Speech
Superintendent Neiman Addresses the New York Bankers Association Annual Meeting

October 26, 2007

Good morning. Thank you Mike.

And I am very pleased to be with you here today.

The last time I spoke to your Association was at your CEO forum on Global Competitiveness in early May, just a few weeks after I had been confirmed.

I used that speech primarily to introduce myself to your organization. I talked about how I was still relatively new and in a listening and orientation mode- getting to know the Department, its mission, and its people.  I also mentioned that I’ve been reaching out to the industry, community groups and not-for-profits.

I have been trying to meet with as many bank executives as possible. In May, I referred to a lunch meeting that I held in Buffalo with a group of 15 state bank CEOs to introduce myself and also to hear their issues. I asked about the following:  

• what are we doing well;
• where could we improve;
• our knowledge of your business;
• the quality and experience of examination staff; and,
• how well we interact with other agencies.

In the end of August, I continued that luncheon format in Rochester and expanded the participants to include national banks as well. 

After my orientation phase which lasted about three months, I then moved into a more action/results driven phase where I began to formalize my priorities as Superintendent.

While we want to remain flexible, I felt it important to articulate our priorities and commit to them.  I particularly wanted them to be clear for the Department staff.  I have shared them with the Banking Board, and provide updates on a regular basis.  I also provide a monthly update to the Governor.

This morning, I’d like to share my priorities with you as well, along with some thoughts on the changing federal/state regulatory paradigm in light of the subprime crisis. 

A. THE FIVE CORE PRIORITIES
1. To begin with, we’re working to enhance and promote the New York State charter.
We’ve taken a number of steps to strive for parity between charter types and ensure that the state option remains competitive.

• Wild card. A prime example is the new wild card authority.  Just this week, I issued an Industry Guidance letter that explains in detail the new enhanced ability both for banks and for me as Superintendent to initiate changes to level the playing field between national banks and state banks.  This gives state banks the ability to easily pursue any right, power or activity granted to a national bank.  We no longer need to issue regulation.  I’d like to hear from you on this. Bring to my attention issues that you think would be appropriate for action. Powers such as the authority to purchase your own stock have already been highlighted, and I am sure there are others.
• Interstate compacts. I’m also enthusiastic about the moves we’ve made to reduce regulatory burden for our banks that operate across state lines.  We’re even considering interstate compacts that would minimize the practical effects of jurisdictional overlap.  Conversations took place just this week with New Jersey, to discuss a possible pact that would also involve Pennsylvania. I am also interested in pursuing legislation to permit reciprocal de novo branching.  We think this would be an enhancement, but obviously would like to hear from you and your organization.
• Charter of choice. I’ve also been reaching out directly to foreign, wholesale, and community banks to gather views on how we can make the New York state charter even more responsive to your needs.  As one who started his career as a lawyer at the OCC and spent over 20 years working for national banks, I am sincerely committed to the dual banking system. It not only promotes innovation between the regulators, but it also acts as a restraint on excessive regulation. Regulators do not lose sight of the fact that you always have the opportunity to switch charters.  That is healthy and a fundamental value of the dual banking system.  And I have now seen up-close the benefits of a state charter– meaning the accessibility of its staff and the collaborative nature of its examination approach, not to mention the reasonableness of its fees when compared to the OCC. It’s for that reason that I can say without any doubt that “the State Charter should be the Charter of Choice for Community Banks”.  And that goes for wholesale banks and foreign banks as well.

2. Second, we’re strengthening our consumer protection and enforcement efforts.   Especially in relation to non-depository mortgage bankers and brokers.

• Mortgage guidance. We’ve adopted new guidance on nontraditional and subprime mortgage lending. This guidance addresses the lack of underwriting discipline that has left so many consumers saddled with unaffordable loans. 
• Mortgage Fraud Unit. We’ve created a new Mortgage Fraud Unit within our criminal investigations division, to root out fraudulent practices such as inflated appraisals. 
• AG’s Group. The Department is also participating in an inter-agency working group composed of attorneys general and state banking supervisors.  The group is meeting with the top mortgage servicers, to encourage responsible loan modifications.  The servicers claim they are being proactive, but that statement is at odds with news reports which indicate that only a tiny fraction of loans are being restructured.  So we’ve asked for data from the servicers to back up those claims.  And I believe that we may need to offer modifications on a large scale, to help distressed borrowers in time. Assessment criteria could be developed, for a tiered approach that would address categories of similarly-situated borrowers.

3. For our third priority, we’re looking to expand economic development and economic inclusion.
Both through efforts to expand traditional banking into unbanked areas as well as efforts to expand the critical role banks – particularly community banks – play in enhancing economic development throughout the state.
 

• BDD Program. That’s why we’re working to expand the Banking Development District (BDD) program. This program offers incentives, like CRA credit and below market rate municipal deposits, for opening branches in underserved communities. I’d like to see the success that the program has had downstate and in Buffalo replicated in more areas upstate. I hope to hear from you with proposals for expanding your branching network.
• We’re also looking at the Community Bank Deposit Program that was expanded this year to include national as well as state banks headquartered in New York, and are working with the State Comptroller to determine the eligibility and application process.

4. Fourth, we’re leading the effort to reform the state system for financial regulation.
We need to ensure that our regulation of all financial services- whether related to banking, securities, or insurance—is consistent and optimal. 
With that in mind, Governor Spitzer created a Commission to “Modernize the Regulation of Financial Services.” The Commission is charged with identifying ways for New York to retain and enhance its status as a world financial center and bring our regulatory structure into the 21st Century.
The Department is gearing up to support the project. We’ve already formed an in-house committee to perform a top-to-bottom review of the banking law.
As a member of the Commission, I look forward to your input.

5. And finally, to support these initiatives my fifth priority is to build on staff development.
We’re working to recruit and retain the best people for the job. I’ve been very impressed with the caliber of our examination staff, they’re key to the superior service that we offer our supervised institutions.
We’re reviewing our hiring and training policies, and I would like to consider upstate hiring for examiners and trainees. 
To remain the premier agency, we need to retain quality.

B. SUBPRIME AND THE ROLE OF THE STATES
Before I close I’d like to spend a few minutes discussing the subprime crisis in the context of the evolving relationship between state and federal regulators. The subprime issue is one that has been consuming a great deal of my time.
1. Overview of the subprime problem
Let’s step back for a moment and consider the origins of the problem more fully.  The causes are diverse; that’s part of the reason it’s so challenging to resolve.  The subprime situation touches all market participants.

• It’s the mortgage loan originators, who have an economic incentive to put customers into unaffordable loans.  
• It’s the mortgage brokers, who don’t provide sufficient supervision to the MLO’s who work for them.  
• It’s the mortgage bankers who know they’re going to securitize all the mortgages they fund, and who don’t underwrite as if they were going to hold the loans for 30 years.  
• It’s the investment bankers, who securitize mortgage loans and believe that disclosure cures all.  
• It’s the secondary market purchasers who are reaching for yield and ignore the risk of the assets they buy.
• It’s the rating agencies, who should have figured out that the underwriting standards had become more lax.  
• It’s the investors worldwide who clambered for more higher-yielding securities.
• And regulators had their own issues, with uneven enforcement among the states, and with federal regulators thwarting state consumer protection efforts through preemption.

I think we should dig deeper into this issue of regulatory involvement.  Not for the purposes of assigning blame, however, but in order to consider how regulators can work together more effectively going forward. To begin with, it’s useful to consider the historic role of the states.

2. The history of state consumer protection
The states have always been active in financial regulation. And historically, states like New York have been zealous in protecting consumers.   
The first major actions against mortgage lenders, like Delta Funding, Household and Ameriquest, were state initiatives.   The NY attorney general and the Banking Department played in a lead role in all of them.  The Ameriquest settlement last year was a landmark victory for consumers, with $295 million of the $325 million settlement being earmarked for borrower restitution.   
And New York was one of the first states to recognize the subprime storm clouds gathering on the horizon. Our anti-predatory lending law in 2000 was among the first in the nation.
Other state and local jurisdictions followed suit, and a multitude of anti-predatory lending laws developed across the country.  These laws may not have been perfect.  But they were sincere and relevant attempts to protect consumers and to elevate the mortgage lending issue in public debate.
It has been suggested that these various state responses became a compliance nightmare for industry.  I’m not here to debate whether that was the case or not.  One thing I do know is that unfortunately too often the federal regulators – instead of cooperating and joining the state –  thwarted state efforts and tried to block their efforts by asserting preemption.  
But I think Barney Frank’s bill is a good start and it should be a lively debate over issues like duty of care, preemption, and assignee liability.
We also need a concerted effort toward greater cooperation between federal and state regulators.  And I am hopeful in this regard. I was glad to hear OTS Director John Reich’s remarks this morning about cooperation between the OTS and state supervisors.

3. Examples of cooperative state solutions
Let me share with you three examples of how state regulators are cooperating in developing solutions.

• First, state regulators are cooperating in the development of a nationwide mortgage licensing system. This system, organized by CSBS, will enroll every individual mortgage originator, and not just the firms where they’re employed. It will help to curb abuse, making it more difficult for bad actors to evade enforcement and reopen shop simply by migrating across state lines. Features of this system include licensing, fingerprinting, and an education requirement.
• Second, state regulators have designed model examination guidelines to support the new mortgage licensing system. These guidelines will promote uniformity in the states’ enforcement efforts by providing standards and templates for evaluating the activities of mortgage originators.
• Third, state and federal regulators are cooperating in pilot exam programs. One of my first conversations as Superintendent was with John Dugan, and we both wanted to move beyond preemption and find areas to work together. We agreed on a joint exam effort where the OCC would examine a national bank at the same time we were examining a mortgage broker who was originating mortgages for that national bank.  In another pilot, the states and the Federal Reserve, OTS, and FTC will be joining forces in the review of selected subprime non-depositories that are the subsidiaries of bank holding company or thrift holding companies.   Both of these pilots are critical in connecting the dots and gaining a more comprehensive view of lending activity in a diversified industry.  

CONCLUSION

I’ve outlined some concrete steps that we have taken to protect consumers and restore market discipline.  There’s still much work to be done, but the subprime situation will be resolved.  We may not be able to say when, but I’m confident it will end.  

For now, we can all admit that the depth of the subprime problem took us by surprise, at least to some extent.  The rapid growth of the subprime sector had been a warning sign to many.  But it mushroomed into a global problem almost overnight, at a speed that alarmed us all.  I hope that lessons learned from this turmoil in the mortgage market will leave us all better prepared to anticipate future challenges.

We never know where the next test for the market will come from.  There are so many areas to watch- whether it’s in credit card lending, student loans, mobile banking technologies, or reverse mortgages marketed to the elderly.   There’s always the potential for misaligned interests to crop up, and regulators need to stay ahead of the curve.  We can meet these challenges best when there is cooperation, between the state and federal government and among the various states.

And constructive relationships between regulators and industry are equally vital.  That’s why I’m so pleased to be at this convention, and I hope that you will share your ideas.   I also look forward to providing continuing updates on the Department’s priorities and current activities in the future.    The issue of the moment may change, but my open door policy is a standing invitation. 

Thank you.