to
determine whether there is discrimination? Would it be the
credit risk associated in matching that with sex, age, or race?
Mr. Olson. As you look at an institution--as you look at an
institution and within that institution, if you look within the
institution either at the various channels or at the product
mix, the question would be are equally situated borrowers
treated equally? What we have described and some of what we
have done, even with HMDA data, is to develop a systematic
method of comparing borrowers called matched pair analysis.
They might take an African American borrower, for example, vis-
a-vis a White borrower or an Hispanic borrower versus a White
borrower and find borrowers with identical characteristics and
then determine the extent to which they are treated similarly.
You need to get down to that sort of a fine comparative
evaluation before you can make a determination as to whether or
not there is disparate treatment.
Mr. McHenry. As policymakers on this committee, what
conclusions can we draw from the HMDA data as presented?
Mr. Olson. It is fair to draw a conclusion that there are
differences among the treatment of minority borrowers and White
borrowers that need explanation and that we ought to
continually look at trying to determine why those differences
exist.
Mr. McHenry. Thank you.
Chairman Bachus. Thank you, Mr. McHenry.
Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
Mr. Olson, let me start by thanking you for some stuff. We
do not want to kill the messenger, and I think it is
significant and something that the Federal Reserve is to be
commended for, that you have expanded the information from just
an approve-deny decision to pricing data, analysis, collecting
information that allows us to analyze pricing data, not just a
decision about whether somebody gets a loan or does not get a
loan. Because if there is disparity in treatment, if there is
discrimination--and I distinguish between those two--it is
getting more sophisticated. We know that.
I applaud the distribution of the HMDA data privately to
the other regulators so that they can get right to work on
doing what their authority gives them the right to do as
regulators.
So nothing we say here should ignore those two applauses
that I am giving you. You say there are 30 data points or
somewhere in that range for determining disparate treatment. I
do not think you mean that disparate treatment, you have
already found anything. There may be 30 data points for
determining whether it is discrimination or whether there is
discrimination, but I think we already have the gross
information about disparate treatment. Am I wrong about that? I
do not want to get into a semantic session here.
Mr. Olson. You are on a very important point. And I think
that in the evolution of our understanding of what constitutes
discrimination. Early on in the process thought of
discrimination as being overt discrimination. We lend to
Whites. We do not lend to Blacks. That was what discrimination
was described as years ago. I think over the course of a number
of years, we have learned that discrimination can also include
either disparate impact or disparate treatment--
Mr. Watt. Disparate impact.
Mr. Olson. --and the differences are significant. Because
disparate impact and disparate treatment, especially disparate
treatment, takes into consideration a whole wide range of
factors, and you cannot have evaluated the entire impact--the
entire universe without looking at that impact.
Mr. Watt. But let me be clear, Mr. Olson--and I hope I am
trying to be fair and clear here--that race is not one of those
30 data points.
Mr. Olson. It absolutely is. Especially if you are using
regression, for example, you control for all of the factors and
you determine what is left that is unexplainable, and if race
is one of the factors that is unexplainable, then you have a
real problem. So indeed it is, if you are looking at it,
because in the context that we were talking about of disparate
treatment--
Mr. Watt. Maybe I should ask the question in a slightly
different way. Surely race--if race is the only data point
standing at the end of the day, you have eliminated all of the
other data points as explanations, then we have a problem.
Mr. Olson. Exactly. And where institutions have
historically run into difficulty in the past--
Mr. Watt. I am going to run out of time here.
Mr. Olson. I will not take your time. I would be happy to
come back, if you would like, and we can talk about this.
Mr. Watt. I want to go beyond the HMDA data, which you said
touches on eight or nine of those data points, and ask you if
you have had an opportunity to review the report of the Center
for Responsible Lending? Have you had that opportunity?
Mr. Olson. I have looked at it briefly, yes.
Mr. Watt. How many more of those 30 data points did they
pick up in their analysis?
Mr. Olson. That I don't remember right off the top of my
head.
Mr. Watt. But significantly more, wouldn't you say, than
the eight or nine that the Federal Reserve picked up, isn't
that right?
Mr. Olson. Not that the Federal Reserve picked up, that is
released in the HMDA data.
Mr. Watt. In the HMDA data that the Federal Reserve
released, right.
Mr. Olson. I believe you are correct.
Mr. Watt. So if there are up to 20 out of those 29 maybe
and race--they factored out, for a certain population, credit
scores and geographic factors and other factors that are data
points, and race still is standing as a significant factor, or
appears to be, I take it that is troubling to you.
Mr. Olson. Congressman, I believe that I am correct and--I
am not sure I am correct--they looked at aggregate data.
Mr. Watt. No, as I understand what they did was they took
the actual data based on actual loans and got down to that
level and analyzed those loans, that you analyzed on an
aggregate basis, on a specific basis and still found that race
was a factor.
Mr. Olson. You hit on the real key fact. You need to look
at it on an institution-by-institution basis. In the initial
look that we did, even of the HMDA data, when you look at it on
an institution-by-institution basis, that explains a lot of
that differential but not all of it. There still is a
persistent difference that remains. But as we look at
institutions, as we go in and examine those institutions, we
can examine them very carefully on all of those bases.
Mr. Watt. And you are going to do that under the 30 to 40
that is under the Fed's jurisdiction?
Mr. Olson. We will continue to do it.
Mr. Watt. Okay, and other regulators will do it, you hope?
Mr. Olson. They do, trust me. They do the examinations as
well.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Watt.
At this time, we are going to recess. There are votes on
the Floor.
Governor Olson, there are other members who do want the
opportunity to ask you questions.
Mr. Olson. Then I will stay.
Chairman Bachus. We appreciate it. I commend you for your
testimony thus far.
The hearing is recessed subject to votes on the Floor of
the House. At the end of the last vote in this series, we will
reconvene here.
[Recess]
Chairman Bachus. The Subcommittee on Financial Institutions
and Consumer Credit will come to order.
At this time, Governor Olson, we are going to allow
additional time for members to ask questions. At this time, I
will recognize Mr. Pearce for any questions he may have.
Mr. Pearce. Thank you, Mr. Chairman, and thank you, Mr.
Olson.
I was a little surprised to see you walk away from your
comments that some borrowers might prefer. We find examples of
that every day. My mom bought a higher-priced car for her whole
life. She chose a higher price because she was more comfortable
at the dealership. People choose higher-priced TV's.
The truth is that many lenders, many subprime lenders hire
people who will talk the language, that will make them feel
more comfortable, compared to going in a bank and seeing the
rigors there.
So I think you had it adequately stated, and I saw you lose
your nerve. I do not really need a comment. I am just making an
observation that I think, in truth, there are times when people
have preferences even to the point of damage. People willingly
purchase narcotics knowing that it is not the best thing for
them. So I think there is an element of personal
responsibility. I do not say that there are not problems and
even deep problems.
How long have you been with the Federal Reserve, Mr. Olson?
Mr. Olson. I have been a Governor for four-and-a-half
years.
Mr. Pearce. Four-and-a-half years. And how long have you
been with the Reserve overall?
Mr. Olson. That is my entire experience with the Fed. I
have been in banking and the banking consulting business for 35
years.
Mr. Pearce. Where I am headed is I see that on page 7 you
conclude that the HMDA data lacks information and that you
cannot use that to observe racial or ethic differences in the
price of loans as being the result of unlawful discrimination.
If you cannot determine that from HMDA loans, have you
submitted a request for the measurement parameters that would
allow you to ascertain that?
Just, yes, you have submitted the request or, no, you have
not.
Mr. Olson. The distinction--the point we are making is that
you do not make that determination based on the information
that is--
Mr. Pearce. I understand that. Have you asked for the full
and complete information that will allow you to get to the
point that we have been discussing?
Mr. Olson. We get the full and complete information when we
go into the institution.
Mr. Pearce. Your statement says HMDA does not allow you to
arrive at the conclusion of whether or not it is unlawful
discrimination. Is that not the statement on page 7?
Mr. Olson. That is the statement.
Mr. Pearce. Is that how you then asked for enough
additional data that would allow you to ascertain that?
Mr. Olson. I am trying to answer the question. The answer
is we have all the access we need to that information, but it
is not information that is in the public domain. HMDA data
gives us one prism with which we look at that organization, but
on a constant basis, on a consistent regular basis, we go into
an institution; we look at their entire loan portfolio.
Mr. Pearce. So the fact that it is not made available to
the public domain does not stop you from regulating it, does
it?
Mr. Olson. That is correct.
Mr. Pearce. How many instances of enforcement have you had
in the last four-and-a-half years that you know of where you
have actually gone in and given somebody a whack for
discriminating racially?
Mr. Olson. In terms of the referrals to the Justice
Department, we have had 35 over the last decade. Now how many
of those have been in the last four-and-a-half years I could
not tell you.
Mr. Pearce. Thirty-five in the last decade of approximately
how many investigations? How many banks have you looked at in
10 years?
Mr. Olson. Nine hundred banks that we regulate, so that we
would have reason to examine on a frequent basis.
Mr. Pearce. Now then when I listen to your testimony, not
your written testimony but your spoken testimony, I hear that
you share the concerns that we share, that there are laws on
the books for 30 years, that the HMDA was an amendment that Mr.
Meeks described, additional thousands paid by minorities. Yet
if the solution is within your reach, if you have all the data
you need to determine if people are discriminating and steering
towards, I just do not understand why that--your presentation--
your verbal presentation gave the appearance that you are kind
of in concert with us, that you agreed with us but you are
unable to do anything about it. But yet I feel through your
discussion you have the capability to do something about it,
and it is confusing.
I will let you answer that. I see my time has expired.
It is disorienting to hear you agreeing with all the
testimony, which is fine, but then the role of the governors is
regulatory and you have the capability to do something, but
that is not in the tone and tenor that came across in your
verbal presentation.
Thank you, Mr. Chairman.
Mr. Olson. Then let me try once more.
Of the roughly 9,000 institutions that provide HMDA data--
9,000 institutions have provided HMDA data after we have
started asking for public disclosure of the pricing data. Of
those 9,000, in roughly 200 we found statistical disparity, and
this statistical disparity could be in one of two forms, either
in the numbers of borrowers--the relative numbers of borrowers
who have received high price loans or in the interest disparity
on the APR. So that is 200 out of 9,000.
Of those 200, somewhere between 30 and 40 are institutions
that we regulate. And of those 30 to 40, some of them may be
multiple HMDA providers within the same organizations. Those
are institutions that we have examined for many, many years for
fair lending, and that we have required to disclose to us how
they manage their fair lending responsibilities.
Now in addition to all of the examination procedures that
we have done in the past, we then look at them again in light
of the new HMDA data.
Now what I have not said yet but is important to say is
that, of those 200, probably 100 of them, probably half of
them, are mortgage lenders that are outside of the banking
industry in terms of the regulatory oversight. They are
national bank or bank holding companies or bank subsidiaries.
And I suspect that a good deal of the instances of questionable
behavior that we find are in those institutions because they do
not receive regulation with the same rigor as do the banks or
the bank subsidiaries.
Chairman Bachus. Thank you, Mr. Pearce.
Mr. Meeks, do you have questions?
Mr. Meeks. Thank you, Mr. Chairman.
Mr. Olson, let me first thank you for your testimony.
Let me make sure that I am clear, also, because I think it
is important. I agree with you that maybe 20 years ago or less
than that we were concerned, very definitely, about approval or
denial, but I do not believe that we intended that to mean that
individuals can be approved but get ripped off. At the same
token, I want to be clear that I am not against subprime
lending. I am against predatory lending, and I see that as two
different things.
But what I am against is and what I think that I know some
of the studies have shown, where both a minority individual and
a nonminority can go to a subprime lender with the same credit
scores. It shows that, basically everything else being equal,
the nonminority would be given advice or direction or something
of that nature to how they can get a cheaper rate. But the
minority is just given the most expensive rate. That kind of
disparity is what I am focused on and I think should not be
happening.
And the same goes whether you are a subprime lender or
prime lender. If you have the same background, everything being
equal, you should have the same rights, and if there is a
practice to steer one to a better rate, then both should be
steered to a better rate.
Historically, because of what you talked about and because
of the way the marketing is done, because Blacks for too long
had been denied by prime banks and so, therefore, they got
tired of being denied and denied and denied, and then there are
advertisements that are projected to the minority community in
particular saying that no credit, any credit, we always say
yes, just come and get your mortgage, and individuals want to
get a home because we have preached the value of home ownership
and they want to be said yes to. And they are steered to the
subprime lenders.
Once they got to the subprime lender, the guy looks and
says they have A-1 credit, then the ethics, I think, that Mr.
Davis was talking about should dictate that they should say,
look, you do not need this. You can qualify for a better loan
than this, and you should go someplace else.
We do not see that kind of policing, that kind of ethics,
if you will, in the industry.
So I guess I led up to my question. One of my questions is
this. Because then I also understand, as a result--and I do not
know, maybe we need to increase the assessment area--that in
those areas that have been classified as a CRA assessment area,
in those areas we have found a much smaller disparity in
lending rates then in those areas that have not been. So is it
possible--because I am also trying to find out some solutions
here. Is it a possible solution somehow that if we expand those
assessment areas we can begin to again do something
affirmatively to start eliminating the disparity that we see in
these rates?
So that is my first question to you.
Mr. Olson. The CRA philosophy is essentially that an
institution that collects deposits in a certain area is
required to meet the financial needs of that community as well.
So that in every bank we essentially we ask them to define
their CRA area footprint. In other words, the areas where they
have branches, the area where they are in the deposit-gathering
process, and then have them assess the needs of that community
and then meet the financial needs of that community consistent
with their financial product offerings.
Many of those institutions may have mortgage lending
affiliates that have offices scattered throughout the country,
and in those offices, they do not have the physical
infrastructure, it is likely that in a lot of those
institutions, the mortgage gathering process is done by
mortgage brokers.
So one of the questions that we raised rhetorically in our
evaluation is perhaps it is the additional use of mortgage
brokers that has resulted in product differences that carry
with them higher rates, and that is one of the issues that we
want to look at. As we examine the banks and the bank holding
companies, including their subsidiaries, that we regulate, that
is one of the questions we ask them, what standards that they
have in place to either police brokers or to provide the
borrowers with a range of products that best fit their credit
profile. So that is one of the criteria that we use.
Mr. Meeks. I will just ask this real quickly, Mr. Chairman,
because I go back and forth in my own mind.
One of the debates that we have here to combat steering and
others is whether or not it would be better to have individual
States address this behavior--we have strong anti-predatory
lending statutes in New York, as opposed to having a national
anti-predatory lending law--and whether or not that would help
prevent this kind of steering. I just wondered whether you had
an opinion on that.
Mr. Olson. Congressman, we have not taken a position on
that.
As I indicated earlier, we are in the process right now of
going around the country and having hearings, what we call the
HOEPA hearings. More broadly, we are looking at the changes
that are taking place in the mortgage industry and in the
mortgage market, and to the extent that there would be a
legislative initiative that came from that, we would then look
at it at that time. At the moment, we do not have a position on
that bill.
Mr. Meeks. Thank you.
Chairman Bachus. Thank you, Mr. Meeks.
Mr. Baker.
Mr. Baker. Thank you, Mr. Chairman. I appreciate your
leadership on this issue and your bringing this matter to the
attention of the committee.
I have several questions that I just want to try to get
into the record, perhaps a slightly different understanding of
the purpose and complexity of HMDA data.
Mr. Olson, my understanding is that HMDA data is a very
broad brush regulatory tool that can open a window for the
regulator to make further examination. But upon looking at the
elements that are reported, I understand the data does not
include, for example, the borrower's individual credit score,
so that it would be difficult to know from HMDA data whether
the person was a 550 or 750. I understand that HMDA data would
not disclose, for example, at the time of closure whether it
was a 100 percent loan or an 80 percent conforming loan. My
opinion is there is a relevance between whether a person has
significant equity in a home or whether they do not and the
likelihood of not making their financial obligations.
It does not disclose, for example, whether there is cash-
out at closing which falls into the range of those mystery
objects, 125 percent of home equity loans. I am still trying to
understand how we allow that to happen.
It does not disclose, for example, the borrower's debt-to-
income ratio. So if the person were making $50,000 a year and
had $200,000 in obligations in addition to a prospective
$100,000 mortgage obligation, that might color the lending
institutions about risk and rates.
It does not include, for example, the loan-to-value ratio.
It does not include a consideration of the individual's other
assets owned. For example, if they were invested in the
markets, they had a relatively modest job but had $2- or
$300,000 in a bank account somewhere, that might incent that
lender to give a lower credit cost to the borrower because of a
low-risk likelihood demonstrated by that person's past savings
history.
It does not include an analysis of the person's employment
record. They could be 20 years of age, right out of college,
and employed 6 months. There is a high degree of risk
associated with that person's earning capacity.
It does not include an analysis of the person's academic
record, which in many cases leads to a determination of a
person's future earnings capacity and stability of holding a
job.
It does not include, for example, the variances in the
lending institution's cost of funds, or a smaller institution
in a rural market as competitive with a larger institution in
an urban market might be at a market disadvantage in the cost
of its own funding which then goes through to the ultimate
borrower.
It does not include consideration that the three credit
rating agencies, which all have their own proprietary method of
rating me, for example, would be extraordinarily unlikely,
almost impossible, for me to call the three rating agencies
today and get all three of them to give me the same identical
numerical score. I cannot believe all three national credit
rating agencies are doing racial profiling. I think it has
something to do with the proprietary methodology with which
they put in the financial indicators for that particular
borrower.
Also, it does not take into consideration that if I go to
lending institution ``A'' with the same credit score and the
same profile and go to credit extender ``B'', that there might
be two variant screens through which my credit application
flows; and the same person going to two institutions will get a
different credible evidence rating risk assessment with the
same person--not similar, the same person. That is called
competition. That is why when you go out and you are looking
for a home loan you very rarely find 20 people all willing to
extend the same credit on the same terms on the same day. There
is variance because all of them have slightly different
proprietary methodologies on how they come to these
conclusions.
The reason why I bring these points up, it would appear to
me to allege that there is racial profiling in the issuance of
credit on the provision that HMDA data is the Bible and clear-
cut philosophic statement on market activity, well, it seems to
be a reach. I would hope that if a regulator, based on their
discovery of the facts at a relevant institution, would find
clear, convincing evidence that the same person who came in
with the same score was treated differently from any other
person with the same set of facts at the same institution for
the same type of borrowing, we would find those people being
treated equitably. And if they were not, wouldn't that be the
regulator's responsibility to make further examination, call
those executives in and say, let's get our business straight?
Or am I wrong?
Mr. Olson. I would go one step further. What you have
described is a referral to the Justice Department. If you went
through that entire analysis and found a pattern of
discrimination, that is not what constitutes a referral to
Justice. You said it exactly right. It is on an institution-by-
institution basis. Because there are different risks. There are
different risk appetites. There is a wider range of products.
There is a wider range.
Mr. Baker. I could apply at 10 o'clock in the morning, go
back to the same institution at 2 o'clock and say, I've changed
my mind; what's your rate now?
Mr. Olson. The rate could have changed.
Mr. Baker. And nothing has changed about me. It is all
changed about the institution because their cost to funds is
different.
So all of the variances that people make reference to need
to be backed up by specific case representations that Mr. Jones
went in and had the exact same profile as Mr. Smith. Mr. Jones
was denied, and that becomes an actionable case by the
Department of Justice.
Mr. Olson. That is correct.
Mr. Baker. Thank you, very much.
Chairman Bachus. Thank you, Mr. Baker.
Ms. Waters.
Ms. Waters. Thank you very much, Mr. Chairman, for not only
holding this hearing and working with Mr. Watt and others to
hold it, but thank you for redirecting me to the hearing when I
was headed in another direction; I appreciate that.
I have been trying to learn more about the role of brokers
and loan officers, and the initiation of loan packages by
people who are associated either with financial institutions or
with other brokers, etc. Would you explain to me--and perhaps I
should know this--what kind of latitude does an institution
have in paying those who initiate loans for them--the yield
spread, the difference in what the institution requests and the
interest rates charged to the homebuyer, or other kind of
pricing and what the broker can ask for--how does this impact
the consumer?
Mr. Olson. The yield spread premium I think is what you are
referring to.
Ms. Waters. Yes, that is what it is.
Mr. Olson. As far as I know, there are no legal parameters
around what a yield spread premium would require, but there are
disclosure requirements for the yield spread premium. In the
regulated financial institutions, we require the lenders to
purchase brokered mortgage products, to have parameters around
what the yield spread premiums can be and what would be
acceptable yield spread premiums. In the less regulated
environment, I should say that same discipline may or may not
happen.
Ms. Waters. I need a little bit more explanation. You said
that it is disclosed.
Mr. Olson. Yes.
Ms. Waters. And what have you learned about--that is okay,
go ahead.
Mr. Olson. This is a very important question.
Ms. Waters. Yes.
Mr. Olson. It is disclosed on the HUD one, HUD disclosure
statement; there is some controversy about how consistently or
how well it is disclosed.
Ms. Waters. What do you know about it? Based on the
disclosure or lack thereof, what can you tell us about how this
is impacting the consumer? What percentage of the subprime
mortgages have yield spread premiums? How much are they? What
is the average rate? How does that add to the mortgage costs?
What is it all about? And can one of these persons, who may or
may not be trained or--I don't know what this relationship is.
I see people on the street offering mortgages, and telling
people all kind of things and trying to get them into all kinds
of risky mortgages. What do you know about this?
Mr. Olson. Congresswoman, let us get back to--I do not have
at my disposal today a significant amount of informational
analysis of the yield spread premium or the impact it has on
the market, but we do have that information, and I would be
happy to come back and provide that for you. Or, Mr. Chairman,
I would be very happy to submit that for the record as well.
Chairman Bachus. Thank you. Without objection.
Ms. Waters. Yes, I suppose so.
But, Mr. Chairman, I would like for this issue to be the
focus of our work as we look at the issue of predatory lending
because I am finding that this yield spread premium is much
larger than most of us understand. We need to know who gets to
initiate these loans, not only much how much the spread is. I
want to know what the various institutions are doing and how
this works. So I would appreciate him not just getting back to
me but getting back to you and this committee.
Chairman Bachus. Congresswoman Waters, as you know, in your
discussions on predatory lending or subprime lending bill, we
have discussed the yield spread premium, and it is part of our
discussions going forward.
Ms. Waters. Do you have any data that has been collected on
it?
Chairman Bachus. We do have data as to what different
States and the Federal Government--the parameters they have set
on yield spread premium and what different States--the
approaches they have taken.
We probably are going to meet this Thursday, and I have
been meeting with Mr. Frank, Mr. Watt, and I think your staff
and others in these ongoing discussions. I think this is very
important, about your line of questioning, that we do get some
uniform bill to regulate subprime lending in this country of
nonfederally regulated institutions.
Ms. Waters. I appreciate it. I would like to see the
information, and they should have it. Because if we have
financial institutions who have a 6.5 interest rate and we have
someone out there initiating a loan at 8 points or 7 points, I
want to know how it all works, and is passed on to the
consumer.
Chairman Bachus. We have Secretary Jackson from HUD. We
have had discussions with him. We have information from the
Federal Reserve. We have a lot of HMDA data, and, in looking at
the cost of these loans, of subprime loans, the yield spread
premium is something that we have focused on.
Ms. Waters. We have to do something about it.
Thank you.
Mr. Olson. Congresswoman, we are involved in some hearings
around the country at the moment. We will be in California on
Friday, as a matter of fact. And during these the whole issue
of the role of brokers has been an important part of those
discussions, and the yield spread premium is a component of the
broker relationship with the borrower. That has come up. I am
disappointed, also, that I am not better informed about that
and cannot add more to it.
Chairman Bachus. Actually, you have informed us about the
hearings on financial literacy and steering.
Mr. Watt. Mr. Chairman, I would like to make it clear that
Ms. Waters was not walking out on you. She has a bill on the
Floor, and I think she got focused on that.
Mr. Olson. I promise you, I spent five-and-a-half years
working for Members of the House and Senate, so I know the
multiple types of responsibilities that you all have to
balance.
Chairman Bachus. I will say the Federal Reserve, as my
understanding is, you all have been having hearings on the
segmentation about race and ethnicity of the housing market--
Mr. Olson. That is correct.
Chairman Bachus. --and will continue to have those.
Mr. Olson. That is correct.
Chairman Bachus. At this time, in the order--the order of
witnesses by seniority, which is what the minority side has
asked me to go by, Mr. Ford, Mr. Green, Mr. Clay, Ms. Lee,
unanimously consent that you be allowed to have questions,
because you are a member of the full committee and are one of
the members who requested this specific hearing. So I would ask
without objection that she also be allowed to ask questions.
Unless there is some direction as far as seniority, I will
take my direction.
Mr. Clay.
Mr. Clay. Thank you, and thank my colleague for yielding.
Mr. Olson, let me ask you about your comment on your
testimony on page 9 where you say, ``Yet the segmentation may
have more troubling causes, at least in part. Segmentation may
steer borrowers to lenders that charge higher prices.''
Who does the steering? Which part of the industry does the
steering?
Mr. Olson. We have heard the range of responses to that
question. I will tell you that some of the people who have
addressed this issue in great detail are the people on the next
panel. So that is an important question you ask, but let me
give you some of what we have learned.
Number one, what we have learned is that people do in fact
go to brokers or to lenders with whom they are comfortable or
with whom they have repeat experiences. They also go to lenders
that their principal advisor for financial products directs
them to. There is a wide variation among how people determine
who their primary advisors are.
There is also in the mortgage business among all segments
of the business a great deal of marketing and we have
uncovered--not uncovered but we are aware of what is called
push marketing, where there is a very substantial--very
aggressive marketing taking place, not all of which necessarily
will lead a prospective borrower to the most advantageous
product based on their needs and on their credit backgrounds.
Mr. Clay. I don't want to cut you off, because I have a
limited amount of time, but don't you think if borrowers don't
know there is a better product out there that prevents them
from getting--
Mr. Olson. Indeed it does. That educational component is
maybe one of the most important elements that we need to deal
with; there is a knowledge asymmetry that is critical and
growing.
Mr. Clay. You also said that you are looking at 35 Federal
Reserve regulated institutions that the 2004 HMDA data showed
significant disparity based on race or ethnicity. How many of
these institutions have outstanding CRA ratings, do you know?
Mr. Olson. I don't have that information.
Mr. Clay. Would you get us some data on that?
Mr. Olson. With this caveat. We are very careful not to
disclose the identity of an institution that we are examining,
but I will try to correlate those two factors, the fair lending
and CRA, to the best I can.
Mr. Clay. My final question. Despite the value of the HMDA
data for elimination of lending discrimination, there is no
enforcement of the mortgage lending industry, the nondepository
institution. This is a failure of the regulatory system. Why
doesn't any other agency such as the FTC or the Justice
Department aggressively pursue supervision and enforcement of
the fair lending laws with nondepository institutions? Is this
a protected group? If not, why no aggressive enforcement?
Mr. Olson. In our case, I say that, broadly, in the case of
the financial institution regulator with prudential
supervision, it is our role to go into those institutions on a
regular basis, and in those institutions we are both examining
for and expecting that they will have processes in place, and
we will examine them for their compliance with the whole body
of fair lending law.
By contrast, Justice and FTC, for example, are enforcers,
as opposed to supervisors. It is a completely different
paradigm. They are not funded or staffed to evaluate in the way
we are. It is a different philosophy, a different approach to
law enforcement.
Mr. Clay. When you find practices of discrimination or
something that is really overt, do you report them, too?
Mr. Olson. To either HUD or Justice. It is almost always
Justice.
Chairman Bachus. Would the gentleman yield?
Mr. Clay. I yield.
Chairman Bachus. It is a referral?
Mr. Olson. To the Justice Department. We have the authority
to refer to HUD. For reasons that I can't tell you in great
detail, they are almost always to Justice. Where we find
evidence, significant evidence of discrimination that we would
think perhaps is actionable, those are referrals to Justice.
Chairman Bachus. From your fair lending reviews.
Mr. Olson. That is right. There are enforcement actions
that we can take independently, but where we see that level of
evidence, it is a referral to Justice.
Chairman Bachus. Congresswoman Lee.
Ms. Lee. Let me thank my colleagues for yielding and
allowing me to ask my questions.
Let me go back to my point I made in my opening statement,
Mr. Olson, with regard to CRA ratings. Of course, Congress
created the Community Investment Act to make sure that banks
are vested in strengthening communities in which they served
and which they were collecting fees and in which they were
doing business.
Now I can understand your response to Mr. Clay not wanting
to give the exact names of the 35 institutions that you are
reviewing at this point, but I also know it is a matter of
public information, especially in California, that the top
five, ten banks, their percentage of mortgage lending to
African Americans and to Latinos amount to, from what I
remember, between 1 and 3, 4 percent, yet these banks--again,
it is public information--their CRA ratings were outstanding.
Now I have been trying for years to reconcile this, and Mr.
Greenspan had indicated it was difficult to reconcile because
the CRA statute did not focus on lending to minorities. But I
guess what I would want to ask you is how do you think we can
strengthen the statute so that we can at least have that
information so we know whether or not the CRA ratings are
really warranted? Because, quite frankly, an outstanding rating
under CRA and mortgage lending to African Americans at 1
percent, something is not in sync, and I would like to get your
ideas on how we can fix that.
Then, secondly, I would just like to ask you about the FICA
scoring process, credit scoring. What do you think we can do to
make that a bit more reasonable so that it works better for
potential homeowners, regardless of their race or ethnicity?
Mr. Olson. When CRA was originally passed, there was a
concern that financial institutions were taking deposits out of
a community--and however you define community, could be a
neighborhood--but out of an area but not looking at meeting the
financial needs of that community. And boiled down to its
essence what the CRA requirements are intended to do was to
have an institution evaluate the extent to which in its
marketplace, however it defines its marketplace, and certainly
one of the key determinants of the marketplace is where it has
its deposit base and the extent to which it evaluates the needs
of that community and then meets the financial needs of that
community consistent with the product line that that
institution offers. That is the criteria.
We take that very seriously in our evaluation and on an
institution by institution basis, and I am sure that the banks
have recognized this is a discussion that has gone on for some
time, the extent to which that is really a serious process.
Ms. Lee. Let me comment here. The needs in many of these
communities are varied, but home ownership is certainly one
need, and the product line of many of these institutions are
mortgages.
Mr. Olson. That is correct.
Now those institutions have varying risk appetites. They
might include a subprime lender or they might not. Some are
very aggressive mortgage lenders. Some are very aggressive
installment lenders. We don't ask all institutions to be all
things to all people. What we ask them to do is evaluate how
they are meeting the financial needs of their community as
defined with the products that they have, and that is the
criteria.
Now I can't answer on a specific institution by institution
basis, but that is one of the reasons that CRA ratings are
disclosed and one of the reasons that HMDA information is
disclosed, to have the institution in the public arena defend
how they juxtaposed the two.
Ms. Lee. I understand that, Mr. Olson. I am saying what
resource is there, from a regulatory standpoint, for these
institutions getting the outstanding ratings and yet they are
flunking, on the most part, on mortgage lending to minorities?
Mr. Olson. If in fact an institution is flunking, that
would be a very difficult question to answer without looking at
the specifics. Because it seems to me that what you have
described is fundamentally inconsistent.
Ms. Lee. But it is a fact and we have been trying to get
some answers to this for years. I am trying to, like many, find
a solution. We haven't been able to get any response from the
Federal Reserve with regard to how we can begin to fix this. So
I would like to work with you.
Mr. Olson. Very good. We will continue to--we will make a
point of following up and give you more specifics.
Ms. Lee. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Ford.
Mr. Ford. I will be very brief.
Good to see you, Governor. You are a bright guy and
brighter because you have a good guy from Memphis to work for
you.
Mr. Olson. Memphis is well-represented in the Federal
Reserve, and we are the beneficiary of it.
Mr. Ford. You tell the other Governor that I like him, but
I like her even more, so I am glad to see you.
Mr. Olson. You like her more so?
Mr. Ford. She is a voter. I thank you.
Just a quick question. I won't take much time.
I have looked--what do you think the answer to this is?
Because, obviously, that is what everybody is struggling to get
at here. And Ms. Lee's frustration was not directed at you but
years before she got here and the California gentleman's work
on this and some of the others.
How do we get at this? Because we all see this data, it
inflames emotions and provokes some policy reactions, and then
we seem to be back here every year. The credit agencies claim
they have nothing to do with it, the banks say they really have
nothing to do with it, and it just kind of happens. Then you
have people we represent stuck with the bill.
Normally, when rich people have a problem, they get a
lobbyist and spend a lot of money and we get them moving up
here. These folks can't do that. I don't mean to put it all on
your shoulders, but how do we proceed from here? That is what
we are trying to get at, and I know you are, too.
Mr. Olson. If I can, Congressman, let me put that in a
little bit broader context and describe what we see. What we
have seen over the years and even incrementally from year to
year, we see a significant increase in the number of mortgage
applications, in excess of the population growth or even the
adult population growth in this country.
So what we are seeing is significant increases in the
mortgage market, providing mortgage financing to an increasing
number of people. We also see efficiencies in the marketplace
so that the products are available at a lower price than ever
before, and the entire growth of the market has meant that more
people, minority and nonminority, have access to more credit
than ever in the past. That process, as best I can tell, is
accelerating because of the numbers of lenders in the
marketplace and the explosion in the secondary market
particularly and the secondary market appetite for the
conforming and nonconforming product.
The real difficulty that we see is that the increasing
sophistication in that product means that the options available
exceed the ability of even a fairly well-informed borrower to
sort through all of the options available to them, and there
are some--I don't remember who first said it, but there are
some bad actors in the mortgage business. It is a small number,
but there are some.
And what we are trying to do, what we have done through the
regs and in the hearings, is to isolate those practices and
those lenders. So what we can do is to preserve the advantages
that mortgage financing has provided to allow more people to
achieve home ownership but, at the same time, identify both the
practices and the lenders that are abusive. And it is a
combination. It is on the one hand an educational process by
the consumer. Certainly there is a responsibility that we ought
to expect of the lenders.
Thirdly, I think that one of the greatest support
mechanisms that we have out there are the community groups.
They have been tremendous both in disseminating information,
helping pinpoint the lenders that probably are abusive and then
call those to our attention.
We have many banks in many markets partnering with
community groups, and that is a process that we have strongly
encouraged and certainly that is the regulators' responsibility
on the oversight function. So it is a shared responsibility.
Mr. Ford. Do you think that the punishment should be
greater?
Mr. Olson. That is a legal question, Congressman, and I am
not sure that--
Mr. Ford. Do you think if there were sterner penalties that
it might deter some of this behavior?
Mr. Olson. I think the penalties--it seems to me that the
most significant penalty that you could provide to a lender, a
responsible lender, would be just the reputational risk
exposure. For a lender to be branded as discriminatory in their
lending practices, for a responsible lender that is the worst
thing you could say about them. I think, to me, that is the
most significant deterrent.
Mr. Ford. I think you are right. That is a big part of it
in some communities. But in some areas where people have
limited options--that is the only concern I have. If you can
only buy from one or two guys or women and they both have awful
reputations but you have limited options, you don't have a real
choice.
Mr. Olson. You are hitting on an important point. Because
one of the dangers that we see is that we are eliminating the
numbers of people providing mortgage financing and to
particular the minority communities. We have seen an increase
in the numbers of lenders willing to aggressively lend. There
is a downside to that. But I think it is important that we
continue to remind lenders that we are encouraging additional
lending into all communities, including the minority
communities.
Mr. Ford. I have gone way over my time, but if this
committee considers anti-predatory lending legislation, the
Governor of my State is about to sign a law in the next few
weeks probably. Your thoughts, do we need a national law on
this?
Mr. Olson. We have not taken a position, Congressman, on
this.
Mr. Ford. I was hoping you were having such a good time you
might break that rule. I appreciate your candor.
I am of the opinion that the States probably should act if
we are not going to act this point and hopefully come up with a
good plan. So you all have not--
Mr. Olson. We have not taken a position.
Mr. Ford. Thank you for taking your time and forgive me for
abusing mine, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Ford.
Mr. Green.
Mr. Green. Thank you, Mr. Chairman and Mr. Watt, for
hosting this hearing, and thank you, Mr. Olson, for your
testimony.
Let's start, if we may, please, with a sentence on page 7
of your testimony. Midway down the first paragraph it reads,
``Some of the typical credit-risk factors not included in the
HMDA data are credit scores and loan-to-value ratios.''
If we had that information, would that alter your testimony
greatly, sir?
Mr. Olson. First of all, let me go back and make an
important distinction. Those are factors that are not publicly
available through the HMDA disclosures, but those are the
factors that we look at very carefully and we do have access to
when we examine those institutions.
So it lends itself to the question, can you make a
decision, can you arrive at a conclusion from HMDA data? And
even that additional incremental data would not allow you to
arrive at a conclusion. However, our responsibility as
regulators is to get into those institutions and look at their
entire lending methodology, and those two factors become
important in our analysis.
Mr. Green. In fact, in that same paragraph you go on to
indicate that additional information about the lender,
including loan products, lending practices, and borrower's
credit worthiness; these are other factors that ought to be
considered, and that would be important.
Mr. Olson. That is correct.
Mr. Green. Is it possible, Mr. Olson, to construct an acid
test, if you will, such that we can ascertain whether or not
invidious discrimination exists with reference to lending
practices? Is it possible?
Mr. Olson. It is possible--well, that is exactly what our
role is, and that is exactly what the Congress has asked us to
do in the enforcement of ECOA and the Fair Housing Act, the
body of law that constitutes fair lending. That is our
responsibility and--as is with the other regulators.
If you were to have in the public domain enough information
to definitively draw that conclusion, you would have had to lay
bare the credit history and a lot of other personal data and a
lot of other information of individuals that I think would be a
fundamental breach of their right to privacy.
Mr. Green. You have indicated that this is a part of your
function, to come to conclusions about price discrimination,
invidious price discrimination, is that correct?
Mr. Olson. That is correct.
Mr. Green. As a part of your function, given that you have
access to information that is crucial in making such a decision
about invidious discrimination, how many referrals have you
made to the Justice Department? Assuming that you have found
some cases of invidious price discrimination, how many
referrals have you made to the Justice Department within the
last 2 years? Let's start with 2 years.
Mr. Olson. The pricing data--only recently has the pricing
data been included in the HMDA disclosures.
Mr. Green. I don't mean to be rude, crude and unrefined,
but I do need to intercede. Because I have to ask this. Has
this been the charge of your institution for the last 10 years?
Mr. Olson. That is correct. For the last--since fair
lending--since ECOA and since the Fair Housing Act have been on
the books.
Mr. Green. Approximately how many years?
Mr. Olson. Twenty-five to thirty.
Mr. Green. In that 25- to 30-year period, could you give me
just a rough guesstimate as to the number of referrals you
have, given that this is one of the charges of your
institution?
Mr. Olson. Let me--I would be happy to follow up and give
it to you more broadly, but let me give you the figures that I
have today. In the last decade, we have made 33 referrals to
Justice.
Mr. Green. In the last 10 years.
Mr. Olson. Of those, I believe that the Justice Department
has--3 of those 33 have actually resulted in action taken by
the Justice Department.
Mr. Green. Thirty-three referred and 3 of 33--
Mr. Olson. I have an update. In 2004 and 2005, we have made
five referrals to Justice.
Mr. Green. 2004 through 2005, five referrals.
Mr. Olson. Correct.
Mr. Watt. Could the gentleman yield?
For clarification, are you saying that 3 out of 33 in which
legal action was taken, or any action was taken?
Mr. Olson. In which the Justice Department took an
enforcement action.
Mr. Watt. That is, filed a lawsuit.
Mr. Olson. I have to get that. Including settlements.
Mr. Watt. So just 3 out of the 33.
Mr. Olson. That is correct.
Chairman Bachus. Would the gentleman further yield?
I think, as Governor Olson has said, this is only the
second year that the pricing data has been available, and the
Federal Reserve, to their credit, in 2002 started requesting
this for 2004. So at least progress, I think, has been made.
Before, you said, actually, this data would be helpful.
Have you found it to be helpful?
Mr. Olson. Mr. Chairman, I suspect that those five
referrals probably are information that predate our receipt of
the 2004 information that we finally got in 2005.
Chairman Bachus. What about the benefits as opposed to the
cost of the data that you are now collecting? Could you give us
an assessment of that?
Mr. Olson. The Congress has mandated that we will collect
the data, and so we do.
Chairman Bachus. Have you found it valuable?
Mr. Olson. There is no question but what the release--that
HMDA and the public release of that information has caused
lending institutions to very significantly focus on the issue
of disparate treatment.
The additional information, the incremental information in
pricing, that should not be new to any lender. Because we have
been examining for compliance with that responsibility for at
least a decade, also should not be new. But, even so, I suspect
that lenders are much more attentive to that issue now that
that information is in the public domain.
So I don't know that I can quantify an answer, but it
certainly has had an impact.
Chairman Bachus. That included census tracking information.
Mr. Olson. Geocode information, yes.
Chairman Bachus. Thank you.
Mr. Green, I yield back 2 seconds, if you have additional
follow-up.
Mr. Green. Thank you, Mr. Chairman.
Permit me to ask about a term that I think I may have
coined, and I simply called it O-U-T-I-N-G, outing. Did you
out--3 of the 33, were they outed? Did we publish that they
were engaged in invidious discrimination?
Mr. Olson. The actions taken by the Justice Department were
very public.
Mr. Green. The others, the 30, what was said or done with
reference to their actions?
Mr. Olson. I would have to guess how Justice handled them,
and I would prefer not to do that. But I suspect that, for
whatever reason, they decided that there was not sufficient
information in order for them to bring action. That is strictly
a presumption on my part.
Mr. Green. If I may, Mr. Chairman, may I ask one additional
question? The Ohio law that has been referenced, I believe,
earlier, if not, I am referencing it presently, it gives
consumers the right to uncapped damages. We were talking about
penalties earlier, and we talked about exposure as a penalty,
and you gave your opinion about exposure as a penalty. What
would be your opinion with reference to uncapped damages as a
penalty?
Mr. Olson. That is way out of my area of expertise,
Congressman. The relationship between the penalties and the
extent to which penalties may in fact deter behavior is way out
of my range.
Mr. Green. Just a final comment, and I appreciate it very
much, if exposure is within your range, it would seem to me
that, as a penalty, that uncapped damages might be something
that we ought to give some thought to. Ohio seems to be a part
of the avant garde, and maybe this is where we are headed. I am
not sure. But I do look forward to visiting with you more.
Thank you. I yield back.
Chairman Bachus. Thank you.
Governor Olson, you have testified before the committee now
for 3 hours with a small break, and I want to commend you for
your testimony and your openness with this committee. I think
that Government works best in this environment, and I think it
is a wonderful opportunity to display a beneficial interaction
between an independent agency of our Government and the
Congress elected by the people. So I very much appreciate it.
We are going to have one follow-up question, unanimous
consent request.
Mr. Watt. In this segment of the hearing.
Chairman Bachus. Governor Olson, let me simply say that
this committee has found on many occasions that home ownership
is a key to financial independence, that affordable rental
housing and home ownership are basically for most people the
choice of where they will call home, and we have programs to
promote both of them. Home ownership, as you know, builds
strong communities, and it offers children a safe and stable
environment in which to grow and flourish.
Having said that, there is a concern that this committee
has--members on both sides of the aisle--on what appears to be
an opportunity gap between our White citizens, non-Hispanic
White citizens, who have home ownership rates of about 76
percent, and our Hispanic and Black populations or citizens,
who have home ownership between 40 and 50 percent. So a gap of
about 25, 26 percent, which is a concern to all of us, and we
would ask your commitment and we know that we have the Federal
Reserve's attention and commitment to seeing that we mirror
this opportunity gap.
Mr. Olson. You indeed have our commitment on that, Mr.
Chairman.
Chairman Bachus. Thank you.
At this time, I will recognize Mr. Watt for unanimous
consent.
Mr. Watt. Mr. Chairman, I ask unanimous consent to be
allowed to submit for the record a report of the Consumer
Federation of America entitled: New Analysis of Nontraditional
Mortgage Borrowers Shows Less Wealthy, Weaker Credit Than
Industry Suggests; second, a report of the Fair Housing Center
of Greater Boston entitled: The Gap Persists, in which the
Boston Center used testers to call and visit 10 banks and 10
mortgage lending companies in the Greater Boston area and found
differences in treatment that disadvantaged minority home
buyers in 9 of the 20 matched pair tests. That was 45 percent.
Seven of these tests, the difference in treatment were large
enough to form the basis for legal action.
So I am just submitting those for the record.
Chairman Bachus. Without objection.
I would also like to submit for the record testimony
submitted by the Consumer Mortgage Coalition entitled: Home
Mortgage Disclosure Act, Newly Collected Data and What it
Means, dated June 13th.
At this time, Governor Olson, you are free to leave.
We will start our second panel. Mr. Tom Price, a Member
from Georgia, will preside for at least the first hour of the
second panel. Thank you very much.
Mr. Olson. Thank you, Mr. Chairman, and members of the
subcommittee.
Chairman Bachus. If our second panel will come forward at
this time.
Mr. Price. [presiding] I want to welcome each member of the
second panel, and I appreciate your patience as well. I know
this has gone on a little longer that you have anticipated, but
we thank you for coming and providing your testimony on this
important issue.
Joining us on the second panel are Dr. Douglas Duncan, who
is a senior vice president and chief economist, research and
business development at Mortgage Bankers Association; Ms. Janis
Bowdler, housing policy analyst, National Council of La Raza;
Mr. Bill Himpler, executive vice president, federal affairs,
American Financial Services Administration; Mr. Keith Ernst,
senior policy counsel, Center for Responsible Lending; Mr.
Calvin Bradford, president, Calvin Bradford & Associates
Limited, on behalf of the National Fair Housing Alliance; and
Professor Michael E. Staten, director, Credit Research Center,
McDonough School of Business at Georgetown University.
We welcome each and every one of you. Please try to keep
your opening statements to 5 minutes. The lights in front of
you will show green until a minute is remaining; and then
yellow will come on; and if you slow down enough, you won't get
to the red, which comes on at 5 minutes to stop your testimony.
If you can stay within these guidelines, it is appreciated.
We will have members come in and out and hopefully have a
good round of Q and A, and we thank you once again for coming
today.
Mr. Price. Dr. Duncan, if you would please begin.
STATEMENT OF DOUGLAS G. DUNCAN, SENIOR VICE PRESIDENT AND CHIEF
ECONOMIST, RESEARCH AND BUSINESS DEVELOPMENT, MORTGAGE BANKERS
ASSOCIATION
Mr. Duncan. Mr. Chairman, members of the committee, thank
you. One brief change. Good afternoon.
I have been analyzing HMDA data for 14 years and believe
that HMDA is an invaluable tool to understand how the mortgage
market works in practice. Our HMDA work at MBA helps our
members reach new customers and develop products and
underwriting tools to better serve new and established portions
of the market.
The most recent HMDA data on loans made in 2004 and 2005
demonstrate the greatest and widest availability of mortgage
credit in our Nation's history, which in turn has made possible
record home ownership rates. The data show that borrowers in
virtually every area of the Nation of every race and ethnicity
and every income level receive a wide array of credit
opportunities.
HMDA is fulfilling its intended legislative and regulatory
purposes of providing data concerning the availability of
credit in order to help lenders, regulators and the public
spotlight where additional lending may be needed. It reflects
activity in the marketplace, provides usable information to
facilitate public and private investment, and provides signals
to regulators where further review is warranted.
The mortgage market is working. Statistical analysis of the
data suggests that denial rates and differences in the
incidence of minority and nonminority higher cost loans are
explained by objective risk-related factors that are being
applied in a nondiscriminatory manner. Absent overregulation
and the imposition of unworkable solutions, the range of
mortgage products and the risk-based pricing prevalent in the
mortgage lending industry will continue to expand access to
credit and record levels of home ownership. At the same time,
competition will continue to compress rate spreads.
The market is working, but we recognize that it is not
perfect. While risk generally determines rates, the
effectiveness of borrower understanding and shopping cannot be
discounted. Borrowers still find it challenging to understand
the mortgage process.
Making financial literacy a reality is a good long-term
goal, but we believe that there are steps we can take in the
short term. First, borrowers need tools to educate themselves
about the mortgage process; second, consumers need simpler,
more user-friendly disclosures about mortgages in order to shop
and compare; and, third, consumers need to be urged to shop
more intensively, comparing mortgage offerings from lender to
lender.
Let me expand on that last point. Our research has shown
that home buyers, particularly first-time home buyers, rely on
a trusted advisor who may have an adverse incentive to help
them through the complex process of buying a home and getting a
mortgage. Too often, these new buyers, and particularly
minority first-time home buyers, either contact only one lender
or mortgage broker or are referred by a real estate agent to
only one lender or broker while shopping for a mortgage.
Borrowers more experienced in the process are generally more
likely to seek additional rate quotes and are therefore more
likely to receive a lower rate.
MBA opposes efforts to chill the innovation in our Nation's
mortgage markets or in any way weaken competition. Some
solutions that would actually harm borrowers include
unnecessarily burdening lenders with additional data
requirements and continuing to expand the patchwork of laws at
the State and local level aimed at predatory lending.
Additional restrictions impose a cost, whether in increased
compliance costs that are passed on to the borrower or through
reduced competition as lenders make the rational decision that
lending in certain markets is too risky.
Here is the conundrum facing lenders today. If they deny a
loan, particularly if it is a request from a lower income or
minority borrower, they risk being charged with red-lining or
falling short on CRA requirements. If they approve a request,
they risk charges of unsuitability or an unsafe or unsound
credit decision. If they charge too much, they are accused of
predatory lending. If they charge too little, they could be out
of the business.
At this point, attorneys are telling businessmen what their
business practices should be, but, despite the number of
attorneys on this committee, that is not a good thing.
Those promoting unwise solutions to abuses in the market
have misused the HMDA data to push their agenda. Press releases
and inaccurate reports state that the differences in denials in
higher rate lending among the minorities are unfair and
discriminatory. More worrying, however, appears to be the wide-
scale use of these reports to make public policy decisions
where more scientific research reaching the opposite conclusion
is available to legislators.
The mortgage market is working, and the innovation in this
industry has benefited borrowers and increased the supply of
credit, ultimately resulting in a higher level of home
ownership than otherwise would have been the case.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Duncan can be found on page
78 of the appendix.]
Mr. Price. Thank you, Dr. Duncan. I appreciate your
testimony.
Next is Ms. Janis Bowdler, the housing policy analyst for
the National Council of La Raza. We welcome you.
STATEMENT OF JANIS BOWDLER, HOUSING POLICY ANALYST, NATIONAL
COUNCIL OF LA RAZA
Ms. Bowdler. Thank you.
Good afternoon. My name is Janis Bowdler, and I am a
housing policy analyst for the National Council of La Raza. I
would like to begin by thanking the chairman, the ranking
member, and other members of this committee for hosting this
important dialogue.
Though I don't have as much experience as my fellow
panelists, I bring NCLR's expertise and perspective on this
important issue.
As a funder of housing counseling, NCLR has been working
with the mortgage industry for nearly 10 years to increase
Latino home ownership. To better serve our clients, we have
sophisticated partnerships with several of the Nation's top
mortgage lenders. This allows us to understand the dynamics
between lenders and the Latino community.
HMDA data is critical in this respect. It is the only
publicly available data that gives insight into how lenders
perform in certain neighborhoods among low income and minority
individuals.
This morning, I would like to briefly describe what HMDA
data tells us about Latino home borrowers and home owners, what
is driving market disparities, and what more is needed from
HMDA to complete the picture. Let me begin with what the 2004
HMDA reveals about Latinos.
In many ways, the story is not new. Latino families are
twice as likely to be in the subprime market as Whites, 18
percent of Latino applicants are denied financing, and this is
compared to 12 percent of Whites.
However, the release of the 2004 HMDA data gave us a look
at disparities in product pricing. As you will hear later,
Latinos are 30 percent more likely than Whites to be in the
most expensive subprime products. Other minority communities
have similar experiences.
In addition, NCLR's review of proprietary HMDA data from
various lenders has revealed similar results. Latinos and other
minorities are underserved by the prime market and
overrepresented in the subprime market. These disparities are a
clear indicator of market failure. Such market segmentation
results in families wasting hard-earned income on access fees
and interest, rather than on building wealth.
Moreover, these market disparities are not an accident,and
centers built into the structure of the market drive
segmentation. Allow me to explain.
A variety of underwriting variables common among Latino
borrowers often require manual underwriting. For example, 22
percent of Latinos do not have credit scores. In a world of
automated underwriting, manually underwritten loans are an
unwelcome increase in time and resources. Not wanting the added
expense, lenders process few loans of this kind. The excess
demand is then forced to turn to the subprime market. Subprime
lenders use a discretionary and proprietary pricing known as
risk-based pricing. It focuses on placing clients in products
that are profitable for the lender rather than suitable for the
borrower.
In an effort to further cut costs and boost profits,
lenders also rely on mortgage brokers. They help reach deeper
into certain markets and cut branch expenses. Consumers rely on
broker services, too, especially Latinos. Bilingual and
bicultural brokers promote themselves as advisors Latinos can
trust to find them the best deal. However, lender-offered
incentives known as yield spread premiums entice brokers to
push the cost of the borrower's loan higher. YSP's add another
layer of subjective pricing to already expensive and risky
products.
NCLR's experience with the market busts the myth that such
products are the only ones available to meet the needs of these
hard-to-serve borrower profiles. Eighty-eight percent of NCLR's
housing counseling clients are below 80 percent of area median
income and many require manual underwriting, but all receive
prime products. Instead, lenders are looking to cut costs,
please their investors, and increase profits.
Still, more information is needed to accurately gauge the
quality of services that lenders provide to minority and
underserved communities. For example, loan-to-value ratios and
credit scores are often considered the driver of mortgage
prices. Those needed fields are not collected by HMDA.
Moreover, HMDA is not as user friendly as it could be. The
Internet offers the easiest access point for most, but not all,
publicly available data is on the Web site.
To summarize, HMDA data provides the only publicly
available picture of how minorities are faring in the
marketplace. It reveals that Latinos and other minorities are
not being served well by the mortgage market. They are forced
to rely on subjective pricing models because of inadequate
service by the prime market, and more information must
collected under HMDA to allow for more in-depth analysis.
In closing, NCLR would like to make the following three
recommendations: First, hold lenders and brokers accountable;
create suitability in anti-steering standards for lenders and
mortgage brokers; remove the barriers to HMDA analysis by
adding additional data field so more robust analysis can be
completed; and invest in housing counseling as a meaningful way
to bridge the gap between underserved borrowers and their home
ownership opportunities.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Bowdler can be found on page
90 of the appendix.]
Mr. Price. Thank you very much.
Next, Mr. Bill Himpler, executive vice president of federal
affairs, American Financial Services Association. We welcome
you.
STATEMENT OF BILL HIMPLER, EXECUTIVE VICE PRESIDENT, FEDERAL
AFFAIRS, AMERICAN FINANCIAL SERVICES ASSOCIATION
Mr. Himpler. Thank you, Congressman Price. Good afternoon,
Congressman Green and Congressman Watt.
I represent the American Financial Services Association and
its 300 member companies, which include consumer and commercial
finance companies, ``captive'' auto finance companies, credit
card issuers, mortgage lenders, and other financial service
firms that lend to consumers and small businesses across the
country. This year, AFSA is celebrating its 90th birthday as
the Nation's premier consumer and commercial credit
association.
I am pleased to be here today to provide an industry
perspective on the Home Mortgage Disclosure Act, also known as
HMDA. Specifically, my comments will focus on the value and
limitations of the data collected under HMDA and why we think
that the 2004 data demonstrates that risk-based pricing works.
First, let me provide some quick background on this law.
As has been stated, HMDA was first enacted in 1975 to
identify and prevent red-lining. Therefore, lenders were
required to provide data on the location of loans financed by
property location by State, county, and census tract.
In 1989, HMDA was amended to require lenders to collect and
report the race, sex, and income of every applicant and
borrower, and, in 2002, HMDA was again amended to include rate
information on higher rate loans. And, in 2004, lenders began
reporting on this new data set, including the spread or the
difference between the borrowers' APR and comparable Treasury
notes.
While HMDA data can assist regulators in several ways, they
do not present a complete picture of the mortgage lending
process. That is because the data do not contain relevant risk-
related and price-related information including the borrower's
credit score, property type, down payment, any cash-out
information, property value, the borrower's debt-to-income
ratio, the loan-to-value ratio, and any assets held by the
borrower.
Marketplace competition and the degree of borrower research
and comparison shopping also are among the factors that
typically determine the rate received by a borrower.
Without the information I just listed, HMDA cannot be used
to draw accurate conclusions about why a loan was refused or
made at a particular rate. Throughout 2005, the Federal Reserve
explicitly cautioned that using raw data from HMDA alone could
lead to faulty conclusions about lending practices.
The obvious question is: Why not require lenders to collect
and report borrowers' credit and risk-related information that
is used to price a loan and determine the rate that is charged;
there are several reasons.
First, the release of credit scores and certain other data
would undermine the privacy interests of borrowers. Second, the
data elements utilized by lenders are numerous and weighted
differently by different lenders and such weighting cannot be
disclosed without undermining market competition and reducing
invasion. Third, regulators already have the ability to review
the individual loan files--let me say that again--individual
loan files, which is really the only way to determine whether
or not lending discrimination has occurred.
Even if all the data points that I mentioned earlier were
collected and reported, HMDA data would still be incomplete.
That is because some of the credit and risk-related factors
that lenders rely upon are not captured electronically. For
example: the data set does not capture the borrower's payment
history related to past rent and mortgage payments; does not
capture information related to the borrower's employment
stability, such as whether or not the borrower has seasonal
work or is an independent contractor; and it does not give an
assessment of the surrounding neighborhood and value of nearby
homes.
In its analysis of the 2004 HMDA data, the Federal Reserve
reported that the risk-based pricing now used is working
effectively. It has expanded access to credit and significantly
contributed to the highest levels of home ownership in our
Nation's history. A record of nearly 70 percent of Americans
now own their own home. Consumers are benefiting tremendously
because mortgage lending is far more competitive than it was
just 10 or 15 years ago. Today's unprecedented competition
between lenders is keeping prices low and allowing consumers to
shop around for a better-priced loan.
Finally, there is one point that I can't stress enough:
Pricing disparities between borrowers who have different racial
or ethnic background but identical personal and property risk
profiles are unacceptable. The mortgage lending industry is
committed to nondiscriminatory lending practices, and we
continue to work with others who share our commitment to
affordable lending to determine why any disparities exist so
that we can take the necessary steps to eliminate them.
I appreciate the opportunity to be here today and would be
happy to answer any of your questions.
[The prepared statement of Mr. Himpler can be found on page
96 of the appendix.]
Mr. Price. We thank you for your testimony.
Next is Mr. Keith Ernst, senior policy counsel for the
Center for Responsible Lending. Mr. Ernst.
STATEMENT OF KEITH ERNST, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING
Mr. Ernst. Thank you.
I would like to thank Chairman Bachus, Ranking Member
Sanders, and members of the committee for the opportunity to
testify on recent developments related to the Home Mortgage
Disclosure Act. Also, I would like to take this opportunity to
specifically thank Chairman Bachus and Congressman Watt for
their thoughtful leadership in addressing predatory lending and
other interests vital to American homeowners.
In these brief remarks, I will discuss a recent study from
my organization. In it we find that African American and Latino
borrowers in the subprime market are commonly 30 percent more
likely to receive a higher rate mortgage than similarly
situated White borrowers. Before turning to the study, however,
I wish to provide some context.
There have been longstanding concerns about potentially
unfair pricing in the mortgage market. In 2000, a joint report
by HUD and the Treasury Department noted that in predominantly
Black neighborhoods, subprime lending accounted for 51 percent
of refinanced loans in 1998, compared to only 9 percent in
predominantly White neighborhoods.
Federal Reserve researchers recently noted in 2004 African
American and Latino home buyers remained respectively 3.1 and
1.9 times more likely to receive a higher rate home loan, even
after controlling for differences in income, gender, property
location, and loan amount.
To help advance understanding, my organization brought
together detailed information on loan prices, loan terms, and
borrower risk profiles in a single database of 177,000 subprime
loans made in 2004. As a result, we were able to ask squarely
if race and ethnicity were significant predictors of whether a
borrower received a higher rate loan. As I mentioned, the
findings were striking.
Even after accounting for objective factors that lenders
used to set prices, including borrowers' credit scores,
including loan-to-value ratios and borrowers' ability to
document income, we report that African American and Latino
borrowers in the subprime market remain commonly 30 percent
more likely to receive a higher rate home loan.
When considering these results, it is important to
understand that our analysis focused exclusively on subprime
mortgages, those intended for borrowers with blemished credit.
Also, our study did not evaluate patterns of loan approvals or
denials. Rather, we illuminate troubling disparities in
pricing. These disparities represent real barriers to economic
progress at a time when the median non-White or Latino family
continues to have just one-sixth the net worth of the median
White family and substantial gaps in home ownership remain.
Even as I note the importance of these findings for
specific communities, I stress that they have implications for
all families. There is simply no reason to believe that the
issues underlying these disparities stop at the color line.
With this in mind, I offer several recommendations:
First, address industry practices that deviate from risk-
based pricing and encourage inflated charges. The clearest
example lies with yield-spread premiums. These cash payments
give brokers a direct incentive to place borrowers in loans
with higher rates. Including these charges in a revised
definition under HOEPA would provide an important check against
predatory lending and unfair pricing.
Second, holds lenders and brokers responsible for providing
loans that are suitable for a given borrower. Investment
counselors have long had such an affirmative obligation, yet
while buying or refinancing a home is the biggest and
increasingly most complex investment most American families
will ever make, lenders and brokers frequently have no such
obligation.
Third, require lenders under HMDA to disclose more detailed
pricing information, indicate whether a loan was brokered, and
provide information on key underwriting variables.
Fourth, encourage regulators to focus and make more
transparent fair lending enforcement activities.
Finally, I recommend supporting a policy framework that
promotes responsible lending. Especially critical to this
objective are policies to end abusive lending so responsible
lenders can successfully compete to meet all families' credit
needs. Along these lines, State predatory lending laws provide
a useful model as they work to filter abusive loans while
allowing credit to flow.
In closing, I recognize that every member of this committee
shares the ultimate goal of fairly priced credit and the
resulting opportunities to build wealth for all families. The
2004 HMDA data shows that we have substantial work ahead to
realize this goal. Thank you for your consideration.
[The prepared statement of Mr. Ernst can be found on page
101 of the appendix.]
Mr. Price. Thank you very much for your testimony.
We now have Mr. Calvin Bradford, president of Calvin
Bradford & Associates, on behalf of the National Fair Housing
Alliance. Mr. Bradford.
STATEMENT OF CALVIN BRADFORD, PRESIDENT, CALVIN BRADFORD
ASSOCIATES, LTD., ON BEHALF OF THE NATIONAL FAIR HOUSING
ALLIANCE
Mr. Bradford. Thank you.
I am speaking here today on behalf of the National Fair
Housing Alliance, or NFHA. I want to thank Chairman Bachus and
the members of this committee for inviting us to these
important hearings.
Professionally, I have worked in the field of fair housing,
fair lending, and community reinvestment for 35 years. NFHA was
founded in 1988. I have worked with this organization on many
of its extensive educational training and enforcement programs
in fair lending.
Today, I want to make five key points:
First, the Home Mortgage Disclosure Act data are widely
used and extensively valuable in fair lending and community
reinvestment activities. Since these data were first released,
HMDA has become the pre-eminent source of comprehensive data to
track patterns and trends in mortgage markets. Community
groups, civil rights attorneys, governments at all levels,
financial regulatory agencies, and lenders have used the data
literally thousands of times each year to address fair lending.
These uses range from identifying lenders for testing to
developing programs that have created literally billions of
dollars in private reinvestment programs.
However, improvements can be made. For example, the HMDA
data software programs could be more user friendly for
community based organizations and others with limited
resources. We also recommend that HMDA be enhanced to include
the identification of loans processed through mortgage brokers,
that interest rates and fees be reported separately, and that
the FFIEC consider whether a single pricing index really is
appropriate for all HMDA loans.
Second, fair lending enforcement by the Federal enforcement
agencies is critical to eliminating housing discrimination.
Private lawsuits have historically been the mainstay in
efforts to combat lending discrimination. While these private
efforts are important, the full engagement of Federal
enforcement agencies is essential for any serious effort to
combat lending discrimination in its many forms. Typically, in
order to show that a member of a protected class was treated
illegally, one needs to know how other applicants were treated.
This requires access to proprietary information that is not in
the public domain. Most victims of discrimination are unlikely
to know that they have been discriminated against, especially
where deception is involved and misleading or fraudulent
practices.
Private organizations simply do not have the resources to
undertake this type of investigation and litigation on a
routine basis. Lack of aggressive Federal enforcement actually
provides a form of safe harbor for those engaged in
discriminatory activity.
Third, the Federal regulatory agencies must improve the
quality and the scope of their fair lending enforcement
activities.
The Federal agencies that regulate depository institutions
have the authority to conduct effective fair lending exams.
However, in the experience of many of us directly involved in
training, education, and litigation, the record of enforcement
falls short of the mark.
For example, in the case of Flagstar Bank, the OTS raised
its CRA rating from satisfactory to outstanding after it was
found liable for overtly discriminating against an entire
national class on the basis of race in a Federal court.
Moreover, the discriminatory policy was implemented while the
bank was being examined.
Fair credit lending exam procedures themselves sometimes
reflect the fundamental lack of understanding of fair lending.
For example, find the examination procedures actually
instructing examiners that it is an indicator of potential
discrimination if the same loan officer is allowed to provide
an applicant with applications, or options, for the prime and
subprime loan product of that lender's mortgage companies.
On the other hand, this practice was seen by fair housing
groups and many of us in the field as essential to fair
lending.
We recommend that Congress should exercise its continued
oversight authority to determine why discrimination that is so
often identified by private enforcement efforts is so seldom
uncovered by fair lending exams.
HUD, Justice, and the FTC must increase their fair lending
enforcement efforts. HUD is the main enforcement agency under
the Fair Housing Act. However, it has undertaken very little
fair lending enforcement activity. The Department of Justice
was the lead agency in establishing some landmark cases in the
1990's, but its enforcement activity has declined since then.
The Federal Trade Commission has the authority over
nonregulated lenders under the Equal Credit Opportunity Act,
but it has pursued almost no lending discrimination cases.
In this environment, Congress needs to allocate additional
resources to HUD's Office of Equal Opportunity and to the Fair
Housing Initiative Programs in order to support increased
educational enforcement efforts on the part of private fair
housing organizations.
Finally, but not least at all, no agency regulates
independent mortgage companies for fair lending compliance.
There is a vacuum of Federal enforcement of nondepository
institutions which account for the majority of loans in the
market today. This is an especially severe problem in the
subprime market and in the wholesale market, where most lending
is done through unregulated brokers.
In addition to HUD, Justice, and the FTC, we believe that
the Federal Reserve should take more aggressive action to
ensure that bank holding companies and all of their affiliates
are in compliance with fair lending laws.
This conclude our comments.
[The prepared statement of Mr. Bradford can be found on
page 110 of the appendix.]
Mr. Price. Thank you, Mr. Bradford.
Finally, we have joining us today Professor Michael Staten,
who is the director of the Credit Research Center at the
McDonough School of Business at Georgetown.
STATEMENT OF PROFESSOR MICHAEL E. STATEN, DIRECTOR, CREDIT
RESEARCH CENTER, MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN
UNIVERSITY
Mr. Staten. Thank you, Congressman Price, and members of
the committee.
As the last of six panelists, and after extensive Q and A
with Governor Olson, I run the risk of sounding like a broken
record. Nevertheless, I will plow forward and get right to the
point.
HMDA is designed to provide information about the extent to
which mortgage loans are available to borrowers across
neighborhoods and across income and racial groups. The data are
very good at that original purpose.
With the addition of pricing data for some loans, the HMDA
data more accurately identifies the location of subprime
lending activity, as well as higher-cost loans under HOEPA
coverage. As such, the database is a gold mine for researchers
and also for marketers seeking to identify certain
neighborhoods that may be ripe for competition. However, the
HMDA reporting process was never designed to replicate the data
collection that mortgage collectors undertake during the
underwriting process.
It can jump-start for the regulators a fair lending
analysis because it indicates the price of the loan that is
actually charged. But far more characteristics about the
borrower and the property and the loan itself are omitted from
HMDA than are included. So the HMDA data by itself cannot be
used to draw any conclusions about the appropriateness of
pricing.
That should not come as a surprise to anybody, because the
Federal Reserve has repeatedly noted for the last several years
that it is going to use this new pricing data purely as a
screening device to identify institutions for closer scrutiny
and inspection of the loan files. It looks for pricing
disparities that can be accounted for with the HMDA data itself
and then flags institutions and loan products for a closer look
at the actual files. The HMDA data help it to focus that
resource-intensive process.
One of the lessons that was pretty effectively demonstrated
in the Fed's bulletin article last fall was that differences we
observe across racial groups in the likelihood of receiving a
high-price loan narrow as more information about risk-related
factors is added to the analysis. Characteristics of the loan,
such as the size of the borrower's down payment and whether the
interest rate is fixed or adjustable, account for some
adjustments in loan price, but they are not reported under
HMDA. Characteristics of the borrower, like credit score and
total debt relative to income, and delinquency history, also
affect the price, but they are not reported under the HMDA.
You are undoubtedly aware that different research groups,
including my own, have used different loan bases with different
variables, and we have all found that when information is added
to the HMDA-reported data, pricing disparities shrink. We all
acknowledge that the databases we use do not contain all of the
risk factors that lenders consider when pricing a loan.
I picked up from comments made earlier in the hearing that
there is this illusion that some of these studies actually
control for everything, but they do not. All of them are short
some of the information that is present in the loan files but
not present in the electronic databases that are utilized.
So there are really two messages here. The first is that
analysis of pricing fairness is greatly affected by the amount
of information about both the borrower and loan
characteristics. The second message is that when available data
are known to be incomplete, analysis must be preliminary and no
conclusions from that analysis are possible.
The Federal Reserve has been saying this repeatedly for
more than a year. Call it, ``the inconvenient truth'' of the
HMDA data. The fact is that no study based on HMDA data alone
can generate a conclusion that any lending institution has
violated fair lending laws, nor can studies like our own or the
recent study by my colleagues at the Center for Responsible
Lending that utilize an expanded but still incomplete set of
loan level characteristics. Good intentions notwithstanding,
this sort of statistical effort is destined to fail. The data
just are not up to it.
The only way to reach defensible conclusions about fair
lending practices is through a combination of statistical
analysis and loan file review through the examination process.
That is exactly the approach, apparently, that the Federal
Reserve is using.
In my written testimony I refer readers to two papers by
agency economists that present results from actual fair lending
exams. Both papers demonstrate rather convincingly how
inspection of loan files can significantly alter conclusions
reached through portfolio-wide statistical analysis alone.
It is certainly reasonable to ask, and it has been asked
several times already this morning, if more statistical
information would be helpful. Wouldn't it be a good idea to
require more detail as part of the HMDA reporting requirements?
I think the answer to that depends on the extent to which
reported items would be publicly disclosed.
The requirement that lenders provide more detail to the
Federal Reserve for its internal use only might help to focus
their pricing disparity analysis and focus those resource-
intensive efforts by telling them which loan files to look at.
Now suppose that the expanded reporting requirement would
also include public disclosure of the data elements, just as
current HMDA data are disclosed. It seems to me that this is a
very bad idea, because the process would quickly compromise the
privacy of borrowers.
The Federal Reserve staff have already demonstrated that it
is possible to match publicly available HMDA data with publicly
available information on property transfers to identify the
race and income of owners reported under HMDA right now with a
high degree of accuracy. Federal Reserve staff indicate that
for more than 90 percent of loan records in a given year's HMDA
data, that the lender reports only one loan in a given census
tract for a specific amount. If you know the lender, the census
tract and the loan amount, you can match it with publicly
available property records and determine the identities of
borrowers. With that match, any item in the HMDA database is
publicly known.
Public release of data on credit scores and other borrower
attributes is virtually unthinkable, given today's regulatory
commitment to privacy protections, and it still would not give
the public all the information necessary to draw fair lending
conclusions.
Thank you very much, and I would be happy to answer
questions.
[The prepared statement of Professor Staten can be found on
page 128 of the appendix.]
Mr. Price. Thank you, Professor Staten. We appreciate it.
We thank you very much for your testimony, and we thank you for
your participation. It is very valuable information you brought
to us today.
I should have mentioned before you began that, without
objection, your complete written statements will be made a part
of the record.
We have scheduled some votes within a relatively short
period of time, but I think we can probably get through
questions. We will begin with Mr. Watt, and I recognize Mr.
Watt for 5 minutes.
Mr. Watt. Thank you, Mr. Chairman.
Let me first commend all of the witnesses and reassure
particularly Professor Staten that we have no illusions that
HMDA data is the end-all to all the questions that are out
there. If we did, I suspect a number of people would be running
out the door to file lawsuits based on discrimination.
I think all of you have demonstrated that there are a
number of factors that go into determining what lender rates
will be and conditions and terms of a loan will be, and for
that reason borrowers are having trouble sifting through all of
these factors. I think it was said there were about 30 of them.
Representative Baker named a bunch of them, including the time
of day.
We know that loan decisions are complex, but we still get
back to the end of the day--a recognition that I think Mr.
Himpler made, if I can find his testimony, that at the end of
the day pricing disparities between borrowers who have
different racial or ethic backgrounds but identical personal
and property risk profiles are unacceptable, and I do not think
any of us, industry, Members of Congress, anybody thinks that
some of that is not going on. So we get back to Representative
Ford's question, and probably the fairest thing to do is to ask
Mr. Duncan and Mr. Himpler to address this.
It is implicit in Mr. Himpler's statement where he says,
``We continue to work with others who share our commitment to
affordable lending to determine why any disparities exist so we
can take the necessary steps to eliminate them.'' It raises the
question, how do we get there from here? In a market that is
very viably complex, where everybody's intentions are good,
rate differentials, loan differentials are still taking place,
how do you suggest we do that?
We do not want to increase the burden of paperwork. We do
not want to make life more miserable for lenders. We simply
want to eliminate any unacceptable factors from being
considered. How do we do it?
Mr. Himpler. Well, since you are referencing my testimony,
I will take the first shot at it, and I have a feeling that my
colleague, Dr. Duncan, will elaborate more fully than I can.
Mr. Watt. If I referred to him as Mr. Duncan, I'm sorry.
Dr. Duncan.
Mr. Himpler. I think at this point we do not want to get
the cart before the horse. It is probably imprudent for me,
Congressman, to ask the members of this committee to please be
patient, but, essentially, that is what I am asking as a
representative of the mortgage industry.
A number of our members have just reported HMDA data for
the first time in 2004, which is why the Federal Reserve worked
so hard to crunch the numbers. They have now made referrals
from the 8,500 plus lenders from whom they reviewed data. They
made referrals for further investigation to the regulatory
bodies that Governor Olson mentioned, including the Federal
Reserve.
My hope is that at the end of the day, as those
investigations come to a conclusion, that--and I would
encourage members of this committee to request that of the
regulators--to report to this committee and to Congress what
findings they had. Let's let the process work itself out. They
have the ability. They are looking at individual loan files,
and only by looking at individual loan files can you determine
whether or not discrimination is taking place. But it is going
to take a little bit more time.
Mr. Price. Dr. Duncan, if you would like to.
Mr. Duncan. Certainly, Congressman. Not to worry about the
title. Only my mother has permission to call me doctor,
typically.
I think the best way both to reveal any inequities and to
ensure that they do not emerge has two parts. One is on the
lender side and the other is on the consumer side. On the
lender side, what you need is vigorous competition so that
someone who is discriminatory is revealed to have pricing,
whether in dollars or quality, that is outside the market and
the market bids the business away from them by doing a better
job.
Oversight over that lender requires vigorous regulatory
oversight and well-funded support for that oversight for
existing laws prohibiting fraud and discrimination. That is
something that we have argued for for some time and is still
not fully there.
On the borrowers' side, what borrowers need are three
things. First, they need good information that is
understandable, to understand the mortgage process from
beginning to end, and that has become ever more important as
some lenders now have 200 to 300 loan products that they offer.
Second, they need clear, understandable disclosures of the loan
terms so they can understand how the product works so that they
can shop it from lender to lender. And third, they need all the
encouragement that they can get to shop from lender to lender
and make the market forces work for them.
We have done some survey work that showed--and this was
about 4 years ago--of the thousand people who bought a home,
not refinanced but bought a home, one-third never talked to
more than one party in the entire transaction. Well, if you
happen to get one of those bad actors you are leaving yourself
open to abuse because you did not activate the power of the
marketplace.
Mr. Watt. I plead guilty to that. Most borrowers will.
Mr. Price. The gentleman's time has expired.
Mr. Ernst. If I may add one note to that. I disagree that
consumers need more information and encouragement to shop
around. I think one of the things that has become very clear to
ask, working with the data being involved in this to date, is
that consumers also need confidence that there are a set of
policies in place that protect them and promote their best
interest.
If we talk about 200 or 300 mortgage products out there in
the marketplace, that really is a bewildering array. I think
that is why one of our strong recommendations at this point in
the debate is the focus and the protections, including
suitability requirements, and ensure that some of that high-
quality information for a while may come from the mortgage
broker, the person sitting across from the table, who is really
in many ways in the best position to provide that information.
Mr. Price. Thank you.
The Chair recognizes himself for 5 minutes. I just want to
thank you all very much for coming. Your testimony and this
information has been very helpful, at least in my education
process on this.
I am also struck by the number of outliers that you note,
Mr. Himpler, and I note that we look forward to that report and
see what information they glean.
I was also struck by the time of day being part of how a
mortgage turns out in terms of offer. I have noted that is true
for purchase of cars as well, time of day, and day of the
month. So it is indeed an education process.
I have just two kind of overarching questions for anybody
who wants to take a stab at them.
One is, is there any role at all for subjectivity in the
granting of a mortgage? And anybody is certainly welcome to
take a stab at that.
The second one, in view of Mr. Himpler's and other's
testimony, I wonder if it is possible--Professor Staten touched
on this as well--to collect adequate data that can either
confirm or disprove that discrimination is in place.
So kind of those overarching questions, if anybody wants to
take a stab at them. Mr. Bradford.
Mr. Bradford. I would like to start with the second one.
I think the real purpose of the Home Mortgage Disclosure
Act has been to try to respond to the market as it has--over
the years, it has changed and added information in order to be
able to highlight the areas, to sort of focus light on the
areas where disparities exist so that the real, substantive,
detailed analysis investigation can take place.
I do not think it is reasonable to assume that you are
going to be able to re-underwrite every single loan by some set
of public data, because of the vast number of loan products and
flexibilities and guidelines that exist. That I think brings us
back to the importance of there being a Federal enforcement
effort, because those agencies have the authority to go and
investigate those cases. It looks like half of these 200
lenders that I find in the Federal Reserve's analysis are
essentially unregulated lenders, and we do not know what is
going to happen with looking intensively at their patterns. We
have the regulatory agencies responding to the ones covered by
them.
Just in passing, I would just comment, sometimes all of us
who have degrees in statistical analysis have done a terrible
disservice to everyone, because there seems to be an impression
that statistical significance is sort of the end-all to
defining these issues, and I think it relates to a subjective
question. Statistical analysis is not going to help you with
the marketing programs where lenders serve different channels
and different groups and populations for different channels. It
is not going to resolve internal decisions people make about
whether to grant exceptions and make subjective decisions that
are informed and that should be guided by policies of the
lender but nonetheless they are not. They are not something
that you can incorporate in the underwriting system. They still
are subjective.
I work with the Fair Housing Act, and the Fair Housing Act
does not say you can discriminate until you pass some threshold
of statistical significance. If you violate anyone's rights,
you have violated the law.
Also, in the Federal Reserve analysis, statistical
significance is driven literally by the size of your groups.
Therefore, you can see statistical significance in a whole
market, but when you pick a particular lender and then a
particular set of loan products and then a particular set of
characteristics to match on, you are likely to end up with a
group that is so small that it really is mathematically
impossible if there aren't statistical differences, even if
people were treated totally differently.
So we have to be careful, that you might have sensed that
somehow the statistical difference is important and the
examination procedures literally allow the examiners under
conditions to use the statistical significance difference and
statistical measures instead of their full exam procedures. So
I think we need to focus on those subjective ways in which they
examined the way the decision actually got made.
Mr. Price. My former statistics professor appreciates your
disclaimer.
Mr. Himpler.
Mr. Himpler. Yes, a couple of comments, Congressman. You
made mention to my reference to the 200 outliers. I do not want
anyone to take away from my commentary this afternoon that I
would characterize those either finance companies or financial
institutions as outliers. They are going through the process.
The HMDA data pointed to the possibility or the need for
further investigation, and until they are investigated fully
then they are not really outliers.
But I did want to make one other comment, because it has
come up a number of times. We are talking about federally
regulated financial institutions and nonfederally regulated
either financial institutions or finance companies, a number of
which I represent. I think it is important for the members of
this committee to remember that a number of the finance
companies that are not federally regulated are very well-
regulated at the State level. A number of members have even
commented that the States should be taking a lead in that. As a
corollary to that--and I appreciate Congressman Meek's comments
earlier--making a distinction between subprime lenders and
those that abuse the process.
It is important to remember that the progress that we have
made over the last 10 or 15 years in the mortgage lending arena
has largely come through subprime lending and digging deeper
and deeper into the consumer market. So that we are not talking
about pass, fail, approval, denial. We are talking about rates.
That is where the debate should be.
Mr. Price. My time has expired, but Ms. Bowdler if you want
to comment.
Ms. Bowdler. Thank you.
I just want to pick up on the idea of subjectivity.
There is an earlier comment--there has been a lot of talk
about the number of products that are out there for people. Say
there are 200 products. It is quite conceivable that I am going
to qualify for 10 or 20 of those products. So, when sitting
down in front of a lender, how our families end up in one
product over another when they could qualify for, say, any
fraction of those 200 really has to do with what are the
motivations of industry. And I am just going to go that, hands
down, they are always going to put them in the loan that is
most profitable for them. That is just the nature of the beast.
The business want to turn a profit, and it needs to do so in
order to continue to serve consumers.
But what we need is something to offset those motivations,
some incentives to make sure that the concerns of the borrower
are represented. So there are a couple of things that have been
talked about.
If you would indulge me for just one moment, I have brought
an example, this question of subjectivity, of how people end up
in the various loans that they do and is there room for
subjectivity.
I have with me the Casa section from the Washington
Hispanic and the Real Estate section from the Washington Post,
both from this month. I went through the Casa section, and
there is not one advertisement in here for a standard prime
product. They are all 100 percent financing, payment option,
adjustable rate mortgages with a teaser rate, and that includes
both mainstream institutions and mortgage finance institutions.
If you look at the English language newspaper in the Washington
Post, I did not find any payment option mortgage
advertisements. I see lists and lists of standard 5/1 ARM's,
standard amortizing product.
So when we are talking about room for subjectivity, I think
there is, but what we need to talk about is also how to offset
the profit motivations of industry to make sure that consumers
are treated fairly.
Mr. Price. Thank you. My time has expired.
Mr. Green, you are recognized for 5 minutes.
Mr. Green. Thank you very much.
I am concerned about the impact of the newly passed Ohio
predatory lending law, and my assumption is that some of you
will be familiar with it. It imposes a good-faith standard for
brokers and lenders. It gives consumers a right to sue for
uncapped damages, and it creates a database of loan officers
who violate the law and make available that database on a Web
site. Now the question is, what impact do you think this newly
passed law will have on lending practices? And I welcome all of
you to give your opinions.
Mr. Ernst. It seems we may not have any Ohio law experts on
the panel, but I will say, in terms of the broker obligations
that you discuss in the Ohio bill, that North Carolina and
several other States have had obligations that they have placed
on brokers, and I know that our banking commissioner, Joseph
Smith, has talked about the importance of those standards in
terms of making sure that borrowers are finding their way to
good products.
I think the other thing that I am aware of in the Ohio law
that is an interesting lesson perhaps for this committee is
that yield spread premiums themselves are subject to scrutiny.
So, in other words, when the loan is evaluated, to determine
whether or not the incentives in place at time of origination
to the mortgage brokers--in other words, how much was the
mortgage broker walking away from the table with, that
measurement is comprehensive. So yield spread premiums, up-
front payments to the mortgage broker are all measured to
determine whether additional protections are put in place.
I will say that that kind of provision in other States has
proven workable. So I think, while it is probably too early to
judge a law that I do not think has actually been signed by the
Governor yet, I think there are some good, optimistic
provisions in there that could serve borrowers well.
Mr. Duncan. Likewise, our organization, being a national
organization, not experts in the State law, but as an economist
just listening to your comments on some of the provisions, they
will impose costs on the businesses within that marketplace and
they could be observed in one of two ways. Either they can be
observed in a shrinkage of lenders serving that market and then
the overall pricing structure in the market rising for
consumers and pricing some people out of the marketplace, or
they could simply be passed through to consumers in the form of
higher costs. But I am not sure if the law has been signed into
law by the Governor yet, but we will certainly take a look at
it when it takes place.
Mr. Himpler. Until then, Dr. Duncan, my fear is that at the
end of the day it may drive lenders out of the community that
are serving the community in the State of Ohio and doing a good
job there. But because of the risk of exposure they cannot
afford to stay in the various communities that they are
currently working in. The result from that is the possibility
that folks who may have been right on the fringe, if you will,
of being able to afford their first home may not be able to go
to those lenders because they are no longer there, and they are
forced to go to the nefarious folks that we are all concerned
about, driving them directly into the hands of the people that
this hearing is trying to address.
Mr. Ernst. I guess the thing that I would put on the table
for consideration is that there is another possibility to have
allowable, will be able to be implemented, and that is that
consumers will find themselves having the luxury of additional
consumer protections that will make a real difference in the
quality of the loans they receive. It will eventually cut down
on foreclosures and help borrowers in preserving their wealth.
That has been the intention of State predatory lending
laws, and research from my organization, from most senior
economists at the Federal Reserve Bank of St. Louis, shows
that, by and large, the predatory lending laws are now leading
to large decreases in access to subprime creditor to credit
overall.
I think we should keep in mind squarely one of the benefits
that come with these laws, which are considerable--and we
should, of course, take every law on its own merit--but I do
not want to lose sight of the fact that these laws are, in
fact, providing enormous benefits to borrowers in the States
that have them.
Mr. Bradford. I think you have an example of a lot of
States trying to come to grips with the process of dealing with
the brokers. Because even the lenders cannot control the
brokers. Because if you decided not to do business with a
broker because you do not like their behavior, they just go and
do business with someone else. So they are not an employee.
So it is one of those difficult situations where we see the
key actor in the market that is often the focus point,
particularly of some of the fraud and abuse, is an actor that
is very hard to control. So what you really have are people
exploring ways in which they can try and deal with that without
shutting down the market, I think, in response to those issues.
The market has become so competitive among lenders. I think
legitimate lenders with good resources and decent products are
going to be so competitive that if a particular broker leaves
the market, other people are going to deal with that pretty
rapidly.
Mr. Duncan. Just to pick up on the research, I think there
is also a compelling body of research that will show that, in
fact, access to credit has declined in some of the States that
have passed fairly punitive laws with regard to predatory
lending.
With regard to the flow-through, of how lenders deal with
brokers, there is a market mechanism which picks that up. The
secondary market today prices mortgage-backed securities and
mortgage-related assets quite competitively, in fact, globally.
Perhaps 15 percent of U.S. real estate assets are funded with
global capital inflows to the United States. That flows through
to the borrower level very quickly in this very efficient
market that we have, and lenders keep a scorecard on their
brokers where they evaluate the quality of the loans that come
through and into the secondary market. If quality suffers, then
the lender suffers with disadvantageous pricing, and they
therefore maintain the scorecard to cut off brokers and push
them out of the system.
So there are some structures that help protect consumers
that are inherent in the marketplace.
Mr. Price. The gentleman's time has expired.
Mr. Green. Thank you, Mr. Chairman.
Mr. Price. Thank you.
I want to recognize Mr. Davis for 5 minutes. But, before I
do, I will have to leave, and I thank the Chair for allowing me
to preside.
Mr. Davis. Thank you, Mr. Price.
Let me, if I can, take the panel back to the observations
that I made during the opening statement, and the question was
the standard that, frankly, is owed someone who comes into an
office for a mortgage transaction. Let me just ask the question
fairly directly, and I want to hear from people from the
industry. I guess that is Dr. Duncan and Mr. Himpler. Briefly,
what do you all consider the standard or the duty of care to be
at present between consumer and mortgage broker or mortgage
banker?
Mr. Duncan. We believe that every credit-worthy borrower
should get the credit in the form that they seek it and that
they are qualified for.
Mr. Davis. And obviously we have an issue as to whether
that happens or not.
Do we believe that the mortgage broker, the mortgage
banker, whoever is involved on the business side of the
transaction has a duty to notify the consumer of the best and
optimal credit to which he or she is entitled?
Mr. Duncan. Let me give you a recent anecdote as an
introductory, and then I will close it.
I was speaking with a reporter who reports on the housing
markets, and in particular the subject was the different loan
types that are available. So I asked her, do you have a
mortgage? And as it turn out she had recently--this was in
January of this year--she and her husband had recently
purchased a home.
So I asked what kind of a loan that they used. They used a
5-year, fixed-rate, interest-only loan. And I said, well, that
is interesting. You are reporting on that. What are you telling
people about the dangers of those loans? Because she was asking
questions about their dangers.
She said, well, in our case, my husband is on a low monthly
base salary and receives commission and at the end of the year
a bonus. So we simply pay the principal when he receives this
bonus, and the loan amortizes as fast or faster than if we had
taken, say, a 30-year, fixed-rate, level-payment, self-
amortizing mortgage.
So the question really revolves around whether it is the
lender that has better insight into how the household intends
to manage their finances or the household. Because the
household qualified for a fixed interest rate, 5-year,
interest-only loan, they could probably also get a 30-year,
fixed-rate, level-payment loan. But they made a decision
because of the structure of the household finances that worked
better for them at that time.
Mr. Davis. Mr. Ernst, Ms. Bowdler, let me pose the same
question to you all. Do you believe that the standard mortgage
industry is what has been described by Dr. Duncan?
Ms. Bowdler. Let me start by saying that, when it comes to
all of these products, subprime products, the alternative
mortgage products that we have been hearing so much about, like
the interest-only product that was just described, are
certainly legal products that are suitable for some people, but
they are not suitable for all people. And we have talked a
little bit about various--subjectivity about who gets these
loans and how to make all of these decisions, which I think was
inherent in Dr. Duncan's anecdote.
But what we do not see in the industry right now is any
obligation on behalf of mortgage brokers specifically, but also
on behalf of lenders, to ensure that the borrower is in fact
getting a loan that they have the ability to repay that is
suitable for their circumstances, or that they are not steering
to a loan that is more profitable for themselves.
Given the structure of the marketplace which has built-in
profit incentives, I think there is definitely a need for a
suitability standard that will offset that structure.
Mr. Davis. Let me pose the questions--because my time is
running. I want to pose a question on the industry.
Dr. Duncan or Mr. Himpler, either one of you, what happens
right now to a mortgage broker, for example, who falls short of
what you describe as best practices in the industry? What is
the punishment in effect for a broker who does not follow best
practices? Is there one?
Mr. Duncan. If the broker commits fraud--
Mr. Davis. Not fraud. There is a difference between fraud
and best practices. It is kind of like for us. There is a
difference between good practices and what will send you to
jail.
Mr. Himpler. I do know that a number of lenders have
certain standards that they apply to brokers, and if they fall
below those standards they do not use those brokers anymore.
But, as was stated earlier, those brokers may go and do
business with some other lender.
But if I could take just a moment, Congressman, to get back
to your initial question as to how the standard--I think you
used the legal profession, which I am also part of, or the
medical profession. I think it is important when you are
talking about mortgage products, because what you are talking
about is a consumer product, not a professional service. And
you can tell whether or not you as a lawyer are providing the
best service to your client. I am not going to be so
presumptuous to determine what is the best product for a given
consumer.
We have heard of a couple of examples already. I am glad
Ms. Bowdler mentioned the ability to repay. AFSA has that as
one of its voluntary standards that all of our members have to
agree to, to be a member of AFSA, is to abide by an ability to
repay standard. I think that is an equitable way of going about
it.
But when we get into the area of suitability, we run into
dangerous ground. Because whereas it might be suitable for
customer ``A'', it may not be suitable for customer ``A'' who
is trying to buy down in order to be able to afford more house
than they might otherwise do.
Mr. Davis. Let me make one observation, since my time is
up.
Mr. Ernst, I know you are dying to say something. Let me
make my closing comment on this.
What is different, though, Dr. Duncan, Mr. Himpler, all of
you on the panel, by definition when these transactions happen,
the prospective buyer, if you will, is obviously at an
informational disadvantage, typically at a sophistication level
disadvantage, at the ultimate disadvantage that he or she
really wants to buy the home and does not want to really know a
lot beyond that at the moment, and the person in the superior
position when it comes to information, when it comes to
detachment, if you will, is the person who is on the seller
side or on the lender side. Given that disparity, it seems to
me that if we are serious about transparency, if we are serious
about accountability, you have to put a little bit more of a
burden upon the lender.
Mr. Himpler, I would make the point that you made about the
legal profession but turn it in a slightly different direction.
I agree when a client would come to me when I was practicing
law they don't know much about the Federal criminal statutes or
title 7 or any of those things. It is my duty to give them my
best and most searching judgment, and to provide good
representation, I had a duty to ask them a lot of questions. I
had to be intrusive. I had to ask them more than they told me.
Those who are in the realm of practicing law, if you are
bound by what your clients tell you, you will commit
malpractice a lot of times. You have to step beyond that. You
have to know what questions to ask. You have to know how to
drive your point home.
That is my concern, that there is a little bit of a sense
of, well, if I am a lender, I am not going to cheat anybody,
but nor am I going to ask them a whole lot of questions. I will
let them tell me, and I will take what they tell me and
structure my advice around it.
I submit to you if doctors followed that standard and
lawyers followed that standard, the quality of care in both of
those professions would dramatically erode.
Mr. Ernst, I will let you get the last word.
Mr. Ernst. I think--Congressman Davis, I think you are
right, that this is an area where the suitability standard
makes sense. There are direct parallels between the legal and
medical profession.
Moreover, I think this is an area where it is actually
unfair to expect the market to unilaterally take steps without
leadership from policymakers. If a given lender tries to rein
in broker behavior on their own, this broker would simply take
their business elsewhere.
That is why it is important as we consider--I know it is
under consideration--what Federal predatory lending standards
can be, that those standards really help consumers, help
lenders rein in instances where discretionary pricing--and this
gets back to a question that was asked by Congressman Price--
where discretionary pricing is leading to bad outcomes of the
sort we have documented in our study where we find that there
are still significant differences with African American or
Latino borrowers being 30 percent more likely to be in a higher
rate loan, even after we control objective risk factors like
loan evaluation.
There has to be assistance from policymakers working in
partnership with consumer groups, with housing counselors, and
with lenders to solve these problems, that is something that is
before you now.
Mr. Davis. Mr. Ernst, have we adequately publicized
offending companies or offending brokers? Do we do a good
enough job as an economy of publicizing bad actors?
Mr. Ernst. I think it may be possible that more could be
done there, but I would say that there are simply so many
lenders and so many mortgage brokers in the marketplace today
that even providing that information is a real challenge.
I know in North Carolina our banking commissioner has
talked about how in the past brokers have been able to set up
shop under a different name, and it is very difficult for
consumers to weed their way through all of that information to
find that sort of best seal of approval that I think you are
suggesting.
Mr. Duncan. If I could, before we have leave the subject,
since this very recent CRL study is coming up repeatedly, I
want to refer back to the professor's statement about the
ultimate efficacy about some of these pieces of research
without full information. A couple of things to make note about
that study is, for example, if you intend for the model in the
study to replicate the lender's behavior, then you have to
replicate what it is lenders look at in terms of the data to
reach their decision.
One of the things that is in the study is the use of
income. In fact, lenders do not use income. Lenders use the
debt-to-income ratio both in the sense of the size of the
potential mortgage payment to the other credit service payments
and the size of the overall debt relative to overall income.
Because what the lender is really interested is in the credit
capacity of that borrower, as opposed to the specific income.
For example, you could have a very high-income household
who also has very high levels of debt and is therefore a bad
credit risk. You could have a very low-income household who has
very low levels of debt and therefore could be a good credit
risk.
Mr. Davis. Dr. Duncan, let me ask you this fairly pointed
question. How much actual discrimination--how much actual race
discrimination do you think goes on in the industry today?
Mr. Duncan. I think we would be naive to say zero. I think
you are hard pressed to find expansive data of systematic
discrimination. In between the two of those, I do not know what
the number is.
Mr. Davis. Ms. Bowdler, do you want to answer the same
question?
Ms. Bowdler. I think I would echo that we would be hard
pressed to come up with an exact percentage, but saying that
there is not systemic discrimination is not right. We know that
the structure of the mortgage market does channel harder-to-
serve borrowers, which usually includes Latinos, African
Americans, low income, other minority communities, and the
elderly, and I think that is discrimination, and we should be
concerned about that.
Mr. Ernst. If I might, since our study has been brought
up--and, Doug, I appreciate you giving me the opportunity to
clarify this here.
In our model, we control for the objective determinants of
loan pricing. We did this by going out and looking, taking a
survey of lenders' rates and saying what factors determine how
your price is set in the market. What we saw in those sheets is
that debt-to-income was the criteria for qualifying for a
mortgage and, in fact, did not affect how mortgages are placed
in the subprime markets. In other words, you can make the
decision whether or not the borrower can pay back a loan
overall, but we did not see this factor being used as a pricing
factor, and that, quite simply, is why it is not included in
our model.
I think the second point you raised is an interesting one.
To look at lenders' behavior, we need to replicate exactly what
they do in the underwriting process, and we have had a number
of comments here today about how no data source can allow you
to do that. I think that is a fair remark, but I would say that
what we sought to do was not to replicate lender behavior, but
to understand what borrowers' experiences were in the
marketplace.
So the strength of our study is that we are able to say,
after we account for businesses between credit scores, between
down payment sizes, we are able to talk about how borrowers'
experiences differ based on their race and ethnicity.
So this is very different from the study that sets out to
ask if lender ``X'', lender ``Y'' or lender ``Z'' is committing
discrimination. That is not something that we set out to do. We
set out to ask what borrowers' experiences are at the end of
the day. Are borrowers more likely to receive a higher rate
loan even after we are able to control for the differences in
their credit score and the other factors that are used to set
prices? And, unfortunately, the answer is that race and
ethnicity still continue to have an effect.
Mr. Watt. Mr. Chairman, since we were getting into a debate
about the Center for Responsible Lending's study, let me make a
unanimous consent request that the study itself be submitted
for the record, and everybody will be able to evaluate it on
its merits or lack thereof, depending on their perspectives.
Chairman Bachus. [presiding] Without objection.
I think at this point we have finalized the questioning,
and the Chair notes that some members may have additional
questions for this panel, which may be submitted in writing.
Without objection, the hearing record will remain open for
30 days for members to submit written questions to these
witnesses, and to place their responses in the record.
Thank you for your attendance.
This hearing is adjourned.
[Whereupon, at 2:17 p.m., the subcommittee was adjourned.]
A P P E N D I X
June 13, 2006
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