Superintendent Richard H. Neiman addresses the annual Regional Inter-Agency Committee (RIAC) Breakfast on Community Groups, Industry, and Government Working Together To Address Emerging Challenges
May 23, 2007
I’d like to start by congratulating you, Sarah, and your team for the valuable services that NHS has provided to the residents of our city for the past 25 years.
As a former bank executive with one of the first CRA strategic plans approved by the OCC and as an active contributor and lender to NHS over the past 10 years, I had partnered with NHS long before my days as Banking Superintendent. However, I must admit that as much as I always respected and liked NHS as a banker, I love them as a regulator.
I know Comptroller Dugan shares my appreciation for the work of NHS, and I’m pleased that he is with us today to join in this important dialogue.
Before I get any further, I want to take a moment to congratulate Mark Willis from JP Morgan Chase and Marie Petraza from HSBC - the two representatives who were honored here today. I have the utmost respect for those within our financial institutions who dedicate their careers to the goals of affordable housing and improving our neighborhoods.
I also want to thank the two customers who came here today and shared their stories with us.
Those of us who remember New York City in the late 70’s and early 80’s have a unique appreciation for the positive difference that NHS had made. NHS, along with other community-based organizations, has played an important role in realizing the values of the Community Reinvestment Act (CRA).
As we approach the thirty-year anniversary of CRA, we look back on genuine accomplishments that include increased levels of minority homeownership and access to credit.
However, while I believe that the accomplishments over the last 30 years are a lot to be proud of, we should restrain from celebrating too much.
When the CRA was first enacted in 1977, the practice of excluding minority communities from access to credit, or redlining, was a primary concern. And ensuring continued credit availability in under banked communities remains a challenge today.
However, with the advent of risk-based pricing and subprime lending in recent times, the issue of access to credit is amplified by a concern that minority and elderly borrowers may be steered into higher-priced, unaffordable products regardless of their credit profile.
My fear, which I’m sure many of you share, is that in many instances the harm to families and neighborhoods from the lack of credit availability that gave rise to the CRA, may be matched - if not surpassed - by the harm and devastation caused by more recent developments.
The advent of targeting increased availability of high priced credit and inappropriate products to those same communities could have a devastating long-term effect.
Just last week, the cover story of Business Week was entitled “The Poverty Business – Inside U.S. companies’ audacious drive to extract more profits from the nations working poor.” The article addressed the growing range of high-priced products marketed to the working poor, from subprime mortgages and credit cards to check cashing and auto financing. In my eyes, the article implied profitability for not only new entrants to financial services but also to some of the largest financial institutions in the county.
I am sure there were magazine cover stories during the 1970s that told an equally disturbing story about the effects of redlining. The contrast between then and now illustrates how far we have come in some areas while new issues continue to emerge.
Addressing these emerging challenges, especially in the context of the present subprime mortgage crisis, requires the best efforts of all of us working together.
There is still so much work to be done and constructive partnerships between community groups, industry, and government are more important now than ever.
But, in order to maximize the value of working together, we need to identify and channel the expertise of each partner- community groups, industry, and government- into its most appropriate area of contribution.
In the limited time I have with you this morning, I’d like to outline some concrete ways in which the Banking Department stands ready to support these creative collaborations.
The first role I see for government is in a support role for the positive programs that are provided by community groups, such as NHS.
We recognize that in many ways the community groups will be on the front lines dealing with the most immediate and personal impacts of the subprime crisis - in counseling borrowers at-risk, offering foreclosure prevention programs, and mediating between borrowers and their lenders.
As first-responders, consumer advocates have a vital but potentially overwhelming task - due to the sheer volume of people who may be affected by the subprime problem.
We are still assessing the scope of the crisis, as a large segment of adjustable rate loans from 2005 and 2006 which will reset in waves over the next few years.
This year alone, it is expected that over 30% of subprime ARMs will reset for the first time, with approximately 25% resetting in 2008. Assuming no change in interest rates, the average 2-28 hybrid ARM originated in 2005 will reset this year from a rate of 7.3% to 10.3%. Those originated in 2006, will go from 8.4% to 11.4%. Many of these will be able to be reset again in six months.
Default rates are already rising steadily across the state as a significant number of overburdened consumers are unable to withstand the payment shock when their adjustable rate loans reset and their payments increase overnight.
All of this is likely to translate into more requests for services from community groups.
One way government can help meet this increased consumer need is to provide support through our existing consumer outreach services. The Banking Department maintains a Consumer Help Unit that administers a toll-free hotline (1-877-BANK-NYS) to answer questions, make referrals, and intervene on behalf of consumers in disputes with regulated entities.
The City of New York has also developed their own foreclosure hotline to assist borrowers, which the Department commends.
The HOPE foreclosure hotline, which will be offered through NeighborWorks America is another example of this kind of creative response from nonprofits.
But, even with this additional support in staging and evaluating initial consumer contacts, it is often the local community groups that shoulder much of the responsibility for counseling borrowers in distress.
While it’s important that hotlines screen consumer calls and channel them to the most suited local provider, it’s just as important that the community group receiving that referral has adequate resources to respond.
This is where the Department would like to hear more from you; from community advocates:
How can we help you as you prepare to deal with the increased volume of cases stemming from the subprime crisis?
Is it “Through improved information sharing and collaboration?” or “Through joint outreach campaigns?”
I invite you to talk with us about the initiatives that would best meet your needs- the Department wants to be an engaged facilitator to assist you in helping our most vulnerable residents.
The second key role I see for government is to encourage industry to be even more engaged in consumer issues.
Even after 30 years, the provisions of CRA remain an important tool for encouraging lenders to do what is actually in their best interest - fully realize all of the business opportunities in their market by making sound loans and supporting investment in low and moderate-income neighborhoods. Everyone wins when capital is matched with the right new opportunities.
A perfect example of this principle is the success of the Department’s Banking Development District program (BDD), which we see as one part of the solution to the problem of the disproportionate rate of higher-priced credit in minority areas. Under this program, banks that establish branches in under-served areas and develop products tailored for those communities are eligible to receive below market rate municipal deposits from the state comptroller.
When depository institutions are absent from a neighborhood, it creates a vacuum that less traditional, higher-priced lenders quickly fill. The goal of the BDD program is to foster more affordable credit choices in those areas, so that qualified customers do not gravitate toward higher-cost options simply because that is the predominant type of credit provider operating in their neighborhood.
I believe that the transition of these consumers into the banking system may also help them to establish credit profiles, as they move out of the all-cash economy into more mainstream transactions.
However, while everyone wins when good credit opportunities are developed, the reverse is also true - everyone loses when an unaffordable loan is made. When borrowers are sold products that are not appropriate for their financial circumstances, they are at increased risk of delinquency or foreclosure.
As we all know the impact of foreclosure is always devastating- it is a personal tragedy, a community challenge, and a business loss. That’s why the Department encourages lenders to work with overextended borrowers to avoid foreclosure whenever possible.
When borrowers are unable to meet their payment obligations, workout arrangements are often in the best interest of both the lender and the consumer. When workout arrangements are an option, we recommend that lenders work with reputable community-based organizations like NHS to find ways to assist borrowers in trouble.
Over the past several weeks, I have been meeting with some of the nation’s largest mortgage servicers to get a better understanding of their legal ability to modify loan terms, as well as the initiatives they have already undertaken.
I was happy to learn that many have established expanded foreclosure prevention and loan modifications units, with one even called the "Mod Squad," to heighten excitement and attention. Some are attempting to reach out to borrowers, well in advance of resets, to assess the borrower’s ability to meet obligations and to consider potential modifications to the loan, including modification of the interest rate, principal balance and maturity.
Unfortunately, there seems to be an inability, in many cases, to connect with the borrower. Borrowers who will be challenged by a mortgage reset are often behind in other credit lines and assume all such calls are collection calls. It’s for this reason that servicers are telling us that partnering with community-based organizations like NHS is so critical.
At this point, I would like to highlight that institutions subject to review under CRA may receive favorable consideration for developing fiscally responsible workout arrangements and loan products designed to help borrowers avoid foreclosure.
Encouraging loan modifications by offering CRA credit is just one example of how government can leverage its position and partner with industry in finding solutions to the subprime problem.
In addition to working with community groups and industry, there is a third form of partnership that’s greatly needed - a constructive relationship between and among government agencies.
This inter-governmental cooperation involves partnership both between the state and federal levels, and between the various state agencies. On the state-federal front, the regulatory landscape post- Watters v. Wachovia demands more, not less, interaction. That’s because the decision in Watters to uphold preemption of state consumer protection laws for the operating subsidiaries of national banks has further stratified the financial services market. That’s why I support the development of national standards for the prevention of predatory lending as a baseline to which all lenders must adhere.
I’d like to commend Comptroller Dugan for his leadership at the OCC. His approach to working closely with the FFIEC has led to the creation of guidance on nontraditional mortgages, the proposal regarding subprime lending and the recent statement on workout arrangements.
I believe that the states can play a key role in working with the federal government to develop these appropriate national standards. States, like New York with its restrictions on prepayment penalties, can serve as models.
I look forward to working with Comptroller Dugan and with other federal regulators as we consider the viability of national standards to protect all consumers, regardless of the financial institution’s charter type. In fact, after this breakfast John and I are meeting for a one-and-one conversation, about these and other topics.
But that’s not the end. Constructive state-federal cooperation is only one side of the story. Within the state system, there is a wealth of resources that also need to be harnessed.
In New York, Governor Spitzer created an interagency Task Force to bring together all of the state agencies and departments that relate to mortgage issues. The HALT Task Force, as it is known, is charged with the mission to “Halt Abusive Lending Transactions.”
As Chair of the Task Force, I am proud to say that we have already identified and are in the process of addressing six core initiatives:
- We are analyzing foreclosure and lending data to identify borrowers and communities most at risk.
- We are developing loan and refinance programs -- in conjunction with SONYMA -- to help homeowners whose current loans are inappropriate for their financial circumstances.
- We are creating statewide outreach and educational campaigns to assist the state’s most vulnerable borrowers.
- We are considering various legislative and regulatory changes to enhance compliance and expand consumer protections.
- We are working with the Division of Human Rights to identify potential discrimination practices and patterns of predatory lending behavior.
- And finally – in coordination with law enforcement agencies, we will be pursing enforcement actions against those engaging in wrongful conduct and in fact have recently established a joint Mortgage Fraud Unit between the Banking Department and Secretary of State.
The Task Force has also begun to reach out to the community and industry through a series of day-long HALT summits. The first of these was held in Manhattan on April 11, and I’m proud to say that NHS was an integral part of that summit with Bernell Grier (coo of NHS) serving as moderator for our first panel of community and advocacy groups.
A second summit is being planned for Buffalo next month. These events reach down to the grassroots level, which I believe is a crucial first step in identifying and responding to the regional challenges facing New Yorkers.
We know that the issues facing mortgage consumers concern all of us and require a coordinated response.
We look forward to working with NHS and all other interested parties in the months and years ahead on developing and implementing solutions for protecting our residents from abusive lending practices.
I can assure you that the Banking Department and the Governor take these concerns very seriously, and that our efforts to protect the most vulnerable are at the heart of this Administration’s mission. And, I appreciate the opportunity to share this commitment with you today.
Our meeting here this morning is an important occasion and I am honored to have been included.
Thank you very much.