Superintendent Richard H. Neiman's Remarks on Consumer Protection before George Washington University's Second Annual Financial Regulatory Reform Symposium
OPENING STATEMENT OF
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS FOR THE STATE OF NEW YORK
The George Washington University Law School Center for Law, Economics & Finance
Second Annual Financial Regulatory Reform Symposium
“The Dodd-Frank Act and the Road Ahead for Financial Regulatory Reform”
November 12, 2010
Thank you for that introduction, I am pleased to be part of this important panel discussion. One of the themes that I hope to bring to the dialogue is the need for a Cooperative Federalism, to realize the Dodd-Frank reforms through a new degree of coordination between regulators at all levels of government. When I look across this table at my co-panelists, I see a perfect example of Cooperative Federalism already in the making.
There are two points that I would like to highlight from a state perspective as we begin our conversation today:
1. The expanded role of the states in consumer protection after Dodd-Frank;
2. Issues around coordination with the new CFPB.
B. Role of states
First, the future of state supervision and consumer protection is stronger today than it was before Dodd-Frank. Dodd-Frank re-affirms the dual banking system. Reform could have eliminated a meaningful state oversight and enforcement role. It could have removed supervisory authority from the FDIC and the Federal Reserve, the agencies that partner with the states, and created a single monolithic regulator. But instead, Congress confirmed that the state role is critical -- providing checks and balances, more cops on beat in enforcement, and serving as a proving ground for new laws.
Some have expressed concern that states will create a compliance patchwork of differing laws. I do not see that happening. The goal is for the CFPB to set national standards high enough that states would rarely need to exceed them. As an example of how this can work, states rarely found a need to exceed the privacy standards under Graham-Leach-Bliley. What I do envision is that states will be active participants in helping to shape national standards, using successful state reforms as models.
C. Coordination with CFPB
Second, even with the advances of Dodd-Frank, challenges still exist and the law itself creates new relationships that need to be worked out. The relationship between the states and the new Consumer Financial Protection Bureau is a prominent example.
State regulators overlap jurisdiction with the CFPB on multiple levels which - for purposes of this discussion - I have bucketed into Banks and Non-banks.
For smaller banks with assets below $10 billion, the Federal Reserve or the FDIC will remain the States’ federal counterpart. The CFPB will participate in exams on a sampling basis. Operationally, the addition of the CFPB as the secondary federal counterpart for smaller banks, although important, represents the least change in the state-federal dynamic.
For larger banks with assets over $10 billion, on the other hand, the CFPB will be a new federal partner for the states in conducting consumer compliance exams. For those larger banks that are state-chartered, the CFPB is required to “pursue arrangements and agreements with state regulators on joint and coordinated examinations.”
There is another important difference in oversight for larger banks to mention. Those with a federal charter will experience a bifurcation in their supervision, with separate federal agencies responsible for prudential oversight and consumer protection. Those that are state-chartered, which account for over a third of larger banks, will retain a holistic approach on the part of their chartering supervisor. The success of this bifurcated approach of supervision for large national banks and joint supervision for large state banks will depend on the level of cooperation between the CFPB and its regulatory counterparts. If you are looking for a proven cooperative model the relationship between the states and the FDIC and the Federal Reserve Board in sharing information and in conducting concurrent or alternating exams works and works well.
We must also not forget that Federal prudential regulators will also still need to maintain strong consumer compliance expertise. They will continue to conduct regular exams for smaller banks. And even at larger national banks, where safety and soundness is being separated from consumer protection, 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.
Regulatory authority over non-banks, however, such as consumer lenders and check cashers, poses different and novel challenges. Unlike with depository institutions, 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.
In fact the state-CFPB relationship with respect to non banks could be the true test of Cooperative Federalism. There is much to be learned and leveraged from the states experience in regulating non-bank providers of financial services. Let me give 2 examples:
1. Check Cashers -- Will need to be a key focus of the CFPB particularly in light of their intent to enter the pay day lending businesses in the guise of “small dollar lending programs” however with pay day pricing. In New York we have adopted a full scope exam process of these money service businesses utilizing a rating system called FILMs – Financial Condition; Internal Controls and Audit; Legal and Compliance; Management; and Systems and Technology.
Not only can States provide a model for supervision and examination but recognizing the thousands of such entities operating nationwide, the CFPB will need to leverage the exam personnel at the state level. There may also be opportunities to utilize the nationwide Mortgage Loan Originator Licensing system developed by the states to expand coverage to other providers of consumer financial services.
2. Mortgage Servicing - New York has taken steps to bring greater accountability.
In 2009, we passed legislation in New York that required servicers to register with the state, and in 2010 we followed up with detailed business conduct regulations. In these ways states that have been first movers can offer a template for national standards. Our new rules in New York provide critical consumer protections in mortgage servicing, such as:
- Establishing an explicit duty of care and fair dealing that is now legally enforceable;
- Requiring consideration of modification prior to foreclosure, with specific time frames for responding to borrowers; and,
- Reporting vital mortgage performance data on delinquencies to the Banking Department.
Performance data, in particular, is a perfect example of what should be required to be reported at the federal level and in a standardized format. That is why I have long called for a national reporting requirement on mortgage performance. This would bring transparency and accountability to the servicing industry, much as the reporting of new mortgages under HMDA has done for originations.
Such data will assist the institutions themselves as well as regulators, to assess whether modification denials, or terms or timeliness of approved modifications are being applied in a nondiscriminatory manner.
In conclusion, what I am describing here, whether it is with respect to banks or to other diverse financial services providers, is the importance of strengthening cooperation and mutual accountability between regulators. While I have long said that there is no one optimal regulatory structure, the changes that we are undertaking will succeed only if we truly embrace Cooperative Federalism at all levels of government. I look forward to exploring these issues further in our discussion today.