Superintendent Richard H. Neiman Addresses the New York Bankers Association About the Current Economic Situation and Financial Regulatory Reform
February 9, 2009
A. IntroductionGood afternoon and thank you for the invitation to join you again this year. I would especially like to thank you, Mike, and the NYBA membership for your significant contributions to the banking industry at this critical point in the history of the financial system.
Just looking back at the issues we were discussing together at last year’s event shows how much the world has changed. We spoke about wild card powers and de novo reciprocal branching – while these issues remain important, it seems like a long time ago when they were at the top of the list. Wall Street was reinvented in 2008 and the whole banking industry is in flux as a result.
These changes have led to changes in the Department’s role as well.
I would like use this time today to update you on our current priorities, as well as take a look into the future of regulatory reform from my perspective, as a member of the Congressional Oversight Panel. The Panel was created under the Emergency Economic Stabilization Act, to evaluate the Treasury Department’s management of the TARP, and we recently released a comprehensive report on regulatory reform.
B. New York- highlights from 2008
1. Expanded role for the Department- Goldman Sachs, ICEThe pace of events has led to major changes in the finance industry and a new supervisory structure is already beginning to take shape. Perhaps no examples are more dramatic than the loss of the five main investment banks to merger, bankruptcy, or conversion to bank holding company status. With conversion to bank holding companies, institutions are seeking structures that will provide more stable funding through deposits and higher levels of confidence to investors, counterparties, and consumers.
As a result of their restructuring and decisions to become bank holding companies, Goldman Sachs and Morgan Stanley will be subject to a regulatory regime with higher capital requirements, lower leverage, and continual on-site supervision. The follow-up to their decision to become a bank holding company, is their subsequent decision on charter type.
This has major implications for us at the state level as we are taking on the supervision of Goldman Sachs, which elected to become a state-chartered bank supervised by the Department and the Federal Reserve Bank of New York. I think this combination of the Banking Department and Federal Reserve is a viable model to be considered by a range of financial institutions.
In fact, the Department has recently approved another large, complex institution that will have a role to play in restoring market order. Intercontinental Exchange, Inc. is creating a New York-chartered trust company, ICE US Trust, LLC to serve as a central clearing facility for credit default swaps. The existence of central counterparties for CDSs will go a long way in covering gaps for this crucial sector of the market, currently estimated to be as large as $30-50 trillion.
Both of these examples reflect confidence in New York as a center for business and demonstrate that state banking regulators deserve a prominent place in the twenty-first century regulatory framework. States like New York offer progressive laws and a supervisory force that understands a range of complex issues- whether that is wholesale activities, community banking, or consumer protection.
2. Implementation of subprime legislation- servicer registrationIn fact, consumer protection has been a particularly prominent focus for the Banking Department this year as over 50,000 New York families face the possibility of foreclosure.
The centerpiece of the state’s response to this crisis is through the Governor’s mortgage legislation that passed last summer, one of the most comprehensive reforms in the country. The legislation gets to the root issues driving these foreclosure numbers, and tackles the problem from both sides: there are provisions designed to help existing homeowners avoid foreclosure, as well as new standards to help prevent future crises.
Implementation of this legislation began last year, and we are already seeing where it is yielding results. We are seeing a reduction in foreclosure filings for the full year and a particularly significant drop in the fourth quarter. We believe this reflects the benefit of the new 90-day pre-foreclosure requirement, which gives homeowners additional time to renegotiate mortgage terms with their lenders. These are statistics we will be following closely in the months ahead.
Another provision of the legislation that we are implementing this July is the move to register mortgage servicers for the first time. This will enable the Department to collect critical data for monitoring industry loss mitigation efforts. This builds on the gains of the State Foreclosure Prevention Working Group, composed of state attorney general and state banking supervisors including New York, which is also collecting and analyzing data on loan modification outcomes.
3. National Mortgage Licensing System (NMLS)
The project to register servicers dovetails with New York’s participation in the National Mortgage Licensing System (NMLS), a state-run project to register individual loan originators. This system includes background checks, fingerprinting, and educational requirements. New York was one of the first states to launch the new system. With 11,000 mortgage bankers and brokers already in process, it is estimated that close to 20,000 originators in the state will be registered by January 2010.
The recently passed federal SAFE Mortgage Licensing Act of 2008 also provides for a federal backup system, should an individual state fail to join the NMLS or fail to adopt comparable standards for originators. This is an example of creative and appropriate state-federal cooperation.
And, I’ve really just scratched the surface in describing a few of our diverse efforts at the state level, which also includes consumer outreach, grants for foreclosure prevention counseling, and enforcement actions. We are using every tool at our disposal, but there is only so much that any one state-even a progressive state like New York- can do alone. Stabilizing the financial markets and the economy has to be a national effort as well.
C. Congressional Oversight Panel
That’s why Governor Paterson urged the leadership in Washington to include state representation from New York on the Congressional Oversight Panel evaluating Treasury’s management of the TARP. I’m privileged to have been appointed by Speaker Pelosi as one of the five members of the Panel, which we also refer to as “the COP.” Well, I’ve always said that in responding to the financial crisis, we need more “cops” on the beat not fewer- and the Panel is one of several TARP oversight bodies, each with a unique role.
There are three Democrats on the Panel- Elizabeth Warren, a law professor from Harvard with a specialty in bankruptcy law serves as the Chair, Damon Silvers, the Associate Counsel of the AFL-CIO, and myself. The Republican members are Congressman Jeb Hensarling from Texas and former Senator John Sununu from New Hampshire. Together, the five of us have diverse and extensive experience with a range of ideological viewpoints- and that is a strength.
The Panel’s tasks include both regular monthly reports as well as a special report on regulatory reform that was just released about two weeks ago. You can read these reports on the Panel’s website at www.cop.senate.gov. The first regular report was issued in December, and laid out a framework for future inquiry through a set of ten questions. Subsequent monthly reports have focused on Treasury’s initial response to those questions, as well as a valuation of investments made through capital purchases.
Our most comprehensive work to date is the special report on regulatory reform. This is an area where I believe I bring a unique perspective as the only regulator on the Panel. I voted to support the report, and also issued a supplemental for two reasons- to amplify issues that I believe are critical and, where the Panel presented options but did not reach consensus on any one approach, to offer my specific recommendations.
I highlighted three main points in my supplemental:
- States must be allowed to increase their role in protecting consumers. States have a strong history of consumer protection, taking an early lead on the subprime issue with anti-predatory lending laws and headline settlements. The OTS and OCC thwarted state efforts, however, and I strongly support the report’s call to roll back the overreach in federal preemption. A new, progressive federalism would restore the proper balance and better coordinate responsibilities between each level of government.
- The Federal Reserve should set minimum national standards on consumer protection. These should be strong mandates that cover affordability, suitability, and duties of care; disclosure alone is insufficient. The report calls for a single federal regulator with over-arching consumer protection responsibilities; however, it is critical to keep consumer protection and safety and soundness responsibilities within the same agency. A loan that is unfair to consumers is not prudent. And regulators need to look at an institution holistically, to detect emerging trends and have the right tools to respond. Too narrow a mission could lead to impractical regulations with unintended consequences. Though the Federal Reserve has been slow to act in the past, the present crisis has served as a wake-up call and this responsibility would be consistent with the Fed’s current rulemaking authority.
- The Federal Reserve should be the systemic regulator. The Panel’s report correctly identifies the need a systemic risk regulator, and I agree with the G-30 and others who state that this is a job for the central bank. The Fed’s functions in setting monetary policy, overseeing bank holding companies, and as lender of last resort position them as the nerve center. We do need to give the Fed authority over a wider range of institutions, but creating a new agency would duplicate existing functions and dilute accumulated experience.
And the work of the Panel in regulatory reform and other key topics is continuing. The March report will focus on foreclosures, in particular-
- Data collection and the need for standardization;
- Drivers of default and re-default, especially the interaction between affordability and negative equity; and,
- Impediments to loan modifications.
This Panel’s purpose in this next report is not to endorse or propose any particular foreclosure program at this stage, but to identify factors that any successful program should address.
D. ConclusionWhile stabilizing the housing market will not solve the financial crisis, the financial crisis can’t be solved without addressing the many Americans who are at risk of losing their homes. While the Panel’s upcoming report will provide Congress with facts to consider in policy decisions, I intend for it to be a practical resource for you in industry as well, as you design your loss mitigation strategies.
And, I know the constructive input that NYBA provided on the Governor’s subprime legislation made the bill a better law. So I hope that you will continue to provide me with your feedback on foreclosure prevention and the range of issues under consideration by the Panel. The innovative ideas of the banking industry in New York, the nation’s hub for global finance, will have a positive impact and are an important part of the solution. Thank you.