"Consumer Protection in Financial Services: Subprime Lending and Other Financial Activities"
Good morning. Chairman Serrano, Ranking Member Regula, and Members of the Subcommittee, my name is Donna Gambrell and I am the Director of the Department of the Treasury's Community Development Financial Institutions (CDFI) Fund. I am part of Secretary Paulson's senior leadership team in the Office of Domestic Finance, which is leading the Department's efforts in addressing the housing market issues. I am pleased to be here this morning along with my colleague from the Federal Trade Commission (FTC) to testify on subprime lending and consumer protection.
As you requested, I am going to focus my remarks on the HOPE NOW Alliance, other efforts to address preventable foreclosure, and Treasury's main financial literacy and education initiatives.
HOPE NOW
HOPE NOW was formed on October 10, 2007, as an alliance among non-profit counselors, servicers, investors, and other mortgage market participants to maximize efforts to reach at-risk homeowners and help them stay in their homes. The American Financial Services Association, which is represented here today on your second panel of witnesses, is one of the many HOPE NOW members.
Let me first briefly highlight the accomplishments of HOPE NOW since its formation over four and a half months ago:
- HOPE NOW membership has grown from less than 60 percent of the subprime mortgage servicing market to 94 percent; today, 26 servicers are represented.
- The nationwide foreclosure prevention hotline (888-995-HOPE) has been publicized and expanded; daily call volume has increased from 625 in the third quarter of 2007 to 4,500 today.
- Servicers and investors are now providing funds for counseling; previously, only government and foundations provided funding.
- Since last November, HOPE NOW servicers sent 1 million letters to at-risk homeowners; early results show a 21 percent response rate, up from just 2-3 percent before HOPE NOW existed. Homeowners who had previously avoided contact are now calling for help, and over 200,000 additional letters are being sent every month.
- Today, all HOPE NOW servicers are contacting subprime borrowers 120 days before their interest rate resets.
- The American Securitization Forum - a HOPE NOW member - developed a Framework (ASF Framework) to streamline refinancing and loan modifications for subprime ARM borrowers whose rates reset between January 1, 2008 and July 31, 2010. It is estimated that up to 1.2 million homeowners could benefit from the ASF Framework.
- In the second half of 2007, the industry provided loan modification and repayment assistance to an estimated 869,000 homeowners. Coincident with the formation of HOPE NOW, the assistance rate in the fourth quarter doubled over the rate in the third quarter. Of the 869,000 homeowners assisted, 545,000 were subprime borrowers.
Most recently, the HOPE NOW Alliance announced that its members would participate in outreach efforts called "Project Lifeline." Under this initiative, HOPE NOW Alliance members agreed to reach out to the most vulnerable homeowners who are 90-days or more delinquent. Homeowners who respond may qualify for a "pause" in the foreclosure process while a loan modification is considered. This initiative is targeted to reach not only subprime borrowers, but all 90-day delinquent homeowners nationwide with a step-by-step approach to find individual solutions to individual problems.
But homeowners must take responsibility and respond to this outreach. Owning a home is a responsibility, and struggling homeowners must actively engage with their lenders and demonstrate they want to keep their homes in order for our initiatives to be effective.
It is important to note that 93 percent of American homeowners pay their mortgages on time. That is 51 million households - many on tight budgets, sacrificing other things in order to pay their mortgage. But even in a year when the economy and the housing market are both strong, we see about 600,000-700,000 foreclosure starts as we have over the last ten years.
The goal of HOPE NOW is to assist troubled borrowers and help them with solutions to stay in their homes. We look forward to seeing the results of HOPE NOW efforts on a monthly basis in the coming weeks, and we will be monitoring the progress of the initiative very closely.
Other Foreclosure Prevention Efforts
In addition to the HOPE NOW efforts, new mortgage solutions are being developed to help homeowners avoid foreclosure.
- On August 31, 2007, the Administration announced "FHASecure" to offer homeowners foreclosure alternatives; since then, over 96,000 Federal Housing Administration (FHA) insured loans have been closed under FHASecure, putting over $13 billion to work. In addition, it is estimated that about 100,000 more applications are in the pipeline.
- Last December, Congress passed a temporary mortgage debt tax relief act that will provide homeowners relief from taxes that would have otherwise been due from principal forgiveness.
- The Administration has advocated temporarily raising the cap on tax-exempt bonds for state housing authorities to help borrowers refinance.
- On December 18, 2007, the Federal Reserve proposed changes to Regulation Z ("Truth in Lending Act"/"Home Ownership and Equity Protection Act") to protect consumers from unfair or deceptive home mortgage lending and advertising practices.
- The Administration has proposed FHA Modernization to create new financing options for home-buyers and homeowners.
- The Department of Housing and Urban Development is proposing to reform the Real Estate Settlement and Procedures Act regulations to bring much needed transparency to the home-buying process.
To boost housing counseling efforts, the Neighborhood Reinvestment Corporation or "NeighborWorksôåà America" was designated by Congress to develop and implement a new program to minimize the impact on homeowners who face or are at-risk of foreclosure. Created by your Transportation-HUD Appropriations Subcommittee colleagues, NeighborWorks is administering a new foreclosure mitigation program, with an appropriation of $180 million provided in the FY 2008 Omnibus Appropriations Act. NeighborWorks has just recently awarded $130 million to applicants who plan to provide 89 percent of their services in areas of greatest need.
Due to the CDFI Fund's experience working in distressed communities and with homeowners, I am serving on the NeighborWorks's advisory committee to assist the organization in implementing this important new program.
Financial Literacy and Education
Treasury plays an active role in improving the nation's level of financial literacy and education for people across our Nation. Whether it is buying a home or making an investment, understanding the basics behind assets and liabilities, managing your credit, saving for the future, or avoiding fraud, I think we can all agree that financial education can help consumers make better choices.
One of Treasury's main efforts in improving the nation's level of financial literacy and education is through the Financial Literacy and Education Commission (known as "FLEC"), which was created by the Fair and Accurate Credit Transactions Act of 2003. Under this Act, the Secretary of the Treasury was named the head of the Commission. FLEC includes 19 other federal agencies, including the FTC which is also represented here today. FLEC published the first-ever national strategy on financial education, and provides useful financial information for consumers on its website at www.