Superintendent Richard H. Neiman's Remarks Before the Women in Housing and Finance Policy Luncheon
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS FOR THE STATE OF NEW YORK
Women in Housing and Finance Policy Luncheon
December 14, 2010
I am so pleased to be here today at this gathering of business and policy leaders in housing and finance. In many ways, I think the intersection of housing and finance has defined my term as Superintendent as well.
The subprime crisis began to explode just as I took office in March of 2007. I saw up close the devastating impact of irresponsible mortgages on communities, which ultimately imperiled our financial system as well. Now, almost four years later, I am even more convinced that enhanced consumer protection will be the bedrock of our current economic recovery and of future financial stability.
There has been progress in restoring sanity to lending practices and in preventing avoidable foreclosures, thanks in part to the efforts of many of you in this room. But there is much more to be done to help current homeowners at risk and to avoid future crises, including the implementation of lasting regulatory reforms.
The Banking Department has certainly given me a once in a lifetime opportunity to contribute to this reform process. The Department has a wide range of institutions under supervision, from the largest banks such as our oldest, Bank of New York Mellon, and our newest, Goldman Sachs Bank, to mortgage brokers, non-depository lenders and other providers of financial services. I believe this diversity in supervisory responsibilities has given me a unique vantage point on the financial crisis. So in my remarks today, I would like to consider the role of the states in a reformed regulatory system, both in the US and in a global context.
B. Cooperative Federalism and the role of the states
As the origination of subprime and nontraditional mortgage loans increased, frankly the federal government was not as swift to act in preventing abusive lending practices. Instead, state governments were the first to respond to this need and translate a heightened concern over the proliferation of subprime mortgage loans into action. For instance, states like New York and North Carolina identified the seeds of the subprime crisis amidst dangerous lending practices over 10 years ago. The irony is that states were forced to stand down their enforcement efforts due to overreaching assertions of federal preemption. Even worse, appropriate federal standards were not developed to replace the preempted state laws.
That is why my message as Superintendent has been to call for a renewed level of coordination among state and federal financial supervisors, a Cooperative Federalism. By this I mean an approach that retains what is best in our current state-federal regulatory framework. We can achieve appropriate oversight and national standardization while making the highest use of the expertise and resources of each level of government.
I believe this vision has been accomplished to a large extent through the Dodd-Frank financial reform legislation. I see Dodd-Frank as a re-affirmation of the state-federal dual banking system that has served this nation well for a hundred and fifty years. Reform could have eliminated a meaningful state oversight and enforcement role, as some called for. 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. It could have undermined state supervision of the vast majority of branches of foreign banks operating in the U.S. But instead, Congress confirmed that the state role is critical – providing checks and balances, more cops on the beat in enforcement, and serving as a proving ground for new laws.
Today, I would like to highlight how I see Cooperative Federalism working in practice, with examples in the area of consumer protection and in the current investigation of foreclosure documentation. There are lessons here that apply to cooperation on the international level as well.
C. Coordination with the CFPB
But first, let’s start with consumer protection, which was at the root of the financial crisis and is integral to any lasting solution. 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, or CFPB, is a prominent example. States overlap jurisdiction with the CFPB on multiple levels, including both depository institutions and non-banks.
In fact, the state-CFPB relationship with respect to non-banks could be the true test for Cooperative Federalism. The CFPB and states will need to be flexible and creative, to ensure we really do work together in implementing our common mission.
I would like to highlight just one example that I believe offers a promising way forward and relates to the CFPB’s explicit statutory mandate, and that is oversight of 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 similar baseline rules where other states fail to act.
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 this fall. 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.
Such protections can serve as a guide for an industry standard nationwide.
D. Foreclosure documentation
The continuing investigation around servicers’ shortcuts or even fraud in foreclosure documentation highlights the urgency to bring order to this segment of the industry.
The Department has joined 50 state attorneys general and 39 banking and mortgage regulators as part of a multi-state group that is investigating the foreclosure practices of mortgages servicers throughout the country. The Department also serves on the Executive Committee of the Multi-State Mortgage Committee (MMC) of state banking regulators, which coordinates multistate regulatory efforts of large mortgage companies supervised by state mortgage regulators.
We are currently working with the MMC to coordinate examinations of the largest state mortgage loan servicers and quickly get to the root of these foreclosure irregularities.Faulty documentation and the potential for loan put-backs have caught families and financial markets in another bout of mortgage-induced uncertainty. Do we face a threat to financial stability once more?
Answering this crucial question is the domain of the new Financial Stability Oversight Council or FSOC, established under the Dodd-Frank financial reform law. Success of the FSOC in addressing the foreclosure documentation scandal is another early test of Dodd-Frank’s new structures.
The FSOC has considerable power to designate financial institutions as systemically important and impose additional oversight. But the FSOC must look also broader, across markets, to identify trends in business practices that have systemic risk potential regardless of whether the activity is concentrated in large institutions. The current mortgage mess is a perfect example of the way industry-wide practices can generate systemic risk. The FSOC, as the coordinating council across all agencies and financial sectors, should take the lead in addressing these issues, leveraging the resources of the states that are leading the enforcement effort.
As a first step, the new Office of Financial Research should be staffed and made operational as soon as possible. The OFR can then provide the FSOC with a comprehensive and independent assessment of mortgage-related exposures and put-back risk from failed representations and warranties. This should include information that the FSOC would gather from the horizontal reviews being conducted by federal supervisory agencies, as well as disclosed pursuant to SEC requirements. Through this independent analysis, the Office of Financial Research can shed light on issues that no single regulator was fully equipped to tackle before, namely legal risk. This analysis is necessary before jumping to any doomsday predictions that could become self-fulfilling.
Armed with this information, at a minimum, the regulators that make up FSOC will need to ensure that banks are properly reserved against these potential losses. Proper disclosure of exposures by public issuers through SEC filings will also further market confidence and discipline.
E. From Cooperative Federalism to Cooperative InternationalismThe same type of cooperation that we are striving for in the US between states and the federal government also holds true on the international level. In the wake of the financial crisis, an effective framework for cross-border supervision has become an even more compelling imperative. Financial and technological innovation has rapidly interconnected global markets, but our supervisory infrastructure has failed to keep pace.
So how should we move forward as an international community? What strategies will best promote financial stability through cross-border supervision that is conducted primarily by national regulators? I believe the key is to harmonize standards whenever practical and to strengthen mechanisms of mutual accountability among financial supervisors. That is precisely what nations are doing under the auspices of the G-20 and the IMF.
While striving for greater convergence on global financial issues, I believe it is healthy to recognize that progress often comes in stages. There is always a tension between a nation being a First Mover on an issue and striving for global harmonization. For example, for the sake of greater international uniformity, the US could have abandoned the leverage ratio, which is a safety check on the use of risk models in determining the adequacy of bank capital. The financial crisis made clear, however, that the FDIC was correct in insisting on retention of the leverage ratio for the US. What was sometimes misinterpreted as intransigence became an occasion for meaningful reforms under Basel III, which includes an international leverage ratio for the first time.Far from frustrating international progress, this appropriate use of discretion by a national supervisor actually reinvigorated our shared goal of creating even more effective international capital standards. Multiple national regulators working together yield better results in setting a robust framework for financial stability, just as multiple judges are used in the Olympics to achieve a fair outcome. As with the state-federal dynamic in the US, it may look messy from the outside, but Cooperative Internationalism can work.
In short, financial and economic recovery both depend upon smart regulation. What I am describing here, whether it is among states, federal agencies, or international partners, 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 reforms that we are undertaking will succeed only if we truly embrace a new level of cooperation.Thank you again for the opportunity to speak today.