[Senate Hearing 115-340]
[From the U.S. Government Publishing Office]
S. Hrg. 115-340
UPDATE FROM THE COMPTROLLER OF THE CURRENCY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF THE OFFICE
OF THE COMPTROLLER OF THE CURRENCY WITH RESPECT TO THE CONDUCT OF
SUPERVISION, REGULATION, AND ENFORCEMENT OF FINANCIAL FIRMS SUPERVISED
BY THE OCC
__________
JUNE 14, 2018
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.govinfo.gov/
______
U.S. GOVERNMENT PUBLISHING OFFICE
31-583 PDF WASHINGTON : 2018
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
JERRY MORAN, Kansas DOUG JONES, Alabama
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Amanda Fischer, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Cameron Ricker, Deputy Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JUNE 14, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 36
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESS
Joseph M. Otting, Comptroller, Office of the Comptroller of the
Currency....................................................... 4
Prepared statement........................................... 36
Responses to written questions of:
Senator Brown............................................ 47
Senator Scott............................................ 57
Senator Cotton........................................... 58
Senator Tillis........................................... 60
Senator Reed............................................. 62
Senator Menendez......................................... 63
Senator Warner........................................... 67
Senator Heitkamp......................................... 71
Senator Cortez Masto..................................... 73
Senator Jones............................................ 82
(iii)
UPDATE FROM THE COMPTROLLER OF THE CURRENCY
----------
THURSDAY, JUNE 14, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. The Committee will come to order.
Today we will hear from Comptroller of the Currency Joseph
Otting. Since being sworn in last November, Comptroller Otting
has been focused on rightsizing regulations and furthering the
mission of the OCC.
Recently the OCC, along with four other regulators, issued
a proposal to make revisions to the Volcker Rule. In May, the
OCC issued a bulletin related to short-term, small-dollar
lending. The OCC has also been looking at modifying and
modernizing how regulators apply the Community Reinvestment
Act.
Comptroller Otting has also identified reviewing compliance
with anti-money-laundering laws as a priority of the OCC. In
addition, the Comptroller has said he expects the OCC to
announce in July a final decision on a specialty bank charter
for FinTech companies. I look forward to hearing more about
some of these important initiatives today.
In addition, the OCC will need to implement a number of
provisions from S. 2155, the bipartisan economic growth
legislation that President Trump signed into law on May 24th.
Among the provisions that the OCC will need to write rules
to implement are: the community bank leverage ratio, which
exempts highly capitalized banks from the international Basel
III risk-based capital requirements; the exemption from
appraisal requirements for banks in rural areas that suffer
from shortages of qualified appraisers; the requirement that
certain acquisition, development, and construction loans not be
subject to punitive capital requirements; reduced reporting
requirements and extended exam cycles for certain small banks;
the requirement to promulgate regulations to remove central
bank deposits from the denominator of the supplementary
leverage ratio for certain banks; the exemption from stress
testing for certain financial institutions, including the
immediate exemption for financial companies with less than $100
billion in assets; and the provision permitting certain Federal
savings associations to elect to operate with the same powers
and duties as national banks without going through the onerous
charter conversion process.
These provisions, and others in the legislation, rightsize
regulations for community banks, credit unions, midsize banks,
and regional banks, making it easier for consumers and small
businesses to get mortgages and obtain credit.
Absent excessive regulatory burden, local banks and credit
unions will be able to focus more on lending, in turn
propelling economic growth and creating jobs.
I look forward to engaging with the OCC, and with other
agencies charged with implementing S. 2155 over the coming
months to ensure that their interpretations are consistent with
the intent of the Members of Congress who voted for the
legislation and with this Committee's goal of promoting
economic growth.
Our economy is strengthening, and the positive effects of
the banking bill and tax reform are just starting to be felt.
Layered together, these policies and others are creating
conditions in our country that enable growth.
I look forward to building on this momentum moving forward.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Thank you,
Comptroller Otting, for joining us today.
In the more than 7 years since we passed Wall Street
reform, our financial system is much stronger than it was at
the outset of the Great Recession.
Much of that hard-earned progress, however, has been
threatened in the 7 months since Comptroller Otting took over
at the OCC--an agency that is supposed to be a watchdog for our
Nation's largest banks.
Comptroller Otting has said that the banks are, in his
word, his agency's ``customers'' and ``partners.'' That is the
exact mindset that contributed to the crash. We thought we got
rid of the Office of Thrift Supervision because it was an
industry lapdog. Perhaps it has been reincarnated at the OCC.
The real customers of the OCC are the Ohio families and
people across the country who suffer when the people they pay
to ensure the stability of our financial system do not do their
jobs.
Mr. Otting, if you have not heard me say this, certainly
your staff has, and my colleagues in this Committee have heard
it many times, but the Zip code my wife and I live in, in
Cleveland, Ohio, 44105, had more foreclosures in the first half
of 2007 than any Zip code in the United States, and I see every
day going to and from my house the results of those
foreclosures and the results of that devastation.
In one of his first acts as Comptroller, Mr. Otting
reversed course on changes meant to prevent OCC from becoming
too close to the banks it oversees. Comptroller Otting decided
that examiners should continue to work out of the bank's
headquarters instead of the OCC to save money. Penny wise,
pound foolish, but I guess befitting a partnership.
It is not as if the banks have been suffering lately.
The FDIC released data last month showing that the industry
increased its profits by 13 percent last year. Oh, but when you
add the tax bill into account, their profits increased 28
percent.
Rather than invest in their workers and communities, big
banks are plowing profits into pushing up their stock price.
The ten largest U.S. banks bought back $67 billion--$6,700
million--in stock in 2017, an increase of 70 percent over 2016.
They just do not seem to have enough, do they?
The CEOs of the six largest banks, already making tens of
millions of dollars a year, got an average 22 percent raise
last year. For the CEO of Well Fargo, it was 36 percent last
year.
And, oh, yeah, the average bank teller in this country
makes $26,000 a year. Twenty-six thousand dollars a year. Tens
of millions for CEOs, $13 an hour for the average bank teller.
When times are good, as they are in the ninth year of a
recovery, banks should prepare for the tough times ahead.
Instead, our watchdogs are loosening the rules that should be
guarding us against the next crash.
Right now, the OCC and the Fed are considering a proposal
to weaken protections and give a $121 billion boost to the
eight largest U.S. banks.
Comptroller Otting announced that he wants banks to get
back into the business of payday loans, something that had been
prohibited since 2002. He has pulled back on guidance meant to
protect the banking system from reckless corporate lending.
And he has other plans--plans that deeply concern Members
of this Committee, I think on both sides of the aisle, and
deeply concern the civil rights community--to gut the Community
Reinvestment Act, a 40-year-old law that pushes banks--very
profitable banks, I might add--to serve their communities. The
CRA emerged out of the civil rights movement to address
generations of exclusion and discrimination in bank lending. I
do not know if Comptroller Otting has read a book called ``The
Color of Law'' that recently came out. I would recommend it. I
think it will give you a better historic knowledge of why CRA
matters. That long legacy is a part of why we still have a
racial wealth gap today.
It is clear that Comptroller Otting has not learned the
hard lessons of the recent past, including the OCC's history of
working to stop State and local protections on subprime
mortgages, ATM fees, and credit card rate hikes. He is
suffering from the same collective amnesia that a number of
Members of this body suffer from, simply forgetting what
happened 10 and 12 years ago.
Right now, families in Ohio and Idaho and across the
country, in Hawaii and Alabama and Pennsylvania and South
Dakota, especially people of color, cannot afford to return to
the risky practices Comptroller Otting is considering.
I look forward to hearing your testimony and answers to the
Committee's questions.
Chairman Crapo. Thank you, and thank you, Comptroller
Otting, for being with us today. You now have the time. Please
make your presentation, and we will proceed with that.
I should alert the Members of the Committee we have a vote
at 10:30, but we intend to try to keep the hearing going by
rotating in and out as we need to.
Comptroller Otting.
STATEMENT OF JOSEPH M. OTTING, COMPTROLLER, OFFICE OF THE
COMPTROLLER OF THE CURRENCY
Mr. Otting. Thank you very much, Chairman Crapo, Ranking
Member Brown, and Members of the Committee. Thank you for the
opportunity to share my priorities as Comptroller of the
Currency and my views on reducing unnecessary regulatory burden
and promoting economic opportunity.
The Office of Comptroller of the Currency's mission is to
ensure that our Federal banking system operates in a safe-and-
sound manner, provides fair access, treats their customers
fairly, and complies with applicable laws and regulations. We
can accomplish that mission and rationalize our regulatory
framework so that the system can help create jobs and economic
opportunity.
My written testimony details the conditions of the Federal
banking system, risks facing that system, and my partners.
These priorities include modernizing the Community Reinvestment
Act; to increase lending, investments, and financial education
where it is needed most; and encourage banks to meet consumers'
short-term, small-dollar credit needs to provide consumers with
additional safe, affordable credit choices.
My priorities also include enhancing bank security and
anti-money laundering compliance so that banks can provide a
more effective means to support law enforcement and comply with
statutory and regulatory requirements more efficiently. I also
support simplifying regulatory capital requirements,
recalibrating the Volcker Rule, including that the agency
operates in a safe-and-sound manner and operates effectively
and efficiently.
Today I want to discuss the importance of the quality of
the work accomplished at the OCC. Since becoming Comptroller, I
have been struck by the professionalism and caliber of the
agency staff. The agency's 4,000 employees serve our Nation by
performing the important task of supervising more than 1,300
national banks, Federal savings associations, and Federal
branches of foreign banks. While the vast majority of the
institutions we oversee are small community banks, the system
also includes the large, most globally active banks in our
country.
Successful supervision requires a corps of professional
examiners supported by lawyers, economists, information
technology specialists, policy experts, and others. Few
Americans know the OCC, but the majority of them have a
relationship with at least one of the banks we supervise. It is
not an overstatement to say our Nation's banking system is the
most respected in the world, due in large part to the quality
of the supervision the OCC provides.
The OCC is unique among Federal banking regulators. It is
the sole regulator exclusively dedicated to prudential
supervision. Undistracted by multiple mandates, we remain a
laser focus on bank safety, soundness, and compliance. The
agency takes a risk-based approach to supervise, tailoring its
oversight to the risks and business models of each bank. At the
same time, its broader national perspective provides value in
identifying risk and concerns that may face similar banks or
the broader system. Our risk-based approach allows us to adapt
to the ever-changing environment and to prioritize our
regulatory resources on the risks with the greatest potential
to disrupt the industry and harm its customers. Our approach
may mean lower risks receive less attention compared with more
immediate concerns, but also the agency has the ability to
adapt quickly.
History demonstrates the value of an agency with such
singular focus and mature capabilities regarding regulation and
supervision.
Following the crisis of 2008, our country's banking system
recovered faster than the rest of the world because regulators
and bankers together recognized losses and worked through
troubled assets more quickly than our international
counterparts. U.S. banks recapitalized faster, established
stable liquidity, while other global economies lagged.
Our economy recovery has been steady. We are now in the
second longest period of expansion in our Nation's history, and
banks have been part of that success. Our banks have capital
and liquidity approaching historic highs. Credit and asset
quality are near pre-crisis quality, and bank risk management
is better than at any time in my 35-year career. This is a
testament to good supervision as well as sound bank management.
That strength helps bank realize their potential of being
engines of job growth and economic opportunity.
I congratulate the Chairman and this Committee on passing
the Economic Growth, Regulatory Relief, and Consumer Protection
Act. The act achieves common-sense, bipartisan reforms that
eliminate unnecessary burdens, promote economic growth, and
continue to safeguard core elements of safety and soundness in
our system.
I am fully committed to implementing the changes in the law
as quickly as possible. I will work with my fellow regulators
on a collaborative interagency basis where appropriate. When
existing rules may conflict with the Economic Growth Act or the
statute provides transition periods or where the law requires
agency rulemaking for implementation, the OCC plans to
supervise institutions consistent with the intent of the law,
including with respect to the amendments to the stress testing
requirements and will not enforce requirements on banks that
the bill intends to eliminate.
As a bank executive, I relied heavily on the judgment and
experience and counsel of the OCC examiners. They helped me to
identify issues and address them effectively before the
concerns became serious problems. I felt the OCC examiners
understood what we as bankers were trying to achieve and how we
worked to meet the financial needs of our customers. I slept
better knowing the OCC supervised my bank, and you can sleep
better knowing that the men and the women of the OCC are on the
job.
In closing, I want to congratulate you, Chairman Crapo, on
your leadership of this Committee, and thank you for allowing
me the time to share my perspective as Comptroller. I look
forward to your questions.
Chairman Crapo. My first question is going to be on your
horizontal review. I appreciate the letter you sent me earlier
this week about the OCC's horizontal review of sales practices
at large and midsize banks with significant retail customer
sales activities. Can you just tell me about the OCC's findings
and what you found and learned in this horizontal review?
Mr. Otting. Sure. Chairman Crapo, in 2016 the OCC started
what we call a ``horizontal review.'' It is frequently that we
will do horizontal reviews amongst the agencies when we see
particular risks that we think can be contained throughout the
industry.
We concluded that review in the fourth quarter of 2017. It
was the primary focus of the agency over about an 18-month
period. More than 40 national banks were involved in that, and
we looked at the new account openings without customer consent,
which included mortgages, auto, credit cards, checking
accountable, savings accounts, money market accounts, and then
any products that would be joined by those products, which may
include overdraft protection or other items.
The banks completed a look-back over a 3-year period, which
included hundreds and hundreds and millions of new accounts. We
sent the final letters to the bank CEOs on June 4th. We did
follow up to the Chairman and Ranking Members of Congress with
a recap on June 11th, which you referenced. The OCC did not
find persuasive or systemic issues in regard to the improper
account openings, but did find the need for banks to improve
their policies, procedures, and controls. And I would say the
key takeaway from this was that our focus of having
institutions develop better controls and better policies around
it, but we did not find the issues that this was systemic
across the industry.
With this horizontal, we issued over 250 MRAs, and 20
percent of those have been closed. And to put that into a kind
of context, we currently have 4,000 MRAs outstanding. So while
substantial, it was not, you know, I think illustrative of it
being a large issue.
Our findings were that less than 20 accounts out of the
hundreds and hundreds of millions, less than half of those were
due to unauthorized account openings. And I would also make
note that it was determined that where there was an account
that was opened, the banks are creating reimbursements for
those dollar amounts, and we feel every consumer will be
reimbursed if they can document that account was opened
inappropriately.
Chairman Crapo. Thank you. So the short summary is that
about 20,000 accounts were identified where the documentation
was not present or could not be located out of around 300
million accounts that were reviewed?
Mr. Otting. Yeah, we actually think the numerator is more
between 500 and 600 million.
Chairman Crapo. OK. So 500 to 600 million reviewed and
around 20,000 that were identified. And of those 20,000, is it
a conclusion that all 20,000 of those were wrongly opened or
just not documented?
Mr. Otting. No, we estimate slightly half of those were
opened inappropriately, and the other half there was missing
documentation that the banks could not prove that they had the
data to open the accounts.
Chairman Crapo. All right. Thank you. I appreciate that,
and I appreciate the attention that has been given to this
issue.
My last question will be related to the company-run stress
test. You referenced this in your opening statement. As you
know, the stress tests are due for financial companies with
total assets between $10 billion and $50 billion in July, and I
strongly encourage you and the other banking regulators to
provide guidance to financial companies about how S. 2155 will
be implemented and make sure that financial companies with less
than $100 billion in total assets receive the relief the bill
intends immediately, consistent with congressional intent.
Can you commit to me that you will work quickly on
implementing S. 2155 generally and to provide guidance on
stress tests for financial companies with total assets of less
than $100 billion specifically?
Mr. Otting. Yes, Chairman Crapo, first of all, thank you
very much. We have made that statement to the financial
institutions. We have made that statement publicly. And then in
regards to the overall implementation, we have created a
critical path document that I have in my possession where we
have harnessed resources within the agency. We have identified
items that can be done within the agency, and then the ones
that require interagency, and there has already begun a process
of discussing and creating teams to work on the interagency
activity. So we fully intend to dedicate the necessary
resources to achieve that objective.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
At the hearing yesterday, Mr. Comptroller, you were asked
if you believed discrimination exists. You said that because
you have never personally observed it, you cannot say. But you
have had ``friends from the inner city'' tell you it exists and
you believe them. And you were asked if you have ever read
about discrimination, you said that you did, but that writers
are only correct about half the time, and then you said you do
not read newspapers. These are unbelievable statements for any
adult in America, especially one that took an oath of office
like you did, but let me ask you a couple of questions.
Does hiring through the old boys' network serve as a
headwind for women and minorities, whether in banking or
Government?
Mr. Otting. My response to that would be I would not
support those kind of activities. I think there are equal
employment opportunity laws in this land that people adhere to,
and I am not aware of any old boy network that I would
associate with the banking industry. So I personally do not--
have not observed that activity, and I would also say, to
answer your question, if there was a network like that, I would
not support that, and----
Senator Brown. Well, you cannot--I know you do not read
newspapers. You could not go to the New York Times and say,
``This is the good old boys' discriminating network.'' But let
me give you an example. When you and Secretary Mnuchin and the
rest of the OneWest board signed a consent order with
regulators--we know about all the foreclosures that your bank
did--signed a consent order over foreclosure misconduct, your
nine-member board--I could read the names; I will not bother--
they were all men. I do not know if you set out to say, ``I am
only going to hire men,'' but I have got to think the old boys'
network that you ended up being part of would have something to
do with it.
So it begs the question to me that you have never seen
discrimination, in your mind, but some friends from the inner
city told you there was discrimination, so you believe them
even though you only believe half of what you read in the
newspaper. And then you are saying that you never saw any
discrimination in hiring even though, coincidentally, all nine
of the people on your board were men. I do not know if they
were all white men. I assume--I do not make assumptions, but I
know they are all men.
So does that not suggest to you maybe there is an old-boys'
network in hiring and that maybe people that look like you and
me and Schatz and Van Hollen and Jones and Toomey and Rounds,
that we might have an advantage in hiring because we know
people that look like us and that is who usually gets hired for
banks? Did that ever occur to you?
Mr. Otting. First of all, I appreciate you do recognize
that I signed that consent order right after I joined the bank,
and I am proud to say that we diversified that board under my
leadership. So I do not think it stayed in the format that you
describe.
Senator Brown. But they go there, these 10 men. I am not
saying you did it. I am saying you do not seem to recognize
that discrimination exists----
Mr. Otting. What I said was----
Senator Brown. ----because you have never seen
discrimination.
Mr. Otting. What I said was that under my leadership we
diversified that board, and so that would give you an
indication while I was there, the actions that I took. There
are tools, trainings, and laws in place to avoid
discrimination. There is lots of evidence of inequity in the
world. I would tell you just because I have not personally
experienced it that I am not saying it is not----
Senator Brown. No, no, no. You did not say--you have said
you did not personally--you said you have never seen it, but
some friends in the inner city----
Mr. Otting. No, that is not true. I mean, being part of an
institution or bank over the course of my career, I have--there
have been instances among employee groups----
Senator Brown. That gives me a little more confidence.
Mr. Otting. ----they get referred to HR. There are
investigations, there is corrective action. What I was saying
was I personally have never experienced it.
Senator Brown. I think you said you personally did not see
it, but----
Mr. Otting. Well, then, let me correct the record.
Senator Brown. OK. I think you said it a number of times.
So why should--with your--I am sorry to say it this way, but
your insensitivity generally to these issues just evidenced by
your response to----
Mr. Otting. That is not true.
Senator Brown. Well, insensitivity----
Mr. Otting. That is not----
Senator Brown. I read your testimony in the House, but let
me go to this: So, fundamentally, why should the public trust
you to overhaul the Community Reinvestment Act, a product of
the civil rights movement meant to address generations of
segregation and exclusion, if you do not seem really--I mean,
you just do not even seem certain that discrimination exists.
In response to Congressman Capuano and Congressman Cleaver, you
did not ever say, ``Yeah, discrimination exists. I know it
exists.'' You had to come to the conclusion it exists because a
``friend in the inner city'' told you it exists. So why should
we trust you, the public, the Congress, the civil rights
community, to address generations of segregation and exclusion
by overhauling the Community Reinvestment Act the way it should
be overhauled? Convince me.
Mr. Otting. Thank you very much for that question. I think
if you look at my top three agendas, two of those top three are
redefining CRA and small-ticket lending, which go right to the
core of what you are describing, the people in America that
need the most help. I am all about expanding CRA into the low-
to moderate-income areas across America, and small-ticket
lending, when we took banks out of that space that offered a
fair alternative to people, people ended up with check cashers,
payday lenders, liquor stores. That is not the source where
people can go and get quality bank products and get back into
mainstream banking. So two or three of my core agenda items are
focused right on those people you are describing.
Senator Brown. So if you--OK. I hear you. If you cannot
just directly say to a congressional hearing discrimination
exists, will you make this promise? You are arguing now that
you say, yes, you recognize that it does exist. Will you
promise us to move forward on a CRA overhaul only if you have
the full support of the civil rights community? Only if you
have the full support of the civil rights community. I
understand you said you are going to do an overhaul. Overhaul
can mean a lot of things. It can be deregulation----
Mr. Otting. They will be one of the----
Senator Brown. ----it can be a lot of things.
Mr. Otting. ----to provide us feedback through the ANPR,
and they will be at the table discussing----
Senator Brown. I understand they will be at the table, but
some people are at the table and ignored by others at the
table. Will you commit to this Committee----
Mr. Otting. They will be at----
Senator Brown. ----that if there is not consensus in the
civil rights community, you will not move that direction on CRA
overhaul?
Mr. Otting. They will be at the table having discussions
like all parties involved in the CRA----
Senator Brown. That is the most you are going to commit?
Mr. Otting. I stand by my answer.
Senator Brown. OK.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. I cannot help but
observe that there are more than a handful of Senate
delegations from various States, including Pennsylvania and
Ohio, which consist exclusively of middle-aged white males. It
is not obvious to me that the voters of those States are all
part of a good old boys' network.
Let me raise a question about Madden v. Midland, a decision
I am sure you are aware of. The Second Circuit Court of Appeals
ruled that nonbank entities, when they purchase loans and debts
originated by a national bank, will no longer be entitled to
the Federal preemption from the State usury laws. This is a big
departure from the practice and the precedent that had
prevailed under the valid-when-made principle. Even the Obama
administration argued that the Madden decision was wrongly
decided. And the result of it, of course, is uncertainty on the
part of a potential buyer of a bank asset, uncertainty as to
whether or not these usury laws will apply.
A dramatic reduction in credit access for low-income people
has already occurred. Quite predictably, if banks cannot be
confident that they can sell these loans, they are just not
going to originate them in the first place. And Columbia
Professor Robert Jackson, who is now a Democratic member of the
SEC, found that borrowers with credit scores under 625 saw a
52-percent reduction in credit access after the Madden
decision.
Now, the Second Circuit based their decision in part on the
notion that they allege that the ability to sell these
instruments to nonbank buyers--the inability to do so would not
hinder national banks' operations.
So my question for you, Comptroller Otting, is: Is it your
understanding that the ability to buy and sell loans that banks
originate is, in fact, an important part of how they manage
their credit exposure, their business generally, and that it is
good for consumers for banks to be able to sell these assets
broadly, including to nonbank entities?
Mr. Otting. Yes, I do agree. I also do agree, I think, that
the Madden ruling was inaccurate. I think national banks need
the ability to originate those credits per the National Banking
Act and then be able to distribute and sell those loans. That
does create a capacity in the marketplace for the originators.
And a lot of banks are interested in that product, and so I
think it expands the choices for consumers.
Senator Toomey. And are there specific steps you could be
taking at the OCC to try to solve the problems that are created
by this decision?
Mr. Otting. I would have to--I believe we filed a brief--we
did file a brief in this matter supporting our position.
Senator Toomey. OK. I would urge you to continue to pursue
that as much as you can because I think this is simply making
credit less available, especially to low-income borrowers, as
long as this stands.
The second point I wanted to raise is, as you are aware,
there have been instances where regulators have used guidance
issuance as a way to circumvent the Administrative Procedures
Act and impose their will without going through the proper
rulemaking. The CFPB did so in the case of the indirect auto
lending rule, and Congress repealed that when the GAO
determined that that guidance constituted a rulemaking. GAO
also determined that the leverage lending guidance constituted
a rulemaking.
My question for you is--I would just like for the record
for you to assure us that you do believe that a binding rule
must go through the APA process, must go through the rulemaking
process, and that a guidance issued by a regulator should not
constitute a binding rule.
Mr. Otting. I do agree that a rule should go through the
binding process. I think there was one item, the leverage
lending, that the OCC could be accused of using that as a rule.
We have done an incredible amount of in-depth training and
discussion within the agency with our examiners that that is
this particular guidance. I have publicly said that on a number
of occasions when I have had speeches to recognize that
guidance is guidance and rules are rules. And so I think we
have taken an aggressive posture to make sure that that is
known within the agency.
Senator Toomey. So just to be clear, if you believe that it
is necessary to have a binding rule on leverage lending, you
would pursue that through the Administrative Procedures Act?
Mr. Otting. We would, correct.
Senator Toomey. Thank you very much.
Thanks, Mr. Chairman.
Senator Brown [presiding]. Thanks, Senator Toomey.
I just want to correct the record on the Ohio delegation.
On the Democratic side, there are five members of the
delegation. There are two African American women, one white
woman, and two white men. So I----
Senator Toomey. I said Senate.
Senator Brown. Well, I am saying the delegation. And that
is about the same--well, the delegation as a whole is about the
same size as the OneWest board.
Senator Schatz.
Senator Schatz. Thank you.
In October of 2017, the OCC made a pretty significant
change in how OCC evaluates banks' performance under the
Community Reinvestment Act, and this change is significant. It
is a little technical, but it is baffling. Before the change,
if a bank engaged in discriminatory lending practices, that
activity logically impacted that bank's CRA rating. That is
intuitive because the CRA was passed to stop discriminatory
lending practices. But now the OCC has decided that a bank's
discriminatory lending practices should not impact the CRA
score if the discrimination is not related to CRA lending.
Under this new approach, a bank that discriminates and engages
in illegal activities, as long as it is lending outside of CRA
lending, could get an excellent CRA rating. Why?
Mr. Otting. I think the issue in October was it went from a
2 downgrade to 1 downgrade. But I----
Senator Schatz. Why?
Mr. Otting. That was made at that particular time--it was
prior to my arrival in the agency. I would be happy to look at
that and follow up with you.
Senator Schatz. You do not know why?
Mr. Otting. I do not have the facts why that decision was
made. It was prior to my arrival in the agency. I have been
more focused on----
Senator Schatz. So CRA was passed to stop redlining,
correct?
Mr. Otting. Yes. It was one of the reasons----
Senator Schatz. Right, one of the reasons. And if a bank is
engaged in discriminatory lending, the OCC would want to make
sure that that stops?
Mr. Otting. Oh, definitely.
Senator Schatz. So then why would we ignore evidence of
discriminatory lending practices when evaluating a bank's CRA
performance?
Mr. Otting. I do not think it would be ignored. Going
through the process--if you understand what generally happens
when we start a CRA exam, we review the HMDA data----
Senator Schatz. So let me just read from the document:
``This principle ensures that the CRA evaluation does not
penalize a bank for compliance deficiencies or illegal credit
practices unrelated to its CRA lending activities.''
Mr. Otting. I apologize. I do not have that data in front
of me. I would be happy to go back and review it and come back
and either meet with you one-on-one or have our staffs discuss
it.
Senator Schatz. You do not know why this happened? You do
not know that----
Mr. Otting. It happened prior----
Senator Schatz. Because, first of all, you said--hold on a
second.
Mr. Otting. It happened prior to my arrival.
Senator Schatz. Hold on.
Mr. Otting. I have not focused on that----
Senator Schatz. Not 6 years prior to your arrival.
Mr. Otting. Yeah. Probably 60 days before my arrival.
Senator Schatz. Sixty days?
Mr. Otting. Yes.
Senator Schatz. And we are here to talk about CRA, and you
do not know why this happened or exactly what happened, because
you just said it downgraded it in terms of the score, but it
actually says ``does not penalize a bank for compliance
deficiencies or illegal credit practices related to its CRA
lending activities.'' So the question becomes: Why would we do
that if the CRA is established for the purpose of preventing
discriminatory practices?
Mr. Otting. Senator Schatz, I would be happy to review that
data.
Senator Schatz. Well, what do you think?
Mr. Otting. I have focused more on how can we make CRA more
effective, how can we be more inclusive.
Senator Schatz. OK. Now that you know a little bit about
this, what do you think?
Mr. Otting. My own personal viewpoint is that we should
never allow discrimination in any kind of lending activities to
occur, and if it does, it should have an impact on their CRA
rating.
Senator Schatz. Will you commit to revisiting this
decision?
Mr. Otting. Oh, absolutely.
Senator Schatz. Thank you.
Another question. Will you commit to providing the
Committee with a comprehensive and detailed summary of the
findings from OCC's sales practice review?
Mr. Otting. Senator, there is a long legislative,
regulatory, and case history protecting confidential
supervisory information for good reason. Maintaining
confidential supervisory information promotes more effective
supervision and the orderly function of the national banking
system. Maintaining the privileged and confidential information
also protects the agency's prerogative to take additional
supervisory enforcement action on that information----
Senator Schatz. Who wrote that?
Mr. Otting. Huh?
Senator Schatz. Who wrote what you just read?
Mr. Otting. I wrote it. I wrote it in conjunction with my
staff. I view at this point in time we are in the middle of
supervisory action, and to release that information would be
inappropriate.
Senator Schatz. I guess the problem is that one of the
things that we are hearing is that the Wells Fargo problem is
much more widespread than we had initially thought, that it is
not confined to Wells Fargo. I understand that your supervisory
procedures--that there is a tension here in terms of
maintaining confidentiality, and I respect that. But there is a
pretty significant issue if we find out that what happened at
Wells Fargo was actually widespread across the economy and
across the country, and because of this objective you have to
maintain confidentiality and discretion, that American
consumers are getting screwed and they do not get to find out
about it until 18 months later or 3 years later. That is a
problem.
So what are you going to do about that part? How are you
going to address that tension?
Mr. Otting. First of all, I can assure you, based upon the
data that I have personally reviewed, that that is not
accurate. Your statement is not accurate. This was not systemic
across the banking industry. There were isolated cases of it.
And so I can assure you that as we go through the supervisory
data that employees--and there has been----
Senator Schatz. So you are able to talk a little bit about
the data. So if these data change, if there is an indication
that there is something more widespread, will you provide that
information to the Committee?
Mr. Otting. I would be happy to come back to the Committee
and have a discussion.
Senator Schatz. Should I take that as a yes?
Mr. Otting. Yes.
Senator Schatz. OK. Thank you.
Chairman Crapo [presiding]. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman. Comptroller
Otting, first of all, thank you. I appreciate the opportunity
here to visit with you.
I was just curious earlier when Senator Brown had asked
some questions concerning CRA, you mentioned the availability
of or at least the need for the availability of some short-
term, small-dollar lending. I want to go into that a little bit
because millions of Americans use small-dollar loans to pay for
unexpected expenses, car repairs, medical bills, and it is
pretty clear that there is a significant demand for these
products, and having establish institutions actually offer them
can provide the market with better alternatives and more
competition than simply payday lending or in some cases where
they are literally going to a loan shark to get a loan, because
they are going to get it from someplace.
I am just curious. While the banks probably have some
additional clarity, can you talk a little bit about your focus
and your thoughts about how to provide for that market for
those small-dollar loans on short-term time periods?
Mr. Otting. Sure. Senator Rounds, we issued a bulletin
about 2 weeks ago to the national banks where we indicated to
them that we encourage them to participate--there are two
market segments here that people can get confused by. There is
the 45 days or less, which generally is referred to as ``payday
lending.'' That generally has one payment based upon a paycheck
or an event occurring. And then there is the 46 days or more
where generally there is some term associated where there are
multiple payments usually from that. What we addressed in the
bulletin was that 45 days or longer. And in 2013 banks
basically exited that market, and for the life of me, I do not
understand, if you take, you know, the banks out of a space
that were providing a critical source of capital, that it did
not end up being worse for consumers and they had less choice.
So one of my initiatives was to get banks back into that
space and do it in a fair and, I think, economically viable way
for consumers, that they have an alternative from financial
institutions. So I have personally met with all the large bank
CEOs--I started doing this after I arrived--to encourage them
that we would be releasing a bulletin, and many of the
financial institutions now are looking at products. It does
take a while to go through a risk management review as they
bring these products back up online, but I am confident more
banks will enter into that sector. And we also provided a lot
of clarity for our smaller community banks that this is
something that we want them to do.
Senator Rounds. I think that probably is an unsung part of
a major improvement in banking opportunities for a significant
part of our population across the board.
Mr. Otting. I agree.
Senator Rounds. Let me ask also about ag lending a little
bit. In the upper Midwest, in South Dakota, you know, we have
suffered through some low commodity prices. We had a drought
last year that significantly impacted our ability to actually
raise crops. Credit is critical, and I think this year once
again we are going to have the same challenges.
Can you talk a little bit about what you are seeing, the
observations of the reports that you have had with regard to ag
lending, the challenges there and what you see as perhaps
either modifications or things that we can do to perhaps
improve our ability to actually lend to these producers during
some tough times?
Mr. Otting. I think there are two things kind of occurring
that people are concerned. In addition to natural disasters, I
think, you know, there is an expectation of softening of
commodity prices. And then you get the kind of double whammy of
an increasing of interest rates. So I think our examiners, you
know, in that space are spending a lot of time talking to the
banks about their plans with their customers to get them
through this period of time. As you know, the volatility in the
ag market, you know, we can have a couple rough years, and then
hopefully followed by solid years that allows farmers to be
recapitalized. But, you know, the intent is--what we are
hearing is banks are prepared to work with their clients to get
through these difficult periods.
Senator Rounds. I guess the point I would like--I am glad
you make it. These banks have to be able to work with their
clients. They know them. They have had relationships that in
many cases go for generations.
The one thing I would not want to have happen is because of
audit procedures or inappropriate guidance that these banks be
pressured into not allowing them to do what they do best, which
is to make appropriate judgment decisions about the extension
of credit in what can be challenging cyclical times for ag
producers. And it sounds like you are on board with that.
Mr. Otting. Yes, I am.
Senator Rounds. Thank you.
Let me ask one last thing, just on cyberissues. Do you feel
comfortable that, with regard to the financial institutions,
there is a broad understanding of the critical need to protect
our assets that are related or directly connected with our
cyberlinks?
Mr. Otting. Yes, on an annual basis, the national banks, we
go in and part of our annual examination we look at the
security perimeters. We look at the hardware, we look at the
software, we look at the patchwork, and we make assessments of
that for each individual bank, and if we see any deficiencies,
we will generally issue MRAs for correction.
We also look as part of that process, you know, at what
does their recovery platform and program look like. I would say
that we are confident that the banks that we provide oversight
to, it is high attention both by management and boards.
However, I would say, you know, the consumer today has become
so reliant upon their debit card and credit card and carry a
lot less cash that that would be the thing that would worry me.
If we were down for a couple days, people could not buy gas in
the morning, get Starbucks coffee, stop and get lunch, go to
the grocery store because we have become such a card-based
industry.
There also is a lot of coordination amongst the
interagencies with Treasury on cyber-related issues, and we are
meeting tomorrow afternoon on this topic. So it is receive the
attention, but it is the unknown, as you know, Senator Rounds,
that gives us all angst, I think, as we try to manage our way
through this.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you for
being here today.
So banks get charters from the Government, which entitles
them to special privileges. In exchange the Government expects
them to meet the credit needs of communities in which they
operate. And that is the idea behind the Community Reinvestment
Act, or the CRA.
The OCC is responsible for enforcing that law, and you have
said you are supportive of the intent of the law, but you think
it needs to be updated, and I just want to explore a little bit
about what that means.
Last year JPMorgan Chase admitted that its African American
and Hispanic borrowers systematically got mortgages with higher
rates and fees than comparable white borrowers. And according
to a new report, African Americans make up 47.7 percent of the
population of Washington, DC, but they received only 2 percent
of JPMorgan Chase's mortgage loans in the city in 2015 and
2016.
So are JPMorgan's practices consistent with the CRA's
intent that banks ``meet the credit needs of their
communities''?
Mr. Otting. Based upon their rating that they have in their
CRA, I would say at an overall organizational perspective they
do. I think in Washington, DC, you are aware they do not have
branches. They have a specific business line. I think the
intent of JPMorgan is to open up a retail banking franchise,
and I think that would aid some of the issues that you have
described.
Senator Warren. So you are saying that when they admit that
African American and Hispanic borrowers systematically got
mortgages with higher rates and fees than comparable white
borrowers, that was OK? In fact, I see----
Mr. Otting. I did not say that was OK.
Senator Warren. ----that they were rated by your group as
satisfactory or outstanding on every one of their publicly
available CRA evaluations?
Mr. Otting. I did not say the issue you described was
satisfactory. I said as an overall organization they received a
satisfactory rating.
Senator Warren. So you get a satisfactory rating even if
you are engaging in that kind of behavior?
Mr. Otting. There is a multitude of factors that go into a
CRA----
Senator Warren. All right. Well, then let us look at
another bank. A new report found that 54 percent of black
families, 45 percent of Latino families who tried to get a
mortgage from TD Bank are turned down. That is more than three
times higher than the industry average. Are TD Bank's lending
practices consistent with the intent of the CRA?
Mr. Otting. I do not--I am not familiar with TD America's
actual community reinvestment, but I would say from a fair
lending perspective, the facts that you are submitting would
indicate that they have fair lending issues.
Senator Warren. Issues. It turns out that the regulators
who report to you seem to think that it is all OK. TD Bank has
received either a satisfactory or outstanding rating on every
one of its publicly available CRA examinations in the past 20
years.
So let us take a look at one more bank: OneWest, which I
know you are familiar with because you used to run it.
Community groups filed a fair housing complaint against OneWest
at HUD in 2016 citing widespread discrimination against Asian,
black, and Latino mortgage applicants. While Latino borrowers
took out 22.4 percent of mortgage loans in Southern California,
only 8.4 percent of OneWest's mortgages went to Latinos.
OneWest apparently avoided putting branches in minority
communities and failed to maintain the foreclosed properties in
minority neighborhoods.
Mr. Otting, do you think your former bank's track record is
consistent with the intent of the CRA?
Mr. Otting. I do think that we were consistent with the
intent. I think that you are looking at an incredibly small
population that you based your statistical analysis on there,
and that was our viewpoint from the beginning, that we were not
in the mortgage business at that point in time.
Senator Warren. Your bank had one out of 74 branches in
Southern California, just one was in a majority minority
neighborhood in that entire region. And this is the fundamental
question about the CRA. You get that banking charter in return
for serving the community. But evidently the community that
OneWest wanted to serve was not the Latino community, the
African American community, or the Asian American community.
Mr. Otting. Could I offer a correction on one thing? We did
not open but one or two branches the entire time. We inherited
every one of those branches from failed institutions, and you
are focusing on the lowest to low. If you looked at the low to
moderate, we did have more dispersion into those markets.
Senator Warren. I am sorry. I am just looking at the facts
that are part of the public record here.
Mr. Otting. The facts that maybe come from a particular
organization that was trying to----
Senator Warren. These are the facts that are in the public
record. You had one out of 74 branches--no point in going back
over the data. I am running out of time here. But, you know,
what bothers me is, despite obvious attempts to avoid serving
communities of color, OneWest passed all of its CRA exams. And
so the problem I am facing here is that you say the CRA needs
to be updated, and I am concerned that the man who ran OneWest,
the man who said that the banks are his customers--the banks,
not the American people--at the OCC, and the man who said
yesterday in a hearing that he had personally never observed
discrimination is not the right man to rewrite the Community
Reinvestment Act.
The CRA needs to be a lot tougher than it is today. The
standards need to be higher. The enforcement needs to be more
rigorous. Studies show all across this country that black and
Latino borrowers get far less access to mortgage credit than
comparable nonminority borrowers, and yet 98 percent of banks
today are passing their CRA exams.
If you weaken the CRA now, you are only going to push even
more struggling families across this country out of the middle
class.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Tillis.
Senator Tillis. Mr. Otting, you did not get an opportunity
to respond to that last loan, so before I ask you some
questions, do you have anything that you would like to add with
respect to the prior discussion with Senator Warren?
Mr. Otting. No, I would say I--first of all, it will not be
me who will do the CRA changes. It will be the communities to
which the CRA is generally deployed. And I have been a big
supporter of how we can drive further and deeper into the
communities across America, and I think my track record stands
for itself on those.
Senator Tillis. Well, that was going to be my first
question. When you get to the unbanked or underbanked
communities that do need access to financing through lenders,
what does the world look like a year or 2 years from now if you
are successful with making that a priority?
Mr. Otting. I think when you look at CRA today, there are
three things we would like to solve for. Today we do not have a
good economic measurement way that we can compare across
different financial institutions in different markets. And so
one of the frameworks that we have been talking about is using
a balance sheet item, whether that is deposits, Tier 1 capital
of total assets, and then an NCB could add up their CRA
activities and come up with a percentage.
Second of all, we would like to expand what qualifies for
CRA today. It is narrowed down to predominantly residential
mortgages and multifamily, and we think there are many more
community activities plus small business lending is capped at
$1 million of revenue.
And then the third is we do CRA exams every 3 years, and it
takes us 6 months to 24 months to turn those around. If we can
fix the economic side of that, we can turn those around much
faster.
And then I would say with some of the small-ticket lending
things that we are proposing that we have given banks insight,
we want banks back into those--lending in those communities
where Senator Rounds said, you know, we have a big void of
banks playing a role in inner-city America of offering credit.
Senator Tillis. Incidentally, do you think the banking
regulatory reform act that we sent to the President that is now
the law, do you think that that will also play a role in terms
of easing the burden on the smaller banks and community banks
and possibly getting lending flowing as you are working on the
CRA?
Mr. Otting. I definitely do. I think in a number of those
instances, community banks that have been so focused internally
on regulation now will be freed up to serve their customers in
their community.
Senator Tillis. Mr. Otting, when you were here for your
confirmation hearing, I asked you how many tips there were on a
spear, and I think we got it cleared out. There are two ends,
but only one tip. And the reason I mention that is that we
still have a lot of--we are at least getting to a more
rationale framework for regional banks and smaller banks,
community banks. But we still have a lot of confusion about
just who is regulating what in the financial services industry.
And I think you and I may have a difference of opinion on a
single regulator for Volcker.
I think Mr. Quarles is doing a pretty good job of engaging
the other regulators, so I am trying to understand--that may be
an issue that we will be at odds with each other. I am trying
to understand why you would have a fundamental disagreement
with Volcker coming under the Fed.
Mr. Otting. Well, first of all, I do agree with you, we
have a very good relationship with Randy Quarles. I think he
has done an incredible job.
The other comment I would make is that every week the FDIC,
the Fed, and myself, the leaders meet. We have lunch once a
month. We have an open forum to talk about any outstanding
issues. So I think recently here we have really gotten strong
momentum on our ability to work across the agencies.
I think on particularly Volcker, if you look at where the
activity is, it is probably 45 percent in banks and 55 percent
of the holding company, and I think they have such a critical
element that our examiners are responsible for not to have a
voice in the final rule would be a fatal flaw.
Senator Tillis. Speaking of the Volcker Rule and the
proposed changes, what do you think those proposed changes are
likely to do in terms of positive impact on the regulated
community?
Mr. Otting. I think it will bring clarity. It will bring
clarity for the banks, and it will bring clarity for the
examiners as we are trying to determine the proprietary trading
element. I think, you know, I personally commend what the
Committee and legislators did regarding the law of excluding
banks of $10 billion or less. And over $10 billion we have gone
to an accounting methodology. It may not be the best solution,
but it is a solution that I think we can all get behind.
Senator Tillis. I know we are running tight on time for
votes, so I will just let you know that I am going to submit a
couple of questions for the record. One has to do with a
discussion on exempting investment and venture capital from the
Volcker Rule, but we will send that as a question for later
this week.
Thank you very much of your time.
Senator Brown [presiding]. Senator Jones.
Senator Jones. Thank you. Mr. Otting, thank you for being
here, and I am going to be short because I have got to get over
to vote.
Getting back to CRA is probably one of the most important
things you are going to do for the folks of Alabama. So in the
modern CRA exam, the type of action a bank takes is extremely
important. Lending counts differently than investment, which
counts differently than service. I think everybody tends to
agree that we need to be encouraging and crediting more types
of CRA-eligible actions, but there are concerns that if we
start--about blurring those lines.
My question to you is: What types of actions should count
differently for CRA credit? What type of action like lending,
investment, and service do you believe are more important to
fulfill the CRA requirements?
Mr. Otting. If your question is if we could place an
emphasis, where would we like to see that emphasis?
Senator Jones. Yes.
Mr. Otting. Senator Jones, most CRA activity today is
really single-family mortgages and multifamily in low- to
moderate-income areas. And one of the bad parts of that is
single-family mortgages often get packaged up in low- to
moderate-income areas, and they can be sold amongst
institutions. And so a new incremental dollar does not get
created when that pool gets sold, but a bank will get credit.
And I think we should bring a stop to that.
Then I think there are some core areas that we should look
at. Today if a small business is $1 billion in revenue, over
that will no longer qualify for CRA credit. And I am a believer
that if a business in East Los Angeles has $1.5 million of
revenue and it is going to create 10 jobs and it is a heavily
blighted area, we should give that CRA credit.
I am also a believer in the inner cities of America. I
understand the difference between church and state, but in most
black and Latino communities, the church is where people go for
their financial counseling and their job disciplines and help
around training. And today if it has got a church associated
with it, it is excluded from CRA. And I think what you need to
do is isolate the community centers associated with churches
and give them credit for CRA accordingly.
Senator Jones. Thank you. You have made some comments--you
know, I think banking has made great advances recently about
trying to reach consumers outside their physical branches. But
you have made comments that seem to de-emphasize the importance
of branches. In Alabama that is really important. I mean, we
have got so many communities that broadband does not touch,
especially high-speed broadband. I think a lot of banking is
personal in those communities.
So what is your view on the importance of branches and how
assessment areas should be calculated?
Mr. Otting. I think assessment areas continue to be
important in virtually all communities. I would say, Senator, I
think assessment areas, though, have actually restricted CRA
investment. I can give you an example. When I was running
OneWest Bank, L.A. County was our assessment area, but we were
also in Inland Empire, Venture, Riverside, and Orange County.
And on one particular street, if the investment was on the
south side, we did not get credit and on the north side we did.
So I think you have to look at, you know, are we defining
assessment areas too narrowly for people to invest in their
community? I do believe around the branches we need to make
sure that institutions are serving the communities around their
branches. And then we have the whole issue of when entities do
not have branches, where should they be doing their community
development activities? And I think personally it should be
where the customers are.
Senator Jones. All right. Well, thank you.
Mr. Chairman, I will yield the balance of my time so I can
get over to the vote. We will have some questions for the
record.
Thank you, Mr. Otting.
Senator Brown. Thank you, Senator Jones.
Comptroller Otting, you said you want the OCC to be more
responsive, you said, to our customers, which are the banks.
How do the American people trust you to protect them from a
financial crisis that cost them their jobs, their homes, their
retirement, their neighborhoods if you say your customer is the
banks, if you are there to serve the banks? How can they trust
you to protect them from another financial crisis?
Mr. Otting. I think, Senator Brown, most of those comments
were isolated to when I was talking about that, you know, I
want to partner with banks to get them deeper involved in the
communities across America. What I mean by that is low- to
moderate-income areas. I want them to be more active in
participating in credit at the lower economic scale. I think we
can partner with the banks and help encourage them to move in
that space. We have well-defined risk assessments categories
that are set forth, and when we examine a bank, these are done
within the examination staffs that I have no influence on. And
so I think you have to bifurcate between where we want to
partner and what is our responsibility as an examiner.
Senator Brown. Well, I hear you, and that is a pretty good
answer. But in the context of you said we want more of a
partnership with the banks as opposed to a dictatorial
perspective under the prior Administration, you compared
decisions by Comptroller Curry to the ``Wrath of Khan''. That
suggests more--that suggests something different and your
partnership term. I guess I would ask you this: After the
global economy crashed a decade ago and the banks' contribution
to that crash, they just had a record year, 13 percent increase
in profits, had a decade mostly of more profits every year,
double-digit percentage profits, and growth in most of these
years. So it sounds to me like you think the banks have had it
pretty tough, and it is mostly about deregulation for them.
Mr. Otting. First of all, the comment on the ``Wrath of
Khan'' had to deal with the leverage lending guidance, which we
were not supposed to be using guidance as a rule. And what
occurred there was they were implementing the leverage lending
guidance as a rule, and I wanted it to be very clear that that
is guidance, that it is not a rule, as was referenced earlier
in this conversation.
Regarding, you know, your point about deregulation of the
bank, I do not--you know, I am comfortable with the framework
of our regulation. I just think there are certain aspects that
we can look at that it will be better for consumers, it will be
better for the banks, and it will be better for the economy if
we can remove things that I do not think aid the safety and
soundness. Some of those are like BSA. I am a big believer
people should not take bad money, put it into the system and
take it out, but today we are producing 10 million pieces of
paper that I do not think add value to the BSA process. If we
can improve that, we can actually fix--correct and find the bad
guys simpler, that is the thing I want to focus on.
Senator Brown. The previous Comptroller was less
concerned--he did not use the term ``partner'' as liberally as
you did, but he was more concerned about fixing what led to the
2008 collapse. He commissioned a study by experts and decided
to remove bank examiners from the banks themselves and sent OCC
staff back at OCC headquarters. One of your first acts as
Comptroller was to reverse that decision, which you say was
based on your personal experience, which to that point included
about a month on the job at OCC. The New York Fed decided to
move examiners out of the banks. The San Francisco Fed decided
to move them out of the banks after they failed to catch the
Wells Fargo fake account scandal.
What do you know that the predecessors with more years of
experience at two of the most important Feds in the country did
not know?
Mr. Otting. I do not think my 30 days was the relevant
baseline to that. I think it was, you know, my roughly 35 years
in the banking industry. And I would ask--I would be happy to
share with you our model in the OCC so you understand that.
We have three primary groups: we have a community bank
model, we have a midsize model, and we have a large bank model.
Our community bank model is actually done on regional offices
where the examiners are actually domiciled in those regional
offices. Our midsize bank, it is kind of a split between some
are onsite and some are local. And our large banks are onsite.
On the onsite bank examiners, just so you understand my
comfort with this, is we do rotate those examiners every 5
years, so an examiner cannot--and often we do it before the 5-
year period, because we were rotating these people amongst
financial institutions across America.
Second of all, we maintain both decentralized and
centralized resident experts on various activities. So an
examiner who does an examination is generally consulting BSA,
CRA, compliance specialists, and there are those people looking
over that work and often participating in those exams that are
in a centralized environment. We have what we call a ``deputy
comptroller'' that is assigned to each bank that provides
oversight, that is actually not in the banks, that is offsite
in the process. And my experience as a CEO of a bank, having
onsite bank examiners that could go to any meeting they wanted,
see any data they wanted, ride up and down the elevator with
the employees and hear the chatter, what was going on in the
bank, gave them the ears and eyes by being in that institution
and what was going on. And I think other than one instance that
I can remember in the last 5 to 7 years, that model has worked
to our benefit.
Senator Brown. Well, that was a good answer, again, but I
hope you appreciate the suspicion and the skepticism and the
lack of trust that American--that a broad swath, I think the
overwhelming majority of the American people have toward banks
and what the financial institutions, what Wall Street did to
this country 10 years ago, what banks like OneWest did to this
country--there was a long article in the Columbus Dispatch, a
series of articles, I believe, about what your former bank--and
I am not holding you responsible. I am not sure you were there
at this exact, precise time, but what it did to force
foreclosures more than there would have been with a different
kind of institution, with robo-signings and other things. And,
I mean, there is a reason that the public has a suspicion and a
skepticism about the banking sector and the regulators. When
this Administration--I mean, this Administration looks like a
retreat for Wall Street executives, and when we see the
Administration, the decisions they make on regulation, when we
see the regulators that are put in place, so many of them come
from Wall Street or come from banks, I would hope you would
have an appreciation that when you do things like this and move
the regulators into the banks, the public already thinks they
are too close to you, the regulators are too close to the
banks, anyway, and I hope you will have some appreciation.
Let me move on to something else. Your OGE filings show
that you purchased hundreds of shares in financial companies,
including shares of a company the OCC supervises after your
nomination was announced but before you took office. You then,
to my understanding--and tell us if we are wrong--claimed the
right to avoid an immediate tax hit on gains from the sale of
those shares, meaning you loaded up on stocks, financial
stocks, which are the ones we are most interested in, before
your confirmation and then you deferred taxes on your
purchases. Even if that is not illegal--and I do not know that
there has ever been any--I am not saying there has been any
prosecutorial action aimed at you. But even if it is
permissible, why is it advisable to buy financial stocks after
you are nominated for this position? Wouldn't it make more
sense to tell your broker to stop purchases of financial stocks
once you were under consideration for one of the most powerful
bank regulating jobs in the country?
Mr. Otting. First of all, I was in constant communication
with the Treasury Department ethics department through this
entire process. No one had ever at any point in time told me
that was improper or illegal.
Second of all, I would tell you that all of my proceeds
were third-party managed. I had no input, no decisions, no
involvement in any of those decisions. And so those decisions
were being done entirely independent of any input or
involvement of myself, and they constantly are rotating in and
out of sectors and different stocks.
What I would tell you is at the point in time that I was
sworn in, you know, all of that activity was stopped, and then
it took us a period of time to go through the dissolution
process. But there was no, you know, bank stocks under the
guidance of the OCC----
Senator Brown. OK. I mean, to rely on the ethics people at
this White House when a story just came out that one of two of
the President's relatives' unpaid advisers made $80 million in
his first year in office and all the stories with all the
strongmen around the world and the discussions of the President
making money and all that, all of those things, I do not really
rely--I do not think you should rely on them on the ethics
questions. But didn't it strike you as a little weird and that
it would send a message to a skeptical public that you get
nominated, you go and buy bank stocks after you are nominated?
I mean, aren't we brought up to think at least it matters what
people think about us that it could look like it is wrongdoing,
it could look like you did it for the wrong reasons? I do not
question your integrity here, but maybe your judgment. You buy
stocks after you get appointed to a job like this. Didn't it
occur to you that--sure, you run it by the ethics committees at
the White House, whoever, whatever they are. But didn't it
occur to you that you have some judgment to exercise here?
Mr. Otting. Senator Brown, you may not be aware, but I
began my nomination process in February of 2016, and I was
sworn in and confirmed on November 27th of 2017--or excuse me,
I have that backwards. In February--so almost 10 months that I
was waiting to go through the process. So I would agree if this
was a 30- or 60-day process it would have--but my investment
advisers who has sole discretion on these investments were
independently making those decisions.
Senator Brown. I am just flabbergasted that that--because
you had to wait 8 months, you could not buy stocks and you
could not direct them to buy stocks somewhere else. I mean, you
have made your mind up on this, but I am just flabbergasted
that the ethics in this town now, ``because I had to wait 8
months, I am going to buy financial stocks, then I am going to
be the regulator here,'' and the ethics people at the White
House with a capital E said it was OK.
Let me ask another question. You approved recently a rule
to weaken capital by $121 billion at the eight largest banks.
FDIC did not sign on to this change. Are you at all concerned
about risk to financial stability?
Mr. Otting. First of all, we have a rule that is out for
comment, and we will expect to get those comments back. You are
also aware the Economic Act will change some of the provisions
of that because of some of the institutions that we were
looking to figure out what to do with the custody banks in the
Economic Act. That is resolved. So I do not think the way it is
currently formatted today will be the way that it is
implemented, because it would be a little bit of double
counting.
Senator Brown. But you approved it that way.
Mr. Otting. Yes, but I also want you to be aware that
number would be as if in its single element the leverage ratio
was the sole determinant. But that is actually a backstop
capital ratio, and there are other ratios that will be more----
Senator Brown. Well, why do you think it is----
Mr. Otting. Because you have----
Senator Brown. I am sorry, Mr. Otting. If you argue that it
does not do damage to do this, which I guess you are arguing,
why would it be something that you would want to do. Why should
the bank--so the banks can be more profitable? Is that the
reason? Have more money?
Mr. Otting. Because the leverage ratio treats all risk
equally, and by focusing on the leverage ratio and that being
the hindrance, it potentially could force a bank into higher-
risk issues at the expense of lower-risk issues.
Senator Brown. Are you arguing the eight largest banks are
not doing well?
Mr. Otting. No, I am not arguing that.
Senator Brown. OK. I guess the question is: Why weaken
capital now in the ninth year of a recovery with potential
trouble ahead when the banks are more profitable than ever? You
know, this recovery does not last forever. It started with the
auto rescue. We have had--that is 8 years, 8-plus years, 90-
some months of job growth. Job growth admittedly was less in
the first year of the Trump administration than it had been in
the number of years prior to that. So it does not really matter
who gets credit for it, but the recovery will end at some
point. Don't you want the banks to be prepared for what they
were not prepared for in 2007 and 2008? And does relaxing
capital standards, doesn't it speak to that?
Mr. Otting. The Federal Reserve--and I think Mr. Quarles
made this comment that, you know, we felt it was $400 million
when you take into account all the other ratios. So I do agree
we want the industry to be well capitalized. We want them to
understand their risks, and we want them to have high-quality
liquidity to get through the next cycle.
Senator Brown. Going back to the whole issue of skepticism
and cynicism about you, us--I mean, I will throw all of us into
this. It is not just the regulators. It is the Senate, it is
the House. It is the CEOs that make tens of millions of dollars
while a bank teller makes $12, $13 an hour. At my high school
reunion 2 years ago, I sat across from a bank teller who had
done it for 30 years, and she makes $30,000 a year after 30
years. So with the skepticism people have toward bank
executives and the cynicism and bank regulators, I just do not
think that giving them more--I mean, they have done so well in
the last few years thanks in part to the bailout with taxpayer
dollars. They have done so well with the tax cut. They have
done so well with the Crapo deregulation bill that my
colleague, the Chairman, introduced and go through the Senate
with Wall Street's loud approval. We are doing--it is just one
thing after another we see you doing and Vice Chair Quarles
doing and probably the FDIC starting to do, one thing after
another that the banks ask for. And if we keep doing things the
banks ask for, particularly since that is almost surely because
the economic cycle is going to contribute to problems 1 year, 2
years, 5 years, 10 years down the road--maybe you and I will be
gone by then, but it just continues to create--to contribute to
that cynicism.
Let me ask one more question, and I think colleagues will
be back. Let me go back to CRA. You have said that your CRA
proposal will simplify the CRA to judge banks based on one
ratio, not the multipart test used today. How do you verify
that banks are meeting unique credit needs of different
communities if you measure CRA based on one specific blunt
ratio?
Mr. Otting. Well, I think the ratio starts actually to make
a determination at a macro level, is that institution
dedicating enough of whatever you choose it to be to the
communities to which they operate? So there will be other
factors that will be important in that overall element,
including things like, you know, where are you lending, what
type of activities that you are doing. We also are proposing
like a two times multiple for equity investments because one of
the things we see a deficiency in, a lot of the CVFIs need
equity. They can get debt, but they cannot get equity. And so
we want to encourage financial institutions to participate in
some of that activity.
Senator Brown. OK. Thank you. And thank you for bearing
with us.
Mr. Chairman, thank you.
Chairman Crapo [presiding]. All right. Thank you for your
patience with us, Mr. Comptroller. I had a couple further
questions, and we do expect another Senator to come back who
has got some questions. And then we will probably be close to
the end of the hearing.
Comptroller, I understand that some of the national banks
are contemplating eliminating their holding companies because
they engage in only traditional activities directly permissible
for the bank. For example, national banks used to need to have
holding companies to be able to branch interstate, but the law
has changed, and that has not been the case for some time.
While the process for the dissolution of a holding company
is fairly straightforward, there are some challenges because of
certain antiquated provisions in the National Bank Act. Can you
describe those challenges and what the OCC or Congress might do
to address them?
Mr. Otting. Yes, thank you very much, Senator Crapo. We
have seen a significant increase in interest of banks that are
predominantly doing core banking-related activities across
America with our current structure of requiring multiple
boards, multiple compliance, multiple BSA-related activities at
both the holding company and the board--or, excuse me, and the
bank, that a lot of banks are looking at, you know, can we
consolidate any activities in the holding company into the bank
and then have dissolution to the holding company.
You know, it is our viewpoint today there are a couple of
these that are in the queue today that we feel we have the
authority that we can do work-arounds. I do believe there would
be some legislative actions in the future that would make that
easier as more banks decide to do that. There are two primary
ones that, as you know, the current provisions do not require a
bank to file the SEC documentation around financial data, and
banks are concern if they do consolidate into the bank, that
they would not have that as a vehicle to get their information
into the hands through the normal practice and procedures. And
so we have worked with the SEC, and we think we have a
memorandum of understanding of how to accomplish that for banks
that want to accomplish that. That was one of the, I think,
significant issues.
And the other significant issues, you know, the way that
the Bank Act requires if an entity wants to issue new shares,
any incremental amount of new share would require a vote of all
shareholders. And at the holding company, they can authorize
the issuance of shares, and so this would require a vote for
each individual share issuance. And that probably today I would
say would be the primary concern that most banks would have
about eliminating the holding company.
Chairman Crapo. All right. And so you will work on trying
to facilitate those changes that can be achieved regulatorily?
Mr. Otting. Yeah, I think we have shared with your staff,
you know, some of the recommendations on that, and we would
be--I do think this has the potential to be sizable in numbers
as others go through that process and then recognize the
ability to reduce their regulatory burden.
Chairman Crapo. All right. And, again, I think you said
this, but with regard to what Congress might need to do, it
would be helpful to have your suggestions as to what is beyond
the authority of the agency.
Mr. Otting. Right.
Chairman Crapo. One other question--well, a couple other
questions. I was encouraged that the regulators recently issued
a proposed rule on Volcker, and I am sure you will receive many
comments and letters, and it is my hope that you will review
them carefully as you consider the impact of the proposal on
firms' trading and fund activities, including their investment
portfolios.
I also hope you will look for additional opportunities to
simplify the rule's operation by rationalizing metrics
reporting and narrowing the scope of covered funds, among other
items.
Can you commit to carefully review the comments received on
the Volcker Rule and adjust the proposal to address legitimate
issues raised by commenters?
Mr. Otting. Absolutely. That is part of our normal process.
We do expect to get a sizable amount of comments back on this.
This was a five-agency Notice of Proposed Rulemaking, which,
you know, in itself was kind of a miracle. But we were able to
kind of get it through the process. And I think one of our big
challenges historically is how do we examine against the
Volcker Rule on the proprietary trading. And I think we at
least have a solution that we will build on in the years to
come.
Regarding the covered funds, you know, one of the
provisions that the Volcker Rule did is that banks used to
invest in various funds in their communities that then funneled
capital into generally small businesses, and small businesses
often have a tough time going from where they are 100 percent
owned by a family to being a public company, and that created a
bridge for a lot of those companies, and that activity has been
virtually eliminated. And so I think, you know, maybe not today
but in the long run we can look at that and say, you know, is
there a source of capital that is needed in the market to be
able to help businesses continue to grow, that, you know,
someday we may bring back in, and I think that is perhaps what
you were referencing in your comments.
Chairman Crapo. Yes, and I appreciate that. I also
appreciate the fact that you and the other agencies finally got
together and made some progress on this. And I do not want this
to be misunderstood. I appreciate the progress that has been
made. I just think that more can be made, and I was hopeful to
see a little more out of the ultimate outcome.
One last thing from me, and I apologize that I had to step
out because of the votes, but I know that there were a lot of
questions on CRA, and I suspect you did not get to give your
full answers in response on some of them. Is there anything you
would like to make clear or add to what you have said with
regard to the questions you have received on the CRA today?
Mr. Otting. Yes, thank you very much. You know, I have been
either a user or an implementer of CRA at financial
institutions for over 25 years. I have designed programs that
are specific markets, and I have been involved in markets where
across the United States where CRA is used. We today, you know,
in 40 years have created an incredibly complex, difficult
system for financial institutions to understand. Often the week
before the CRA team comes in from their examinations, they do
not know if they are going to get a good rating or bad rating.
Often they find that products that they thought qualified, that
they made investments in or made loans against do not qualify.
And so I think the ability to bring clarity--we are at a point
in time where we can bring clarity to the CRA process, which I
think will encourage more institutions to go deeper into their
communities and remove the restrictions that I think
historically have caused CRA to be held back.
There are three primary things that we are trying to solve
for. The first is to come up with a more objective way to
measure a financial institution's success and commitment to
their communities. I talked about using a balance sheet item
and adding up all the CRA activity and using that item to be
able to come up with a percentage. I think that has universal
appeal.
The second part is we really feel we should expand the
products and services that do qualify under CRA. We have
narrowed it very narrowly now to mortgages in multifamily in
low- to moderate-income areas, and I think we can expand that
to more small business lending, more community centers, and
encouraging banks to do more. And we will give banks a read on
the front end if they want to make an investment so they are
not kind of making it and then hoping it qualifies.
And then the last thing, which is, you know, exams are done
every 3 years, and every 3 years it usually takes us 6 to 24
months to issue a CRA report. If a bank wants to close a branch
or open a branch or enter a new product line or make an
acquisition or divestiture, often they are challenged by some
certain community groups about whether they are in compliance
with CRA. If we can fix the first one, I think that can solve
the third part of this, and we can allow banks then to be--we
can encourage banks to be able to say that they are in
compliance with CRA on a continual basis if they report that
data.
So I am highly encouraged--I just want to instill it is a
false narrative if anybody thinks we are trying to bring CRA
down. We actually think this is an opportunity to partner with
community groups and banks to make CRA better.
Chairman Crapo. All right. Thank you very much. I
appreciate that.
Senator Cortez Masto, you are next. I have not been able to
vote on the second vote yet, so I will ask you to be very brief
if you can because we have got a couple of Senators here and we
need to wrap up. So to the extent you can keep it to right at 5
minutes or less, I would appreciate it.
Senator Cortez Masto. Absolutely.
Chairman Crapo. I apologize for that.
Senator Cortez Masto. Thank you. Thank you, Mr. Chair.
Thank you, Mr. Otting, good to see you again.
So, clearly, the concern that you have seen from many of my
colleagues with respect to the Community Reinvestment Act and
ensuring there is no discrimination in lending, and I know the
OCC is required to ensure that the banks comply with laws
prohibiting the unfair and discriminatory lending, correct?
Mr. Otting. That is correct.
Senator Cortez Masto. And so with that, you are ensuring
the banks----
Mr. Otting. But, Senator, not with CRA. That is fair
lending. Actually, there are fair lending exams done based upon
the HMDA data. So fair----
Senator Cortez Masto. That you do.
Mr. Otting. That is correct.
Senator Cortez Masto. Correct. Thank you. And so in
ensuring that there is no discrimination, let me ask you this:
Are you ensuring that the banks are complying with the Fair
Housing Act?
Mr. Otting. Am I ensuring that they are complying with the
Fair Housing Act?
Senator Cortez Masto. Correct.
Mr. Otting. Yes, we are.
Senator Cortez Masto. And are you ensuring they are
complying with the Equal Credit Opportunity Act?
Mr. Otting. Yes, we are.
Senator Cortez Masto. And has your office reported any
violations of those acts to DOJ?
Mr. Otting. Yes, we have.
Senator Cortez Masto. So they are actively looking at that
now. Thank you very much.
Let me ask you this: Going back to the CRA enforcement, it
is my understanding you have instructed your bank examiners to
change how they consider CRA bank exams. Is that true?
Mr. Otting. Not to my knowledge.
Oh, we are--I believe we are sending out a bulletin today.
So there are bulletins that we send out where we update
procedures, and it either is--yeah, we have been holding a--we
frequently will provide Q&A or bulletins as updates, and so we
have been holding, hoping we were going to get the ANPR out,
and so there were some updates that went out, if that is what
you are referencing, to our CRA----
Senator Cortez Masto. Updates in how the bank examiners
will be and the criteria they will be looking at when they are
engaging in these exams? Is that what----
Mr. Otting. No, no.
Senator Cortez Masto. OK.
Mr. Otting. The criteria has been--you know, for banks over
$1,236,000,000, there is a point system that is lending
investments and then a service----
Senator Cortez Masto. Well, let me ask you this, because I
am just trying to get to something specific, and I only have so
much time, so I appreciate--and I want to let my colleagues
also ask--my understanding is that the bank examiners consider
the CRA when they are engaged in these bank exams. Isn't that
correct?
Mr. Otting. We actually do specific CRA----
Senator Cortez Masto. And are they looking to ensure that
there is no discriminatory lending going on as part of the CRA
review?
Mr. Otting. So what occurs in a CRA exam is we do a HMDA
review first to ensure that we can rely upon the information
that the financial institution has given us. It does not mean
that they are doing a fair lending exam at the same time they
are doing a CRA exam.
Senator Cortez Masto. But are they still looking at data
points that may----
Mr. Otting. Yes, the HMDA----
Senator Cortez Masto. Well, let me ask you this: As part of
their CRA exam, are there any concerns that they look at data
points that they look at to ensure there is no discrimination
in any manner whatsoever? They do not look a any of that, any
of the HMDA points, there is nothing in the mortgage lending or
anything that they look at to ensure there is no
discrimination? Because that is what I am hearing you tell me,
that your bank examiners do not look for that.
Mr. Otting. Let me be clear.
Senator Cortez Masto. OK.
Mr. Otting. So prior to a CRA exam starting, we do a HMDA
review to determine the accuracy of the data. If there are
items that are discovered in the HMDA that would lead our
suspicion that there is not--that there are fair lending
questions, then we are required by statute to do within 12
months a fair lending examination. We are also frequently doing
fair lending examinations independent of CRA.
Senator Cortez Masto. OK. And so knowing this--and I know
the OCC supervises about 1,000 banks, correct?
Mr. Otting. 1,300.
Senator Cortez Masto. OK. And how many of those banks, if
you know, make fewer than 500 mortgage loans or home equity
loans?
Mr. Otting. We looked at that data, and it is less than 5
percent.
Senator Cortez Masto. OK. And then as you well know,
Congress passed a law----
Mr. Otting. Five percent of the volume, I am sorry.
Senator Cortez Masto. OK. And Congress passed a law that
exempted banks that make fewer than 500 mortgage loans from
reporting publicly on much of the loan and borrower
characteristics like points and fees, interest rate, and other
indicators of loan quality. So how can you ensure without that
data--let me finish my question.
Mr. Otting. OK. I want to----
Senator Cortez Masto. OK, and then you can clarify. I will
let you clarify. How can you ensure that without that data that
you are not determining that there is the presence of
discrimination or not if you do not have all of the information
you need to make that determination?
Mr. Otting. So just as a point of clarification, those
banks that will be excluded still have a HMDA lite that they
have to file. The enhanced HMDA data is what the other
financial institutions will submit.
Senator Cortez Masto. No, I recognize that. That is why I
opposed it. I think HMDA lite does not give us enough
information to determine whether there is discrimination or
not, and that is my question to you. Without that additional
data, how do you ensure there is no discrimination?
Mr. Otting. We have historically used the HMDA data to
point us in the direction where we think that there is----
Senator Cortez Masto. Do you still have access to all of
the HMDA data or just the HMDA lite, like you called it?
Mr. Otting. Well, only the institution--well, it has been
being enhanced, and there is new enhancement based upon the
CFPB's criteria. But what will occur is that data will come in
to us for 95 percent of the volume; 5 percent of the volume
will be HMDA lite.
Senator Cortez Masto. OK. So you are only referring and
utilizing HMDA lite data, is what I hear. And I know my time is
up. I would defer to my colleagues.
Mr. Otting. Five percent of the data.
Senator Cortez Masto. Thank you.
Chairman Crapo. Thank you very much.
Senator Menendez? And, again, I did not think you had come
in. I have not voted yet, so I need to ask you to please stay
right to your 5 minutes if you can so I can wrap the hearing
up.
Senator Menendez. All right, Mr. Chairman. The second vote
just began, and this is the problem with conducting hearings
while voters are--I will object on the floor from now on to
having committees meet while----
Chairman Crapo. Well, then you can take your time, and I
will ask them to hold the vote open. It is still a 5-minute
timeframe.
Senator Menendez. Mr. Otting, the horizontal review of
sales practices that has been completed for which I understand
you have reiterated here today that you are not going to
publicly release detailed findings. I sent a letter this
morning to you along with several of my colleagues on the
Committee asking for more information, and I have to say the
reality is that your citing confidential supervisory
information is spurious. The OCC has provided public reports on
unsafe and unsound banking practices before, namely, during the
independent foreclosure review, after millions of Americans
were harmed by unfair and predatory foreclosure practices. In
that case the OCC provided critical information to the public
explaining how mortgage services had failed to service
distressed mortgage loans and outlined how those institutions
would remediate borrowers.
I am the Ranking Member of the Senate Foreign Relations
Committee. I understand all about classified information. This
is not classified. This is an effort not to have the ability
for the public to understand that the institutions that they
are banking at may very well have had the same practices as we
have seen before.
So, you know, when you were in front of this Committee for
your confirmation last year, you refused to provide State-by-
State information on the number of OneWest foreclosures in our
States, and today as Comptroller you refuse to provide
information about consumers that have been harmed not only by
Wells Fargo--of course, we know that--but by Wells Fargo-style
sales practices.
So I have to ask myself: Who are you trying to protect? Who
are you trying to protect: hardworking American families or big
banks?
Mr. Otting. I am trying to protect American consumers,
and----
Senator Menendez. Well, you are not doing that when you do
not disclose.
Mr. Otting. Well, first of all, this is not an unsafe and
unsound manner. You quoted unsafe and unsound manner, and you
may have not been in the room when I gave the statistics, but
out of between an estimate of 500 to 600 million accounts, we
found 20,000 items. Of those----
Senator Menendez. That is 20,000 too many.
Mr. Otting. I would agree with you, 20,000----
Senator Menendez. Why can't we know who the 20,000 are,
what practices took place at those institutions?
Mr. Otting. This is a regulatory matter. There are MRAs
open that we continue to go through. I have publicly said that
this was not a systemic issue in the industry, and as we work
through the MRAs and clean these issues up, all consumers that,
if they were harmed, will receive restitution.
Senator Menendez. Well, I think that people should know the
institutions that they are banking, whether they have these
practices, whether they were among the 20,000 who were hurt or
those who were not. And unless you know whether an institution
was conducting those practices, you will not know whether that
is an institution I should be banking with. So you are doing
the consumer universe a huge discredit, and you seem to be
shilling for the banks. I have to be honest with you.
Let me ask you, do you believe--let me go to a different
topic, because I could not believe the answers you gave
yesterday at the House Financial Services Committee. Are you
sitting before this Committee telling a Hispanic American that
there is no discrimination in this society and that there is no
discrimination in mortgage lending?
Mr. Otting. I did not say that.
Senator Menendez. OK. Can you tell me, is there
discrimination in mortgage lending?
Mr. Otting. I believe that there is. I think there is
disparate impact that occurs in America. What I said was I had
not personally observed it, but many people who----
Senator Menendez. But when you were pressed consistently to
say do you believe it, you did not give the answer you have
given me today. So I am happy to see that you have finally come
to the conclusion, whether you have experienced it, seen it, or
not, that, in fact, there is discrimination in the mortgage
lending field.
Mr. Otting. I do not think that comment was right. When I
was pressed yesterday, I said that people that I care about, I
love, and I have friendships have told me that there is
discrimination, and I believe those people.
Senator Menendez. Will you commit today to retain
assessment areas with a local geographical focus under the
Community Reinvestment Act which helps ensure that banks are
combating historic redlining and lending in low- and moderate-
income communities?
Mr. Otting. I think there has to be a new look at
assessment areas. I do think that around branches that we have
to protect that banks are participating in the low- to
moderate-income communities. But, Senator Menendez, my
experience and other people's experiences is that assessment
areas also can restrict investments. And so I just think we
need to think through what is an assessment area.
We also have financial institutions today that have no
branches, but they have customers, and I think we need to think
through what are we going to call--what is the assessment area
for those institutions.
Senator Menendez. Let me tell you, I will make sure, along
with national leading civil rights groups, that you understand
that there is discrimination in our society in this regard, and
that you do not water down what limited protections already
exist.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. And welcome.
I am going to follow up on a couple of questions that have
been asked. One was by Senator Warren regarding the case that
was brought against OneWest for alleged discriminatory
practices. To your knowledge, is HUD still engaged in an
investigation of that complaint?
Mr. Otting. Are you referencing the HUD on the financial
freedom where OneWest Bank paid a fine?
Senator Van Hollen. I am referencing the case that was
brought with respect to the alleged discriminatory lending that
was referenced by Senator Warren earlier.
Mr. Otting. I do not know if that is a HUD issue. The
accusation by community groups was that OneWest Bank, when you
looked at effectively our fair lending data, we had out of
proportions for the community. And I do not have it in front of
me, Senator Van Hollen, but it was an incredible--I think it
was less than 100 mortgages that they used to base that data
on. So it was not a statistical relevant--I mean, we were low
in certain particular areas, but it was not like you had a
statistical relevant population in the narrative to make that
accurate assessment.
Senator Van Hollen. I guess my question is----
Mr. Otting. But that was not a HUD----
Senator Van Hollen. Was a complaint filed in that case? And
has that issue been resolved?
Mr. Otting. It was filed by a nonprofit organization.
Senator Van Hollen. And is that case still pending, to your
knowledge?
Mr. Otting. To the best of my knowledge.
Senator Van Hollen. It is still pending?
Mr. Otting. Yes.
Senator Van Hollen. Have you been questioned in that case?
Mr. Otting. I have not.
Senator Van Hollen. OK. Because the comments you made in
the House yesterday obviously generated a lot of understandable
concern, and in my State of Maryland, in Baltimore, a case was
brought against Wells Fargo back in 2011 for pricing
discrimination. Baltimore City alleged that Wells Fargo steered
minorities into subprime loans, gave them less favorable rates
than white borrowers, and foreclosed on hundreds of Baltimore
homes, creating blight and high public safety costs. And in
this case, in fact, Wells Fargo conceded that this had happened
and paid a penalty of $7.5 million to the city of Baltimore.
Do you have any reason to contest the conclusion that there
was pricing discrimination in this case in Baltimore City?
Mr. Otting. I do not.
Senator Van Hollen. OK. I want to get to some of the issues
of regulatory capture, and you and I have had an exchange of
letters, and I welcome the opportunity to follow up even
further on that. I believe that Senator Brown referenced the
GAO report where they looked into the situation, and you are
aware of the fact that there was a case where Wells Fargo
alerted a bank to the fact that there was going to be an OCC
investigation? Are you aware of that case?
Mr. Otting. I think it was an OCC employee alerted Wells
Fargo.
Senator Van Hollen. I am sorry. Yes, an OCC employee
embedded in Wells Fargo.
Mr. Otting. That is what the allegations were, yes.
Senator Van Hollen. And there was since a recommendation
based on a 2013 study from outside peer groups recommending a
separation; in other words, recommending that OCC employees not
be embedded in banks because they would treat them too much
like customers as opposed to being on the lookout for potential
wrongdoing and hold people accountable. So my question is: You
have decided not to pursue that recommendation. Did you do any
kind of study that would contradict or conflict with the 2013
finding?
Mr. Otting. I covered this earlier, but I want to make sure
that I have a chance to cover it with you. Just so you
understand, we have three kind of models in the OCC: we have a
community banking model, we have what we call a midsize bank
model, and we have a large bank model.
On the smaller end, we service those banks by regional
locations in the OCC so examiners are not embedded in the
banks. In the midsize bank group, we have a split where some
are in and some are out. And in the large bank, we have them
resident onsite at the large banks, and that is the category
you want me to described, but I just wanted--so you understood
it.
Senator Van Hollen. Yeah, understood.
Mr. Otting. So when I got here and examined it and also
based upon my background and knowledge, I looked at the
procedures and processes, and just so everybody is aware, every
5 years we rotate--actually, it is less than 5 years. We rotate
the examiner in charge of a financial institution, so we do
have a rotation.
Second of all, we have resident experts that are both in
the field and in Washington that review all the examination
papers and data for accuracy and make sure that no one could
take data and make inappropriate conclusions. And then we also
have what we call a ``deputy comptroller'' that is centralized
and has oversight for that financial institution.
So while it could happen, I thought that the controls were
in place, and the fourth category from my experience as a CEO,
having resident onsite examiners who have open architect access
to anything going on in that bank, they can go to risk
meetings, credit quality meetings, they can go to credit
approval meetings, wander around the bank, be able to interact
with people, I think actually provides better risk management
by----
Senator Van Hollen. I appreciate that. I think the issue
here is that obviously there may be some benefits. The question
is whether the benefits outweigh the risks, and there have been
now a number of independent analysts that looked at this
particular situation with respect to OCC and said it is too
great a risk that you will have regulatory capture. And so my
question was: Did you undertake any independent study----
Mr. Otting. I did not. I reviewed----
Senator Van Hollen. ----in reversing this conclusion?
Mr. Otting. ----the situation, and I am only aware of one
time where that has been----
Senator Van Hollen. All right. Well, I look forward to
following up.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Comptroller Otting, I appreciate you coming here before us
today, but also putting up with the inconveniences that have
been caused by us having to shift around for votes. We
appreciate the work that you are doing and, again, appreciate
the fact that you would come here and report to the Committee.
I look forward to our further work with you.
That does include all of the questions, and this hearing is
adjourned.
Mr. Otting. Thank you.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today, we will hear from Comptroller of the Currency Joseph Otting.
Since being sworn in last November, Comptroller Otting has been
focused on right-sizing regulations and furthering the mission of the
OCC.
Recently, the OCC, along with four other regulators, issued a
proposal to make revisions to the Volcker Rule.
In May, the OCC issued a bulletin related to short-term, small-
dollar lending.
The OCC has also been looking at modifying and modernizing how
regulators apply the Community Reinvestment Act.
Comptroller Otting has also identified reviewing compliance with
anti-money laundering laws as a priority of the OCC's.
In addition, the Comptroller has said he expects the OCC to
announce in July a final decision on a specialty bank charter for
FinTech companies.
I look forward to hearing more about some of these important
initiatives today.
In addition, the OCC will need to implement a number of provisions
from S. 2155, the bipartisan economic growth legislation that President
Trump signed into law on May 24th.
Among the provisions that the OCC will need to write rules to
implement are:
The community bank leverage ratio, which exempts highly
capitalized banks from the international Basel III risk-based
capital requirements;
The exemption from appraisal requirements for banks in
rural areas that suffer from shortages of qualified appraisers;
The requirement that certain acquisition, development, and
construction loans not be subject to punitive capital
requirements;
Reduced reporting requirements and extended exam cycles for
certain small banks;
The requirement to promulgate regulations to remove central
bank deposits from the denominator of the supplementary
leverage ratio for certain banks;
The exemption from stress testing for certain financial
institutions, including the immediate exemption for financial
companies with less than $100 billion in assets; and
The provision permitting certain Federal savings
associations to elect to operate with the same powers and
duties as national banks without going through the onerous
charter conversion process.
These provisions, and others in the legislation, right-size
regulations for community banks, credit unions, midsize banks, and
regional banks, making it easier for consumers and small businesses to
get mortgages and obtain credit.
Absent excessive regulatory burden, local banks and credit unions
will be able to focus more on lending, in turn propelling economic
growth and creating jobs.
I look forward to engaging with the OCC, and with other agencies
charged with implementing S. 2155, over the coming months to ensure
that their interpretations are consistent with the intent of the
Members of Congress that voted for the legislation and with this
Committee's goal of promoting economic growth.
Our economy is strengthening, and the positive effects of the
banking bill and tax reform are just starting to be felt.
Layered together, these policies and others are creating conditions
in our country that enable growth.
I look forward to building on this momentum moving forward.
______
PREPARED STATEMENT OF JOSEPH M. OTTING
Comptroller, Office of the Comptroller of the Currency
June 14, 2018
Introduction
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the invitation to testify today. I am pleased to have the
opportunity to share my priorities as Comptroller of the Currency and
update the Committee on the supervision, regulation, and enforcement of
financial institutions within the regulatory purview of the Office of
the Comptroller of the Currency's (OCC). I intend to work diligently to
ensure that the institutions within the Federal banking system operate
in a safe-and-sound manner, provide fair access to financial services,
treat customers fairly, and comply with applicable laws and
regulations. I am honored to serve as the 31st Comptroller of the
Currency, alongside nearly 4,000 men and women who share a deep
dedication to the agency's mission. During my tenure, I look forward to
advancing financial institution regulation with a focus on promoting
the long-term health of the institutions we supervise and improving
their ability to serve their customers and meet their communities'
needs. In my testimony today, I will share my views on the condition of
the Federal banking system, the risks facing that system, and my
priorities as Comptroller of the Currency.
Before I turn to those topics, however, I want to congratulate
Chairman Crapo on his leadership toward the successful enactment of S.
2155, the Economic Growth, Regulatory Relief, and Consumer Protection
Act (Economic Growth Act). The Economic Growth Act contains a number of
important, bipartisan provisions that will have a meaningful impact on
OCC-regulated institutions. Those include provisions reducing the
number of community banks and savings associations subject to the
Volcker Rule; a simpler capital regime for highly capitalized community
banks and savings associations; allowing qualifying banks under $5
billion in assets to file a simplified call report; expanding
eligibility for an 18-month exam cycle to well-managed and well-
capitalized banks under $3 billion in assets; exempting certain
mortgage loans for properties located in rural areas from appraisal
requirements; and adding greater financial protections for our military
servicemembers and veterans. The law also raises the thresholds for
application of the Federal Reserve Board's enhanced prudential
standards for bank holding companies to focus on the very largest
companies, right-sizes stress testing requirements, and provides
Federal savings associations with less than $20 billion in assets the
flexibility to exercise the powers of national banks without changing
charters, an important improvement championed by Senators Moran and
Heitkamp, and suggested by the OCC.
The OCC will work closely and cooperatively with our fellow
financial regulators to ensure that all of these important reforms are
implemented quickly so that financial institutions can continue to
create jobs and promote economic opportunity in a safe, sound, and fair
manner.
Condition of the Federal Banking System
As of the end of the first quarter of this year, the Federal
banking system comprised approximately 1,325 national banks, Federal
savings associations and Federal branches of foreign banks (banks)
operating in the United States. These banks range in size from small
community banks to the largest most globally active U.S. banks.
Approximately 1,061 of these banks have less than $1 billion in assets,
while more than 60 have more than $10 billion. Combined, these banks
hold $11.8 trillion or about 67 percent of all assets of U.S.
commercial banks. These banks also manage almost $51 trillion in assets
held in custody or under fiduciary control, which amounts to 42 percent
of all fiduciary and custodial assets in insured U.S. banks, savings
associations, and national trust banks. The Federal banking system
holds two-thirds of credit card balances in the country, while holding
or servicing almost half of all residential mortgages. Through their
products and services, a majority of American families have one or more
relationships with an OCC-regulated bank.
Because of the reach of the Federal banking system and the
essential role it plays in meeting the financial services needs of so
many Americans, their businesses, and their communities, it is critical
that the system operate in a safe-and-sound manner, provide fair access
to financial services, treat customers fairly, and comply with laws and
regulations. That is the unique mission of the OCC.
The OCC employs nearly 4,000 people, two-thirds of whom are bank
examiners, overseeing the Federal banking system. The majority of those
examiners are dedicated to the daily supervision of community banks and
work in offices and banks across the Nation.
Supervision by Risk
The OCC applies a supervision by risk approach to the banks the
agency supervises. Supervision by risk focuses on assessing risk,
identifying existing and emerging issues, evaluating the effectiveness
of a bank's risk management systems in appropriately controlling risk,
and ensuring that bank management takes corrective action before
problems compromise the safety and soundness of a bank. This approach
requires an understanding of the operations of each bank or thrift and
the systems each has in place to control risk, with consideration of
the institution's size, scope of operations, complexity, and the risks
presented by its business model.
Our supervision by risk framework establishes an examination
philosophy and structure that is used at all national banks, Federal
savings association, Federal branches of foreign banks, and national
trust companies. This approach includes a common risk assessment system
(RAS) \1\ that evaluates each bank's risk profile across eight risk
areas--credit, interest rate, liquidity, price, operational,
compliance, strategic, and reputation--and assigns each bank an overall
composite rating and component ratings on the bank's capital adequacy,
asset quality, management, earnings, liquidity, and sensitivity to
market risks using the interagency Uniform Financial Institutions
Ratings System (informally known as CAMELS). \2\ Specific examination
activities and supervisory strategies are tailored to each bank's risk
profile. These strategies are updated and approved annually. While
tailored to each individual bank's risk profile, they also incorporate
key agency supervisory priorities for the coming year.
---------------------------------------------------------------------------
\1\ See OCC Bulletin 2015-48, ``Risk Assessment System''. December
3, 2015 (https://www.occ.gov/news-issuances/bulletins/2015/bulletin-
2015-48.html).
\2\ See Comptroller's Handbook, ``Bank Supervision Process''
booklet, which explains UFIRS/CAMELS. (https://www.occ.gov/
publications/publications-by-type/comptrollers-handbook/bank-
supervision-process/pub-ch-bank-supervision-process.pdf).
---------------------------------------------------------------------------
To reflect the different expectations for controls and risk
management between banks of varying sizes, operations, and complexity;
our bank supervision programs and core examination procedures for
determining a bank's RAS and CAMELS ratings are aligned across two
primary lines of business: Midsize and Community Bank Supervision and
Large Bank Supervision.
Our community bank supervision program is built around local field
offices in more than 60 communities throughout the United States. Every
community national bank is assigned to an examiner who monitors the
bank's condition on an on-going basis and who serves as the focal point
for communication with the bank. The primary responsibility for the
supervision of individual community banks is delegated to a local
Assistant Deputy Comptroller, who reports to a district Deputy
Comptroller, who in turn, reports to the Senior Deputy Comptroller for
Midsize and Community Bank Supervision. This structure allows community
and midsize banks to benefit from assigned teams with thorough
knowledge of local conditions and support from national resources with
broad industry insight.
The frequency of on-site examinations for community banks follows
the statutory provisions set forth in 12 U.S.C. 1820(d), \3\ with on-
site exams occurring every 12 to 18 months. The scope of these
examinations is set forth in the OCC's Community Bank Supervision
handbook \4\ and requires sufficient examination work and transaction
testing to complete the core assessment activities in that handbook,
and to determine the bank's RAS and CAMELS ratings. On-site activities
are supplemented by off-site monitoring and quarterly analyses and
discussions to determine if significant changes have occurred in the
bank's condition or activities.
---------------------------------------------------------------------------
\3\ 12 U.S.C. 1820(d) prescribes the annual examination
requirement. As noted earlier, that provision has been amended by the
Economic Growth Act to expand eligibility for an 18-month exam cycle to
well-managed and well-capitalized banks under $3 billion in assets.
\4\ ``Community Bank Supervision'' booklet of the Comptroller's
Handbook. October 2017 (https://www.occ.gov/publications/publications-
by-type/comptrollers-handbook/community-bank-supervision/index-ch-
community-bank-supervision.html).
---------------------------------------------------------------------------
The OCC's Large Bank Supervision program is centralized and
headquartered in Washington, DC. It is structured to promote consistent
uniform coordination across institutions. As part of the Large Bank
program, the OCC assigns examination staff who are resident on-site at
the institution and who conduct on-going supervisory activities and
targeted examinations in specific areas of focus. This process allows
the OCC to maintain an on-going program of risk assessment, monitoring,
and communication with bank management and directors. Given the volume
and complexity of the literally millions of transactions that flow
through large banking organizations each day, it is not feasible to
review every transaction in each bank, or for that matter, every single
product line or bank activity in each supervisory cycle. Nonetheless,
the scope and frequency of the OCC's targeted examinations and our
constant, day-to-day supervision ensure that examiners complete
sufficient work and transaction testing throughout the year to complete
the core assessment activities set forth in the OCC's Large Bank
Supervision handbook, \5\ and to determine the bank's RAS and CAMELS
ratings. The on-site teams at each bank are led by an Examiner-in-
Charge, who reports directly to the Deputy Comptrollers in our Large
Bank Supervision Office, and in turn, to our Senior Deputy Comptroller
for Large Bank Supervision. On-site examiners are supported by
specialized examiners in the OCC's lead expert program and the
Compliance and Community Affairs unit which provides a horizontal view
across the industry, a focus on particular risks, and can quickly share
insight from that broader perspective.
---------------------------------------------------------------------------
\5\ ``Large Bank Supervision'' booklet of the Comptroller's
Handbook. October 2017 (https://www.occ.gov/publications/publications-
by-type/comptrollers-handbook/large-bank-supervision/pub-ch-large-bank-
supervision.pdf).
---------------------------------------------------------------------------
Supporting OCC examination staff is a nationwide network of
lawyers, economists, accountants, compliance, and administrative and
policy experts who together make the OCC the world's preeminent
prudential supervisor. This network of experts brings a broad national
perspective to complement the deep local expertise of the assigned exam
teams.
The quality of that supervision contributes to the strong condition
of the Federal banking system today. The system has rebounded from the
crisis. Capital and liquidity are near historic highs. Bankers
understand the risks facing their banks better than at any point in my
35-year banking career. Return on equity and asset quality are
approaching precrisis levels. Bank profitability improved in 2017 when
compared with 2016 on a pretax basis. OCC-supervised banks reported
healthy revenue growth in 2017 compared with 2016. Net income was flat
for banks with total assets less than $1 billion and declined 8.5
percent for the Federal banking system because of the effect of the Tax
Cuts and Jobs Act. Pretax income rose 4 percent in 2017 for the Federal
banking system and more than 7 percent for banks with assets less than
$1 billion. That improvement continued into the first half of this
year, and the economic environment is expected to continue to support
loan growth and bank profitability through 2019.
Risks Facing the Federal Banking System
Despite the relative strength of the banking system and health of
the economy, the regulators' job is to peer over the horizon and assess
any gathering storm clouds. The OCC publishes its view of risks facing
the banking system twice each year in its Semiannual Risk Perspective.
\6\ Our objective is to provide transparency around trends and
potential risks so that the industry takes these risks into account and
adjusts their practices accordingly. The most recent edition of the
report, published on May 24, primarily focuses on credit, interest
rate, operational, and compliance risks.
---------------------------------------------------------------------------
\6\ See ``Semiannual Risk Perspective'', Spring 2018, at https://
www.occ.gov/publications/publications-by-type/other-publications-
reports/index-semiannual-risk-perspective.html.
---------------------------------------------------------------------------
Credit Risk
At this point in a long economic expansion, asset quality metrics
are, as is typical, very good, and changes in risk appetite and
external factors are the primary drivers of credit risk and future
performance. While overall credit quality remains strong, bankers must
remain vigilant about the potential effects of competition and undue
complacency on the quality of new loans and credit risk management.
Recent reviews of underwriting indicate that satisfactory policies and
practices exist to guide lending decisions and that, thus far in this
economic cycle, banks as a whole are operating within established risk
tolerances. Competition for quality loans remains strong, however, and
examiners note evidence of eased underwriting, increased commercial
real estate concentration limits, and a higher level of concerns
related to policy exceptions. The accommodating credit environment
warrants a continued focus on underwriting practices to monitor and
assess credit risk and prevent lender complacency.
Overall lending grew 3.6 percent within the Federal banking system
in 2017. That growth continues the positive trend of the last several
years, albeit somewhat slower in 2016 and 2017 than in previous years.
Commercial loan growth for large banks, which hold more than 83 percent
of all loans, fell to 4.2 percent, down from the 10-percent level 2
years ago. Although loan growth has slowed, growth rates still
represent a healthy economy. Midsize and community banks continued to
experience significant loan growth, particularly in commercial real
estate and other commercial lending, which grew almost 9 percent last
year. Such growth heightens the need for strong credit risk management
and effective management of concentration risk.
Interest Rate Risk
At the same time, rising interest rates also pose a number of
potential risks for some banks. Although rising interest rates
generally increase net interest margins at small banks, bank investment
portfolios with concentrations of long-duration and low, fixed-rate
assets could erode in value as interest rates rise, particularly if
they increase more abruptly than expected. Rising interest rates also
likely will increase the cost of deposits because of competitive
pressures particularly for banks with total assets of $250 billion or
more that are subject to additional regulatory liquidity requirements.
\7\ Banks should be modeling these potential risks as part of sound
balance sheet management.
---------------------------------------------------------------------------
\7\ See OCC Bulletin 2014-51 (https://www.occ.gov/news-issuances/
bulletins/2014/bulletin-2014-51.html), which describes the Liquidity
Coverage Ratio final rule and provides a link to that rule.
---------------------------------------------------------------------------
Credit risk is also likely to increase as interest rates rise.
Rising interest rates will often increase debt service costs and may
affect credit affordability as well as repayment capacity of some
financially stretched customers.
Operational Risk
Operational risk remains elevated as banks adapt business models to
the evolving banking environment, transform technology and operating
processes, and respond to increasing cybersecurity threats. The speed
and sophistication of cybersecurity threats show no signs of abating.
Banks face constant threats from bad actors seeking to exploit
personnel, processes, and technology. Some of these threats target
large quantities of personally identifiable information and proprietary
intellectual property to facilitate fraud and misappropriation of funds
at the retail and wholesale levels. Other threats are aimed at
disrupting or otherwise impairing operations. Failure to maintain
proper controls over cybersecurity can lead to material negative
effects on financial institutions, consumers, and national and economic
security. Banks also continue to rely on third-party relationships to
support a significant number of key services and operations because of
the greater economies of scale and advanced technical resources that
allow them to manage operations better and more efficiently. Banks need
to manage risks associated with using third parties \8\ through
appropriate due diligence and risk oversight to ensure controls
protecting the confidentiality, integrity, and availability of systems
and data are maintained. Increasing consolidation among large
technology service providers has created third-party concentration
risk, in which a limited number of providers service large segments of
the banking industry for key financial services. Operational events at
these larger service providers could affect large parts of the
financial industry, if not properly managed by the service providers
and the banks that rely on their services. The OCC and the other
Federal banking agencies continue to prioritize supervisory activities
related to these large service providers.
---------------------------------------------------------------------------
\8\ See OCC Bulletin 2013-29, ``Third-Party Relationships''
(https://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-
29.html).
---------------------------------------------------------------------------
Cybersecurity and operational issues have a greater potential to
affect individual consumers, business, and communities than ever
before. As innovation and technology moves us toward greater
interconnectedness and reliance on online transactions, outages and
breaches generate greater disruption in how we conduct our lives and
businesses. Extended outages of bank websites and applications,
automated teller networks, or payments systems can paralyze commerce
and undermine overall confidence in our system. To avoid these
consequences, banks, retailers, nonbank service providers, and
regulators must be vigilant in working together to protect the system
and improve its resiliency.
Compliance Risk
Compliance risk remains elevated as banks manage risks in an
increasingly complex environment and work to comply with evolving
regulations.
The dynamic nature of money-laundering and terrorist-financing
methods present challenges for banks to comply with the Bank Secrecy
Act (BSA) requirements. Banks offer new or evolving delivery channels
that increase customer convenience and access to financial products and
services, and they must maintain a focus on refining or updating BSA
compliance programs to address vulnerabilities in these new delivery
channels that criminals seek to exploit. At the same time, recent
changes to the regulatory framework implementing the BSA increase the
burden of complying with the law. One example involves the Financial
Crimes Enforcement Network's (FinCEN) new requirements for conducting
customer due diligence and documenting the beneficial ownership of
companies conducting financial transactions. While these new
requirements enhance the transparency and confidence of financial
transactions, they place significant new burden on financial
institutions.
Other complex and constantly changing regulations also strain bank
compliance management systems and change management processes, which
increases operational, compliance, and reputation risks. Recent
regulatory changes in the consumer compliance area include changes in
the requirements under the Home Mortgage Disclosure Act and Military
Lending Act, and implementation of the integrated mortgage disclosures
under the Truth in Lending Act and the Real Estate Settlement
Procedures Act. Banks need consumer compliance risk management and
audit functions sufficient to promote ongoing compliance with
regulations, even those that change on a frequent basis.
My Priorities as Comptroller of the Currency
As Comptroller, my short-term priorities have focused on
initiatives to help banks promote job creation and economic opportunity
while continuing to operate in a safe, sound, and fair manner. These
priorities include modernizing the regulatory approach to the Community
Reinvestment Act (CRA), encouraging banks to meet consumers' short-
term, small-dollar credit needs, enhancing our supervision of BSA/anti-
money laundering (AML) compliance and making it more efficient,
simplifying regulatory capital requirements, and reducing burden
associated with the Volcker Rule. At the same time, we continue to
enhance the agency's effectiveness and efficiency.
Modernizing Our Approach to the CRA
During the four decades since the CRA became law, the regulatory
approach to implementing that law has become too complex, outdated,
cumbersome, and subjective. We have an opportunity to modernize the
regulatory framework around CRA to better serve its original purpose
and encourage more investment and banking activity supporting the
people and communities needing it most.
As a banker for more than 30 years, I saw firsthand the benefit of
CRA activities and how they make communities more vibrant. I believe in
the power of community reinvestment to reinvigorate financially
distressed areas and to give residents of those neighborhoods new hope
and new economic opportunities. I have been involved in directing
hundreds of millions of dollars in community development, reinvestment,
and support for groups that provide important services to their
communities, and I want to expand the types of activities eligible for
CRA consideration to include more small business lending and community
development activities and strengthen the CRA regulatory framework to
benefit future generations.
Stakeholders from all perspectives have called for modernizing the
current regulatory framework for the CRA. Members from both sides of
the aisle have described their frustration with some of the CRA
regulatory framework's current limitations. Many have complained of
significant administrative burden, lack of incentives for investment,
and failure to adapt to advances in banking such as interstate
branching and digitization of services. Others have complained about
the limited opportunity for bank activities to qualify for CRA
consideration. Bankers and community groups alike criticize the length
of time between the issuance of CRA performance evaluations, the
unwieldly length of performance evaluation reports, and the lack of
transparency, clarity, and flexibility with respect to regulatory
requirements and processes. The complaints I hear most frequently are
that the current approach to evaluating CRA performance is too
subjective and costly.
To begin the process of modernizing the CRA, the Federal banking
agencies are discussing an Advanced Notice of Proposed Rulemaking
(ANPR) soliciting comments from stakeholders on how best to modernize
the CRA regulatory framework. We have an opportunity to consider a
transformational CRA framework that would: (1) expand and provide
clarity regarding the bank activities that receive CRA consideration;
(2) revisit the concept of assessment areas; and (3) increase the
transparency of how bank CRA performance is measured by using
quantitative standards that are applied consistently.
First, we should expand the types of activities that qualify for
CRA consideration. Over the years, opportunities for CRA consideration
have focused heavily on single- and multifamily residential lending.
While necessary for a vibrant community, residential lending is not the
only activity that can have a meaningful impact in these communities.
Communities also need more small business lending, student lending,
economic development opportunities, and in some cases, additional
opportunities for consumers to access credit including responsible,
short-term, small-dollar consumer loans. These activities deserve more
consideration during CRA evaluations. We have the opportunity to
encourage banks to help neighborhoods become communities where families
can make a living and not just reside.
Second, we need to revisit the concept of assessment areas.
Limiting assessment areas to a bank's branch-based footprint has become
an impediment to investment and providing capital in areas of need that
the bank may serve. I have seen situations where projects have not
received CRA consideration merely because they were on the wrong side
of a street. I have also seen needy communities go unserved or have
much needed resources delayed because of a lack of clarity in current
regulations. In reconsidering assessment areas, we need to broaden our
thinking to include all areas where institutions provide their services
rather than only narrow geographies defined by branches and deposit-
taking automated tellers.
Third, we need to develop a metrics-driven approach to evaluating
CRA performance using clear thresholds. Such changes could make facts
and data regarding a bank's CRA activity more transparent and available
to the public more frequently. Establishing clearer, more transparent
metrics for what banks need to do to achieve a certain CRA rating would
allow stakeholders to understand how a bank is working to meet the
credit needs of its community, provide a more objective base for
examiner ratings, and allow regulators to report on aggregate activity
to show a bank's overall performance. Clear thresholds would minimize
subjectivity, encourage consistency, and promote transparency in
contrast with today's evaluations that may rate similar activities
differently from bank to bank and make comparisons across institutions
difficult and less meaningful. This type of change would also help
regulators to make decisions that rely on CRA data more quickly and to
produce more concise and meaningful performance evaluations.
The ANPR will solicit comments on all possible approaches to
modernizing CRA, including modest changes to the existing CRA framework
and more transformational changes. It also will seek feedback on
allowing community banks to retain a more traditional approach based on
their business models.
Once published, I encourage all stakeholders to provide their
thoughts on how to improve our approach to the CRA regulatory framework
to better encourage banks to meet the credit needs of their
communities, including those in low- and moderate-income neighborhoods,
consistent with the safe-and-sound operation of these institutions. I
recognize that there are many people and organizations with decades of
experience in this important field. I look forward to publishing the
ANPR and reviewing the comments received as we move ahead.
Encouraging Banks To Meet Consumer's Short-Term, Small-Dollar Credit
Needs
Millions of Americans rely upon short-term, small-dollar credit to
make ends meet, but have few choices in this area. According to one
study, U.S. consumers borrow nearly $90 billion every year in short-
term, small-dollar loans typically ranging from $300 to $5,000. \9\
Consumers need safe, affordable choices, and banks should be part of
that solution. While banks may not be able to serve all of this market,
they can reach a significant portion of it and bring additional options
and more competition to the marketplace while delivering safe, fair,
and less expensive credit products that support the long-term financial
health of their customers.
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\9\ Refer to Center for Financial Services Innovation, ``2017
Financially Underserved Market Size Study'', pp. 44-47, for revenue and
volume data on pawn loans, online payday loans, storefront payday
loans, installment loans, title loans, and marketplace personal loans.
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That is why the OCC clarified its position in a bulletin published
on May 23, 2018, that encourages banks to offer responsible short-term,
small-dollar installment loans to help meet the credit needs of their
customers. \10\
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\10\ See OCC Bulletin 2018-14, ``Installment Lending: Core Lending
Principles for Short-Term, Small-Dollar Installment Lending'' (https://
www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-14.html).
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Banks are well suited to offer affordable short-term, small-dollar
installment lending options that can help consumers find a path to more
mainstream financial services without trapping them in cycles of debt.
When banks offer products with reasonable pricing and repayment
structures, consumers can benefit from banks' other financial services
such as financial education and the opportunity to build a positive
credit record.
Banks should consider the following three core principles when
offering short-term, small-dollar lending products. \11\
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\11\ Refer to OCC NR 2017-118.
All bank products should be consistent with safe-and-sound
banking, treat customers fairly, and comply with applicable
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laws and regulations.
Banks should effectively manage the risks associated with
the products they offer, including credit, operational,
compliance, and reputation.
All credit products should be underwritten based on
reasonable policies and practices, including guidelines
governing the amounts borrowed, frequency of borrowing, and
repayment requirements.
The agency's bulletin also highlighted reasonable policies and
practices specific to short-term, small-dollar installment lending,
including:
Loans and terms that align with eligibility and
underwriting criteria. Products should be designed to achieve
reasonable borrower affordability and repayment.
Loan pricing that complies with applicable State laws and
reflects overall returns reasonably related to product risks
and costs. The OCC views unfavorably an entity that partners
with a bank with the sole goal of evading a lower interest rate
established under the law of the entity's licensing State(s).
Analysis that uses internal and external data sources,
including deposit activity, to assess a consumer's
creditworthiness and to effectively manage credit risk. Such
analysis could facilitate sound underwriting for credit offered
to consumers with an ability to repay but who do not meet
traditional standards.
Marketing and customer disclosures that comply with
consumer protection laws and regulations and provide
information in a transparent, accurate, and customer-friendly
manner.
Loan servicing processes that assist customers, including
distressed borrowers. To avoid continuous cycles of debt and
costs disproportionate to the amounts borrowed, timely and
reasonable workout strategies should be used.
Timely reporting of a borrower's repayment activities to
credit bureaus. Borrowers should have the ability to
demonstrate positive credit behavior, build credit history or
rebuild credit scores, and transition into additional
mainstream financial products.
The Pew Charitable Trusts praised the OCC's action when announced
by saying the action encourages ``the other Federal bank and credit
union regulators to follow the Comptroller's lead and institute the
necessary standards to ensure the development of safe and affordable
small installment loans that will save millions of borrowers billions
of dollars a year.'' The OCC also is working with Congress to encourage
the banking sector to offer additional short-term, small-dollar lending
products to meet consumer needs.
Enhancing BSA/AML Compliance
The BSA and AML laws and regulations exist to protect our financial
system from criminals who would exploit that system for their own
illegal purposes and from use of that system to finance international
terrorism. Bank regulators, law enforcement, national security
personnel, and bankers must continually adapt to increasingly
sophisticated criminals and other illicit actors who take advantage of
the Nation's banks and financial system. While regulators and the
industry share a commitment to fighting money laundering and other
illegal activities, the process for complying with current BSA/AML laws
and regulations has become inefficient and costly. Banks spend billions
each year to comply with BSA/AML requirements. We need to reform the
BSA/AML to be more efficient while improving the ability of the Federal
banking system and law enforcement to safeguard the Nation's financial
system from criminals and terrorists.
In May, the Federal banking regulators met to discuss ideas on how
to improve our approach to implementing BSA/AML laws and regulations
and presented those recommendations to the Department of the Treasury
and FinCEN.
There are several improvements that the OCC believes could be
addressed through regulation and others that would need legislative
relief. Opportunities include:
Allowing regulators to schedule and scope BSA/AML
examinations on a risk-basis and identifying ways to conduct
associated examinations in a more efficient manner.
Considering changes to the threshold requiring mandatory
reporting of Suspicious Activity Reports (SARs) and currency
transaction reports and simplifying reporting forms and
requirements.
Working with law enforcement to provide feedback to banks
so that they understand how SARs and other BSA report filings
are used and can provide the most useful information.
Exploring the use of technologies to reduce reporting
burden and provide more effective access and information to law
enforcement and national security personnel.
I look forward to working with my fellow banking regulators,
Treasury, FinCEN, law enforcement, and national security personnel in
the coming months to identify changes we can implement to reduce the
burden of complying with BSA/AML laws while also improving how we
protect our financial system. I also look forward to working with
Members of this Committee who are interested in improving the BSA/AML
laws.
Simplifying Regulatory Capital and the Volcker Rule
Following the financial crisis, bankers, regulators, and
policymakers responded by appropriately focusing on improving the
quality and quantity of capital and liquidity in the banking system. As
a result, today's financial institutions have capital and liquidity
near historic highs. At the same time, calculating regulatory capital
has become too complex. Even some of the most seasoned bankers need the
assistance of a capital expert to understand and explain how the
various categories of capital are counted. This results in regulatory
and business inefficiency and places an unnecessary burden particularly
on well-capitalized community and midsize banks.
In late October 2017, Federal bank regulators proposed a rule
intended to reduce burden by simplifying several requirements in the
agencies' regulatory capital rule. \12\ Most aspects of the proposed
rule would apply only to banking organizations that are not subject to
the ``advanced approaches'' in the capital rule, which are generally
firms with less than $250 billion in total consolidated assets and less
than $10 billion in total foreign exposures. The proposal would
simplify and clarify a number of the more complex aspects of the
existing capital rule. The Federal banking agencies received a number
of comments on various aspects of the proposal and are working together
to consider what changes to the proposal would be appropriate in light
of the different ideas and suggestions provided in the comments.
Additionally, one area of the proposal--the treatment of acquisition,
development, and construction loans--has been superseded by the
Economic Growth Act. As we move forward with our efforts to simplify
and clarify our regulatory capital requirements, the agencies will, of
course, make any changes necessary to conform our capital rules to the
new law.
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\12\ 82 FR 49984 (October 27, 2017).
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In April of this year, the OCC and the Board of Governors of the
Federal Reserve System proposed a rule that would further tailor
leverage ratio requirements to the business activities and risk
profiles of the largest domestic firms. \13\ Currently, firms that are
required to comply with the ``enhanced supplementary leverage ratio''
are subject to a fixed leverage standard, regardless of their systemic
footprint. The proposal would instead tie the standard to the risk-
based capital surcharge of the firm, which is based on the firm's
individual characteristics. The resulting leverage standard would be
more closely tailored to each firm. Importantly, the Economic Growth
Act includes a provision (section 402) that requires the agencies to
make changes to the calculation of the supplementary leverage ratio for
banking organizations engaged in custody, safekeeping, and asset
servicing activities. As we move forward with the changes required by
the new law, we will need to consider whether the proposed
recalibration of the enhanced supplementary leverage ratio remains
appropriate, or whether additional fine tuning will be necessary.
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\13\ 83 FR 17317 (April 19, 2018).
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I also look forward to working with fellow regulators to update
regulations to implement additional relief authorized in the Economic
Growth Act. Among those provisions are section 201 which allows banks
that exceed a ``community bank leverage ratio'' (tangible equity to
average total consolidated assets of 8 percent to 10 percent) to be
deemed to be in compliance with current leverage and risk-based capital
provisions. This will greatly reduce regulatory burden for well-
capitalized, qualifying institutions.
Similarly, the agencies have been working to simplify the Volcker
Rule \14\ to ease associated burden, particularly for those community
and midsize banks that do not pose systemic risk to the Nation's
financial system and typically do not engage in the type of activities
that the statute was intended to address. I also applaud the changes
made by the Economic Growth Act to reduce the number of banks subject
to the Volcker Rule and want to thank the many Members of this
Committee who supported this reasonable exemption.
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\14\ 12 U.S.C. 1851; 12 CFR 44.
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For those entities that remain subject to the rule, the OCC is
committed to adding clarity and reducing unnecessary burden, as
appropriate. In August 2017, the OCC sought public comment about what
should be done to improve the current regulation implementing the
Volcker Rule \15\ and specifically invited input on ways to tailor the
rule's requirements and clarify key provisions that define prohibited
and permissible activities. The agency also sought input on how the
Federal regulatory agencies could implement the existing rule more
effectively without revising the regulation. The OCC has used comments
to inform its dialogue with other Federal regulatory agencies.
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\15\ 82 FR 36692 (August 7, 2017).
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The OCC has worked collaboratively with the other Federal
regulatory agencies responsible for the Volcker Rule to develop a
proposed rule that would clarify and streamline the current regulation.
These proposed changes focus on reducing the subjectivity, and
associated uncertainty, of the current rule. A key objective is to
provide clear lines that enable firms to quickly and easily determine
whether activities are subject to the rule. In this regard, the
proposal seeks to eliminate the test that looks to the subjective
intent of a transaction for purposes of determining whether it is
proprietary trading and to focus on objective factors. For example, a
trading desk that operates within a prescribed profit and loss
threshold would be presumed to be operating in compliance with the rule
unless the appropriate agency determines otherwise.
In addition, the proposed rule focuses on appropriate burden
reduction by seeking to calibrate the regulation to the type and level
of risk presented. For example, a bank with only moderate trading
activities would be eligible for streamlined versions of the market-
making and hedging exemptions relative to a bank that has significant
trading activities. For banks with the most limited trading activities,
there would not be any ongoing obligation to demonstrate compliance,
although the rule's substantive restrictions on proprietary trading and
covered funds activities would still apply. We believe these changes
will reduce burden, particularly for smaller and midsize banks that
remain subject to the Volcker Rule following the recent statutory
amendment. We believe these changes will also improve the agencies'
implementation of the Volcker Rule by allowing regulators to focus on
the activities that were at the core of the statutory prohibitions.
Each of the five agencies involved in writing the rules
implementing the Volcker Rule has adopted the proposal, and I look
forward to working with my fellow regulators to finalize changes to the
Volcker Rule later this year.
Agency Effectiveness and Efficiency
Ensuring that the OCC operates as effectively and efficiently as
possible allows the agency to succeed in its mission, to be a
responsible steward of every assessment dollar collected, and to
maintain a professional and inspiring workplace for the men and women
who contribute to the economic security of our Nation by supervising
its banks.
Since I arrived at the OCC, we have greatly improved the agency's
decision-making processes. Over the years, the OCC had developed a
centralized and bureaucratic approach to decision making that required
multiple officials and many layers of review to approve examiner
guidance, internal policies, and public issuances. We have 3 months of
data that tell us that the change is paying dividends. The average
total time for executive managers to review documents and agency
decisions is now less than 8 days, down from an average of nearly 22 in
calendar year 2017. The revised process also pushes decision making
down to appropriate staff. Under the revised process, for example, the
Comptroller's approval has been required on 54 percent of the documents
issued by the agency, compared with 97 percent of documents reviewed at
the agency in 2017. This more efficient approval and coordination
process reduces waste and allows more resources to be committed to
executing decisions rather than coordinating their approval. We
continue to look for opportunities to make that process even more
efficient and reduce the time even further.
The agency has also focused on reducing its costs through gaining
efficiencies and making better use of technology. When I arrived at the
OCC, I was greeted with 18-inches of three-ring binders for briefings
the next day. Executives would arrive to meetings with their binders
and coordination packages would be copied and bound for each required
signature. Today, we have significantly reduced paper received by the
front office and coordinate all materials electronically. Executives
largely rely on electronic communication, and staff share information
and document decisions online. Moving to an online-only system has
saved an incalculable amount of paper and time--time spent under the
old process assembling and delivering paper packages for each reviewer.
Now, because comments are now provided electronically, we have
eliminated the need to copy and scan comments by reviewers, decipher
handwritten notes, and track down the commenter when follow-up is
required. Recordkeeping is accomplished more quickly because all the
documents are electronic and easily saved to the initiating office's
system of records.
The agency is also mindful of our responsibility to get the most
out of every dollar assessed to the institutions we supervise and is
working to reduce costs wherever it makes sense. At the beginning of
fiscal year 2018, the OCC supervised 1,347 institutions and had
authorized 3,945 full-time employees. After I became Comptroller, OCC
management conducted a thorough budgetary review and identified
efficiencies to fulfill our mission and lower our expected expenses by
reducing the number of additional personnel we planned to hire during
the year, prioritizing our work, completing that work more efficiently,
and taking a closer look at actual versus planned spending for
personnel travel and contracts. That effort reduced the amount we
planned to spend in fiscal year 2018 by nearly $70 million, or about 5
percent of our expected costs.
As the agency looks ahead to fiscal year 2019, we will think even
more critically and creatively about what we need to do our jobs
successfully and reduce our anticipated costs further. There are many
ways to save money and operate more efficiently and effectively, and
currently none of them involve a reduction-in-force through layoffs or
buyouts. As the agency plans its spending for fiscal year 2019 and
beyond, we will seek to optimize our real estate strategy by shrinking
our physical footprint and taking advantage of technology to reduce our
costs. Our revised spending plan for the remainder of fiscal year 2018
and the budgets I authorize in the future will continue to provide the
resources necessary for the agency to succeed in its mission and to
provide employees an engaging and fulfilling work experience. The
agency will continue to invest in training and career development while
providing a professional, supportive workplace so that the agency can
attract and retain the experience and talent it needs.
Conclusion
Thank you for the opportunity to provide my views on the condition
of the Federal banking system, risks facings that system, and my
priorities as Comptroller. I look forward to working with Members of
this Committee, my fellow regulators, and the seasoned team at the OCC
to address these important issues facing our Nation's banks and to
further strengthen the Federal banking system.
I again congratulate the Chairman on his leadership and I thank the
Committee Members for their important and formative work resulting in
common-sense relief for community and midsize banks that was passed
into law last month.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JOSEPH M. OTTING
Q.1. Under your leadership, has the OCC experienced any
reductions in staffing?
A.1. At the end of fiscal year 2017, the OCC employed 3,956
staff. As of May 31, 2018, the OCC employed 3,838 staff.
Q.2. If so, what reductions were the result of attrition versus
other forms of staff reduction?
A.2. Fluctuation in the number of employees reflects
seasonality and ordinary attrition. The OCC has not conducted
and has no plans to conduct a reduction in force or other forms
of layoffs. The agency does intend to operate as effectively
and efficiently as possible with sufficient staff to fulfill
its mission.
Q.3. Is the OCC anticipating future reductions in staffing? If
so, please explain the number of staff reductions implemented
or expected, and please list the locations of the staff
reductions, including the division within the OCC and the
geographic location.
A.3. The OCC is in the process of developing its strategic plan
for fiscal years 2019-2023 and its budget for fiscal year 2019.
The agency intends to operate more effectively and efficiently
in the future. The budget and staffing levels will be set
sufficiently to fulfill the agency's important mission, but
these levels have not yet been determined for fiscal year 2019
and beyond.
Q.4. Also, please describe any other significant cost or
expense reduction measures, including any reductions that could
impact oversight of financial institutions. Finally, please
describe any Administration recommendations or requests to
reduce staffing or costs.
A.4. The OCC is in the process of developing its strategic plan
for fiscal years 2019-2023 and its budget for fiscal year 2019.
The agency intends to operate more effectively and efficiently
in the future. The budget and staffing levels will be set
sufficiently to fulfill the agency's important mission, but
these levels have not yet been determined for fiscal year 2019
and beyond. Finally, the Administration has neither instructed
nor advised the OCC to reduce staffing or costs.
Q.5. Does discrimination in housing exist? Does discrimination
in banking exist? Does discrimination in lending exist?
A.5. I do not condone discrimination and believe more can be
done to provide credit and banking services mare fairly. This
is one of the reasons I support changes to the Community
Reinvestment Act (CRA) to encourage more lending and investment
activity in our communities and to expand banking services to
more consumers and businesses, particularly in low- and
moderate-income communities. One of the reasons the CRA was
enacted was to address redlining activity in the United States.
Even today, there are observable differences in the approval
rates and distribution of housing, banking services, and
lending by race and other attributes.
The OCC employs the tools and authority it has to combat
discrimination. Examiners are required to complete a fair
lending risk assessment for all OCC-supervised institutions
during each supervisory cycle to guide the fair lending
examination strategy for each bank. Using a risk-based process
to identify banks and focal points for fair lending
examinations, the Home Mortgage Disclosure Act (HMDA) screening
process is intended to supplement the fair lending risk
assessments. Using a combination of statistical analysis based
on the HMDA data as well as a review of the data collected
using the OCC Fair Lending Risk Assessment Tool, the OCC
identifies banks that exhibit higher fair lending risk for
which a fair lending examination is required within the
following fiscal year. In instances where the OCC has
identified evidence of redlining or discriminatory practices,
it has taken supervisory action, and where appropriate, made
referrals to the Department of Justice and Department of
Housing and Urban Development in accordance with OCC policy.
Q.6. In your testimony, you noted that you diversified
OneWest's Board. Please provide a list of Board members, along
with each individual's gender, race, and ethnicity, for each of
the years you were employed at the bank.
A.6. As discussed at the hearing, during my tenure at OneWest,
we diversified the Board of Directors from the one that was in
place when I arrived. Public information about the board
members of CIT Bank, N.A., is available on S&P Global at
https://platform.mi.spglobal.com/web/
client?auth=inherit#company/officers?id=4227407.
Q.7. In your testimony, you noted that you were ``not aware''
of an ``old boys' club'' in the banking industry.
A.7. I am not.
Q.8. What does research suggest regarding barriers to inclusion
for women and persons of color in the banking industry?
A.8. While the banking industry is generally a leader in
employee inclusion and diversity, current research suggests
women and people of color continue to be underrepresented in
the banking industry as a whole, and we should continue to
encourage their participation.
Q.9. Do you believe you would be serving as Comptroller of the
Currency if you did not have a prior relationship with
Secretary Mnuchin?
A.9. I serve the country as Comptroller of the Currency because
the President nominated me and the Senate reviewed my
nomination and qualifications and voted to confirm me to this
position.
Q.10. The Director of the Office of Minority and Women
Inclusion (OMWI) at the OCC directly reports to the
Comptroller, per Section 342 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010. How many times have
you met with the OCC OMWI Director? What specific objectives
within the purview of the OMWI do you plan to accomplish during
your tenure? What is your timeline for meeting your goals?
A.10. I meet at least monthly and more often as the need arises
with the OCC's Executive Director for Workforce Diversity and
Inclusion, Joyce Cofield. She and I also attend diversity
meetings and events together, regularly.
More diversity broadly at senior level positions at the OCC
is one objective. In addition, I am particularly committed to
enhancing the participation of more Hispanics at the OCC in
terms of overall representation throughout the agency as well
as at the most senior leadership levels to address the low
participation of Hispanics in our workforce. Women also are
underrepresented in the examiner discipline and we are
considering ways to address this. Finally, I am proposing a
summer internship program for 2019 in which local high school
students from low- and moderate-income areas could participate
to increase their awareness of career opportunities at the OCC.
Q.11. According to the OCC's most recent No FEAR Act
disclosure, the OCC will receive 52 EEO complaints in 2018. In
comparison, the OCC received 23 EEO complaints in 2017, 18 in
2016, 15 in 2015, and 17 in both 2014 and 2013. What explains
the jump in EEO complaints during your tenure?
A.11. The question incorrectly projects the number of
complaints for 2018. The accurate projection is 26 not 52,
based on the 13 complaints filed from October 1, 2017, to March
30, 2018. This figure is not a significant increase over 2017
and is still a low number for an agency of our size. I am
committed to maintaining a workplace that is free from fear,
harassment, and discrimination. The agency has made a concerted
effort to make employees aware of all of the channels they have
to voice concerns.
Q.12. The Comptroller has the discretion to waive confidential
supervisory information disclosure restrictions generally
applicable under 12 CFR Part 4 if the Comptroller determines
such disclosure ``may be necessary or appropriate.'' As such,
will you use this discretion to make additional information
public regarding the OCC's horizontal review of sales practice
violations? If not, why not?
A.12. I have previously provided a public summary of the OCC's
horizontal review of sales practices. Information that remains
confidential supports ongoing supervisory activity. Release of
any additional confidential supervisory information could
prejudice or adversely affect future supervisory actions.
Q.13. Please list the 40 national banks subject to the OCC's
horizontal review of sales practice violations, which concluded
in the fourth quarter of 2017.
A.13. The banks reviewed included the largest national banks
and Federal savings associations with significant consumer
sales activity.
Q.14. Why did the OCC select a ``look-back'' period of 3 years
for the horizontal review given that Wells Fargo admitted that
the bank's unauthorized account scandal dated back to the year
2003?
A.14. The primary objective of the review was to determine
whether systemic issues were occurring in the Federal banking
system related to unauthorized account openings. Three years
were sufficient for that purpose. While the look-back period
was set by my predecessor, I agree with this timeframe.
Q.15. Your testimony noted that the OCC sent final letters to
bank CEOs upon the conclusion of the horizontal review on June
4th. Please provide the Committee with a sample of a final
letter sent to a bank CEO.
A.15. Our formal communications with the institutions we
supervise are confidential supervisory documents. However, a
summary of our horizontal review was provided to the Chairman
and Ranking Member in a letter dated June 11, 2018. The
information provided in the June 11 letter was similar to that
contained in the final letters to bank Chief Executive
Officers.
Q.16. You noted in testimony that the OCC did not find
pervasive or systemic issues in regard to improper account
openings. Please explain why you view the OCC's findings to be
nonsystemic.
A.16. Based on the hundreds of millions of accounts opened by
the reviewed banks during the 3-year look-back period, neither
the volume of accounts identified with issues nor the variety
of root causes for those issues constituted a systemic issue.
Q.17. Please provide a copy of each of the five industrywide
matters requiring attention.
A.17. The matters requiring attention (MRA) are confidential
supervisory information. They generally involved deficiencies
in policies, procedures, and controls as described in my June
11, 2018, letter to the Committee Chairman and Ranking Member.
Q.18. (MRAs) the OCC issued as a result of the horizontal
review of sales practice violations. If the OCC intends not to
provide such documentation, what is the rationale for keeping
industrywide information private? To what extent have the MRAs
been addressed by the banking industry?
A.18. The MRAs are confidential supervisory information. They
generally involved deficiencies in policies, procedures, and
controls as described in my June 11, 2018, letter to the
Committee Chairman and Ranking Member. The MRAs support our
ongoing supervisory activities. Release of any additional
confidential supervisory information could prejudice or
adversely affect future supervisory actions. The OCC is
monitoring banks' actions to correct issues identified in the
horizontal review, and approximately 20 percent of the MRAs
have been remediated to date. Failure to correct the issues in
a timely and effective manner may result in additional
supervisory actions, including public enforcement actions if
warranted.
Q.19. Please describe in detail the methodology used to conduct
the horizontal review. How did the OCC review 500 to 600
million recently opened accounts, and determine that only
20,000 were unauthorized? What was the sample size of the
accounts reviewed? Did OCC examiners inspect account opening
documentation or files for signatures? How did OCC supervisors
determine if signatures were legitimate?
A.19. The general methodology used to conduct the horizontal
review was described in my June 11, 2018, letter to the
Committee Chairman and Ranking Member. The review was conducted
in three phases. Phase 1 determined whether systemic or bank-
specific issues exist with regard to bank employees opening
accounts on behalf of individual and small business customers
without consent. In phase 2, examiners evaluated sales goals,
strategies, incentive compensation, and quota programs to
determine if they appropriately balance sales and revenue
targets with risk management and customer satisfaction. Phase 3
included large and midsize insured depository institutions with
assets greater than $50 billion to determine if their risk
management framework effectively controls risks associated with
sales practices and incentive compensation programs. Specific
review methods varied from bank to bank based on the risk
characteristics and business portfolio of that bank. The 500 to
600 million number represents an estimate of the total number
of accounts opened by the participating banks during the 3-
year, look-back period.
Q.20. How did the OCC determine that of 20,000 authorized
accounts, half were opened inappropriately and half were merely
missing documentation? How did the OCC distinguish between
those two categories?
A.20. The approximately 20,000 accounts with issues were
identified through the 3-year look-back of accounts and
supporting documentation used by the banks to open the
accounts. More than half of the 20,000 accounts involved issues
unrelated to the initial account authorization. In those
instances where proof of authorization could not be provided,
we determined the account merely lacked customer consent
documentation if the consumer activated or used the product
since opening the account. In other cases, known issues related
to recordkeeping or system deficiencies were determined to be
causes of poor or incomplete documentation.
Q.21. In a briefing with Senate staff conducted on June 8,
2018, the Senior Deputy Comptroller for Large Bank Supervision
indicated that the CARD Act of 2009 (Public Law 111-24) may
have contributed to banks' creating unauthorized accounts. Why
does the OCC believe that the CARD Act led to the creation of
unauthorized bank accounts?
A.21. To clarify, the CARD Act added a signature requirement
for applications to open a credit card account by a consumer
who is under 21, which we understand some banks interpreted as
requiring signatures only in those limited circumstances.
Credit cards were the products most often associated with
concerns regarding unauthorized account openings. However,
banks involved in the horizontal review have implemented more
robust account opening and closing policies, procedures, and
controls designed to reduce the potential for inappropriate
activities or unauthorized account openings.
Q.22. Less than a month into your tenure at the OCC, you
reversed a decision by former Comptroller Curry to bring bank
examiners to OCC offices instead of keeping them on-site at the
banks they supervise. At the hearing, you said that you made
this decision to keep bank examiners on-site based on your 35
years of experience in the banking industry. It was unclear,
however, what other perspectives, such as those of your fellow
regulators, you considered in making this decision.
Please describe the process for making this decision.
A.22. As I discussed at the hearing, I relied upon my
experience and judgment to make the decision. The value of
retaining on-site examiners outweighs any benefit of removing
them from bank premises. Open, effective communication and
early identification of concerns are the keys to effective
supervision, both of which are supported by an on-site
presence. My decision is further supported by the practices at
the OCC to rotate examiners-in-charge after 5 years, to provide
oversight by Deputy Comptrollers assigned to OCC Headquarters,
and to depend on off-site lead experts who provide a horizontal
view of risks and practices across the agency. Also, there has
been no study to date regarding the cost of moving examiners
out of banks or showing that moving examiners would reduce the
perception of regulatory capture.
Q.23. Did you solicit the views of or consult any individuals
at (i) the OCC; (ii) the Federal Reserve Bank of New York;
(iii) any other banking regulatory agencies; (iv) any industry
groups; (v) any banks; or (vi) any groups representing the
interests of consumers? If so, please describe these
communications and provide any copies of the communications to
the Committee.
A.23. No. I relied upon my experience and judgment to make the
decision. My decision is further supported by the practices at
the OCC to rotate examiners-in-charge after 5 years, to provide
oversight by Deputy Comptrollers assigned to OCC Headquarters,
and to depend on off-site lead experts who provide a horizontal
view of risks and practices across the agency. Also, there has
been no study to date regarding the cost of moving examiners
out of banks or showing that moving examiners would reduce the
perception of regulatory capture.
Q.24. Did you or any OCC staff conduct an economic or other
analysis to support the decision? If so, please provide a copy
of any such analysis to the Committee.
A.24. No, nor was there such a study conducted to determine the
effect of moving examiners out of bank space to support the
original recommendation in 2013.
Q.25. At the hearing, when asked why you purchased stock in
financial companies after your nomination to lead the OCC,
including banks regulated by the OCC, you noted that you played
no role in these decisions, and that they were made by a third-
party money manager. Given the potential for at least the
appearance of a conflict of interest--if not a conflict of
interest itself--why not instruct your money manager to place
all your holdings in a passive investment, such as a broad-
based index fund, or a blind trust? Wouldn't that better avoid
the appearance of a conflict of interest?
A.25. I abided by all of the available guidance and ethics
standards applicable to this and previous Administrations, and
continue to do so.
Q.26. The OCC's proposal to weaken leverage limits for the
biggest banks would, according to the OCC, reduce the required
capital for the eight banks covered by the proposal by $121
billion. This reduction would increase the likelihood that such
banks fail and would likewise increase the magnitude of harm
caused by their failure, potentially leaving taxpayers with the
bill and increasing overall risks to financial stability.
A.26. The proposed changes would retain a meaningful
calibration of the Enhanced Supplemental Leverage Ratio (eSLR)
standards while not discouraging firms from participating in
low-risk activities. The changes correspond to changes in the
leverage ratio standard published by the Basel Committee on
Banking Supervision in December 2017. It is unlikely that banks
would release $121 billion in Tier 1 capital because of other
binding constraints on liquidity and capital. The proposed eSLR
standards along with current risk-based capital standards and
other constraints applicable at the holding company level would
continue to limit the amount of capital that global
systemically important banking organizations (G-SIB) could
distribute to investors, thus supporting the safety and
soundness of G-SIBs and helping to maintain financial
stability. I look forward to reviewing comments received on the
proposal.
Q.27. Please provide a bank-by-bank breakdown of these
reductions in capital across the eight national banks impacted
by the proposal supervised by the acc.
A.27. As indicated above, it is unlikely that the national
banks supervised by the OCC and affected by the proposal would
release a combined total of $121 billion in Tier 1 capital.
Other binding constraints on liquidity and capital, combined
with current risk-based capital standards and other constraints
applicable at the holding company level would continue to limit
the amount of capital that these banks could release, thus
supporting their safety and soundness and helping to maintain
financial stability.
Q.28. What benefits would the OCC's proposal create?
A.28. The changes to the eSLR requirements proposed by the
Federal Reserve and the OCC would tailor the requirement to the
business activities and risk profiles of the largest banks. The
proposed changes would retain a meaningful calibration of the
eSLR while not discouraging banks from participating in low-
risk activities. With the proposed modifications, the eSLR
would serve as a backstop to the risk-based measures rather
than the primary binding constraint. In addition, the proposed
changes are aligned with recent changes to the leverage
standard published by the Basel Committee on Banking
Supervision in December 2017. Aligning with the Basel standard
creates a more level international playing field, reducing
disadvantages faced by U.S. G-SIBs in competing with
international counterparts.
Q.29. What costs would the OCC's proposal impose (e.g., risks
to the Deposit Insurance Fund, or decreased financial
stability)?
A.29. The change to the eSLR requirements is being proposed by
the Federal Reserve and the OCC. \1\ We are unable to predict
exactly how banks will choose to respond to these changes in
regulatory capital under the rule and therefore to quantify the
costs of the proposal. As part of the preliminary assessment of
the potential effect of the rulemaking, OCC staff concluded
that banks might respond to a decrease in minimum required
regulatory capital in three ways. First, all else equal, banks
affected by the rule will have improved capital ratios, and
they can elect to operate with these higher capital ratios.
Second, if capital at the higher ratios exceeds regulatory
minimums and the bank's internal capital requirements, the bank
con choose to return some of this capitol to shareholders in
the form of stock buy-backs or increased dividend payouts.
Third, banks can choose to increase their assets until they
achieve their targeted capitol ratio.
---------------------------------------------------------------------------
\1\ See https://www.occ.gov/news-issuances/news-releases/2018/nr-
la-2018-36a.pdf.
Q.30. How did the OCC determine that the benefits of its
proposal would exceed the costs? Did the OCC perform any
quantitative analyses? If so, please provide a copy of any such
---------------------------------------------------------------------------
analysis.
A.30. The change to the eSLR requirements is being proposed by
the Federal Reserve and the OCC. \2\ Staff at the OCC conducted
a preliminary assessment of the potential effect of the
rulemaking. Staff did not quantify the potential benefits of
the proposal, however, as part of the assessment OCC staff
determined that the proposed rule would help alleviate any
unintended distortive effects of the SLR, particularly for
custody banks, and address concerns that the eSLR is punitive
because it does not make accommodations for low-risk business
models or low-risk assets such as central bank deposits and
U.S. Treasury securities. Second, the proposed rule would
retain the original purpose of the SLR which is to be a non-
risk-based measure of a banking organization's overall
leverage, including off-balance-sheet exposures. Third, the
proposal would make the institution's eSLR buffer proportional
to an institution's systemic riskiness as measured by its G-SIB
buffer. This proportional approach is in alignment with recent
Basel III reforms endorsed by the Basel Committee on Banking
Supervision's oversight body, the Group of Central Bank
Governors and Heads of Supervision (GHOS), reducing
disadvantages faced by U.S. G-SIBs in competing with
international counterparts.
---------------------------------------------------------------------------
\2\ See https://www.occ.gov/news-issuances/news-releases/2018/nr-
la-2018-36a.pdf.
Q.31. Asked during June 13th House Financial Services Committee
hearing whether the current Volcker Rule has unacceptably
``chilled'' market-making functions, you replied: ``I don't
believe so.'' If the Volcker Rule is not unacceptably hurting
market-making, then is the only benefit to the Volcker proposal
---------------------------------------------------------------------------
a reduction in compliance costs?
A.31. Compliance cost and unnecessary burden on institutions
that do not engage in the type of activities that section 13 of
the Banking Holding Company Act (Volcker Rule) was intended to
restrict are reason enough to revise the Volcker Rule. However,
other reasons exist, which include providing greater clarity on
the scope of activities that are covered by the rule and
clarifying the compliance responsibilities for covered
entities.
Q.32. How did the OCC determine that this reduction in
compliance costs, or any other benefits, would exceed the
benefits to financial stability and protection of the Deposit
Insurance Fund that the current Volcker Rule provides? Did the
OCC perform any quantitative analyses? If so, please provide a
copy of any such analysis.
A.32. The OCC performed an analysis consistent with the
Unfunded Mandates Review Act to evaluate whether the mandates
imposed by the proposal may result in an expenditure of $100
million or more by State, local, and tribal governments, or by
the private sector, in any one year. The OCC also performed an
analysis pursuant to the Regulatory Flexibility Act on whether
the proposal will have a significant economic effect on a
substantial number of small entities. The OCC determined the
proposal would neither result in expenditures in excess of $100
million, nor impact a substantial number of small entities. A
copy of the OCC's analysis is attached.
Q.33. How does the OCC plan to surveil banks with below $100
billion in assets for resiliency to economic shocks in the
absence of stress testing? How does the OCC plan to test for
correlated risks across this cohort of banks?
A.33. The OCC's examinations of the institutions we supervise
will continue to include evaluations of capital adequacy and
stress testing. OCC Bulletin 2012-16, ``Guidance for Evaluating
Capital Planning and Adequacy,'' provides our examiners and the
industry with our expectations in this area. This bulletin
addresses the expectation for these institutions to ``have a
forward-looking assessment of the bank's capital needs,
including capital needs that may arise from rapid changes in
the economic and financial environment.'' Similarly, OCC
Bulletin 2012-14, ``Stress Testing-Interagency Stress Testing
Guidance'' addresses sound practices for effective stress
testing. Further, our OCC subject matter experts monitor for
correlated risks across product types and economic conditions.
Q.34. Please provide a list of all OCC rulemakings mandated by
S. 2155 and an expected timeline of when the OCC will propose
the required rulemakings.
A.34. The OCC expects to be engaged in at least 11 rulemakings
to implement the following sections of the Economic Growth,
Regulatory Relief, and Consumer Protection Act (Economic Growth
Act):
Section 103. Exemption From Appraisals of Real Property
Located in Rural Areas
Section 201. Capital Simplification for Qualifying
Community Banks
Section 203. Community Bank Relief
Section 204. Removing Naming Restrictions Section 205.
Short Form Call Reports
Section 206. Option for Federal Savings Associations To
Operate as Covered Savings Associations
Section 210. Examination Cycle
Section 214. Promoting Construction and Development on
Main Street
Section 401. Enhanced Supervision and Prudential
Standards for Certain Bank Holding Companies
Section 402. Supplementary Leverage Ratio for Custodial
Banks
Section 403. Treatment of Certain Municipal Obligations
The OCC can issue a rule to implement section 206,
providing greater flexibility for Federal savings associations,
on its own. The remaining rulemakings are joint or coordinated
rulemakings and will require interagency work. We are currently
engaged in discussions with the other regulators to develop
timelines for these rulemakings.
Q.35. In your Senate testimony, regarding the OCC's 2013
leveraged lending guidance, you noted that you've emphasized to
OCC examiners that ``guidance is guidance and rules are rules .
. . so I think we've taken an aggressive posture to make sure
that that is known within the agency.'' The OCC has not
rescinded this guidance, and yet you've downplayed its
importance as a supervisory directive. How are OCC examiners
currently using the 2013 leveraged lending guidance in their
exams? How does this differ from how it was used in 2013
through April 2017?
A.35. Supervisory guidance outlines safe-and-sound banking and
risk management principles and promotes transparency and
consistency in the OCC's supervisory approach across banks.
Guidance does not impose legally binding constraints on banks.
The agency has stressed that examiners should focus on the
deficient practice and the potential for the deficient practice
to adversely affect the bank's condition or result in
violations if not addressed. In some instances in the past,
examiners may have inappropriately relied on guidance alone
when citing compliance requirements and deficiencies. We have
communicated extensively to OCC staff the differences between
regulations and guidance.
Q.36. Regarding OCC deposit advance products guidance issued in
2013, you noted that, ``banks basically exited that market, and
for the life of me, I don't understand if you take, you know,
the banks out of a space that were providing a critical source
of capital, that it didn't end up being worse for consumers and
they had less choice.'' Please provide any studies or research
indicating that consumers were harmed following the issuance of
this 2013 guidance and had less choice.
A.36. An example of analysis in this area was conducted by the
Pew Charitable Trust. \3\ The Board of Governors of the Federal
Reserve System also published a study in 2016 that stated
nearly half of adults were unprepared to cover an emergency
expense of $400. \4\ The general logic is that if you
dramatically decrease supply for a product without reducing
demand, the price of that product increases and terms often
become less consumer friendly.
---------------------------------------------------------------------------
\3\ See ``Regulators Should Let Banks Get Back to Small-Dollar
Loans'', The Pew Charitable Trusts. January 7, 2016 (http://
www.pewtrusts.org/en/about/news-room/opinion/2016/01/ 07/regulators-
should-let-banks-get-back-to-small-dollar-loans) and ``From Payday to
Small Installment Loans'', The Pew Charitable Trusts. August 11, 2016
(http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/
08/from-payday-to-small-installment-loans#O-overview).
\4\ See ``Report on the Economic Well-Being of U.S. Households in
2015''. Board of Governors of the Federal Reserve System. May 2016
(https://www.federalreserve.gov/2015-report-economic-well-being-us-
households-201605.pdf).
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM JOSEPH M. OTTING
Q.1. I think the Community Reinvestment Act serves a valuable
purpose. It isn't perfect . . . but few things are. That said,
the Administration is on the right track in considering some
changes to how we implement that law. Let's face it the CRA was
first enacted in 1971. A lot has changed since then.
I want to focus your attention on the Opportunity Zones
that tax reform created. We've got about 50 million Americans
living in economically distressed communities around the
country. These folks have a lot of potential, it's just the
matter of unlocking it.
That's why my Investing in Opportunity Act directed the
Treasury Department and all 50 governors to designate
``Opportunity Zones'' and invite more private investment into
the places that need it the most.
So there's a shared objective with the CRA-increasing
economic activity in underserved communities. To me, it would
make a lot of sense to incorporate these Opportunity Zones with
the CRA. Please answer the following with specificity:
Are you considering broadening CRA-eligibility to
investments in Opportunity Zones? If so, could we give
financial institutions CRA-credit for making such investments?
A.1. I would welcome considering making investments in
Opportunity Zones eligible for CRA credit.
Q.2. What's your timeline on some of these proposed changes to
the CRA?
A.2. I am working on an interagency basis with the intent to
publish an ANPR as soon as possible. Comments from an ANPR may
then inform an NPR, which is typically followed by a final
rule.
I would like to bring attention to a subject we have
discussed in the past nonbank SIFI designations. Secretary
Mnuchin and I agreed on the perfect analogy for the designation
process how it stands: It is like getting a speeding ticket in
a neighborhood with no speed limit signs. I know the
Administration is reforming the process. That aside, it still
does not make sense to me that a group of bank regulators like
you are making designation decisions for insurance firms. It is
not that you are not bright folks--it is just that banking and
the business of insurance are totally different.
Q.3. I hope the Administration keeps that in mind as it
continues with reforming FSOC. I'm concerned that
implementation of the Volcker Rule as it stands could
dramatically slow down or even halt capital investments in the
financial services sector, despite enactment of S. 2155,
Section 203. The last thing we should do is discourage capital
investments in the lending arena that do not pose a risk to
insured deposit funds, which is what the Volcker Rule was
designed to protect against.
Do you share this concern in regards to implementation of
the Volcker Rule? If so, what is the OCC doing to rectify the
situation?
A.3. The recent proposed changes to the Volcker Rule and the
changes included in the Economic Growth Act would make
significant improvement to the implementation of the rule by
maintaining core prohibitions and protections while reducing
burden on banks that do not engage in the type of activities
that section 13 of the Bank Holding Company Act (the Volcker
Rule) was designed to restrict and providing greater regulatory
clarity for all banks. I look forward to reviewing the comments
received on the proposed changes to the Volcker Rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM JOSEPH M. OTTING
Q.1. S. 2155, the Economic Growth, Regulatory Relief, and
Consumer Protection Act was signed into law last month. Senator
Jones and I were pleased that S. 2155 included our provision
that clarified rules on High Volatility Commercial Real Estate
(HVCRE), providing much needed, common-sense relief for
acquisition, development or construction (ADC) loans. We're
pleased that lower-risk loans and good business practices are
no longer being penalized by vague, counterproductive
regulations.
As you are no doubt aware, those changes were effective
immediately, and they supersede contrary provisions of the
current HVCRE rule. As a result, the HVCRE rule currently on
the books is inconsistent with the law.
What steps are the OCC and the other Federal banking
agencies taking to conform the HVCRE rule to what the law
requires?
A.1. The OCC is working with the Federal Reserve and the FDIC
to implement the new statutory requirements. With respect to
HVCRE, the agencies noted that a depository institution would
immediately be permitted to, consistent with the statute, risk-
weight at 150 percent only those commercial real estate
exposures it believes meet the statutory definition of an HVCRE
ADC loan. When reporting HVCRE exposures on Schedule RC-R, Part
II of the Consolidated Reports of Condition and Income (Call
Report), depository institutions may use available information
to reasonably estimate and report only HVCRE ADC loans.
Depository institutions may refine these estimates in good
faith as they obtain additional information but will not be
required to amend previously filed regulatory reports as these
estimates are adjusted. Alternatively, a depository institution
may also continue to report and risk-weight HVCRE exposures in
a manner consistent with the current instructions to the Call
Report, until the agencies take further action.
Q.2. What are you planning to do in the meantime to assure
banks that you and the other Federal banking agencies will not
enforce the current rule in a manner inconsistent with this
legislation?
A.2. The OCC together with the Federal Reserve and FDIC issued
a Statement Regarding the Impact of the Economic Growth Act
which addresses how the agencies plan to enforce the HVCRE
requirements until a rule is finalized. See https://
www.occ.gov/news-issuances/news-releases/2018/nr-ia-2018-
69a.pdf.
Q.3. The OCC's supervisory manual makes it clear that there is
a difference between, on the one hand, a Matter Requiring
Attention (MRA) which is based on a violation of law, and, on
the other hand, an MRA which is based on the local examiner's
opinion of actions which the bank might take to improve the its
ability to deal with future, hypothetical concerns or threats.
Will the OCC make it dear that the first kind of MRA is
compulsory and could be subject to an enforcement action, and
the latter is not, but rather a type of safe harbor or best
practice?
A.3. The OCC uses MRAs to communicate the OCC's concern with a
bank's deficient practices. In addition to a practice that
results in a violation of law or regulation, deficient
practices also include bank practices that deviate from sound
governance, internal control, or risk management principles,
and have the potential to affect the bank's condition if not
corrected. The OCC's MRA policies indicates that MRAs are not
used to communicate best practices or offer enhancements to a
bank's practices that are not deficient.
Examiners may discuss recommendations for best practices or
enhancements with banks informally; the OCC does not track such
recommendations or include them in the report of examination,
and there is no expectation for bank management to take action
in response to recommendations. The OCC's Office of Enterprise
Governance and the Ombudsman, which operates independently from
the bank supervision process, maintains a bank appeals process.
Banks may appeal agency decisions through this process,
including material supervisory determinations such as MRAs,
compliance with enforcement actions, or other conclusions in
the report of examination.
Q.4. Yes or no, can an OCC examiner issue a ``Matter Requiring
Attention'' to a bank for not following agency guidance that
has not been subject to review under the Congressional Review
Act?
A.4. No. Agency guidance alone does not have the same force and
effect as a statute or regulation. Guidance generally outlines
safe-and-sound banking or risk management principles and
promotes transparency regarding the agency's supervision. No
single risk management system works for all banks. Therefore,
examiners assess each bank's risk management consistent with
the bank's individual circumstances and risks. MRAs focus on
the deficient practice and its potential to adversely affect
the bank's condition or result in violations if not addressed.
Referring to supervisory guidance may assist bankers in
implementing sound risk management principles for certain
activities, depending on the bank's circumstances.
Q.5. Senator: In Acting Comptroller Noreika's letter on the GAO
determination that the joint agency guidance on leveraged
lending constituted a rule under the Congressional Review Act
(CRA) and therefore must be submitted to Congress for review as
required by law, the OCC acknowledged that guidance cannot be
used to create a legal obligation. While it seems the OCC
leadership is on its way to complying with the law under the
CRA, it has been brought to my attention that this has not
changed the mindset of bank examiners.
To ensure bank examiners, and as importantly, bank
compliance officers, understand that guidance is not legally
enforceable, would you consider including a notice in
examination and supervisory handbooks making clear that
guidance cannot be the basis of enforcement actions?
A.5. We have communicated extensively with our examiners the
important distinction between supervisory guidance and
regulations. Supervisory guidance does not have the force and
effect of law or regulation, but provides transparency about
the factors the OCC considers when exercising its supervisory
authority. Examiners will continue to base their criticism of a
supervised institution on the institution's deficient practices
or its failure to comply with a specific law or regulation.
Q.6. Senator: In today's economic environment, a growing number
of Americans are having trouble making ends meet. The Federal
Reserve found nearly half of the country could not cover a $400
emergency expenditure, and many have few choices to turn to for
help. Banks previously offered the deposit advance product
(DAP) to help existing customers with proven income streams
meet their critical needs, but in 2013 both the FDIC and OCC
effectively regulated banks out of this space, pushing
customers into the less regulated payday loan market.
Given the need for small-dollar credit and the benefit of
permitting access to product from a well-regulated industry,
will you revisit the 2013 guidance to allow responsible actors/
banks to reenter this market?
A.6. The OCC rescinded that guidance in October 2017.
Q.7. Good actors and responsible banks/credit unions have left
the small-dollar market as a result of overregulation: Where do
consumers go to make ends meet considering this gap in the
market?
A.7. I agree that guidance perceived as regulation caused
certain banks to stop making demand-deposit advance loans in
the short-term, small-dollar space, and no alternatives were
apparently pursued by banks to service this space. As a result
of the reduced supply, costs and features became less consumer
friendly as consumers turned to available sources for such
credit-payday lenders, check cashers, pawn shops. We need to do
more as a Nation to encourage institutions to responsibly meet
this consumer need. On May 23, 2018, the OCC issued a bulletin
encouraging banks to offer responsible short-term, small-dollar
installment loans and to remind banks of the core lending
principles for prudently managing the risks associated with
offering short-term, small-dollar installment lending programs.
See https://occ.gov/news-issuances/bulletins/2018/bulletin-
2018-14.html.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JOSEPH M. OTTING
Q.1. Are banks restricted from providing capital and credit to
businesses because of limitations of providing this capital and
credit under various fund structures? Does the current covered
fund structure limit this availability of capital and credit?
How do you plan on narrowing this definition so that banks can
engage in the lending and capital injection that continues to
grow and stimulate the economy?
A.1. The Volcker Rule (section 13 of the Bank Holding Company
Act) restricts banking entities from engaging in certain fund
activities and investments. The NPR issued by the OCC, Federal
Reserve, FDIC, Securities and Exchange Commission and Commodity
Futures Trading Commission (the Agencies) solicits comments on
whether the regulatory provisions implementing this statutory
provision--in particular the regulatory ``covered fund''
definition--has been imprecise and whether that has led to
unintended consequences. The NPR requests comment on both the
``base definition'' of covered fund in section 10(b) of the
regulation as well as potential exclusions to this base
definition. Banks may continue to engage in fund activities and
investments that are not covered by the Volcker Rule and are
otherwise permissible for national banks. I look forward to
exploring this issue further together with my counterparts at
the other Agencies. The Agencies welcome specific examples from
commenters an the types of activities that have been limited by
the regulatory definition.
Q.2. The Volcker Rule was never intended to penalize bank
lending, it was intended to reduce risky activities of banks,
specifically proprietary trading. Under the current rule, banks
are restricted from providing credit via various partnership
structures.
Is that correct?
A.2. See response to Question 1 above.
Q.3. If the above is correct, does the OCC plan on addressing
these limitations to promote lending?
A.3. See response to Question 1 above.
Q.4. Do you believe that the current definition of a covered
fund is too broad?
A.4. See response to Question 1 above.
Q.5. If so, does the OCC plan on narrowing that definition so
that the unintended consequences are eliminated?
A.5. See response to Question 1 above.
Q.6. I am aware of multiple examples where banks have passed on
opportunities to engage in lending activities to entities since
it was determined that such engagement would meet the current
covered fund definition due to the recipients' business
structure or strategy. However, to me, these examples do not
appear to be consistent with the original intent of the Volcker
Rule, and should not meet the definition of what a covered fund
is.
Are you aware of such scenarios?
A.6. I am not familiar with specific examples you might be
referencing and welcome the opportunity to discuss them with
you.
Q.7. Do you think that regulators should limit a bank's ability
to provide services to companies through a fund structure
limitation? Are there scenarios where we would want to limit a
bank's ability to provide such services via a fund structure?
A.7. See response to Question 1 above.
Q.8. Why would we allow a bank to provide debt or equity
financing directly from its balance sheet to a company, but
restrict them by providing financing through a covered fund?
A.8. See response to Question 1 above. Even absent the Volcker
Rule, national banks are generally restricted in their ability
to provide equity financing subject to certain limited
exceptions. National banks may not generally acquire equity
investments in venture capitol funds unless the fund qualifies
as a small business investment company (SBIC) or public welfare
investment fund. Both SBICs and public welfare investment funds
are currently excluded from the Volcker Rule covered fund
definition. Other ``banking entities'' subject to the Volcker
Rule may have additional authorities to provide equity
financing to portfolio companies and fund structures such as
venture capital funds.
Senator: It is my understanding that under the Volcker
Rule, a fund is considered ``covered'' if it avails itself of
exemptions provided by the Investment Company Act, but that
regulators have authority to exclude funds and have done so
since first issuing regulations.
Q.9. Is that correct?
A.9. Section 13 of the Bank Holding Company Act generally
restricts a banking entity from acquiring or retaining an
ownership interest in or sponsoring a hedge fund or private
equity fund. The statute defines hedge fund and private equity
fund as an issuer that would be an investment company, as
defined in the Investment Company Act of 1940, but for section
3(c)(1) or 3(c)(7) of that Act, or such similar funds as the
relevant agencies by rule determine. The current regulation
includes the same definition referencing sections 3(c)(1) and
3(c)(7) of the Investment Company Act of 1940. Consistent with
the statute, the current regulation provides a number of
exclusions, including for foreign public funds, loan
securitizations, wholly owned subsidiaries, joint ventures, and
small business investment companies, among others. The
regulation also permits consistent with the statute certain
additional covered fund activities, such as organizing and
offering, underwriting, and market making with respect to a
covered fund.
Q.10. It is my understanding that previous exclusions have
included: foreign public funds; certain securitization
vehicles; wholly owned subsidiaries; and joint ventures.
Can you look into these exclusions and communicate to me if
these situations can be exempted under your existing authority
in the final proposal that you and the other Volcker Regulators
are currently engaged on?
A.10. The NPR requests comment on whether the Agencies should
provide new exclusions in order to more effectively tailor the
covered fund definition. The Agencies specifically requested
comment on whether to exclude funds that lack certain
characteristics of hedge funds and private equity funds, among
other types of issuers. The Agencies welcome specific examples
from commenters on the types of activities that have been
limited by the regulatory covered fund definition.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JOSEPH M. OTTING
Q.1. As you know, the OCC is 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. As part of the confirmation process, I asked whether
you would support and enforce these strong MLA rules to the
fullest extent possible. You responded that you ``would support
and enforce strong MLA rules.''
Since you have been confirmed, can you please tell us how
you have lived up to this commitment?
A.1. I am committed to supporting and enforcing strong MLA
rules. In May of this year, we issued OCC Bulletin 2018-11 with
examination procedures to provide supplemental guidance to
examiners regarding the MLA. \1\ The Handbook provides
background information on the MLA and its implementing
regulation, as well as examination procedures. The Handbook is
to be used in conjunction with other examiner guidance to
assist examiners in determining the scope of the examination
based on risk. Should the OCC identify deficiencies or
violations, we will use our supervisory and enforcement
authorities to address them.
---------------------------------------------------------------------------
\1\ See OCC Bulletin 2018-11, ``Comptroller's Handbook, Military
Lending Act'', May 11, 2018 (https://www.occ.gov/news-issuances/
bulletins/2018/bulletin-2018-11.html).
Q.2. 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. As part
of the confirmation process, I asked how you would prioritize
SCRA enforcement. You responded that you ``would be supportive
of SCRA being part of the regulatory exam process and would
endorse a horizontal review in the industry.''
Since you have been confirmed, can you please tell us how
you have lived up to this commitment?
A.2. The agency includes examinations for compliance with the
SCRA in its regular supervision of national banks and Federal
savings associations. I am committed to ensuring that we
continue to supervise for compliance with that statute, and
take supervisory action, including enforcement actions, when
warranted.
Q.3. If changes are made to the Community Reinvestment Act that
lead to financial institutions, including those that have an
online presence, to take deposits from communities but actually
make less of an effort to reinvest in these same communities,
would you consider that to be a good or bad outcome?
A.3. I would consider that to be a bad outcome, and it is one
of the reasons that I believe assessment areas should be
expanded and better defined.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JOSEPH M. OTTING
Q.1. Please provide the following information, disaggregated by
institution, about the findings of the horizontal review of
sales practices:
The volume and type of misconduct uncovered.
A.1. Such detail beyond what was provided in my June 11, 2018,
letter to the Committee Chairman and Ranking Member and my July
9, 2018, to you would be confidential supervisory information.
Q.2. Whether, if any, Matters Requiring Immediate Attention
were issued, and a description of when such misconduct
occurred.
A.2. As stated in my testimony, there were more than 250 MRAs
issued. Five types addressed broad weakness in policies,
procedures, and controls. The remaining were bank specific. All
reviewed banks received at least one MRA.
Q.3. The number of consumers impacted, disaggregated by State.
A.3. As stated during the hearing, the review identified
approximately 20,000 accounts with potential issues, about half
of those involved instances where proof of authorization could
not be provided. The OCC is monitoring banks' corrective
actions, including reimbursing consumers' applicable costs and
fees when applicable.
Q.4. A description of any incentive compensation plans that may
have encouraged the sales practice misconduct.
A.4. The review did not identify situations where the design of
incentives or quotas resulted in widespread unauthorized
account openings. In those limited instances where accounts
were opened without authorization involving issues other than
failure to maintain documentation, the most common factors
included either short-term sales promotions without adequate
risk controls, deficient account opening and closing
procedures, or isolated instances of employee misconduct with
no clear connection to sales goals, incentives, or quota
programs. During the review, banks reassessed the design of
their existing incentive programs and took steps to better
balance sales, production, and revenue targets with risk
management and customer satisfaction.
Q.5. A general summary of the Action Plans that the OCC
required banks to create and the expected timeline of adoption
of such Action Plans.
A.5. Action plans and timelines are specific to the findings of
each bank and are confidential supervisory information. The OCC
is monitoring bank compliance with action plans to ensure
timely resolution.
Q.6. A progress report outlining banks' adoption of OCC's
recommended inventory of practices to improve banks' management
of sales practice risk.
A.6. The OCC continues to monitor banks' corrective actions.
Q.7. The amount of remediation payments required and the
timeline for the completion of such remediation.
A.7. The OCC has not aggregated the dollar value of remediation
payments. However, where unauthorized account opening or other
inappropriate sales practices were identified, banks had
already taken, or were in process of taking, remedial action.
This could include closing the account, refunding or reversing
any inappropriate fees or other customer charges, or correcting
credit bureau information. In most cases, remediation has been
completed or is underway now.
Q.8. Whether the banks that engaged in misconduct used, and/or
seek to enforce, forced arbitration clauses in contracts used
to create unauthorized accounts.
A.8. The review did not reveal any action by any bank to
enforce forced arbitration clauses in contracts used to create
unauthorized accounts.
Q.9. In your testimony on June 14, you said that the horizontal
sales practice review included between 500-600 million accounts
over a 3-year period.
What is the 3-year period covered by the review?
A.9. The review covered 2014-2016.
Q.10. Given the fact that Wells Fargo was engaging in these
practices as early as 2009, and perhaps earlier, shouldn't the
OCC conduct a second review with a longer look-back period to
capture any misconduct that occurred prior to the 3-year period
covered by the review?
A.10. The purpose of the review was to determine whether such
practices presented a systemic problem. A 3-year look-back
period is sufficient for that purpose. My predecessor
determined the 3-year look-back period, and I agree with this
timeframe.
Q.11. During a Banking Committee staff briefing with OCC staff
on June 8, 2018, OCC Senior Deputy Comptroller for Large Bank
Supervision Morris Morgan said that the CARD Act's digital
verification requirements were partially to blame for the
creation of unauthorized accounts uncovered in the horizontal
review. Please identify what provision of the CARD Act Mr.
Morris was referring to, and please provide an explanation as
to why that provision is related to the creation of
unauthorized accounts.
A.11. To clarify, the CARD Act added a signature requirement
for applications to open a credit card account by a consumer
who is under 21, which we understand some banks interpreted as
requiring signatures only in those limited circumstances.
Credit cards were the products most often associated with
concerns regarding unauthorized account openings. However,
banks involved in the horizontal review have implemented more
robust account opening and closing policies, procedures, and
controls designed to reduce the potential for inappropriate
activities or unauthorized account openings.
Q.12. During the aforementioned briefing on June 8, OCC staff
stated that the horizontal review was conducted in conjunction
with the CFPB, FDIC, and Federal Reserve. Did any of the other
agencies involved in the review issue any MRAs connected to the
review?
A.12. I am not aware that any other agency took any action or
issued any finding against the banks they supervise based on
their review. The other Federal agencies are better positioned
to answer questions about their actions.
Q.13. On June 15, 2018, the OCC rescinded its guidance for how
examiners should evaluate large banks for compliance with the
Community Reinvestment Act. What is your justification for
rescinding this guidance?
A.13. The guidance was outdated. Since its publication in 2000,
the regulations have been revised twice (2005 and 2010), and
the supplementary interagency Questions and Answers on
Community Reinvestment have been revised numerous times.
Q.14. Do you believe that enforcement against discriminatory or
unfair lending practices should work hand-in-hand with any
revisions to the Community Reinvestment Act?
A.14. Fair lending laws (e.g., the Fair Housing Act, the Equal
Credit Opportunity Act) and the CRA were enacted as separate
statutes, and vary in terms of the banking regulators authority
to take enforcement action. At the OCC, CRA evaluations and
fair lending examinations are conducted separately, however,
findings from one are considered during examinations of the
other. Findings during a CRA evaluation can be used to
prioritize and focus fair lending examinations. For example,
the current CRA regulations require the OCC to determine
whether assessment areas reflect illegal discrimination and to
consider the effect of discriminatory or other illegal credit
practices when assigning a bank's overall CRA rating. The
agencies are discussing an ANPR to solicit input and feedback
on ideas to revise or modernize the CRA.
Q.15. Do you believe that in some low income and hard-to-reach
communities, physical branches are sometimes the only way to
meet credit needs?
A.15. I believe branches remain an important part of bank
services to their communities and for some services and some
individuals. However, in same instances, internet banking,
automated teller machines, loan centers, and FinTech may
actually be better options.
Q.16. Will you commit to retain assessment areas with a local
geographical focus under the Community Reinvestment Act, which
help ensure that banks are combating historic redlining and
actually providing access to credit in low- and moderate-income
communities?
A.16. I have no intention to eliminate the concept of
assessment areas. The intent is to identify a banks' assessment
area more effectively to determine the geography in which a
bank should be evaluated. That geography, however, may be
better determined by considering where a bank provides its
services, where its customers are located or through means
other than where its branches or deposit-taking automated
teller machines are located.
Q.17. The Treasury Report issued in April recommends that the
Federal Reserve and FDIC adopt the OCC's new policy allowing
banks with failing CRA ratings to merge or expand. Is it your
opinion that regulators should allow banks with failing CRA
ratings, which may be engaged in discriminatory lending
practices; to merge and expand?
A.17. Applications should be considered based on their unique
facts and circumstances. In some cases, denying an application
based on a CRA rating alone could exacerbate the bank's ability
to meet the credit needs of it's community.
Q.18. Comptroller Otting, when I asked you about the Dodd-Frank
Section 956 incentive-based compensation rulemaking last July,
you said ``If confirmed, I would urge all the regulators to
work together to finalize the rule as required by statute.''
But nearly a year later, and we have still don't have a final
rule. How is it that you have had time to revisit capital
rules, revisit leverage rules, revisit the Volcker Rule--all of
which were finalized after years of deliberation, public
comments, and input from other regulators--and you have not had
time to finish the incentive-based compensation rulemaking for
the first time? When will this rulemaking be finalized?
A.18. There is much to do, and I am proud of the progress we
have made in the areas you mention. As you know, the law
requires a joint rulemaking or guidelines regarding incentive-
based compensation. I look forward to working with my fellow
regulators to complete that rulemaking.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM JOSEPH M. OTTING
Q.1. On May 25, 2018, I led 15 other Democrats in a letter to
you, Chairman Powell, and then-Chair Gruenberg on the issue of
potential new regulations on the Community Reinvestment Act
(CRA). I think there's broad consensus on a number of ideas out
there, making clearer which bank investments will qualify under
the CRA, improving the consistency of CRA exams across banks,
and adjusting the definition of a bank's assessment area to
account for the technological innovations that have allowed
banks to do significant business outside its branch footprint.
But there are a couple of areas that the OCC, under your
predecessor, Acting Comptroller Noreika, has led on that gave
me and the 15 other Democrats some pause.
First, I have concern about the new policy that expands
banks' ability to grow their footprint even if they have a
``less than satisfactory'' CRA rating. The prior policy was a
strong presumption against expansion if a bank was failing to
meet its CRA obligation. Given that one of the only formal
consequences--and the most serious consequence--for the failure
to receive a satisfactory rating on a CRA exam had been limits
on expansion, I'm concerned that the change will cause banks to
take their CRA obligations less seriously.
Do you support the change made by your predecessor? If so,
what incentive will banks have to comply with the CRA and what
will be the consequences for failing to do so?
A.1. I think applications should be evaluated by the unique
facts and circumstances of each application. Denying
applications on a near automatic basis because of a low CRA
rating could have unintended consequences and may adversely
affect a bank's ability to meet the credit needs of its
communities. We do need to revisit CRA, including how we incent
banks to loan and invest where it is needed most, and consider
consequences for failing to do so.
Q.2. OCC CRA guidance used to say that if you are a bank that
is not meeting your consumer protection responsibilities, that
will negatively affect your CRA rating. New OCC guidance
considers whether there is a nexus between a CRA rating and
evidence of a consumer protection law violation, suggesting
that some consumer protection laws are not relevant to a bank's
CRA rating. I find this suggestion troubling, given that the
statutory purpose of the CRA is to require banks to demonstrate
that they ``serve the convenience and needs of the communities
in which they are chartered to do business''--they are hardly
doing so if they are violating laws that protect those
communities.
Do you support the OCC's change? If so, why?
A.2. During my hearing I committed to reviewing the rationale
for the previous policy change and am in the process of doing
so. Consistent with the current regulations, the OCC considers
violations of law that reflect discriminatory or other illegal
credit practices in determining a bank's assigned rating. The
regulations include specific examples such as violations of the
Equal Credit Opportunity Act, the Fair Housing Act, or
violations of the Truth in Lending Act provisions regarding a
consumer's right of rescission.
Q.3. I've read reports about the OCC horizontal review that
covered approximately 40 banks and their sales practices. I
understand that the OCC has issued MRA letters to banks in the
report about any found deficiencies covering more than 250
specific problems, including a number of issues beyond sales
practices. These reports are deeply troubling.
Please describe the extent of problems that you saw.
A.3. I provided a summary of those findings in a letter to the
Committee Chairman and Ranking Member on June 11, 2018, that
included the following information. The review identified
several common weaknesses in policies, procedures, and controls
and in banks' risk governance frameworks related to account
opening, account closing, account management, employee
complaints, and employee fraud or misconduct. These common
weaknesses were documented in MRAs issued to the participating
banks. Most banks received MRAs regarding one or more of these
common weaknesses. These MRAs were focused primarily on actions
to strengthen operational risk governance and policies and
procedures, and were not based upon findings related to
unauthorized account openings. During the hearing, I confirmed
that the review identified approximately 20,000 accounts with
issues from among the hundreds of millions of accounts opened
by reviewed banks during the 3-year look-back period.
Approximately half of the 20,000 accounts involved issues
unrelated to account authorization. In those instances where
proof of authorization could not be provided, it was considered
merely lack of documentation if a consumer continuously used
the product since opening the account. In other cases, known
issues related to recordkeeping or system failures were
determined to be causes of poor or incomplete documentation.
Q.4. How many banks received MRA letters relating to your
inquiry?
A.4. All of the reviewed banks received at least one MRA.
Q.5. Of those, how many would you say have very serious
problems with their customer activities?
A.5. We take every MRA seriously. Failure to correct issues in
MRAs in a timely and effective manner may result in additional
supervisory actions, including public enforcement actions, if
warranted.
Q.6. Are there issues other than sales practices that your
inquiry surfaced that you find very troubling?
A.6. The key issues related to policies, procedures, and
controls. The OCC also issued MRAs related to bank policies,
procedures, and controls. Failure to correct issues in MRAs in
a timely and effective manner may result in additional
supervisory actions, including public enforcement actions, if
warranted.
Q.7. Why did the conduct uncovered not warrant a consent order
with any bank? Do you anticipate that one or more banks will
have more significant regulatory consequences as a result of
this inquiry, such as a consent order or a fine?
A.7. The supervisory process is an incremental one that
typically begins with an examination and includes discussions
around any concerns found, which may include the issuance of
MRAs. Failure to correct issues in MRAs in a timely and
effective manner may result in additional supervisory actions,
including public enforcement actions, if warranted. We continue
to monitor banks' corrective actions.
Q.8. I've read that you do not intend to disclose any further
information about the review. The OCC has broad authority to
make public information that is otherwise considered
confidential.
Given the widespread public interest in the subject--and
the desire by banks who have not had any compliance issues to
be in the clear--why have you decided not to release more
information about the review?
A.8. We have ongoing supervisory actions regarding this matter.
Releasing confidential supervisory information could prejudice
or adversely affect potential future action by the agency.
Q.9. I'm interested in anti-money laundering compliance reform.
Banks spend around $8 billion per year on AML compliance, which
is nearly the cost to fund the entire FBI for a year. And for
smaller banks, AML compliance costs are a disproportionately
large share of their personnel and compliance expenses. And
this Committee heard testimony earlier this year from law
enforcement experts who agreed that the current system does not
deliver outcomes that justify that kind of expense.
What steps are you taking now to ease the compliance burden
and strengthen the efficacy of the compliance regime?
A.9. I agree we need to make compliance with the Bank Secrecy
Act (BSA) and anti-money laundering (AML) lows and regulations
more effective and efficient. We particularly need to find ways
to reduce burden on small, less complex banks with lower risk
profiles. I have made modernizing the regulatory approach to
BSA/AML compliance one of my top priorities and am actively
working with other regulators, Treasury, and the Financial
Crimes Enforcement Network to identify changes we can make to
improve how BSA/AML compliance works. Changes may include
greater use of technology and analytics, clearer guidance,
providing greater flexibility for regulators to implement a
risk-based approach for less complex and well run banks, and
revisiting thresholds for Suspicious Activity Reports and
Currency Transaction Reports. In most cases the OCC does not
write the rules and in some cases revising the rules will
require statutory relief. Whatever actions we pursue, we must
be careful to maintain or improve the protection of our
Nation's financial system and continue to provide law
enforcement the information and data it needs to succeed in its
important job.
Q.10. How and on what subjects are you working with other
regulators to improve the AML system?
A.10. We are having dialogue on a variety of ways to improve
BSA/AML compliance such as greater use of technology and
analytics, clearer guidance, providing greater flexibility for
regulators to implement a risk-based approach for less complex
and well run banks, and revisiting thresholds for Suspicious
Activity Reports and Currency Transaction Reports.
Q.11. Are there any aspects of AML reform that you believe
merit congressional action?
A.11. We are working on an interagency basis on a number of
opportunities to make compliance with AML regulations work more
efficiently. At this time, the only items that may require
Congressional action include increasing thresholds for
Suspicious Activity Reports and Currency Transaction Reports.
Q.12. The policy behind the Volcker Rule is to reduce risky
activities in banks, in particular high risk proprietary
trading. This is a worthy goal, as we never want banks to go
back to that type of risky trading. The rule aims to achieve
this in part by prohibiting banks from investing in hedge funds
and private equity funds. I've heard, however, that the current
definition has captured investments that seem far removed from
the statute's original concern--such as an incubator for women-
run businesses. It is critical to have an appropriate
definition of ``covered fund'' that can balance the statute's
command and goals, while ensuring banks can provide enough
capital to companies looking to grow and innovate Under the
current definition of ``covered fund'' in the Volcker Rule,
there appears to be an inconsistency in the regulatory
structure where banks are permitted to directly provide
important types of capital and credit to businesses yet are
materially restricted when doing so via a fund structure where
the bank can diversify risk.
Do you believe that fund structures can diversify a bank's
risk compared to portfolio investments?
A.12. It is entirely dependent on the structure and underlying
assets of the fund, as well as the individual institution. The
recent NPR requested comment on a characteristics-based
exclusion from the covered fund definition for issuers that
lack certain characteristics of hedge funds and private equity
funds or that do not engage in activities that section 13 of
the Bank Holding Company Act was designed to address. The
Agencies welcome specific examples from commenters.
Q.13. If so, does this suggest that regulators can broaden the
scope of qualifying fund investments while improving safety and
soundness?
A.13. As reflected in the NPR's robust request for comment on
the covered funds provisions, the Agencies are exploring
whether there is opportunity to permit a broader range of
activities and investments consistent with section 13 of the
Bank Holding Company Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
FROM JOSEPH M. OTTING
Q.1. What response have you received from lenders in light of
the OCC's May bulletin encouraging national banks and Federal
savings associations to offer short-term, small-dollar
installment loans?
A.1. In speaking about this and other priorities, lenders,
community groups, social and religious organizations and
legislators, have applauded the action.
Q.2. Have you gotten commitment to see installment loans at a
scale that you believe would provide consumers with a better
option than what's currently available through payday lending?
A.2. I expect large regional banks will be the first to return
to this space and will offer consumers responsible, affordable
options to meet their short-term, small-dollar needs.
Q.3. Has the OCC heard from lenders who are looking to extend
credit in Indian Country or seen certain installment products
that look promising for getting more credit into these
communities?
A.3. Through various publications, the OCC encourages national
banks and Federal savings associations to engage in consumer
and commercial lending and with nonprofit partners working in
Indian Country. Examples of such publications can be found at
the following: https://www.occ.gov/publications/publications-
by-type/other-publications-reports/cdi-newsletter/extending-
credit-indian-country-aug-2013/indian-country-ezine-table-of-
contents.html; https://www.occ.gov/topics/community-affairs/
publications/insights/insights-commercial-lending-indian-
country.pdf.
Q.4. Has the OCC run any analysis on what type of fee structure
or interest rate would be necessary to achieve profitability
for small-dollar loan-type products?
A.4. Loan pricing will be very bank specific to the cost and
business goals of individual banks. Through our supervisory
process, we will review and assess the appropriateness of
pricing.
Q.5. Given the disruption in trade, rising interest rates, and
depressed commodity prices, many farmers in North Dakota and
across the region are carrying some of the highest levels of
debt since the 1980's crisis. What is the OCC seeing in terms
of the risk to our ag lenders and farmers in this environment?
A.5. Our most recent Semiannual Risk Perspective identifies
agricultural lending as one of the risks that warrants further
monitoring, stating that ``low or declining prices for grain,
livestock, and dairy that result in lower cash flow and
increased farm carryover debt for agricultural borrowers.'' \1\
The report also states ``In addition, while net farm income
stabilized in 2017 due to improved yields, the outlook for 2018
is not favorable. Net farm income in nominal dollars is
projected to decline to the lowest level since 2006, driven
primarily by a decline in revenues and increased fuel and oil,
interest, and labor expenses.''
---------------------------------------------------------------------------
\1\ See ``Semiannual Risk Perspective'', Spring 2018 (https://
www.occ.gov/publications/publications-by-type/other-publications-
reports/semiannual-risk-perspective/semiannual-risk-perspective-spring-
2018.pdf).
Q.6. Does the prospect of an increasingly high interest rate
---------------------------------------------------------------------------
environment concern you?
A.6. Yes, interest rate risk is one of the four primary risks
identified in our most recent Semiannual Risk Perspective.
Rising interest rates pose risks that warrant monitoring.
Multiple rate increases could negatively affect credit
affordability, performance, and asset valuations. Additionally,
in a rising rate environment, refinancing risk, underwriting
behavior, and changing credit terms could limit future
performance. There is also uncertainty in how bank deposits
will react to increasing interest rates. Banks may experience
unexpected shifts in liability mix or increasing costs that may
adversely affect earnings or increase liquidity risk. Examiners
will be working closely with banks to ensure their risk
management activities effectively mitigate the risk associated
with higher interest rates.
Q.7. What steps are you taking to work with lenders to help
them assist our farmers with the operating credit they'll need
to weather these challenges?
A.7. Examiners are working with bankers to appropriately
identify risks in their portfolio that allows banks to
proactively identify opportunities to work with borrowers
early. Most OCC-supervised banks focused on agricultural
lending have a long history with multiple economic cycles.
Furthermore, the OCC issues publications related to rural
development, for example, to encourage national banks and
Federal savings associations to enter into partnerships with
nonprofits to expand rural lending and educate them about
applicable Federal loan guarantee programs. Examples can be
found at the following: https://www.occ.gov/topics/community-
affairs/publications/fact-sheets/fact-sheet-usda-rural-housing-
finance-program.pdf; https://www.occ.gov/topics/community-
affairs/publications/insights/insights-usda-business-industry-
guaranteed-loan-program.pdf. Recently, the agency released a
publication on the benefits of investments in rural broadband
(https://www.occ.gov/topics/community-affairs/resource-
directories/rural-economic-development/bank-financing-for-
rural-broadband-initiatives.html).
Q.8. What are some of the activities that we should be
encouraging banks to do that are limited by the covered funds
section of the Volcker Rule?
A.8. The Volcker agencies are currently exploring the scope of
covered funds provisions put forward in the implementing
regulation. The recent Notice of Proposed Rulemaking (NPR)
includes a robust request for comment on whether there are
types of issuers or activities that have been inadvertently
scoped into the Volcker Rule covered fund provisions and that
may be excluded from the regulation consistent with the statute
and safe-and-sound operations. In addition to requesting
comment on the scope of the covered fund definition (see
Question 9 below), the NPR requests comments on other aspects
of the covered fund provisions, such as the scope of the so-
called ``Super 23A'' provisions. I look forward to exploring
these issues further with my counterparts at the other
agencies. The agencies welcome specific examples from
commenters on these issues.
Q.9. Are we harming financial innovation by the broad
definitions of covered funds in the rule?
A.9. I look forward to reviewing the comments provided to the
questions asked about covered funds in the recently issued NPR.
In particular, the NPR solicits comments on whether the
regulatory covered fund definition has been imprecise and
whether that has led to unintended consequences. I look forward
to exploring this issue further with my counterparts at the
other agencies and welcome specific examples from commenters on
the types of activities that may have been limited by the
regulatory covered fund definition.
Q.10. How can we ensure that banks are not proprietary trading
while also allowing them to help companies that need capital to
grow and innovate?
A.10. The recent proposed changes to the Volcker Rule and the
changes included in the Economic Growth Act make significant
improvements to the implementation of the rule by maintaining
core prohibitions and protections while reducing burden on
small and midsize banks and providing greater regulatory
clarity for all banks.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JOSEPH M. OTTING
Q.1. Numerous studies, including a 2016 study from the Urban
Institute, found that banks often charge single women
significantly higher interest rates when they borrow money to
purchase a home than single men. Women do, on average, make
less money than men and have lower credit scores. But women are
better credit risks. They tend to default on their loans less
than men.
In addition, another study from Center for Public Integrity
and REVEAL found that in 61 metropolitan regions, there were
significant disparities by ethnicity in mortgage acceptance
rates.
In your testimony before the House Financial Services
Committee, you said you only believed about half of what you
read on discrimination. Do you believe these two reports are
accurate? Why or why not?
A.1. I have not read either report, but I am aware that such
disparities exist. However, disparities alone do not indicate
illegal discrimination has occurred in the underlying credit
decisions.
Q.2. Please provide me a bibliography and links to research
that OCC has led or reported on through your newsletters or
other communications in the past decade regarding gender;
racial, ethnic or other bias in mortgage lending or bank
services in the past 2 years.
A.2. The OCC, through its Community Affairs Division, has
issued numerous publications to encourage banks to serve
underserved communities including ``Profitable Partnerships;
Collaborating With Minority Depository Institutions''. These
publications can be found at https://www.occ.gov/topics/
community/affairs/publications/index-ca-publications.html.
Q.3. Which of these documents have you read? Which of these do
you agree with the conclusions?
A.3. I strongly support OCC developing publications on a wide
variety of topics including encouraging banks to serve
underserved communities.
Q.4. The Community Reinvestment Act was designed to equalize
the financial playing field by encouraging banks to meet the
credit needs of consumers in low-income neighborhoods,
especially African American communities. Specifically, the CRA
was designed to address discriminatory policies such as
redlining. Under your leadership, the OCC is actively trying to
change the Community Reinvestment Act. I am concerned that
someone with such little familiarity nor sophistication about
the long history of discrimination in lending and redlining is
spearheading changes to CRA.
A.4. I have been involved in CRA lending and activities
throughout my career of more than 30 years. I have a deep
personal commitment to the goals of CRA and appreciation of its
history and evolution. While CRA is color-blind, I strongly
support increasing bank lending and activity in the communities
and to the people who need it most, specifically in low- and
moderate-income communities, which often are communities of
color.
Q.5. Will you commit to make no changes to CRA enforcement
until you have the support of the other regulators--the FDIC
and Federal Reserve--and the consensus of community development
and civil rights groups?
A.5. I support working jointly with fellow regulators at the
Federal Deposit Insurance Corporation (FDIC) and the Federal
Reserve whenever possible. I also support a broadly inclusive
decision-making process that includes community development and
civil rights voices. As Comptroller of the Currency, however, I
have the responsibility and authority to act in the best
interest of the Federal banking system and the consumers who
depend on it to meet their banking needs and will act
accordingly to fulfill that responsibility, including, when
necessary, acting independently when I believe that is the
right thing to do. In discussing CRA with hundreds of people
across the country with diverse views, there is strong
consensus regarding the need to update our approach to the CRA.
Q.6. I asked you about the number of banks supervised by the
OCC which make fewer than 500 mortgage loans or home equity
lines of credit in a year. You said those banks produce 5
percent of the volume of mortgage loans.
How many banks supervised by the OCC make fewer than 500
mortgage loans or home equity lines of credit in a year?
A.6. Based on 2017 HMDA data, 733 national banks and thrifts
(OCC-supervised banks) reported data to either the OCC or the
Bureau of Consumer Financial Protection. Of these, 555 OCC-
supervised banks originated fewer than 500 closed-end mortgage
loans. Overall, the banks that make fewer than 500 mortgage
loans or home equity lines of credit in a year represent less
than 5 percent of the total volume of those loan products.
Q.7. Congress passed a law that exempted banks that make fewer
than 500 mortgage loans from collecting loan and borrower
characteristics and reporting that data publicly. In our
discussion, you said that examiners would only look at ``HMDA-
lite'' information, meaning, examiners would NOT consider the
expanded HMDA information required under Dodd-Frank, which
would include credit scores, points and fees, loan terms, etc.,
for lenders which made fewer than 500 mortgage loans or home
equity lines of credit unless they gathered it separately as
part of an examination.
A.7. Section 104 of the Economic Growth Act provides regulatory
relief to depository institutions that have originated less
than 500 closed-end mortgage loans or less than 500 open-end
lines of credit in each of the two preceding calendar years by
generally exempting them from certain additional disclosure
requirements under the HMDA. Examiners continue to receive
basic HMDA information on all institutions, and can gather any
necessary additional data as part of fair lending examinations.
For institutions with more than 500 mortgages, agencies will
receive the additional information beginning in 2019.
Q.8. To clarify, for the majority of regulated banks, OCC
examiners will no longer have access to detailed loan
characteristics like points and fees, interest rate, credit
score, and other indicators of loan quality through HMDA. They
will only be able to find detailed loan and borrower
information if they receive it separately as part of the
institutional exam. Is that correct?
A.8. To clarify, the OCC will receive the additional HMDA data
on 95 percent of the loans originated within the Federal
banking system starting in 2019. For institutions that make
under 500 closed-end mortgage loans annually that are now
exempt from providing certain additional HMDA data as required
by the recent rulemaking, the OCC will continue to have access
to necessary additional bank data during its fair lending
examination process.
Q.9. Please estimate how much more costly the exams will be for
OCC now that they may need to stay on site longer to review a
bank's loan portfolio loan by loan instead of building on the
HMDA data? How much longer will exams need to remain at banks
for such reviews?
A.9. I do not anticipate any increase in cost to OCC exams or
spending additional time on-site as a result of changes in HMDA
reporting resulting from the Economic Growth Act.
Q.10. The Treasury Department released recommendations last
April for modernizing CRA. Currently, the only penalties for
failed CRA ratings is the possibility of denial of merger or
branch applications, and would only apply to the approximately
2 percent of banks that fail their CRA exams. This is one of
the few sticks that motivates banks to pass their CRA exams.
But Treasury recommended eliminating this penalty for failing
exams.
With a lack of penalties, how do we ensure banks are
improving their performance and fulfill their obligations under
the law?
A.10. The statute, itself, does not provide enforcement
authority to regulators as it is intended to encourage banks to
meet the credit needs of the communities they serve, including
low- and moderate-income communities. That is one of the many
reasons we need to modernize the regulatory framework of the
CRA to provide greater incentive for banks to lend and invest
in the communities that need it most.
Q.11. Shouldn't there be a presumption that a bank with a
failing CRA rating will not have its application approved until
it passes its exam? If not what would be an incentive for the
relatively few failed banks to improve their performance?
A.11. The facts and circumstances of each application should be
evaluated on its merits. It would be counterproductive to deny
an application that may increase services in low- and moderate-
income communities simply because of a less than satisfactory
CRA rating.
Q.12. Currently, the CRA service test places primary emphasis
on bank branches while still considering alternative service
delivery. Bank branches remain vital, specifically for low and
moderate income communities and must be given strong
consideration even while alternative delivery channels develop.
Deemphasizing bank branches on CRA exams could cause banks to
pay less attention to neighborhoods where they receive deposits
(redlining or not reinvesting in neighborhoods generating
deposits for banks was the major concern of lawmakers when they
passed CRA).
Will bank branch presence remain the focus of the service
test?
A.12. Branches remain a significant part of many banks' service
models, but we must find a way to assess bank performance in
those instances where banks provide services through other
means or do not maintain a network of branches. In those cases,
we should consider alternative ways of defining a bank's
community. This could include considering where a bank's
headquarters or major offices are, location of employees or
where customers are located. Let me be clear, I do not intend
to eliminate the concept of assessment areas. I hope they can
be expanded and redefined to better capture a bank's service
area.
Q.13. The Treasury report was unclear whether just investments
should be considered outside of the current assessment areas or
whether CRA exams should consider investments and retail
lending.
What is your view on whether CRA exams should consider
retail lending and investments?
A.13. We should expand investments and activities eligible for
CRA consideration and incentivize institutions to engage in
qualifying activities that contribute to creating greater
opportunity in the communities banks serve, particularly low-
and moderate-income communities. This is a subject that we
should solicit feedback on through the Advance Notice of
Proposed Rulemaking (ANPR) process.
Q.14. The OCC examined the opening of 500-600 million new
accounts during a 3-year period and found roughly 20,000
without proof of authorization and other issues. Of those
20,000, the OCC believes ``less than half'' were unauthorized.
They found 252 MRAs.
Were there any banks that you reviewed that did not have an
MRA?
A.14. No. All banks had at least one MRA.
Q.15. How soon will harmed consumers see remediation?
A.15. Much of the required remediation has already been
completed or is underway.
Q.16. Is the OCC considering any enforcement actions on its
own, or in coordination with other agencies based on the
horizontal review?
A.16. The agency is monitoring bank actions required to correct
issues identified in the horizontal review through the normal
course of our supervision process. Failure to correct issues in
a timely and effective manner may result in additional
supervisory actions, including public enforcement actions if
warranted.
Q.17. Were incentive compensation practices part of the review?
If so, did you provide MRAs for concerns that employees were
compensated in ways that could lead to fraudulent acts? Please
describe the compensation practices that would be concerning
for incenting fraud.
A.17. In those limited instances where accounts were opened
without authorization involving issues other than failure to
maintain documentation, the most common factors included either
short-term sales promotions without adequate risk controls,
deficient account opening and closing procedures, or isolated
instances of employee misconduct with no clear connection to
sales goals, incentives, or quota programs.
Q.18. Senator: The Wells Fargo fraudulent account scandal, and
the incentive-based cross-selling strategy that fueled it are a
stark reminder of how important it is for financial regulators
to finalize executive compensation rules. Section 956 of the
Dodd-Frank Act directed regulators, including the Fed, to adopt
joint rules aimed at prohibiting incentive compensation
arrangements that might encourage inappropriate risks at
financial institutions. The regulators made an initial proposal
in 2011, then reworked the proposal and issued a new plan in
2016. The proposal increases in stringency based on the
financial company's asset size with enhanced requirements for
senior executive officers and significant risk-takers.
Given that this is not a discretionary requirement, but a
mandatory one, what steps are you taking to implement and
enforce this provision of the law?
A.18. The law requires the agencies to jointly issue rules or
guidelines. The OCC remains committed to working with other
regulators to complete the rule. In the meantime, OCC-
supervised institutions will continue to be subject to the
compensation requirements in 12 CFR part 30, appendix A (and,
for larger institutions, appendix D). The joint OCC, FDIC, and
Federal Reserve Guidance on Sound Incentive Compensation
Policies also continues in effect.
Q.19. On December 6, 2017, you halted the removal of in-house
bank examiners stating, ``Upon review, it is not practical to
continue the agency's efforts to move resident examiners out of
on-site locations,'' You said, ``The agency will continue to
review its locations and real estate strategy to ensure they
support the agency's mission in the most operationally and cost
effective manner possible.'' However, on the same day, the
Government Accountability Office (GAO) released a report
indicating that Federal Reserve had not taken enough steps to
address regulatory capture and ensuring independence for its
examiners. GAO has previously found that regulators should be
independent of inappropriate influence, including undue
influence from the industry they are regulating. While the
Federal Reserve has taken observers offsite in order to avoid
regulatory capture, you have decided to keep OCC regulators on
site.
What is your rationale for keeping regulators on site
despite the evidence of regulatory capture?
A.19. Based on my experience and judgment, the value of
retaining on-site examiners outweighs the benefit of removing
them from bank premises. Open effective communication and early
identification of concerns are the keys to effective
supervision, both of which are supported by on-site presence.
My decision is further supported by the practices at the OCC to
rotate examiners-in-charge after 5 years, to provide oversight
by Deputy Comptrollers assigned to OCC Headquarters, and to
depend on off-site lead experts who provide a horizontal view
of risks and practices across the agency.
Q.20. Why did the OCC issue a proposal with the Fed that would
revise the enhanced Supplementary Leverage Ratio (eSLR) which
according to the FDIC, could reduce bank capital by as much as
$120 billion at the Nation's largest banks?
A.20. The changes to the eSLR requirements proposed by the
Federal Reserve and the OCC would tailor the requirement to the
business activities and risk profiles of the largest banks. The
proposed changes would retain a meaningful calibration of the
eSLR while not discouraging banks from participating in low-
risk activities. With the proposed modifications, the eSLR
would serve as a backstop to the risk-based measures rather
than the primary binding constraint. In addition, the proposed
changes are aligned with recent changes to the leverage
standard published by the Basel Committee on Banking
Supervision in December 2017. Aligning with the Basel standard
creates a more level international playing field reducing
disadvantages faced by U.S. G-SIBs in competing with
international counterparts. It is also unlikely that banks
would release $121 billion in Tier 1 capital because of other
binding constraints on liquidity and capital. The proposed eSLR
standards along with current risk-based capital standards and
other constraints applicable at the holding company level would
continue to limit the amount of capital that G-SIBs could
distribute to investors, thus supporting the safety and
soundness of G-SIBs and helping to maintain financial
stability.
Q.21. What are your views on research from the Federal Reserve
that suggests that current bank capital requirements are on the
lower end of what is socially optimal, and that regulators
should consider raising them for the public's benefit and to
mitigate future financial crises? Their research is backed by
other research done by the Minneapolis Fed, FSB, Basel
Committee, Macroeconomic Assessment Group, and the IMF.
A.21. While there has been research conducted in this area, I
note that the recent proposed revisions to the eSLR
requirements were approved by the Federal Reserve and are
consistent with the leverage ratio standards published by the
Basel Committee on Banking Supervision in December 2017.
Q.22. Will the OCC consider increasing capital requirements for
the largest banks?
A.22. I have no plans to increase the overall capital
requirements for the largest banks. The agencies will continue
considering ways to simplify the capital rules for all of the
banking organizations we regulate in order to reduce compliance
costs. Some changes may affect banking organizations in
different ways depending an the nature of their business and
assets--for some, the capital requirements may increase
slightly, for others, they could fall slightly--but we do not
intend to significantly change overall capital levels.
Q.23. Are you concerned that granting a FinTech charter to a
nonbank lending company or nonbank payments company would bring
an end to the traditional separation of banking and commerce by
allowing large commercial companies, like Amazon and Google, to
obtain a national bank charter?
A.23. No. Granting a charter to a FinTech engaged in the
business of banking does not change any of the legal and
regulatory requirements prohibiting commercial firms from
owning a bank. Further, we believe a FinTech charter is another
way of providing consumers with more options and choices to
meet their financial service needs.
Q.24. Recently, you expressed an unfavorable view of bank-non
bank partnerships, where the ``sole goal [is] evading'' State-
law rate limits. Given that a primary purpose for a nonbank
lending company seeking a FinTech charter would be to evade
State-law rate limits, why is creating a FinTech charter less
unfavorable than bank-nonbank partnerships?
A.24. I reject the premise of the question. I do not agree that
evading State-law rate limits are a ``primary purpose'' for a
nonbank lending company to seek a national bank charter. There
are many other business advantages, such as access to
customers, scalability, cost of funds, and more effective
supervision.
Q.25. Senator: In reference to FinTech Charters and small-
dollar loans you have been quoted saying, ``that as long as
FinTech firms don't take consumer deposits, they will pose
little risk to the financial system.'' Yet, small-dollar loans
pose risks directly to consumers.
What measures will you have to protect consumers from being
charged high interest rates or falling into debt traps?
A.25. With regard to FinTech lenders that became national
banks, the new national bank would be subject to regular,
rigorous examination and supervision, which nonbank lenders do
not currently face. With regard to short-term, small-dollar
loans, that lending is still subject to Federal consumer
protection laws, and regulations, including the prohibition
against unfair or deceptive acts or practices under section 5
of the Federal Trade Commission Act.
Q.26. Senator: In a document released by the OCC titled
``Exploring Special Purpose National Bank Charters for FinTech
Companies'', the agency cited 12 U.S.C. 1, 12 U.S.C. 1461,
and 12 U.S.C. 3102 as statutory authority to grant banking
charters to FinTech companies. However, the plain language
reading of the statute does not clearly indicate that your
office has this authority.
Can you specifically point out the section in the statute
that gives your office authority to issue banking charters to
FinTech companies?
A.26. Under the National Bank Act, the OCC has broad authority
to grant charters for national banks to carry on the ``business
of banking.'' 12 U.S.C. sections 21 and 27. The OCC has
interpreted the ``business of banking'' to include any of the
three core banking functions of receiving deposits, paying
checks, or lending money. The Act does not require that a bank
take deposits in order to be engaged in banking. Rather, under
the Act, performing only one of these three activities is
sufficient to be performing core banking functions. This is
reflected in the OCC's regulation 12 CFR 5.20, which provides
that, to be eligible for a national bank charter, a special
purpose bank must either be engaged in fiduciary activities or
conduct at least one of three core banking functions: receiving
deposits, paying checks, or lending money.
Q.27. What concerns, if any, do you have about Bitcoin and the
use of other virtual currency in the U.S. banking system?
Should banks promote or discourage their use? What protections
are needed to ensure these cryptocurrencies can't be used to
evade anti-money laundering and antiterrorism financing laws?
A.27. Regulators should continue to push for transparency and
safeguards to prevent criminals from using cryptocurrencies to
evade anti-money laundering laws and regulations or to fund
other crimes. We also believe it is important to ensure that
consumer protections are in place as the use of virtual
currency expands.
Q.28. I believe it is important to promote diversity at the
various financial agencies, including the OCC, and in the
financial services sector.
What has OMWI Executive Director Cofield told you about
discrimination at the OCC?
A.28. The OCC's OMWI office produces an annual report provided
to Congress regarding the diversity of the OCC and briefs each
business area on its diversity as it compares to the rest of
the country and similar business functions elsewhere. The most
recent report showed that as of September 30, 2017, the OCC's
permanent workforce totaled 3,930 employees, a decline of 0.7
percent below the 3,958 permanent employees at the end of
fiscal year 2016. The participation rate of females (currently
45.0 percent) in the OCC's workforce has remained fairly stable
since fiscal year 2013 (a 0.6 percentage point decrease).
Minority participation increased from fiscal year 2013 by 2.6
percentage points to 34.7 percent in fiscal year 2017. At the
end of fiscal year 2017, all major EEO groups were at or near
parity with the 2010 national civilian labor force (NCLF)
rates, with the exception of females and Hispanics. Although
the OCC continues to work to address the law participation of
Hispanics in its workforce, their overall participation rate
remained below their NCLF rate (see table 2). In fiscal year
2017, the OCC slightly increased its Hispanic participation
rate to 7.0 percent, from 6.9 percent in fiscal year 2016, and
this was an improvement from 6.6 percent in fiscal year 2013.
Hispanic participation rates are below parity in the following
occupational positions--economists, bank examiners (females),
and ``all other series.'' Similarly, females across EEO groups
in bank examiner positions participated below their
occupational civilian labor force (OCLF) rates, and White
females in economist and ``all other series'' positions
participated below their respective OCLF and NCLF rates. \1\
---------------------------------------------------------------------------
\1\ See OMWI Annual Report to Congress, FY2017 (https://
www.occ.gov/about/who-we-are/occ-for-you/diversity/and-inclusion-
programs/omwi/omwi-annual-report-fy-2017.cid).
Q.29. What steps can the OCC take to promote diversity within
the financial system, especially with respect to the firms the
---------------------------------------------------------------------------
OCC regulates?
A.29. Pursuant to the Dodd-Frank Act, the OCC and other OMWI
directors collaboratively published a policy statement on June
10, 2015. The standards identified in the policy statement
offer guidance and a framework to enable an entity to
voluntarily assess its diversity policies and practices in the
following key areas:
Organizational commitment to diversity and
inclusion
Workforce profile and employment practices
Procurement and business practices--supplier
diversity
Practices to promote transparency of organizational
diversity and inclusion
Entities' self-assessment process
In July 2016, the Office of Management and Budget approved
the collection of voluntary self-assessment information from
institutions. During the second quarter of fiscal year 2017,
the OCC sent letters to 382 chief executive officers of
institutions with 100 or more employees. Approximately 14.7
percent of the institutions provided their diversity self-
assessments. The OCC OMWI director, along with OMWI directors
at other agencies, conducts various outreach to institutions to
engage them, discuss diversity, and solicit feedback on the
diversity self-assessment process and perspectives of the
institutions.
Q.30. Some of the biggest concerns regarding ``Small-Dollar
Loans,'' formerly known as ``Payday Loans,'' are that consumers
end up in ``debt traps'' in which consumers are borrowing one
loan to pay off another. Recently, your office published a
bulletin titled ``Core Lending Principles for Short-Term,
Small-Dollar Installment Lending'' dated May 23, 2018, but
fails to discuss this issue in detail. In your testimony, you
mention that consumers benefit when banks offer ``reasonable
pricing and reasonable repayment structures.''
What kinds of measures will you put in place to ensure that
banks aren't charging too high interest rates?
A.30. Loan pricing should reflect overall returns reasonably
related to product risks and costs and should comply with all
applicable laws and regulations. If necessary, we can use our
supervisory and enforcement powers to address unfair or
deceptive acts or practices prohibited by the Federal Trade
Commission Act, violations of other relevant consumer
protection laws and regulations, and unsafe and unsound
practices. Interest rates are determined based on the State
where the national bank is located.
Q.31. Please indicate how a bank can offer a small-dollar loan
at a ``reasonable price'' with a ``reasonable repayment
structure.''
A.31. Banks can offer short-term, small-dollar loans in a
responsible manner by following the three core principles
included in the May bulletin: \2\
---------------------------------------------------------------------------
\2\ See OCC Bulletin 2018-14, ``Installment Lending: Core Lending
Principles for Short-Term, Small-Dollar Installment Lending''. May 23,
2018 (https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-
14.html).
All bank products should be consistent with safe-
and-sound banking, treat customers fairly, and comply
---------------------------------------------------------------------------
with applicable laws and regulations.
Banks should effectively manage the risks
associated with the products they offer, including
credit, operational, compliance, and reputation.
All credit products should be underwritten based on
reasonable policies and practices, including guidelines
governing the amounts borrowed, frequency of borrowing,
and repayment requirements.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM JOSEPH M. OTTING
Q.1. The OCC's actions on the Community Reinvestment Act
represent an excellent opportunity to modernize CRA rules--but
there is also great risk at taking a step backwards. One area
that I am especially concerned with is the potential that you
undertake this effort alone--without the Federal Reserve and
without the FDIC.
Will you commit to working and moving forward with the
other regulators on an advanced noticed of proposed rulemaking?
On the next step, a NPR? And on the final step of official
rulemaking?
A.1. I support working jointly with fellow regulators at the
FDIC and Federal Reserve whenever possible. I also support a
broadly inclusive decision-making process that includes
community development and civil rights voices. As Comptroller
of the Currency, however, I have the responsibility and
authority to act in the best interest of the Federal banking
system and the consumers who depend on it to meet their banking
needs and will act accordingly to fulfill that responsibility,
including, when necessary, acting independently when I believe
that is the right thing to do.
Q.2. The reports of the opening of unauthorized consumer
accounts is extremely alarming for me.
What exactly is the timeline and procedure the OCC will
follow in following up on the Action Plans that the OCC
required banks to create? Once an Action Plan is created, what
steps will the OCC take to ensure it is properly implemented?
What are the regulatory options the OCC is considering if a
plan is not properly developed or is not properly implemented?
A.2. OCC is monitoring banks' corrective action through the
normal course of supervision, which for large and most midsize
banks is a continuous process. While timelines vary based on
the findings of particular banks, failure to correct identified
deficiencies in a timely and effective manner may result in
additional supervisory action, including public enforcement
actions if warranted.
Q.3. Payday lending is an issue that is of great importance to
me and to the State of Alabama. I believe your comments to
encourage banks to enter small-dollar lending has merit--but I
remain concerned on the lack of certainty about whether banks
would be required to follow an ability to repay standard.
You have previously mentioned banks offering products to
consumers who ``have the ability to repay,'' but you don't
offer specifics on how this would be measured. Does the OCC
plan to move forward at any point with further guidance on
these standards?
A.3. The OCC published core principles in its May bulletin, \1\
but banks may identify unique and individual means to assess
customers' ability to repay. The OCC does not want to stifle
innovation or discourage lending by being overly prescriptive.
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\1\ See OCC Bulletin 2018-14, ``Installment Lending: Core Lending
Principles for Short-Term, Small-Dollar Installment Lending''. May 23,
2018 (https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-
14.html).