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Speech
Superintendent of Banks, Richard H. Neiman Testifies on the Governor's Program Bill to Address Foreclosure and Subprime Lending Practices


May 12, 2008

TESTIMONY OF

RICHARD H. NEIMAN, SUPERINTENDENT OF BANKS

On behalf of
THE NEW YORK STATE BANKING DEPARTMENT

On
EVALUATING THE GOVERNOR’S PROGRAM BILL TO ADDRESS MORTGAGE FORECLOSURES AND SUBPRIME LENDING PRACTICES IN NEW YORK STATE

Before the
SENATE COMMITTEE ON BANKS, THE NEW YORK STATE SENATE

Good morning.  Chairman Farley and distinguished members of the Committee: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you and I commend the Committee for holding this hearing to address solutions to the growing foreclosure crisis.

I am pleased to offer further information on a proposal for new subprime legislation, known as Governor’s Program Bill 44 (A.10817/S.8143).  This bill would create substantial protections for mortgage borrowers in distress, as well as provide a solid basis for preventing problems in the future.

Before turning to the elements of the bill, however, I would first like to update the Committee on: 1) the latest statistics on the subprime mortgage market and the impact on New York, and 2) the Department and the HALT Task Force’s most recent responses to help stem the crisis.

Recently received data highlights depth of the problem, as well as the compelling need for a more comprehensive public sector response, including legislation.

A. UPDATE ON THE MORTGAGE MARKET
When I appeared before you last December, the year-end had not closed.  Now we have the benefit of the full 2007 mortgage data to inform the decision-making process, as well as first quarter 2008 data. I’d like to highlight the following critical statistics:

While a comparison with national trends places New York in the middle of the pack, areas of the state are being disproportionately affected.  The chart below identifies the top ten counties with the highest number of foreclosure filings.

New York Foreclosure Filings for the 1st Quarter of 2008

 

Lis Pendens

Notice of Sale

Real Estate Owned

Total

Percent of Filings

% Change vs. First Quarter 2007

Queens

2,110

358

215

2,683

19.2%

83.3%

Suffolk

1,865

89

125

2,079

14.8%

2.2%

Brooklyn

1,603

168

61

1,832

13.1%

66.5%

Nassau

1,082

44

150

1,276

9.1%

33.6%

Monroe

665

12

138

815

5.8%

-3.7%

Westchester

619

65

50

734

5.2%

72.7%

Staten Island

536

157

36

729

5.2%

110.1%

Bronx

534

107

35

676

4.8%

62.9%

Erie

5

330

86

421

3.0%

8.5%

Albany

186

61

74

321

2.3%

401.6%

Subtotal

9,205

1,391

970

11,566

82.6%

43.9%

Other 52counties

947

755

734

2,436

17.4%

70.9%

Total

10,152

2,146

1,704

14,002

100.0%

48.0%

Data from RealtyTrac as of 3-31-08

To highlight the disproportionate impact of the foreclosure problem, you’ll note that Queens and Brooklyn alone account for approximately 32% of the total foreclosure filings in the state.  While Nassau and Suffolk are also heavily impacted, with approximately 24% the state’s foreclosure filings.

Additional data with respect to foreclosures, delinquencies, and the composition of the subprime market are included in the recently released report from the Governor’s HALT Task Force.   I am submitting a copy along with my testimony today and, as you will see from the report, clearly the foreclosure problem in New York is real and growing.

That’s why the Banking Department and the HALT Task Force have taken action on multiple fronts.  No one factor caused the crisis. And no one solution will solve the crisis.

B. UPDATE ON BANKING DEPARTMENT  AND HALT TASK FORCE INITIATIVES
I’d like to highlight several of those key efforts, as detailed in the HALT report:

  1. Operation Protect Your Home.  First, day-long foreclosure prevention forums are being co-sponsored by the Department and state legislators.  These unique events bring borrowers and their loan servicers together face-to-face to discuss possible solutions to foreclosure, including loan modifications or other workout arrangements.  Representatives from nonprofit counseling agencies and government agencies were also available to provide assistance.  Already this year we have held six foreclosure forums: the Bronx, Staten Island, Queens, Brooklyn, Westchester, and Buffalo which was just this past Saturday.  An event in Long Island is being planned for June 7.

  2. Grants for consumer services. Another substantial commitment to help consumers comes in the form of a $2 million grant program, to facilitate credit counseling and other consumer services.  The program is funded by recoupment from prior Banking Department enforcement actions. In addition, the new state budget will include $25 million for grants to nonprofits for this critical homeowner counseling.  As caseloads have grown, the sustained ability of counseling and legal aid groups to respond to the increasing need is a pressing issue.  The new grant monies will help ensure that community groups have the right tools and training.

  3. National Mortgage Licensing System. In 2008, we’ve also begun the process of enrolling all of the state’s mortgage loan originators into the nationwide licensing system.  New York is one of the first states to sign on to this system, organized by the states through the Conference of State Bank Supervisors.  The new system includes review of fingerprints, background checks, and an education requirement for over 20,000 originators in the state. These standards will go a long way toward closing the gaps and harmonizing state enforcement of mortgage bankers and brokers.  New York had already passed its own mortgage loan originators’ law early last year, which happened to dovetail with the timing on the nationwide system.  I’d like to commend the legislature for your forethought on this issue.  A key benefit of the system is that it will help to curb the abuses that contributed to the subprime crisis.  With a nationwide tracking system, fraudsters who run afoul of the laws in one state cannot evade enforcement and reopen shop, simply by migrating across state lines.  

  4. The State Foreclosure Prevention Working Group. As noted in the HALT report, we play an important role on the State Foreclosure Prevention Working Group, which is composed of state attorneys general and the New York and North Carolina banking supervisors.  This Working Group has been meeting since last summer with the nation’s top mortgage servicers to encourage large-scale modifications and to seek data with regard to loss mitigation efforts.  A second report analyzing data received from the servicers was issued on April 22; a summary of those findings is included in the attached HALT report.

  5. Mortgage Fraud Unit. A dedicated Mortgage Fraud Unit was formed within the Banking Department last year and is actively working with local, state, and federal law enforcement officials to prosecute mortgage fraud.  The Unit has also been recognized as a resource for expertise in this area, as national conference speakers and in providing training to prosecutors.

As important as the State Working Group and our other initiatives are in addressing the subprime crisis, we still recognize the need for other immediate and long-term solutions, which can only be accomplished through legislation at both the state and federal levels.

C. SUBPRIME LEGISLATION
While I am proud of the broad range of aggressive and innovative initiatives we have taken at the state level, as you can see from the data, the picture continues to worsen and foreclosures are still on the rise.  More needs to be done.  We’ve urged and will continue to urge the federal government to act decisively.  But in the face of continued federal reluctance, we believe the state must move forward with its own legislation. And legislation needs to address immediate concerns, by assisting borrowers and lenders to find alternatives and avoid unnecessary foreclosures, while pursuing long-term, permanent solutions to assure a similar crisis doesn’t occur in the future.  The Governor’s Program Bill is designed to respond to both of these objectives.

And in considering a legislative solution, we must never lose sight of the paramount goal of striking the right balance between consumer protection and the availability of affordable credit.  That is why we were so conscious in the drafting process of the risk of unintended consequences, particularly that lenders might be unwilling or unable to continue to provide home financing.  And we also appreciate the need to respond in time, before more families lose their homes and neighborhoods become destabilized.

We need to assist borrowers and lenders in pursuing strategies to prevent unnecessary foreclosures, and we need the right checks in place to help prevent this kind of market disruption from ever happening again.

D. ELEMENTS OF THE BILL: HELPING EXISTING BORROWERS
The immediate focus is on existing homeowners facing foreclosure. States can make a unique difference here.  The changes we propose affect real property and other laws that are especially appropriate for action at the state level.  And since foreclosure is a process as well as an event, we have targeted relief by stage.

  1. Pre-foreclosure notice. First, we need relief for borrowers in default, before foreclosure proceedings are initiated.  The problem is that many borrowers have no personal contact with their lender during the foreclosure process, there’s a failure to communicate.  Our solution is to require that the lender send a pre-foreclosure notice, with the names of housing counselors, 60 days prior to the initiation of foreclosure proceedings.  If the borrower reaches out to the lender within 30 days of receiving the notice, the lender will be precluded from initiating a foreclosure action for a period of 60 days.  This requirement would apply to high-cost and other subprime loans.  Those subprime borrowers have more limited financing options, and are especially in need of early intervention.

  2. Mandatory Settlement Conference. Once foreclosure proceedings have been initiated, it’s still not too late to find another solution.  Our bill would create additional space for a resolution through a mandatory settlement conference.  And here the relief is available whenever the home is occupied by the owner or a family member.  The court has to hold a settlement conference within 60 days of the answer date.  If the homeowner appears without counsel, the court will assume that he or she wants to proceed as a poor person and the court will decide whether to appoint counsel.

  3. Affirmative Allegation of Ownership. The third element concerns proof of the legal standing to initiate foreclosure.  With the complex contractual relationships involved in mortgage securitization, we would require an affirmative allegation that the plaintiff is the owner or authorized designee of the note and mortgage holder.  This applies to subprime loans, and would also include affirmation that the loan was made in compliance with the state’s anti-predatory lending statute.

  4. Rescue Scams. And finally, we have included provisions to address foreclosure rescue scams, an unfortunate outgrowth of equity scams, intended to take advantage of borrowers at their most vulnerable time.  New York already prohibits equity stripping scams, but the ingenuity of crooks has outstripped that law.  We want to protect homeowners from being further victimized, by prohibiting upfront fees and requiring a written contract for services from so-called “distressed property consultants.”

E. ELEMENTS IN THE BILL: PREVENTING FUTURE CRISES
There are an additional six elements in the bill that look forward, to prevent future crises; the first two relate to expansion of Section 6-l of the Banking Law, which is New York’s anti-predatory lending statute.

  1. Expansion of a covered transaction under 6-l. First, we would expand the definition of a covered transaction under the state’s anti-predatory lending law to include loan amounts up to $750,000. This change is especially critical for protecting borrowers in downstate, where home prices are typically higher than the state average.  The proposal would also create a new class of nonconventional loans- those with annual percentage rates that are 3% or 5% above the corresponding Treasury, for first and second liens respectively.  These standards are identical to the thresholds for identifying a “higher-cost” loan under the Home Mortgage Disclosure Act (HMDA), as well as many Congressional and Federal Reserve Board proposals.

  2. Additional standards and prohibitions under 6-l. In addition to expanding the scope of coverage, amendments to the anti-predatory lending statute would also provide additional standards and prohibitions.  The five requirements for this expanded category of loans would do the following:

    1. prohibit prepayment penalties;
    2. prohibit yield spread premiums;
    3. prohibit option ARMs, when there is the possibility for negative amortization;
    4. require escrow for taxes and insurance, with the ability to opt out after the first year, and;
    5. require special disclosure about taxes and insurance to first-time home buyers.

    The goal with provisions such as a ban on yield spread premiums is to prevent steering.  If the broker’s compensation varies depending upon the rate the borrower receives, there is a potential conflict of interest between the broker’s profit motive and the customer’s desire for the best deal.  This prohibition is intended to address this misaligned incentive.

  3. Duty of care.  This conflict becomes more serious if the consumer is unaware of the mortgage broker’s incentives.  And, even worse, if the borrower is being placed into a more costly product, when the borrower would have qualified for more advantageous terms.  Therefore, to address the potential for conflicts of interest to arise, the Bill would establish a general duty of care on the part of mortgage brokers to their customers.  Among other things, this would require brokers to act in the borrower's interest; act with reasonable care, skill and diligence; act with good faith and fair dealing; and present the loans most appropriate for the borrower.

  4. Ability to pay standardIn addition to conflicts of interest, another major concern is the widespread disregard of the borrower’s ability to pay.  We strongly believe in establishing an ability to pay standard for all mortgages as lax underwriting was a key precipitating factor of the current crisis.  Ascertaining ability to pay is a basic tenet of prudent lending, but this fundamental principle was not always followed, to the long-term detriment of consumers, lenders, and investors alike.  That’s why this bill would establish such an ability to pay standard, regardless of the principal amount. Lenders would have to make a reasonable and good faith determination of whether the borrower has the ability to repay the loan, including the principal, interest, taxes, insurance, assessments, points and fees.  For subprime loans, the borrower's ability to pay would require verification by detailed documentation of all sources of income.

  5. Registration of servicersMortgage servicing companies are important players in the mortgage financing process, and I don’t believe this proposal would be complete without including them.  We are proposing that mortgage servicers in New York should be registered with the Banking Department. A key goal here is to have access to data for the purpose of monitoring industry loss mitigation efforts.  Such information would aid the state in quantifying the extent of the foreclosure problem, as well as in identifying areas where state support is most needed.

  6. Mortgage Fraud. And finally, we would criminalize the act of mortgage fraud, making it easier for prosecutors to pursue these cases.  While prosecutors today may bring these cases under various theories such as criminal enterprise, scheme to defraud and larceny, this provision would make it easier for prosecutors to target these particular forms of abuse.  And as the magnitude of the fraud increases, so would the criminal penalty.

F. CONCLUSION
This Bill is a comprehensive piece of legislation designed to address the two areas of need: the need for immediate solutions to assist borrowers and lenders in finding alternative workout arrangements and avoid unnecessary foreclosures, as well as the need to set permanent safeguards to prevent future crises.

The drafting process included input from a wide range of stakeholders, including consumer groups, bankers, brokers, and securities firms.  The Banking Department and the Governor’s office continue to engage in dialogue with these groups, many of whom will also present testimony today.   Input from the industry and feedback from you in the legislature is so important in ensuring that the Bill has struck that right balance between consumer protection and the availability of credit.

We may differ about the form that new laws or other forms of public sector involvement should take, but I hope that we can all agree that additional measures are necessary.  We’re all striving toward the same objective, to prevent unnecessary foreclosures.  Everyone loses in a foreclosure- it’s a personal tragedy, a community challenge, and a business loss.  To prevent this loss, we need to take decisive action at the state level.

I believe that the facts speak for themselves: private sector efforts are an important first step, but they are woefully inadequate to address a housing crisis of this magnitude.   And time is of the essence.  We need to help borrowers on the brink of losing their homes.  And we need to restore discipline to the market, through sensible measures such as sound underwriting standards and a duty of care for mortgage brokers.  The goal is to ensure that a tragedy like the subprime crisis never happens again.  Thank you.

ATTACHMENT: THE HALT TASK FORCE REPORT, 4-30-08

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