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Speech
Superintendent Richard H. Neiman Testifies before the New York State Senate Committee on Banks on Legislative Initiatives Implemented by the Banking Department

TESTIMONY OF

RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS
On behalf of
THE NEW YORK STATE BANKING DEPARTMENT
On
“LEGISLATIVE INITIATIVES IMPLEMENTED BY THE BANKING DEPARTMENT”
Before the
COMMITTEE ON BANKS
COMMITTEE ON OVERSIGHT, ANALYSIS AND INVESTIGATION
THE NEW YORK STATE ASSEMBLY

March 10, 2010

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 on the Department’s priorities in 2010.

I look forward to your questions on the full scope of the Department’s responsibilities, but will focus my opening remarks on our progress in implementing state laws and programs, particularly those designed to protect consumers and promote economic inclusion:

  1. The Banking Development District Program;
  2. The registration of mortgage loan originators and mortgage servicers; and,
  3. 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.

A. The Banking Development District (BDD) Program

The 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.  It is estimated that 761,000 or 9.8% of households in New York State do not have a banking account of any kind.  Another 1.5 million or 19.3% of New Yorkers may have an account, but still rely on more expensive nonbank services providers such as check cashers.

Lack of access is only part of the problem, however- 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.

Last 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 are in the process of finalizing a report on the hearing that will present our findings and future actions for program enhancement.  I am pleased to preview the findings with you this morning.

The Department has identified a number of next steps within our existing authority to improve the program. Let me cite three:
  1. Including the provision of financial education as a requirement for participation.
    Sufficient lead time will be given to current branches to identify appropriate partners and curricula to satisfy this requirement.  We will strongly recommend that branches consider fulfilling this requirement by partnering with a third-party for whom such services are a part of the organization’s primary mission.
  2. Encouraging BDD branches to provide additional affordable banking products and services.
    Many branches have innovative offerings, such as small dollar loans, remittance products, technical assistance, and free tax preparation services. However, we believe that more needs to be done.  Consequently, applications for the BDD program will be required to include more detailed information on the costs associated with their “affordable” products, beyond the Basic Banking Account mandated under state law.
  3. Developing assessment criteria for determining when to allow multiple branches within a single designated district.
    Recent state legislation (Chapter 11 of the Laws of 2009) clarified that the Department may designate multiple BDD branches within a single district.  We are considering the standards we would use to permit entry by a second branch into a district, or the creation of a new district with partial territorial overlap.  This would include an assessment of the competitive impact on the existing BDD branch, which may be a particular concern in more sparsely populated geographies.

We are committed to improving the administration of the BDD program, and are considering convening forums that would promote an ongoing exchange of ideas between stakeholders.

In addition, our report will highlight areas which would require legislative action or approval of the State Comptroller’s Office.  An especially urgent issue is the need to reduce the cost of collateral.

Cost of Collateral

There is a major concern that the cost of collateralizing the subsidized deposits exceeds the benefits and is discouraging program participation.  Currently, the State Comptroller only accepts US Treasury bonds or notes, or Federal Home Loan Bank letters of credit as collateral.  There is another option, however.  The Certificate of Deposit Account Registry Service (CDARS) would greatly reduce collateral cost without sacrificing security for municipal deposits.

Using an electronic settlement process, the CDARS network allows participating banks to invest customer funds at other member institutions through reciprocal matched deposit transactions.  The CDARS program is distinctive in that funds in excess of FDIC insurance limits at a single institution will still be eligible for full coverage, and yet effectively remain a deposit in the local bank through which the funds were invested.

To date, 39 states have availed themselves of this innovative network that provides the ability to deal with one bank and receive up to $50 million in insured deposits.  The Department is of the opinion that CDARS is already compliant with New York law.

However, the Comptroller is of the belief that legislation is needed. We are committed to working with you and the Comptroller to expedite that process.

B. Registration of Mortgage Loan Originators and Mortgage Servicers

Mortgage Loan Originators

Another 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.  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.

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.  The NMLS has also been an opportunity for an enhanced level of state-federal cooperation, which I often cite as an example of a New Federalism.  The federal SAFE Act for registering of MLOs relies on the NMLS as the primary system.  A federal back-up structure will be created to cover originators in states that elect not to join the NMLS.

The MLO registration process involves a major commitment of the Department’s resources.  To date, over 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, 27 of individuals who might otherwise be selling mortgage loans in New York have been denied MLO status.

The bulk of these MLO applicants are still in the process of completing their educational requirement and testing.  Applicants are expected to send all missing documentation by May 30, to be assured of receiving a decision by the July 31 deadline.  MLO applicants that fail to submit timely information may face an interruption in their ability to conduct business after that deadline.  A major focus of the Department’s effort, therefore, has been to promptly notify applicants of their status.

Mortgage Servicers

A 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 44 servicers and notification of exempt status from approximately 125 additional 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, as well as model forms such as disclosures for yield spread premiums.  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.

C. The Governor’s Program Bill

And 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 on December 15, 2009.  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 now applies to all home loans, not just subprime.  Effective February 13th of this year, lenders that serve a 90-day notice are also 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.

In less than a month of operations, we have already received over 5,500 filings from 60 different servicers.  An even higher filing rate is anticipated going forward, as there have been over 50,000 properties each year in some stage of the foreclosure process since the financial crisis began.  We are finalizing a confidentiality agreement to facilitate sharing of this borrower information with housing counselors, who will reach out directly to borrowers in default in an effort to avoid unnecessary foreclosures.

The following statistics are based on approximately 2,500 of the 5,000 filings, as the remainder was just received in a bulk shipment that is being processed.  Even this initial information, however, reveals important trends.  The top 10 counties with the highest number of filings account for just over 60% of all filing activity in the state. These top 10 counties are Suffolk, Nassau, Queens, Monroe, Kings, Erie, Orange, Westchester, the Bronx and Dutchess.  These counties have been consistently identified as hard-hit from the beginning of the foreclosure crisis. Within the coming weeks, more complete data and analysis will be available.

This database will be a premier source of mortgage and economic data for the state. Even the limited information available from a few weeks’ worth of activity is already yielding insights into lending and housing patterns in New York.  Having this information will enable the state to better allocate outreach efforts and funds to support communities at high risk of foreclosures.  It will also enable the Department to evaluate the loss rates and loss mitigation efforts of supervised financial institutions and prevent predatory practices.

D. Operational Issues

Budget and Staffing

The Banking Department’s ability to fulfill our mandates and remain at the forefront of financial services regulation is largely dependent on the expertise of our staff.  We continue to face the loss of experienced examiners through retirement and the result is a knowledge gap in new examiners.  In addition, budget restraints over the last year limited our ability to hire additional staff needed to replace the loss of examiners and address the labor intensive needs of our new responsibilities in regulating the mortgage banking industry.

The good news is that the Governor’s recommended budget for 2010-11 restores 15 of the 30 positions lost in July 2009.  This is a first step in restoring the adequate staffing and training needed to continue to be an effective competitive regulator.  With the approval of this budget, we will prioritize our needs and hire key positions, including examination staff at the entry level.

Regulatory Reform

The Department faces other challenges beyond resource issues, however.  The ability to fulfill our mandate also hinges on the outcome of regulatory reform at the federal level.  Proposals are pending in Congress which could undermine the viability of the dual banking system.

Consolidation of regulatory agencies at the federal level, coupled with new fee structures, could create incentives for banks to abandon the state charter.  These incentives would be targeted to particularly appeal to large banks, which would leave states with oversight of smaller and regional institutions.  With 33% of the Banking Department’s depository assessments derived from our seven largest institutions, the loss of our largest charters would result in greatly increased assessments for the remaining banks and drive additional conversions to the federal charter.

Other provisions related to the scope of federal preemption will impact New York’s ability to adopt and enforce laws against national banks and protect consumers. The Supreme Court’s decision last year in Cuomo v. Clearinghouse upheld states’ traditional authority in consumer protection. Legislation is still needed, however, to ensure that national standards remain a floor which states can choose to exceed.

Conclusion

We will continue our efforts to influence the outcome of regulatory reform discussions and debates through direct outreach and meetings with the Administration, Treasury and Congress, particularly the New York delegation.  New York has led the way in passing the most comprehensive mortgage reforms in the country, and states must retain the ability to adopt effective laws that can serve as national models.  I look forward to continuing to work with the Committee in protecting consumers and promoting economic inclusion.  Thank you, and I would be pleased to answer any questions.