Banking New York July/August 2012 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS • JULY/AUGUST 2012 • VOLUME 23

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WHAT IS YOUR EMAIL TELLING YOUR CUSTOMERS? REGULATORS NOW HAVE BROADER CONSUMER-ABUSE LABEL NEW YORK STATE'S THOUSAND-DAY FORECLOSURE NIGHTMARE

BANKING NEW YORK Volume 23 | July/August 2012

04 FROM THE EDITOR

Staying on Message

06 GUARDING THE GATE

Confusing Bank Messages Undermine Customer Trust

08 BANK PROFILE

10 ATTITUDE ADJUSTMENTS

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CONTRIBUTING WRITERS THIS ISSUE Debbie Swanson, Steve Viuker, Scott Van Voorhis

EDITORIAL Cory Hopkins Christina P. O’Neill ASSOCIATE EDITOR Cassidy Norton Murphy EDITORIAL DIRECTOR

CUSTOM PUBLICATIONS EDITOR

©2012 The Warren Group Inc. All rights reserved. The Warren Group is a trademark of The Warren Group Inc. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher. Advertising, editorial and production inquiries should be directed to: The Warren Group, 280 Summer Street, Boston, MA 02210 www.thewarrengroup.com

TWG STAFF CHAIRMAN Timothy M. Warren CEO & PUBLISHER Timothy M. Warren Jr. PRESIDENT David B. Lovins CONTROLLER DIR. OF OPERATIONS Jeffrey E. Lewis SALES George Chateauneuf Megan Braga Cara Feldman Richard Ofsthun

DIRECTOR OF MEDIA SOLUTIONS ADVERTISING COORDINATOR

ADVERTISING ACCOUNT MANAGERS

ART CREATIVE DIRECTOR John

Bottini Scott Ellison Amanda Martocchio DESIGN INTERN Alyssa Sullivan DESIGN PRODUCTION MANAGER GRAPHIC DESIGNER

The Thousand-Day Nightmare

20 COMPLIANCE CORNER

16 COVER STORY

Managing Against Critical Drivers Boosts Profits

12 FORECLOSURE CRISIS UNRESOLVED

New York Community Bancorp

State Law’s Longer Reach

LETTER FROM THE EDITOR | By Christina P. O’Neill

Staying on Message

he cover feature in the previous issue of Banking New York focused on peoples’ message to banks. This issue puts that into reverse – what messages are banks sending their customers via advertising? In fact, what message is your bank sending at all? Are your emails to customers giving them pause? And what about the message your staff sends to customers if employees are disengaged? The Warren Group, publisher of Banking New York, also publishes six

other financial-institution industry periodicals for other states. Banking New York is the only one in our lineup that is produced independently of a state banking association, which gives us a different perspective. We see the New York market as a bellwether for the rest of the country. Regulatory initiatives that start out as concepts in New York state more often than not go mainstream throughout the rest of the country. New York state’s business and regulatory infrastructure is among the nation’s most developed. And

New York banks and credit unions are among the most well-informed, with a strong collective voice – there’s that message issue again. We’d like to do all we can to provide a forum for the agendas of the state’s financial institutions, and, by implication, the country's. ■

Christina P. O’Neill Editor, Banking New York Custom Publications Editor The Warren Group

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GUARDING THE GATE | By John Jaser

Confusing Bank Messages Undermine Customer Trust

onfusion in bank messages to their e-banking customers continues to undermine confidence in a bank’s Internet channel, making it easier for competitors to pull customers away or worse, for cyber criminals to pilfer funds. Let me present an example – the first three paragraphs of an email I received from custserv@mybank.com at the suspicious hour of 12:57 a.m.: Since you’ve added a payee, you’re now ready to start making payments! Just enter an amount and a date, click a button, and your payment is ready to go. And with Online Bill Pay, many of your payments will reach payees even faster. So why not get started today, and begin enjoying the freedom and convenience of Online Bill Pay – you may never write a check again! If a forgotten user ID or password is stopping you from coming back, please contact us. We’ll get you back online fast. Doesn’t that sound clear? I thought so, until I remembered that I hadn’t added a payee to this account in months and that the email arrived at 12:57 a.m. I began to wonder: does my bank know me, or did it merely send a generic email in the middle of the night to e-banking customers who haven’t paid bills online lately? From a pure marketing perspective, this is trouble, since most e-bankers actually pay attention to their accounts online. They understand that frequent visits to their bank’s website enable them to spot unauthorized activity. As a result, e-bankers know when the bank hasn’t done its homework. I began to wonder if this message actually came from my bank. After all, my bank is

smarter than this. It should know that I haven’t added any payees. It shouldn’t send email in the middle of the night. The email concluded with standard language about security followed by these equally standard instructions: “Please do not respond directly to this email message. If you have any questions, please contact us at custserv@mybank.com.” Now I’m really confused. This email supposedly came from custserv@mybank. com. I am not supposed to respond directly to this address. But if I have something to say, the email tells me to contact the bank at custserv@ mybank.com. Wow! So, I ask again – is this a phishing email or is it simply inept marketing? Either way, the bank hasn’t gained a smidgeon more of my trust. If anything, I have a queasy feeling that quality is a lost art in banking and perhaps the cyber criminals have tried something new. This is exactly where banks and bankers don’t want to be. After years of warning customers about cyber crime, we finally have customers who pay attention, ask questions, and verify answers. Messages like this – sloppy at best, criminal at their worst – undermine the trusted relationships that banks are trying to cultivate. It’s not hard to prevent these snafus. A careful read by staff and a customer focus group would have uncovered the problems. By listening to these groups, the bank could have protected its reputation for quality service and security, and perhaps even enhanced it. Unfortunately, this bank squandered a good opportunity with sloppy execution. Given today’s jumpy customers and ever present cyber criminals, the banking industry can ill afford such errors. Competitors as well as cyber criminals know how to disrupt the vital chain of trust between banks and their customers. Let’s not tip the scales in their favor. ■

John Jaser manages Internet Services and Security at Avon, Conn.-based COCC, Inc., a 43-year-old firm specializing in outsourced information technology and support. 6 | Banking New York

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BANK PROFILE

New York Community Bancorp A Consistent Lender with a Targeted Niche By Debbie Swanson

ith roots that go back 153 years, New York Community Bancorp today is the 21st largest bank holding company in the nation, with two bank subsidiaries – New York Community Bank, established in 1859 under the name Queens County Savings Bank, and New York Commercial Bank, established more recently, in 2005. With 275 branches in five states, including New York, and a consistent record as one of New York City’s leading multi-family lenders, the company has come a long way since its

8 | Banking8 New | Banking York New York

beginnings as the first savings bank chartered by the state in Queens. The company went public in November 1993. “That came after a four-decade decision to transition into a class of assets that does better in the worst of times,” says Joseph R. Ficalora, president and CEO, and a director of New York Community Bancorp, Inc. A series of earnings-accretive mergers and acquisitions between 2000 and 2010 expanded the company’s reach beyond its traditional continued on page 22 

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ATTITUDE ADJUSTMENTS

Managing Against Critical Drivers Boosts Profits

SAMPLE CHECKLIST OF CRITICAL DRIVERS BY POSITION

WHAT DO I LOOK AT AS CRITICAL DRIVERS OF THE CLIENT BANKS I WORK WITH? Loan Officer: • Yield on loan portfolio • Delinquency ratio 30 day past dues • Cross sales ratio with new customers • Cross sales on current accounts • Dollars in weighted sales funnel • Aces received on Top 100 sales prospects

By Roxanne Emmerich

Tellers: • Balance to zero three days per week on the first attempt • Customer needs questions • Mystery shopping scores • Referrals made • Referrals closed CSR/New Accounts: • 3 or greater cross sales ratio with new customers • Complete all touches on First Impressions checklist within one day of due date • Complete needs questionnaire on all new customers • Ask a customer a needs question five times each week

rofit hides a lot of mistakes. But now that the economy has put pressure on all of us to find what works and chuck what doesn’t, it’s time to give credit to the greatest single predictor of profits and growth – your critical drivers. And what’s the number-one critical driver? Mood – frame of mind – the way a particular group of people think and feel about your bank at any one time. Mood is money, and if you have a culture where people don’t want to come to work on Mondays and count the days until Friday, you are headed for a life lesson that is costly beyond measure. 10 | Banking New York

Information Technology: • Touch all new Internet and bill-pay customers within three days of sign up • Respond to mission-critical IT issues within one hour • Uptime during banking hours

BOOST YOUR CRITICAL DRIVERS Gallup research shows businesses with disengaged employees experience $3,400 in lost productivity for every $10,000 of payroll, and employee engagement is the leading indicator of corporate health. A study of 19 insurance companies revealed that in 75 percent of cases, climate alone accurately sorted companies into high versus low profits and growth. Out of the hundreds of variables that impact insurance companies, to have one variable so closely predictive of actual results is overwhelming evidence that mood matters.

Managers: • Complete all quarterly plans for every employee by first week of following quarter • Coach any team member who does not receive a “10” within two days of being scored • Follow up with each team member at least once a week on results from their plan • Loan goals • Deposit goals • Mystery shopping scores Loan Clerk: • Loan-maintenance errors per week • All loan filing completed weekly

First Volunteer Bank, now known as “The Bank with Personality,” had tried everything – sales training, restructuring, strategic planning, you name it – but couldn’t get beyond average. Then, after a one-day “Thank God It’s Monday” presentation, they experienced 35 percent annualized growth in a single month – more organic growth than in the previous 10 years combined. Mood matters.

but lousy attitude. He needed to move on or realize that he was choosing his attitude. Are you like my uncle? Let’s face it – we want our lives to count for something. We want our work to matter. When we went to work the first day, our shoes were shined and we knew we wanted to be a huge contributor. Then, as life happened, we disengaged ourselves. Maybe we found out the humans we worked with weren’t perfect. Go figure. Or maybe we thought somebody did something unfair and we got our nose out of joint. Whatever the cause, instead of accepting people and coaching them, or requesting fairness in an adult way, or learning why perhaps the situation

ROCK YOUR CUSTOMERS’ WORLDS Will your workplace mood spill out onto the streets and impact your customers and get them to come back and bring others? Yes! For every 1 percent improvement in service climate, there is a 2 percent increase in revenue. If employees are engaged, customers not only reward you with more business – they come back and bring their friends! When your team members are doing backflips to delight customers and are committed to the success of your customers and clients, that’s a business that works. Unfortunately, it works both ways. Bad employee moods and rudeness are also contagious. Cardiac care units where nurses’ moods were defined as “depressed” had a patient death rate four times that of comparable units. Yikes. A study of 32 retail stores showed that positive salespeople outsell their grumpy workmates. Mood matters to customers. Mood either causes customers to buy more or to leave and never come back – and one bad encounter can echo through that lost customer and everyone they talk to for decades.

was fair after all, we disengaged ourselves. We are living in a world that is filled with spiritual bankruptcy. Empty activities fill our days. More than ever, we need our lives to matter, and our work fills so much of our lives that we can’t afford emotionally for that work to not fulfill us. Khalil Gibran said it best: “Work is love made visible.” We need to make work matter – for our own sanity and fulfillment and for the success and fulfillment of those around us. The time for change is now, and the person to make the change is you. Recessions are the time to pull ahead while others are blindsided and confused. Decide that you will be the one to pull ahead. This is your time. ■

Roxanne Emmerich, CSP, CMC, CPAE, is principal of Emmerich Financial, a consulting company that helps banks improve their performance.

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FORECLOSURE CRISIS UNRESOLVED

The Thousand-Day Nightmare ‘Affirmation’ Makes New York Foreclosure Process the Longest in the Nation By Scott Van Voorhis national average and the longest in the country, according to RealtyTrac. While some prominent members of the state’s judiciary are starting to recognize the problems posed by the affirmation requirement, changing it may not be so easy. Modifying or doing away with the affirmation might create the impression that it would then become easier for banks to foreclose, frustrated real estate attorneys say. “When they first put out the affirmation, some of the attorneys in our firm said this isn’t going to work, it’s too broad,” said Allison Schoenthal, a partner at Hogan Lovells US LLP, which does extensive real estate work. “The courts are getting jammed up.”

HIGH HOPES DASHED

seemingly innocuous rule aimed at curbing robosigning has backfired, clogging New York state courts with unresolved foreclosure cases and ultimately punishing homeowners stuck in limbo, real estate attorneys contend. Since 2012, bank and mortgage company attorneys have been forced 12 | Banking New York

by the courts to sign an “affirmation” that all elements of a foreclosure filing are accurate. But the result has been a logistical nightmare, adding mountains of paperwork and leading to a backlog of tens of thousands of foreclosure cases, critics contend. It now takes nearly three years for banks to foreclose on a home in New York state, roughly three times the

There was little fretting, at least publicly, when New York state’s Office of Court Administration rolled out the affirmation rule in the fall of 2010. In a press release, New York State Chief Judge Jonathan Lippman lauded the new filing requirement, saying it would ensure that documents judges rely on “will be thoroughly examined, accurate and error-free.” But what sounded simple on paper has become a nightmare for real estate attorneys representing banks in foreclosures. First, the penalties could be career-ending if a flaw is found in the paperwork – a potential charge of perjury and the prospect of losing one’s license to practice law. And the

attorneys involved have to certify they have personally reviewed all key documents in all new and pending cases and that they have spoken directly to the bank or lender they are working for. They also have to vouch for all notarizations as well. Instead of rushing forward to sign affirmations, lawyers for lenders have been bogged down trying to meticulously meet all the conditions, Schoenthal notes. It can take countless hours of document reviews and phone calls to satisfy the requirements, heaping thousands of additional costs onto the books of the lender or bank trying to foreclose. “It creates layers of paperwork,” Schoenthal said.

A GROWING LOGJAM The affirmation requirement added the final straw to a court system that was already buckling under a flood of foreclosure filings and an earlier round of requirements also aimed at protecting homeowners. Before a foreclosure auction can be scheduled, lenders have to agree to hold a series of meetings with homeowners to try and work out a loan modification or other settlement. The meetings themselves have to be spaced out every few months, meaning the entire process takes as long as 18 months. That was already difficult, but now banks and their attorneys have to file their affirmations before those meetings can take place. The result is not surprising – the number of foreclosure cases in New York state courts spiked to 74,520 in 2011. Meanwhile, dispositions dropped by almost a third from 2010, to 19,205, while new filings plunged nearly two-thirds to 16,156, according to the New York State Unified Court System. continued on page 14 

July/August 2012 | 13

THE THOUSAND-DAY NIGHTMARE 

continued from page 13

When homeowners who are delinquent, but not formally in foreclosure, are counted, the number of soured mortgages across New York State rises to 345,000, according to a recent report by the Neighborhood Economic Development Advocacy Project. All told, it now takes more than 1,000 days to for a bank or other financial institution to move a foreclosure through the court system, from filing to auction, notes Joshua Stein, chairman of the education committee of the Mortgage Bankers Association of New York. That’s up from 666 days in 2010 and compared to 348 days across the rest of the country, RealtyTrac has reported. “When you pile it all one and add it all up, you have a foreclosure process that just doesn’t work,” Stein said.

14 | Banking New York

DELAYS PROVE COSTLY The backlog is unfair to both the financial institutions involved and the homeowners, Schoenthal contends. The long delays can rack up thousands of dollars, if not tens of thousands, in costs for the banks involved. Along with the loss of mortgage payments on the home, banks also automatically start picking up the tab on taxes once a homeowner defaults. As the foreclosure process drags on, the property is likely to steadily deteriorate, with the homeowner unlikely to be to motivated to maintain it. The lender must then pick up the tab for potentially thousands in repairs in order to make the house saleable again. The neighborhood also takes a hit, as the home facing foreclosure enters a steadily decline, dragging down the value of other homes.

But the foreclosure logjam is also unfair to struggling homeowners. The court-mandated workout sessions with the banks can’t begin until the affirmation is filed. As the process drags on, the unpaid mortgage payments and interest pile up, creating an even deeper hole to dig out of. The longer the homeowner remains in default, the harder it becomes to work out a loan modification, Schoenthal said.

AFFIRMATION REQUIREMENT DRAWS CRITICS In an encouraging sign, some members of the judiciary are starting to at least acknowledge the logistical problems the affirmation requirement has created. In testimony before Congress in March, Judge Arthur Schack of the New York State Supreme Court,

raised serious questions about the affirmation requirement and its impact on an already overtaxed court system. He argued that bank lawyers are skittish about filing the affirmations under penalty of perjury and being “sanctioned by the courts for filing false statements.” The criticism is all the more telling given that Schack was a early and strong critics of the way banks and mortgage companies have handled foreclosures. “This laudatory requirement, as a practical requirement, slowed up the foreclosure process … This logjam is something else our courts have to deal with, despite our limited resources.” Yet despite the growing concern that the affirmation requirement has only made the foreclosure mess worse, real estate lawyers and bankers face an uphill battle trying to convince New York court administrators or legislators to scrap or modify it. Some suspect the logjam was not totally unforeseen, and that it serves as a mechanism to seriously slow down bank efforts to foreclose on homeowners in default, Stein said. The required workout sessions with homeowners, for example, are of limited value other than dragging out the process for months. Stein sees a similar motivation behind the affirmation requirement. However, critics of the affirmation requirement have little political leverage in the current economic requirement. Legislators are unlikely to back any proposal, such as amending or repealing the affirmation requirement, which could be perceived as speeding up foreclosures and helping evict families from their homes. Judges and court administrators are not immune to these pressures, either, but the real victims, in the end, are average homeowners across the state faced with a real estate market that can’t seem to quite get back on its feet. The backlog of foreclosures

distorts property values and exerts a strong downward pull on the market. While politically unpalatable, the best way to help fix the real estate market is to bite the bullet and let banks clear foreclosures off their books. “Nobody wants to be seen as

making it easier to foreclose because that is how you get bad publicity because you are taking people’s houses away, but that is exactly what needs to happen,” Stein said. “As long as you have this foreclosure overhang, you are not going to have a healthy housing market.” ■

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July/August 2012 | 15

CAN’T BUY

Trust

Banks Must Counter Bad Publicity with Good Customer Relations. Who’s Doing Well, and Who’s Not?

By Steve Viuker

U Edward Boches

Dean Crutchfield

Sharon Wilkinson

sually, it isn’t news when a bank puts its ad account up for review. Banks, like all businesses, change messages on a fairly regular basis. But when Bank of America announced that its account was up for review, that was news. In fact, anything BoA and the other “too big to fail banks” do is news. But is a new ad campaign enough to regain trust? “Reputation is based on trust, respect, fairness and integrity. Consumers have lost faith in the banking industry,” said Shannon Wilkinson, founder of Reputation Communications. “In the last decade, the feeling is that banks have focused on how to make the most profits and have contributed to the economic issues that the country and world both face. On the micro-level, many feel they don’t matter to the banks. You regain your reputation by changing your behavior. Some of the major banks are becoming involved with their communities and large scale philanthropy. Consumers realize that businesses make mistakes and are willing to give most a second chance. If you look at the websites, BoA and JPMorgan Chase seem to want to serve their customers beyond just making a profit. People don’t know where to focus their anger and fears. So the financial institutions became the target. And Occupy Wall Street represents a fundamental mood change in America; as major as the sentiment and demonstrations in the 1960s. Some of the ads by banks seem to respond to that sentiment by reaching out to the communities they serve.” Michael Germanovsky, editor-in-chief of CreditLand.com, said that out of the more than 1.2 million complaint inquiries against banks, mortgage lenders and credit card companies submitted to the Better Business Bureau in 2011, the three issues that arise most often are billing, interest rates and fraud. “That means that many consumers are still having a hard time understanding terms of their contractual agreements and the type of protection coverage they receive from the banks,” he said. “Although the CARD Act established some guidelines for clearer terms and conditions, there is still lack of clarity that confuses consumers. Cautious about big banks looking to make up lost profits from Durbin Amendment that capped interchange fees, customers tend to look towards those financial institutions that are more transparent, more lenient, and consumer friendly. With all the bad publicity banks got in 2011, it will take something beyond generous rewards programs to win back consumer’s trust.”

“Small businesses are looking for personal service from banks and financial institutions,” said Chicago-based attorney Charles Krugel. “Small business owners are aware that bankers pay lipservice to them as being job creators. But most bankers don’t seem to really care about helping small businesses with either financing options or reducing bureaucracy as an obstacle to obtaining financing. Additionally, most banks seem to take a ‘one size fits all’ way of providing loans and credit. This doesn’t work for small businesses. Most small businesses are run in an entrepreneurial and more creative way than larger businesses. In order to establish credibility with small businesses, banks don’t necessarily have to reflect that creativity and entrepreneurialism, but they do need to prove that they understand and support that in small businesses. One way of doing this is to provide flexible financing options.” Banking consultant Dean Crutchfield was somewhat harsh in his opinion. “I think we need to see people falling on their swords. What we believe they did to us was total outrage and we need to see what they’re really doing to change. I believe that is difficult with just a campaign message. How are they taking that message into their business operations. OWS made it clear that people are not happy. How do bankers say they really care when it was clear they didn’t?” For Edward Boches, chief innovation officer at advertising firm Mullen, getting in touch is key. “It’s possible we’ll see something new but banks usually tout community involvement and lowincome loans and the like,” he said. “In the case of BoA, they do a pretty good job of offering free admission to museums in the communities they serve and other initiatives. But in my opinion, their management people are four to five steps removed from actual customers. Despite all of the technology, they seem to make things harder for customers than easier.” Boches cites a bank in Boston called Perk Street, which is online only. “Many people I know in their 20s bank with them. One reason is the CEO is talking about the responsibilities of a financial institution to its customers. Instead of doing ‘penalize banking’ with their customers, they reward them for using the bank and its services. We all remember when we had great customer continued on page 18  July/August 2012 | 17

CAN'T BUY TRUST  “Reputation is based on trust, respect, fairness and integrity. Consumers have lost faith in the banking industry.” service, perhaps with Zappos, LL Bean or American Express. If you a have credit card problem with American Express versus Citi, it’s like night and day.” While some commercial banks turn to educating communities through programs like Minority/Women Business Enterprise Development by Capital One or Banking for WomenOwned Businesses by Sovereign Bank, these education programs may not compensate for lost faith in big banks.

continued from page 17

YEARS AGO, BANKS HAD CATCHY SLOGANS: “When Your Needs Are Financial, Your Reaction is Chemical” Chemical New York “Tell It To The Marine” Marine Midland “Your Anchor Banker – He Understands. Your Anchor Banker – She Understands.” Anchor Bank

Many consumers are turning to credit unions, community development banks, and loan funds to get financing. Without improving lending opportunities for average consumers, big banks will continue to lose customers to smaller banks and credit unions and even WalMart. “We need banks,” said Crutchfield. “They are a part of everyday life. Community banks and credit unions are B:7.25” immersed in their communities. As for T:7.25” the major banks, S:6.75” Wells Fargo has always

had a large retail presence and they’re an excellent example of how a brand communicates. Flimsy advertising with throwaway phases isn’t going to work. BoA had a great idea with ‘Bank of Opportunity’ because it was America and the flag. It was a campaign-led initiative but didn’t go far enough into the organization to create that mindset. I would tell the banks to employ shuttle diplomacy; as opposed to campaign advertising. That is what countries use to appease people.” ■

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COMPLIANCE CORNER

State Law’s Longer Reach Dodd-Frank Changes Rules on Federal Pre-Emption By Cliff Weber

inancial-institution compliance officers in New York state should prepare for a new level of vigilance to protect their organizations against consumer-protection lawsuits. Two recent decisions by the New York Court of Appeals may be harbingers of a more expansive approach to consumer litigation by New York regulators. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 recalibrates the balance of power between federal and state regulators over financial products and services. The determination that federal law does not necessarily pre-empt state law creates more avenues by which state regulators and law enforcers can assert their jurisdiction over financial wrongdoing and redress perceived harm to consumers.

APPRAISALS In People v. First American Corporation, the New York Attorney General sued First American Corporation, a residential real estate appraisal company. The AG’s complaint, based on the New York General Business Law and New York common law, sought an injunction and money damages arising from First American’s appraisal practices. Specifically, the AG alleged that First American, at the behest of Washington Mutual (WaMu), engaged in a pattern of fraudulent and deceptive conduct against consumers. The AG alleged that WaMu prodded First American to inflate the appraised values of homes Cliff Weber is a partner in the White Plains office of Hinman, Howerd & Kattell, L.L.P. He represents community banks in regulatory, securities, corporate and transactional matters. He is a frequent contributing writer to Banking New York. 20 | Banking New York

on which Wamu made mortgage loans and that First American yielded to this coercion because WaMu was its largest client, accounting for almost 30 percent of its business. First American moved to dismiss the complaint based on federal preemption. It contended that the Home Owners’ Loan Act (HOLA) and sections of FIRREA (the Financial Institutions Reform, Recovery, and Enforcement Act of 1989) pre-empt state law either because federal law occupies the field through a comprehensive statutory/ regulatory scheme or because New York law conflicts with federal law. Both are recognized bases for preemption. The Court of Appeals denied First American’s dismissal motion and allowed the case to continue. The court traced the federal involvement in appraisal practices to FIRREA, one purpose of which was to “thwart real estate appraisal abuses…[by] establish[ing] a system of national uniform appraisal standards.” The court found further that FIRREA’s legislative history “envisaged a robust partnership with the states,” evidenced by the recognition that states are best positioned to certify and monitor appraisal practices and OTS’s relegation of appraisal complaints to state authorities. Against this background, the Court of Appeals concluded that OTS’s pre-emption regulation, which purported to occupy the entire field of lending for federal savings associations, does not apply to the AG’s complaint. Finding that the state law grounding the AG’s action would only incidentally affect federal lending operations, the court held that: “…FIRREA governs the regulation of appraisal management companies and explicitly envisioned a cooperative effort between federal and state authorities to ensure that real estate

appraisal reports comport with USPAP [Uniform Standards of Professional Appraisal Practice]. We perceive no basis to conclude that HOLA itself or federal regulations promulgated under HOLA preempt the Attorney General from asserting both common law and statutory state law …” What it means: The AG will fight federal pre-emption to preserve New York’s power to enforce state consumer protection laws.

SECURITIES AND INVESTMENTS Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. involved Section 349 of the General Business Law, the Martin Act, also known as New York’s “blue sky” law. This law grants broad remedial investigative and enforcement powers to the AG to combat securities fraud. The Martin Act is the same state law that was involved in the First American case. The issue in this second case was whether the Martin Act pre-empted the plaintiff’s common law causes of action for breach of fiduciary duty and gross negligence. Assured Guaranty, a financial guarantor that paid its client for investment losses incurred in an investment portfolio managed by J.P. Morgan, sued J.P. Morgan for breach of fiduciary duty and gross negligence, based upon J.P. Morgan’s alleged mismanagement of Assured’s client’s portfolio. J.P. Morgan moved to dismiss the complaint, asserting that the Martin Act pre-empted the plaintiff’s common law claims and that their prosecution by the plaintiff “would be inconsistent with the attorney general’s exclusive enforcement powers under the [Martin] Act.” Significantly, in an amicus brief, the AG opposed J.P. Morgan’s motion, arguing that “neither the language nor the history of the Martin Act requires pre-emption” and that public policy

favors permitting the plaintiff’s common law claims to continue alongside the AG’s Martin Act claims. The Court of Appeals examined the history of the Martin Act. Noting that “a clear and specific legislative intent is required to override the common law” (that is, judge-made law, as opposed to statutes enacted by the Legislature), the court found that the text of the Martin Act “does not expressly mention or otherwise contemplate the elimination of common law claims…” As to policy concerns, the court sided with the AG and the plaintiffs, concluding that public policy is better served by allowing private litigants to pursue common law claims in tandem with the AG’s Martin Act claims against the same defendant. What it means: The AG will fight to preserve a broad array of remedies to combat consumer and business fraud, and the limits on pre-emption give the AG more tools with which to do so.

THOUGHTS Neither of the defendants in these two cases are banks. But the meaning of the cases’ outcome for financial institutions is obvious, and perhaps ominous: emboldened by Dodd Frank, state regulators will not hesitate to investigate or litigate re: perceived consumer abuse. Note, for example the New York Department of Financial Services’ pending investigation into banks’ forced placed insurance practices, a product that is now the subject of several class actions. The consumer protection universe is a complicated and expanding alphabet soup – TILA, RESPA, TISA, EFTA, CRA, etc. And full time compliance staffs are costly for community banks. But on balance, if they protect a bank from time- and money-consuming enforcement litigation, they’ve earned their keep. ■ July/August 2012 | 21

NEW YORK COMMUNITY BANCORP 

Queens borders. Mergers with five local institutions solidified its presence throughout metropolitan New York and New Jersey. In December 2009, the bank completed its first acquisition of a failed institution, acquiring Joseph R. Ficalora the assets and liabilities of AmTrust Bank. That transaction expanded the company’s franchise into Ohio, Florida and Arizona. Months later, it completed its second FDIC-assisted transaction, expanding its Arizona franchise with the acquisition of Desert Hills Bank. While NYCB originates one- to four-family loans throughout the U.S. for sale to Fannie Mae and Freddie Mac, its primary business is making multi-family loans. New York City is an area dense with multi-family housing, and the majority of the bank’s $25.5 billion portfolio of loans held-for-investment is secured by apartment buildings that are rent-regulated and feature below-market rents. “Their loan portfolio is 70 percent multifamily and 25 percent commercial real estate. Even in their commercial real estate loans, there is usually an apartment above, with retail at the ground level,” observes Anthony Polini, managing director at Raymond James Financial in New York. The lending model remains successful: NYCB has the rare distinction of having gone 52 consecutive quarters without experiencing a loss on any loan it originated, from the first quarter of 2005 through the fourth quarter of 2008. The company earned the top ranking for U.S. thrifts with assets of $2 billion or greater in SNL’s annual performance ranking for the 12-month period ending March 31, 2011. Because tenants will hold on to rentcontrolled and -stabilized apartments, rentregulated buildings remain occupied during difficult times. But that isn’t the only reason for their continued stability, says Polini. “Not everyone in multi-family lending loses so little,” says Polini, who accredits NYCB’s success to their ability to develop a “niche

22 | Banking New York

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within a niche. They look for buildings with a high percent of rent-controlled apartments. They loan on discounted cash flows, to landlords looking to make improvements on the property. They value the loan based on current rent rolls, not projected. They grow their portfolio at the bottom of the cycle, not the top. When others leave the market, fail or retrench, NYCB’s market goes up.” “We are truly a risk-averse bank,” comments Ficalora, who has been with the bank for over 40 years. “We go out of our way to take less risk. Bad times are inevitable and we prepare for them. So when other lenders step away from this niche, we are still lending and still building our portfolio. And this has been our consistent approach over the past 40 years.” Over the decades, the bank has generated a dedicated following of brokers and landlords in the region. Driving the bank’s decisions is a highly experienced board, which values continuity and passes its values along to newer members, says Ficalora. “Given the expertise of our board, as well as their involvement, we are well positioned to make important decisions, and very well situated for the challenges of the current environment.” Ficalora reports the bank has been so consistent in its methods, it was only marginally affected by the credit crisis, and did not change much of its approach to lending in light of it. “We lost a small amount in the past three years, as compared to other lenders. We were fortunate to have a disproportionate amount of really good loans in the recent credit cycle, which verified the merits of our lending model.” Ficalora feels optimistic about the bank’s continued success. “We issued more loans [in 2011] than in any other year in our history, and we give more back to shareholders than any other bank in the country.” The company reported assets in excess of $42 billion at the end of 2011, an $833.6 million increase from the balance at the close of 2010. “We are in the business of creating a better bank,” says Ficalora, “and that is to everyone’s benefit.” ■

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