[Senate Hearing 115-133]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-133


            NOMINATIONS OF JOSEPH OTTING AND RANDAL QUARLES

=======================================================================

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

                          THE NOMINATIONS OF:

Joseph Otting, of Nevada, to be Comptroller of the Currency, Office of 
                    the Comptroller of the Currency

                               __________

 Randal Quarles, of Colorado, to be a Member of the Board of Governors 
of the Federal Reserve System, and Vice Chairman for Supervision, Board 
               of Governors of the Federal Reserve System

                               __________

                             JULY 27, 2017

                               __________

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Joe Carapiet, Senior Counsel

                Graham Steele, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 27, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     1
    Senator Brown................................................     2

                               WITNESSES

Richard Burr, Senator from the State of North Carolina...........     1

                                NOMINEES

Joseph Otting, of Nevada, to be Comptroller of the Currency, 
  Office of the Comptroller of the Currency......................     5
    Prepared statement...........................................    36
    Biographical sketch of nominee...............................    38
    Responses to written questions of:
        Senator Brown............................................    59
        Senator Sasse............................................    66
        Senator Reed.............................................    70
        Senator Menendez.........................................    71
        Senator Heitkamp.........................................    72
        Senator Schatz...........................................    74
        Senator Cortez Masto.....................................    76
Randal Quarles, of Colorado, to be a Member of the Board of 
  Governors of the Federal Reserve System, and Vice Chairman for 
  Supervision, Board of Governors of the Federal Reserve System..     6
    Prepared statement...........................................    46
    Biographical sketch of nominee...............................    47
    Responses to written questions of:
        Senator Brown............................................    79
        Senator Sasse............................................    88
        Senator Reed.............................................    90
        Senator Menendez.........................................    92
        Senator Heitkamp.........................................    94
        Senator Schatz...........................................    97
        Senator Cortez Masto.....................................    98

              Additional Material Supplied for the Record

Letters submitted in support of the nomination of Joseph Otting..   115
Letter submitted in support of the nominations of Joseph Otting 
  and Randal Quarles.............................................   121

                                 (iii)

 
            NOMINATIONS OF JOSEPH OTTING AND RANDAL QUARLES

                              ----------                              


                        THURSDAY, JULY 27, 2017

                                       U.S. Senate,
           Committee on Banking, Housing, and Urban Affairs
                                                    Washington, DC.
    The Committee met at 9:59 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Michael Crapo, Chairman of the 
Committee, presiding.
    Chairman Crapo. And would the witnesses for our hearing 
please come and take their seats, and while they are doing 
that, Senator Shelby cannot be here for his questioning time, 
and so he has asked for just like a minute to make a quick 
statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Mr. Chairman, I will be real quick today.
    I just want to say I will not be here. I have got to 
preside over an appropriations hearing, but I believe that the 
President has sent us two good nominees. One, we have waited a 
long time on the Vice Chairman of Supervision for the Fed--Mr. 
Quarles, Mr. Otting--and I think they are outstanding nominees. 
I hope that you--the hearing goes well and we can expedite 
these nominees and get them in place.
    Thank you.
    Chairman Crapo. Thank you, Senator Shelby.
    All right. The hearing will come to order.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    This morning we will consider the nominations of Mr. Joseph 
Otting to be Comptroller of the Currency and the Honorable 
Randal Quarles to be a Member of the Board of Governors of the 
Federal Reserve System and Vice Chairman for Supervision of the 
Board of Governors of the Federal Reserve System.
    Welcome to both of you.
    Mr. Otting. Thank you.
    Chairman Crapo. And congratulations to you on your 
nominations to these important offices.
    I see that you have friends and family sitting with you, 
and I welcome them here today as well.
    These two positions are critically important to ensuring a 
safe, sound, and vibrant financial system, and we are fortunate 
to have two highly qualified individuals to consider for these 
posts.
    Mr. Otting brings a particular expertise and understanding 
of our banking system from a long career in financial services. 
As head of the OCC, Mr. Otting would oversee supervision of all
national banks and Federal savings associations as well as 
Federal branches and agencies of foreign banks. Having served 
in leadership positions at various financial institutions in 
the past, I am confident that Mr. Otting will bring strong 
leadership to the OCC.
    Mr. Quarles has a wealth of government and private-sector 
experience as well dealing with both domestic and international 
financial markets. He is no stranger to public service, having 
previously served in multiple top posts in the Treasury 
Department. As Vice Chairman for Supervision, Mr. Quarles would 
play a key role in developing regulatory and supervisory policy 
for the Federal Reserve System.
    President Obama never designated anyone for this role. 
Instead, former Fed Governor Dan Tarullo acted as the de facto 
Vice Chairman for Supervision in various ways, including by 
chairing the Federal Reserve Board's Committee on Supervision 
and Regulation, overseeing the Large Institution Supervision 
Coordinating Committee, and representing the Fed at the 
Financial Stability Board and in Basel, among other functions.
    In February, Chair Yellen committed in a hearing that she 
expected President Trump's nominee for Vice Chairman for 
Supervision will have the same responsibilities that Governor 
Tarullo had, including heading the Federal
    Reserve's Committee on Supervision and Regulation and 
representing the Fed at the Financial Stability Board and in 
Basel. I look forward to working with Mr. Quarles in this 
effort.
    Congratulations again on your nominations, and thank you 
and your families for your willingness to serve.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, and welcome to the 
witnesses.
    I appreciate holding today's hearing. I thank the witnesses 
for their willingness to enter public service.
    This Committee under the previous Chairman, not the 
gentleman whom I respect sitting next to me, waited 2 years and 
never did hearings on two Federal Reserve nominees. I am glad 
that this Chairman and the Democrats are willing to move 
forward on a nominee of the President, of the party that is not 
ours, unlike what this body, this Committee failed to do for 2 
long years.
    You are seeking, all of you--the two of you are seeking to 
follow in the footstep of two people, each in the Fed and OCC, 
who are dedicated public servants and did a great deal to make 
our financial system safer.
    Mr. Quarles served as Treasury's Under Secretary for 
Domestic Finance in the years leading up to the 2008 financial 
crisis. His job was to coordinate oversight of the financial 
industry and ensure Government watchdogs were looking out for 
the best interest of American taxpayers. However, many of his 
statements leading up to the crisis lead me to wonder whether 
he was asleep at the switch or willfully turning a blind eye to 
Wall Street abuses and excesses.
    Contrary to Mr. Quarles' predictions in 2006, the economy 
was--quote, was not, as he said, ``strong''; the financial 
sector was not, as he said, ``healthy''; and our future was 
not, as he said, ``bright.'' The banks were not, in fact, as he 
said at the time, ``well capitalized,'' and as a result, 
taxpayers paid billions to bail these banks out, while Mr. 
Quarles and his company turned a profit off of the crisis.
    Exotic mortgage products were not confined to, as he said, 
quote, ``upper-income individuals that can manage a sizable 
increase in their monthly mortgage payment,'' unquote. Shady 
loans were pitched to sheet metal workers in Parma, Ohio; 
school teachers in Cleveland, Ohio; servicemembers from Wright-
Patterson Air Force Base in Dayton, Ohio.
    The financial crisis devastated the Ohio families that lost 
their jobs and their homes and their savings, but for wealthy 
bank executives, for private equity investors, the crisis was 
hardly life-changing. It was an opportunity to profit by 
flipping failing banks bought at rock-bottom prices and 
foreclosing on working families, all while raking in taxpayer 
dollars.
    I have said this in Committee before. My wife and I live in 
ZIP Code 44105 in Cleveland. In 2007, the first half of that 
year, more homes were foreclosed on than any ZIP Code in the 
United States of America. So I see--I see the aftermath of that 
every day I am in Ohio, which is 4 or 5 days almost every week.
    Mr. Otting's bank made money by kicking seniors out of 
their homes and then turned around and said the Government made 
them do it. Mr. Quarles bemoaned the role of the Government as 
a player in the financial sector rather than a referee. These 
sentiments would ring a little less hollow had their banks not 
accepted $2.5 billion from the FDIC to protect them from 
losses. Apparently, they believe in Government help for Wall 
Street, just not families in ZIP Code 44105.
    In the wake of the crisis, the FDIC was forced to step in 
to share losses at failed banks, banks like IndyMac and 
BankUnited, to prevent a bigger hit on the insurance fund. Mr. 
Quarles and Mr. Otting then stepped in and made good money 
after those banks had been propped up by taxpayers.
    According to the Columbus Dispatch, Ohio's most 
conservative newspaper, 2,000 Ohioans were foreclosed on by 
OneWest in our six largest counties alone from 2009 to 2015 
while Mr. Otting served as its CEO. In fact, he was held 
accountable for robo-signings by the Office of Thrift 
Supervision, the predecessor to the agency he now hopes to run.
    My concern is not whether today's nominees have a great--
have a wealth of experience--they do--running, working for 
banks. My concern is whether they will work for American 
taxpayers and working families.
    We have made a lot of progress in the 7 years since we 
passed Wall Street reform. One-fifth of the rules, however, 
remain unfinished. Instead of finishing the job, Wall Street's 
allies in this town try to take us backward, weakening or 
eliminating important safeguards.
    We already see this at some of the agencies that have 
removed Wall Street reform from their agendas and attacked 
other
agendas--other agencies--excuse me--for doing their jobs. This 
collective amnesia reminds me all too well of 2006. Big banks 
make record profits, yet they claim they are besieged by their 
overseers, the regulators.
    The banks' refrain is to be expected. What is not 
acceptable is for the referees to join the chorus.
    I look forward to hearing from our witnesses.
    Chairman Crapo. Thank you.
    We will now--will the nominees please rise now and raise 
your right hands, and we will administer the oath. This 
constitutes two questions. First, do you swear or affirm that 
the testimony you are about to give is the truth, the whole 
truth, and nothing but the truth, so help you God?
    Mr. Otting. I do.
    Mr. Quarles. I do.
    Chairman Crapo. And then, second, do you agree to appear 
and testify before any duly constituted Committee of the 
Senate?
    Mr. Otting. I do.
    Mr. Quarles. I do.
    Chairman Crapo. Thank you. Take your seats.
    Your written statements will be made a part of the record 
in its entirety. I think you have already been advised we 
allocate you 5 minutes for an introductory oral statement.
    I again remind my colleagues on the Committee that the time 
for questioning is 5 minutes and ask cooperation of all to try 
to maintain those timeframes.
    Before you begin your statement, I invite you, if you would 
like to do so, to introduce any of your family members who are 
in attendance, and, Mr. Otting, you may proceed.
    Mr. Otting. OK. Thank you very much, Chairman Crapo.
    First of all, I would like to introduce my wife and best 
friend, Bonnie Otting, who is sitting behind me. Sometimes you 
get lucky in life, and I am forever grateful the day that we 
had the opportunity to meet. She has always been my compass in 
life, and for that, I love you.
    In addition, I would like to recognize Bonnie's father, 
Herman Espinoza, who could not be with us today due to his 
health and age of 94. Herman is a first-generation immigrant 
who came to the United States to pursue the American dream so 
his family could live a better life. One of his proudest 
moments was when he was granted his U.S. citizenship.
    My mother, Grace Ann McQuillen Otting, is with us today 
also. She has been my guiding light in life, instilling in me a 
strong moral compass and helping me appreciate the values of 
sound family life. She taught school for 35 years and was an 
inspiration to many students.
    I would also like to acknowledge my late father, James 
Otting, and mother-in-law Jessie Espinoza. My father taught me 
very many valuable lessons in life, not the least of which were 
his business acumen, focus on family, and his commitment to 
serving his community. From Bonnie's mother, I learned the 
value of kindness to others and that love can solve many 
things.
    Last, I would like to introduce my sister, Julie Ardell 
Otting, and my brother, James Otting, who are also with us 
today. Over the years, we have learned the value of love, 
companionship, and the ability to be dependent on each other.
    Thank you very much.
    Chairman Crapo. Thank you, and, again, welcome to your 
family.
    Mr. Otting. Thank you.
    Chairman Crapo. You may begin your statement.

STATEMENT OF JOSEPH OTTING, OF NEVADA, TO BE COMPTROLLER OF THE 
      CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Otting. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, it is an honor to appear before you 
today.
    I am grateful to be nominated by President Trump to be the 
Comptroller of the Currency, and if confirmed for this role, I 
would be honored to serve the citizens of the United States of 
America.
    Thank you to all the Committee Members I had an opportunity 
to meet. I enjoyed the opportunity to meet some of you for the 
first time and to get reacquainted with others, but most 
importantly, I appreciated the opportunity to learn more about 
the issues you feel are important to the people of America. For 
those who I did not get to meet, if confirmed, I look forward 
to meeting and working with you in the future.
    I grew up in a Midwestern family where my father was an 
entrepreneurial businessperson and my mother, as I indicated, 
was a school teacher. At the young age of 10, I learned the 
value of business, client relationships, and leadership from my 
father while working at his businesses, often doing the jobs at 
that age that nobody else wanted to do. I also observed how my 
father--how hard work, willingness to take risk, and family 
support led to success. I learned from my mother, who taught 
school during the day, raised three children and went to 
college at night, that hard work and dedication can make a 
difference.
    I studied at the University of Northern Iowa, following a 
family tradition of my mother, sister, and ultimately my 
brother to the university. During the summer and holiday 
breaks, my father would have me work at his businesses and 
arranged other roles, which included working at an electrical 
dam for a regional utility, commercial construction, and at a 
bakery, all great roles for building character, an appreciation 
for people and their individuality, and how leadership can make 
a difference.
    After college, I was fortunate to be chosen to be part of 
Bank of America's training program in California. It was an 
experience that forever changed my life. I gained insight into 
the banking system from the other side of the table and 
discovered how banks can help consumers and businesses with 
services, deposits, and loans. It is in this industry that I 
spent the next 34 years of my life and learned the importance 
of serving employees, the community, customers, and 
shareholders.
    My banking experience has allowed me to work for one of the 
largest banks in the United States, two well-respected regional 
banks, and a community bank. I have touched virtually every 
segment of the industry, including serving consumers, 
businesses, trust functions, private banking, investment 
services, human resources, compliance, audit, treasury, 
financial management, and operations. This experience provides 
a broad base of knowledge that would be helpful and insightful 
if I was chosen to be the Comptroller.
    In 2010 I decided to leave an executive position at an 
established financial institution because I felt Southern 
California was in need of a hometown bank. When approached 
about the idea, I knew it would be challenging and a tremendous 
amount of work but ultimately an achievement for myself and the 
company. With the assistance of many dedicated men and women of 
OneWest Bank, we were able to create the largest hometown bank 
in Southern California. It was able to grow beyond just being a 
mortgage company and being able to serve the needs of local 
businesses, families, and consumers. Hopefully, helping build 
this company is something that I will and will remain proud of.
    After a successful merger in 2015, I left the organization 
and became an entrepreneurial person returning to me roots in 
real estate and small business.
    The mission of the OCC is to ensure that national banks, 
Federal savings and loans, and foreign operations of 
international banks operate in a safe and sound manner, provide 
fair access to financial services, treat customers fairly, and 
comply with applicable laws and regulations. If confirmed as 
Comptroller of the Currency and given the opportunity to lead 
the men and women of the agency, I pledge to honor the OCC's 
mission and cooperate and work with this Committee and all 
Members of Congress.
    Thank you for your time today. I look forward to answering 
any questions the Committee may have, and I am honored to share 
this hearing with Mr. Quarles.
    Chairman Crapo. Thank you, Mr. Otting.
    And, Mr. Quarles, you may begin.
    Mr. Quarles. Thank you, Mr. Chairman.
    I would like to introduce my wife, Hope Eccles, who is with 
me here today; my parents, Ralph and Beverly Quarles; and our 
niece, Liza Burnett, who is interning here on the Hill and can 
be with us today.
    Chairman Crapo. Well, thank you, and, again, we welcome 
your family.
    Mr. Quarles. My statement?
    Chairman Crapo. Yes. Please go forward.

STATEMENT OF RANDAL QUARLES, OF COLORADO, TO BE A MEMBER OF THE 
   BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND VICE 
  CHAIRMAN FOR SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL 
                         RESERVE SYSTEM

    Mr. Quarles. Chairman Crapo, Ranking Member Brown, Members 
of the Committee, thank you for this opportunity to appear 
before you today.
    I am honored that the President has nominated me to serve 
as a Member of the Board of Governors of the Federal Reserve 
System and as the Board's Vice Chairman for Supervision, and I 
am grateful for the privilege of your consideration. And I am 
also very grateful for the support not only of my wife and 
family who are here, but of our three children, Randy, Spencer, 
and Hope Jr., who have put up with a lot in their lives from 
their father's public service.
    The Federal Reserve System occupies a central position in 
our country's policy infrastructure for promoting a strong 
economy and the stability of the financial system and 
supporting robust job growth in a context of price stability. I 
can assure the Committee that were I to be confirmed as a 
Governor of the Federal Reserve, I would be strongly committed 
to all these objectives.
    The specific position for which I have been nominated, Vice 
Chairman for Supervision, has a particular role in ensuring the 
safety, soundness, and efficient operation of the financial 
system. As recognized by the Treasury's recent report, 
regulatory policies that have been enacted since the financial 
crisis have improved the safety and soundness of the system, 
but as with any complex undertaking, after the first wave of 
reform, with the benefit of experience and reflection, some 
refinements will undoubtedly be in order.
    Former Governor Dan Tarullo, who was one of the principal 
architects of many of these reforms, said as much himself in a 
valedictory speech that he gave in April on the occasion of his 
leaving the board, stating that there are clearly some changes 
that can be made without endangering financial stability. The 
key question will be ensuring that as we continue to refine the 
system over time, we do so while maintaining the robust 
resilience of the system to shocks.
    I believe that I am well qualified to undertake that role. 
As this Committee knows, I have had experience over my career 
with the financial sector from many different points of view. I 
have been a practicing lawyer versed in the granular 
technicalities of the most complex aspects of the regulatory 
system. At the other end of the spectrum, I have been an 
investor in small community banks. I am familiar with the 
particular benefits and challenges that those institutions 
face.
    And I have been a financial regulatory policymaker under 
two different Presidents in two different decades. In fact, my 
first tour of duty in public service was during a similar 
period of response after a financial crisis, arriving in 1991 
during the clean-up phase of the savings and loan crisis and 
facing the insolvency of the FDIC's insurance fund.
    While this experience has given me substantive insight into 
the issues that the Federal Reserve's Vice Chairman for 
Supervision will face, it has also reinforced my commitment to 
what I think is the single most important characteristic of a 
good policymaker, that he be humble, humble about the 
constraints on our understanding of complex systems, humble 
about the fallibility of our judgments, and humble about how 
our assumptions and views influence even what we believe to be 
our most data-driven and analytical conclusions.
    As a consequence, were I to be confirmed for this position, 
I would approach this undertaking as I try to approach every 
task, with a continual openness to input from every source. In 
particular, I would look forward to working with the Members of 
this Committee on both sides of the aisle and their staffs to 
understand the challenges that face the financial system as 
they evolve over time.
    Thank you for the honor of this hearing, and I look forward 
to answering your questions.
    Chairman Crapo. Thank you, Mr. Quarles.
    And, Mr. Quarles, I will start and will start with you 
first.
    Immediately prior to leaving the Fed, former Governor 
Tarullo gave a speech highlighting areas where regulatory 
relief could be appropriate, in his opinion. Former Governor 
Tarullo said, one, the $50 billion SIFI threshold should be 
changed; two, the Volcker rule is too complicated and may be 
having a deleterious effect on market making, particularly for 
some less liquid issues; three, community banks should have a 
much simpler capital regime; four, the supplementary leverage 
ratio should be revisited; five, the $10 billion asset 
threshold for company-run stress test is too low; and six, the 
Federal Reserve should consider eliminating the qualitative 
portion of CCAR for all banks.
    Mr. Quarles, do you agree with all of these 
recommendations?
    Mr. Quarles. I actually do agree with all of those 
recommendations. I think they are very much in line with how I 
would approach regulation.
    Chairman Crapo. Well, thank you.
    And this second part of this question may be something you 
want to take a little bit of time and think about and respond 
later, but if you have any ideas right now, are there any 
additional areas of regulatory relief that you think it would 
be appropriate for us to look at?
    Mr. Quarles. I think that one important area that was not 
mentioned in that list is transparency. I would want that to be 
a theme of the Federal Reserve's regulatory activities, were I 
confirmed for this position.
    I think that both as an appropriate relationship between 
the regulator and the regulated and also as a matter of 
improving the content of regulation, it is important for 
regulators to be very clear about the principles that are 
driving their decisions and about the expectations they have 
for the regulated system.
    I think an example of that, although it is only one 
example, is the lack of transparency that has surrounded the 
CCAR stress test up to now. So I do think that the Federal 
Reserve can look at being more transparent about those 
activities and can do it in a way that does not in any way 
reduce the effectiveness of those tests.
    Chairman Crapo. Well, thank you. I appreciate that, and as 
you have further observations, I welcome you relaying them to 
us.
    Mr. Otting, I enjoyed meeting with you last week, and at 
our meeting, we spent some time discussing your time as an 
executive at OneWest. There has been some controversy about 
OneWest, and would you like to take a little minute or two here 
to respond to some of the questions that have already been 
raised and, frankly, to describe for the Committee your tenure 
at OneWest?
    Mr. Otting. Thank you, Chairman Crapo.
    First of all, in 2008 was when IndyMac failed. It was taken 
over by the FDIC, and it operated until March of 2009. In March 
of 2009, an investment group led by Steven Mnuchin acquired the 
bank and renamed the entity OneWest Bank. As we all know, this 
was a very difficult time in America in the middle of the 
financial crisis.
    The investment group bought IndyMac because they believed 
in an American recovery, that they could rebuild and create a 
regional bank and save thousands of jobs. Going into IndyMac 
can only be described as what a fireman feels when he gets to 
the front door of a five-alarm fire. The bank had almost 
200,000 loans in default. The men and women of OneWest Bank 
were working diligently to save the homes of thousands of 
Americans.
    While some of those who focus on the homes that were lost--
and this was clearly a tragedy--we like to focus on the 80 
percent, roughly, of the 160,000 homes that were able to be 
saved, and those Americans are in those homes today.
    We did this by having some very creative initiatives. We 
were the first to offer principal forgiveness. We lowered 
interest rates, and we modified payments and moved principal to 
the back so people could afford their homes.
    Another area the bank received attention was the servicing 
of mortgages. The bank through the acquisition of IndyMac 
assumed a large portfolio of non-owned servicing of mortgages. 
We were doing them as a third-party servicer. These portfolios 
often had restrictive agreements on what both the bank--actions 
they could take regarding those agreements.
    In April of 2011, OneWest Bank and all the large mortgage 
servicers in America signed a consent order to review and 
improve servicing practice and standards. A significant part of 
this order was the review of foreclosures and modifications 
completed in 2009 and 2010. For OneWest Bank, this involved 
reviewing 175,000 borrowers that were in foreclosure.
    Ultimately, OneWest Bank was the only bank, 1 out of 14, 
that actually completed that look-back of the foreclosures. 
This was completed by an independent third party under the 
engagement and supervision of the OCC. The results prove that 
OneWest Bank had a very low error rate, and independent 
Government reviews routinely demonstrated that we had the most 
effective loan modification of any program. These are facts 
that are available in the public arena.
    We also took litigation efforts against some of the holders 
of the mortgages to allow us to have similar actions against 
their portfolios. For any errors that were identified--and 
there were errors, but they were small and in the small basis 
points--the bank made full restitution to the borrowers to the 
tune of almost $9 million.
    If it were not for the hardworking employees of OneWest 
Bank, I believe that many more foreclosures would have 
happened, numerous job losses would have occurred, and Southern 
California consumers and businesses would have been left 
without an additional bank that could provide loans and 
products and services.
    Thank you, Chairman Crapo, for allowing me to address that.
    Chairman Crapo. Thank you.
    Senator Brown.
    Senator Brown. Thank you.
    Mr. Otting, I will start with you, and thank you for that 
explanation. I want to pursue that further.
    The Columbus Dispatch article I mentioned, one, the most 
conservative newspaper in Ohio, OneWest denied loan 
modifications or gave the runaround to homeowners like Carla 
Duncan, a social worker from Cleveland Heights who was current 
on her mortgage. As CEO of OneWest, you signed the consent 
order that I mentioned in my opening statement for shoddy 
services and improper foreclosures related to the practice of 
robo-signing, which you did not mention in your robo-signing, I 
do not believe you mentioned in your answer to Chairman Crapo. 
In other words, you permitted your bank to break the rules 
while in the process making life harder for homeowners like Ms. 
Duncan across the country trying to stay in their homes. How do 
we trust that you will not allow banks to skirt the rules and 
harm their customers as their regulator?
    Mr. Otting. Thank you, Senator Brown, for the question.
    First of all, just for a correction, I did sign the consent 
order, but we did not confirm or deny the accusations in the 
consent order. The follow-up review reviewed 175,000 borrowers. 
In the area of did we not provide modifications, I believe the 
number--I could be wrong--was roughly 35 out of 29,000 
modifications that were reviewed.
    We did make 29 mistakes, and I apologize to the American 
people for that. But the error rate was incredibly low, and so 
my viewpoint is if you look at the actual facts, there is a 
false narrative out there about the OneWest Bank servicing 
operation. I think you would walk away feeling very good about 
our operations.
    Senator Brown. Well, it is a false narrative to you, not to 
those that lost their homes. More on that in a moment.
    Mr. Quarles, year before the beginning of the financial 
crisis while in charge of the Office of Treasury, responsible 
financial regulation, you downplayed the risks emerging in the 
financial sector. You touted its resiliency. You said, ``I can 
assure you that my colleagues and I at Treasury are doing 
everything in our power to make our financial system even more 
resilient in the future.''
    In retrospects--in retrospect, do you believe you and your 
colleagues at Treasury did everything you could have and should 
have to prevent the crisis, and what more--if not, what more 
should have been done? And be as precise as you can.
    Mr. Quarles. Thank you, Senator. I appreciate that question 
because I have, obviously, reflected since the crisis on the 
measures that were taken leading up to the crisis.
    We were aware--I guess the right way to put it is that we 
believed that even given the information that we had from the 
regulatory system that the risks that were building up in the 
system were manageable, we did believe that there were measures 
that could be taken to improve the resiliency of the regulatory 
system and the ability of the regulatory system to understand 
risk, and we were beginning a process of presenting a program 
for change that would have improved the regulatory system.
    With the benefit of hindsight, we could have been more 
aggressive in pushing that program forward and in putting those 
ideas forward.
    As I think you can appreciate and all the Members of this 
Committee can appreciate, in advance of the financial crisis, 
the political obstacles to the changes that we thought would be 
appropriate to improve regulation would have been formidable, 
and so we were proceeding cautiously. With the benefit of 
hindsight, I would say it was probably too cautious to putting 
forward----
    Senator Brown. Right. But implicit and political obstacles 
are the power of--and the influence of Wall Street on this 
Committee?
    Mr. Quarles. I would not say it was so much the power and 
influence of Wall Street on this Committee. I think, you know, 
one of the ways in which I think that on a clean slate, 
financial regulation could be improved would be to have a much 
simpler, clearer, less kaleidoscopic construction of the 
regulatory system that would make it easier for the regulators 
to understand where risk is and where it is not.
    The political obstacles to that were less those of the 
industry versus the Committee and more those of people of 
goodwill having differing views in a time that was not a crisis 
as to what the right answers were. It had been a longstanding 
question that changing those rules was going to be difficult.
    I do think it is a very fair question to ask what could we 
have done differently, and I think my answer would be we could 
have moved more quickly. We could have been more aggressive in 
pushing some of these regulatory changes that we wanted to push 
but believed would be politically difficult.
    Senator Brown. And last, back to you, Mr. Otting. Treasury 
released its report recently on financial regulation as 
required by the President's Executive order. Much of that 
report focused on rolling back rules for the Nation's largest 
banks, including decreasing capital requirements. Do you agree 
we should roll those rules back for the Nation's largest banks?
    Mr. Otting. I believe there were a lot of recommendations 
in that report, and I do support a number of those specifically 
as they deal with community banks and small banks across 
America.
    Senator Brown. Yeah, but that was not my question. 
Specifically, I knew--I knew from our individual conversation 
that was the case, but----
    Mr. Otting. I think the capital structure that we have in 
place today is highly complex, and I think it needs to be 
examined. And I would be--welcome to sit down and have dialogue 
with you on that.
    Senator Brown. Well, you said in our conversation on 
Tuesday that you think the rules for the largest banks are 
appropriate and should not be weakened.
    Mr. Otting. Well, I said I--overall, I think that the 
regulatory system we have in place today has resulted in banks 
understanding their risks much better than they ever have, and 
we have better capital levels.
    I do think that we have created--you know, in 150 years, we 
have had many provisions and laws that have come through the 
banking system. Seven years ago when Dodd-Frank was put in 
place, I think it has opened up to look at some of the 
characteristics, but I am a believer of a well-capitalized 
banking system and a banking system that understands its risk.
    Senator Brown. Well, I am concerned that a President who 
says we should drain the swamp, as he surrounds himself with 
him almost looking like a Wall Street executive retreat in his 
President's Cabinet, I am concerned about a report coming from 
Treasury suggesting decreasing capital requirements.
    I will just close with this. I just hope that you are not 
part of any effort to weaken capital requirements. That clearly 
is the wrong direction for a stable banking system.
    Chairman Crapo. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman, and thank you, 
gentlemen, for joining us today.
    Let me start with Mr. Quarles. Thanks for visiting with me 
recently in my office. I enjoyed our discussion, and I want to 
follow up a little bit on one aspect of that which relates to 
the resolution authority of Dodd-Frank.
    As you know, I made it clear, among the many very serious 
flaws in Dodd-Frank, one that has bothered me from the 
beginning is the resolution authority that grants very 
disturbing discretion to regulators in the case of a failing 
institution and puts taxpayers at risk for having to bail out a 
failing financial institution.
    It has always been my view that the right way to resolve 
the failure of a big financial institution is to do it in 
bankruptcy, where the losses would be taken by shareholders and 
unsecured creditors, where creditors could know with complete 
transparency how they will be treated, because it is a matter 
of precedent and law, and where similarly situated creditors 
would be treated the same way. These are fundamental principles 
of bankruptcy, and yet it seems to me as long as we have this 
resolution authority and a bankruptcy code that needs to be 
modified, there is a danger that in the event that a big 
financial institution gets into trouble, we would have--we 
would use this flawed authority.
    So I have legislation that would amend the bankruptcy code. 
It is designed to enable bankruptcy to work for even a very 
large, very complex financial institution, and I would just 
like to get your thoughts on whether, A, you believe it is 
necessary and appropriate to amend the bankruptcy code for this 
purpose and whether you would work with me and this Committee 
to try to get to that goal so that we would never have to worry 
about taxpayers having to bail out a financial institution 
again.
    Mr. Quarles. Well, thank you, Senator.
    I think a theme throughout my career of my approach to 
policymaking and particularly to regulation has been that the 
discretion of policymakers and regulators--particularly 
regulators--should be as constrained as possible, and where 
discretion remains, those regulators should be as clear as 
possible about how they will exercise it in the future so that 
their actions are predictable and there is less uncertainty as 
to what their policy will be.
    In connection with that, I do think that it is a very 
valuable effort. Indeed, the right way to approach continuing 
to improve the environment for the resolution of financial 
institutions is to improve the operation of the bankruptcy code 
so that a financial institution could fail in the same way that 
any other institution fails, and the rules surrounding that 
would be understood as they are for any other institution with 
as little exercise of discretion as is possible.
    I think that, as you have noted, there is more work that 
needs to be done to improve the bankruptcy code, a lot of 
questions that surround how one can do that, but I believe that 
is achievable, and I would be happy to work with you and your 
staff on that effort.
    Senator Toomey. Great. Thank you.
    I am going to run out of time, so I just want to be 
quickly--I want to touch on CCARs. And, Mr. Quarles, you 
mentioned earlier, if I understood you correctly, that you 
think there should be more transparency in the methodology.
    I just want to mention for the Committee's benefit a 
reminder of the GAO report on CCARs. In addition to--we know 
how incredibly costly it is to comply with this regime, but the 
models and testing procedures are not transparent according to 
GAO. But not only that, the Fed has not done enough to assess 
whether CCAR is inadvertently pro-cyclical, and, of course, if 
it is, there is a danger that it actually could contribute to 
systemic risk through the dynamic of the crowded trades that 
you have alluded to.
    So I would just urge you to seriously consider that 
possibility and the extent to which really CCAR is even 
necessary anymore, especially given the DFAS mechanism.
    Very quickly, Mr. Otting, if I could just ask you a 
question. One of the other things about Dodd-Frank that I find 
very problematic is the SIFI designations. I object to the 
concept, but I acknowledge that it is the law.
    Nevertheless, the process by which the FSOC has made the 
designations has been so badly flawed that, as you know, a 
court has ruled that it is impermissible in at least one case.
    You would be a member of the committee making designations. 
I think it is irrefutable that the process has been opaque. 
That institutions subject to the designation do not know the 
criteria by which they are designated. That there is no well-
defined process by which a firm could choose to discontinue the 
activity that would cause a designation. There is no well-
defined process for a de-designation.
    Given all of these fundamental flaws, which at least one 
court has agreed, do you think it is appropriate that there 
would not be any additional nonbank SIFI designations until at 
least this process is changed?
    Mr. Otting. Senator Toomey, first of all, I agree with all 
the points that you made, and I think it--both of us, as a 
Committee, to sit down and bring greater definitions to those 
before we would designate another SIFI. So I do agree with you.
    Senator Toomey. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    So after the 2008 crisis, Congress put the Fed in charge of 
supervising the biggest banks and created a new position, this 
Vice Chair for Supervision that was supposed to lead that 
effort. That means if you are confirmed to this position, Mr. 
Quarles, you will have more influence than any other person 
over the regulation of the big banks.
    Now, given that enormous power, the number one thing we 
need from the Fed's Vice Chair for Supervision is a 
demonstrated willingness to stand up to the interests of the 
big banks that threaten the financial institutions, but when I 
look at your 30-year career spinning through the revolving door 
of the private sector, Mr. Quarles, I just do not see it. You 
have got 15 years representing big banks at a New York law firm 
working on some of the mergers that created the too-big-to-fail 
banks that we have today. You have two stints at the Treasury 
Department, including shortly before the 2008 crisis, where you 
insisted that the banks were well capitalized enough to survive 
a housing downturn--it turns out they were not--and more than a 
decade in private equity and investment management, where you 
have argued repeatedly for weaker rules for the biggest banks. 
So that is not a track record that should give Americans a 
whole lot of confidence in you.
    But what I want to do is try to look ahead on this. The big 
banks and financial firms have a lobbying organization called 
the Financial Services Roundtable, or FSR, and it has no 
community bank members. It is purely the big guys. FSR recently 
submitted a 124-page wish list of financial rule rollbacks for 
the Treasury Department.
    So I want to go through some of these and see how your 
views line up with the views of the big banks. So first one 
here, FSR would like to see the stress test relaxed for the Fed 
and give it stress test models to the banks before the actual 
test. They want to see the test ahead of time. Do you support 
those changes?
    Mr. Quarles. Well, not having read the FSR's report, I do 
not know all of the details about the----
    Senator Warren. Wait, wait. Let me get this straight. You 
have been nominated to be the head of Fed Supervision, and you 
have not read this from the FSR?
    Mr. Quarles. I have not read that report.
    Senator Warren. OK. So we will ask the question, then, more 
generally: Do you think that stress test standards need to be 
relaxed and the banks need to see them in advance?
    Mr. Quarles. I think that transparency around the content 
of the test with the public in general, which would include the 
regulated entities, is a benefit.
    Senator Warren. So they ought to be able to see the test in 
advance?
    Mr. Quarles. I believe that that would----
    Senator Warren. And you think they ought to be relaxed?
    Mr. Quarles.----improve the conduct of regulation.
    I do not have a view as to whether they ought to be 
relaxed----
    Senator Warren. All right.
    Mr. Quarles.----in part because I am not--because of the 
lack of transparency, I am not perfectly familiar with all of 
the content of the test.
    Senator Warren. OK. So you think they ought to see the test 
in advance, which is what they are asking for, and you do not 
have an opinion on whether or not they ought to be weakened.
    How about capital? FSR would like a bunch of changes to the 
calculation of how capital and leverage requirements that would 
have the effect of lowering--all of which would have the effect 
of lowering these standards. Do you believe that capital and 
leverage standards should be lowered?
    Mr. Quarles. I do not have a view as to whether they should 
be higher or lower.
    I do think that more can be done to ensure that in setting 
the capital for the full range of institutions in the system 
that we can be more sensitive to the character of each 
institution in determining the appropriate----
    Senator Warren. So you think it should be lowered for some 
but raised for others?
    Mr. Quarles. Again, in advance of the analysis, I could not 
tell you----
    Senator Warren. So you do not have an opinion on that.
    What about the Volcker rule, which prohibits the banks from 
making risky bets with their own money? FSR wants to cut the 
rule back so that the banks can make more of those kinds of 
investments. Do you agree with FSR that the Volcker rule should 
be cut back so that it should place fewer restrictions on the 
banks?
    Mr. Quarles. I agree with former Governor Tarullo that the 
complexity of the rulemakes it very difficult to apply, and 
that we should work to try to simplify the application of the 
rule.
    Senator Warren. Well, now, that is easy. If you just want 
to simplify it, you would support Glass-Steagall. Right? Do you 
support Glass-Steagall?
    Mr. Quarles. Well, as you know, Senator, the key provisions 
of Glass-Steagall are still in force----
    Senator Warren. Well----
    Mr. Quarles.----which are Sections 16 and 21 of the Banking 
Act----
    Senator Warren. No, no.
    Mr. Quarles.----of 1933.
    Senator Warren. The key provisions of Glass-Steagall are 
not enforced any more. They have been repealed.
    Mr. Quarles. No. The ancillary provisions, which are 
Section 20 and 32----
    Senator Warren. Which are the ones which permit the big 
banks----
    Mr. Quarles.----of the Banking Act of 1933----
    Senator Warren.----to be able to engage in these combined 
activities that Glass-Steagall were supposed to separate. That 
is what is now permitted.
    Mr. Quarles. Well, the core provisions actually prevent the 
bank from engaging in that, so Section 16 and 21----
    Senator Warren. So you think we are perfectly protected if 
we took away Volcker? Is that what you are saying, and we do 
not need Glass-Steagall?
    Mr. Quarles. I am sorry. I did not catch the first part of 
the question, ma'am.
    Senator Warren. You are saying we are protected if we took 
away Volcker and did not put Glass-Steagall in its place? That 
is why nothing went wrong in 2008?
    Mr. Quarles. Well, I do not think that the re-imposition of 
those--of the ancillary provisions governing affiliates, which 
are Sections 20 and 32, would, in fact, have made a difference 
in the financial crisis. But, usually, when people are talking 
about today about the re-imposition of Glass-Steagall, they are 
talking about ensuring that the depository institution is 
protected from risks in another part of a large financial 
institution.
    Senator Warren. You know----
    Mr. Quarles. I think that is a very worthy goal.
    Senator Warren. I am over my time, and so I want to be 
respectful here.
    But I am just looking for any area where you disagree with 
the major financial institutions, and I am not hearing it. The 
primary purpose of this job is to be able to stand up to the 
largest financial institutions in this country. You have no 
history of having done that, and sitting here right now, all 
you can say is, gee, I have not thought about that.
    We just went through a devastating financial crisis less 
than a decade ago because powerful people in Government let 
powerful financial institutions call the shots. We cannot go 
down that road again. We need people in Government who are 
willing to stand up to large financial institutions, and we 
need people who have a demonstrated history of that. And you 
simply do not, Mr. Quarles.
    Thank you. I apologize for running over, Mr. Chair.
    Chairman Crapo. Thank you.
    Senator Rounds.
    Senators Rounds. Mr. Quarles, I am just curious, and I will 
give you a chance to kind of respond on the comments here. Do 
you believe that a strong regulatory process is appropriate?
    Mr. Quarles. Absolutely, Senator.
    Senator Rounds. Do you believe that a regulatory process 
which clearly defines what the rules are is appropriate?
    Mr. Quarles. That, I also agree with.
    Senator Rounds. Do you believe that the regulations should 
be such that the--that there is an understanding of what the 
expectations are of any bank, regardless of its size, should be 
in place?
    Mr. Quarles. I think that that is not only appropriate; it 
is necessary for the regulations to be effective.
    Senator Rounds. Do you think that there are regulations in 
place today that make it difficult for financial institutions 
to understand the direction that the regulators expect them to 
go without going back in and asking for additional information 
time and time again?
    Mr. Quarles. I think that is true in many areas of the 
current system.
    Senator Rounds. I have been aware of concerns that certain 
bank risk exposure regulations have inadvertently impacted 
liquidity in the listed options market. The regulations fail to 
account for the risk-mitigating nature of options and are 
impeding access to central clearing and hampering market 
liquidity by artificially constraining clearing members and 
their customers who make markets. It is concerning when markets 
that effectively provide portfolio insurance to investors are--
well, let us just say adversely impacted by banking regulations 
because the regulations are not sufficiently precise to account 
for the offsetting characteristics of options.
    Are you committed to exploring ways to remedy this unforced 
error, including via interpretive relief from the Board of 
Governors?
    Mr. Quarles. I think that would be a very appropriate area 
for us to look into. I do not have all of the details around 
that
question, but I think that question and questions like it are 
important areas for the board to examine.
    Senator Rounds. Post-crisis, our Nation's banks, especially 
the largest, hold significant levels of capital. Governor 
Powell and Secretary Mnuchin have echoed this in the past while 
testifying before Congress. Additionally, you recently noted 
that you do not believe that we will likely--that you believe 
that we will likely not see another financial crisis in our 
lifetimes due to post-crisis reforms.
    In June, the Fed announced that all banks had enough 
capital to pass a stress test, including both the quantitative 
and the qualitative elements of CCAR, and you did not object to 
a single bank's capital plan.
    I have heard discussion of potential Fed proposal 
incorporating G-SIB surcharge into CCAR as the new post-stress 
minimum capital requirements. Would you support the inclusion 
of the G-SIB surcharge in CCAR?
    Mr. Quarles. I would have to look at that question in more 
depth, but at this point, I think that is something that is 
definitely worthy of looking at.
    Senator Rounds. Would you drop us a note back on that as a 
take-it-for-the-record, please? Would you?
    Mr. Quarles. Yes, I would be very happy to.
    Senator Rounds. Thank you.
    I would like to--for both of you, I would like to discuss 
questions that I recently had the chance to ask Federal Reserve 
Governor Powell at another recent hearing. I had the 
opportunity to ask Governor Powell about the supplemental 
leverage ratio, or SLR. As I told Governor Powell, it is a 
blunt instrument that fails to account for very safe 
investments like cash deposited at central banks.
    In particular, institutions that provide custodial services 
have raised concerns that the SLR fails to account for very 
safe investments like cash deposited within the central banks.
    In response to one of my colleagues on the House side, 
Chairman Yellen acknowledged that these concerns, in a question 
for the record, and said that the Federal Reserve Board is 
actively considering these suggestions and other suggestions 
about how to improve the cost-benefit balance for our leverage 
ratio requirements.
    Can both of you discuss any suggestions you would have to 
improving the ESLR and--or the SLR and the ESLR? My concern is 
this. Mutual funds right now--if we want mutual fund investors 
to have the least expensive approach, then one of the ways we 
do that is by considering whether or not investments in a 
central bank, like these do--they invest back in, in 
treasuries, in a custodial nature--should we include or should 
we take that out of the denominator in determining what the 
ESLR is or the SLR is? Is that something that should be fairly 
considered, just to bring down the price to investors in mutual 
funds?
    Mr. Quarles. Well, I think that the practical consequences 
of those regulations, of any regulations and particularly with 
respect to the leverage ratio regulations, should definitely be 
taken into account in determining the character of the 
regulation.
    So in looking at that proposal as well as a whole range of 
proposals about how to address the leverage ratio, I think that 
that is something that we ought to be looking at. Yeah.
    Senator Rounds. Sir?
    Mr. Otting. Senator Rounds, thank you much for the 
question.
    I too think it should be examined, as we discussed in your 
office. I think the complexity that we built via Dodd-Frank and 
the capital structure makes it incredibly difficult for banks 
to bounce around between all the categories--risk base, 
leverage--and I do think that when you look at some of the 
assets that are held on the balance sheet, they really have 
limited to no risk. And I do think it is impairing certain 
segments of the industry, as you described.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Cortez Masto.
    Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
    Gentlemen, welcome. Thank you for your willingness to 
serve. Welcome to your family members as well. I appreciate the 
opportunity to meet with you in person. Sorry our meeting had 
to be rescheduled, and so always look forward to that 
opportunity.
    But, Mr. Quarles, I would like to start with you, and let 
me just say I think your actions in the past are important for 
us to figure out how you are going to pursue your roles 
currently that you have been nominated for. So some of the 
questions are going to be some of the past actions and the work 
that you have done in the past.
    So, Mr. Quarles, one of the things I want to understand, 
that you have been a member of the board of directors at FINRA 
since 2015. Correct?
    Mr. Quarles. Yes, ma'am.
    Senator Cortez Masto. OK. And FINRA is the organization 
that is supposed to serve as a watchdog for Wall Street. You 
qualify as the, quote, ``public Governor'' on FINRA's board, 
which is the slot that is meant to represent the investing 
public when it comes to how FINRA operates. Correct?
    Mr. Quarles. That is correct, ma'am.
    Senator Cortez Masto. OK. And as the qualified--as a public 
interest representative, you qualified even though you have 
investments in lines of credit from many firms regulated by 
FINRA, and you also serve, currently on the board of directors 
for the U.S. Chamber of Commerce, during that time. Is that 
correct?
    Mr. Quarles. Yes, ma'am.
    Senator Cortez Masto. OK. And the Chamber of Commerce has 
repeatedly sued regulatory agencies to overturn investor 
protections on behalf of its Wall Street members. If confirmed 
to the position at the Fed, how can we trust you to balance the 
public interest against the interests of Wall Street, given the 
obvious conflicts in your current role? Can you explain that to 
me?
    Mr. Quarles. In the same way that in representing the 
public on the FINRA board, I have done that without any 
influence from or even discussion with the Chamber of Commerce. 
I think that it is possible to exercise responsibilities, given 
the nature of the duties that a person has.
    Senator Cortez Masto. So when the Chamber of Commerce, 
which includes Wall Street, some of the Wall Street's biggest 
banks and accepts their contributions, sues to overturn rules 
on their
behalf, you are--are you in a role of supporting those actions 
by the Chamber of Commerce, even though you sit on the opposite 
side as a public interest representative with FINRA?
    Mr. Quarles. If there were any specific decision that 
involved a matter of which the Chamber of Commerce was a party, 
I would recuse myself. That has not arisen while I have been on 
the board.
    Senator Cortez Masto. So you have never recused yourself 
while you are on the board of the U.S. Chamber and/or FINRA in 
relationship to your interactions on both?
    Mr. Quarles. No matters have arisen that would have 
required that.
    Senator Cortez Masto. OK. And if confirmed to the Fed, will 
you use your position to try and stop the CFPB's arbitration 
rule?
    Mr. Quarles. I do not believe I have a role with respect to 
that.
    Senator Cortez Masto. So that is a no?
    Mr. Quarles. I have not given any thought as to how I would 
affect that. The CFPB is an independent regulator and 
appropriately so. With regard to it, I think that the robust 
enforcement of the consumer rules is an important policy 
matter, and I certainly support that.
    Senator Cortez Masto. Thank you.
    Did you ever use your slot on FINRA's board to advocate for 
the Chamber's position on arbitration?
    Mr. Quarles. No, ma'am.
    Senator Cortez Masto. OK. Thank you.
    My time is running low. So, Mr. Otting, let me jump back to 
some questions in a follow-up to the conversation you were 
having with Senator Brown.
    If I understand this correctly, you said that 160,000 homes 
were saved, and when you say 160,000 homes were saved, they 
were actually modified? People were able to stay in their 
homes. Is that correct?
    Mr. Otting. They did not go through foreclosure. That is 
correct.
    Senator Cortez Masto. OK. And then 175,000 nonbanked--non--
I guess homes that were not in your portfolio were the subject 
of a separate modifications, or can you explain that $175,000 
figure you cited?
    Mr. Otting. There were 175 loans that went through the 
consent order look-back, which was done by an independent 
consultant under the guise of the OCC.
    Senator Cortez Masto. OK. And it is true that OneWest is 
the only bank that did not settle the independent foreclosure 
review. Correct?
    Mr. Otting. That is correct.
    Senator Cortez Masto. OK. And so can you----
    Mr. Otting. Well, can I----
    Senator Cortez Masto. Sure, go ahead.
    Mr. Otting. The other bank settled. OneWest Bank was the 
only one who completed the look-back that had the actual 
results associated with the consent order.
    Senator Cortez Masto. OK. Thank you.
    And can you tell me how many actual loan modifications did 
OneWest provide to Nevadans during your tenure while you were 
there? Do you know?
    Mr. Otting. I do not have that number.
    Senator Cortez Masto. OK. I appreciate that.
    Can you--let me just say this. As the Comptroller of the 
Currency, you are going to be entrusted with tremendous 
responsibility. The decisions the Comptroller makes impact 
whether borrowers can keep their homes or whether we have 
another economic crisis, as you well know, and we have talked 
about this when we were together.
    Can you point to a single area where you think additional 
consumer protection is needed?
    Mr. Otting. I think there is a lot of discussion today 
about small-ticket dollar amounts for lending activities, and 
what came out of Dodd-Frank was a fairly, highly complicated 
product that almost requires you to underwrite a $2,500 loan, 
like a mortgage. And I think that is one area that would 
require a lot of input and discussion to be able to make those 
products available. We have kind of pushed those out of the 
banking sector, and I think they should be actually back into 
the banking sector, where oversight and regulation can allow 
those to be offered in a fair and economic manner.
    Senator Cortez Masto. To the exclusion of the CFPB?
    Mr. Otting. No, not to the exclusion. In participation.
    Senator Cortez Masto. OK. Thank you.
    I notice my time is up. Thank you very much.
    Mr. Otting. You are welcome.
    Chairman Crapo. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman, for holding this 
hearing today, and thank you to the nominees for joining us 
today.
    At their core, both the Federal Reserve and the OCC are 
bank regulators, yet due to nonbank SIFI designations from 
FSOC, they now oversee a huge chunk of the insurance industry. 
Having sold insurance for more than 20 years and being well 
versed in the business, I think it is time to reconsider the 
designation process. The President agrees per his executive 
order earlier this year.
    Insurance has primarily been regulated on the State level, 
and nonbank SIFI designations are a deviation from a system 
that has worked well for about 150 years.
    FSOC and its Federal regulators lack an understanding of 
the differences in business models between banks and insurance 
companies. Insurance firms simply do not pose the same systemic 
risk, but the added costs associated with a council's 
designations have an outsized impact on the economy at large.
    For example, life insurers are the largest investors in 
corporate bonds in the United States, the same bonds that fund 
business growth in South Carolina. They also manage 20 percent 
of all defined contribution plan assets and 14 percent of IRA 
assets. Many Americans have entrusted life insurers with their 
savings.
    I will ask Mr. Quarles first and then Mr. Otting: Does the 
business of insurance pose the same systemic risk as banking?
    Mr. Quarles. Well, I think that it would be difficult to 
say that the business of insurance posed the same systemic 
risks as banking. I mean, principally, as is also obvious, 
systemic risk is created when you have organizations that have 
liabilities that can run, short-term liabilities that can all 
be called very quickly, that are funding activities that are 
very interconnected with the rest of the system and usually of 
a size that the disruption of that interconnectedness would 
result in severe problems for the system.
    Insurance companies--and particularly life insurance 
companies--I guess in some theoretical way could have a run if 
all of the policyholders showed up and asked for the cash 
surrender of the value of their policies at the same time, but 
that is such a remote and historically unprecedented 
possibility that I do not think it is a practical one to 
consider.
    So I think that the risks that are posed by insurance 
companies are quite different.
    Senator Scott. Thank you.
    Mr. Otting?
    Mr. Otting. Senator Scott, thank you for the question.
    I agree with Mr. Quarles. I do think the funding source--
and as long as the core business is in line with the mission of 
an insurance company, I do not agree that it poses the same 
risk as a financial institution.
    Senator Scott. Thank you.
    Do you support legislative efforts to ensure there is 
always a voting member on FSOC with insurance expertise?
    Mr. Otting. Absolutely.
    Mr. Quarles. I think that would be wise.
    Senator Scott. Thank you.
    I am looking forward to our Chairman and our Ranking Member 
continuing their efforts to make this a reality.
    For regulatory purposes, the Federal Reserve often uses 
arbitrary asset thresholds like $250 billion or $50 billion or 
$10 billion. These levels seems to come with very little rhyme 
or reason. At the same time, multiple regulations, which 
utilize these thresholds, including Basel framework, include 
waiver language that allows the Fed to exercise discretion on a 
case-by-case basis. In other words, you can tailor regulations 
as you see fit.
    Mr. Quarles, would you use this discretionary power under 
the law, and if so, under what circumstances?
    Mr. Quarles. Well, I think that one of the important 
general themes of regulation is ensuring that the character of 
the regulation is adapted to the character of the institution 
being regulated, what has become the word ``tailoring.'' I 
fully support that, and I think that it is not only appropriate 
to recognize the different levels of risk and types of risk 
that different institutions in the system pose, but then it 
also makes for better and more efficient regulation. And 
efficient regulation allows the financial system to more 
efficiently support the real economy.
    So I do think that we should look very carefully--and will 
certainly be an advocate for that were I confirmed--at 
tailoring capital regulation and other types of regulation to 
the particular character of the institutions that are 
regulated, and that includes their size, and it includes other 
aspects of their character.
    Senator Scott. Thank you very much.
    Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and a special 
thank-you to the Honorable Senator from Indiana for letting me 
go ahead of him. Thank you very much. I appreciate that.
    First of all, Mr. Otting, Mr. Quarles, thanks for both 
being here today. I very much appreciate it.
    Mr. Otting, when you were in my office earlier this week--
and thank you for coming in--we talked a little bit about 
NeighborWorks, and at that moment in time, you were not up to 
speed on it. I told you I was going to ask you some questions 
on NeighborWorks at this hearing, and hopefully, you have 
gotten up to speed. Have you had a chance to take a look at it?
    Mr. Otting. I have. I went to graduate school over the last 
24 hours.
    Senator Tester. Oh, good for you.
    [Laughter.]
    Senator Tester. Well, the question is, is that, What is 
your view on NeighborWorks? You are going on--you are going to 
be a director of that program. It is an affordable housing 
program. What is your view of it?
    Mr. Otting. Senator Tester, we--there is a representative 
from the OCC. It is not currently the acting nor was Mr. Curry 
in that role when he left, but it is one of the more senior 
persons that does sit on the board and actually is the 
chairman----
    Senator Tester. Yeah.
    Mr. Otting.----of the NeighborWorks.
    I would say, you know, I have spent a lot of time. I have 
noticed--you know, I went and looked at the budget.
    Senator Tester. Yeah.
    Mr. Otting. It was $200 million last year. One-hundred-
eighty of it came from appropriations. About 20 of it came from 
really foundation gifts.
    I also went out and spoke with people in Nevada last night 
at a very late time on the east coast here and learned about 
the organizations----
    Senator Tester. Yeah.
    Mr. Otting.----what they do about going back to the 
communities really across the United States and offering 
consultative and----
    Senator Tester. Yeah.
    Mr. Otting.----data of how you do that.
    Senator Tester. Yeah.
    Mr. Otting. And I think, you know, you know my perspective 
on affordable housing.
    Senator Tester. Yeah.
    Mr. Otting. It is a critical element of our economy, and I 
also think we have to find a way for an organization like 
NeighborWorks to be able to maintain their place in America.
    Senator Tester. OK. And so I assume by your previous 
statement that you do not intend to be the rep on the 
NeighborWorks?
    Mr. Otting. I did not say that. I was just clarifying when 
you said----
    Senator Tester. OK.
    Mr. Otting.----that I was on that.
    Senator Tester. Oh, yeah. I am sorry. I meant to say your 
position.
    Mr. Otting. Yes.
    Senator Tester. Do you intend to fill that, or do you 
intend to appoint?
    Mr. Otting. It is a role I have historically played in the 
communities that I lived in.
    Senator Tester. Good.
    Mr. Otting. And so I would be honored to be considered for 
that.
    Senator Tester. Good.
    As you well know, the President slashed the budget of 
NeighborWorks from $140 to $27 million, also cut a lot of other 
affordable housing programs.
    I asked you this in the office, and I will ask you this. If 
these are programs you believe in, are you willing to push back 
and talk about the positive impacts of these programs and 
potentially help us get to a point where the funding is at a 
reasonable level?
    Mr. Otting. I would be happy to.
    Senator Tester. I appreciate that, and I appreciate that 
answer too, by the way, because oftentimes we do not get that 
straight-up kind of stuff. I appreciate that.
    The next line of questioning is something we also took in 
my office that is critically important for my support of you. I 
will just tell you this, because when we talked about robo-
signing in my office, your exact words were ``This is a false 
narrative.''
    And I went back and I looked at the consent orders with the 
Office of Thrift Supervision, which no longer exists, but which 
part of that job is going to be in the OCC and the other 
regulators. And here is what it said about OneWest, of which 
you were a big part of. It says that, ``Numerous affidavits or 
other mortgage-related documents were not properly notarized.'' 
That is a quote, and this is quote too:

        Litigated foreclosure proceedings without always ensuring that 
        a promissory note or mortgage document were properly endorsed 
        or assigned, and that OneWest failed to devote sufficient 
        financial staffing and managerial resources to ensuring proper 
        administration of its foreclosure processes.

Can you tell me what that is if that is not robo-signing?
    Mr. Otting. Well, I do not believe that is robo-signing. 
First of all, when we signed the consent order, we did not 
confirm or deny the accusations in the consent order. That was 
a fairly generic consent order that all banks were asked to 
sign and really did not have a choice.
    The issue--I think the issue of documentation and robo-sign 
are two separate things. There was an organization called MERS 
where most of notes and deeds of trust were electronically 
stored, and there was a provision at that time where you could 
use the MERS system to be able to do foreclosures. And when the 
OCC came in and the OTS, they found that there were lots of 
errors in that system, and they forced upon the banks to clean 
that up, which we did.
    Senator Tester. I got it. I got it, and I appreciate----
    Mr. Otting. But if I could comment on the robo-signing----
    Senator Tester. Yes.
    Mr. Otting.----for you, I would be happy to do that.
    Senator Tester. Yes, go ahead.
    Mr. Otting. So, in my mind, there are a lot of definitions 
to robo-signing. I think if--like I told you in your office, if 
we all wrote it down, my guess is we would have different 
descriptions of it. There are four key ways that I would answer 
did OneWest Bank robo-sign. The first is, did we have a process 
and controls to review the affidavits and complete those at 
OneWest Bank? We did. Were there errors from time to time? I 
could--I do not have that statistic, but I would tell you there 
were.
    Second of all, in some accusations of robo-signing, it was 
that people signed other people's names. I can tell you that 
was never done at OneWest Bank, that Bill Jones signed for 
Sally Smith.
    The third, the third issue was--was that were they properly 
notarized, and we had all our notarization activity occurred in 
one location. People sat next to each other. They knew those 
people. They were not doing it remotely.
    And, last, the critical component of a foreclosure is that 
the affidavit is the person who is signing that affidavit 
validated principal past due and amount due, and quite frankly, 
we found no errors when that person was doing that work.
    Senator Tester. And I would just say this--and I am way 
over time, Mr. Chairman, and just bear with me just for a 
second. But if, in fact, you were to sign off on an agreement 
that was not accurate--I do not know why you would do that 
being in business and especially in the banking business.
    Mr. Otting. I would agree with you.
    Senator Tester. And this is pretty darn clear when it says 
litigated foreclosure proceedings without always ensuring that 
the promissory note or mortgage document were properly endorsed 
or assigned.
    Now, I would imagine that if the Office of Thrift 
Supervision found that happened once or twice, this would not 
be in there. It happened--it had to happen with some 
regularity, and I got it. I am not saying that, but it does say 
properly endorsed or assigned.
    Mr. Otting. I would appreciate the opportunity to have a 
follow-up discussion with you.
    Senator Tester. We can do that.
    Mr. Otting. So we can--I can try to gather data and bring 
it in----
    Senator Tester. OK.
    Mr. Otting.----from public sources.
    Senator Tester. Well----
    Mr. Otting. But I can tell you, similar to Secretary 
Mnuchin, we have kicked this thing five ways to Sunday.
    Senator Tester. I know, but----
    Mr. Otting. But there were errors. I do not want you to 
think that we never made errors----
    Senator Tester. No, I----
    Mr. Otting.----because that--we did make errors.
    Senator Tester. I am going to close it out real quick, and 
we will talk. But the issue is you are going to be ahead of the 
OCC.
    Mr. Otting. That is correct.
    Senator Tester. You are going to be supervising people who 
potentially did the same thing that was claimed on OneWest.
    Mr. Otting. That is correct.
    Senator Tester. All right. Thank you.
    Chairman Crapo. Senator Tillis.
    Senator Tillis. Thank you, Mr. Chair.
    Thank you, gentlemen, for being here, and congratulations 
to you and your family on your nominations.
    Someone earlier said, Mr. Quarles, that they were concerned 
with you doing the revolving door between regulatory roles and 
out in the private sector. I actually find that refreshing 
versus bureaucrats that just ride this escalator to learn how 
to regulate, regulate, regulate more, so I think that is a good 
thing, not a bad thing. And I am impressed with your past 
experience in both, in both settings.
    First, to either one of you, do you think Glass-Steagall 
caused the 2008 financial crisis?
    Mr. Quarles. Well, as I had mentioned in the context of the 
previous----
    Senator Tillis. Give me a real quick yes or no or maybe, 
because I have got a couple other ones.
    Mr. Quarles. Oh, you have got a couple other ones.
    I do not believe so. I think that keeping the depository 
institutions safe from other activities in a larger 
organization is important.
    Senator Tillis. I am going to get back to that in a follow-
up.
    How about you, Mr. Otting?
    Mr. Otting. I do not.
    Senator Tillis. Now, the Fed Chair Volcker has said that he 
actually thinks that the rule should be simplified. Do you all 
agree with the former Fed Chair?
    Mr. Quarles. I do.
    Senator Tillis. Yeah. I have tried to give somebody that, 
you know, is watching this and does not understand what we are 
talking about in terms of the regulatory overreach a kind of 
visual, and, Mr. Quarles, you and I talked about this briefly. 
I have done the math since our meeting the other day.
    Mr. Otting, I have not had the pleasure to meet with you, 
but I will look forward to it.
    But there are some--some of the larger, more complex banks 
will submit as many as 80 to 100,000 pages--80 to 100,000 
pages--annually to be compliant with the CCAR, the stress test 
submission. That is seven--if you line up those pieces of 
paper, long end, that is 17 miles, yet it is 81 volumes of 
``War and Peace.'' It is close to 20 or 30 feet of shelf space.
    Now after they submit it, we hear regulators going into 
these agencies a week or so later. I do not know if anybody in 
here can read 81 volumes of ``War and Peace'' in a week and 
digest it, but my guess is no regulator can.
    So it raises a question about how valuable that information 
is, and one thing that I think we have to look at is, of 
course, we would--many of these larger banks, many of the 
smaller banks regulatory do stress tests. Can you talk about 
why you think the transparency is not--I think some people are 
suggesting it is kind of giving somebody the answer key before 
they take the exam. Can you--can you tell me why you think that 
transparency is important and still provide you with that--the 
regulatory--I mean, having the lens into that, that it is not 
an issue to be actually transparent, and let the institutions 
kind of know what they have got to be up against?
    Mr. Quarles. Well, I think there----
    Senator Tillis. And, Mr. Otting, I am happy to have you 
opine as well.
    Mr. Otting. OK.
    Mr. Quarles. I think there are a number of aspects of that. 
It is not giving the entity the answer key; it is giving them 
the questions. It is giving them the test. So it is a little 
difficult.
    I mean, if the situation we are in now----
    Senator Tillis. Yeah. But the suggestion is that if they 
get it, then they can game the system, but I just do not--I do 
not get that, particularly for these institutions who are 
regularly doing stress tests anyway.
    Mr. Quarles. I think that, certainly, the benefits of 
transparency outweigh any of the theoretical costs, because if 
you are clear about what it is that you expect, you will 
inevitably get more compliance. Plus, you will get feedback--
and not only from the banks, but from the public--as to how the 
test can be improved.
    Senator Tillis. And who ultimately pays for the cost of 
this? At the end of the day, if we keep on ratcheting up the 
cost, who ultimately pays for this?
    Mr. Quarles. The consumer.
    Senator Tillis. Yeah. The little guy.
    Mr. Quarles. Exactly.
    Senator Tillis. I wanted to ask a question about--and, Mr. 
Otting, I will start with you. How many tips are there on a 
spear, a classical spear?
    Mr. Otting. Two.
    Senator Tillis. Two.
    So we have got five--or four or five on the regulatory 
spear for the financial services industry. Right?
    Mr. Otting. Yes.
    Senator Tillis. We have people--and let us get away from 
the big banks for a minute. Let us deal with the community 
banks or the midsize banks. We have got four or five regulatory 
agencies on any given day going into a bank, pretending to be 
at the tip of the spear. Does that make sense? Is there some 
way that we can actually get to a point where we have certainty 
and responsibility around the regulators so that the financial 
services industry, whether you are a small community bank or a 
super bank, actually knows who they should be answering to for 
a given set of regulatory regimens?
    Mr. Otting. Well, I would say for the record, I misspoke. 
It should be one tip, not two.
    Senator Tillis. Yeah, I know.
    Mr. Otting. But----
    Senator Tillis. I gave you a pass. I was going to look it 
up on the Internet later on, but----
    [Laughter.]
    Mr. Otting. But I will say one of the complexities----
    Senator Tillis. There are two ends.
    Mr. Otting. Yes.
    Complexities of the regulatory body when you talk to a 
financial institution is often similar entities are asking for 
same information. One is coming in the door when the other is 
going out, and the lack of coordination makes it very difficult 
on the industry.
    Senator Tillis. And this is an area where I will ask you 
all to commit to not being territorial and deciding that you 
are right, there is only one tip of the spear, and you are the 
tip. I think there are logical--assignments are a rational 
basis for one to take the lead and the other to follow and 
provide that clarity to the financial services industry.
    If you really do want to help the little guy, you better 
stop passing the regulatory costs down to them by adding a 
regulatory burden.
    I worked at Pricewaterhouse. Regulations were good for us, 
put my kids through college, but I think we have to simplify 
these things so that we get to right-size regulations. 
Otherwise that money goes down to that individual depositor, 
that individual small business, the people who are using these 
financial institutions, and I hope that you all will get in 
there, right-size the regulations. Regulations exist for a 
reason, but do it in a way that actually is responsible, 
predictable, and as lean as possible, because I think it will 
have an enormously positive impact on the movement of capital 
in this country and getting growth where we need it to be.
    Thank you. I look forward to supporting your nominations.
    Oh, and, Mr. Quarles, I hope you do not have an opportunity 
to deal with the arbitration rule, because I hope we repeal 
that long before you ever get there.
    Chairman Crapo. Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. Thank you both 
for being here.
    I would just like to let you know real--obviously, these 
are positions of incredible importance and that the American 
people are counting on you.
    I just want to quickly let you know the results of what 
happened in 2008 in my congressional district that I 
represented at the time. Elkhart County, 20 percent-plus 
unemployment. The Chrysler transmission plant, that was in my 
district. Over 5,000 people worked there; a little bit later, 
less than 100. So that is 4,900 people who are wondering how 
they are going to pay their mortgage, how they are going to 
feed their family, how they are going to be able to make ends 
meet.
    Small businesses in my district, I met with one after 
another that had lines of credit that were all called, and 
these lines of credit that were called, these are small 
businessmen who had worked all their lives, small businessmen 
and--women who then at that point had to have a fire sale of 
assets in order to cover the line of credit. Twenty percent 
unemployment, lines of credit being called, people losing jobs 
because we had a financial collapse caused by Wall Street, but 
it was not--it was not Wall Street who at the end of the day 
got the pain. It was--it was the folks I live with in Indiana.
    And so when you miss it, the real result is people losing 
their houses who did nothing wrong other than show up for work 
every day and work nonstop to take care of their family, and 
that is the obligation and the responsibility of these jobs 
that you are walking into.
    And I just wanted to ask a couple questions. Mr. Quarles, 
one of the things I saw was that the ratings agencies basically 
were selling ratings. Were you aware that they were taking B 
and BB, stuffing them together, and then having that be rated 
AAA by the agencies at the time?
    Mr. Quarles. The exact mechanics of some of that rating 
agency practice, I was not aware of, but I was--we were looking 
at the rating agencies and their practices is something that we 
were in the process of doing when I was there.
    Senator Donnelly. Did you see anything that caused you to--
caused concern for you back then when you looked at their 
practices? Because you could see the products that they were 
putting together.
    Mr. Quarles. I would say that while we did not appreciate 
the depth of the problem, it was something that we were looking 
at. I think that was an issue that was evident and should have 
been more evident to us.
    Senator Donnelly. Synthetic CDOs, pure gambling is what it 
struck me as. Do those kind of things concern you? Do you think 
they are appropriate?
    Mr. Quarles. I spoke at the time against excessively 
complex derivative products, so yes, they did concern me. And I 
do not believe that they are appropriate. Yes.
    Senator Donnelly. Mr. Otting, what lessons did you take 
from the crisis that you would bring to this job? I mean, we 
were looking at basically the Wild West, synthetic CDOs, rating 
agencies that would take B's and C's, and you put enough of 
them together, and all of a sudden, you have a AAA. And, as I 
said, the people that suffer live in Indiana and lose their 
jobs.
    Mr. Otting. Senator Donnelly, thank you for the question.
    I too have experienced pain of people who I have personally 
met with who went through the foreclosure process. It is a 
life-changing event for those people, especially when, as you 
said, they are hardworking Americans.
    At the time of the crisis, I worked at U.S. Bank, and we 
never participated in any of the subprime----
    Senator Donnelly. Right.
    Mr. Otting.----activities. We always felt that people, you 
know, needed to have the proper credit, proper underwriting.
    Senator Donnelly. When you were working with the other 
people there, did you ever look at some of this and say this is 
crazy?
    Mr. Otting. We did. We did. In fact, I--there was a point 
in time where there used to be kind of a matrix with high-to-
low--to loan value and high/low FICO, and if somebody had a 
really good FICO, maybe they justified a higher loan-to-value, 
or if they had a bad FICO, they better be less loan-to-value. 
When the boxes flipped where you could have low FICO and high 
loan-to-value, we knew this was----
    Senator Donnelly. I am almost out of time, so I want to ask 
one more question, which is as you look ahead, you know, 
obviously, I want to make sure that it does not happen again. 
Everybody does. What concerns you the most? Student loans, or 
is there anything on the horizon that you look at and go, 
``This could be a problem''?
    Mr. Otting. I think--I think student loans are an issue if 
you really look at it from an underwriting perspective, and I 
think the auto loan market, it got a little overcooked. It has, 
I think, pulled back a little bit now, where terms were getting 
aggressive, loan-to-values were getting aggressive, and now I 
think with the insight of the OCC examining, they have pulled 
back some of the auto-lending activities.
    Senator Donnelly. Mr. Quarles?
    Mr. Quarles. I would agree with both of those points.
    Senator Donnelly. Anything else that concerns you as you 
look?
    Mr. Quarles. You know, I continue to be concerned about 
the--some of the level of complexity in the system I do not 
think that we have given enough thought, and that we can give 
more thought as to how various parts of it relate to each 
other.
    Senator Donnelly. Thank you, Mr. Chairman.
    Mr. Otting. Could I add one thing, Chairman?
    Chairman Crapo. Briefly.
    Mr. Otting. You asked me about what concerns me about 
America today. My big concern is that a lot of people at the 
lower end or echelon of the banking are not qualifying for 
banking products and services. You have branches going away. 
You have people concerned when they walk into branches, the 
kind of questions people are asking about opening up accounts, 
and I think there needs to be a real focus of how do we make 
banking available for the lower economic and ethnic people 
across America.
    I think there are some tools to do that with automation. We 
did that at OneWest Bank, where we really focused on bringing 
people in and making banks available to them when they were not 
in their neighborhood, so----
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Quarles, you left the Treasury Department in 2006 and 
joined The Carlyle Group, a private equity firm in 2007. After 
you left the Administration, you publicly advocated to change 
the rules limiting private equity investment in banks. Is that 
correct?
    Mr. Quarles. That is correct, Senator.
    Senator Menendez. Now, in September of 2008, the Federal 
Reserve announced a policy shift allowing for private equity 
firms to take larger ownership stakes in banks. In May of 2009, 
The Carlyle Group acquired, along with two other firms--$12.8 
billion--BankUnited. Is that correct?
    Mr. Quarles. That is also correct.
    Senator Menendez. As part of that deal, the FDIC agreed to 
cover most of the losses, and in total, the FDIC made $1.6 
billion in payments, more than any other loss-sharing agreement 
during the financial crisis.
    Ultimately, BankUnited failure cost the FDIC $5.7 billion, 
and The Carlyle Group and other private equity investors walked 
away with more than $2 billion. That sounds pretty much to me 
like IndyMac and OneWest.
    So it seems, Mr. Quarles, that you used your remaining 
influence in the Administration to change the rules to make it 
easier for your new employer, a private equity titan, to turn 
America's struggling community and regional banks into cash 
cows, and in so doing, you gave little regard for the 
communities served by these banks.
    And I hope my colleagues are acutely aware of the 
consolidation of community banks, that they understand what we 
are talking about here. Mr. Quarles lobbied the Government so 
that his employer could invest in deals where the FDIC would 
take on all the risk. The private equity investors would reap 
all the benefits, and the future of the community banks 
involved was merely an afterthought. And that worries me in the 
context of some of the comments that you and I discussed 
yesterday about your views on regulatory oversight, changes in 
that regulatory reform, changes in the Wall Street reform that 
came in the aftermath of the world's worst financial--or the 
Nation's worst financial crisis, where we were told by Ben 
Bernanke we were going to have a global financial meltdown. And 
so I worry about that.
    Mr. Otting, I heard the answers you gave to Senator Tester 
on robo-signing, and I think--just like Secretary Mnuchin, I 
think there is a misstatement of the facts here, but I think 
Senator Tester did a good job on focusing on that.
    Let me ask you something else. Did OneWest engage in the 
practice of dual tracking, offering a struggling homeowner the 
hope of a modification while simultaneously pursuing a 
foreclosure?
    Mr. Otting. Mr. Menendez, that was an industry practice.
    Senator Menendez. I did not ask you that.
    Mr. Otting. And so----
    Senator Menendez. I asked you did OneWest engage in it. Yes 
or no?
    Mr. Otting. The answer to that is yes. We did, and it was 
an industry practice that we discontinued once it was 
identified in the consent order as not to be an acceptable 
practice.
    Senator Menendez. Will you commit to provide the total 
number of foreclosures and loan modifications completed in each 
of the States represented by Members of this Committee prior to 
the Committee's vote on your nomination?
    Mr. Otting. I do not have access to that data. It is the--
and it is owned by CIT Bank, and we could--you can request that 
information from them, but I would not have any influence over 
that.
    Senator Menendez. You do not have the wherewithal to ask 
them to provide that?
    Mr. Otting. I do not.
    Senator Menendez. Well----
    Mr. Otting. Will ask, but I do not know if they would 
comply.
    Senator Menendez. I understand that while you may not have 
direct access to the information, you certainly can be helpful 
in requesting CIT provide this information prior to the 
Committee voting on your nomination. I hope you would do that.
    Mr. Otting. Are you asking for me to request that 
information?
    Senator Menendez. Yes.
    Mr. Otting. I do not think that that is my position, 
Senator, to request that information from CIT.
    Senator Menendez. Well, let me just say New Jersey was 
particularly hard hit by the 2008 financial crisis, and it 
continues to have the highest foreclosure rate in the Nation. 
So as long as
homeowners in New Jersey continue to struggle with foreclosure, 
I am not going to forget OneWest's practices and expect you 
will take seriously my request for this information, and you 
are going to a position for which this information is critical.
    I cannot understand nominees who must understand that based 
upon the positions they have been nominated to and positions 
they have taken in the past that one does not come prepared to 
reconcile--or try to reconcile those views. So I have a problem 
with that.
    Finally, Mr. Quarles, you and I spoke about a rules-based 
approach to monetary policy, and you told me you do support a 
rules-based approach to monetary policy. Do you accept the 
analysis that suggests that following a strict Taylor rule 
would undermine the Fed's ability to achieve its full 
employment mandate? And talk to me about the full employment 
mandate as part of your dual obligation. We talked a lot about 
the one side of that obligation. We did not talk very much 
about the full employment side and your views on that.
    Mr. Quarles. Certainly, Senator. I think that the Taylor 
rule is merely one example of a rule. I am not advocating the 
adoption of the Taylor Rule to guide Fed policy.
    With respect to the employment mandate as part of the dual 
mandate that faces the Federal Reserve, I think that is an 
important element of the Federal Reserve's obligations. I would 
take it very seriously.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator.
    That concludes the questioning, except that Senator Brown 
has asked to ask two more questions. So we will do that, and 
then the hearing will conclude.
    Senator Brown. Before Senator Menendez leaves, I was a 
little--perhaps the collective amnesia has spread to me 
personally from this, but my understanding in my office when I 
pointed out the information that Senator Menendez just asked 
you for, I had asked Secretary Mnuchin in six different 
letters. Senator Menendez and I sit on the Finance Committee 
together. I believe he signed a couple of those letters asking 
for the information he just asked you about. I thought you said 
in my office that you would be willing to make that request to 
get that information for us, so I would like to reiterate that 
you----
    Mr. Otting. I do not believe I--if I led that impression, I 
did not say I would seek that information.
    Senator Brown. Well, I would like to ask you----
    Mr. Otting. I said I would help participate, but it is 
solely at CIT's decision whether they will release that.
    Senator Brown. I understand that, but I think a request 
from the designee for the--to be the Comptroller might get 
their attention, and it did not get their attention through the 
whole process. When Secretary Mnuchin was nominated, we all--a 
number of us asked him repeatedly. He would not disclose that, 
and he would not try to disclose that information. We went a 
number of letters and could not get it. So I would ask you to 
help us with that, to commit to help us try to get that 
information.
    Mr. Otting. Yes. As I said, I would be happy to help 
support, but I do not feel it is my position to request that 
information.
    Senator Brown. I am sorry to hear that.
    Thank you, Senator Menendez, for that.
    My two questions about this, one--one is, Mr. Otting--and 
earlier you had talked about the 38 people, I guess, you just 
apologized to in my question earlier, and I want to follow up 
on that.
    The OCC's April 2014 report on the consent orders we 
discussed found that OneWest did not comply with rules to 
protect active duty servicemembers, borrowers not in default, 
modification requests, and others. The report, the consent 
order said that there were 10,700, not the 38, I believe, 
number that you cited an hour or so ago. Why not apologize to 
the 10,700?
    Mr. Otting. Yeah. The 10,000 number was--there was an 
accepted practice. If you had a de minimis dollar amount at the 
close of escrow--when an escrow would close, you would get a 
bid for a title policy, an appraisal policy, for other 
activities, and often these would be 2 cents. And so the 
thought was that between relatively small-dollar amounts, we 
did not ask for nor give refunds.
    When the OCC came in and said we had to be 100 percent 
accurate on those transactions--and so anybody--99 cents or 
less on those--we gave them the actual dollar amount. In 
certain circumstances, it was 10 cents plus $25, and we scaled 
that up. But we ended up reimbursing every one of those dollar 
amounts.
    Senator Brown. OK. I want to know more about that.
    Mr. Quarles, last question for you. You earlier--you had 
said, quote, ``Markets are always ahead of the regulators. 
Frankly, that is how it should be. It is analogous to the 
advice that my father provided me,'' that, quote, ``If you do 
not miss at least two or three planes a year, you are spending 
too little time at the airport''--I am sorry--``you are 
spending too much time in airports''--sorry about that--
unquote. If the regulators are not--you went on to say, ``If 
the regulators are not a little behind the market in a few 
areas at any given time, they would be stifling innovation and 
evolution,'' unquote.
    We have all been guilty of using unfortunate analogies, but 
what concerns me that this--is that this world view contradicts 
the ideas that you were--the idea that you were doing 
everything in your power to prevent a crisis. It concerns me 
even more that you believe that oversight agencies, like the 
one you hope to run, should, in fact, miss risks, miss a plane 
here and there, should miss risks in the system. The last time 
you missed those risks, it cost my ZIP Code and my State and 
our country, lots of people, their homes, their jobs, their 
retirement savings. You claim it is in the name of innovation, 
but the question is at what price.
    So do you stand by your statement that regulators should 
be, quote/unquote, ``behind the market''?
    Mr. Quarles. That is probably the most unfortunate use of 
language that I have ever made, and I do not stand behind that 
statement.
    Senator Brown. Thank you. Thank you. And thank you for what 
you said in your earlier statement about humility. Those are 
two things we do not always see in this Committee.
    My last--just last thing I would like to say is when Chair 
Yellen was nominated and confirmed, I asked her to come to 
Cleveland and see what--see what the real economy looked like 
and learn a little more about manufacturing and what decision 
she would make as Chair of the Federal Reserve, the impact, and 
she did that, went to Alcoa, got to operate--sort of, kind of 
operate a 50,000-ton press. And considering what Mr. Otting's 
bank, the impact it had on my neighborhood and beyond, 
considering what some of the statements from Mr. Quarles--and I 
so much appreciate your comments a minute ago--I would like to 
invite both of you, once confirmed, to come to my State.
    President Lincoln once said that while his staff wanted to 
keep him in the White House to win the war and free the slaves 
and preserve the union, he said, ``I have to get my public 
opinion bath and go out among people,'' and I would like to 
invite each of you, if confirmed, to Ohio to join me in 
learning more about an economy in the Midwest.
    Mr. Quarles. I would be delighted to do that.
    Senator Brown. Thank you both.
    Mr. Otting. Back to Cleveland for me.
    Senator Brown. Back to Cleveland for a Midwestern guy. 
Thank you.
    Chairman Crapo. Thank you.
    And I understand Senator Cortez Masto has one brief 
question, I hope.
    Senator Cortez Masto. I do. Just a clarification. Thank 
you, Mr. Chair.
    So, Mr. Otting, in your answers to Senator Tester, did I 
hear right that you said that OneWest did not engage in robo-
signing?
    Mr. Otting. I said when I answered the question that there 
could have been errors, they were not identified in the robo-
signing, but our process is in place. And, again, what I would 
comment on is that I think a lot of people have different 
definitions of robo-signing. Mine is, did we have a process for 
the affidavits? Second of all, did anybody sign any affidavits 
of another person's name? Third was the data check before 
somebody signed the affidavit, and last, was a notarization 
process done? And I would respond that we did do those at 
OneWest Bank accurately. There may have been exceptions. I am 
not aware of those exceptions, and they were not identified as 
any issues in the interim OCC report that reported our results.
    Senator Cortez Masto. OK. Here is my concern, and very 
briefly. I have in front of me the consent order between the 
Office of Thrift Supervision and OneWest.
    Mr. Otting. Right.
    Senator Cortez Masto. And, specifically, it states that 
OneWest Bank engaged in unsafe or unsound banking practices 
relating to mortgage servicing and the initiation and handling 
of foreclosure proceedings. Specifically, those unsound 
practices included filed or caused to be filed in State and 
Federal courts or in local land records, offices--and this is--
and it happened in Nevada--numerous affidavits or other 
mortgage-related documents that were not properly notarized, 
specifically that were not signed or affirmed in the presence 
of a notary, litigated foreclosure and bankruptcy
proceedings, and initiating nonjudicial foreclosure proceedings 
without always ensuring that the promissory note and mortgage 
document were properly endorsed or signed and, if necessary, in 
the possession of the appropriate party. That is robo-signing. 
That is what is in this consent order that says that you have 
done.
    Mr. Otting. The things that were made, if you will know, we 
did not confirm or deny. You have to look at the results that 
came from the----
    Senator Cortez Masto. Then why did you sign the consent 
order? If you did not agree with the decision----
    Mr. Otting. Have you ever had to sign a consent order?
    Senator Cortez Masto. Actually, I was Attorney General of 
the State of Nevada.
    Mr. Otting. You basically do not have a choice. When the--
--
    Senator Cortez Masto. So you are telling me that your 
company----
    Mr. Otting. You do not have a choice.
    Senator Cortez Masto.----did not engage in this, but you 
were forced under duress to sign this consent order?
    Mr. Otting. I hope you are never in the position that I 
was. I had great pride. I had been at that company a little 
less than a year, and I was--I would argue I had to, for the 
benefit of our employees, sign that consent order, when I did 
not agree with what was described. The words that were inserted 
in there were ``do not confirm or deny.'' I think I would 
encourage you to look at the results that were produced in 
2014. I would be happy to get those over to your office. I 
think it paints a different story of OneWest Bank.
    Senator Cortez Masto. If you did not engage in the 
practices, then you should not have signed the consent order, 
Mr. Otting, but----
    Mr. Otting. I wish--I wish it was that easy.
    Senator Cortez Masto.----I appreciate your comments.
    Mr. Otting. I wish it was that easy.
    Senator Cortez Masto. Thank you very much. It was very 
instructive.
    Chairman Crapo. Thank you.
    And that does conclude the questioning and the hearing, 
with the exception of a few final announcements.
    Before I do that, though, I want to again thank you both 
for coming in and participating today at the hearing, and I 
thank you for your willingness to serve the country.
    Mr. Otting. Thank you.
    Chairman Crapo. For Senators, all follow-on questions need 
to be submitted by Tuesday, August 1st, and for our witnesses, 
response to those questions are due by the following Monday 
morning, August 7th. So please respond quickly to the questions 
as you receive them.
    With that, the hearing is adjourned.
    Mr. Otting. Thank you.
    Mr. Quarles. Thank you.
    [Whereupon, at 11:35 a.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of nominees, 
responses to written questions, and additional material 
supplied for the record follow:]
                  PREPARED STATEMENT OF JOSEPH OTTING
  To Be Comptroller of the Currency, Office of the Comptroller of the 
                                Currency
                             July 27, 2017
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
it is an honor to appear before you to today. I am grateful to be 
nominated by President Trump to be the Comptroller of the Currency, and 
if confirmed for this role, I would be honored to serve the citizens of 
the United States of America.
    Thank you to all of the Members of the Committee I had an 
opportunity to meet. I enjoyed the opportunity to meet some of you for 
the first time, and to get re-acquainted with others, but most 
importantly, I appreciated the opportunity to learn more about the 
issues you feel are important to the people of America. For those I did 
not get to meet, if confirmed, I look forward to meeting and working 
with you in the future.
    I would like to introduce my wife and best friend of 27 years, 
Bonnie Otting. Sometimes you get lucky in life and I am forever 
grateful for the day we met. You have always been my compass in life 
and for that I love you. In addition, I would like to recognize 
Bonnie's father, Herman Espinoza, who could not be with us today due to 
his health and age of 94. He is a first generation immigrant who came 
to the United States to pursue the American dream, so his family could 
live a better life. One of his proudest moments was when he was granted 
his U.S. citizenship.
    My mother, Grace Ann McQuillen Otting, is with us today. She has 
always been my guiding light in life, instilling in me a strong moral 
compass and helping me appreciate the values of a sound family life. 
She taught school for 35 years and was an inspiration to so many 
students.
    I would also like to acknowledge my late father, James Otting, and 
mother-in-law, Jesse Espinoza. My father taught me many valuable 
lessons in life, not the least of which were his business acumen, focus 
on family and his commitment to serving his community. From Bonnie's 
mother, I learned the value of kindness to others and that love can 
cure many things.
    Lastly, I would like to introduce my sister Julia Ardell and my 
brother James Otting. Over the years we have learned the value of love, 
companionship and dependence on each other.
    I grew up in a Midwestern family where my father was an 
entrepreneurial business person and my mother, as I indicated, was a 
school teacher. At the young age of 10, I learned the value of 
business, client relationships and leadership from my father while 
working at his businesses. Often doing the jobs no one else wanted to 
do! I also observed from my father how hard work, willingness to take 
risks and family support led to success. I learned from my mother, who 
taught school during the day, raised three children and went to college 
at night, that hard work and dedication can make a difference.
    I studied at the University of Northern Iowa, following a family 
tradition of my mother, sister and ultimately my brother to the 
University. During the summers and holiday breaks my father would have 
me work at his businesses and arranged other roles which included 
working at an electrical dam for a regional utility, a commercial 
construction site and at a bakery. All great roles for building 
character, an appreciation for people and their individuality, and how 
leadership can make a difference.
    After college, I was fortunate to be chosen to be a part of a 
management training program for a leading national financial 
institution. It was an experience that forever changed my life. I 
gained insight into the banking system from the ``other side'' of the 
table and discovered how banks help consumers and businesses with 
services, deposits, products and loans. It is in this industry I spent 
the next 34 years of my life and learned the importance of serving 
employees, the community, customers, and shareholders.
    My banking experience has allowed me to work for one of the largest 
banks in the Nation, two well respected regional banks, and a community 
bank. I have touched virtually every segment of the industry including 
serving consumers, businesses, trust functions, private banking, 
investment services, legal, human resources, compliance, audit, 
treasury, financial management, operations and technology. This 
experience provides a broad base of knowledge that will be helpful and 
insightful in the role as Comptroller.
    In 2010 I decided to leave an executive position at an established 
financial institution because I felt that Southern California was in 
need of a ``hometown bank.'' When approached about the idea, I knew it 
would be challenging and a tremendous amount of work, but ultimately an 
achievement for myself, the company, and the region. With the 
assistance of the many dedicated women and men of OneWest Bank, we were 
able to create the largest hometown bank headquartered in Southern 
California. It was able to grow beyond primarily mortgage originations 
to a bank with a full suite of products and services for local 
businesses, families and consumers. Helping build this company is 
something I am and will remain proud of. After a successful merger, I 
left the organization in late 2015 and became an entrepreneur focusing 
my efforts on real estate and small businesses.
    The mission of the OCC is to ensure that national banks, Federal 
savings and loans and foreign operations of international banks operate 
in a safe and sound manner, provide fair access to financial services, 
treat customers fairly, and comply with applicable laws and 
regulations.
    If confirmed as Comptroller of the Currency and given the 
opportunity to lead the women and men of the agency, I pledge to honor 
the OCC's mission and cooperate and work with this Committee and all 
members of Congress.
    Thank you for your time today. I look forward to answering any 
questions the Committee may have.
















                  PREPARED STATEMENT OF RANDAL QUARLES
To Be a Member and Vice Chairman for Supervision, Board of Governors of 
                       the Federal Reserve System
                             July 27, 2017
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for this opportunity to appear before you today. I am honored 
that the President has nominated me to serve as a Member of the Board 
of Governors of the Federal Reserve System and as the Board's Vice 
Chairman for Supervision, and I am grateful to have the privilege of 
your consideration. I am also very grateful for the support of my 
family--my wife, Hope Eccles, our three teenage children, Randy, 
Spencer, and Hope, Jr., and my parents, Ralph and Beverly Quarles.
    The Federal Reserve System occupies a central position in our 
country's policy infrastructure for promoting a strong economy and the 
stability of the financial system, and supporting robust job growth in 
a context of price stability. I can assure this Committee that, were I 
to be confirmed as a Governor of the Federal Reserve Board, I would be 
strongly committed to these objectives.
    The specific position for which I have been nominated--Vice 
Chairman for Supervision--has a particular role in ensuring the safety, 
soundness, and efficient operation of our financial system. As 
recognized by the Treasury report, regulatory policies enacted since 
the financial crisis have improved the safety and soundness of the 
financial system. But as with any complex undertaking, after the first 
wave of reform, and with the benefit of experience and reflection, some 
refinements will undoubtedly be in order. Former Governor Daniel 
Tarullo, who was one of the principal architects of many of these 
reforms, indicated as much himself in a valedictory speech that he gave 
in April on the occasion of his leaving the Board, stating that ``there 
are clearly some changes that can be made without endangering financial 
stability.'' The key question will be ensuring that, as we continue to 
refine the system over time, we do so while maintaining the robust 
resilience of the system to shocks.
    I believe that I am well qualified to undertake this role. As this 
Committee knows, I have had experience over my career with the 
financial sector from many different points of view. I have been a 
practicing lawyer versed in the granular technicalities of the most 
complex aspects of the regulatory system; at the other end of the 
spectrum, I have been an investor in small, community banks, and am 
familiar with the particular benefits of those institutions and the 
challenges they face; and I have been a financial regulatory 
policymaker under two different presidents in two different decades. In 
fact, my first tour of duty in public service was during a similar 
period of response after a financial crisis--arriving in 1991 during 
the clean-up phase of the savings and loan crisis and facing the 
insolvency of the FDIC's Bank Insurance Fund.
    While this long experience has given me substantive insight into 
the issues that the Federal Reserve's Vice Chairman for Supervision 
will face, it has also reinforced my commitment to what I think is the 
single most important characteristic of a good policymaker: the need to 
be humble--humble about the constraints on our understanding of complex 
systems, humble about the fallibility of our judgments, and humble 
about how our own assumptions and views influence even what we believe 
to be our most data-driven and analytical conclusions. As a 
consequence, were I to be confirmed for this position, I would approach 
this undertaking--as I try to approach every task--with a continual 
openness to input from every source. In particular, I would look 
forward to working with the Members of this Committee on both sides of 
the aisle, and your staffs, to understand the challenges that face the 
financial system as they evolve over time.
    Thank you again for the honor of this hearing, and I look forward 
to responding to your questions.

























  RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOSEPH 
                             OTTING

Q.1. If confirmed, will you commit to reply to every oversight 
or other letter and request for information from all Members of 
the Banking Committee in a timely manner?

A.1. I am committed to furthering a constructive relationship 
between Congress and the OCC, and responsiveness to 
congressional requests for information is a critical element of 
that relationship. I believe that the OCC should provide 
appropriate, useful responses to all members of Congress. If 
confirmed, I will act accordingly.

Q.2. In June, the Treasury put out a report suggesting many 
changes to the regulatory structure, and we know the impact of 
deregulatory policies advocated by Treasury in past 
Administrations.
    If confirmed, you will represent an independent agency. Do 
you commit to being independent from the Administration, 
including Treasury Secretary Mnuchin, and to speak out if you 
think a legislative or regulatory recommendation threatens the 
financial stability of our economy, consumer protection, or 
safety and soundness of our banking system?

A.2. Yes. Treasury has put out a thoughtful and practical 
document in response to the President's Executive order to 
guide the efforts to implement much needed change to the 
current financial regulatory system. The OCC has shared 
responsibility with the other banking and financial regulators 
on a significant portion of the Report's recommendations. I 
understand that many of these are focused on the capital and 
liquidity rules and the Volcker rule. If confirmed, I look 
forward to carefully studying each recommendation and working 
with my fellow regulators and members of Congress.
OneWest/CIT
Q.3. As you know, despite numerous requests by many members of 
the Senate to Mr. Mnuchin, we have still not received State-by-
State data regarding OneWest's foreclosures. Will you reach out 
to your former employer CIT and request that they provide this 
data to me and other Senators who have requested it?

A.3. I am no longer employed by OneWest/CIT and do not have 
access to its internal records, including the information you 
are requesting.

Q.4. Under the terms of the Independent Foreclosure Review that 
OneWest completed as part of consent orders issued by your 
regulator, how much did OneWest pay to service men and women 
for violations of the Servicemember Civil Relief Act? How many 
mortgages were recommended by the consultant for remediation?

A.4. I am no longer employed by OneWest/CIT and do not have 
access to its internal records. In April 2014, the OCC reported 
that the independent foreclosure review undertaken by OneWest 
had recommended 54 mortgages for remediation related to this 
issue. To the best of my recollection, a number of these errors 
were the result of inaccurate information we received when 
utilizing the Defense Manpower Data Center, or DMDC, which we 
later discovered routinely misstated active duty status, and 
OneWest paid restitution of $2,946,986 as recommended by the 
review. More information is available at the following link: 
https://www.occ.gov/news-issuances/news-releases/2014/nr-occ-
2014-65a.pdf.

Q.5. How many borrowers were not in default when OneWest 
initiated the foreclosure process, and how much did OneWest 
provide in compensation?

A.5. In April 2014, the OCC reported that the independent 
foreclosure review had recommended 23 mortgages for remediation 
relating to this issue out of 178,886 mortgages tested. The 
review recommended compensation of $730,719 which, to the best 
of my recollection, OneWest paid. More information is available 
at the link above.

Q.6. How many mortgage modifications were denied in error?

A.6. In its April 2014 report, the OCC stated that the 
independent foreclosure review had recommended 43 mortgages for 
remediation relating to this issue out of 29,964 mortgages 
tested. More information is available at the link above.

Q.7. According to the Form 8-K filed by CIT Group in July 2014, 
following its merger with OneWest, you would join CIT as Co-
President, and CEO of CIT Bank. This remained true in 
subsequent 8-K filings, including one made in July 2015. The 
CIT-OneWest merger was completed in August 2015. CIT then 
announced that it was terminating your employment in another 8-
K filing in December 2015. Please describe the reason(s) for 
your sudden termination from CIT.

A.7. The Board and CEO determined they wanted to consolidate 
the bank management and holding company structure and thus 
eliminated my position.

Q.8. The redlining complaint against OneWest filed with HUD 
suggests redlining had been a problem since at least 2011. 
While you were CEO, were you aware of the bank's low lending 
levels to African Americans, Latinos, and Asians, and low 
number of branches outside of majority white communities? If 
not, why not? If so, why didn't you take steps to address the 
problem?

A.8. This document was filed with HUD well after my departure 
from CIT. During my time at OneWest/CIT, I was not aware of any 
violations of the Fair Housing Act.

Q.9. When you testified before the Federal Reserve during the 
consideration of the application for the merger between OneWest 
and CIT, you blamed current regulations for OneWest's high 
foreclosure numbers. If confirmed, what regulatory changes will 
you propose to make it easier to modify mortgages? Do you 
support servicing reforms?

A.9. In my testimony, I was referring to a Department of 
Housing and Urban Development (HUD) policy under Mortgagee 
Letter 2015-11, which required mortgagees to initiate 
foreclosure on reverse mortgages when borrowers were past due 
on certain property charges by de minimis amounts. I understand 
that HUD modified certain aspects of this policy when, on March 
30, 2016, it issued Mortgagee Letter 2016-07. If confirmed, I 
look forward to working with the OCC's career staff to ensure 
that institutions supervised by the OCC operate in a safe and 
sound manner and that consumers have fair access to financial 
services.

Q.10. 2014 Steven Mnuchin joined the Board of Relatively Media, 
a customer of OneWest Bank. Jim Wiatt was also on the Boards of 
OneWest Bank and Relatively Media. In the spring of 2015, Mr. 
Mnuchin resigned from the Relatively Media board, OneWest bank 
swept $50 million from Relativity Media accounts, and 
Relatively Media filed for bankruptcy. In bankruptcy 
proceedings OneWest was listed as an owed creditor, and CIT 
stated in its September filing that it was owed $38.5 million 
by OneWest.
    Did OneWest's regulators ever raise concerns about the 
relationship between OneWest and Relatively Media, or the roles 
of Steven Mnuchin and Jim Wiatt on the Relatively Media Board? 
Where any concerns by the regulators raised since Mr. Mnuchin 
was also an investor in Relatively Media? Did the OneWest Board 
of Directors, which you were a member, ever discuss any of the 
transactions involving Relatively Media? If so, what was 
discussed?

A.10. Relativity Media maintained a lending relationship 
through a syndicated bank facility that comprised a number of 
banks, including OneWest Bank. The lending relationship was 
reported as required under Regulation O to the OCC.
    To the best of my recollection, the OneWest Bank lending 
relationship with Relativity Media was approved at the Board 
level, all amendments or changes were also approved by the 
Board, and Secretary Mnuchin and Jim Wiatt recused themselves 
from any action at the bank as it related to Relativity Media.
Wells Fargo
Q.11. A little over a year ago, the OCC and CFPB took 
enforcement actions against Wells Fargo for creating over 1 
million fraudulent accounts for their customers possibly going 
back as far as 2007. We know now that the OCC had taken many 
steps prior to the enforcement action to get Wells Fargo to 
address these issues, yet somehow the former CEO and the Board 
of Directors were allegedly unaware of the issues at the 
national bank until late 2014 or early 2015 when the LA Times 
wrote a story about the practices.
    If confirmed, as Comptroller what will you do to ensure 
that situations like the one at Wells Fargo which harmed 
consumers for over a decade don't happen at other banks? Do you 
think that the OCC is aggressive enough in enforcing the law?

A.11. The OCC and CFPB have taken enforcement action against 
Wells Fargo for the creation of the fraudulent accounts. 
Clearly, the creation of fraudulent accounts has no place in 
our banks. If I am confirmed as Comptroller, I will review the 
OCC's internal documentation concerning the Wells Fargo case 
and take any actions necessary going forward.

Q.12. The enforcement action against Wells Fargo related to the 
fraudulent accounts is not the only OCC enforcement action 
against Wells Fargo. The OCC has taken 11 actions against Wells 
Fargo since 2005. And some of the misconduct that occurred at 
this bank took place while they were under consent orders 
issued by the OCC and other regulators for other misconduct, 
including violations of the Servicemembers Civil Relief Act.
    Unfortunately, this level of recidivism is not unique to 
Wells Fargo. This isn't just about strong regulatory 
supervision and enforcement but also about the culture at banks 
where violations of the law are just one of the costs to do 
business.
    If confirmed, what will the OCC do to prevent the largest 
banks from engaging in repeated misconduct?

A.12. If confirmed, I will use every available means to prevent 
banks from engaging in repeated misconduct. The OCC has a 
variety of tools that it can use, ranging from guidance to 
onsite supervision and examination to enforcement action, when 
warranted.
    I believe the OCC's greatest resource is its staff of 
highly trained, professional bank supervisors and support 
personnel (including lawyers, analysts, policy experts, and 
economists). The OCC staff are very effective in conducting 
their examinations, identifying and communicating risks to bank 
management and boards of directors, and holding banks 
accountable for actions necessary to correct identified 
deficiencies. For examiners to succeed, as Comptroller, I will 
work to ensure they are empowered to make the important 
judgment calls necessary to ensure banks operate in a safe and 
sound manner, provide fair access to financial services, treat 
customers fairly, and comply with applicable laws and 
regulations. Further, I will ensure that they have the 
leadership, support, resources, guidance and policy, and world-
class training necessary to ensure that the banks they 
supervise adhere to all appropriate laws and regulations.
    To help prevent banks from engaging in repeated misconduct, 
the Federal banking system also needs clear rules and 
standards. The OCC has implemented enforceable heightened 
standards for bank management and boards of directors. The 
standards require an effective risk governance framework, 
established guidelines for board responsibilities, and are 
enforceable under part 30 of the OCC's regulations.
    When banks fail to comply with applicable laws and 
regulations or engage in unsafe or unsound banking practices, 
the OCC also has a variety of enforcement tools which it can 
use to hold banks accountable for their actions.
    At the same time, if the responsibilities of regulators and 
law enforcement agencies overlap, as Comptroller I would ensure 
the OCC maintains collaborative working relationship with other 
regulatory and law enforcement agencies who play an important 
role in ensuring our financial system operates as it should and 
benefits the consumers, businesses, and communities it serves.

Q.13. Do you think that the OCC is doing enough to hold the 
Board of Directors of the largest national banks accountable 
for misconduct?

A.13. As mentioned above, the OCC established enforceable 
heightened standards that describe the responsibilities of 
Boards of the largest national banks and Federal savings 
associations. These standards include ensuring an effective 
risk governance framework, providing active oversight of 
management, and exercising independent judgment. If confirmed, 
I would ensure that OCC examiners continue to apply these 
standards to the largest banks and look for opportunities to 
improve these standards.
Regulation and Supervision
Q.14. You've been in the banking industry for nearly 40 years, 
but have no experience as a financial regulator. Why do you 
want the job as the top regulator of national banks?

A.14. The U.S. banking system is the best in the world. I think 
we can make it even better to support economic growth, 
innovation and accessibility for all Americans while 
maintaining safety and soundness. I want to lead an effort to 
help make this happen.

Q.15. You have only worked at banks regulated by the Office of 
the Comptroller of the Currency, the agency you are nominated 
to lead. Do you think the OCC is a fair regulator? What do you 
think it does well? What will you try to improve or change?

A.15. The staff of the OCC have consistently been identified as 
one of the most talented, thorough, and advanced regulatory 
groups in Government. In my view, examiners in charge of the 
safety and soundness of the banking industry must constantly 
ask themselves and banks what risk they believe there is in the 
system and ensure that these risks do not impair the U.S. 
economy. If confirmed, I hope to harness technology to monitor 
and oversee the industry while minimizing the impact to banks.

Q.16. One of the most significant accomplishments of the OCC 
after the 2008 financial crisis was its heightened supervision 
program for the Nation's largest banks. If confirmed, will you 
continue and strengthen this program? How?

A.16. To be clear, I support strong and effective regulation of 
our banking system. I would not support changes that would harm 
the safety and soundness of our banking system. It is important 
to keep in mind that the U.S. banking system today is 
dramatically better capitalized than it was before the 
financial crisis and that it is subject to a more rigorous set 
of regulations. If confirmed, I will engage in a continuous 
review of our regulatory framework to ensure our system is safe 
and sound and that regulations are efficient, effective, and 
appropriately tailored so that the financial sector can 
continue to foster economic growth.

Q.17. Acting Comptroller Noreika has proposed that the OCC be 
given the authority to both charter and grant deposit insurance 
to national banks. The lesson from the 1980s on this is 
problematic. Do you support this proposal? What is the 
rationale for combining the deposit insurance and chartering 
decision in one agency?

A.17. The referenced proposal raises significant issues related 
to the relationship of chartering banks and insuring deposits, 
as well as interagency responsibilities. If confirmed, I will 
carefully review this matter and related issues.

Q.18. The OCC has proposed issuing national bank charters to 
nonbank fintech firms. This proposal is controversial and is 
currently the subject of a lawsuit initiated by State 
regulators. Supporters believe this will encourage innovation. 
Critics of this effort have raised questions about its effect 
on the marketplace, the payment system, and potential 
consequences for small community institutions, as well as the 
tax payer. What do you think about a
national charter for fintech firms? How do you propose to 
address concerns raised?

A.18. I am supportive of initiatives that encourage economic 
growth and innovation, and believe this is an area that 
requires input and discussion amongst industry and Federal and 
State regulatory bodies to determine the appropriate path 
forward.

Q.19. The OCC has a history of working to undermine strong 
State-based consumer protections through preemption--
effectively making State mortgage and usury caps moot. This 
happened in Cleveland leading up to the financial crisis. Do 
you think the OCC should respect States' authority to protect 
consumers from predatory bank products offered within their 
borders? Instead of attacking State consumer protections, 
should the OCC set minimum standards and allow States to 
improve upon them?

A.19. I support appropriate preemption for national banks. 
States play a very important role in consumer protection when 
not preempted by Federal laws and should continue to do so.

Q.20. Do you think that if a regulatory agency that is being 
consulted by another regulatory agency for a rulemaking had 
safety and soundness concerns about the rule under 
consideration that they would raise that concern as soon as 
possible? Does it make sense that an agency would wait 2 years 
into the rulemaking to raise these concerns?

A.20. I believe the banking regulators can improve their 
coordination in the rulewriting process. During that process, 
issues should be raised within a reasonable period of time.

Q.21. Will you commit to making policy based on fair and 
transparent analysis of data, and to make that analysis 
available to Committee Members for scrutiny? Specifically, will 
you share any and all analysis OCC staff or leadership has 
prepared on the safety and soundness impacts of the CFPB's 
arbitration rule?

A.21. If confirmed, I will work to make sure that the OCC 
continues to conduct rigorous analyses of data, and to share 
data where appropriate.

Q.22. Will you provide community banks with the resources and 
technical assistance necessary to keep up with quickly changing 
cybersecurity threats? How do you plan to reduce the burdens 
that the threat of breaches poses to small institutions?

A.22. Yes. Community banks are a vital part of our Nation's 
banking system and as their regulator, we should continually 
seek ways to support these banks in serving the consumers, 
businesses, and communities that depend on them. One 
significant challenge is cybersecurity. Supporting the Nation's 
community banks with this and other issues would be a priority 
of mine.
    If confirmed, I would continue the OCC's commitment to 
provide community banks with the informational resources and 
technical assistance necessary to keep up with cybersecurity 
threats. The OCC also has made it a priority to continually 
review and consider ways to reduce burdens on community banks 
that relate to regulatory or business requirements.
    Finally, while not exclusively focused on cybersecurity, 
one of the primary purposes of the OCC's Office of Innovation 
is to support community banks to understand and take advantage 
of innovation in a safe and sound way to enhance the banking 
products and services available throughout our Nation.

Q.23. At your nomination hearing, you said you agree with the 
June Treasury Report's recommendations to provide regulatory 
relief to small banks and credit unions. What changes to law 
would do the most to lower compliance costs and other 
regulatory burdens for small banks and credit unions with 
assets under $10 billion without jeopardizing safety and 
soundness?

A.23. I support the Treasury's recommendations and am 
personally committed to improving the financial regulatory 
framework. I believe that regulations must be appropriately 
tailored to the risk posed by community banks and other banks 
to consumers, businesses, and the financial system. If 
confirmed, I will seek to improve the current regulatory system 
to avoid a one-size-fits-all approach to banking regulation, 
which will help reduce burdens and costs on small banks that 
pose very limited risk to the safety and soundness of the 
banking and financial system.
    More specifically, if confirmed, I will work with my fellow 
regulators to continue their current efforts to reduce the 
burden on small banks from being required to obtain appraisals 
for relatively small commercial real estate and other loans in 
rural areas and other areas suffering a shortage of certified 
appraisers. I also believe that the frequency of examinations 
should be better tailored to banks' CAMELS ratings and capital 
levels. If confirmed, I will also continue the ongoing work of 
the OCC and other banking agencies to reduce the size and 
content of quarterly Call Reports based on the size, 
complexity, and systemic riskiness of banks. Finally, the 
application of the Volcker rule to community banks should be 
reconsidered to exempt small banks with de minimis trading 
activities.

Q.24. After the financial crisis, and the failure of the Office 
of Thrift Supervision to appropriately regulate thrifts, the 
agency was merged with the OCC. Are there any specific 
priorities you have regarding the regulation of thrift banks?

A.24. Federal Savings Associations continue to play an 
important role in meeting the financial services needs of 
people across the country. There are 368 Federal savings 
associations with more than $760 billion in assets.
    The supervision of Federal savings associations is now 
fully integrated into the OCC, and the agency regulates all 
national banks and Federal savings associations consistent with 
its mission. If confirmed, I would seek to continue to ensure 
the safety and soundness of both national banks and Federal 
thrifts.

Q.25. If confirmed, you will be a voting member of the 
Financial Stability Oversight Council. What emerging financial 
stability risks would you want to focus on?

A.25. If confirmed, I look forward to serving as a voting 
member of the Financial Stability Oversight Council and would 
collaborate with other Council members to identify potential 
emerging threats and vulnerabilities in the U.S. financial 
system. The Council has focused on several areas that are 
critical to OCC-supervised institutions, including, for 
example, cybersecurity and the critical role of central 
counterparties.

Q.26. If confirmed, you will also be a member of the FDIC's 
Board of Directors. What do you think about the FDIC's Orderly 
Liquidation Authority?

A.26. The financial crisis showed us how necessary it is to 
have an effective resolution regime for failing banks. As for 
the OLA specifically, I understand that Treasury is working on 
a response to an April 2017 Presidential Memorandum that 
requires it to thoroughly review OLA and provide a report to 
the President on its findings. I would like to review that 
report fully before discussing the future of OLA.
Miscellaneous
Q.27. In your ethics disclosures you list your ownership of 
many residential properties in California and Nevada. Did you 
own these properties before the financial crisis? If not, when 
did you purchase each property, did you receive financing for 
any of these purchases, what bank(s) originated those loans? 
Were these arm's length transactions?

A.27. The Nevada properties were purchased between 2013-2016 
and the California properties were purchased in the timeframe 
of 2006-2016. One of the Nevada investment purchases had a 
short-term loan provided by UBS, which since has been paid off. 
My primary residence is the only Nevada property that has a 
loan against the property and that is with UBS. Three of the 
California properties have mortgages as identified in my 
financial disclosure, two from UBS and one from the Otting 
Family Trust. To the best of my knowledge and belief, these 
transactions were concluded on commercially reasonable terms.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JOSEPH 
                             OTTING

Q.1. My constituents tell me that the EGRPRA report 
inadequately highlighted concrete ways to reduce the regulatory 
paperwork burden. What more can the OCC do to reduce the 
regulatory burden on community banks?

A.1. The EGRPRA report provided to Congress in March 2017, 
describes ongoing steps the agencies plan to pursue jointly, 
and actions the OCC has taken independently to reduce the 
regulatory paperwork burden on supervised entities. I believe 
this report is a good first step toward meaningful burden 
reduction, and work already has been accomplished to reduce 
burdens in certain areas.
    As Comptroller, I would continue to look for additional 
ways to reduce unnecessary burden and promote economic 
opportunity while ensuring that the Federal banking system 
continues to operate in a safe and sound manner, provide fair 
access to financial services, treat customers fairly, and 
comply with applicable laws and regulations.

Q.2. Our financial system has become increasingly consolidated 
as community banks and credit unions either close their doors 
or merge with larger institutions.

Q.2.a. Are you concerned about this pattern? Why?

A.2.a. I am concerned about the increasing consolidation of 
community banks and if confirmed I will examine this trend to 
ascertain if regulatory burden is a cause. These institutions 
play an outsized role in the economy, lending to small and mid-
size businesses that fuel economic growth.

Q.2.b. What services can these smaller institutions provide 
that larger institutions cannot provide?

A.2.b. Community banks, due to their unique insight into the 
credit needs of their communities and close relationships with 
their customers, are able to deliver financial services in ways 
larger institutions cannot and thus play a vital role 
supporting economic growth in cities and towns around the 
country. Community banks serve as essential engines of 
``relationship'' lending to small and mid-size businesses, 
farms, and consumers in individual communities.

Q.3. Multiple anecdotes from my constituents make it clear that 
there are several Nebraska counties where mortgages are not 
originated because of over-regulation. What is the best way to 
address this problem from a regulatory standpoint?

A.3. While I cannot comment on the particular challenges of the 
counties in Nebraska, I support Treasury's findings from its 
June report to the President on how to better align our 
financial regulatory system with the needs of consumers and 
businesses. I understand that Treasury's report made several 
recommendations to modify regulations that are negatively 
affecting the ability of creditworthy American families to gain 
access to affordable mortgages.

Q.4. My understanding is that only two banks have opened since 
the passage of Dodd-Frank, including Bird in Hand Bank in 
Pennsylvania, which has a customer base that is around half 
Amish.

Q.4.a. Why do you believe this is the case? The dearth of de 
novo banks is an important issue and adversely affects the 
availability of banking services.

A.4.a. As Comptroller, I would work to identify opportunities 
to eliminate barriers to de novo banks, including looking for 
ways to make the chartering and deposit insurance approval 
process more efficient.
    There are a variety of factors contributing to the low 
number of de novo banks since 2008, including slow economic 
growth, a
sustained period of historically low interest rates, industry
consolidation, competition from nonbank financial service 
providers, and challenges with obtaining deposit insurance.
    In his June 22 testimony, the Acting Comptroller discussed 
possible ways to make deposit insurance approvals more 
efficient by leveraging the chartering approval process 
conducted by the primary prudential authority. As Comptroller, 
this would be a subject that I would continue to explore.

Q.4.b. What potential impacts does this have on our financial 
system?

A.4.b. Consolidation of banks and the lack of de novo activity 
can reduce the availability of banking services where they are 
needed most and contribute to stagnation within the industry. A 
healthy, diverse Federal banking system requires an efficient 
process for new companies seeking to engage in the business of 
banking to become national banks.

Q.4.c. Is there anything more the OCC can do to encourage the 
opening of new banks?

A.4.c. In his June 22 testimony, the Acting Comptroller 
discussed possible ways to make deposit insurance approvals 
more efficient by leveraging the chartering approval process 
conducted by the primary prudential authority. As Comptroller, 
this would be a subject that I would continue to explore. I am 
hopeful that making the de novo process more efficient will 
result in more interest by new entrants into the national 
banking system.
    In addition, if confirmed, I would continue to be receptive 
to more innovative approaches to banking. De novo banks can be 
a source of responsible innovation and taking an affirmative 
stance toward innovation that enhances banking services, 
products, and operations can encourage more companies to 
explore opportunities to become banks.

Q.5. As you know, in December of 2016 the OCC released a 
whitepaper discussing the possibility of a fintech charter, 
entitled, ``Exploring Special Purpose National Bank Charters 
for Fintech Companies.''

Q.5.a. Do you intend to move the OCC forward on finalizing a 
fintech charter? Why or why not? If so, please provide a 
timeline on these efforts.

A.5.a. If confirmed, I look forward to evaluating the merits 
and value of the OCC's proposed approach to chartering 
financial technology companies engaged in the business of 
banking. As financial technology accelerates, it is important 
to ensure that companies engaged in the business of banking 
have the appropriate oversight and regulatory structure in 
place.
    Companies engaged in the business of banking should have 
the option of pursuing their businesses as a federally 
chartered bank, if they meet the standards and criteria for 
becoming a national bank. Any company that earns a national 
bank charter should be held to the same high standards, laws, 
and regulations applicable to other national banks.

Q.5.b. Does the OCC have sufficient statutory authorization to 
implement a fintech charter? Why or why not?

A.5.b. The authority to grant national bank charters and 
Federal thrift charters is well established and includes the 
authority to charter limited purpose national banks.
    The authority to grant special purpose national bank 
charters is described in 12 CFR 5.20 Section 520.(e)(1). I 
support the OCC in defending its authority against the 
challenge being brought by the Conference of State Bank 
Supervisors (CSBS) and the New York Department of Financial 
Services (NYDFS).
    While CSBS and NYDFS are challenging the OCC's authority 
articulated in 12 CFR 5.20(e)(1) to grant special purpose 
national bank charters to uninsured, nondepository fintech 
companies engaged in the business of banking, the OCC has other 
authorities to charter full service national banks as well as 
trust banks, banker's banks, and credit card banks, which may 
be chartered using the OCC's broad authority under 12 U.S.C.  
27(a) and (b); 12 U.S.C.  1841(c)(2)(D) and (F).

Q.5.c. Under what legal circumstances is the OCC allowed to 
regulate fintech companies?

A.5.c. The OCC can only regulate those fintech companies that 
choose to become a national bank or that provide services to a 
national bank as a third-party service provider. The OCC would 
have authority to regulate any fintech company that becomes a 
national bank under the same laws and regulations that grant 
the OCC authority to administer the Federal banking system. And 
the OCC would have authority to regulate fintech companies to 
the extent that the agency has authority to oversee third-party 
service providers to national banks, Federal savings 
associations, or Federal branches of foreign banks. The vast 
majority of fintech companies operate under State authorities 
and are likely to continue to do so.

Q.5.d. What concerns, if any, do you have with the OCC's 
fintech charter, as outlined in the previously mentioned 
December 2016 whitepaper?

A.5.d. The proposal by the OCC is a thorough and thoughtful 
proposal. It is important to ensure we have a Federal banking 
system that can adapt to the changing needs of the market and 
its customers. If confirmed, I will take the opportunity to 
carefully consider the proposal, its potential impact on 
products and services offered to customers of the Federal 
banking system, and the possible effects on other institutions 
that make up the Federal banking system.

Q.6. As you know, the OCC recently released a bulletin 
entitled, ``Frequently Asked Questions to Supplement OCC 
Bulletin 2013-29,'' which provided some regulatory guidance for 
banks that partner with fintech companies. However, I am told 
there is still confusion about such partnerships, including 
when fintech companies will be treated as third-party service 
providers, as well as the regulatory implications of this 
arrangement.

Q.6.a. Should the OCC provide further guidance to banks about 
their partnership with fintech companies, including when 
fintech companies will be treated as third-party service 
providers, and the corresponding regulatory implications for 
banks? If so, please provide a timeline for such efforts.

A.6.a. This is a very important question, particularly as banks 
rely more upon third-party service providers and explore other 
partnerships to serve their customers better and enhance their 
operations. If confirmed, I will look for opportunities to 
enhance OCC guidance in this area.
    Communication is key to successful supervisory 
relationships. Banks with questions about partnering with 
fintech companies can always discuss their concerns with 
assigned supervisory staff or with staff within the OCC's 
Office of Innovation.

Q.6.b. Under what conditions have onsite bank examiners treated 
fintech companies as third-party service providers?

A.6.b. In my experience as a bank executive, bank regulators 
treat a company as a third-party service provider when a bank 
contracts with the company to engage its services. OCC Risk 
Management Guidance defines a third-party relationship as any 
business
arrangement between a bank and another entity, by contract or 
otherwise. The OCC expects a bank to practice effective risk 
management regardless of whether the bank performs the activity 
internally or through a third party. A bank's use of third 
parties does not diminish the responsibility of its board of 
directors and senior management to ensure that the activity is 
performed in a safe and sound manner and in compliance with 
applicable laws.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JOSEPH 
                             OTTING

Q.1. The Federal Reserve, OCC, and FDIC in 2016 published a 
joint advance notice of proposed rulemaking (ANPR) on 
cybersecurity, asking for comment, among other things, on 
whether boards of directors should have adequate expertise in 
cybersecurity. Citing the ANPR: ``a cyber incident or failure 
at one interconnected entity may not only impact the safety and 
soundness of the entity, but also other financial entities with 
potentially systemic consequences.'' Other than the 
solicitation of comments, we are not aware of any material 
progress on this ANPR. If confirmed, may I have a personal 
commitment from each of you that you will work with the FDIC 
and each other on advancing this cybersecurity ANPR?

A.1. I support the fact that this Administration has made the 
security and resiliency of the U.S. financial system a key 
priority. Effective coordination and dialogue is vital to 
further promoting effective cybersecurity. If confirmed, you 
have my commitment that I will work with staff at the OCC to 
continue to pursue appropriate and productive work to help 
promote effective cybersecurity.

Q.2. The OCC and the Federal Reserve are each authorized to 
enforce the Military Lending Act (MLA), which is a bipartisan 
law enacted in 2006 that sets a hard cap of 36 percent interest 
for most loans to the military. On July 22, 2015, the 
Department of Defense finalized MLA rules that closed prior 
loopholes that allowed unscrupulous lenders to prey upon 
servicemembers and their families. Do you support these 
stronger MLA rules? If confirmed, will you support and enforce 
these strong MLA rules to the fullest extent possible?

A.2. If confirmed, I would support and enforce strong MLA 
rules.

Q.3. As part of its duties, the OCC is also expected to enforce 
the Servicemembers Civil Relief Act (SCRA), but SCRA 
enforcement of the 6 percent interest cap on loans incurred 
prior to active duty or the SCRA's foreclosure protections has 
been inconsistent and subject to the discretion of our 
financial regulators. If confirmed, can you tell me how you 
will prioritize SCRA enforcement?

A.3. If confirmed, I would be supportive of SCRA being part of 
the regulatory exam process and would endorse a horizontal 
review in the industry.

Q.4. The Comptroller is supposed to be independent from the 
Administration and while it is part of the Treasury Department, 
it is an independent bureau. In the financial regulatory space, 
can you point to anything where you do not agree with the 
position taken by either the Trump administration or Secretary 
Mnuchin?

A.4. If confirmed, I will carry out my duties consistent with 
applicable law, in a manner free from undue influence.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JOSEPH 
                             OTTING

Q.1. Please provide State-by-State numbers of the total number 
of foreclosures and loan modifications completed by OneWest. 
While you may not currently have direct access to this 
information, you can request that CIT provide this information 
prior the Banking Committee's consideration of your nomination.

A.1. I am no longer employed by OneWest/CIT and do not have 
access to its internal records, including the information you 
are requesting.

Q.2. In the wake of the financial crisis, Congress enacted a 
provision, section 956 of Dodd-Frank, to require financial 
regulators to jointly issue rules to ban incentive pay 
practices at large financial institutions that encourage 
inappropriate risk-taking. In May of 2016, the financial 
regulators including the Federal Reserve Board and the OCC 
proposed a rule to implement section 956. More than a year 
later, the rulemaking still has not been finalized. The Wells 
Fargo fraudulent account scandal uncovered last year, where 
senior executives were given bonuses for ``successes in cross-
selling,'' underscores the need for rules regarding incentive-
based compensation agreements. Last month, the Office of 
Management and Budget published updated regulatory agendas, and 
the rulemaking was removed from the OCC's agenda.\1\
---------------------------------------------------------------------------
    \1\ https://www.reginfo.gov/public/do/
eAgendaMain?operation=OPERATION_GET_ 
AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=1
500&Image 58.x=56&Image58.y=6&Image58=Submit.

Q.2.a. Will you commit to prioritizing the section 956 
rulemaking and ensuring that it is part of the OCC's regulatory 
---------------------------------------------------------------------------
agenda?

A.2.a. Section 956 of the Dodd-Frank Act requires financial 
regulators to jointly issue rules relating to enhanced 
compensation structure reporting. The OCC, together with the 
other designated Federal regulators, published a proposed joint 
rule on this matter in June 2016. If confirmed, I would urge 
all the regulators to work together to finalize the rule as 
required by statute.

Q.2.b. Will you commit to implementing section 956 of Dodd-
Frank?

A.2.b. As Comptroller, I would work to fulfill all of the 
statutory obligations of the office.

Q.2.c. Will you commit to implementing all congressionally 
mandated rulemakings?

A.2.c. As Comptroller, I would work to fulfill all of the 
statutory obligations of the office.

Q.3. In 2015, while you were Chair of the California Chamber of 
Commerce, the organization placed a State bill, AB 244, on its 
``jobs killer'' list and urged State legislators to oppose it. 
The bill would have protected from foreclosure surviving 
spouses who have a legal interest in a home but who were not 
listed on the mortgage. In the same year, you said at the 
public hearing regarding the merger of OneWest and CIT Group, 
``Let me be clear, we urge and fully support a moratorium on 
foreclosure of nonborrowing spouses.'' When you were publicly 
representing OneWest, you took a sympathetic tone toward 
borrowers, but when you were making policy decisions for your 
association, you staked out a position that would harm the very 
borrowers you claimed to want to help. How do you reconcile 
these two positions?

A.3. I had no direct involvement in the decision by the Chamber 
regarding AB 244.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM JOSEPH 
                             OTTING

Q.1. Your testimony raised a lot of important issues related to 
consumer rights and the proper balance of regulations in our 
economy. I think it's important to remember that you are 
nominated for a position of public trust and with that comes a 
different set of priorities and obligations than what you might 
have experienced in the private sector. Your decisions will 
greatly impact not only the bottom line of the financial 
institutions that you regulate, but as we saw all too 
tragically during the financial crisis, regulatory decisions 
can have a dramatic impact on the well-being of individuals and 
their families.
    If confirmed, how do you intend to separate yourself from 
past conflicts and carry out your duties independently so that 
you can serve the public's best interest?

A.1. If confirmed, I will adhere to all applicable ethics laws, 
rules, and policies. Should I have a question concerning my 
ethical obligations, I will seek the counsel of appropriate 
ethics staff.

Q.2. As you're well aware Wells Fargo was fined $180 million 
last year by regulators, including the OCC, for setting up 
fraudulent accounts for its customers.
    I'm curious to know your views on the role the OCC should 
play in preventing these types of scandals? Do you believe more 
should be done in the future to avoid this type of systemic 
fraud, and if so, what would you recommend?

A.2. As a former bank executive, I can tell you the primary 
responsibility for preventing such abuse and ensuring 
incentives are properly aligned to motivate appropriate 
behavior and achieve business goals rests with the bank 
leadership and boards. As Comptroller, I would look for 
additional opportunities to ensure bank boards and management 
fully understand their roles and responsibilities in preventing 
this behavior.
    If confirmed, I believe it is critical to empower OCC's 
cadre of professional community, midsize, and large bank 
examiners and ensure that they have the support, resources, and 
training necessary to exercise their responsibilities to ensure 
that the banks they supervise adhere to all appropriate laws, 
regulations and other issuances. Ongoing supervision is the 
most effective tool the agency has to affect change.
    Consumer fraud has no place in the Federal banking system 
and I believe in providing examiners authority to consider 
appropriate remediation activities, up to and including formal 
enforcement actions, when the circumstances warrant.
    The OCC conducted an internal review of its supervision of 
Wells Fargo, which included several recommendations. As 
Comptroller I will look to ensure these recommendations have 
been implemented effectively and continue to look for 
opportunities to enhance our supervision of large, complex 
banks.
    The OCC is also conducting a horizontal review of the sales 
practices among large and midsize national banks. I look 
forward to discussing the findings when that review is complete 
and working with staff to correct any deficiencies they 
identify.

Q.3. During our one-on-one yesterday we covered some important 
ground as it relates to regulatory relief for community banks. 
I appreciate your comments on the need for relief in mortgage 
lending and rural appraisals. Another area that I believe is 
ripe for regulatory overhaul is small dollar lending. In North 
Dakota, we have several community banks that are trying to help 
extend small dollar credit to customers, but can't because of 
regulatory uncertainty and onerous compliance standards. 
There's analysis that shows banks and credit unions could offer 
safe loan alternatives at prices six times lower than payday 
lenders. I believe it's far better to have these loans made by 
well-regulated community banks that know their customers and 
have their long-term financial interests in mind.

   LWill you commit to working with banks to enable 
        them to offer new reasonable and safe installment loans 
        to their customers that can be a true alternative to 
        payday loans?

A.3. Access to a diverse set of credit products is essential 
for consumers across America. I support adjustments to our 
regulatory
approach designed to decrease our population of unbanked and 
underbanked consumers and bring more of these consumers into 
the financial mainstream. I also support innovation in banking 
and a marketplace with a level playing field for all financial 
institutions that will increase competition, which is 
ultimately beneficial to consumers. You have my commitment to 
work with your office on these matters.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JOSEPH 
                             OTTING

Q.1. Mr. Otting, in our one-on-one meeting, you and I had a 
chance to talk about the Wells Fargo scandal. I was encouraged 
to hear your view that their behavior was totally unacceptable. 
I also agree with your assessment that the corporate culture, 
with its drive to cross-sell and an obsession with sales 
targets, was at the heart of the problem. Since that 
conversation, we have learned of yet another Wells Fargo 
scandal. This one involved charging consumers for high priced 
auto insurance that they did not need, without their knowledge. 
The high cost of the auto insurance pushed roughly 274,000 
Wells Fargo customers into delinquency and resulted in almost 
25,000 wrongful vehicle repossessions.

Q.1.a. What will you do to prevent these types of scandals from 
happening again?

A.1.a. I understand that following the OCC's enforcement action 
against Wells Fargo last September, the agency undertook a 
thorough review of its supervisory activities to determine any 
lessons learned that it could utilize going forward. The OCC 
made its lessons learned findings public on April 19, 2017. I 
believe that the OCC is in the process of institutionalizing 
the recommendations included in this report, which is intended 
to correct supervisory deficiencies identified. As Comptroller 
I will look to ensure these recommendations have been 
implemented effectively and continue to look for opportunities 
to enhance our supervision of large, complex banks.
    The OCC is also conducting a horizontal review of the sales 
practices among large and midsize national banks. I look 
forward to discussing the findings when that review is 
complete, working to correct any deficiencies staff identify, 
and determining what additional steps can be considered to 
prevent such practices from recurring.
    Consumer fraud has no place in the national banking system 
and I believe in providing examiners authority to consider 
appropriate remediation activities, up to and including formal 
enforcement actions, when the circumstances warrant. OCC 
examiners will have my strong backing to exercise their 
supervisory judgment, and take enforcement or other remedial 
actions to ensure banks operate in compliance with appropriate 
law and regulations.

Q.1.b. At what point do these kinds of violations become a 
safety and soundness concern for the banks the OCC supervises?

A.1.b. I do not have first-hand knowledge of the sales 
practices at Wells Fargo, but treating customers unfairly and 
failure to implement effective controls against fraud are 
safety and soundness issues. No bank can operate in a safe and 
sound manner for long if it abuses its customers and allows 
misaligned incentives to motivate improper behaviors.
    The OCC's enforcement action against the bank (September 8, 
2016) states clearly that the agency found the bank's sales 
practices to be unsafe or unsound. See https://www.occ.gov/
news-issuances/news-releases/2016/nr-occ-2016-106a.pdf and 
https://www.occ.gov/news-issuances/news-releases/2016/nr-occ-
2016-106.html.

Q.1.c. Do you think banks' compensation practices are 
contributing to the problem of banks harming their consumers in 
order to increase profits?

A.1.c. In the case of the OCC's enforcement action against 
Wells Fargo for its sales practices violations, the OCC 
identified unsafe or unsound practices in the bank's risk 
management and oversight of its sales practices and noted that 
the bank's incentive compensation program and plans were not 
aligned properly and fostered unsafe and unsound practices. 
Based on my personal experience, it is critical that a bank's 
sales culture and compensation be properly aligned to avoid any 
actual or perceived inappropriate incentives.

Q.1.d. In the auto insurance scandal, consumers who fell behind 
in paying their auto loan or had their car repossessed likely 
have negative trade lines on their credit report that will 
haunt them for years. These errors on their credit report will 
lower their credit score, prevent them from getting loans in 
the future or increase the cost of borrowing, and make it 
harder for them to get hired or rent an apartment.
    What will you do as Comptroller of the Currency to ensure 
that (1) Wells Fargo works with credit reporting agencies to 
remove the negative trade lines on consumer credit reports as a 
result of the scandal, and (2) Wells Fargo helps impacted 
consumers verify that their credit reports no longer contain 
negative information related to this scandal?

A.1.d. If confirmed, I will carefully review the OCC's 
supervisory record and findings relating to Wells Fargo auto 
loan practices and ensure that appropriate action--up to and 
including formal enforcement action if necessary--is taken to 
ensure that any adverse impacts to consumers of such practices 
are fully addressed.

Q.2. It does not require too much imagination to understand why 
the financial industry is lobbying against the CFPB's new rule 
banning mandatory arbitration. They have been able to avoid all 
kinds of lawsuits by taking away consumers' right to go to 
court.
    But it is very troubling that one of the most vocal 
opponents to the new rule was the Acting Comptroller of the 
Currency. He claims that the rule poses a safety and soundness 
risk to banks. However, he has not provided any evidence to 
support that claim. In fact, several of the largest banks do 
not use them. And those institutions that have chosen to stop 
using mandatory arbitration--Bank of America, Capital One, 
JPMorgan Chase--are no less safe or sound as a result.

Q.2.a. What should the OCC's role be when it comes to weighing 
in on rules issued by other financial regulators, like the 
CFPB's arbitration rule?

A.2.a. By statute, the CFPB has exclusive authority to 
prescribe regulations administering certain consumer protection 
laws, and is required to consult with the prudential regulators 
prior to proposing a rule and during the rulemaking process. If 
during the consultation process, a prudential regulator 
provides a written objection to all or any part of a proposed 
rule, the CFPB must describe the objection and how it is 
addressed. This process is critical to ensure meaningful input 
by the OCC into CFPB regulations and to avoid any unintended 
consequences of a CFPB rule on the national banking sector and 
to ensure consistent application of the rules by multiple 
regulators.
    The statute also provides for the review and stay of rules 
for safety and soundness reasons under the Financial Stability 
Oversight Council. As member of the council and the primary 
prudential regulator of the Federal banking system, the 
Comptroller of the Currency has an important role to play 
ensuring rules do not adversely affect the safety and soundness 
of the Federal banking system. It is important for the agencies 
to maintain a positive collaborative relationship to ensure 
such concerns are addressed early and relevant data and 
information are shared so that each agency has the opportunity 
to fully consider such matters in exercising their independent 
authorities.

Q.2.b. How would you evaluate whether the CFPB rule presents 
safety and soundness concerns?

A.2.b. To evaluate whether the CFPB rule regarding arbitration 
agreements presents safety and soundness concerns, one would 
look at its potential effects on the Federal banking system as 
a whole as well as the institutions within that system. One 
would seek to ascertain the rules' impact on the banks' ability 
to mitigate risk and limit liability, on reserves, and on the 
availability and cost of the products and services it offers. 
The effects need to be evaluated in context to determine the 
cumulative impact, rather than in isolation.
    In general, as part of the OCC's statutory consultative 
role, it is crucial that CFPB provide the OCC with adequate 
information, findings, and data that OCC economists, policy 
experts, and examiners may review in order to determine any 
safety and soundness or other potential implications of 
proposed rules. If confirmed, I will expect that the CFPB will 
engage with the OCC early and often as it develops regulations 
to ensure that the consultation process is meaningful, and that 
we have the information we need to provide feedback and 
recommendations to the bureau to accommodate any safety and 
soundness concerns that may arise.

Q.3. If there is a lack of evidence that the CFPB rule 
undermines banks' safety and soundness, will you retract Acting 
Comptroller Noreika's opposition to the rule?

A.3. I believe this is a complicated matter--one which I will 
give serious attention to if I am confirmed. If confirmed, I 
commit to work faithfully to help ensure the safety and 
soundness of national banks and Federal savings associations, 
and will work closely with the members of the FSOC to help 
assure U.S. financial stability.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                         JOSEPH OTTING

Q.1. How many foreclosure completions did OneWest (the Bank) 
engage in during your employment at the Bank? How many 
foreclosure completions were in Nevada?

A.1. As I am no longer employed by OneWest/CIT and do not have 
access to its internal records, I do not have sufficient 
information to answer this question.

Q.2. An April 2014 report from the OCC indicated that OneWest 
improperly foreclosed on 54 servicemembers in contravention of 
the Service Member Civil Relief Act.\1\ How many of those 
servicemembers resided in the State of Nevada?
---------------------------------------------------------------------------
    \1\ https://www.occ.gov/news-issuances/news-releases/2014/nr-occ-
2014-65a.pdf.

A.2. As I am no longer employed by OneWest/CIT and do not have 
access to its internal records, I do not have sufficient 
---------------------------------------------------------------------------
information to answer this question.

Q.3.a. Secretary Mnuchin in his questions for the record to the 
Senate Finance Committee following his confirmation hearing 
suggested that OneWest modified the loans of approximately 
2,150 Nevadans. But his answer conflated modification offers 
with actual modifications. Everyone who has worked with 
homeowners understands that an offer from a bank to modify a 
loan is not the same thing as a modification. How many 
completed loan modifications did OneWest provide to Nevadans 
during your tenure?\2\ How many of those completed loan 
modifications included a reduction in the borrower's principal 
amount?
---------------------------------------------------------------------------
    \2\ http://static.politico.com/bc/9e/81e33aa74b5980daa9ffdeb7cba9/
steven-mnuchin-responses-to-senate-finance-committee.pdf.

A.3.a. As I am no longer employed by OneWest/CIT and do not 
have access to its internal records, I do not have sufficient 
---------------------------------------------------------------------------
information to answer this question.

Q.3.b. In your response to my question at your confirmation 
hearing, you said, ``a lot of people have different definitions 
of `robo-signing.' '' What is your definition of what's 
colloquially referred to as ``robo-signing?'' Do any of the 
Office of Thrift Supervision's findings on pages 2 and 3 of 
OneWest's 2011 consent order constitute what is colloquially 
known as robo-signing?\3\
---------------------------------------------------------------------------
    \3\ https://www.occ.gov/static/ots/misc-docs/consent-orders-
97665.pdf.

A.3.b. I do not believe that OneWest Bank engaged in practices 
that are commonly associated with this term. I am also not 
---------------------------------------------------------------------------
aware of any legal definition of this term.

Q.4. In response to one of my questions at your confirmation 
hearing, you seemed to suggest that because OneWest had a 
``process'' in place to handle residential real estate mortgage 
foreclosures, that it was evidence that the Bank did not, in 
fact, ``robo-sign'' or engage in unsafe or unsound banking 
practices. Would you concede that a bank merely having a 
process in place is insufficient to guard against unsafe or 
unsound banking practices, and that such processes must 
actually be followed by employees of the bank? For example, a 
OneWest employee testified in a 2009 deposition that she signed 
6,000 documents per week, mostly affidavits, and that she did 
not check the figures outlined in the affidavits.\4\ Does the 
behavior described in this deposition constitute ``robo-
signing?'' Did OneWest's ``processes'' prove sufficient to 
guard against this misconduct?
---------------------------------------------------------------------------
    \4\ http://4closurefraud.org/2009/11/15/full-deposition-of-the-
infamous-erica-johnson-seck-re-indymac-federal-bank-fsb-plaintiff-vs-
israel-a-machado-50-2008-ca-037322xxxx-mb/.

A.4. Banks should take appropriate steps to comply with all 
applicable laws, rules, and policies, including those relating 
to safety and soundness. Often, this counsels in favor of 
adopting internal processes as well as implementing and, as 
necessary, updating, reasonable controls to provide for 
adherence to those processes. As demonstrated by the 
independent foreclosure review, under the policies and 
procedures in place at OneWest, the bank experienced relatively 
low rates of irregularities associated with its mortgage 
activities. Additionally, it is my understanding based on the 
testimony you cite that the employee was not describing her 
individual workload but rather the activity of multiple 
---------------------------------------------------------------------------
employees.

Q.5. Please elaborate on the answer you provided to me during 
your oral testimony and indicate why you signed the 2011 
consent order between OneWest and the Office of Thrift 
Supervision if you believed that the findings in the consent 
order did not accurately reflect the practices of the Bank at 
that time.

A.5. After due consideration, we believed that this was the 
most appropriate course of action at the time.

Q.6. In your oral response to my questions at the hearing, you 
seemed to indicate that consent orders which do not require 
admissions of guilt are somehow invalid or coercive on the part 
of the Government. Given these views, if confirmed, will the 
OCC require admissions of guilt when entering into a consent 
order with a regulated institution?

A.6. If confirmed, I look forward to considering this issue in 
consultation with career staff at the OCC. I believe that the 
OCC should take appropriate action to vigorously enforce the 
laws within its jurisdiction.

Q.7. When asked about ``dual tracking'' at your confirmation 
hearing, you responded that OneWest's behavior was not 
significant
because it was ``industry practice,'' insinuating that it was 
permissible because it was common. Please elaborate on your 
views on the practice commonly known as ``dual tracking.'' Also 
please describe the relevance of whether or not it was industry 
practice in your answer.

A.7. I did not testify that OneWest's activities regarding 
these issues were ``not significant'' because they were 
``industry practice.'' I believe that a bank's actions 
regarding mortgage modifications and foreclosures must be 
undertaken consistent with applicable law. Thus, I do not 
believe that ``industry practice'' should necessarily be 
dispositive with respect to any determination by a bank 
regarding these issues. To the best of my recollection, OneWest 
initially implemented policies and procedures consistent with 
guidance set by Treasury and the Government-Sponsored 
Enterprises; Treasury performed regular audits of OneWest, 
which received industry-leading quality scores; and OneWest 
modified its policies and procedures over time based on new 
regulatory feedback and guidance. As a general matter, I 
believe that loss mitigation efforts--including loan 
modifications--as an alternative to foreclosure can be 
beneficial for both borrowers and financial institutions.

Q.8. In 2015, the California State house considered legislation 
(AB 244) that would've clarified that widowed homeowners were 
protected by the State's Homeowner Bill of Rights. The purpose 
of the legislation was to protect surviving spouses living in a 
home that went to foreclosure after their spouse died. At that 
time, you were Chairman of the California Chamber of 
Commerce.\5\ The Chamber lobbied against that bill, putting it 
on a list of ``jobs killers.''\6\ What was your role in placing 
this legislation on the ``jobs killers'' list?
---------------------------------------------------------------------------
    \5\ http://advocacy.calchamber.com/2014/12/16/calchamber-elects-
2015-board-officers/.
    \6\ http://advocacy.calchamber.com/policy/bill-tracking/job-
killers/2015-job-killers/.

A.8. I had no direct involvement in this decision.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RANDAL 
                            QUARLES

Q.1. While at the Treasury Department you negotiated the 
financial services provisions of six free trade agreements and 
described ``liberalization of financial services'' as ``vital'' 
to U.S. trade policy. Wall Street has sought to include 
financial regulation in trade agreements, most recently in the 
Transatlantic Trade and Investment Partnership (TTIP), as a 
backdoor way of weakening Wall Street reform. Secretary Lew, 
Governor Tarullo, and others pushed back on those efforts and 
argued that financial regulation should be addressed outside of 
trade policy. Do you agree that financial regulation should be 
negotiated outside of broader trade agreements?

A.1. I continue to believe that liberalization of financial 
services through increased market access and national treatment 
for U.S. financial firms in foreign markets is vital to U.S. 
trade policy. Traditionally, the financial services provisions 
of our trade agreements have been negotiated separately from 
the other provisions. Rather than being led by the Office of 
the United States Trade Representative (USTR), the negotiation 
of these provisions has been led by Treasury (which coordinates 
input from all the U.S. financial regulators), and the 
provisions are placed in separate chapters reflecting a 
recognition of all parties that the prudent and efficient
operation of the financial sector has a foundational role for 
all other sectors of the economy and therefore should not be 
subject to compromises and tradeoffs with those other sectors. 
This insulation of the financial services provisions during the 
negotiating process also recognizes that discussions regarding 
financial regulation already occur regularly in various 
international bodies with financial services expertise, such as 
the Basel Committee, the Financial Stability Board, and the 
International Association of Insurance Supervisors.
    The process I have described above was true of all the 
trade agreements for which I negotiated the financial services 
provisions, and this separation was scrupulously respected by 
USTR throughout the negotiating process. I support this 
bifurcation and believe it is well designed to ensure that the 
financial services provisions of trade agreements are 
calibrated to preserve financial stability while also providing 
a broader and fairer playing field for U.S. firms.

Q.2. In September 2016, Governor Tarullo announced that the 
Board of Governors would be incorporating some modified form of 
the GSIB capital surcharge into the CCAR's minimum common 
equity ratio that apply to the U.S. GSIBs. When Senator Rounds 
asked you about your position on this change, you responded 
that you would want to look at the question in more depth, but 
that it is definitely worth looking at. Having had more time to 
consider the question, do you support this change for the 2018 
CCAR process?

A.2. I understand that the Federal Reserve has previously 
committed that any change to incorporate the globally 
systemically important bank (GSIB) surcharge into the 
Comprehensive Capital Analysis and Review stress testing would 
have to go through the normal notice and public comment process 
of rulemaking. If I were to be confirmed, I look forward to 
studying the issue more in-depth and working with members of 
the Federal Reserve Board (Board) to further evaluate the 
benefits and costs associated with adoption of such a measure.

Q.3. In your 2016 Wall Street Journal op-ed you said:

        But the consequence of a dramatic increase in bank capital is 
        an increase in the cost of bank credit, meaning higher interest 
        rates across the board. Those who favor much higher bank 
        capital argue this would not happen, because investors would 
        accept lower returns if the banks they put their money in were 
        safer. In the real world of capital markets, however, there are 
        not enough natural investors in bank equity seeking utility-
        like returns.

Q.3.a. Please provide all of the relevant literature upon which 
you are basing your assertion that a ``dramatic increase in 
bank capital is an increase in the cost of bank credit[.]''

Q.3.b. Do the prospective increased costs outweigh the 
associated benefits to increased financial stability, 
particularly when accounting for the cost of the recent 
financial crisis?

Q.3.c. Please provide supporting evidence for your assertion 
that ``there are not enough natural investors in bank equity'' 
should capital requirements be increased substantially. What is 
a ``natural'' investor, and what distinguishes them from other 
types of investors?

A.3.a.-c. The stability of the U.S. financial system is 
supported by the safe and sound operation of banking 
institutions. One of the most important prudential measures for 
ensuring that stability is bank capital. Of course, there is a 
tradeoff between higher bank capital levels that increase the 
resiliency of individual institutions and the system as a 
whole, and the cost of that capital. A goal of regulation 
should be to balance to protection of financial stability in a 
way that promotes economic growth and business opportunity.
    Equity investors hold an institution's riskiest securities 
and as a consequence demand a return for that risk that is 
higher than the institution's debt holders in any given capital 
structure. Although in ideal conditions the return demanded on 
the equity should fall in proportion to increases in the firm's 
equity and reductions in its debt, actual capital markets 
differ from ideal conditions in a variety of ways: there is a 
tax preference for debt; there are higher direct and indirect 
transaction costs for issuing equity; a material portion of a 
bank's debt is insured (its deposits) and the insurance premium 
is not fully related to the risk covered; and both real and 
perceived asymmetries in information between an institution and 
its investors result in an underpricing of the riskiest 
securities and an overpricing of the less risky. As a result, 
equity financing is
materially more expensive for a financial institution than debt
financing, and there is persuasive literature that relates this 
higher cost of financing to a higher cost of credit provided by 
banks (e.g., Cosimano and Hakura 2011; ECB 2015; de Ramon, et 
al. (2012); Francis and Osborne (2009)).\1\
---------------------------------------------------------------------------
    \1\ Cosimano, Thomas F. and Dalia S. Hakura (2009). ``Bank Behavior 
in Response to Basel III: A Cross-country Analysis.'' IMF Working Paper 
WP/11/119; ``Euro Area Bank Lending Survey'' (January 2015); de Ramon, 
Sebastian J.A., et al. (2012). ``Measuring the Impact of Prudential 
Policy on the Macroeconomy: A Practical Application to Basel III and 
Other Responses to the Financial Crisis,'' Financial Services Authority 
Occasional Paper Series, No. 42; Santos, Andre Oliveira and Douglas 
Elliott (2012). ``Estimating the Costs of Financial Regulation.'' IMF 
Staff Discussion Note SDN/12/11; Martin-Oliver, Alfredo et al. (2013). 
``Banks' Equity Capital Frictions, Capital Ratios, and Interest 
Rates.'' International Journal of Central Banking, Vol. 9, No. 1, 
p.183.
---------------------------------------------------------------------------
    Relatedly, there is a growing body of literature that 
analyzes the effect of bank capital levels on the quantity as 
well as the cost of credit. For example, Board Governors have 
cited the following studies. Furfine \2\ analyzes data on large 
U.S. commercial banks between 1989 and 1997 and concludes that 
a 1-percentage point increase in capital standards reduces loan 
growth by 5.5 percent. Berrospide and Edge \3\ find a more 
modest impact. Using U.S. bank holding company data from 1992 
to 2009, the authors conclude that a 1-percentage point 
increase in capital requirements reduces loan growth by roughly 
0.7 to 1.2 percentage points. Other studies tell a similar 
story using non-U.S. data. For instance, Francis and Osborne 
\4\ find, using U.K. data, that a 1-percentage point increase 
in capital requirements reduces bank lending by approximately 
1.2 percent. Finally, Martynova's \5\ survey of the 
literature--mostly of studies using non-U.S. data--shows that 
an increase in capital requirements by 1 percentage point 
reduces loan growth by 1.2 to 4.6 percentage points.
---------------------------------------------------------------------------
    \2\ Furfine, Craig (2000). ``Evidence on the Response of U.S. Banks 
to Changes in Capital Requirements.'' BIS Working Papers No. 88.
    \3\ Berrospide, Jose M. and Rochelle M. Edge (2010). ``The Effects 
of Bank Capital on Lending: What Do We Know, and What Does It Mean?'' 
Federal Reserve Board Finance and Economics Discussion Series 2010-44.
    \4\ Francis, William B. and Matthew Osborne (2012). ``Capital 
Requirements and Bank Behavior in the U.K.: Are There Lessons for 
International Capital Standards?'' Journal of Banking and Finance, 36, 
803-816.
    \5\ Martynova, Natalya (2015). ``Effect of Bank Capital 
Requirements on Economic Growth: A Survey.'' DNB Working Paper No. 467.
---------------------------------------------------------------------------
    As your question notes, however, whether the costs outweigh 
the benefits of higher capital is a separate issue. There is a 
growing body of research regarding the costs and benefits of 
bank capital that addresses the impact of capital standards on 
economic growth. A number of studies, also cited by Board 
Governors, including the Basel Committee on Banking 
Supervision,\6\ the Bank of England,\7\ the Federal Reserve 
Bank of Minneapolis,\8\ and Firestone et al.\9\ suggest that 
higher bank capital requirements (up to a point) are good for 
long-term credit availability and economic growth, but that 
with levels of capital beyond that point, social welfare is 
decreased. While the optimal level of capital varies between 
studies, the basic framework is the same.
---------------------------------------------------------------------------
    \6\ Basel Committee on Banking Supervision (2010). ``An Assessment 
of the Long-Term Economic Impact of Stronger Capital and Liquidity 
Requirements.''
    \7\ Brooke, Martin et al. (2015). ``Measuring the Macroeconomic 
Costs and Benefits of Higher U.K. Bank Capital Requirements.'' Bank of 
England Financial Stability Paper No. 35.
    \8\ Federal Reserve Bank of Minneapolis (2016). ``The Minneapolis 
Plan to End Too Big To Fail.''
    \9\ Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ``An 
Empirical Economic Assessment of the Costs and Benefits of Bank Capital 
in the U.S.'' Federal Reserve Board Finance and Economics Discussion 
Series 2017-034.

---------------------------------------------------------------------------
Q.4. In the same op-ed, you said:

        Focusing on bank size is politically appealing but diverts 
        attention from the major source of systemic risk in the 
        financial sector: a shortage of stable deposits. Banks are but 
        one part of an interconnected financial sector providing over 
        $40 trillion of credit to the economy, but that credit is 
        supported by only about $11 trillion of bank deposits.

        The gap must be closed largely with professionally managed, 
        `wholesale' funding, such as short-term repurchase agreements. 
        Wholesale funders are quick to pull their support by not 
        rolling over short-term credit if they perceive those funds are 
        at risk. This leads to periodic runs on financial institutions 
        and the resulting demand for Government intervention to prevent 
        the failure of those institutions. Substantial wholesale 
        funding is necessary to sustain the current level of financial-
        sector credit that supports the economy.

        Whether there are 10 big banks in the country or 10,000 small 
        ones, there will still be insufficient stable financing from 
        deposits, and a resulting reliance on wholesale funds.

In 2013, Governor Tarullo told this Committee that the ``issue 
of short term, nondeposit, runnable funding'' is ``the one I 
think we should be debating in the context of too-big-to-fail, 
and in the context of our financial system more generally.''

Q.4.a. Do you agree with Governor Tarullo that more needs to be 
done to address the issue of short-term wholesale funding?

A.4.a. Since the time of Governor Tarullo's testimony, the 
Board has undertaken several efforts to address banking 
organizations' use of short-term wholesale funding. For 
example, the Board has implemented the liquidity coverage ratio 
and has proposed the net stable funding ratio to increase large 
banking organizations' resilience to disruptions in short-term 
wholesale funding. In addition, the Board adopted the GSIB 
surcharge rule, which takes U.S. GSIBs' reliance on short-term 
wholesale funding into account in the calibration of each 
GSIB's capital surcharge, and adopted a long-term debt 
requirement for U.S. GSIBs. If confirmed, I look forward to 
further evaluating the benefits and costs associated with 
adoption of such measures.

Q.4.b. In 2013, the GAO found that ``the use of programs by 
institutions of various sizes were driven in part by 
differences in how institutions funded themselves,'' and that 
large banks holding companies received a higher ratio of 
support relative to their total assets because they ``relied 
less on deposits as a source of funding and more on short-term 
credit markets and participated more in programs created to 
stabilize these markets.''
    Do you agree that ``focusing on size'' may be an 
appropriate approach, to the extent that larger financial 
institutions (particularly bank holding companies) rely on more 
wholesale funding?

A.4.b. Large banking firms tend to have more complex risk and 
funding profiles relative to smaller firms. Accordingly, for 
some regulations it may be appropriate to use size-based 
thresholds to determine their scope of application. For other 
regulations, it may be appropriate to consider factors in 
addition to size in setting their scope of application, given 
the considerable variation in risk and funding profiles and 
systemic footprints across large firms.

Q.4.c. Do you support the following measures that have been 
proposed to mitigate the risks posed by short-term wholesale 
funding:

  i. LThe supplementary leverage ratio?

  ii. LThe liquidity coverage ratio?

  iii. LThe net stable funding ratio? If so, will you making 
        finalizing the net stable funding ratio rule a 
        priority?

  iv. LUniform margin requirements for securities financing 
        transactions? If so, will you make proposing a rule for 
        uniform margin requirements for securities financing 
        transactions a priority?

A.4.c. As noted in the above response, the Board has undertaken 
several measures aimed at mitigating the risks of over-reliance 
on short-term wholesale funding, including the liquidity 
coverage ratio and the GSIB risk-based capital surcharges. The 
supplementary leverage ratio, while not specifically targeted 
toward short-term wholesale funding, also impacts firms' 
funding decisions. The net stable funding ratio and margin 
requirements for securities financing transactions could 
further mitigate potential risks to financial stability 
associated with different types of short-term wholesale 
funding. I have not had the benefit of the extensive review and 
analysis conducted by the Federal Reserve in the course of 
developing these measures, and thus, if confirmed, I look 
forward to further evaluating the benefits and costs associated 
with adoption of such measures.

Q.5. In January 2014, the Board announced an Advanced Notice of 
Proposed Rulemaking on financial holding companies' commodities 
activities. In September 2016, the report released by the 
Board, the OCC, and the FDIC pursuant to section 620 of Wall 
Street Reform, on banks' securities activities recommended that 
Congress rescind two authorities under the Bank Holding Company 
Act--the merchant banking authority under section 4(k) and the 
grandfathered authority under section 4(o). Later that month, 
the Board released a proposed rule to limit some of the 
financial holding companies' commodities activities.

Q.5.a. While at the Treasury Department, did you have any 
involvement in the 2003 joint report with the Board of 
Governors on Financial Holding Companies under the Gramm-Leach-
Bliley Act or the 2005 Treasury Department report on the Impact 
of the Gramm-Leach-Bliley Act on Credit to Small Businesses and 
Farms?

A.5.a. These reports were prepared by the Office of Domestic
Finance of the Treasury. During the periods of their 
preparation, I was serving in the Office of International 
Affairs (as Assistant Secretary in 2003, and as Assistant 
Secretary and Acting Under Secretary during the first part of 
2005). The Office of International Affairs has no policy 
responsibility for the matters discussed in these reports, and 
I was not involved in their preparation.

Q.5.b. Do you support the Board's recommendations in the 
section 620 report?

A.5.b. The Board's recommendations in the 620 report were the 
result of an extended review of the history and operation of 
the provisions under consideration. Having not had the benefit 
of that
review, my views on the 620 report are not yet formed. If 
confirmed, I would look forward to understanding and exploring 
these issues with the other Board members.

Q.5.c. Do you support the Board's proposed rule, and will you 
make finalizing the rule a priority?

A.5.c. The proposed rule invited public comment on additional 
prudential requirements and limitations on the physical 
commodities activities of financial holding companies (FHCs) to 
address the risks the activities may pose to FHCs and their 
subsidiary insured depository institutions. I understand that 
the Board received a wide range of comments from a variety of 
interested parties, including Members of Congress, academics, 
physical commodity end users and producers, public interest 
groups, and FHCs. I think it would be inappropriate for me to 
express a view in advance of reviewing all of these comments, 
and thus, if I am confirmed, I will review the proposal and 
comments to consider what future action may be appropriate.

Q.6. In 2008, you editorialized in the Wall Street Journal 
against the restrictions on bank ownership imposed by the Board 
and the FDIC, and in 2009 you editorialized against aspects of 
the FDIC's proposed rule imposing additional restrictions on 
bank ownership by private equity funds. Did you have any 
contact with the Board concerning rules governing bank 
ownership? If so, please provide such contacts.

A.6. I spoke informally with Governor Randall S. Kroszner, at 
his request, in the fall of 2008 about potential safeguards to 
allow the safe expansion of the pool of bank capital given the 
need for such capital during the financial crisis, and had one 
formal meeting to discuss the issue with Governor Daniel 
Tarullo in March 2009.

Q.7. As I mentioned during your hearing, in 2015 Bloomberg 
Television interview, you said:

        The Government should not be a player in the financial sector. 
        It should be a referee. And both the practice and the policy 
        and the legislation that resulted from the financial crisis 
        tended to make the Government a player. It put it on the field 
        as opposed to simply reffing the game.

Please explain your views as to what distinguishes being a 
``player'' from being a ``referee,'' as it relates to financial 
regulation.

A.7. My approach to policymaking, and particularly to 
regulation, has been that the discretion of policymakers, and 
particularly of regulators, should be as constrained as 
possible. Where discretion remains, regulators should be as 
clear as possible about how they will exercise it in the future 
so that their actions are predictable and there is less 
uncertainty as to what the policy will be.

Q.8. In 2011, at an Atlantic Council event, you said:

        I have come to believe that there is a fundamental problem with 
        resolution mechanisms that allow substantial discretion for 
        Governments to act in particular cases, which Dodd-Frank . . . 
        does. The consequence of that is that it multiplies uncertainty 
        in a time of crisis because you're not going to act until you 
        know what the Government is going to do . . . I think 
        ultimately the only really workable solution, which is to sort 
        of have something that is like a bankruptcy regime--a rules-
        based approach as opposed to something that says, `and then 
        `Mr. Wizard' will decide what to do.'

Q.8.a. Do you believe that Title II Orderly Liquidation 
Authority, as implemented by the FDIC's Single Point of Entry 
approach, allows ``substantial discretion'' to regulators in 
the event of an orderly liquidation?

A.8.a. The Department of the Treasury is reviewing the 
authorities of the Federal Deposit Insurance Corporation (FDIC) 
under the
Orderly Liquidation Authority (OLA), and I will review the 
Treasury report on OLA. Where the law provides regulators with 
discretion, regulators should be as clear as possible about how 
they will exercise their discretion. Since my 2011 statement, 
the FDIC has provided additional clarity regarding the single 
point of entry (SPOE) strategy it may employ under OLA. In 
addition, the Board has issued rulemakings to facilitate the 
resolution of global systemically important banking 
organizations, including an SPOE resolution under OLA. 
Regulators should continue their efforts to provide as much 
clarity as possible regarding the resolution of systemically 
important financial institutions.

Q.8.b. Do you believe that some sort of bankruptcy regime for 
large, complex financial institutions is the only ``rules-based 
approach'' to the failure of such an institution?

A.8.b. Conceptually, there could be many ways to constrain the 
discretion of Government actors to improve the certainty and 
predictability of their actions in the event of a financial 
institution's distress, of which bankruptcy is one but not the 
only one. An advantage of the bankruptcy process is that there 
is a long history of practice and interpretation that provides 
further clarity about how the system will operate in specific 
cases in the future. This is among the reasons it would be 
beneficial if the Bankruptcy Code could be amended so that a 
financial institution could fail in the same way that any other 
institution fails, and the rules surrounding that would be 
understood as they are for any other institution.

Q.8.c. Do you believe that imposing different national 
bankruptcy regimes on the respective subsidiaries of a large, 
international financial institution multiplies uncertainty?

A.8.c. Whether the entry of a subsidiary of a large, 
international banking organization into a separate insolvency 
proceeding
impedes the orderly resolution of the organization depends on a 
number of factors, including the structure of the organization, 
the functions of the subsidiary, and the circumstances that 
cause the failure. The Board and the FDIC (agencies) are 
responsible for reviewing the plans of many large, 
international banking organizations for their orderly 
resolution under the U.S. Bankruptcy Code. The agencies have 
provided guidance to the internationally active firms that the 
firms should take steps to address resolvability obstacles 
related to their foreign subsidiaries. To further reduce 
uncertainty, large, international banking organizations and 
their domestic and foreign regulators should continue their 
efforts to plan for and coordinate the potential resolution of 
these organizations and should be as clear as possible as to 
how such resolutions may occur.

Q.8.d. In your hypothetical scenario, is ``Mr. Wizard'' always 
a financial regulatory agency, or could such person also 
include a bankruptcy judge or trustee?

A.8.d. In my view, a critical issue in the resolution of 
financial firms is to improve the predictability and certainty 
of the course of resolution, and limiting the discretion of 
Government actors is an important element of that process. 
Accordingly, improving the speed and certainty of outcomes in 
the bankruptcy process, including the predictability of 
decisions made by judges in that process, is central to the 
improvements that should be made to the Bankruptcy Code for the 
resolution of financial institutions. The Board and FDIC have 
made progress through the resolution planning, or ``living 
will,'' review process to make the largest banking 
organizations easier to resolve under the current Bankruptcy 
Code. I support improving the Bankruptcy Code so that the rules 
surrounding the bankruptcy of a large financial company would 
be understood as they are for any other company with as little 
exercise of discretion as possible.

Q.9. Related to monetary policy, do you agree with the 
``unconventional'' steps taken by Federal Reserve Chairman 
Bernanke during the crisis? Since the crisis, do you think the 
Federal Open Market Committee has been on the right course of 
gradually increasing interest rates, and taking steps to begin 
to unwind their balance sheet later this year?

A.9. The financial panic and associated steep economic downturn 
in 2008/2009 was the most severe financial and economic crisis 
faced by the United States and the world since the Great 
Depression. In those circumstances, Congress, the 
Administration, and many Federal agencies including the Federal 
Reserve took extraordinary steps to address the crisis. I am 
not in a position to judge the merits of every single action 
taken by the Federal Reserve over this period, but it is clear 
that the economy was in very serious trouble at the end of 
2008.
    Regarding the current trajectory of monetary policy, if 
confirmed, I expect to benefit from interactions with 
colleagues on the Federal Open Market Committee (FOMC) in 
assessing the appropriate course of policy. Broadly though, it 
does appear that the FOMC's approach to date in gradually 
raising the Federal funds rate and preparing to reduce the size 
of its balance sheet in a gradual and predictable fashion has 
been effective in fostering the goals of maximum employment and 
stable prices while at the same time returning the stance of 
monetary policy to a more normal setting.

Q.10. If confirmed, you will be a member of the Federal Open 
Market Committee. What experience will you bring to this role? 
Are there any changes in how monetary policy is currently 
conducted that you will advocate for?

A.10. Over the course of my career, I have gained broad 
experience in economic and financial issues, both from a 
private sector perspective in working with both large and small 
financial firms and from a policy perspective in serving in 
senior policy positions in two previous Administrations. Based 
on this experience, I have developed a mature understanding of 
the key monetary policy issues confronting the FOMC. Of course, 
if confirmed, I expect to add to this experience from 
interactions with colleagues on the FOMC.
    I support the basic framework for the conduct of monetary 
policy established by the Congress. The Congress has directed 
the Federal Reserve to promote two basic goals--maximum 
employment and stable prices. The Federal Reserve has an 
important degree of
operational independence in how it conducts policy to achieve 
these goals--but that operational independence comes with an 
obligation to be accountable and transparent to the public and 
the Congress.
    The Federal Reserve has taken many steps over recent years 
to enhance transparency and accountability in the conduct of 
monetary policy. I would certainly support any additional steps 
in this area that would both enhance Federal Reserve 
transparency and support the effective conduct of monetary 
policy.

Q.11. You have said in the past that Federal Reserve should 
adopt a monetary policy rule, like the Taylor rule. As you 
know, the Federal Reserve currently uses a variety of monetary 
policy rules,
including the Taylor rule, in its analysis and monetary policy 
decisionmaking, but does not rely solely on rules to determine 
interest rate adjustments. Do you agree with the Federal 
Reserve's current approach, or are you advocating that the Fed 
use a single rule?

A.11. The Federal Reserve has made substantial progress over 
the last 25 years in becoming both clearer and more consistent 
in explaining its monetary policy decisions. I believe, though, 
that there is still room for the Federal Reserve to do more in 
developing and explaining a clearly delineated and broadly 
measurable strategy that would improve current understanding 
and reduce future uncertainty concerning the expected course of 
monetary policy. My commitment to a greater focus on rules in 
the conduct of policy is not inconsistent with the Federal 
Reserve's progress in improving its transparency, nor a 
dramatic change in direction, but a recognition that the 
Federal Reserve can and should continue to improve the clarity 
and consistency of the framework in which it conducts monetary 
policy. This discipline can improve the policy itself, and 
improve the understanding of that policy by markets and by the 
public.

Q.12. How important is it for the U.S. central bank to be 
independent?

A.12. I support the basic framework for the conduct of monetary 
policy established by the Congress. The Congress has assigned 
to the Federal Reserve the goals of monetary policy, and the 
Federal Reserve has an important degree of operational 
independence in how it conducts policy to achieve these goals. 
Independence of the central bank is critical in insulating the 
conduct of monetary policy from political pressures that can 
lead to ineffective policy and poor macroeconomic outcomes. 
Research has demonstrated that central banks that are subject 
to political pressures are generally less effective in 
achieving their macroeconomic objectives; for example, some 
historians have suggested that political pressures on the 
Federal Reserve may have contributed to policy mistakes and the 
``Great Inflation'' of the late 1960s and 1970s.
    While I am a strong supporter of the independence of the 
Federal Reserve, the Federal Reserve is a public institution 
and its
independence comes with an obligation to be transparent and 
accountable to the Congress and the public in the conduct of 
monetary policy. Over time, the FOMC has made considerable 
strides in enhancing transparency. For example, it now issues 
statements following every meeting, the Chair holds a press 
conference four times each year, FOMC participants prepare 
quarterly economic projections, detailed minutes of FOMC 
meetings are published 3 weeks following each meeting, and full 
transcripts of meetings and supporting documents are released 
to the public with a 5-year lag. These steps have significantly 
enhanced Federal Reserve transparency and have also supported 
the effectiveness of monetary policy by allowing the public to 
better understand and anticipate the Federal Reserve's policy 
decisions. If confirmed, I would support any additional steps 
that the Federal Reserve could take that would enhance both 
Federal Reserve transparency and the effective conduct of 
monetary policy.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM RANDAL 
                            QUARLES

Q.1. Our financial system has become increasingly consolidated 
as community banks and credit unions either close their doors 
or merge with larger institutions.

Q.1.a. Are you concerned about this pattern? Why?

Q.1.b. What services can these smaller institutions provide 
that larger institutions cannot provide?

A.1.a.-b. Community banks play a critical role in our financial 
system and economy. While the consolidation trend in the 
industry has continued over the past 30 years, I believe that a 
number of factors in the post financial crisis environment have 
exacerbated the challenges facing these institutions, including 
the substantially increased cost of regulatory compliance. 
Despite this trend, community banks continue to support local 
economies and serve as a key source of financing to households 
and small businesses.
    Research conducted over many years has concluded that 
community banks provide several distinct advantages to their 
customers compared to larger banks. For example, given their 
smaller size and less complex organizational structure, 
community banks are often able to respond with greater agility 
to lending requests. In addition, reflecting their close ties 
to the communities they serve and their detailed knowledge of 
their customers, community banks are able to provide 
customization and flexibility to meet the needs of their local 
communities and small businesses. Community banks are 
particularly important for rural communities, where the closing 
of a bank can be associated with a material decline in local 
economic activity.
    Recognizing the important role of community banks in our 
diversified banking industry, if confirmed, I will work with my 
colleagues at the Federal Reserve to supervise and regulate 
community banks in a way that fosters safe and sound operation 
without limiting their capacity to support the financial needs 
of their communities.

Q.2. Constituents in my State tell me that the EGRPRA report 
inadequately highlighted concrete ways to reduce the regulatory 
paperwork burden. What more can the Federal Reserve do to 
reduce the regulatory burden on community banks?

A.2. As noted in my previous answer, community banks play a 
critical role in our financial system and economy. If 
confirmed, I will work with my colleagues at the Federal 
Reserve to supervise and regulate community banks in a way that 
fosters safe and sound operation without limiting their 
capacity to support the financial needs of their communities. I 
believe more can be done to better tailor regulation and 
supervision for community banks in a manner that is appropriate 
to their small size and simplicity. I look forward to working 
with Congress and others at the Federal Reserve to identify 
further ways to effectively reduce burden.

Q.3. Multiple anecdotes from my constituents suggest that there 
are several Nebraska counties where mortgages are not 
originated because of over-regulation. What is the best way to 
address this problem from a regulatory standpoint?

A.3. I believe that we should make efforts to right-size 
regulations to reduce burden for community banks consistent 
with safety and soundness and consumer protection, so they can 
properly serve their communities. I understand that the 
financial regulators discuss compliance and supervisory issues 
related to the mortgage regulations on a regular basis. If 
confirmed, I look forward to participating in these interagency 
communications to seek ways to reduce burden and improve access 
to safe and appropriate mortgage loan products.

Q.4. My understanding is that only two banks have opened since 
the passage of Dodd-Frank, including Bird in Hand Bank in 
Pennsylvania, which has a customer base that is around half 
Amish.

Q.4.a. Why do you believe this is the case?

Q.4.b. What potential impacts does this have on our financial 
system?

Q.4.c. Is there anything more the Federal Reserve can do to 
encourage the opening of new banks?

A.4.a.-c. Historically, new bank formations have been cyclical 
and have fallen after the financial crises in the 1980s and 
1990s before recovering as economic conditions improved.\1\ 
Recent research has supported this and has shown that a portion 
of the decline in new charters since the crisis can be 
explained by factors such as a weak economy, low interest 
rates, and weak demand for banking services.\2\ Nonetheless, 
from my experience as an investor in community banks since the 
crisis, I know that the widely recognized
increased cost of regulatory compliance is an important factor 
deterring many investors who might potentially contemplate the 
formation of a new institution.
---------------------------------------------------------------------------
    \1\ https://www.fdic.gov/regulations/examinations/supervisory/
insights/sisum16/SI_Summer16.pdf.
    \2\ https://www.federalreserve.gov/econresdata/feds/2014/files/
2014113pap.pdf.
---------------------------------------------------------------------------
    Potential impacts of fewer de novo bank entrants include 
lack of innovation, reduced competition, lack of local lending, 
and reduced availability of credit.
    The Federal Reserve does not have chartering authority for 
insured depository institutions, which is the responsibility of 
the States and the Office of the Comptroller of the Currency, 
nor does the Federal Reserve grant deposit insurance. If 
confirmed, however, I would expect to work with the other U.S. 
Federal and State banking agencies to prudently explore ways to 
increase new bank formation.

Q.5. I'm concerned that our Federal banking regulatory regime
relies upon arbitrary asset thresholds to impose prudential
regulations, instead of relying on an analysis of a financial 
institution's unique risk profile.

Q.5.a. Should a bank's asset size be dispositive in evaluating 
its risk profile in order to impose appropriate prudential 
regulations?

A.5.a. One of the important general themes of regulation is 
ensuring that the character of the regulation is adapted to the 
character of the institution being regulated, what has become 
referred to as tailoring. I fully support tailoring, and I 
think that it is not only appropriate to recognize the 
different levels of risk and types of risk that different 
institutions in the system pose, but that it also makes for 
better and more efficient regulation. Efficient regulation 
allows the financial system to more efficiently support the 
real economy.
    I believe a variety of approaches could be taken to 
determine which prudential regulations should apply to which 
banks in the U.S. banking system. For some regulations or for 
some bank populations, a simple fixed-asset threshold may work. 
For other regulations or bank populations, a more complex, 
multi-factor approach may be appropriate. If I were to be 
confirmed, I would stand ready to work with Congress and my 
colleagues at the Federal Reserve on appropriate tailoring 
thresholds.

Q.5.b. If not, what replacement test should regulators follow?

A.5.b. Broadly speaking, I support tailoring regulations in 
such a way that reduces the risk that financial distress in the 
banking industry would cause substantial harm to the U.S. 
economy, without imposing undue burden on smaller community and 
regional banking organizations whose failure would not cause 
notable harm to the U.S. economy. I understand that Congress is 
currently considering whether and how to raise existing 
statutory thresholds in the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, and that the Federal Reserve has 
expressed support for increasing these thresholds. I, too, 
would support these efforts. As noted above, I believe a 
variety of approaches could be taken, and I would stand ready 
to work with Congress and my colleagues at the Federal Reserve 
on the design of such an approach, if I were to be confirmed.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM RANDAL 
                            QUARLES

Q.1. The Federal Reserve, OCC, and FDIC in 2016 published a 
joint advance notice of proposed rulemaking (ANPR) on 
cybersecurity, asking for comment, among other things, on 
whether boards of directors should have adequate expertise in 
cybersecurity. Citing the ANPR: ``a cyber incident or failure 
at one interconnected entity may not only impact the safety and 
soundness of the entity, but also other financial entities with 
potentially systemicconsequences.'' Other than the solicitation 
of comments, we are not aware of any material progress on this 
ANPR. If confirmed, may I have a personal commitment from each 
of you that you will work with the FDIC and each other on 
advancing this cybersecurity ANPR?

A.1. Cybersecurity continues to be a major concern for the 
financial sector. If I were to be confirmed, I would be 
committed to finding ways to strengthen the resiliency of the 
financial sector against cyber risks.
    One of my priorities would be to harmonize our supervisory 
expectations with those of other regulators in the financial 
sector as much as is practical. Therefore, an important step 
would be to reach a consensus on as many of the core elements 
of the advance notice of proposed rulemaking as possible.

Q.2. The OCC and the Federal Reserve are each authorized to 
enforce the Military Lending Act (MLA), which is a bipartisan 
law enacted in 2006 that sets a hard cap of 36 percent interest 
for most loans to the military. On July 22, 2015, the 
Department of Defense finalized MLA rules that closed prior 
loopholes that allowed unscrupulous lenders to prey upon 
servicemembers and their families. Do you support these 
stronger MLA rules? If confirmed, will you support and enforce 
these strong MLA rules to the fullest extent possible?

A.2. The Military Lending Act (MLA) provides special consumer 
protections for servicemembers and their dependents. In 
enacting the MLA, the Congress directed the Department of 
Defense to issue implementing regulations after consulting with 
the Federal Reserve and other agencies. I understand the 
Federal Reserve staff has worked with Defense Department staff 
to carry out that mandate and, if confirmed, I will support 
that effort and the Federal Reserve's full enforcement of the 
MLA at the institutions it supervises.

Q.3. Half of the Federal Reserve's dual mandate is to achieve 
maximum employment. How would you support this part of the dual 
mandate to ensure that Rhode Islanders have more jobs?

A.3. The Federal Reserve System occupies a central position in 
our country's policy infrastructure for promoting a strong 
economy and the stability of the financial system, and 
supporting robust job growth in the context of price stability. 
I can assure you that if I were to be confirmed, I would be 
strongly committed to all these objectives. With respect to the 
employment mandate, I believe it is an important element of the 
Federal Reserve's obligation, and I would take it very 
seriously.
    If I were to be confirmed, in my capacity as a Federal 
Reserve Board member and as Vice Chair for Supervision, I would 
work to refine and enhance regulations in ways that promote a 
safe and sound financial system and that support the flow of 
credit to households and businesses. As I have noted on 
previous occasions, I believe there are opportunities to 
simplify and streamline regulations, particularly for smaller 
financial institutions, which have a particular role in 
supporting the small businesses that are the engines of job 
creation. Easing regulatory burdens can help to foster improved 
access to credit, as well as more business and employment 
opportunities, without sacrificing the gains of recent years in 
strengthening the financial system.
    If confirmed, I look forward to engaging with Federal 
Reserve Board members and staff to gain an accurate and 
complete picture as possible on overall and specific labor 
market conditions.

Q.4. The White House has asked the Treasury Department to
review the orderly liquidation authority (OLA) established by 
the Dodd-Frank Wall Street Reform and Consumer Protection Act. 
The statutory purpose of OLA is ``to provide the necessary 
authority to liquidate failing financial companies that pose a 
significant risk to the financial stability of the United 
States in a manner that
mitigates such risk and minimizes moral hazard.'' I would like 
to highlight some existing OLA provisions and ask you whether 
you support them.
    In the case of a failure of a megabank, do you support the:

   Lmandatory removal of the megabank's executives and 
        board members responsible for the failure?

   LFDIC's authority to claw back compensation from 
        executives or directors substantially responsible for 
        the failure?

   Lstatutory mandate that ``taxpayers shall bear no 
        losses from the exercise of any authority'' under OLA?

A.4. Avoiding taxpayer loss and reducing moral hazard, which 
these provisions of Orderly Liquidation Authority (OLA) 
address, are important goals for the resolution of a large, 
systemically important financial company, and thus I fully 
support the objectives of these provisions. The Department of 
the Treasury is reviewing OLA, and if I am confirmed, I will 
give the resulting report serious review.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDAL 
                            QUARLES

Q.1. In January, the Minneapolis Federal Reserve published a 
report estimating that if the Federal Open Market Committee had 
been required to follow the Taylor Rule for the last 5 years, 
2.5 million more Americans would be out of work today.

Q.1.a. Do you accept the analysis that suggests strictly 
following the Taylor Rule would undermine the Federal Reserve's 
ability to achieve its full employment mandate?

Q.1.b. Assuming this analysis is correct, and adhering to a 
strict Taylor Rule or other monetary policy rule would result 
in the loss of a large number of jobs, would you still argue in 
favor of following such a rule?

A.1.a.-b. Of course, in general, it is difficult to say how the 
economy would have behaved in the past if the Federal Reserve 
or any other part of the Government had followed a different 
set of policies. That basic difficulty is compounded many times 
over when examining the possible effects of alternative polices 
during a period that includes the aftermath of the most severe 
financial crisis since the Great Depression.
    My commitment to a greater focus on rules in the conduct of 
policy, however, is not a back-door effort to reduce the 
Federal Reserve's commitment to its dual mandate. Rather, it is 
to acknowledge that there is still room for the Federal Reserve 
to do more in developing and explaining a clearly delineated 
and broadly measurable strategy that would improve current 
understanding and
reduce future uncertainty concerning the expected course of
monetary policy. In determining whether a particular policy 
rule or strategy is effective, an important element of that 
assessment is whether it supports the Federal Reserve's 
congressional mandates, including the full employment mandate. 
Thus, if the best analysis of a monetary policy rule's 
projected effects were that it would be inconsistent with the 
dual mandate, the Federal Reserve should not adopt that rule. 
And if experience over time demonstrated that the practical 
application of a rule was leading to outcomes that were 
inconsistent with the dual mandate, the rule should be refined 
or replaced.
    The Federal Reserve has made substantial progress over the 
last 25 years in becoming both clearer and more consistent in 
explaining its monetary policy decisions. My commitment to a 
greater focus on rules in the conduct of monetary policy is 
neither inconsistent with that progress, nor a dramatic change 
in direction, nor a prioritization of one element of the dual 
mandate over another, but rather a recognition that the Federal 
Reserve can and should continue to improve the clarity and 
consistency of the framework in which it conducts monetary 
policy. This discipline can improve the policy itself, and 
improve the understanding of that policy by markets and by the 
public.

Q.2. In the wake of the financial crisis, Congress enacted a 
provision, section 956 of Dodd-Frank, to require financial 
regulators to jointly issue rules to ban incentive pay 
practices at large financial institutions that encourage 
inappropriate risk-taking. In May of 2016, the financial 
regulators including the Federal Reserve Board and the OCC 
proposed a rule to implement section 956. More than a year 
later, the rulemaking still has not been finalized. The Wells 
Fargo fraudulent account scandal uncovered last year, where 
senior executives were given bonuses for ``successes in cross-
selling,'' underscores the need for rules regarding incentive-
based compensation agreements.

Q.2.a. Will you commit to implementing section 956 of Dodd-
Frank?

A.2.a. Incentive compensation is important to attract qualified 
employees and executives to financial institutions. It is also 
important that compensation programs do not distort incentives 
for employees to act in the long-term interest of the 
institution.
    If confirmed, I would look forward to working with the 
other agencies to understand the issues raised in this 
rulemaking and fulfilling the requirements of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act.

Q.2.b. Will you commit to implementing all congressionally 
mandated rulemakings?

A.2.b. If confirmed, I am committed to fulfilling the 
requirements of all laws to which the Federal Reserve has been 
given authority by the Congress.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM RANDAL 
                            QUARLES

Q.1. Looking through your past statements, it's clear that you 
believe we need to have a financial system that takes on risk 
in order to get innovation and growth in our economy. However, 
as we saw during the financial crisis, too much risky behavior 
can lead to outright fraud and manipulation of markets, which 
ultimately led to widespread systemic harm. I strongly believe 
that criminal penalties for executives can deter the type of 
fraud and market manipulation that led to the 2008 crisis. If 
an executive acts recklessly and that recklessness results in 
substantial economic harm to the economy, he should be held 
criminally liable. Do you believe thoughtful changes to our 
white collar criminal standards and penalties would be an 
effective tool for protecting our financial system?

A.1. As the Federal Reserve has publicly stated, no individual 
and no institution should be exempt from prosecution when they 
commit a crime. The Justice Department has the sole authority 
to indict or seek Federal criminal fines or other sanctions and 
to criminally prosecute individuals for their actions. The 
Federal Reserve may bring enforcement actions against and 
remove an institution-affiliated party in certain circumstances 
if they have violated a law or regulation or engaged in unsafe 
and unsound practices. When warranted, the Federal Reserve also 
has the authority to impose fines. I believe the Federal 
Reserve should take whatever action is appropriate to ensure 
individuals subject to the Federal Reserve Board's (Board) 
jurisdiction comply with the law and act consistently with 
safety and soundness principles.

Q.2. As I'm sure you're aware the economy in North Dakota and 
rural America more generally is facing headwinds from a variety 
of factors including a strong dollar, potential trade 
restrictions and low commodity prices.

Q.2.a. To take just the issue of trade, I'm interested to know 
how you would factor the Administration's trade policies into 
your monetary policy decisions and efforts to achieve economic 
growth at the Fed?

A.2.a. Monetary policy decisions should be based on an 
assessment of realized and expected progress toward the Federal 
Reserve's employment and price stability objectives. 
International trade is an important part of the U.S. economy, 
so trade developments should be an important aspect of that 
assessment. In addition to the current state of trade and trade 
policy, monetary policy should also consider several factors 
that could affect the outlook for trade, including movements 
incurrency and commodity markets as well as prospects for 
economic growth abroad.

Q.2.b. Do you believe that we can achieve economic growth at 
rates of 3 percent with a restrictive policy on trade?

A.2.b. With the economy now close to full employment, a step-up 
from recent growth rates of around 2 percent to a sustained 3 
percent growth rate would require some combination of a 
sustained increase in productivity growth from its recent weak 
trend or an improvement in the trend in labor force growth 
despite the downward pressures being exerted by the aging baby-
boom cohorts. An assessment of a trade policy's effect on 
growth would need to involve an assessment of its effect on 
these two factors.

Q.2.c. Beyond regulatory changes and taxes, what steps should 
we be taking to increase productivity and achieve more robust 
GDP growth?

A.2.c. In my view, a combination of more encouragement for 
private investment, more-effective regulation, better 
education, and improved public infrastructure would contribute 
positively toward increasing productivity and improving GDP 
growth. I do not believe there is a single, unalterable 
combination of these proposals that would have to be followed 
to have a positive effect, and Congress could choose from a 
variety of specific policies addressing these issues in order 
to further this objective.

Q.3. As part of the EGRPRA process, regulators identified 
access to timely appraisals--especially in rural America--as a 
major challenge for small lenders. Yet the report itself did 
little to address residential appraisal requirements.

Q.3.a. Do you share my concerns that the appraisal system in 
rural America is broken?

A.3.a. As both my wife and I come from families involved in 
agriculture in the West, I am very aware of concerns about the 
availability of appraisers in rural areas. I understand that 
the Board, Federal Deposit Insurance Corporation (FDIC), the 
Office of the Comptroller of the Currency (OCC), and the 
National Credit Union Administration recently issued an 
advisory addressing some of the ways institutions can address 
the issue of appraiser availability. If confirmed, I look 
forward to hearing from the industry stakeholders to understand 
their positions on this regulatory action. It is an issue I 
take very seriously.

Q.3.b. What concerns would you have with raising the 
residential exemption threshold--which was last modified in 
1994--above its current limit of $250K?

A.3.b. I understand that the Federal banking agencies are in 
the process of evaluating the current threshold. The Board, 
OCC, and FDIC recently issued a proposal to increase the 
transaction size threshold for requiring appraisals for 
commercial real estate transactions, and in that proposal have 
requested comments on many aspects of the appraisal 
regulations, including whether the appraisal threshold for 
residential transactions should be raised to reduce burden, 
consistent with safety and soundness and consumer protection. 
If confirmed, I look forward to hearing what the public has to 
say about that proposal and better understanding the issues 
involved. It is also my understanding that the bulk of the 
residential mortgage market is subject to the appraisal rules 
of other Government entities, such as the Government-Sponsored 
Enterprises or the Federal Housing Administration. If 
confirmed, I would support working with those other entities to 
harmonize appraisal rules for residential mortgages.

Q.4. On several occasions before the Banking Committee Governor 
Tarullo testified that the dollar asset thresholds in Dodd-
Frank such as the $50 billion threshold for SIFI designation, 
is far too high.

Q.4.a. Do you believe regulators could effectively address 
systemic risk if the threshold were raised above $50 billion?

A.4.a. One of the important general themes of regulation is 
ensuring that the character of the regulation is adapted to the 
character of the institution being regulated, what has become 
referred to as tailoring. I fully support tailoring, and I 
think that it is not only appropriate to recognize the 
different levels of risk and types of risk that different 
institutions in the system pose, but that it also makes for 
better and more efficient regulation. Efficient regulation 
allows the financial system to more efficiently support the 
real economy.
    I believe a variety of approaches could be taken to 
determine which prudential regulations should apply to which 
banks in the U.S. banking system. For some regulations or for 
some bank populations, a simple, fixed-asset threshold may 
work. For other regulations or bank populations, a more 
complex, multi-factor approach may be appropriate. If I were to 
be confirmed, I would stand ready to work with Congress and my 
colleagues at the Federal Reserve on appropriate tailoring 
thresholds.

Q.4.b. Are there specific provisions in Dodd-Frank which you 
believe are particularly costly or unnecessary for a certain 
subset of banks above the $50 billion threshold?

A.4.b. Broadly speaking, I believe that smaller community and 
regional banking organizations, whose failure would not cause 
notable harm to the U.S. economy, can be supervised in a way 
that promotes safe and sound banking without being subject to 
the enhanced regulations that apply to larger banking firms. I 
support efforts to consider whether and how specific 
regulations should be tailored in a way that reduces the risk 
that bank failures or distress will have a harmful impact on 
economic growth, without imposing undue burden. I support 
efforts to raise the $50 billion threshold in the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 
to reduce regulatory burden on some regional banks, and, if 
confirmed, I am open to discussing the best way to accomplish 
that goal.

Q.4.c. Are there specific provisions in Dodd-Frank which you 
believe are necessary for all banks above $50 billion in assets 
that should be retained in order to mitigate systemic risk?

A.4.c. If confirmed, one of my first priorities will be to 
engage in a comprehensive review of rules to ensure we have a 
system in place that promotes the safety and soundness of 
individual institutions, protects the stability of the U.S. 
financial system, and fosters economic growth and business 
opportunity. In advance of such a review, I do not have a final 
view on any specific provisions that should remain in place for 
all banks over $50 billion. However, I support efforts to raise 
the $50 billion threshold in the Dodd-Frank Act to reduce 
regulatory burden on some regional banks with assets over $50 
billion, and, if confirmed, I am open to discussing the best 
way to accomplish that goal.

Q.4.d. What concerns do you have with having a purely 
qualitative test for identifying systemic risk?

A.4.d. I believe a variety of approaches could be taken to 
measure a firm's ``systemic footprint.'' While there is merit 
to considering a qualitative test--since size is not a perfect 
proxy for risk--care would have to be taken in crafting such a 
test to ensure that measuring an institution's standing under 
the various qualitative elements did not itself become a 
burdensome compliance effort even for banks that ought clearly 
to be exempt. If I were to be confirmed, I would stand ready to 
work with Congress on the design of an approach to measuring 
firms' systemic importance.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM RANDAL 
                            QUARLES

Q.1. This Administration's narrative is that Dodd-Frank is 
constraining lending because compliance is so costly. However, 
Federal Reserve data shows that banks' commercial lending is at 
an all-time high--far higher than pre-recession levels--and 
bank profits are also at an all-time high. The largest banks 
all passed their stress tests and were given the green light to 
increase dividend payments and stock buybacks. This is above 
the high levels we saw in 2016, when the largest banks had over 
$100 billion to spend on dividends.

Q.1.a. Do you agree that these are signs that banks are 
thriving?

A.1.a. The stability of the U.S. financial system is supported 
by the safe and sound operation of banking institutions. One of 
the most important prudential measures for ensuring that 
stability is bank capital. Of course, there is a tradeoff 
between higher bank capital levels that increase the resiliency 
of individual institutions and the system as a whole, and the 
cost of that capital. A goal of regulation should be to balance 
to protection of financial stability in a way that promotes 
economic growth and business opportunity.
    Since the financial crisis, banks have substantially 
improved their capital planning practices and their capital 
adequacy. Bank lending in the United States has grown steadily 
since the crisis and U.S. banks are providing significant 
support to U.S. economic activity.
    If confirmed, I will work with Congress and my colleagues 
at the Federal Reserve to ensure we have in place a financial 
regulatory system that protects U.S. financial stability and 
maximizes long-term economic growth and credit availability.

Q.1.b. Do you think the amount of capital that banks are 
devoting to dividends and stock buybacks is a problem for our 
long-term economic growth?

A.1.b. We need a resilient, well-capitalized, well-regulated 
financial system that promotes the safety and soundness of 
individual institutions, protects the stability of the U.S. 
financial system, and fosters economic growth and business 
opportunity.
    Having sufficient capital is essential to the resiliency of 
the largest banking organizations, as undercapitalized firms 
may be unable to lend and act as a financial intermediary 
during stress. Such undercapitalization impeded the ability of 
banks to lend and was a key contributor to the weakness in 
economic activity following the financial crisis. Nonetheless, 
higher levels of capital--at least at some point--may increase 
the cost of capital to banks, reduce lending, and potentially 
affect long-term economic growth. If confirmed, I will work 
with Congress and my colleagues at the Federal Reserve to 
ensure that capital requirements are well-calibrated to the 
risks of the activities and exposures of the banking industry 
and are sensitive to the character of each institution.

Q.2. In addition to the fake accounts scandal, we recently 
learned that Wells Fargo charged consumers for high priced auto 
insurance that they did not need, without their knowledge. The 
high cost of the auto insurance pushed roughly 274,000 Wells 
Fargo customers into delinquency and resulted in almost 25,000 
wrongful vehicle repossessions.

Q.2.a. What will you do to prevent these types of scandals from 
happening again?

A.2.a. As I mentioned during my confirmation hearing, the 
robust enforcement of the consumer rules is important. I 
understand that the Federal Reserve has authority to address 
violations of law and unsafe and unsound practices at the 
institutions it supervises, and, if confirmed, I am committed 
to taking whatever action is appropriate based on the facts and 
circumstances. This would extend to the Board's supervisory 
responsibilities for Bank and Financial Holding Companies, 
including for the governance structure and enterprise 
compliance risk management and controls of these holding 
companies.

Q.2.b. At what point do these kinds of violations become a 
safety and soundness concern for the banks the Fed supervises?

A.2.b. I understand that the Federal Reserve has authority to 
address violations of law and unsafe and unsound practices at 
the institutions it supervises, and, if confirmed, I am 
committed to taking whatever action is appropriate based on the 
facts and circumstances of each situation. The Federal Reserve 
has taken enforcement actions against firms for compliance and 
other risk management failures that demonstrated overall 
weaknesses in a firm's risk management framework and internal 
controls. I consider robust and effective risk management, 
including compliance risk management, an essential aspect of 
safety and soundness.

Q.2.c. Do you think banks' compensation practices are 
contributing to the problem of banks harming their consumers in 
order to increase profits?

A.2.c. While incentive compensation is an important tool in 
successful management of financial institutions and is critical 
to attracting qualified employees and executives, improperly 
structured incentive-based compensation arrangements may 
encourage inappropriate risk-taking at financial institutions. 
If confirmed, I look forward to engaging with Federal Reserve 
Board members and staff to better understand the impact of 
incentive compensation practices on the safety and soundness of 
financial institutions.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                         RANDAL QUARLES

Q.1. Please describe the steps you took as a Public Governor on 
FINRA's Board of Governors to manage your conflicts of 
interest.

A.1. The Financial Industry Regulatory Authority (FINRA) asks 
all prospective Governors to disclose board and corporate 
affiliations prior to service on its Board. Sitting Governors 
also have an ongoing obligation to update those disclosures 
annually and as circumstances warrant; FINRA circulates an 
annual questionnaire to which all Governors respond which 
identifies and records any changes to such affiliations.
    FINRA's governance team (Office of the Corporate Secretary 
and Office of the General Counsel) reviews agendas prior to 
Board and Committee meetings to determine whether any items 
appear to be a conflict for a specific Governor based on the 
standards set forth in the FINRA Board's Code of Ethics and 
Business Conduct (attached). If a potential conflict of 
interest is identified, the matter will be referred to the 
Board Conflicts Committee for consideration and determination 
of whether the matter requires recusal. If this review 
determines that there is an apparent conflict of interest, the 
Corporate Secretary will notify the Governor of the need to 
recuse himself or herself and notify the Board Conflicts 
Committee, and ensure that the affected Board member is recused 
from the discussion and voting. Board members are also asked to 
notify the Conflicts Committee if they are aware of a need for 
recusal that has not been identified through the process 
described above.
    During my tenure as a Governor, there were no matters 
identified by FINRA or by myself as being an actual or apparent 
conflict of interest.

Q.2. During your tenure on FINRA's Board of Governors, did you 
ever raise with FINRA ethics counsel any issues that may have 
raised the need to recuse yourself from Board decisionmaking? 
If so, how was that issue resolved?

A.2. No.

Q.3. Please provide copies of FINRA's corporate governance 
guidelines and Board Member code of conduct.

A.3. Attached is the Code of Ethics and Business Conduct and 
the Corporate Governance Guidelines.

Q.4. Please identify and describe any board committees you 
served on while on FINRA's Board of Governors.

A.4. I serve on three Committees at FINRA: the Executive 
Committee, Management Compensation Committee, and the 
Regulatory Policy Committee.
Executive Committee
    The Executive Committee is comprised of all Committee 
chairs and is authorized to exercise all the powers and 
authority of the Board in the management of the business and 
affairs of the Corporation between meetings of the Board. I 
began serving on this Committee effective July 15, 2016.
Management Compensation Committee
    The Management Compensation Committee reviews and 
recommends changes to FINRA's Compensation Policy with the 
primary objective that it attract, develop and retain high 
performing individuals who are capable of achieving FINRA's 
mission of ensuring market integrity and investor protection. 
The Committee
reviews the plans for the development, retention, succession 
and retirement of key executives of the Corporation and its 
subsidiaries. I began serving on this Committee effective 
November 10, 2015.
Regulatory Policy Committee
    The Regulatory Policy Committee advises the Board with 
respect to the regulatory policies and strategy of FINRA 
programs. The Committee develops and/or adopts necessary or 
appropriate regulatory policies and strategy and makes 
recommendations to the Board on regulatory rule proposals. I 
began serving on this Committee effective November 10, 2015.
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