Superintendent Neiman Addresses the New York Bankers Association
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS FOR THE STATE OF NEW YORK
New York Bankers Association
Annual Meeting and Legislative Conference
Albany, New York.
February 11, 2008
Good afternoon. I’m pleased to be here with you today and to have this opportunity to update you on my priorities for the Department for the year ahead.
And, it’s a privilege to join Senator Bruno, Speaker Silver, and other distinguished members of the legislature in discussing the landscape of bank regulation in New York.
I’m grateful for the many opportunities I have had to engage constructively with both the Senate and the Assembly, since I was appointed as Superintendent last March.
I’d especially like to thank Senator Farley and Assemblyman Towns, who will both be addressing you shortly. Their work as committee chairs in banking is a major contribution in this challenging time for both consumers and the mortgage industry.
Attending public hearings and various community-based events sponsored by legislators has given me the opportunity to experience an up-close and personal view of the regional- and very personal- expressions of this foreclosure crisis.
Just yesterday, we announced a series of foreclosure prevention forums that bring lenders and borrowers together to work together on avoiding unnecessary foreclosures for borrowers who have the desire and ability to make regular payments. With more than 20 lenders/servicers participating, this is an important program to expand and monitor, to measure the true impact on borrowers seeking assistance.
However, as important as these events are, they are not the solution for every borrower and outreach alone is not enough to prevent these problems from happening again. So in our continuing response to the subprime crisis, the Department is engaged on many other fronts.
As we address this crisis, it is vital that we never lose sight of our over-arching mission to ensure the safety and soundness of the financial system, while providing second-to-none consumer protections.
That’s why I’ve adopted a five-pronged approach in identifying our agency priorities for 2008. We’re working to:
- Promote the dual banking system and enhance the state charter;
- Protect consumers;
- Expand community development;
- Recruit and train staff; and
- Modernize our regulatory framework.
Out of this list, I’d like to focus today on regulatory and legislative initiatives to enhance the state charter and promote the dual banking system, as well as protect consumers.
A. PROMOTE DUAL BANKING / ENHANCE THE CHARTER
The reforms we are pursuing as state regulators help position the banking industry in New York for sustainable success. Even banks with a national charter benefit indirectly from state oversight of the industry through the dual banking system - the checks and balances in the dual model act as a built-in restraint against excessive regulation by either level of government.
Both state and federal regulators are always aware that you have a choice when it comes to charter. This healthy form of regulatory competition provides for diverse markets where industry can be innovative, which also benefits consumers through expanded product choices.
Let me give you a few examples of ways we’re breaking down competitive barriers through regulatory and legislative reforms:
- WILD CARD
First, as I’ve mentioned to you in the past, the process to initiate changes under the wild card authority has been expanded. Both you as industry and I as the Superintendent have greater flexibility to initiate changes than ever before. This legislative enhancement passed last year, and we’ve wasted no time in exercising the option.
The first recommendation I initiated under this enhancement was approved last week by the Banking Board. It permits state banks and trust companies to repurchase their own common stock. This gives them repurchase rights to the same extent and under the same conditions as national banks.
This proposal represents a significant benefit to smaller community banks, especially those that are closely held and don’t already have this ability through a holding company. I expect other proposals to follow, and I encourage you to bring recommendations for other rights and powers to achieve parity.
- RECIPROCAL DE NOVO BRANCHING
Since we are talking about striving for parity, it makes sense to start at the very beginning, with the standards for de novo branching. Reciprocal de novo branching is a particular hot button issue.
Let me say this at the outset- I realize that not all community banks are convinced that reciprocal branching would be an improvement. After all, the “closed border” policy places a premium on existing branches in the world of mergers and acquisitions.
I’m sympathetic to that concern, but at the same time, the inability to branch freely can have a negative impact on all banks- including community banks- that are looking to grow and expand their service area. This is especially true for those located along the border, where marketing opportunities may logically extend beyond jurisdictional boundaries.
I look to those of you who support this change, which has already been implemented in 25 other states, to join with me in advocating for a legislative amendment. Consider the wide range of new business opportunities that reciprocal de novo branching could provide. With most states in the Northeast participating, banks could follow existing customers as they relocate throughout the region, as well as capitalize on new marketing opportunities.
- MULTI-STATE PACT
As our state-chartered banks prosper and expand their business regionally, a related goal is to reduce regulatory burden stemming from multi-state oversight. And that means harmonizing rules and coordinating state supervisory processes whenever possible.
I’m proud to announce that we have taken a major new step forward on that front, in reducing burden for state-chartered regional banks.
We have reached an historic agreement through an interstate compact with New Jersey and Pennsylvania that will be signed later this month. One very practical result of this compact will be to relieve state-chartered banks from compliance with multiple levels of state regulatory oversight. The home state will be responsible for supervision of branch activities in the other jurisdictions.
For example, New York state-chartered banks that operate in New Jersey will no longer be subject to New Jersey’s host state supervision. And vice versa.
That puts state-chartered banks on the same footing as national banks, which operate in more than one jurisdiction while retaining the simplicity of having only one functional regulator and one set of controlling laws. Through this new agreement, we’re putting Riegle-Neal into practice more fully.
- MUNICIPAL DEPOSITS / FDIC INSURANCE LIMITS
Another legislative change I’m interested in pursuing would permit banks operating in New York to accept municipal deposits in excess of FDIC insurance limits in certain circumstances, without having the cost and inconvenience of collateralization.
The idea is for the bank to act as custodian, and arrange for deposit of the over-limit funds with other banks, to maintain FDIC insurance. A growing number of other states already authorize this practice.
B. PROTECT CONSUMERS / SUBPRIME LEGISLATION
As I’ve been outlining these examples of our positive initiatives, you may be thinking- “Sounds good so far, but when’s the other shoe going to drop? What does the Department have in mind when it comes to consumer protection and mortgage legislation?”
At the moment the Banking Department is providing input to the administration in developing a legislative proposal, as outlined in the Governor’s State of the State- so yes, something’s in the works. And, we are looking for your input and contribution as part of that process.
I especially appreciate the preliminary feedback we’ve already received already Mike Smith and individual members of the NYBA Task Force. I met with the full NYBA board this morning, and enjoyed an open and constructive dialogue on our proposal.
But before we dive into this somewhat more controversial subject of mortgage legislation- let me reassure you of some core beliefs we have in common, which go beyond our shared concern for the effects of the subprime crisis. First, we share your concerns about issues such as maintaining the banking industry’s reputation.
We realize that even though all market participants are feeling the negative consequences of the mortgage crisis, not all were involved to the same extent in creating the problem. For example, many New York banks, particularly community banks, were not active in originating subprime loans.
I’m also sympathetic to the concern that the words “bank” and “mortgage banker” may be synonymous in the public’s perception. And for that matter, there are many non-depository firms with integrity who are likewise worried that the irresponsible behavior of some has tarnished the whole profession.
So, when we discuss the need for legislative solutions, I am very mindful of the language we use in describing the origins of the problem. And we want to make clear that all types of financial institutions- including mortgage bankers and brokers- that arrange or originate mortgages can perform a valuable public service.
Which leads me to another concern we have in common- we all want credit to remain available. Without access to credit, homeownership rates will decline. We don’t want any new legislation to adversely impact credit availability or the secondary market.
While diversification of risk through the securitization process helped to create a culture of reduced accountability in some segments of the industry, securitization itself is not the problem. Using the capital markets as a funding source is an innovation worth preserving, within the bounds of a more disciplined approach to risk assessment.
The best legislation in the world would fail to achieve its aim if it placed unnecessary burdens on the competitiveness of New York’s regulated institutions and restricted legitimate consumer choice.
And, quite frankly, we can’t protect consumers if the laws we design don’t apply to the industry because it decides to reorganize outside of our supervisory authority.
So we are aware of the impact that preemption has in a competitive marketplace, and we are not looking to put New York industry or the state charter at a disadvantage.
That’s also why we are advocating for a national standard, to function as a floor and further level the playing field.
With all that being said, let’s consider a few of the particulars from our legislative proposal from the State of the State. The details will be introduced soon in a Governor’s program bill, but there are two broad parts:
- amendments to the banking law, and;
- amendments to the real property law.
1. AMENDMENTS TO THE BANKING LAW
On the banking law side, we’re looking to address the practices that most contributed to the subprime crisis. As I said, the subprime problem is complex and there are multiple precipitating factors. But if I had to identify one- just one- factor that was a primary driver, it would have to be undisciplined underwriting standards- specifically, the failure to ascertain the borrower’s ability to repay.
It still astounds me that lenders and investors were willing to incur credit exposures in these dollar amounts based largely upon the value of the collateral- especially at a time when the market was widely characterized as a real estate bubble. So I strongly believe that setting a new standard requiring ability to pay across the board is critical in preventing this type of market failure in the future.
In looking to address other abuses, we advocate expanding the protections and provisions of Banking Law 6-l, the state’s anti-predatory lending statute. This statute only addresses a segment of the market- those loans that are high-cost. We’re closely studying the various proposals at the federal level in relation to subprime loans, and are looking to adopt a consistent approach.
2. AMENDMENTS TO THE REAL PROPERTY LAW
Also under development are changes to the real property law. As state government, we have a traditional role in overseeing the real estate market in our jurisdiction. Real property laws, including those governing the foreclosure process, are a matter of state law not subject to preemption.
A key feature here that we are suggesting is the development of a pre-foreclosure notice. This would build on the positive experience with the consumer notice sent under the state’s Home Equity Theft Prevention Act.
The idea is to give consumers a clear and conspicuous notice that they are at risk of losing their homes, and it would include a list of credit counseling services. Borrowers who take action and contact a counselor or their lender-servicer would then have a specified period in which to attempt a workout. During that period, the mortgagee would be prohibited from proceeding with the foreclosure process.
I realize that the foreclosure process in New York is already a long one- well over a year on average- especially compared to some states in which foreclosure can occur in just a few months. So we’re not looking to take a long process and make it even longer. But we are interested in providing breathing room for borrowers who have the desire and ability to make regular payments of some form, and who take clear steps to work with their lender.
I’ve just touched on a few of the reforms we’re considering in relation to subprime and foreclosures. But mortgages are not the only area we’re looking to improve. New York State has a much broader reform and modernization effort underway, through Governor Spitzer’s Commission on Financial Modernization.
The Commission is charged with identifying ways for New York to enhance its status as a world financial center and bring our regulatory structure into the 21st Century.
We want to optimize the regulation of all financial services- whether related to banking, securities, or insurance. Good regulation promotes healthy competition, diversified financial institutions, and market innovation- while ensuring that any redundancies or overlap are minimized.
This is a complex task that requires deep analysis. To do this, the Commission brings together a prestigious group: executives of financial institutions, consumer organizations, elected officials, and the heads of state agencies.
I’ve already met with Mike and his team to gather their initial input for the Commission. I look forward to continuing that dialogue, and I encourage others to reach out to me directly with recommendations.
But I want to emphasize that the panel is no mere think tank- even though the issues are complicated, the goal is to produce tangible results in the form of an action plan.
I am quite excited about the prospects for the Commission and am proud to be serving as a member. Although we just had our first full meeting last month, a key topic already under consideration is whether a more principles-based approach to regulation would be desirable. And the Banking Department is conducting a top-to-bottom review of the banking law in support of the Commission’s work. So it’s likely that we’ll be discussing legislation again, in the not too distant future.
But for now, let me conclude by restating my firm conviction that New York will successfully weather the current turmoil in the mortgage market.
Legislation will play a role in this recovery- so I think we can approach the hard work ahead of us with realism and determination, but also with a dose of optimism. Together we can effect meaningful change. I appreciate the opportunity to speak with you today, and to share my vision for the Department as we work toward that goal. Thank you.