NY's Top Financial Regulator Talks Relief, Recovery And More

By Jon Hill
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Law360 (June 12, 2020, 10:30 PM EDT) -- As superintendent of New York's Department of Financial Services, Linda Lacewell has spent the past three months working to limit economic fallout from the nation's worst coronavirus outbreak. Now with the tricky process of reopening underway, Lacewell spoke with Law360 about the response and what else is on her agenda.

Linda Lacewell

Lacewell leads one of the most powerful state regulatory agencies in the country, overseeing a constellation of banks, insurers and other financial services companies that collectively hold trillions of dollars in assets.

Since taking the reins at DFS last year, she has sought to position the agency as a force for consumer protection, and on her watch, it has pushed into new territory with student loan servicer regulation, launched a first-of-its-kind cybersecurity division, and forged international partnerships around climate change and fintech innovation.

"We have impact across a broad market of institutions that operate with respect to the state of New York, and we have a global footprint through these coalitions as well as through our very robust foreign financial institution industry," Lacewell said. "The reach is deep and it is broad."

But the COVID-19 pandemic has presented Lacewell and DFS with their biggest challenge yet. In an interview with Law360, Lacewell discussed how her agency has responded to the pandemic, what role innovation can play in the recovery, where she sees opportunities in the year ahead and more.

This interview has been edited for length and clarity.

Given DFS' uniquely powerful position as a state regulator, how have you sought to use the agency's authority to respond to the COVID-19 pandemic? 

Leaving aside the Department of Health itself, no agency in the state of New York — and I would venture to say across the country — has been more active and more assertive with respect to mitigating the impacts of the COVID crisis, both as a public health matter and as an economic impact matter.

I've worked with the governor for many years, and I was called back from London, where I was planning to meet with [Bank of England Governor] Andrew Bailey as part of a [Conference of State Bank Supervisors] coalition out there dealing with post-Brexit issues and what the alliance opportunities might be. I was called back on March 2 and came up to Albany, where I pretty much remained with the governor's core team managing the crisis on a day-to-day basis.

DFS has taken a multitude of actions, starting with deferring mortgage payments for 90 days, which was centrally important to families who were no longer working. Given the pause that was put on external activities and the need to stay home, that's a real kitchen table issue.

We also made sure there was no negative credit impact, no negative impact on the ability to refinance the mortgage, and the ability to not have to pay a lump sum at the end of the 90 days and either refinance the loan or put it at the end of the payment period.

We then did the same thing on the insurance side, with respect to auto, homeowners and life insurance payments. We told health insurers that they needed to work with the hospitals to get rid of a lot of the bureaucratic rules and regulations, with our permission, so that hospitals could focus solely on saving lives, because this is a public health crisis. And at the time, we were going up the side of the mountain, not down the side of the mountain.

We've also been in very close touch from the beginning with banks and insurance companies with respect to their own safety and soundness, how they're faring and what their risk exposure is. That is critically important because they've got to be focused on their own risk exposure.

In that regard, I think the insurance industry is very strong. I think that we have yet to fully see what the impact is on financial institutions with respect to their risk exposure, because that may turn on default rates, and how much help they continue to get from the federal government and the like. So we're all watching everything very carefully.

How has the pandemic forced you to adjust the way DFS watches for and works on those issues?

What I say is everything that I thought before is true now only more so.

When I came into DFS, we created a research and innovation division on an equal footing with our banking and insurance divisions and our consumer division because I believe strongly that we need innovation and technology, both internally in the way that we operate and examine institutions and externally for economic development in the state of New York.

We were already talking internally about how to modernize our examination system so we can get to a place of virtual supervision, where the data is coming in continuously. We ought to be able to see the data with analytics and visuals and have an ability to risk-rate on an ongoing basis to focus our energies where they need to be. We had also just done a pilot program on remote work for our state employees.

Then we have this pandemic, and it becomes abundantly clear that the need to do the job remains, but now you've got to do it differently. Everything has been accelerated. The need to execute on these priorities of innovation and technology, virtual supervision and transforming ourselves internally to have that external impact has really advanced tremendously.

On the innovation side, for example, we had a pilot program earlier this year for insurtech called Project Whitehall, where we spoke with budding entrepreneurs in the insurtech space to help them understand the regulatory landscape and have very informal, direct conversations.

That was very successful, so we're now taking the second step of launching DFS FastForward, where we're really opening our arms to innovators and entrepreneurs. We want to work with them and hear their ideas to help them think through regulatory impact, focusing really on three fundamental areas.

One is health, such as telehealth and other types of initiatives that can help both the business community and individuals get through this postpandemic universe. Another area is personal finance, enabling households and families to deal with this new remote, socially distanced world and manage their finances.

The third and really vitally important area is small business, which is more than 90% of our business activity in the state and half of the jobs. It has been enormously affected by the shutdown, and now that the state is beginning to reopen, it's really critically important to generate ways of helping small business get back on its feet. Innovation can and must be a very big part of that.

The watchword across the board is change: change before the pandemic, change during the pandemic and change after the pandemic. It's a chance to improve the service of government, the economic opportunities for our state and the innovation and transformation of our state.

At the federal level, consumer advocates and Democratic lawmakers have been critical of federal regulators like the Consumer Financial Protection Bureau for not doing enough to protect consumers during the pandemic. How would you grade the federal response in this area?

Well, I think that the Federal Reserve has done a tremendous job, including the messaging by Chairman Jay Powell. He spoke directly and plainly about the damage that was being done to real people in the economy, and he was very clear that the Federal Reserve could provide liquidity but could not get money into the hands of real people and that, implicitly, Congress needed to do that.

It's difficult with a divided Congress, and they've obviously taken some steps with the stimulus money and the unemployment insurance supplement, but it's taking too long to get additional money out there.

I would say further with respect to innovation, we need better payment vehicles to get money to real people because the current banking and financial infrastructure does not do that.

That's where fintech and other technology solutions have a role to play. Take contact tracing — you should not need to hire an army of people in every county in order to do contact tracing. Where are the innovators with the apps that can be used to cut down on that legwork, so to speak, by identifying the individuals and making it a lot easier? We are really at baby steps with that.

So what I say to the innovation community is, you've been saying for a long time that we need to embrace innovation. Well, now everybody has no choice but to embrace innovation. So let's step up with the products and services and get them done. Let's help people through the public health crisis, the financial impact and the ability to rebuild businesses and lives moving forward.

You talk about wanting to support innovation, but is that in tension with the way DFS is fighting in court against the Office of the Comptroller of the Currency's fintech charter?

No, I think that our lawsuit supports innovation because the states are in the best position to deal with small business innovators and the impact on consumers. The federal regulators are in the best position to look at overall market policy and safety and soundness at that top level in regulating banks.

But a fintech is not a bank. They don't take deposits. That's why they're not a bank. That's like a grade-school financial premise. And that's basically what the court said: It requires deposits, so the OCC does not have the authority to provide some kind of banking charter to fintech companies.

The victory that we had in the lower court was a victory for the people, because states are better at regulating consumer protection issues and institutional issues at that type of level. They've done it for a century or more, and we'll continue to do it.

We're going to have a whole parade of initiatives to partner with fintechs. We laid the foundation last year with our new innovation division and some critical hires, and I think [fintechs] heard our message loud and clear that we're open for business. We're going to support them through the regulatory environment so that they can grow responsibly, because it's not just about innovation — it's responsible innovation, and that's what they get with us.

Can you preview some of those other upcoming initiatives?

I would keep an eye on our BitLicense review. I said before the pandemic that we were coming up on the five-year anniversary of the BitLicense, and that it was a good time to see how we can be more responsive to industry and the new business models coming into the market. I'm expecting as we arrive at the anniversary that we'll be putting out some initiatives, after having engaged in a lot of productive conversation with industry, experts and smart people from foundations, think tanks and universities.

We're very grateful for all their input, because I believe strongly that it's important to engage with industry as we move forward to deal with change. Change is hard. It's complicated and there can be unforeseen effects, so if we all talk about it together around the table, we're likely to achieve a stronger result.

Speaking of anniversaries, we're coming up on the one-year anniversary of your confirmation as DFS superintendent. What has been your proudest accomplishment in this first year?  

I'm very proud that the first thing I did was focus on recruiting a stellar a team of leaders to transform the agency. We were able to attract the best and the brightest, and that helped us to transform the profile of DFS, not just as a strong, powerful regulator and enforcer, but as one that is focused on the impact of consumers and innovation across the board — and that is open to innovation, which has not always been the reputation of DFS.

I am also proud that DFS performed in such a stellar way during this pandemic. DFS continued to operate at a high level remotely, bringing relief to people over and over again. We must have done 25 different things to help on the economic impact side and the public health side.

I believe government is service to the people. We are in trust to the people, who relay their power to government to act on their behalf. And I think people can be proud of DFS and the way it executed that power on their behalf and in their interest.

You mentioned some of the consumer relief that DFS has provided, but do banks need any relief to get through the pandemic, and if so, what is DFS doing to provide it?

We are looking for opportunities to help the financial sector because we have a complex mission. It's the safety and soundness of our financial institutions, it's consumer protection, it's economic development, and I would include in that innovation.

Now that we've had the pandemic, and the economy has been so adversely affected, it's imperative for us at DFS now to lean in more on the economic development side. And that means staying in dialogue with our financial sector to see how we can be helpful, consistent with consumer protection and reasonable regulation.

The new acting head of the OCC recently expressed concern that pandemic lockdowns and stay-at-home orders could pose potential threats to financial stability. Is that a concern you share?

Public health is paramount. The pandemic is not over. We are reopening and we have to do it carefully. We have to avoid a second wave. Nothing would be more damaging to the economy and to the financial sector, including the banks, than a second wave.

And the concept that maybe people shouldn't have to wear masks because people could rob banks — well, suffice it to say, I don't agree with that. I think the balance is properly struck by asking people to socially distance and, where they can't, to wear masks to protect others in case they are infected.

You're a former federal prosecutor, and many of your key hires in the past year have also been prosecutors. Is that a trait you've looked for when making these staffing decisions? And if so, what message are you hoping to send?

Well, DFS is a regulator and therefore it's filled with lawyers as an initial proposition. And lawyers are important not only because they understand the law and can read regulations, but because we've been taught to think with a critical and complex analysis that is very much needed in a regulatory role.

A prosecutor to my mind is a higher version of that. When you are a prosecutor, especially a federal prosecutor, you're given a great deal of discretion in the decisions that you make. Not just the cases you choose to bring, but those that you choose not to bring.

You need the critical thinking of what I would call a super lawyer, which is what the prosecutor is. You need the judgment as to what's fair and not to try to win at all costs. And you've got to be fearless, because there's a lot of pressure out there — corporate pressure, political pressure, whatever it may be with respect to the oversight of financial institutions. You need to be able to focus on the facts and the law and what's fair and strike the right balance, without fear or favor to anyone. That's what a prosecutor does.

Going into your second official year as superintendent, what are some of the big-ticket agenda items that you want to accomplish?

Consumer protection is going to continue. Innovation is going to continue to open up. At the right moment, we are going to lean in on climate change with respect to our regulated institutions once the economy is settled down a little bit, and we're going to be vigilant about protecting communities of color and the disadvantaged.

The legislature gave us authority to create a statewide office for financial inclusion, and that's going to be very active. I don't believe that redlining is a thing of the past. That's a very sad thing to have to say. Banks ought to be looking at that, and when I say that we're going to enforce our [Community Reinvestment Act] law, I do mean that.

What role do you envision for enforcement as you focus on climate change?

Well, I think climate change is more for us about a risk analysis. One of the things I take very seriously about being the head of DFS is the dialogue that we have with our industry. The issues I raise with industry, whether it's one-on-one with heads of industry or through correspondence and requests for data, tell our industry what we think is important, and it causes them to focus on it as well. That's why I speak pretty openly about things like climate change.

The U.S. has been very far behind Europe, the French and the English in particular, on climate change. In Washington, they simply deny climate change. Denial is not a life strategy. Tearing up the Paris accords is not a strategy — it only hurts ourselves.

I think that at DFS, we can help our industry to engage in dialogue about that and start to identify, measure, manage and reduce their risk. I think that we can help set a standard. That's what New York does for other states and I really hope one day federal authorities and regulators can do the same.

Do you have any TV show or book recommendations to help us stay occupied while we're at home for a few more weeks?

Well, I'm reading everything about cryptocurrency. I don't know why, but it is entertaining. I'm a fan of "Billions" and I can't help myself. I'm a former federal prosecutor, so I just went back and watched "The Wire," all seasons.

--Editing by Breda Lund.

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