Hearing on "Predatory Mortgage Lending: The Problem, Impact and Responses."
Second Hearing in a Series

Good morning, Chairman Sarbanes and members of the Committee. I am Lee Williams, President of Aviation Associates Credit Union, a $38 million state-chartered credit union in Wichita, Kansas. I am testifying this morning on behalf of the Credit Union National Association (CUNA), which represents over 90 percent of the 10,500 state and federal credit unions nationwide. In my capacity as chair of CUNA’s State Issues Subcommittee, I have had the privilege of carefully considering issues surrounding the abusive practices of predatory lending and appreciate the opportunity to present some of our findings.

The credit union system abhors the predatory lending practices that are being used by some mortgage brokers and mortgage lenders across the country. America's more than 10,000 credit unions - member owned, not-for-profit cooperatives - strive to help their 80 million members create a better economic future for themselves and their families.

Predatory lending is a complex and difficult issue to resolve, as evidenced by the many witnesses that have testified before this committee over the past two days. The primary targets of predatory lenders are subprime borrowers. Subprime borrowers are consumers who do not qualify for prime rate loans because of a poor credit history, or in some cases, simply a lack of a credit history. This segment of the population is of particular interest to the credit union industry because historically it is that population that has turned to credit unions for our flexibility and wide range of credit options.

CUNA is concerned that the term "predatory" has become synonymous with "subprime" in the minds of some policymakers. We believe it is important to distinguish the difference between subprime loans and predatory lending practices when formulating laws or regulations to eliminate predatory lending practices. If subprime lending is unintentionally restricted through efforts to prohibit predatory lending practices, the result could be a significant decrease in available credit to borrowers with blemished credit histories.

Credit unions do not engage in predatory practices. Credit unions are non-profit, cooperatively owned financial institutions. All profits are returned to the credit union members, after expenses and distribution to reserves. To participate in any activity that would take advantage of our members, who are also our owners, would be counter-productive to our operations, our structure, and our philosophy.

Credit unions are not in business to make money by providing financial services. In part, they are in business to provide financial services because people need them and, all too often, cannot obtain them at reasonable costs and terms. As the so-called "fringe" banking industry, such as payday lenders, pawn shops and check cashers, has significantly expanded over the past decade, credit unions have been out in front to combat the devastating effects of these high cost money brokers by offering alternative services at reasonable rates.

America's credit unions support the elimination of lending practices that are intentionally structured in a manner that is deceptive and disadvantageous to borrowers. CUNA and credit unions across the country have been establishing programs to help our members fight back against the effects of high cost and predatory loans.

At Aviation Associates Credit Union, we recently initiated the "Take Control" program, which provides resources for our members allowing them to take control of their financial well-being and effectively deter the success of payday lenders and the predatory mortgage lenders in our community.

Let me provide an example. Members with high interest mortgage loans acquired from a mortgage broker have asked our credit union for help because they cannot make their monthly payments. My initial response is to refinance these onerous loans and reduce the interest rate. But often that's no solution. Typically, these types of loans have been initially packed with so many fees--paid up front and financed--that the loan-to-value ratio is pushed as high as 125 percent. My credit union, and few others, can refinance such a loan.

Even in such a dire situation, our "Take Control" program can improve the member's financial circumstances. Our program does so through member education.

With the help of an on-site consumer credit counselor (available twice a week), members can learn how to pay down loans faster, obtain lower fees and rates, and--even in the grip of such a "predatory mortgage loan"--learn how to build equity faster so that the credit union can eventually refinance the loan.

This is only a band-aid on a serious injury. When the credit union refinances for the member, the predatory lender wins. At Aviation Associates Credit Union, we believe our members must never fall victim to predatory lenders in the first place. That is why the "Take Control" program includes a significant education component to teach our members how to avoid the predatory mortgage trap. We are convinced that education is a critical tool in our efforts to obtain financial independence for our members.

On a national level, CUNA and credit unions are active on several fronts to combat predatory lending. Last summer, CUNA developed "Mortgage Lending Standards and Ethical Guidelines" to be adopted by credit unions across the country. These guidelines were designed to help emphasize credit unions’ concern for consumers and further distinguish credit unions as institutions that care more about people than money.

The guidelines prohibit:

· interest rates that are significantly above market rates and which are not justified by the degree of risk involved in providing the credit

· excessive balloon payments that require refinancing at a rate that is more than the rate on the existing note

· lending without regard to whether the borrower has the ability to repay

· requirements for frequent refinancing of the loan resulting in additional costs to the borrower and significant erosion of the borrower's equity;

· repayment penalties, in excess of actual costs incurred and unpaid

· exorbitant fees and insurance premiums that the borrower may be required to finance, further jeopardizing equity

· misleading or false advertising

A copy of these guidelines are attached to this statement.

One of the most important programs CUNA is currently promoting to combat predatory lending practices is financial education of our nation’s youth. Credit unions believe that by educating our young people in the area of personal finance they will learn to make sound financial decisions and choose not to use high cost or predatory lenders.

CUNA has partnered with the National Endowment for Financial Education (NEFE) and the Cooperative Extension Service (CES) to expand financial education among teens throughout America. Through this partnership CUNA, NEFE, and CES provide an educational curriculum and materials to high schools across the country to combat financial illiteracy.

In addition to providing the necessary materials, credit unions actively participate in the classrooms. During the 1999-2000 school year credit unions conducted over 5,000 financial education presentations reaching almost 130,000 students nationwide.

Because credit unions are an important component of the solution to predatory lending -- not part of the problem -- CUNA has supported regulatory proposals that would strategically address predatory lending concerns without unduly burdening credit unions in the process. For example, CUNA supports the Federal Reserve Board’s proposed change to Regulation Z, which is targeted only to high cost loans under the scope of the Home Ownership and Equity Protection Act. CUNA has not supported regulatory proposals that are not carefully constructed to address only predatory lending problems, such as the Fed’s proposed changes to amend Regulation C, Home Mortgage Disclosure Act (HMDA). This proposal would require all covered lenders, whether they make high cost loans or not, to face additional, significant and costly reporting burdens not required by the HMDA. CUNA will continue working with the regulators to develop strategies that will protect consumers without imposing broad-based requirements that divert them from their primary mission of serving the financial needs of their members.

A growing number of credit unions offer subprime loans to members who do not qualify for a prime rate loan. Subprime loans are offered to members at rates above the prime rate to offset the higher risk of lending to members with poor credit histories. Credit union subprime loans are not predatory. They are a necessary tool that gives borrowers with poor credit histories the ability to build, or rebuild, their credit.

To help illustrate some of the alternative subprime lending programs offered by credit unions, CUNA created the Equitable Subprime Lending Task Force last February. The Task Force has recently completed a handbook entitled: Subprime Doesn't Have to Be Predatory - Credit Union Alternatives, which is included as an attachment to this statement.

Some credit union subprime loan programs, such as Aberdeen Proving Ground Credit Union's "Credit Builder" program in Aberdeen, Maryland, are designed to help borrowers improve their credit standing. This program offers subprime loans at 2 percent or

4 percent above normal rates, depending on collateral, but these higher rates automatically drop when the borrower makes 12 on-time payments.

In this program, the borrower is well informed that if he or she has one payment that is over 30 days past due any time during the first year of the loan, then the borrower is locked into the higher rate for the life of the loan. But, if the borrower makes the first 12 payments on time, the loan rate will automatically drop to the prime rate. However, the borrower must continue the timely payments for the life of the loan to retain the lower rate. If, after the first year of on-time payments, the borrower misses a payment, then the rate reverts to the higher rate again for the life of the loan. This loan is structured as an incentive to make on-time payments.

In Seattle, Washington, the Washington State Employees Credit Union all too often saw single income families struggling to make ends meet while the American dream of home ownership remained beyond their grasp. To help more consumers buy homes, the credit union developed the "First Step" program. This program requires only percent down, an interest rate of .50 percent above the standard Fannie Mae 30 year fixed rate, and certification that the borrower has attended a home buyer education seminar by a local agency or group. To qualify for this loan, the borrower's income cannot be above a certain level and the purchase price of the home must be below maximum limits.

The credit union staff work closely with these borrowers through the life of the loan offering financial guidance and budgeting assistance to promote success for this program, as well as for the borrowers.

The credit union has allocated $20 million to this program and has been very successful getting people into homes that could not ordinarily qualify for a mortgage anywhere else.

And Antioch Schools Federal Credit Union, located in California, offers its subprime borrowers several ways to reduce their interest rates, while picking up smart credit habits in the process. This "Rate Reduction" program includes:

· a 1/2 percentage rate reduction for attending one consumer credit counseling class;

· a 1 percent rate reduction for attending more than one consumer credit counseling class;

· a 1 percent rate reduction for each year of the term of the loan that there are no draws or escalation of debt during that year;

· and to promote savings, the Antioch Schools credit union will drop a subprime borrower's rate one half percent if the borrower makes a deposit of at least $15 a month to a savings account and keeps it on deposit for a year.

With the many positive programs being developed in the subprime lending market to assist consumers of all economic circumstances, credit unions urge policymakers to address the abuse of lending practices rather than complete prohibition of practices that, when used legitimately, provide flexibility and credit options to meet individual borrowers' needs.

Credit unions urge policy makers to use a scalpel, not an elephant gun, when drafting legislation to eliminate predatory lending practices. Subprime borrowers need to be served. Credit unions do not want to lose their ability to create flexible subprime loan programs.

For example:

· Bona Fide Discount Points Should Not be Eliminated. Credit unions are concerned that a definition of "high cost mortgage" that includes "total points and fees" and lowers the HOEPA threshold to 5 percent could restrict the use of discount points, which in many cases borrowers pay for the purpose of reducing the interest rate or time-price differential applicable to the loan. This is an important loan option for some borrowers who intend to stay in their home for a long time.

CUNA recommends that bona fide buy down points be excluded from the definition of "high cost mortgage" where the borrower has a completely free choice among a set of interest rate and point combinations.

· Legitimate Balloon Notes Should Not be Prohibited. Credit unions are concerned that strictly prohibiting balloon payments will eliminate a legitimate credit option for lenders who wish to extend loans without holding excessive interest rate risk or for borrowers, under specific circumstances, to obtain lower monthly payments.

CUNA recommends that balloon payments be allowed if the borrower has the option of continuing the loan at the then current interest rate available from that lender for similar borrowers with no additional costs or fees.

· Financing Points and Fees Should Be Allowed When in the Best Interest of the Borrower. There may be cases where it is in the consumer's best interest to refinance an existing high cost mortgage. Credit unions are concerned that a strict prohibition of the financing of certain points and fees could limit borrowers' options and in many cases, access to credit.

CUNA recommends that legislation restricting the financing of points and fees include an exception for transactions in which : (a) the action provides a material benefit to the consumer, and (b) the amount of the fee or charge does not exceed, (i) an amount equal to 1.0 percent of the total loan amount, or (ii) $600 in any case in which the total loan amount of the mortgage does not exceed $60,000.

Again, let me say that I am very pleased you are holding these hearings. Credit unions are very anxious to see the abusive practices of predatory lending eliminated. Credit unions have taken positive steps in that direction through their voluntary efforts to educate their members and provide them with fair and sound alternative products. It is our hope that we will have allies in our efforts to assure that all consumers have access to credit products that do not unfairly take advantage of their circumstances.

Thank you, and I will be happy to answer any questions.

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