Thank you. It is my pleasure to be here today on behalf of both the Conference of State Bank Supervisors and the New York State Banking Department. When the Home Owners Equity Protection Act was enacted, it was an excellent first step. It focused attention on the problems associated with high cost home loans and it provided a model of how to prevent abuses in such loans. And yet HOEPA has had very little impact on sub prime lending. Even when interest rates were much higher than they currently are, very few loans were priced above either the “APR” or the “points” thresholds set forth in the statute. Moreover, the statute did not address “yield spread premiums” or “single premium credit insurance” and open end credit plans including home equity loans were not subject to the law. Because of the high statutory thresholds, a loan could be priced below the thresholds and yet, in truth, be an expensive loan. As a result, when the Banking Department conducted its examinations of certain mortgage bankers, we often found loans that were high priced, but just below the HOEPA thresholds so as to avoid compliance with the law. Similarly, a large nationwide lender, among others, used the fact that home equity loans were not covered to create what were termed “piggyback” or “side by side” loans. If a borrower sought to refinance a loan, he or she actually obtained two loans. The first loan, which was for the majority of the amount sought, was priced to fall below the thresholds and therefore not be subject to HOEPA. The balance of the amount sought was lent in the form of a high priced home equity loan that almost always was nearly entirely disbursed at closing. However, since it was a home equity loan, the points and interest rate were immaterial—the loan was not covered by HOEPA. The more we examined these loans, the more convinced we became that, despite HOEPA, many of them had no apparent benefit to the borrower and demonstrated patterns of abusive lending practices. But the loans were in perfect compliance with then existing state laws and regulations that were highly disclosure oriented and they did not exceed the HOEPA thresholds. Clearly, action was needed on the state level if predatory lending was to be curtailed. North Carolina had adopted a statute modeled on HOEPA but which went significantly further. There were draconian predictions that sub prime lending would dry up in North Carolina, a contention that North Carolina would strongly dispute. For us, the issue was what action could the Department take with regard to these loans and these lenders. We did not want to dry up sub prime residential lending, but we did want to end abuses.
Ultimately, New York adopted Part 41 of the General Regulations of the Banking Board in 2000. In 2003, section 6-l of the New York Banking Law was enacted which built on the regulation, but went farther in certain respects. During this time period, many other states enacted similar legislation. The New York law has significant differences from HOEPA. To begin with, the “APR” threshold is 8% above the yield on treasuries with comparable maturities for first liens and 9% for junior lines. The “points” threshold is 5% or, for small loans, 6%. Home equity loans are included. The financing of single premium credit insurance is prohibited. Yield spread premiums are included in the definition of “points and fees”. In addition, if a loan is a high cost loan, it must comply with various provisions pertaining to verification, affordability and refinancing. And yet, similarly to HOEPA, the New York law and regulation have also had very little direct impact in that, once again, very few loans are made above the thresholds. This is most likely due to the low interest rate environment that we have had over the last several years which allows loans to continue to be made right below the thresholds. And now there are new and dangerous products on the market. Times have changed, primarily due to these state laws and regulations. Awareness has increased. Enforcement actions have been taken. Other laws and regulations have been passed through out the nation. Practices and procedures that were common place just a few years ago are no longer found to be so common. And despite it all, sub prime credit continues to exist. Yet much remains to be done.