Tag Archives: Lawsky

Tough Edge for Financial Services

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Maria T. Vullo %>

Maria Vullo

 

 

 

 

 

 

 

Law360 quoted me in Cuomo’s DFS Nominee Likely To Keep Tough Edge (behind a paywall). It reads, in part,

Although New York Gov. Andrew Cuomo turned to a longtime BigLaw attorney to lead the New York State Department of Financial Services, observers say the agency is likely to continue taking the aggressive regulatory and enforcement stance that has become its calling card.

The governor tapped Paul Weiss Rifkind Wharton & Garrison LLP’s Maria T. Vullo to lead the DFS, completing a monthslong search to replace former New York Superintendent of Financial Services Benjamin M. Lawsky. In turning to Vullo, Cuomo brings on a litigator and former prosecutor with 25 years of experience in the law, including two decades of representing banks.

But given the reputation that the DFS has built up since it burst onto the scene with its $340 million sanctions violation settlement with the U.K.’s Standard Chartered PLC in 2012, advocates and observers believe that if confirmed, Vullo will continue to push for tough enforcement and big penalties against the banks, insurers and other financial firms that the DFS oversees.

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However, because Vullo comes from a BigLaw background with extensive experience representing financial firms, some have raised concerns that the agency will become less aggressive in enforcing New York state’s financial regulations.But observers who spoke to Law360 said her noncorporate experience gives a clearer picture of how she might run the DFS.

Vullo has been an advocate for women in the legal profession and represented women who sued for damages after being raped during the war in Bosnia between 1992 and 1995, helping secure a $745 million verdict in that case.

And in her work for Cuomo during his tenure as New York’s attorney general, Vullo oversaw a staff of around 200 that worked in the office’s investor protection, antitrust, real estate finance, consumer fraud and Internet bureaus.

In that position, she took action against Ezra Merkin and Ivy Asset Management for their roles in defrauding investors in Bernard L. Madoff’s $65 billion Ponzi scheme, as well as launching an investigation and action against Ernst & Young for investor losses in Lehman Brothers Holdings Inc.’s 2008 bankruptcy.

Those past experiences should allay any fears that Wall Street’s critics might have, said David Reiss, a professor at Brooklyn Law School.

“I thought that Governor Cuomo would seek an aggressive replacement for Lawsky,” Reiss said. “Vullo fits the bill.”

To that point, financial reform and other advocates said in interviews that they knew little about her, but were encouraged by what they did know.

“What we’re hoping is that the reputation that the department has established will continue through the new leadership,” said Andy Morrison of the New Economy Project, a New York-based advocacy group.

Indeed, Cuomo has an interest in maintaining an aggressive DFS.

The billions of dollars in fines it collected from banks have gone to fund state infrastructure projects, including the construction of a new Tappan Zee Bridge across the Hudson River north of New York City.

And that get-tough approach has also been a way to attract voters.

“My sense is he benefits from the halo effects of an aggressive DFS,” Reiss said.

Reiss on Lawsky Legacy

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Benjamin_Lawsky_picture

Law360 quoted me in Lawsky’s Aggressive Tactics Provided Model For Regulators (behind a paywall). It reads, in part,

New York Superintendent of Financial Services Benjamin Lawsky’s frequent, aggressive and often creative enforcement actions generated billions of dollars for the state and put his agency at the forefront in financial services regulation, and observers expect a similar approach from Lawsky’s successor when he leaves his post next month.

Confirmed to lead the New York Department of Financial Services in May 2011, few expected the new agency, which combined the state’s banking and insurance regulators, to make much of a mark. But after collecting $3.3 billion in penalties and forcing several traders and top executives out of their positions, Lawsky’s agency has proven to be a powerful enforcer.

“His biggest legacy is simply that he stood up a brand new regulator in one of the global financial centers and made it matter almost immediately,” said Matthew L. Schwartz, a partner at Boies Schiller & Flexner LLP and a former federal prosecutor. Lawsky, who announced his departure from the agency on May 20, established a name for himself and for the Department of Financial Services when he jumped ahead of federal banking regulators and prosecutors in announcing a $340 million settlement with British bank Standard Chartered PLC over its alleged violation of U.S. sanctions against Iran and other countries in August 2012.

That a newly formed state regulatory agency would move ahead with a stiff penalty and threaten to wield the most powerful of weapons — the pulling of Standard Chartered’s license to operate in New York state — reportedly rankled his federal counterparts

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“He made clear that consumer protection is integral to the mission of the agency,” Brooklyn Law School professor David Reiss said.

Despite Lawsky’s frequent reminders that he works for New York Gov. Andrew Cuomo — for whom he has also served as chief of staff — and the superintendent’s constant praise for his staff, there is fear among some reformers that the DFS won’t be the same without Lawsky at the helm.

“Lawsky proves that the character of individual regulators can make a crucial difference more than the letter of the law itself,” said Bartlett Naylor of Public Citizen.

“Ideally, he’ll inspire his successor and other regulators that honor awaits the vigilant and opprobrium will fall upon the indolent. More practically, however, the problems of regulatory capture by an enormously influential industry reliant on government favor can prove overwhelming,” Naylor added.

Others are more confident that the agency Lawsky set up will continue its work even after his move to the private sector.

In part, that’s because the penalties the DFS has wracked up have been a boon to New York’s budget.

Cuomo, the state’s former attorney general, has an interest in many of the issues Lawsky acted on, as well.

“I have every reason to expect that Cuomo would want to have a very vigorous enforcer to replace Lawsky,” Reiss said.

En-Titled Insurance

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Benjamin M. Lawsky, the New York State Superintendent of Financial Services, has promulgated a proposed regulation regarding title insurance that is sure to shake up the title industry and, more importantly, reduce closing costs for NY homeowners.

The proposed regulation opens with a statement of its scope and purpose:

(a) The purpose of this Part is to promote the public welfare by proscribing practices that are not in accordance with Insurance Law section 2303, which provides that insurance rates shall not be excessive, inadequate, or unfairly discriminatory. This Part also interprets and implements Insurance Law section 6409(d), which prohibits giving any consideration or valuable thing as an inducement for title insurance business, as well as Insurance Law section 6409(e), which states that title insurance premiums shall reflect the anti-inducement prohibition of Insurance Law section 6409(d).

(b) This Part further protects consumers, pursuant to the authority of Insurance Law sections 2110 and 2119 and Article 24 and Financial Services Law sections 301 and 302, by ensuring that the title insurance industry provides valuable products and services to consumers at reasonable rates and fees and does not overcharge consumers or charge improper and excessive fees that constitute engaging in untrustworthy behavior and unfair and deceptive acts and practices. (Section 227.0 )

New York has long had some of the most expensive title insurance premiums in the country, so homeowners and other owners of real estate should welcome this development. Title insurance agents are not allowed to compete on price in NY, so they compete for business from real estate lawyers (who typically select the title insurance agent for any given transaction) by offering them all sorts of perks such as hard-to-get tickets to events and fancy meals. The proposed regulation attempts to rein in this behavior.

The NYS Department of Financial Services will be accepting comments for 45 days after the proposed regulation is published in the State Register, so get crackin’.

Reiss on Ocwen Settlement

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Law360 quoted me in New York’s Ocwen Deal Sets Tough Precedent For Regulators (behind a paywall). It reads in part,

New York regulators ordered Ocwen Financial Corp. to pay $150 million in hard cash and barred the company from claiming a tax deduction on the restitution payments in a mortgage servicing settlement that could set a new standard for regulators accused of being soft on the companies they penalize.

The New York Department of Financial Services’ penalty against Ocwen, which also saw the company’s executive chairman lose his job, comes amid criticism that major penalties against Bank of America Corp., JPMorgan Chase & Co. and other banks have been too lax. In a move aimed at addressing concerns over companies’ abilities to game the penalties, New York’s settlement specifically says Ocwen will not be able to use some of the techniques banks have used to lessen the blow of earlier settlements.

“They’ve tried to make a very tight settlement that demonstrates that Ocwen is suffering measurable costs for their behavior,” said David Reiss, a professor at Brooklyn Law School.

The New York Department of Financial Services announced Monday that Ocwen, the country’s fourth-largest mortgage servicer, with some $430 billion in unpaid servicing balances, would pay out $150 million in “hard money” to New York homeowners who were victim to the company’s problematic servicing operations. A third of that $150 million would go directly to people who were foreclosed upon, and the remaining $100 million would go to housing-related projects chosen by the state.

But, unlike in previous mortgage-related settlements, Ocwen will not be able to count what are known as “soft dollar” modifications of mortgages they do not own and other techniques toward its settlement total, the DFS said. Banks and other servicers have been able to count such modifications in their total settlement amounts in previous deals, including the $25 billion national mortgage settlement from 2012.

Critics say such soft-dollar remediation has allowed law enforcement agencies, regulators and banks to inflate the amount of money banks and servicers are said to be paying out while limiting the amount of money they actually pay.

“It seems like a transparent settlement,” Reiss said.

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“A lot of the problems that people have had with these financial settlements are specifically identified,” Reiss said.

Reiss on Lawsky’s Departure from DFS

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Bloomberg interviewed me for Lawsky Leaving After $3 Billion in Fines Makes a Mark. The article reads in part,

When Ocwen Financial Corp. (OCN) shares soared on the news that regulator Benjamin Lawsky, who’s probing the company, will step down, Bill Miller shrugged.

The next head of New York’s Department of Financial Services will probably be as aggressive as Lawsky, continuing the uncertainty for Ocwen, said Miller, who runs the $2.2 billion Legg Mason Opportunity Trust. (LMOPX) Lawsky’s investigations of nonbank mortgage servicers such as Ocwen have caused their shares to plunge.

“Ocwen has been rallying on the view that with him gone that will lift the burden, but I would be surprised if the next person didn’t at least follow through in the way Lawsky was going to,” said Miller, whose fund, which invests in Nationstar Mortgage Holdings Inc., has gained an annual 38 percent since 2011.

In three years as New York’s financial watchdog, Lawsky extracted more than $3 billion in fines from global banks, called for the firing of executives and questioned whether the lightly regulated nonbank servicers are properly handling modifications and defaults. As the department’s first superintendent, Lawsky hired experienced lawyers from the New York Attorney General’s office, creating a strong enforcement culture that will continue after he’s gone, said Kathryn Judge, an associate professor focusing on financial institutions at Columbia University Law School.

“Similar to what we saw Eliot Spitzer doing as attorney general, being in New York allowed Lawsky to step in where federal regulators hadn’t,” Judge said. “By stepping into this role at a formative stage for the regulator, he created a footprint. That legacy will survive.”

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The superintendent’s work has reflected favorably on the governor, said David Reiss, a professor who specializes in real estate and consumer protection at Brooklyn Law School. That will encourage Cuomo to select a successor who’s equally dynamic, Reiss said.

Cuomo will want to build on Lawsky’s record of protecting homeowners from improper foreclosures and holding mortgage servicers accountable, said Reiss.

Chief of staff Anthony Albanese, general counsel Daniel Alter, and capital markets division head Maria Filipakis are among the top people that Lawsky brought to the department. One of them may be in a position to replace him, according to a lawyer who has had extensive dealings with the superintendent. The lawyer asked not to be named because he’s not authorized to speak publicly about the matter.

The successor will have to focus more on regulation and finding answers to the issues the department uncovered with nonbank servicers and insurers, said Eric Dinallo, who served as New York’s superintendent of insurance from 2007 to 2009.

“Each superintendent or commissioner wants to put their unique stamp on the agency,” he said.

Reiss on State Enforcement of Dodd Frank

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Auto Finance News quoted me in The Mess at Condor Capital Signals Stiffer State Oversight. It opens,

Legal action brought by New York State last month against Condor Capital Corp., a Long Island subprime lender accused of bilking customers out of millions of dollars, could signal an increase in state prosecution under Dodd-Frank federal laws.

Legal experts say the case, even though it involves wildly egregious practices by Condor, could be the first of many by states against auto lenders, even if the lender’s nefarious actions are more modest than Condor’s.

In April, New York’s Department of Financial Services (www.dfs.ny.gov) obtained a temporary restraining order in federal court against Hauppauge, N.Y.-based subprime auto lender Condor Capital Corp. (www.condorcap.com) and owner Stephen Baron. The case is being handled in U.S. District Court for the Southern District of New York.

The state’s complaint paints a picture of a company run with disregard for compliance. However, a former senior Condor employee told Auto Finance News that Condor’s practices might have been even worse than what was described in the state’s complaint. The former manager of Condor’s collection department told Auto Finance News that management thumbed its nose at the very notion of compliance.

Plain and simple, the federal law provides state regulators with a new tool according to Law Professor David Reiss from Brooklyn Law School.

“States have historically identified new forms of unfair, deceptive, or abusive acts and practices before they get on the radar of national regulators, so states are likely to be quicker to take action than their federal counterparts,” Reiss said. “In all likelihood, the New York case, as well as a case from the attorney general in Illinois, are just the tip of a burgeoning enforcement iceberg.”

A Shared Appreciation for Underwater Mortgages

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New York State’s Department of Financial Services has proposed a rule that would allow for “shared appreciation” of a property’s value if an underwater loan is refinanced. The Department states that this will provide a helpful option for underwater homeowners facing foreclosure. If a homeowner were to take a shared appreciation mortgage, he or she would get a principal reduction (and thus lower monthly payments) in exchange for giving up as much as fifty percent of the increase in the home’s value, payable when the property is sold or the mortgage is satisfied.

The precise formula for the holder of the mortgage is as follows:

The Holder’s share of the Appreciation in Market Value shall be limited to the lesser of:

1. The amount of the reduction in principal (deferred principal), plus interest on such amount calculated from the date of the Shared Appreciation       Agreement to the date of payment based on a rate that is applicable to the Modified Mortgage Loan; or

2. Fifty percent of the amount of Appreciation in Market Value. Section 82-2.6(b).

The principal balance of a shared appreciation mortgage “shall be no greater than: (i) an amount which when combined with other modification factors, such as lower interest rate or term extension, results in monthly payments that are 31% or less of the Mortgagor’s DTI; or (ii) 100% of the Appraised Value.” Section 82-2.11(i). The proposed regulation contains mandatory disclosures for the homeowner, including some examples of how a shared appreciation mortgage can work.

How does this all play out for the homeowner? We should note that similarly situated homeowners can be treated differently in a variety of ways. Here are a few examples. First, two similarly situated homeowners with different incomes can receive different principal balances because of the DTI limitation contained in section 82-2.11(i). Second, similarly situated homeowners can receive different principal balances because their houses appraise for different amounts. And third, different rates of appreciation of homes can make two similarly situated homeowners give up very different absolute dollars in appreciated value.

All of this is to say that homeowners will have to consider many variables in order to evaluate whether a share appreciation mortgage is a good option for them. They should also know that what is a good deal for one homeowner may not be a good deal for a similarly situated one. It is unlikely that the mandatory disclosures will be sufficient to explain this to them in all of its complexity. It is not even clear that loan counselors could do a great job with this either.

I am not arguing that the share appreciation mortgage is a bad innovation. But I do think that lenders will be able evaluate when offering one is a good deal for them while homeowners may have trouble evaluating when accepting one is a good deal on their end. I would guess that many may take one for non-economic reasons — I want to keep my home — and just take their chances as to how it all will play out financially.