Lacewell’s Time as New York Finance Cop Marked by Missed Chances

Linda Lacewell prioritized consumer protection, promoted financial innovation, and pushed banks to combat climate change despite a distant relationship with both industry and consumer advocates during her tenure as New York’s top financial cop, agency watchers say.

Lacewell, who is leaving her post as New York superintendent of financial services on Tuesday, came into office promising to be a bulwark against the Trump administration’s rollback of consumer protection and climate change policies, as well as a champion of responsible innovation.

To those ends, she continued an existing lawsuit against an Office of the Comptroller of the Currency rule that would grant national bank charters to fintech firms, defended New York’s 25% interest rate cap on loans, and pushed insurers and banks on environmental and diversity issues.

Lacewell’s attention was split when the coronavirus struck in early 2020 and she was detailed to help New York Gov. Andrew Cuomo’s (D) response team. Even before the pandemic, many who dealt with the Department of Financial Services said the agency wasn’t as aggressive or creative as it could’ve been on consumer protection, particularly with respect to fintech firms and insurance companies.

“She seemed to genuinely want to be friendly to innovation but because she lacked a strong financial services background, she seemed to have difficulty making the hard calls,” said Todd Baker, a senior business, law, and public policy fellow at Columbia University’s Richman Center.

One example is Lacewell’s treatment of early wage access companies, a growing sector viewed as an alternative to payday loans, but one that doesn’t fit into existing regulatory frameworks for lending or money transmission. A 2019 state investigation has slowed adoption in New York, while other states have allowed the companies to operate after reaching supervisory agreements with them.

Cuomo Ties

Lacewell also exerted tight control over personnel, a hallmark of the outgoing Cuomo administration. She had limited communications with consumer advocates and the financial services industry, according to people with knowledge of the DFS’s operations under Lacewell.

Among Lacewell’s first actions was to create a set of task forces and advisory boards where DFS staff could speak with industry and consumer advocates of all stripes. Those task forces limited the amount of direct contact Lacewell had with outside parties, multiple people said.

“I would say she created a forum for us to be heard, and certainly it was nice to have the audience with her staff. I feel like she could’ve empowered her staff more,” said Kirsten Keefe, a senior staff attorney at the Empire Justice Center, a New York-based public interest legal group and think tank.

Lacewell, appointed by Cuomo in early 2019, is leaving the agency after a report from the state’s attorney general outlined several allegations of sexual harassment against the governor. Lacewell, Cuomo’s former chief of staff and a close confidante, was mentioned as advising Cuomo several times in the report and engaging in efforts to undermine his accusers.

In an Aug. 13 email to DFS staff announcing her resignation, obtained by Bloomberg Law, Lacewell said that she was departing the agency to allow Cuomo’s successor, Lt. Gov. Kathy Hochul (D), to name her own superintendent of financial services.

“We only have a moment in time to make a difference. I am proud of the work we have done together,” Lacewell said in the email.

Pushing Industry

Lacewell, a former assistant U.S. attorney for the Eastern District of New York, brought in several other former prosecutors as part of a reorganization of the DFS and pushed industry in several areas.

One was cybersecurity, where Lacewell’s predecessor Maria Vullo put in landmark regulations that became a de facto national standard for banks and other financial firms. When the rules took effect under Lacewell’s watch, she created a DFS cybersecurity unit that investigated data breaches and focused on compliance and enforcement, according to Brian Mahanna, a WilmerHale partner who previously served as chief of staff to former New York Attorneys General Eric Schneiderman and Barbara Underwood.

“It’s been one of their largest focuses,” he said.

The DFS under Lacewell was among the first U.S. regulators to prod banks and other financial firms to incorporate climate change in their operational and risk management plans. The state agency was the first U.S. regulator to join the Network for Greening the Financial System, a panel of international financial regulators, in September 2019.

Lacewell also pushed the insurance industry to take climate change into account, making her among the most aggressive state regulators on the issue.

So far, that push hasn’t resulted in much concrete action, said Robert Hunter, a former Texas insurance commissioner.

“You have to see something happening that actually impacts people rather than talking about it, ultimately,” said Hunter, now the director of insurance at the Consumer Federation of America.

In one of Lacewell’s last actions before her departure, DFS announced it expected the companies it regulates to prioritize diversifying their boards and senior ranks to include more women and people from underrepresented communities. The move includes data collection beginning later this year.

Lacewell’s DFS also modernized the BitLicense, New York’s first-of-its-kind licensing regime for cryptocurrency firms, by making it easier for companies to obtain conditional licenses and list new digital assets on their platforms.

Missed Opportunities

But the DFS under Lacewell didn’t take consumer-focused actions that regulators in other states did.

While states like California ordered auto insurers to refund premiums collected during the pandemic when people weren’t driving, New York declined to do so, Hunter said.

Baker pointed to Lacewell’s treatment of the earned wage access industry, a collection of fintech firms that partner with employers to allow employees to get early access to portions of their paychecks.

The DFS responded to reports that some industry practices might run afoul of the state’s 25% interest rate cap by announcing an industry probe in August 2019, but never moved forward with an enforcement action, Baker said.

California, by contrast, negotiated agreements with early wage access providers that allowed them to keep servicing California consumers “while imposing conduct and reporting requirements to facilitate future decisions about regulatory treatment,” Baker said.

Some forms of earned-wage access, particularly pay advance options paid for by employers as a perk for employees, are viewed as a more consumer-friendly alternative to payday loans.

Meanwhile, the market remains somewhat frozen in New York.