NYDFS 2014 Annual Report
To view a full PDF copy of the 2014 Annual Report, please visit, link. The Executive Summary of the report is below. A chart of major NYDFS enforcement actions contained in the report can be found, here.
Four years ago, in the wake of a devastating financial crisis, Governor Cuomo proposed creating the New York State Department of Financial Services (NYDFS) and appointed Benjamin M. Lawsky as the agency’s first superintendent. NYDFS supervises approximately 3,800 financial firms with assets totaling more than $7 trillion, including most of the large foreign banks operating in New York; the major U.S. and foreign insurance companies operating in New York; and other non-bank financial companies. In the four years since its creation, by employing a number of innovative enforcement strategies, NYDFS has sought to strengthen efforts to (1) police Wall Street, (2) protect consumers, and (3) regulate financial markets.
INNOVATIVE APPROACH TO WALL STREET ENFORCEMENT FOCUSED ON DETERRENCE
- $6 Billion in Penalties, Individual Accountability for Senior Executives. NYDFS has brought significant, civil enforcement actions against a number of the world’s largest banks, insurers, and mortgage companies for misconduct, including money laundering and foreclosure abuse. While NYDFS has levied nearly $6 billion in monetary penalties against financial firms, it has also repeatedly stressed the importance of individual accountability for senior executives in its settlements, including through the termination of employees who engaged in misconduct. As Superintendent Lawsky noted in a 2014 speech in Washington, DC: “If we’re just getting large fines from the corporations . . . are we really deterring future bad conduct? . . . To get real deterrence, we need to have individuals who are personally held to account.”
- Penalties for Senior Executives, Up to and Including the C-Suite. While NYDFS does not have authority to bring criminal prosecutions, it took a number of actions to expose and penalize misconduct by individual senior executives – including all the way up to the C-Suite, when appropriate. Among other actions, NYDFS required the Chief Operating Officer of France’s largest bank, BNP Paribas, and the Chairman of one of the United States’ largest mortgage companies, Ocwen Financial, to step down as part of enforcement actions brought against those companies. The Department has also banned multiple senior executives from participating in the operations of NYDFS-regulated institutions for engaging in misconduct.
- Accountability for Bank Consultants through a Century-old Statute. NYDFS became the first financial regulator to bring successful enforcement actions against bank consulting companies – including “Big 4” firms PwC and Deloitte – for their roles in helping large financial institutions whitewash misconduct. NYDFS unearthed and used a more than century-old statute to ban those firms from doing work at institutions regulated by the Department, among other penalties.
- Disrupting Terrorist Financing for Iran and Other Rogue Nations. Through enforcement actions against Standard Chartered Bank, BNP Paribas, Bank of Tokyo Mitsubishi-UFJ, RBS, and other major, international financial firms, NYDFS has sought to stiffen the penalties imposed on financial institutions for illegally doing business with Iran, Sudan, and other rogue nations.
- Identifying and Investigating a New Front in Foreclosure Abuse. In the wake of the financial crisis, a number of large banks sold off their rights to service mortgages to more lightly regulated firms known as “non-bank mortgage servicers.” NYDFS commenced an aggressive and wide-ranging investigation – including “surprise” examinations – into non-bank mortgage servicers, shining a spotlight on foreclosure abuses in this industry and bringing enforcement actions to deliver relief to homeowners.
STRENGTHENING CONSUMER PROTECTION
- Protecting New York Consumers. One of the key missions that Governor Cuomo gave NYDFS was to protect consumers better than ever before. The Department moved quickly to create and build an aggressive consumer protection unit that took a number of actions to protect New Yorkers against abusive lenders and insurance companies. NYDFS work in this area has been cited as “nation-leading” and helped establish the agency as an “energetic consumer watchdog.”
- Combatting Illegal, Online Payday Lending Charging Interest Rates Over 1,000%. Payday lending is illegal in New York for good reason. Those predatory short-term loans, with interest rates as high as 1,000 percent, often trap borrowers in destructive cycles of debt from which they cannot escape. In some cases, however, lenders attempt to do an end run around New York’s prohibition on payday lending by offering loans over the Internet – and collecting on them using electronic payment and debit networks – in an effort to avoid prosecution. The Cuomo Administration has taken a series of steps to help stop illegal online payday lending in New York through a multi-faceted, full-court press. These include measures to cut off online payday lenders access to the bank payment system, which has helped lead a majority of the firms that NYDFS targeted to stop lending into New York. NYDFS was also the first regulator to bring a successful enforcement action against a payday loan “lead generation” firm, which market those illegal loans.
- Helping Consumers Fight Back Against Abusive and Harassing Debt Collection Practices. In 2014 alone, New York consumers filed more than 20,000 complaints regarding debt collection practices. To help combat this problem, Governor Cuomo and NYDFS announced new reforms. These new NYDFS regulations will provide consumers with important disclosures to help combat aggressive and deceptive practices that take advantage of confusion or fear; help stop attempts to sue to collect "zombie debts" where the statute of limitations has expired; establish a new debt "substantiation" requirement so that consumers can request information to avoid paying what they do not owe; and address other widespread abuses in the debt collection industry.
- Recovered $1 Billion in Unpaid Life Insurance Benefits for Consumers. In 2012, NYDFS launched an investigation that uncovered many insurance companies regularly received a list of recent deaths from the Social Security Administration for the purposes of stopping annuity checks to the deceased, but were not using that list to determine if a policy holder had died. That means that if a family member did not know there was a life insurance policy or simply forgot to file a claim to the insurance company, the policy went unpaid. As a result, thousands of families did not receive life insurance benefits to which they were entitled. Working with those insurers, NYDFS helped recover more than $1 billion in unpaid life insurance benefits for consumers stuck on the books of insurers, including nearly $400 million for New Yorkers.
- Reforming “Force-Placed” Home Insurance Practices That Pushed Borrowers over the Foreclosure Cliff. NYDFS helped reform and clean up a little-known area of the financial industry – rife with kickbacks and consumer abuses – called force-placed insurance, which stuck already struggling borrowers with inflated home insurance costs, threatening to push them over the foreclosure cliff.
- Stopping Surprise, Out-of-Network Medical Bills That Slam Consumers. NYDFS helped push for passage of legislation in the 2014-15 state budget that Governor Cuomo proposed to protect consumers from surprise, out-of-network medical bills. Among other protections, the law holds consumers harmless from any surprise or emergency out-of-network medical bills they receive from providers, and requires enhanced consumer disclosures to protect patients from getting hit with surprise medical bills in the first place.
- Reforming Inflated Title Insurance Costs. NYDFS conducted an extensive investigation into the title insurance industry, which was sticking consumers with the bill for lavish entertainment expenses and other inflated costs. That investigation led to reforms that will help provide significant savings to homeowners – in some cases, as much as 60 percent on their title insurance bill.
- Helping New Yorkers Recover after Natural Disasters. NYDFS has helped consumers recover and deal with their insurance companies and other financial institutions in the wake of natural disasters, such as Superstorm Sandy and Irene. Governor Cuomo has deployed DFS Mobile Command Centers to more than 100 locations throughout New York in the aftermath of major disasters, as well as taken a number of steps through the Department to help speed up relief payments owed to affected New Yorkers from banks and insurers.
- An Innovative Use of the Federal Dodd-Frank Law to Protect New York Consumers. In 2014, NYDFS brought a lawsuit against Condor Capital Corporation, a subprime auto lender based in Long Island, after a Department investigation uncovered that the company deceptively retained millions of dollars owed to vulnerable borrowers and overcharged them for interest in violation of the Truth in Lending Act. The lawsuit against Condor (Lawsky v. Condor) was the first legal action initiated by a state regulator under section 1042 of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act, which empowers state regulators to bring civil actions in federal court for violations of Dodd-Frank’s consumer protection requirements. After the lawsuit, Condor agreed to make full restitution plus nine percent interest to all aggrieved customers nationwide (an estimated $8-9 million), pay a $3 million penalty, and admit violations of New York and federal law.
ADDRESSING NEW FINANCIAL PRODUCTS AND RISKS
- Helping Strengthen Bank Cyber Security. NYDFS has sought to sound the alarm on the threat cyber hacking poses to consumers and financial markets. In response to those risks, NYDFS has undertaken a number of actions to help propel banks and insurance companies to strengthen their cyber defenses, including targeted examinations and proposing new regulations requiring stronger cyber security preparedness.
- Blowing the Whistle on “Shadow Insurance.” In 2012, NYDFS commenced a multi-year investigation into “Shadow Insurance” — a little-known loophole putting taxpayers and policyholders at greater risk. Insurance companies use shadow insurance to shift blocks of insurance policy claims to special entities — often in states outside where the companies are based, or else offshore (e.g., the Cayman Islands) — in order to take advantage of looser reserve and regulatory requirements. Reserves are funds that insurers set aside to pay policyholder claims. This financial alchemy, however, does not actually transfer the risk for those insurance policies off the parent company’s books because, in many instances, the parent company is ultimately still on the hook for paying claims if the shell company’s weaker reserves are exhausted through a “parental guarantee.” NYDFS’ investigation uncovered and exposed that New York-based insurers and their affiliates are on the hook for at least $48 billion in hidden ‘shadow insurance’ transactions through shell companies in other states and offshore. What’s worse, many of these companies are using this scheme to avoid billions of dollars in taxes.
- Virtual Currency Regulation. In 2013, NYDFS launched an extensive inquiry into the appropriate regulatory guidelines for the virtual currency industry, including public hearings that the Department held in January 2014. Using the information gathered during that inquiry, NYDFS proposed a first-in-the nation, comprehensive regulatory framework for firms dealing in virtual currency, including Bitcoin. The regulatory framework contains key consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms. NYDFS also licensed the first regulated virtual currency exchange in the United States.
- Strengthening Retirement Protections by Cracking Down on Private Equity Companies. As part of its regulatory work, NYDFS uncovered and highlighted a spike in private equity firms moving into the annuity business. This trend raised concerns since private equity firms typically have a more short-term oriented business model than traditional insurers, and the annuity business is focused on ensuring long-term security for policyholders. As such, NYDFS reached agreements with a number of the largest private equity firms involved in the annuity business requiring those firms to put in place a set of heightened policyholder protections. These policyholder protections include heightened capital standards; the establishment of a separate, additional “backstop” trust account dedicated to further safeguarding policyholder claims; enhanced regulatory scrutiny of investments, operations, dividends, and reinsurance; and other strengthened disclosure and transparency requirements.