This article provides background on the New York Department of Financial Services' climate risk management initiative and discusses the new guidance on how the banks and mortgage institutions it regulates should manage climate-related financial and operational risks.

The New York Department of Financial Services (NYDFS) finalized guidance on how the banks and mortgage institutions it regulates (New York Institutions) should manage climate-related financial and operational risks (the Guidance").1 The Guidance establishes extensive obligations for New York Institutions, which—even if tailored by the state to be proportionate to size and activities—may create a significant burden. This is particularly true for mortgage bankers and mortgage servicers, which, historically, have not been subject to the same prudential standards and risk management expectations as banks.

While the Guidance largely tracks the December 2022 proposed guidance, it includes some significant changes, particularly with respect to operational resilience and the roles of the governing body or board of directors and management.

The Guidance became effective upon issuance, although NYDFS has not established a timeline for implementation at this time. This article provides background on the NYDFS's climate risk management initiative and discusses the Guidance.

BACKGROUND

NYDFS is the primary regulator for many categories of financial institutions that do business in New York, including New York Institutions. As with the federal banking regulators, NYDFS is charged with promoting the safety and soundness of New York Institutions.2 In recent years, safety and soundness principles have been construed as including the establishment of enterprisewide risk management systems, although the risk management expectations for mortgage bankers and mortgage servicers are not as well-defined or extensive as those for banks. However, this situation may be changing, as evidenced by the release of model state regulatory prudential standards for nonbank mortgage servicers by the Conference of State Bank Supervisors.3

In 2020, NYDFS identified climate change as a driver of risk for the financial institutions that it regulates. This is consistent with the focus of other regulators, such as the Federal Housing Finance Agency (FHFA). In October 2020, NYDFS released initial guidance to New York Institutions on how to manage the financial risks from climate change. It seemed likely, however, that NYDFS would revisit that guidance, particularly given federal and international developments. Therefore, it was not a surprise when NYDFS proposed further guidance in December 2022 on managing climate risk at New York Institutions.

FINAL GUIDANCE

The Guidance expands on the 2020 guidance by establishing a comprehensive framework for managing climate-related financial and operational risks. As with guidance from other regulators, the Guidance defines climate-related financial risk as consisting of physical risks and transition risks, and states that New York Institutions should consider the effects of each of these types of risks on their operational resilience and their safety and soundness, as well as the particular consequences these risks may pose to their customers.

The Guidance identifies three themes to climate risk management: (i) physical and transition risk channels that give rise to climate-related financial risks, (ii) the centrality of operational resilience to safety and soundness, and (iii) the requirement to ensure compliance with all applicable consumerprotection considerations—including fair lending—in adapting the risk management frameworks to account for material climate-related financial and operational risks. The Guidance makes clear that the NYDFS expects New York Institutions to minimize and affirmatively mitigate disproportionate impacts on low- and moderate-income communities and communities of color that may violate fair lending laws.

In a change from the proposal, the Guidance elevates operational risk and operational resiliency from being elements of climate-related financial risk to being top-tier considerations in a New York Institution's response to climate change. While the Guidance does not define operational risk, it states that operational resilience is a New York Institution's ability to deliver operations, including critical operations and core business lines, through a disruption from any hazard. This theme is integrated into every part of the Guidance.

The Guidance clarifies the issue of proportionality (mentioned above) by stating that New York Institutions should take a proportionate approach to the management of climate-related financial risks based on the institution's exposure to climate risk. The guidance notes that New York Institutions vary in many ways, including size, complexity, and lines of business.

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Footnotes

1. NYDFS, Governor Hochul Announces Guidance to Manage Climate Risk For New York State-Regulated Banking And Mortgage Institutions (Dec. 21, 2023),https://www.dfs.ny.gov/ reports_and_publications/press_releases/pr202312211. New York Institutions include New York-regulated banking organizations, New York-licensed branches and agencies of foreign banking organizations, and New York-regulated mortgage bankers and mortgage servicers.

2. See, e.g., N.Y. Banking L. §§ 14, 44.

3. Press Release, CSBS Releases Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers (July 26, 2021).

Originally Published by THE BANKING LAW JOURNAL

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