Superintendent Richard H. Neiman's Remarks Before the New York Bankers Association's Annual Meeting and Legislative
RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS FOR THE STATE OF NEW YORK
New York Bankers Association
Annual Meeting and Legislative Conference
Albany, New York.
February 7, 2011
This has been a tumultuous period for financial markets and economies around the world. 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 safe and sound lending practices and enhanced consumer protection will be the bedrock of our current economic recovery and of future financial stability.
As we begin 2011, 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. The Banking Department has certainly given me a once in a lifetime opportunity to contribute to issues in financial reform that will have an impact far beyond New York and long after my tenure as Superintendent. Much has been accomplished, including the Dodd-Frank legislation and creation of the Consumer Financial Protection Bureau (CFPB) at the federal level, which will become an important partner for the states.There is more still to do, however, in the implementing regulations that will take shape in the weeks and months ahead. My hope is that we really do seize this time to lay a foundation for the remaining work, because financial and economic recovery depends upon smart regulation. And the challenge is to simultaneously promote a profitable and competitive business environment.
B. Cooperative Federalism
So first and foremost, regulators across jurisdictions need to be on the same page in developing these regulations. That is why my message as Superintendent has been to call for a renewed level of coordination at all levels of Government - between states, among state and federal financial supervisors, and between federal agencies. I refer to this as a Cooperative Federalism, by which I mean an approach that retains what is best in our current state-federal regulatory framework.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. Let’s not forget that 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 federal 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.
C. State Mortgage Reforms
Today, I would like to describe how I see the state role contributing to this Cooperative Federalism in practice, through legislative and regulatory efforts in states like New York. In 2008 and 2009, New York adopted the most comprehensive Mortgage Reform Law in the nation, to address contributing factors to the financial crisis.
I am especially proud that these rules were developed with the active engagement and input of a wide variety of stakeholders, including consumer advocates, housing counselors, and the industry- including many of you in this room. Your participation in this process as the banking industry helped ensure that we drew the right lines, balancing consumer protection with responsible credit access. In these ways states that have been first movers can offer a template for the right national standards as well.
Some of these new protections:
- Require lenders to send a pre-foreclosure notice at least 90 days before initiating foreclosure proceedings to allow lenders and homeowners the opportunity to reach resolution before the initiation of a foreclosure action;
- Require lenders to list in the pre-foreclosure notice the name and telephone numbers of government-approved housing counselors serving the borrower’s area to help homeowners effectively connect with counselors;
- Established an early mandatory settlement conference in court for those homeowners with subprime loans against whom foreclosure proceedings are commenced; and
- Established business conduct rules for mortgage servicers for the first time, with an explicit duty of care that is now legally enforceable.
We have already seen results and the positive impact of these changes. For example, the pre-foreclosure filings is a data resource that allows us to identify patterns of borrowers-at-risk and hard-hit neighborhoods in time to intervene and prevent unnecessary foreclosures. And with the mandatory settlement negotiations in New York, while it used to be that 90% of borrowers did not appear at their foreclosure court proceeding and faced default judgments, now only 20% do not appear- that means 80% are in mediation. That is a win-win situation, both for homeowners and for lenders and investors who could face a loss in foreclosure.
The servicer conduct regulations, which are applicable to all mortgages, including banks’ own loans in portfolios, are already serving as a model for national reforms whether by the banking agencies or the CFPB.
By building on such reforms that have been found successful at the state level, we can ensure that there are no gaps, no opportunities for regulatory arbitrage, as well as ensure a level playing field across the industry. We can achieve appropriate oversight and national minimum standards while making the highest use of the expertise and resources of each level of government. This is the recipe to minimize regulatory burden as well.D. New Department of Financial Regulation
Such a Cooperative Federalism increases coordination between states and the federal government, and among the fifty states. The missing component is greater coordination, with consolidation where appropriate, among the multiple agencies within one state that relate to the finance industry. That streamlining results in smarter supervision that reduces burden on the industry as well.
We have seen the benefits of intra-state agency cooperation through the Governor’s HALT Task Force, to Halt Abusive Lending Transactions, which I chair. The Task Force has been responding to foreclosure issues in the current crisis, but we need long-term solutions that formalize this kind of cooperation. The state needs to combine its resources for maximum effectiveness not just in times of emergency, but in the routine work that prevents emergencies in the first place.That is why Governor Cuomo is proposing to modernize financial services regulation in New York through the merger of the state’s Banking Department, Insurance Department, and Consumer Protection Board into a new Department of Financial Regulation. This reflects the realities and reserves the benefits of today’s sophisticated capital markets, while establishing enhanced systemic risk oversight. Regulatory structures have failed to catch up with the increasingly integrated marketplace that developed after Gramm-Leach-Bliley in 1999, which permitted the consolidation of banks and insurance companies. The merger would be consistent with the financial industry’s approach to doing business.
As with mortgage servicing rules, this is another example of state actions that could serve as a national model. Where regulators may have been limited in the past, New York will have the authority to regulate and enforce standards by product, regardless of whether that offering institution is a licensed entity. I think that comprehensive approach is the way of the future.
There are numerous other advantages to the agency merger that can increase the industry’s competitiveness. For example, as proposed-
- The agency would leverage the resources of the currently separate departments in order to consolidate technical expertise, for instance in capital market analysis;
- It should achieve cost-efficiencies in the long-term by reducing overhead and administrative expenses;
- With a consolidated supervisor, the prudential and consumer protection functions do not work at cross-purposes, which reduces the risk of burdening financial institutions with mixed messages; and,
- The new combined consumer protection and fraud prevention team will weed out bad actors and provide a level playing field for the vast majority of companies that want to do right by their customers.
I also believe that agency consolidation will position New York to deal even more constructively with new federal oversight bodies that have been established under the Dodd-Frank reforms. This includes the Financial Stability Oversight Council (FSOC), as well as the CFPB. The FSOC will be looking for risks that cut across financial sectors and developing plans to remediate those risks. To continue to be a leader in first identifying emerging issues, the state needs similar capability to take a broad view of the industry and break down information silos.
While my remarks this afternoon are concluding, the work of building a more resilient financial sector has really just begun. My hope is that the industry remains as engaged in the implementation phase of agency consolidation and rulemaking as it was in the passage of other reform legislation. The changes we are undertaking will only succeed if they are embraced as relevant both to your business model and to the needs of New York consumers. Thank you again for the invitation to speak today, and I look forward to answering any questions you may have.