Superintendent Taylor Addresses the New York Bankers Association During Its Annual Meeting and Legislative Conference
January 8, 2007
Let me start by stating the obvious. There has been some pretty fundamental change in our world since I stood before you a year ago—2006 was a very eventful year at the Banking Department too.
Let’s start with personnel: 2006 was a year in which we lost a lot of people to retirement. I signed some certificates of appreciation for people who had served the Banking Department for over 30 years! Some of the names you will all recognize – and with their departure, we also lost quite a bit of institutional knowledge:
- Dan Muccia, the Department’s First Deputy retired after 32 years and is now working for the New York Fed.
- Barbara Kent, a force in mortgage banking regulation, mortgage law and a leader in developing innovative programs for the benefit of New York’s consumers retired to work for a non-profit here in the City.
- Mike Lesser, the Deputy of our Large Complex Banks Division, which, by the way, was combined with our Foreign and Wholesale Banks Division in 2006, retired and went to work for the Qatar Regulatory Authority.
- Ed Kramer, the Deputy of our Consumer Services Division and one of the driving forces behind the expansion of our Banking Development District Program retired and now works in the private sector.
- And just last week, Sara Kelsey, the Department’s General Counsel announced her departure from the Banking Department in order to serve as the FDIC’s new general counsel.
And, this is in an environment where, as usual, change is everywhere.
- We are seeing continuing consolidation of the banking industry through mergers and acquisitions
- Many European banks have begun to implement Basel II – we will be studying the effects of this on those institutions while we evaluate how to best implement Basel II in the U.S. and ponder the effects it will have on the competitiveness of not only the large international banks but also on our smaller banking institutions.
- The United States Supreme Court finally weighed in on the OCC’s preemption of state laws when it agreed to hear arguments in Watters v. Wachovia on November 29 – clearly the outcome of this case will have a tremendous impact on the future of the dual banking system, and
- We have a new Governor here in Albany and an entirely new second floor staff who have said “Day one everything changes.” It is now Day 7, and I think all indications are that this administration is going to be very successful.
So where does the Department stand? Let me talk about something I know you are all interested in – those of you chartered by us, that is, our budget.
As you know, the Legislature approved our budget recommendations last year, as they have in years past, and now, the Department no longer charges licensing fees. Some of those fees harkened back to 1914 and were not high enough to cover our administrative costs, and we did not benefit from them anyway as those fees all stayed in the general fund so it was a double whammy for us.
And, we now receive the revenue for the revised and upgraded application and investigation fees we charge. Because these fees come directly to the Department instead of being deposited in the State’s general fund, they serve to offset your assessment charges. To give you a sense of the impact of this, we expect fee revenue generated after the first year of this change to be approximately $1.4 million.
We are now finishing our second year of the Department’s changed general assessment methodology and I think all of our regulated entities have settled into the spirit and sense of what we have designed.
Naturally, we will continue to make further refinements but I do believe that we have reached a point where everyone, bank and non-bank entities, are paying their fair share for the cost of regulation.
We continue to try to improve the efficiency and effectiveness with which we work, to reduce both our budget and staffing as we continue to lose our largest state-chartered entities. We have streamlined our application process, we have upgraded our examiner training programs, we are continually working with our federal counterparts on ways to make our examination process less onerous and time-consuming for you, we are upgrading our IT systems to help make our staff more efficient and effective.
In areas that may not affect you directly, but are also important, we have done a lot of work upgrading our licensing and supervision of money service businesses and the mortgage industry. These are areas which are very important to the consumers of our State, are usually well run, but, which can be fraught with risk with disastrous consequences for consumers.
We have improved our licensing process, we have upgraded the caliber of examiners who supervise these institutions, and we have drastically revamped our regulatory criteria.
We absolutely understand that we are not the only game in town and that you can change your charter any time you want. However, you will appreciate that we have a job to do, and there is a limit to what we can cut and still carry out our very important responsibilities to you, to the system and to the consumers of the State.
I think we are successfully balancing these pressures. We supervise 300 depository institutions and 3,299 non-depository institutions. Based on the asset size of the institutions we supervise (in aggregate, more than $1.3 trillion), the Department continues to be the largest state bank regulator in the United States, which is only fitting as New York State is the financial center of the country, if not of the world. Something we would all like to see continue to be true.
I have always said that the value of the state charter was not only in its flexibility, which allows state regulators to react quickly to external changes, but also in its responsiveness to the needs of its supervised institutions. These two attributes are what I believe lead to greater innovation by state-chartered entities of new products and services that meet ever-changing demand in the marketplace.
These attributes also allow us to be much more responsive to the needs of New York’s consumers.
So what did we do in 2006? For one thing, we finally got a final regulation on bounce protection. This is an issue which we have been working on for years. You had asked us for parity with nationally chartered banks in terms of your ability to offer this service to your customers, and get paid for it, as the nationally chartered banks were allowed to do.
You argued that it was a competitiveness issue while consumer groups saw the fees involved as something akin to payday lending and were therefore vehemently and loudly against it.
I know it took awhile, but in 2006, we were able to issue a final regulation on this issue, allowing you to do this. It was a classic demonstration of how a state regulator works to try to carve out solutions to problems that satisfy the state chartered banks and their need to compete while making sure that consumers have the information they need to make choices that work for them.
Our banks were given the ability to charge a daily overdraft or bounce protection fee on checks, other payment orders, or electronic transactions, but they were also required to provide a “separate, clear and conspicuous” notice to all account holders for who bounce protection would be applied to a new or existing account.
I think we were successful in balancing everybody’s interests because it seems we came up with a set of regulations that left both sides just a little unhappy.
On the legislative front, we worked closely with the New York State Legislature in 2006 to get several regulatory relief bills passed. Thanks to this legislation:
- Non-executive officers of mutual savings banks are now permitted to obtain all types of credits from the institution for which they work
- Boards of banking institutions are now permitted to declare stock dividends more frequently than quarterly (with the Superintendent’s approval)
- Non-bank subsidiaries of state-chartered banking institutions are now permitted to merge with the parent banking institution, as long as the parent bank can directly perform the activities of the subsidiary.
- The Superintendent now has greater flexibility in making adjustments to examination schedules in order to better coordinate with federal regulators’ exam schedules
- Foreign banking organizations, or any state or federally chartered entity are prevented from using business names that would conflict with preexisting names of other banking institutions
And another lingering issue that was finally resolved in 2006 was the revision of the lighting requirements of the ATM Safety Act.
One issue that is still out there is the Wild Card legislation. I testified before the New York State Assembly on this issue last month and encouraged them to consider our recommendation to revise, expand and extend the Wild Card laws as a way to promote efficient and effective parity for all our state banking institutions.
We understand very well that banks have to make business decisions on a daily basis, and that sometimes the speed with which these decisions are made does not mesh well with the pace of legislative and regulatory decision making regarding the treatment of those decisions – so our proposal is intended to allow our banks to remain competitive “instantly” (after notification to the Banking Department and approval of course) as state-chartered entities. So we continue to work on this issue.
On the consumer protection front, we saw the Home Equity Theft Prevention Act passed which regulates the sale of property in foreclosure or default. By requiring financial institutions to give additional notice to homeowners in foreclosure of the resources available to them and of the many perils they may face if they are so unfortunate as to wind up dealing with unscrupulous individuals purporting to want to help them “save their home”, we’ve taken an important, and necessary step in ensuring that consumers on such precarious financial footing are not pushed even further to the precipice of total financial ruin.
Also on the mortgage front, we saw Governor Pataki sign the Mortgage Loan Originator Registration Bill which requires registration of all loan originators working for mortgage bankers and brokers in New York State. The bill also establishes certain background and educational requirements as a condition for registration. This is a new responsibility for us which will take some time to implement.
So, let’s talk about the mortgage industry for a minute – there are some interesting trends here, and I believe the proliferation of many of the alternative mortgage products prior to and during 2006, particularly to individuals who may not otherwise qualify for a traditional mortgage loan (and therefore may not understand the associated risks) has exposed our financial markets to increased risk.
Many of these products have allowed borrowers to exchange initial lower payments for higher payments later. It follows then, that unless a borrower is fully aware of all of the nuances of their particular mortgage product, they will be in for a serious shock when their payments adjust after the expiration of their initial payment period.
This is disconcerting because with many of these products, there is a lack of principal amortization and a strong potential for negative amortization. Also, as we continue to see a slowing of the residential housing market, the situation gets even worse for consumers who are unable to handle their increased monthly payments.
Clearly, this is not an ideal situation for consumers and if these types of mortgage products lead to a rash of defaults and foreclosures – it is clearly not in the best interest of the financial services industry.
State and federal regulators took some significant steps in 2006 to address this growing fear – issuing guidance to financial institutions – encouraging them to fully consider a borrower’s repayment capacity before making the loan and to further make sure the borrower understands the loan terms and associated risks prior to making a product or payment choice.
The Banking Department’s Consumer Services Division has already initiated discussions with several municipalities and is focusing many of its outreach efforts for 2007 on combating abusive and predatory lending in the State. Not only do we help individual consumers directly but we also work closely with non-profits across the State in this area to make sure they know what information is out there to help their constituents.
As in most situations, the common denominator of any type of guidance is consumer education. An educated consumer is equipped to make better financial choices – leading to a healthier economy and, incidentally, making that individual a better customer for you.
To that end, 2006 was an historic year for the Banking Department as we awarded our first-ever financial education grant. As a result of settlement agreements negotiated over the years with various actors in the mortgage industry, we awarded a total of $1 million in grants to 11 different organizations that provide sustainable financial education programs throughout New York State.
The response to our initial RFP was overwhelming with more than 180 organizations submitting proposals. After an exhaustive review process, I’m confident that we’ve made these awards to organizations with the most creative and innovative ideas that will impact New Yorkers from New York City all the way to Rochester and Buffalo.
We’re looking forward to seeing the effects this grant money has on the populations it is designed to serve and we are exploring ways in 2006 to award additional grants and fund additional initiatives that support this Department’s financial education goals in 2007.
Unfortunately, all of this financial education is for naught if New Yorkers don’t have access to basic banking and financial services.
And – that is where our Banking Development District program continues to make significant strides.
In 2006 alone the BDD program was used to establish 12 new districts across New York State. As a result, there are now 31 BDDs – all of which serve populations that were previously unbanked or underbanked.
The BDD program is on its way to becoming a national model for how government can provide incentives to banks to open branches in areas where there is little or no access to banking services. The program was featured in a report released last summer by the Brookings Institute and is currently being looked at by the state Legislatures in California and Pennsylvania as a model for their own programs to improve banking access for all their citizens.
One important element of the BDD application is a commitment on the part of the bank to providing products and services specifically tailored to the community it intends to serve. As a result, many of our BDD banks are offering a unique array of financial education programs in their communities.
In fact in November, Carver Federal Savings Bank, which has a BDD branch in Central Harlem, just opened its first-ever financial literacy center. The first item on their financial education agenda: combating predatory mortgage lenders.
So not only are we seeing an expansion of the BDD program, and increased opportunities for New Yorkers to establish banking relationships and improve their knowledge of the financial products and services on the market – we’re seeing a synergy between the financial education goals of our banks and those of this Department.
This spirit of cooperation goes a long way to improving communities and the lives of New Yorkers – and this cooperation is not just limited to our specific relationships with our BDD banks.
We recently became the first state to sign a Memorandum of Understanding with the OCC for sharing consumer complaint information. This agreement underscores the fact that many consumers still do not know which regulatory agency supervises their bank. Our MOU provides procedures that ensure misdirected complaints are sent to the appropriate agency and it creates a mechanism to allow that agency to track the status of the complaint and most importantly, to report back on the outcome.
So where does that leave us for 2007?
First and foremost, we have a new Governor who will prioritize the goals and future direction of New York State. I know he is committed to ensuring we have a vibrant and healthy economy and that we maintain the strength of our financial services industry while protecting the rights of New York’s consumers.
Last fall, we were all asked to put together transition plans for our respective agencies, which the Banking Department duly did. In that document, we outlined who we are, what we do and our challenges for the future. Among those challenges, we discussed the fact that, as you all know better than anyone, we, the Banking Department, operate in an environment which is unique among State agencies. We are in direct competition for bank charters with the federal government.
Other challenges include the pre-emption issue, continuing consolidation of the banking industry, implementation of Basel II and its effect on that consolidation, and competition in the industry, among others. These are challenges where we do not have very much control. We can testify, submit our opinions and research, but at the end of the day, it will be Congress, the Federal regulators and to some extent the economy that govern these issues.
There is, however, another challenge, which we as a State do have some control over, which is equally important. I mentioned in the beginning of my remarks the attrition which is taking place at the banking department – especially among the ranks of very experienced staff.
We have lost, and will continue to lose a significant amount of experience through retirement and attrition in the coming years. We must be able to move quickly to develop new managers and examining staff that have the expertise to provide effective and efficient regulation of your institutions. There is a significant stumbling block which governs the process of filling vacant positions – our very own Civil Service system.
Unfortunately, the Department of Civil Service’s one size fits all classification and compensation model and its lengthy, labor intensive testing procedures have the potential to leave the Department unable to address critical staffing needs with speed and flexibility.
For example, during the 2005/2006 fiscal year, a total of 54 employees left the Banking Department, representing 9.2 percent of the Department’s total strength. We expect more attrition in the 2006/2007 fiscal year, with 41 departures, or 7.5 percent of the workforce.
While these numbers show a significant turnover, the numbers mask the fact that most of those who are leaving are high-level employees who possess extensive industry knowledge and experience. The Department must proactively seek qualified individuals to enter the bank examiner career ladder and to serve in other professional positions where expertise in financial industries is required.
The Civil Service system presents a number of obstacles to effective hiring of qualified individuals with experience and expertise. As it is currently structured, the Department’s only opportunity to hire bank examiners with experience outside the Banking Department comes at the entry and Senior Bank Examiner levels.
It is not possible to bring in a mid-level examiner with either expertise garnered at another financial services regulatory agency or through private industry experience. Advancement through the career ladder from the trainee level to a supervisory level takes a minimum of seven years if testing schedules and eligibility align perfectly.
Couple that with the fact that the current retirement boom that we’re all experiencing is mirroring the baby boom and you have even greater cause for concern. At the Banking Department 34% of all Bank Examiners are currently eligible to retire. The average age of the Department’s workforce is 49 and 26% of the entire workforce is eligible to retire now. Of the Department’s top 3 titles, Deputy Superintendent, Assistant Deputy Superintendent and Supervising Bank Examiner, respectively 40%, 65% and 56% of the employees in those titles are eligible to retire now.
This will place a significant strain on the Department in the upcoming months and years if those employees with a significant amount of institutional knowledge retire and there isn’t an adequate amount of employees to replace them.
Initiatives we undertake to correct this situation are vital to maintaining this Department’s status as the premier state banking regulator in the nation, something which is in your best interest as regulated institutions.
As our mission statement says, our goal is to “allow the financial services industry to expand and prosper through judicious regulation and vigilant supervision, to educate and protect consumers while promoting economic growth and ensuring that the financial services system is safe and accessible to all.”
We cannot meet this goal without a knowledgeable and motivated workforce. This problem is not unique to just the Banking Department – it is a national problem and it is one that’s been predicted for quite some time as there just aren’t as many people in the jobs behind those being vacated by the Baby Boom generation.
As always, it will take innovation, deliberation, compromise to address these problems. It is crucial that we start to think about how to deal with this now.
I want to thank you all for your hard work and support during a very dynamic time for the banking industry. Despite the challenges I shared with you, the Department still has many talented and dedicated employees. Coupled with the leadership of this new administration, and our long legacy of innovation, I’m confident the Banking Department will continue to exceed its mandate and that New York will continue its dominance as the financial capital of the world. And I want to specifically thank Mike Smith and all the work and support he and his staff has given the Department.