Superintendent of Banks, Richard H. Neiman, Testifies Before the New York State Senate Committee on Banks on the Banking Department's Response to the Financial Crisis
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS
On behalf of
THE NEW YORK STATE BANKING DEPARTMENT
“THE BANKING DEPARTMENT’S RESPONSE TO THE FINANCIAL CRISIS”
COMMITTEE ON BANKS
THE NEW YORK STATE SENATE
February 25, 2009
Good morning. Chairman Foley, Ranking Member Farley, and distinguished members of the Committee: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today. I welcome the Chairman’s request to provide an update on the Department’s activities and hope this dialogue becomes a regular occurrence, as we continue working together to address the financial crisis and the impact on New York.
There are three action areas that I will focus on in my testimony this morning:
- The impact the financial crisis is having on New York banks, consumers, and the Banking Department;
- The importance of the state’s ongoing efforts to address the foreclosure crisis; and,
- New York’s role in shaping national policy and regulatory reform.
A. The Impact of the Financial Crisis on New York’s Banks, Consumers, and the Banking Department
Wall Street was reinvented in 2008, and the whole banking industry is in flux as a result. We are at a critical point in the history of the financial system, and restoring stability while maintaining and even expanding credit access is difficult to achieve. The paramount mission for me as Superintendent and for the agency, therefore, remains the safety and soundness of the institutions we supervise.
The financial condition of New York banks
The entire banking industry is facing challenges, and banks headquartered in New York are no exception. Based on call report data from the FDIC, there are 195 banks headquartered in New York, approximately half of which are state-chartered. I should point out that this total does not include Citibank and JPMorgan Chase, which are technically headquartered out-of-state. Results for the third quarter of 2008, the most recent time period available, show a significant increase of 70% in noncurrent loans and 35% in charge-offs for New York banks compared to the same time last year. Even so, this compared favorably with national trends, which saw noncurrent loans increase almost 125% and charge-offs increase over 150%. But New York banks have managed to be resilient; the industry as a whole measures favorably with trends for the U.S. and remains sound and well-capitalized.
The Treasury Department’s TARP funds will also contribute here, as New York banks come to participate and receive additional capital. To date, 26 New York banks or bank holding companies formally applied for over $107 billion. This total includes 10 New York state-chartered banks, with the bulk of the funding ($92 billion) going to other national institutions. We have noted a possible new trend, in that several New York banks which had been approved for TARP capital are now declining the funds.
The pace of all of these market events has led to major changes in the finance industry and a new supervisory structure is already beginning to take shape, even before any structural changes are implemented by policymakers. 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.
New state charters- Goldman Sachs and ICE
With conversion to bank holding companies, institutions are seeking structures that will provide higher levels of confidence to investors, counterparties, and consumers. As a result of their restructuring as bank holding companies, Goldman Sachs and Morgan Stanley will have access to more stable funding through deposits, and are now subject to a regulatory regime with higher capital requirements, lower leverage, and continual on-site supervision.
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 the Federal Reserve is a viable model to be considered by a range of financial institutions, both wholesale and retail.
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. New York’s role in chartering and supervising ICE will be a critical element of this new regulatory regime.
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.
On expanding credit access, challenges remain despite provision of public funds through the TARP. There has been a notable improvement in inter-bank lending in the capital markets, the original source of the “credit freeze.” This circulation of funds is critical, and the subsequent lending to consumers and businesses ultimately depends upon it. But the degree of progress in the capital markets is still fragile, and lending in many sectors of the economy has yet to rebound.
One area of concern is in commercial real estate. Short credit supply and tightened lending standards for any deals tied to real estate are jeopardizing the refinancing of billions of dollars in commercial real estate loans that are coming due this year. Statistics from the Federal Reserve’s Senior Loan Officer Survey bear this out: approximately 80% of the domestic banks surveyed had tightened their lending standards for commercial real estate loans in the fourth quarter of 2008.
A smaller but still substantial percent of domestic banks, about 45%, had also tightened lending standards for prime residential mortgages to consumers. And yet only 10% of banks surveyed experienced weaker demand for residential mortgages. While a process of deleveraging, both for financial institutions and for households, is both inevitable and necessary, we need to be vigilant in ensuring that credit access is not unduly restricted. That is especially true in the need to provide creative refinancing options, as one tool in preventing unnecessary foreclosures. Stabilizing the housing market will not solve the financial crisis, but the financial crisis cannot be solved without addressing the many Americans who are at risk of losing their homes.
B. The Importance of the State’s Ongoing Efforts to Address the Foreclosure Crisis
I would like to provide an update on the impact of this foreclosure crisis in New York, and on the state’s comprehensive response. The growing number of foreclosures is having a broad impact, affecting Main Street as well as Wall Street.
Scope of foreclosure crisis in New York
Foreclosures have a destabilizing effect on entire neighborhoods. Included with my testimony is a chart that displays foreclosures trends for every county in the state. Foreclosure filings in New York increased 29% in 2008 over 2007, whereas filings increased 81% over the same time period nationwide. New York is not among the states hardest-hit, ranking only 35th in the nation; nevertheless, pockets of the state are being disproportionately impacted. The top twenty counties for foreclosures account for over 90% of total filings in the state. And over 50,000 New York families are in some stage of the foreclosure process, a number that is unacceptably high.
Even borrowers who are current with their mortgage or who own their homes free and clear are seeing their property values erode as well. A recent study by the Center for Responsible Lending projected $64 billion in lost equity in New York through the end of this year, due to proximity to foreclosed properties.
Implementation of Governor’s mortgage reform legislation
Since the first day I joined the Department in March of 2007, foreclosure prevention and consumer protection have been a particularly prominent focus for the agency. The centerpiece of the state’s action is through the Governor’s mortgage reform 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. I commend the legislature, and particularly this Committee, for tackling and reaching consensus on these critical and complex issues.
Implementation of this legislation began last year, and is already yielding results. We are seeing a significant reduction in foreclosure filings in the fourth quarter, down 42% compared to the prior quarter and down 33% compared to the same time last year. 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, as new results for January do show an increase of 24% over the prior month. Year-over-year trends, however, still show a solid reduction in total foreclosure filings of 28%.
Another provision of the legislation that we are implementing this July is the registration of 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 Multi- State Foreclosure Prevention Working Group, composed of state attorneys general and state banking supervisors including New York, which is also collecting and analyzing data on loan modification outcomes.
The Governor’s Inter-agency HALT Task Force
In addition to the new legislation, New York has adopted a multi-pronged approach to consumer protection through the Governor’s inter-agency HALT Task Force, to “Halt Abusive Lending Transactions.” The Task Force includes the heads of all the state agencies and departments that relate to the mortgage market, to provide a coordinated response. As chair of the Task Force, I would like to share the highlights from our latest December 31 report, as well as other initiatives:
- Grants to Non-Profits for Foreclosure Prevention Services – The Division of Housing and Community Renewal (DHCR), the Banking Department and SONYMA each have developed and administered programs which provide grant funds to non-profit organizations to provide foreclosure prevention assistance to New York homeowners. These funds include the $25 million allocated in the state budget, as well as another $2 million that the Banking Department recouped in fines. Through close cooperation, the three state agencies have insured that foreclosure prevention services are available in every county in the state.
- Loan Modifications- The Department has conducted eight foreclosure prevention forums around the state through its Operation Protect Your Home campaign, in cooperation with the Senate and local legislators. At these forums, borrowers at risk of foreclosure, foreclosure prevention counselors, and loan servicers have been brought together to arrange loan modifications and other solutions to help homeowners avoid foreclosure. Statewide, nearly 36,000 borrowers received solicitations to participate in Operation Protect Your Home forums this year.
- Financial Literacy and Economic Inclusion- Last year we were asked by the Treasury Department to join federal regulators and private financial institutions in developing a set of best practices recommendations for the President’s Advisory Council on Financial Literacy. Financial literacy has always been a special interest to the Department. In fact, one of my predecessors, Muriel Siebert, has developed an outstanding “Personal Finance Program” for high school students that is gaining ground statewide and could be even more widely used. Another innovative project we facilitated was the opening of a branch of a bank branch in a Bronx high school that is staffed by students. Financial literacy is also a core activity for banks that participate in the Banking Development District (BDD) program for economic inclusion and open branches in underserved communities. These hearings will provide an opportunity for community groups and banks to comment on the program and increase its reach and effectiveness. Comptroller DiNapoli and I will kick-off these hearings at the first event in Harlem on April 2, with other hearings to occur across the state. We are currently looking at Buffalo, Syracuse, and Saratoga as venues.
- Enforcement- Supervisory standards and enforcement efforts have been heightened, including steps to combat fraud. The Department’s Mortgage Fraud Unit has been convening monthly meetings of federal, state, and city law enforcement agencies to coordinate efforts in combating mortgage fraud, and has also provided training sessions across the state. New York is one of the first states to participate in the National Mortgage Licensing System, a multi-state project to register individual loan originators. This system includes extensive security measures and educational requirements. With 11,000 mortgage bankers and brokers already in process, it is estimated that close to 20,000 originators in New York will be registered by January 2010.
And, I’ve really just scratched the surface in describing a few of our diverse efforts. 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. Helping homeowners to avoid foreclosure, stabilizing the financial markets, and reforming our financial regulatory system has to be a national effort as well.
The Homeowners Affordability and Sustainability Plan that was announced last week by President Obama and his economic team is the type of federal support that is needed. The plan is comprehensive and thoughtful in tackling the foreclosure crisis by addressing significant impediments to successful loan modifications, including affordability, meaningful incentives to lenders, servicers and borrowers, and outreach. I look forward to seeing detailed guidelines around eligibility and to working with the Administration on the implementation of this plan, which will help thousands of New York homeowners who have been unable to refinance or modify into more affordable mortgages. This plan complements activities that states, like New York, have already taken a lead on and addresses many issues raised by the states, specifically data collection and systemic modifications.
C. New York’s Role in Shaping National Policy and Regulatory Reform
Overview of Panel
To further develop effective state-federal partnerships, Governor Paterson last fall urged the leadership in Congress 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. There are two other Democratic-appointed members- Elizabeth Warren, a law professor from Harvard with a specialty in bankruptcy law serves as the Chair, and Damon Silvers, the Associate Counsel of the AFL-CIO. The Republican-appointed members are Congressman Jeb Hensarling from Texas and former Senator John Sununu from New Hampshire. Together, we bring 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 three 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. The regular monthly reports have focused on Treasury’s initial response to those questions, as well as a valuation of investments made through capital purchases.
Report on regulatory reform
Our most comprehensive work to date is the special report on regulatory reform. The Panel identified eight problems with recommendations for improvement:
- Identifying and regulating systemic risk;
- Limiting excess leverage;
- Modernizing supervision of the shadow financial system;
- Creating a new system for regulating consumer credit products;
- Creating executive pay structures that discourage excessive risk-taking;
- Reforming the credit rating system;
- Establishing a global financial regulatory floor; and,
- Taking steps to plan in advance for the next crisis.
The issue of regulatory reform is an area where I believe I bring a unique perspective as the only regulator on the Panel, as well as the only member with industry and compliance experience. I voted to support the report, and also issued supplemental views 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.
There are three main points that I highlighted:
- States must be allowed to increase their role in protecting consumers. States, like New York, sounded an early alarm on subprime lending by adopting anti-predatory lending legislation and reaching landmark settlements with the nation’s top mortgage bankers. These actions led to hundreds of millions of dollars in consumer restitution and improved industry practices. Rather than join with the states, however, the OCC and the OTS thwarted state efforts with broad claims of preemption. That is why I underscored the report’s call to roll back the overreach in federal preemption. I called for what I refer to as a Progressive Federalism that would draw on what is best in our current dual banking system, close gaps in consumer protection, and maximize the effectiveness of the joint resources of state and federal regulators.
- 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. In designating a regulator with over-arching consumer protection responsibilities, however, it is critical to keep the consumer protection and safety and soundness functions within the same agency. A loan that is unfair to consumers is not prudent. 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.
- The Federal Reserve should be the systemic regulator. The Panel’s report correctly identifies the need for 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 it 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.
Upcoming report on foreclosures
And the work of the Panel in regulatory reform and other key topics is continuing. The March report will focus on foreclosures, in light of last week’s announcement of the Homeowner Affordability and Sustainability Plan. Based on our experience in dealing with foreclosures at the state level, I have been asked to take the lead in preparing this report which will consider data collection and standardization, the drivers of loan default and re-default, such as the interaction between affordability and negative equity, and impediments to loan modification.
With profound changes on Wall Street and the emergency relief being offered by the government, the industry is being reshaped and New York is making a substantial and positive contribution to this reform effort. I am proud of what we are accomplishing together and you should be proud as well. I look forward to continuing to work with this Committee in maintaining New York’s prominence in consumer protection and as a global financial center. Thank you, and I would be pleased to answer any questions.
Top twenty counties in New York for foreclosure filings – fourth quarter 2008
Foreclosure filings alphabetically by county for all 62 counties – fourth quarter 2008
Foreclosure filings by percentage of filings for all 62 counties – fourth quarter 2008
Foreclosure filings alphabetically by county for all 62 counties – full year 2008
Foreclosure filings by percentage of filings for all 62 counties – full year 2008