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Superintendent Richard H. Neiman's Remarks Before the 20th Annual Fair Lending Conference,
Cleveland, Ohio



20th Annual Fair Lending Conference
Cleveland, Ohio

October 29, 2010

A. Introduction

Thank you for that warm welcome.  I am so pleased to be here today at this gathering of leaders in consumer protection.   In some ways, I think of fair lending as the issue that has defined my term as Superintendent.  The subprime crisis began to explode just as I took office in March of 2007.  I saw up close the devastating impact of irresponsible lending practices, which were disproportionately concentrated and even targeted in Brooklyn and Queens.  Responding to these predatory lending and housing issues has been a top priority for me since day one- as a regulator, as a member of the Governor’s Cabinet, and as a member of the TARP Congressional Oversight Panel. 

There has been progress in preventing avoidable foreclosures, thanks in part to the efforts of many of you in this room.  But the response from the industry has been too little, too late.  From the long ramp-up time servicers took to begin HAMP modifications, to the months that borrowers have waited to hear if their modification has been approved- it has been a frustrating waiting game. 

That is part of what makes the current foreclosure documentation scandal so outrageous.  When it comes to modifying loans, the industry has told homeowners to hurry up and wait.  But when it comes to proceeding with foreclosures and evictions, it’s been full steam ahead- even if that meant taking illegal shortcuts.  Rest assured, however, that state attorneys general and state banking commissioners will require servicers to rectify wrongs and will persevere in determining whether documentation issues are the tip of the iceberg.

My hope this morning is to share my perspective on ways that government can better protect borrowers and help restore sanity to our mortgage system.  We have taken a multi-pronged approach in New York, including our 2009 Mortgage Lending Reform Law, which expanded the use of pre-foreclosure notices and mandatory settlement conferences. The Banking Department has also required that mortgage servicers address the issue of false affidavits expeditiously.  But today I would like to focus on three areas in which national reforms are a critical complement to state action:

  1. The launch of the new federal Consumer Financial Protection Bureau (CFPB);
  2. The creation of a new oversight regime for the mortgage servicing industry; and,
  3. The modernization of the Community Reinvestment Act (CRA), to ensure appropriate and affordable credit access.

B. State coordination with the CFPB

The establishment of the CFPB presents a unique opportunity to build on the strong state role in consumer protection that was re-affirmed in Dodd-Frank.  States like New York and North Carolina were the first to identify the subprime crisis amidst dangerous lending practices almost 10 years ago.  But the states were forced to stand down their enforcement efforts by federal regulators who were asserting preemption and calling for exclusive authority at the federal level.  Dodd-Frank has corrected this federal overreach and laid the groundwork for a more productive collaboration between the state and federal government, what I refer to as Cooperative Federalism.  We can achieve appropriate oversight and national standardization while putting to best use the expertise and resources of each level of government.

States overlap jurisdiction with the CFPB on multiple levels. The clearest distinction is between banks and non-banks.  On the bank side, the CFPB will be the states’ new federal partner in supervising the largest institutions. Unlike depository institutions, however, non-banks have typically been supervised exclusively at the state level.  Here the addition of the CFPB as a federal counterpart will be breaking entirely new ground.  There are numerous areas where the CFPB and states will need to be flexible and creative, to ensure we implement our common mission effectively.

  1. Payday loans and other nontraditional products
  2. For example, payday loans will be a focal point for the CFPB. Payday loans can be a debt trap for unwary or financially distressed borrowers.  It is especially important that the CFPB quickly define a payday loan under Dodd-Frank, as the term is not defined in the laws.  The check cashing industry is lobbying Congress and state legislatures to create new powers that would exempt them from state usury laws in offering payday loans cloaked as “small dollar loans.” 

    The CFPB will need to be vigilant in setting definitions, disclosures, and rules for payday lending and other nontraditional credit products.  Inappropriate or unsuitable loans that cannot be repaid or drive consumers deeper into debt are destabilizing to institutions as well as to families.  Product design standards and simpler disclosures are only part of the solution.  While nontraditional products are right for some, these products may be aggressively sold to consumers for whom they are not appropriate, given their financial circumstances.  That is why a duty of care is a necessary complement to other reforms.While issues around liability and safe harbors would have to be addressed, that is no reason to avoid the discussion.

  3. Registration and licensing of non-bank lenders

    In increasing oversight of non-banks, the CFPB should also build on state registration and licensing efforts, which have been especially effective for mortgages.  The states have already developed a nationwide licensing system for mortgage loan originators -- the National Mortgage Licensing System, or NMLS, which is recognized under federal law.   The federal SAFE Act mandated a registration system for mortgage loan originators, but it was careful to utilize existing state resources.  Federal registration functions as a back-up, in case a state opts out of the NMLS or otherwise does not have state rules that conform to SAFE Act minimums.  Using this model of state-federal cooperation, consideration should be given to expanding the NMLS to intelligently include other non-depository lenders and providers of financial services.

  4. Enforcement

Another area that presents a real opportunity to inaugurate a new era of cooperation lies in the enforcement of consumer protection laws.  Dodd-Frank codifies the Supreme Court’s recent decision in Cuomo vs. Clearinghouse, re-affirming the right of state Attorneys General to bring actions against national banks under non-preempted state laws such as UDAP.   It also authorizes state Attorneys General to bring actions under federal consumer financial protection laws in state or federal court.   Now the CFPB and the states must work together, as the states and the Federal Trade Commission have long done, to coordinate enforcement where appropriate to achieve the most effective results.

All regulators need to remain vigilant.  I believe strongly that prudential supervisors cannot turn a blind eye to consumer issues or rely passively on the CFPB.   For example, a proper assessment of the strength of an institution’s management, the “M” in the CAMELS rating which is a core element of a prudential review, cannot ignore consumer issues.  In fact, it is my hope that the CFPB’s existence will create healthy competition among regulators in setting a high bar with respect to consumer protection. 

C. Oversight of mortgage servicing

A federal response is also needed to complement state action in bringing order to the mortgage servicing industry.  Servicers have been largely unregulated in the past, but states like New York have taken steps to bring greater accountability. The CFPB should establish baseline rules where other states fail to act.  If such protections became the industry standard nationwide, we could slam the door on bad foreclosure practices. 

In 2009, we passed legislation in New York that required servicers to register with the state.   In 2010 we followed up with detailed business conduct regulations, and the toughest such rules in the nation went into effect in New York at the beginning of this month.  Now the force of law dictates that mortgage servicers have a duty of care and fair dealing in how they treat homeowners, including requiring consideration of mortgage modifications prior to foreclosure and requiring quick feedback to homeowners requesting modification.   In these ways states that have been first movers can offer a template for national standards.  

The developing scandal around servicers’ shortcuts or even fraud in foreclosure documentation highlights the urgency to create nationwide rules for this segment of the industry.   The number of permanent modifications made under HAMP has been disappointing, to say the least, but HAMP did help to standardize loss mitigation and develop best practices.  The goal now is to build on this provisionary and voluntary process, to create rules with staying power and real consequences for noncompliance.

D. Reinvigorating the CRA

If anything positive has come out of this housing crisis, it is perhaps a new awareness by a greater range of stakeholders that fair lending is a comprehensive business ethic. Fair lending impacts every aspect of the loan process, including servicing.  The spotlight has been turned on the predatory practices that were at the root of the crisis, and rightly so.  But as we think long-term, we need to consider that access to appropriate and affordable credit is also an integral component of the fair lending ethos.

That is why I see a deepening connection between fair lending and CRA.  There are neighborhoods that were historically redlined, that became targets for steering or “reverse redlining” by predatory lenders. And now these communities are understandably concerned that the pendulum will swing back too far in the opposite direction, leaving them shut out of credit choices and victimized once again. This yo-yo treatment leaves many people understandably skeptical of financial institutions, and could lead to a reversion to the kind of credit vacuum that existed in the 1970’s before CRA was adopted.

We cannot afford to forget what CRA has achieved.  The incentives for banks provided by this law have leveraged infusions of public capital perhaps by as much as 10 to 25 times, attracting additional private capital in the process. Over the past decade, the CRA has fostered a doubling in lending to small businesses and farms, in excess of $2.6 trillion. With two out of every three jobs in America created by small businesses, this is exactly the type of stimulus we need to help jumpstart the economy.

Despite how some scapegoat the CRA, these loans and investments have been done prudently and were not a culprit in the mortgage meltdown.  For example, only six percent of the higher rate loans made during the subprime boom were originated by institutions subject to the CRA in their assessment area.  Even more impressive, when these loans were originated by nonbank mortgage lenders who are not subject to CRA, less than two percent were acquired by institutions for CRA credit.  Far from being part of the problem, CRA is part of the solution.

It is therefore very welcome news that the federal bank regulatory agencies are currently considering revising the CRA to enhance its impact.  They must.  While most needed changes can be made on a regulatory basis, there may be some changes that need legislative action.  But the first place to start is with the regulatory process, and in my brief time remaining let me offer just one example of a needed reform.

In the 1990s CRA evaluation became quantitative. That was the right choice then, but over time a “check-the-box” compliance mindset developed on the part of many banks and even regulators.  Regulators regularly examine banks for compliance with the CRA. Yet year after year, 85% to 90% of banks receive a “Satisfactory” rating. Like grade inflation, this uniformity reduces the value of the CRA as a tool for meaningful comparison. 

A more precise ratings scale is needed, to differentiate between banks whose performance is very good and those who are not making a real impact.  CRA evaluations should take into account a variety of factors, such as whether the bank offers safe and affordable products and outcomes-based financial education. The ability to distinguish more finely between banks would restore the CRA’s original intention to hold banks up to the sunshine of public scrutiny and place limits on their activities when CRA performance is substandard.  Lending will never be fair without equal access to the opportunity to obtain safe and affordable products and services.

E. Conclusion

In conclusion, fair lending is not a niche compliance specialty or a mere reputational risk for financial institutions that operate on the edge.  Fair lending embodies the spirit, as well as the letter of the law.  The prominence of fair lending today coincides with a greater emphasis on principles in financial services regulation.  Principles can serve as the context, the perimeter that protects core rules from being breached.  And if we want to stabilize the housing market and prevent future crises, there is no better place to start than with a renewed focus on fair lending. That is only what is just. Thank you.



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