Superintendent of Banks, Richard H. Neiman, Testifies Before the New York State Assembly Banking and Oversight, Analysis and Investigation Committees on Legislative Initiatives Implemented by the Banking Department
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS
On behalf of
THE NEW YORK STATE BANKING DEPARTMENT
“LEGISLATIVE INITIATIVES IMPLEMENTED BY THE BANKING DEPARTMENT”
COMMITTEE ON BANKS
COMMITTEE ON OVERSIGHT, ANALYSIS AND INVESTIGATION
THE NEW YORK STATE ASSEMBLY
December 22, 2009
Good morning. Chairman Towns and other distinguished members of the Committees: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today on the Department’s progress in implementing state laws and programs, particularly those designed to protect consumers and promote economic inclusion.
I look forward to your questions on the full scope of the Department’s responsibilities, but will focus my opening remarks on three initiatives that are especially critical:
The Banking Development District (BDD) Program;
The registration of mortgage loan originators (MLOs) and mortgage servicers ; and,
The recently passed Governor’s Program Bill that expands the scope of protections to homeowners in preventing foreclosures.
Each of these programs contributes to the state’s multi-pronged efforts to address the current financial crisis and help ensure that a housing problem of this magnitude never happens again.
The Banking Development District (BDD) ProgramThe current foreclosure crisis is partially a result of insufficient access to traditional credit. When banks are absent from a community, nontraditional service providers or even predatory lenders may fill the vacuum. But lack of access is only part of the problem- we also need innovative products and services tailored to the needs of currently unbanked or under-banked consumers.
The BDD Program is designed to fill these gaps by combining access to the right products and services with financial literacy, developing long-term customer relationships and greater opportunities for economic inclusion.
Earlier this year we held community hearings across the state on the BDD Program, to solicit feedback and ideas for improvement from a wide range of stakeholders. We will soon be releasing a report that compiles the results from these hearings, but there are several important points from the coming report that I would like to highlight.
1. Geographic Distribution of BDD Branches
A recurring theme is the need to expand the BDD program upstate. Currently there are 38 BDD designations, with 25 in New York City, four in Buffalo, and the remainder thinly spread out statewide. Rural areas where residents have to travel a great distance to access a bank branch are most in need of BDD Program participation. To ensure the viability of new branches in rural areas with less dense populations, we are considering refining the program standards to allow for partial territorial overlap.
2. Activities of BDD Branches
Another series of recommendations relate to the activities of BDD branches, to hold them accountable to their mission of economic inclusion. Financial literacy is an expected activity for BDD branches that we are considering making mandatory. The current foreclosure crisis has demonstrated that financial education is critical, and the state has taken a lead role in facilitating the work of nonprofit counselors through the $25 million grant program. A formal process to connect nonprofit providers of financial education with BDD branches would be an effective way to reach households that would most benefit from these services. And to help ensure delivery of appropriate products and services, we recently began requiring BDD branches to report to the Department on the number of Basic Banking and related low-cost accounts that they open.
3. Program Funding
The ability of the BDD Program to continue as a vehicle for economic inclusion is dependent on program funding through the Office of the State Comptroller (OSC). We are developing two proposals that have preliminary support from OSC: to extend the length of the initial maturity for subsidized deposits from two to four years, and to permit use of a broader class of assets as collateral for subsidized deposits. The collateral issue is particularly pressing. A number of branches have demonstrated that the cost of obtaining Treasury securities or Federal Home Loan Bank letters of credit as collateral erodes or even exceeds the benefit of the subsidized deposits, jeopardizing the viability of the branch and of the BDD Program. OSC is open to accepting other forms of collateral that would be FDIC-insured. There is a difference of opinion on legal interpretation, however, as to how such a change in collateralization requirements could be accomplished, with OSC maintaining that new legislation would be needed.
Registration of Mortgage Loan OriginatorsAnother key consumer protection initiative is the Department’s registration of mortgage loan originators (MLOs). This involves registration of individual employees, and not just the firms where they are employed. The process involves rigorous background checks, fingerprinting, education requirements and testing. This registration is also part of New York’s participation in the National Mortgage Licensing System (NMLS), a state-run effort through the Conference of State Bank Supervisors to create more uniform industry standards. Entry in this national database will help to curb mortgage fraud, as it will be more difficult for fraudsters to evade enforcement and reopen shop simply by crossing state lines.
The MLO registration process involves a major commitment of the Department’s resources. To date, almost 15,000 MLOs have applied through the system, and an additional 500 or more are anticipated. This heightened screening process has already yielded results in enhanced consumer protection: to date, 21 of individuals who might otherwise be selling mortgage loans in New York have been denied MLO status.
Registration of Mortgage ServicersA related effort involves the registration of mortgage servicers, who perform payment processing and collections work after the loan is originated. This group was previously unregulated, but became subject to the Department’s jurisdiction as part of the comprehensive state mortgage reforms enacted last year. Currently we have received applications for registrationfrom 40 servicers and notification of exempt status from an additional 126 entities.
Registration and supervisory oversight of MLOs and servicers is a massive new undertaking, but one that is vital to ensuring the integrity of the mortgage market in New York. As part of this registration process, the Department has prepared draft regulations to cover conduct of business rules. These regulations address areas such as servicer obligations to borrowers, handling of consumer complaints, mortgage delinquencies and crediting of payments and regulatory reporting, including with respect to loss mitigation. A copy of the draft regulations is available on the Department’s website, and we are working with stakeholders to refine these regulations. We also continue working with mortgage servicers, the Treasury Department, consumer groups and borrowers to keep families in their homes.
The Governor’s Program BillAnd we continue to build on the protections in the landmark subprime lending reforms enacted last year, through the new Governor’s Program Bill that was signed just last week. The housing crisis, which began in subprime, is expanding and families with all types of loans are facing foreclosure. The Governor’s bill addresses this evolving crisis by providing new protections for both prime borrower and renters, which also expands the responsibility of the Banking Department.
With respect to prime borrowers, the 90-day notice and mandatory settlement conferences will now apply to all home loans, not just subprime. Lenders that serve a 90-day notice will also be required to file within three days with the Banking Department, to allow the Department and the Division of Housing and Community Renewal to offer targeted assistance to distressed homeowners.
The development of a data system to capture 90-day notice filings is a particularly urgent priority for the Department, as this system needs to be operational within the first few months of 2010. Further, there have been over 50,000 properties each year in some stage of the foreclosure process since the financial crisis began; therefore, we anticipate that a high volume of 90-day notices will need to be processed. We are currently assessing database solutions that would allow remote access by lenders, to streamline the process and provide for automated filing.
Operational IssuesThe Banking Department’s ability to fulfill these new responsibilities and remain at the forefront of financial services regulation is largely dependent on the expertise of our staff. We are facing the retirement of many senior staff, and this impending knowledge gap combines with the budget reductions required of all state agencies to pressure our operational capacity.
We continue to meet out legislative mandates, although we are limited in our ability to be proactive in areas beyond our mandate but within our oversight. We also have concerns about the impact of current budget cuts on our ability to develop staff for the future. The immediate and serious economic issues of the state must be addressed, however, and we support the effort to close the budget gap.
ConclusionI am proud of what we are accomplishing together, even in these challenging economic times, and you should be proud as well. New York has led the way in passing the most comprehensive mortgage reforms in the country. Through New York’s role in consumer protection, as a significant regulator, and as a global financial center, we demonstrate why it is so critical for states to have a meaningful role within a renewed regulatory framework. I look forward to continuing to work with the Committees in protecting consumers and promoting economic inclusion. Thank you, and I would be pleased to answer any questions.