[Senate Hearing 115-407]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 115-407

                 IMPLEMENTATION OF THE ECONOMIC GROWTH, 
                   REGULATORY RELIEF, AND CONSUMER PROTEC-
                   TION ACT

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

                                HEARING

                               BEFORE THE

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

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 RECEIVING AN UPDATE ON EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF 
FEDERAL FINANCIAL REGULATORY AGENCIES TO IMPLEMENT THE ECONOMIC GROWTH, 
             REGULATORY RELIEF, AND CONSUMER PROTECTION ACT

                               __________

                            OCTOBER 2, 2018

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                              
                                

                Available at: https: //www.govinfo.gov /
                
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
33-409 PDF                 WASHINGTON : 2022                     
          
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

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

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Joe Carapiet, Chief Counsel

                Brandon Beall, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Chief Counsel

                       Dawn Ratliff, Chief Clerk

                      Cameron Ricker, Deputy Clerk

                      Shelvin Simmons, IT Director

                     James Guiliano, Hearing Clerk

                          Jim Crowell, Editor

                                  (ii)
                           
                           
                           C O N T E N T S

                              ----------                              

                        TUESDAY, OCTOBER 2, 2018

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    41

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     3
        Prepared statement.......................................    42

                               WITNESSES

Joseph M. Otting, Comptroller, Office of the Comptroller of the 
  Currency.......................................................     5
    Prepared statement...........................................    43
    Responses to written questions of:
        Chairman Crapo...........................................    79
        Senator Brown............................................    80
        Senator Heller...........................................    83
        Senator Reed.............................................    83
        Senator Menendez.........................................    84
        Senator Scott............................................    86
        Senator Cotton...........................................    87
        Senator Rounds...........................................    88
        Senator Tillis...........................................    89
        Senator Cortez Masto.....................................    91
        Senators Warner, Cotton, Tillis, and Jones...............    94
Randal K. Quarles, Vice Chairman for Supervision, Board of 
  Governors of the Federal Reserve System........................     7
    Prepared statement...........................................    49
    Responses to written questions of:
        Chairman Crapo...........................................   100
        Senator Brown............................................   101
        Senator Toomey...........................................   108
        Senator Heller...........................................   109
        Senator Scott............................................   111
        Senator Menendez.........................................   111
        Senator Rounds...........................................   114
        Senator Perdue...........................................   116
        Senator Tillis...........................................   119
        Senator Cortez Masto.....................................   123
        Senators Warner, Cotton, Tillis, and Jones...............   127
Jelena McWilliams, Chairman, Federal Deposit Insurance 
  Corporation....................................................     9
    Prepared statement...........................................    53
    Responses to written questions of:
        Chairman Crapo...........................................   132
        Senator Brown............................................   134
        Senator Toomey...........................................   139
        Senator Heller...........................................   140
        Senator Menendez.........................................   141
        Senator Scott............................................   142
        Senator Cotton...........................................   143
        Senator Tillis...........................................   144
        Senator Cortez Masto.....................................   146
        Senators Warner, Cotton, Tillis, and Jones...............   148
J. Mark McWatters, Chairman, National Credit Union Administration    10
    Prepared statement...........................................    58
    Responses to written questions of:
        Chairman Crapo...........................................   154
        Senator Brown............................................   154
        Senator Toomey...........................................   156
        Senator Heller...........................................   158
        Senator Scott............................................   159
        Senator Rounds...........................................   161
        Senator Tillis...........................................   162
        Senator Cortez Masto.....................................   163
        Senators Warner, Cotton, Tillis, and Jones...............   168

              Additional Material Supplied for the Record

Letters to the Committee submitted by Chairman Crapo and Senator 
  Brown..........................................................   174

 
IMPLEMENTATION OF THE ECONOMIC GROWTH, REGULATORY RELIEF, AND CONSUMER 
                             PROTECTION ACT

                              ----------                              


                        TUESDAY, OCTOBER 2, 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. This hearing will come to order.
    Today we will hear from four agencies responsible for the 
supervision and regulation of banks or credit unions. Each will 
provide an overview of its efforts, activities, objectives, and 
plans to implement S. 2155, the Economic Growth, Regulatory 
Relief, and Consumer Protection Act.
    Providing testimony will be Federal Reserve Vice Chairman 
for Supervision Randy Quarles; Federal Deposit Insurance 
Corporation Chair Jelena McWilliams; National Credit Union 
Administration Chairman Mark McWatters; and Comptroller of the 
Currency Joseph Otting.
    Each of these agencies plays an integral role in 
implementing key provisions of this law. As policymakers, it is 
our job to enact laws and regulations that not only ensure 
proper behavior and safety for our markets, but are also 
tailored appropriately.
    Shortly after Dodd-Frank was signed into law, we began to 
see some of the unintended cumulative regulatory burden it had 
on certain financial institutions. For years, I and many other 
Members of the Committee, on both sides of the aisle, worked to 
find a solution to provide meaningful relief to small financial 
institutions, and we succeeded in crafting S. 2155.
    We are now approaching 5 months since S. 2155 was signed 
into law by the President, having passed both the House and 
Senate with significant bipartisan support.
    The law's primary purpose is to make targeted charges to 
simplify and improve the regulatory regime for community banks, 
credit unions, midsize banks and regional banks to promote 
economic growth. It right-sizes regulations for financial 
institutions, making it easier for consumers to get mortgages 
and obtain credit while also increasing important consumer 
protections for veterans, senior citizens, victims of fraud, 
and those who fall on hard financial times.
    For example, just over a week ago, the Federal Trade 
Commission and Bureau of Consumer Financial Protection 
announced as effective a provision of S. 2155 that provides 
consumers concerned about identity theft or data breaches the 
option to freeze and unfreeze their credit for free.
    A New York Times article commenting on this provision noted 
that:

        one helpful change . . . will allow consumers to `freeze' their 
        credit files at the three major credit reporting bureaus--
        without charge. Consumers can also `thaw' their files, 
        temporarily or permanently, without a fee.

    Susan Grant, Director of Consumer Protection and Privacy at 
the Consumer Federation of America, expressed support for these 
measures, calling them ``a good thing.''
    Although agencies have started to consider this law in some 
of their statements and rulemakings, there is still a lot of 
work to do on the bill's implementation.
    It is imperative that the agencies carry out all of their 
responsibilities under this law expeditiously so that 
consumers, homeowners, veterans, and small businesses can begin 
to fully experience its benefits.
    In addition to timing, Members of this Committee are also 
deeply vested in the substance of agencies' specific actions to 
implement this law and other actions and efforts by the 
regulators to provide regulatory relief.
    In particular, agencies should: significantly tailor 
regulations for banks with between $100 billion and $250 
billion in total consolidated assets, with a particular 
emphasis on tailoring the stress testing regime (it should be 
noted that the primary reason we gave the regulators time to 
implement this provision was to develop a streamlined stress 
testing regime, and I encourage you to move quickly here); 
tailor the Liquidity Coverage Ratio for regional banks with 
more than $250 billion in total consolidated assets; reassess 
the advanced approaches thresholds; provide meaningful relief 
from the Volcker Rule for all institutions, as I said in a 
letter to the regulators yesterday; and examine whether the 
regulations that apply to the stand-alone U.S. operations of 
foreign banks should also be tailored at the same time and in a 
similar manner as U.S. banks.
    S. 2155 raised the threshold for the application of 
enhanced prudential standards under Section 165 of the Dodd-
Frank Act from $50 billion, and in some cases $10 billion, to 
$250 billion.
    Regulators have applied the Section 165 asset thresholds in 
various rulemakings and guidance documents in the past.
    For example, the Fed's Comprehensive Capital Analysis and 
Review requires bank holding companies with more than $50 
billion in total assets to submit capital plans to the Fed on 
an annual basis.
    In the final capital plan rule, the Fed notes that:

        the asset threshold of $50 billion is consistent with the 
        threshold
        established by Section 165 of the Dodd-Frank Act relating to 
        enhanced prudential standards and prudential standards for 
        certain bank holding companies.

    The OCC recently raised the threshold for requiring 
recovery plans from $50 billion to $250 billion. I encourage 
the regulators to revisit all regulation and guidance 
thresholds that were consistent with the outdated Section 165 
threshold to an amount that reflects actual systemic risk.
    Regulators have two options: use a systemic risk factors-
based approach, or raise all thresholds to at least $250 
billion in total assets to be consistent with S. 2155.
    Many of this law's provisions require agency rulemakings. 
In order to avoid unnecessary delays in implementation, 
agencies should promptly issue notice of proposed rulemakings 
for all relevant aspects of this law.
    As S. 2155 is implemented, I suspect some of it may be 
implemented through guidance or other policy statements that do 
not go through formal notice and comment rulemaking.
    While I encourage the regulators to use notice and comment 
rulemaking generally, I recognize that sometimes policy must be 
communicated through more informal means.
    The Congressional Review Act, however, requires agencies to 
submit, with certain minor exceptions, all rules to Congress 
for review.
    By definition, a rule is:

        the whole or a part of an agency statement of general or 
        particular applicability and future effect designed to 
        implement, interpret, or prescribe law or policy or describing 
        the organization, procedure, or practice requirements of an 
        agency.

    This is a very broad definition.

    In order to ensure that Congress can engage in its proper 
oversight role, as well as ensure that future Congresses do not 
overturn the agencies' policy statements related to 
implementation of S. 2155, I encourage the regulators to follow 
the Congressional Review Act and submit all rules to Congress, 
even if they have not gone through formal notice and comment 
rulemaking.
    Our economy is finally getting back on track, and the full 
implementation of S. 2155 will continue to drive growth and 
improve economic health to the benefit of families across 
America.
    I look forward to hearing more from each of you on how your 
agencies have begun and will continue to implement the Economic 
Growth, Regulatory Relief, and Consumer Protection Act. Thank 
you.
    Senator Brown.

           OPENING STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. I welcome all four 
witnesses. Thanks for your public service.
    This hearing was originally scheduled for September 13th--
the same week 10 years ago that Lehman Brothers declared 
bankruptcy, paving the way for the worst economic crisis since 
the Great Depression.
    We know what happened next. The Bush administration put 
together an alphabet soup of programs to keep the financial 
sector afloat, but it was not enough. Ten years ago this week, 
taxpayers were forced to set aside $700 billion to bail out 
Wall Street and save our economy from collapse. A New York 
Times headline from 10 years ago today, October 2, 2008, 
described those chaotic early days of the collapse with this 
headline: ``36 hours of Alarm and Action as Crisis Spiraled.''
    A decade after the most severe financial crisis since the 
Great Depression, today we are discussing how the financial 
watchdogs will roll back rules put in place after that crisis. 
Imagine that.
    These are the same agencies, your agencies, that ignored 
the buildup to the 2008 collapse and, in the case of the OCC, 
went to court for those who were fighting to try to do 
something.
    In some cases, they are now led by the very people that 
failed to prevent or who profited from the crisis.
    S. 2155 was described as an effort to reduce the burden of 
regulation on the Nation's smallest community banks and credit 
unions--something many of us agreed we could and should 
improve. But in reality, this bill is littered with concessions 
to the big banks; it offers virtually nothing to American 
consumers.
    Based on the questions and letters sent to officials by my 
Republican colleagues since passage of S. 2155, it seems they 
are most concerned about how the law will help the largest 
domestic and foreign banks--or to use a new Republican 
euphemism for companies like Deutsche Bank, ``regional banks 
with an international parent.''
    ``Regional banks with an international parent.'' These 
dreamers always have support in Washington.
    These are the same banks that have been profitable every 
quarter since the second quarter of 2009. Last quarter profits 
at U.S. banks reached record levels--more than $60 billion 
dollars, a 25-percent jump from the year before. The five 
largest banks in this country recently announced more than $72 
billion in stock buybacks, a 30-percent increase from last 
year. How many workers got a 30-percent raise last year? How 
much is enough for the Nation's very, very profitable banks?
    While the banks have recovered, so many Americans have not.
    Ten million Americans lost their jobs during the crisis. 
The unemployment rate peaked at 11 percent in my State. More 
than a third of workers across the country were unemployed for 
27 weeks or more.
    Losses in household wealth and income were devastating to 
families during the crisis. African Americans and Latino 
Americans suffered even worse losses.
    Now, do not try to argue that household wealth has 
recovered since the crisis because aggregate measures are 
misleading. Recent data from the Federal Reserve Board of 
Governors shows that the top 10 percent of households have seen 
big gains in household wealth; the bottom 90 percent have 
experienced no gains. So this Committee and you as regulators 
seem to be most interested in how those 10 percent can be even 
more profitable.
    The poverty rate rose 2.5 percentage points between 2007 
and 2012, with 46.5 million people living in poverty by 2012.
    Eight million children were affected by the foreclosure 
crisis by 2012--6 percent of children in Ohio, one out of 16 
children in Ohio affected. It is even higher in States like 
Nevada and Rhode Island and Maryland on this Committee, and 
Tennessee.
    We all know the lasting impact of childhood displacement, 
although our Government does not seem to care a whole lot about 
that, and there are a lot of examples of that.
    Some studies suggest a correlation between the Great 
Recession and the opioid crisis.
    In August, the Federal Reserve Bank of San Francisco 
released research that said the financial crisis ``cost the 
average American $70,000 in lifetime income.'' The Federal 
Reserve Bank of Dallas estimated the loss was even higher. 
Numerous other studies estimate the impact of the crisis on the 
overall economy at $10 trillion.
    But here we are today, here we are today talking about--in 
the Banking Committee, in front of the most important financial 
regulators in the world, we are talking about how Washington 
can do more to help the Nation's banks. How Washington can do 
more to help the Nation's banks.
    We should be talking about how to increase wages, how to 
make housing more affordable and accessible, how to protect 
consumers, how to build up capital at banks. Many academics and 
Fed researchers suggest capital at banks is still too low, so 
that taxpayers and families--because it is too low, taxpayers 
and families could be forced to bail out banks again when the 
next crisis hits.
    I do not think we will hear about any of these issues from 
today's witnesses.
    The collective amnesia in this Administration and this 
Congress and this Committee is astounding. I ask the panel to 
start thinking more about middle-class families and less about 
Wall Street profits.
    Thank you.
    Chairman Crapo. Thank you.
    We will now proceed to the testimony of the witnesses. As 
you are well aware, we ask you to keep your remarks to 5 
minutes. Your full statements will be made a part of the 
record. And I remind all of my colleagues to keep your 
questioning to 5 minutes as well.
    With that, we will go in the order that you are seated, so 
we will start with Comptroller of the Currency Joseph Otting, 
then move to Federal Reserve Vice Chairman for Supervision 
Randy Quarles; then Federal Deposit Insurance Corporation Chair 
Jelena McWilliams; and, finally, National Credit Union 
Administration Chairman Mark McWatters.
    Mr. Otting, please begin.

   STATEMENT OF JOSEPH M. OTTING, COMPTROLLER, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Otting. Thank you. I do appreciate choosing the order 
based upon beauty versus tenure and experience.
    [Laughter.]
    Mr. Otting. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for the opportunity to 
discuss implementation of the Economic Growth, Regulatory 
Relief, and Consumer Protection Act. I am honored to be here 
with my regulatory colleagues to update you on our progress 
implementing the Economic Growth Act.
    Over the last 10 months that I have served as Comptroller, 
a strong working relationship has developed among regulatory
agencies based upon open and frequent dialogue and valuing each 
other's opinions and viewpoint.
    I want to begin by congratulating the Chairman and the 
Committee on passing bipartisan, commonsense reforms that ease 
the unnecessary regulatory burden on small- and mid-size banks 
across the country. By lifting that burden, we helped small 
banks survive to be vital parts of their communities, serve 
their customers, and promote economic growth.
    The reforms included in the law are an important step 
toward rationalizing our regulatory framework while ensuring 
our financial system continues to operate in a safe and sound 
manner, provides fair access to financial services, and treats 
customers fairly.
    The Office of the Comptroller of the Currency recognizes 
the importance of this effort and is committed to implement the 
law as quickly as possible. We have dedicated the necessary 
resources to accomplish this task in a prompt and efficient 
manner.
    The Act authorizes the OCC to issue one regulation on its 
own and to jointly issue 10 others with fellow safety and 
soundness regulators. Separately, we will consult with the 
Bureau of Consumer Financial Protection on a variety of 
consumer protection requirements included in the Act.
    The one regulation that tasks individually to the OCC 
afford Federal saving associations greater flexibility without 
the burden and cost of changing charters. The OCC has advocated 
for greater flexibility for Federal savings associations since 
becoming their primary regulator in July 2011. I commend 
Senators Moran and Heitkamp for taking the lead on this issue.
    On September 10, the agency published a notice of proposed 
rulemaking to implement this provision and allow Federal 
associations with $20 billion or less in assets on December 31, 
2017, to elect to operate with national banking powers. Federal 
savings associations that make this election generally would 
have the rights and privileges as a national bank and be 
subject to the same duties, restrictions, penalties, 
liabilities, and limitations. Comments on the proposed rule are 
due in November. Following a review of the comments, I expect 
to issue a final rule in January 2019.
    In August, the OCC joined the Federal Reserve and FDIC to 
issue two interim rules. On August 22nd, the agency issued an 
interim rule amending the agency's liquidity rules to treat 
certain municipal securities as high-quality liquid assets. The 
next day, the agencies issued final rules to expand the number 
of community banks eligible for an 18-month examination cycle 
to effect changes sponsored by Senators Heller and Donnelly. 
The rule allows qualifying entities with less than $3 billion 
in total assets to benefit from an extended examination cycle, 
greatly reducing their regulatory burden.
    Most recently, on September 18, the agencies published a 
notice of proposed rulemaking to revise the definition of 
``high volatility commercial real estate,'' or HVCRE, subject 
to the heightened capital requirements as supported by Senators 
Cotton and Jones.
    Work on the remaining interagency regulatory is well 
underway, and we will issue notice of proposed rulemakings to 
simplify capital requirements applicable to eligible community 
banks and reduce all call requirements later this fall. While 
we work expeditiously to complete these regulations, the OCC 
joined the Federal Reserve and the FDIC in July to issue a 
statement clarifying that the agencies' intent to supervise 
institutions consistent with the intent of the law. In doing 
so, the agencies will, among other things, not enforce 
requirements on banks that the Economic Growth Act intends to 
eliminate, including with respect to the amendments to the 
stress test requirements imposed by Dodd-Frank and exempting 
institutions with less than $10 billion from the Volcker Rule.
    I appreciate the opportunity to update the Committee on the 
implementation of the Economic Growth Act and progress the OCC 
has made in other areas to reduce unnecessary burden and 
promote economic opportunity and job growth. That additional 
work includes encourage banks to reenter the small-dollar 
lending market, issue an advance notice of proposed rulemaking 
to begin public dialogue regarding modernizing the Community 
Reinvestment Act regulations, and moving forward on accepting 
special purpose national charters for fintechs engaged in the 
business of banking, and making compliance with the Bank 
Secrecy Act and anti-money-laundering regulations more 
effective and efficient.
    My written testimony provides additional details on these 
efforts. I believe that consumers and communities alike will 
benefit from the reforms included in the Economic Act and the 
agencies' other work for many years to come. The OCC will keep 
the Committee apprised of our work, and I look forward to 
answering your questions.
    Thank you very much.
    Chairman Crapo. Thank you, Mr. Otting.
    Mr. Quarles.

STATEMENT OF RANDAL K. QUARLES, VICE CHAIRMAN FOR SUPERVISION, 
               BOARD OF GOVERNORS OF THE FEDERAL
                         RESERVE SYSTEM

    Mr. Quarles. Thank you, Chairman Crapo, Ranking Member 
Brown, Members of the Committee. I appreciate this opportunity 
to testify on the Federal Reserve's implementation of the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act. The Act calls on the Federal banking agencies to aid in 
promoting economic growth by further tailoring regulation to 
better reflect the character of the different banking firms 
that we supervise and recognizes that banks have a variety of 
risk profiles and business models. I believe that our 
regulation and supervisory programs can be flexible enough to 
accommodate this variety.
    The Federal Reserve's implementation of the Act's 
directives is underway. In my testimony today, I will describe 
the progress we have made to date on tasks set out for the 
Federal Reserve in the Act. I will also highlight the work that 
will be our top priorities in the next few months.
    Turning first to the progress that we have made to date, 
among the Act's key provisions are targeted tailoring measures 
to reduce the regulatory burden on community banks. To provide 
clarity to the public, the Board and the Federal banking 
agencies in July issued public statements on the regulations 
and associated reporting requirements that the Act immediately 
affected, indicating that we would give immediate effect to 
those provisions even before the formal regulatory changes were 
fully implemented. And in August, the Board began implementing 
these and other aspects of the law with several interim final 
rules.
    One interim final rule raised the asset threshold from $1 
billion to $3 billion for bank holding companies, or BHCs, to 
qualify for what is known as the ``small BHC policy 
statement.'' The rule renders most BHCs and savings and loan 
holding companies with less than $3 billion in assets exempt 
from the Board's regulatory capital rules and provides 
corresponding relief from comprehensive consolidated financial 
regulatory reports.
    Another interim final rule expanded the eligibility for 
small firms to undergo 18-month examination cycles rather than 
an annual cycle from less than $1 billion to $3 billion in 
total assets.
    In addition, the task of developing a community bank 
leverage ratio is a high priority for the Board and our fellow 
regulators, and our goal is to issue a regulatory proposal in 
the very near future.
    Turning to larger firms, the Board has placed their highest 
priority on issuing a proposed rule on tailoring enhanced 
prudential standards for banking firms with assets between $100 
billion and $250 billion.
    Our task is not merely to reform the current regulation of 
the particular institutions that are affected by the Act at 
this moment, but to develop a framework that will describe in a 
principled way when future institutions may expect enhanced 
regulation and why, using objective measures that account for 
the relative complexity and interconnectedness among large 
banks.
    While the statute sets an 18-month deadline for this 
regulatory process, we expect to move much more quickly than 
this. Topics covered by such a proposal could include, among 
other things, capital and liquidity rules, resolution planning 
requirements for the less complex and interconnected of these 
firms.
    The statute requires periodic supervisory stress testing by 
the Federal Reserve, which I believe recognizes the value of 
stress testing but requires a more tailored frequency and 
requires us to think more carefully about the burden of these 
tests.
    Beyond thinking about how we will further tailor our 
regulation and supervisory programs for firms with assets 
between $100 and $250 billion, the Board is similarly reviewing 
our requirements for firms with more than $250 billion in total 
assets but below the G-SIB threshold. Through this review, the 
Board aims to ensure that our regulations continue to 
appropriately increase in stringency with the risk profiles of 
firms, consistent with the Act and the Board's extant focus on 
tailoring. Currently, some aspects of our regulatory regime--
liquidity regulation, for example--treat banks with more than 
$250 billion in assets with the same stringency as G-SIBs. I 
see reason to apply a clear differentiation.
    Let me conclude by saying that the provisions I have 
highlighted in my delivered remarks focus on tasks that the 
Board has completed or made a priority for the near term. In my 
written testimony, in its appendix, you can find a more fulsome 
list with additional important tasks and the Board's latest 
thinking and actions on them. Implementing the Act is an 
important milestone in the Federal Reserve's continuing 
tailoring mandate.
    Thank you again for the opportunity to testify before you 
this morning. I am looking forward to answering your questions.
    Chairman Crapo. Thank you, Mr. Quarles.
    Ms. McWilliams.

   STATEMENT OF JELENA McWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. McWilliams. Thank you, Chairman.
    Chairman Crapo, Ranking Member Brown, and Members of the 
Committee, thank you for the opportunity to testify today on 
the FDIC's efforts to implement the Economic Growth, Regulatory 
Relief, and Consumer Protection Act. I want to congratulate 
Chairman Crapo and other Members of the Committee who worked 
hard to craft this bipartisan legislation and former Chairman 
Shelby for his prior work in the area.
    When I testified during my confirmation hearing, I stated 
that one of my top priorities at the FDIC would be the health 
of the Nation's community banks and their ability to 
effectively serve their communities. Community banks play a 
vital role in their local economies, and our regulatory regime 
must do what it can to ensure their continued vitality. The 
Committee's efforts on S. 2155 have provided a strong 
foundation for delivering on this priority with a number of 
directives to reduce regulatory burden on the Nation's small 
banks.
    I particularly appreciate the Committee's efforts to give 
regulators the requisite flexibility to tailor regulations to 
the size and risk profile of an institution. As my written 
statement details, the agencies have already taken steps to 
conform existing regulations to the new law, including on items 
such as extending the examination cycle for small banks and 
amending the capital treatment of commercial real estate loans. 
We are also working expeditiously on the community bank 
leverage ratio, which will exempt a large number of community 
banks from the complex Basel III requirements. Taken together, 
these provisions and others will help community banks focus on 
serving their customers and communities. I can assure you that 
the FDIC takes the law's requirements very seriously.
    Since I became Chairman, the FDIC has also commenced to 
work on a number of complementary initiatives to eliminate 
requirements that are duplicative, unnecessarily burdensome, or 
that fail to contribute materially to the safety and soundness 
of the financial system.
    One of my initial priorities is to make sure that our 
supervisory guidance is clear and concise and that outdated or 
superseded supervisory communications are archived. As a 
result, we are looking to rescind more than one-half of our 
financial institution letters. Over 400 letters will be 
retired.
    Yesterday we issued a request for comment on how the FDIC 
communicates with regulated institutions with a goal of 
streamlining communication and further reducing compliance 
burden. In the coming weeks and months, we will also address a 
number of additional regulatory priorities, including issues 
such as small-dollar lending, consistency of CAMELS ratings, 
and resolution planning.
    Beyond addressing regulatory burdens on existing banks, we 
are actively considering how we can more effectively encourage 
new entities to enter the market while still ensuring that they 
are strong enough to survive. This includes improving the de 
novo application process and providing additional technical 
assistance to applicants.
    Since 2010, only 11 new deposit insurance applications for 
startup FDIC-insured banks have been approved and opened, and 
most of those within the last 15 months. To ensure the long-
term vibrancy of the banking industry, we must attract new 
financial institutions and their capital. The FDIC's review 
process must support that crucial goal, particularly for those 
communities that do not have access to a bank or are served by 
a single institution.
    We are also reviewing the application process for 
industrial loan companies. Congress authorized the FDIC to act 
on applications for deposit insurance for ILCs, and the FDIC 
stands ready to fulfill its mandate to review any application 
and approve them when they meet statutory requirements.
    The FDIC has also begun a holistic review of its regulation 
of brokered deposits and national rate caps. We recently issued 
a proposed rule to implement Section 202 of S. 2155, which 
provides that certain reciprocal deposits are not considered 
brokered deposits. Additionally, we will seek comments later 
this year on the FDIC's brokered deposit regulations more 
generally. The banking industry has undergone significant 
changes since these regulations were put in place, and we will 
consider the impact of changes in technology, business models, 
and products since the brokered deposit requirements were 
adopted.
    Last, I have embarked on a Chairman's Listening Tour to 
visit with bankers in each State during my 5-year term to 
gather their input and meet with some of their customers, 
including small businesses, farmers, and consumers. My goal is 
to reverse the longstanding trend of having those affected by 
our regulations come to Washington to be heard. It is long 
overdue that we come to them instead.
    By increasing transparency, engaging more effectively and 
directly with our regulated entities and consumers, and by 
eliminating unnecessary regulatory burdens, the FDIC will be 
better positioned to support the health of the Nation's banks 
to ensure economic growth and job creation. I look forward to 
working collaboratively with the Committee on these efforts, 
and thank you again for the opportunity to appear before you 
today.
    Chairman Crapo. Thank you, Ms. McWilliams.
    Mr. McWatters.

   STATEMENT OF J. MARK McWATTERS, CHAIRMAN, NATIONAL CREDIT 
                      UNION ADMINISTRATION

    Mr. McWatters. Good morning, Chairman Crapo, Ranking Member 
Brown, and Members of the Committee. Thank you for the 
opportunity to participate in this important hearing on the 
implementation of S. 2155.
    S. 2155 includes a number of amendments applicable to 
credit unions that provide regulatory relief, promote economic 
growth, and protect consumers. Specifically, Section 103 
exempted from appraisal requirements certain rural real estate 
transactions. At its September 2018 meeting, the NCUA Board 
proposed an appraisals rule incorporating this exemption and 
making additional burden-reducing changes. Section 105 amended 
the statutory definition of a member business loan to exempt 
all loans fully secured by a one-to-four-family dwelling, 
regardless of the borrower's occupancy status. The NCUA 
incorporated this amendment into its regulations less than 1 
week after S. 2155's enactment.
    Finally, Section 212 requires the NCUA to annually publish 
the agency's draft budget and hold a public hearing. The NCUA 
has been compliant with the spirit of Section 212 since the 
fall of 2016 when we restarted public budget hearings and 
posted significant budgetary analysis on the agency's website.
    I wish to thank my Democratic colleague Rick Metsger for 
diligently working with me in a collegial, collaborative, and 
bipartisan manner for 2 \1/2\ years to reorganize the agency 
and to develop sensible and targeted relief for the Main Street 
credit union system, including: one, establishing a Regulatory 
Reform Task Force to develop a comprehensive review of the 
agency's regulations; two, providing flexibility to corporate 
credit unions' capital standards; three, recognizing that 
Federal credit unions may securitize loans they make; four, 
improving the NCUA's examination appeals process to ensure due 
process and fairness; five, improving the efficiency of the 
NCUA's capital planning and stress testing rules; six, adding 
flexibility to the NCUA's field-of-membership process; seven, 
proposing additional options for Federal credit unions to offer 
payday alternative loans that present a viable alternative to 
traditional payday lenders; and, eight, proposing a more 
tailored risk-based capital rule that does not needlessly 
burden the smallest credit unions.
    Additionally, the NCUA promulgated an advance notice of 
proposed rulemaking on the issuance of supplemental capital for 
risk-based net worth purposes. The NCUA also undertook 
initiatives to improve the agency's efficiency and reduce 
unnecessary examination and reporting burdens.
    Specifically, the agency has: one, reorganized by 
eliminating two of our five regional offices and streamlining 
several agency functions to reduce costs and increase 
efficiencies; two, extended our examination cycle to 18 months, 
reducing the agency's presence in well-run credit unions; 
three, undertaken a modernization of the agency's call report; 
and, four, implemented a program to incorporate emerging and 
secure technology that supports the agency's examination, data 
collection, and reporting efforts.
    Finally, I would like to offer two suggestions for 
legislative action that would benefit the credit union system 
and the underserved and assist the NCUA in carrying out its 
safety and soundness mission.
    First, permit all credit unions, not just multiple common 
bond institutions, to add underserved areas to their field of 
membership so as to expand access to financial services for the 
unserved and the underserved and those of modest means; and, 
second, provide the NCUA with examination and enforcement 
authority over certain third-party vendors, including credit 
union service organizations, information security, and fintech-
related vendors. We stand ready to work with you on your 
legislative priorities.
    I look forward to your questions. Thank you.
    Chairman Crapo. Thank you, Mr. McWatters. I thank each of 
you for the attention you are giving to implementing S. 2155 
and encourage you to continue to do so. The benefit that we are 
seeing from this regulatory reform is evident in our economy, 
and I think the people who pay these costs, whether it be 
business owners, consumers, or workers, will continue to 
benefit from your enhanced efforts.
    Ms. McWilliams, my first question today will be on the 
community bank leverage ratio. Section 201 of S. 2155 
simplifies the capital regime for community banks by presuming 
community banks not engaged in certain activities and meeting a 
minimum level of capital to be compliant with generally 
applicable capital requirements. The provision requires Federal 
banking regulators, in consultation with State banking 
regulators, to develop a simple leverage ratio and establish a 
minimum level of capital for banks to qualify for the 
presumption.
    When do you plan to release a notice of proposed rulemaking 
on the community bank leverage ratio? And can you provide us an 
insight into how regulators may be approaching setting this 
minimum?
    Ms. McWilliams. Sure. Thank you, Senator Crapo. Very soon. 
The answer is very soon. We are hoping to have the proposed 
rule out shortly, certainly before the year end, if not much 
sooner.
    We are approaching the capital regime for community banks 
from a very, I would say, simple perspective. We have made 
things too complicated. They should not be subject to the Basel 
III requirements. Those requirements should apply to 
internationally active large banks. The system that we put in 
place now needs to be commensurate to the risk profile of small 
community banks and primarily banks below $10 billion.

       Letter submitted to Chairman Crapo from Jelena McWilliams
        Federal Deposit Insurance Corporation

        October 17, 2018

        Honorable Michael Crapo
        United States Senate
        Washington, DC 20510

        Dear Mr. Chairman,

        Thank you for the opportunity to testify before the Committee 
        at the October 2, 2018, hearing on ``Implementation of the 
        Economic Growth, Regulatory Relief, and Consumer Protection 
        Act.'' I am writing in response to the question you posed to 
        the witnesses at the hearing pertaining to the review of 
        thresholds contained in agency guidance documents and rules.

        As you note, Section 401 of S. 2155 generally raised the asset 
        thresholds for application of enhanced prudential standards for 
        bank holding companies (BHCs) under Section 165 of Dodd-Frank 
        from $50 billion to $250 billion, while giving the Federal 
        Reserve flexibility to apply certain standards to BHCs below 
        $250 billion in total consolidated assets under certain 
        conditions. In addition, Section 401 raised the asset threshold 
        for company-run stress testing by financial companies, 
        including insured depository institutions, from $10 billion to 
        $250 billion.

        Following the passage of Dodd-Frank, the banking agencies also 
        applied certain other standards or adopted other policies that 
        apply to banks using the thresholds found under Section 165 of 
        Dodd-Frank. Two examples of note for the FDIC are (1) the 
        interagency supervisory guidance on stress testing issued in 
        2012 and (2) the FDIC's rule on resolution plans for
        insured depository institutions initially proposed in 2010 and 
        finalized in 2012.

        Since the passage of S. 2155, the banking agencies have 
        prioritized finalizing rulemakings required by the legislation. 
        For example, as I mentioned at the hearing, the agencies have 
        been working hard on a notice of proposed rulemaking to 
        implement Section 201, establishing a community bank leverage 
        ratio, which we plan to issue soon.

        At the same time, the FDIC has also been undertaking a holistic 
        review of all of its rules, regulations, guidance documents, 
        and policies. This includes a close look at the guidance on 
        stress testing and the rule on resolution planning mentioned 
        above. We are reviewing the stress testing guidance both in 
        light of the passage of S. 2155 and the interagency statement 
        on guidance issued on September 11, 2018. The stress testing 
        guidance was issued jointly by the banking agencies, and 
        discussions with the other agencies related to the guidance in 
        light of the statutory changes made by S. 2155 are ongoing.

        The FDIC has also been looking very closely at the 2012 final 
        rule on resolution planning for insured depository 
        institutions. As I mentioned in my opening statement at the 
        hearing, I have made changes to the resolution planning process 
        a priority of mine, and it is something that we plan to address 
        in the near future.

        Thank you again for the opportunity to testify before the 
        Committee earlier this month. I look forward to continued 
        engagement with the Committee on implementation of S. 2155 and 
        other regulatory initiatives.

        Sincerely,

        Jelena McWilliams

    Chairman Crapo. Well, thank you.
    My next question is for you, Mr. Quarles, and it deals with 
tailoring the supervisory stress tests. You referenced this in 
your testimony, but Section 401 of S. 2155 requires a periodic 
supervisory stress test for banks with between $100 billion and 
$250 billion in total consolidated assets. Consistent with 
right-sizing and simplifying regulations for regional banks, 
such supervisory stress tests should be streamlined and 
tailored accordingly.
    When do you expect to release a notice of proposed 
rulemaking on supervisory stress tests for banks between $100 
and $250 billion in total assets? And can you describe how such 
stress tests could be simplified from the current approach 
applied to these institutions and what factors the Fed may be 
considering for tailoring such stress tests?
    Mr. Quarles. Thank you. So with respect to the timing of 
our rulemaking with regard to stress tests and other provisions 
applicable to banks between $100 and $250 billion, that is our 
highest priority in the sort of necessary sequencing of tasks 
associated with the implementation. I expect, as Chairman 
McWilliams said, that we will be completed with that task very 
soon, certainly by the end of the year, and I hope well before 
that.
    For the elements of the stress tests, I think that, as I 
indicated in my testimony, we have a clear instruction with the 
use of the term ``periodic'' replacing the term ``annual,'' 
that we certainly need to tailor the frequency of those tests. 
And we need to consider some of the burden appropriate to 
stress testing even on that less frequent basis for banks in 
that category.
    We have not completed our analysis of exactly how we will 
look at the burden of the tests or the timing of the tests, and 
I do not want to front-run the formal Board decision on those 
measures, but it is a high priority, and we will have an NPR 
out for consideration by the Committee soon.
    Chairman Crapo. All right. Thank you very much, and I 
appreciate the attention you are both giving to these two 
important issues.
    This last question is for all of you, and there will not be 
enough of my time left after I ask it for you to answer here, 
so I am going to ask you to provide your answer in writing. You 
may get some additional written questions, as you know, but I 
would like you to take this as your first written question.
    Section 165 of Dodd-Frank established a $50 billion and in 
some cases a $10 billion threshold in total consolidated assets 
for the application of enhanced prudential standards. Such 
thresholds were applied in rulemakings and guidance documents 
consistent with Dodd-Frank's requirements. Supervisory guidance 
on company-run stress testing for banks with more than $10 
billion in assets issued jointly by regulators in 2012 is just 
one example.
    The agencies have also applied numerous other standards 
using either the $10 billion or $50 billion asset threshold to 
be consistent with Section 165. For example, banks with $50 
billion or more in total assets have historically been subject 
to CCAR, a supervisory stress test not required by statute.
    My question with regard to this set of issues is: Are you 
reviewing all rules and guidance documents referencing such 
thresholds? And can you provide your thinking on revising these 
rules and documents in light of S. 2155? My staff will be glad 
to give you further thought on exactly what that question is, 
but it is literally making sure that we accomplish the intent 
of S. 2155 across the regulatory spectrum.
    Chairman Crapo. With that, Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    To start with, I would like yes or no answers to the first 
question I ask, if you would, and we have a lot of issues to go 
through, and I appreciate the conversations that we have had 
privately and individually.
    I will start with you, Mr. Otting. If one of your employees 
made racist and sexist comments and his first instinct was to 
stick by them, would you leave that person in charge of fair 
lending at your agency?
    Mr. Otting. I do not think it is a yes or no answer. I 
think there is a comprehensive analysis that would need to be 
done.
    Senator Brown. Well, that is sort of a yes or no----
    Mr. Otting.----[inaudible] that would have to be done.
    Senator Brown. OK. And use your mic, if you would.
    Mr. Quarles.
    Mr. Quarles. I would have to support Comptroller Otting's 
answer on that. I think it is a facts and circumstances 
determination.
    Senator Brown. Well, I am asking if the facts are your 
employee made racist and sexist comments, his first instinct 
was to stick by them, would you leave that person in charge of 
fair lending at your agency? That is the fact that I am 
asserting.
    Mr. Quarles. Racism has no place in the workplace.
    Senator Brown. Ms. McWilliams?
    Ms. McWilliams. Senator, if my employee made sexist or 
racist comments in our workplace, that would certainly be 
subject to a disciplinary action. There is no room for that at 
the FDIC.
    Senator Brown. Thank you.
    Mr. McWatters?
    Mr. McWatters. If a background analysis yielded exactly the 
facts as you stated them, no, I would not leave that person in 
charge of that area.
    Senator Brown. Thank you for your candor.
    Vice Chair Quarles, I predicted that S. 2155 would be used 
to justify weakening rules for banks over $250 billion and 
foreign mega banks. Five months later, groups of House and 
Senate Republicans have written letters to you and Chairman 
Powell saying that the Fed has a responsibility under the law 
to do more favors for them. That letter also was the letter I 
cited about regional banks with international parents.
    Do you agree with the Republican letter that the Fed has a 
responsibility to do more favors for mega banks?
    Mr. Quarles. Favors for mega banks is not how I would at 
all characterize anything that we are doing at the Federal 
Reserve or that we are required to do under any law.
    Senator Brown. Banks--well, favors by definition of doing 
things that make them more profitable, that relax the rules on 
them for capital standards, and the like.
    Mr. Quarles. So I do think that we have an obligation as 
responsible regulators to consider the efficiency of our 
regulatory scheme in addition to its effectiveness in promoting 
safety and soundness. We have a public interest in the 
efficiency of the financial sector because it supports economic 
growth, it supports job creation, and that economic growth is 
the basis of the ability we will have to solve a lot of other 
problems in the country.
    Senator Brown. The efficiency, when I hear conservative 
regulators who were in charge a decade ago when all this 
happened, I hear about efficiency, but efficiencies always seem 
to mean more profits for the banks and less stability for the 
banking system. But it just seems like never enough for them.
    Now let me say something. Ten years later, the eight 
largest U.S. banks are asking the Fed to lower their risk-based 
capital surcharge. If there was anything that Republicans and 
Democrats agreed on after the crash, if there was anything, it 
was that the largest banks needed more capital to make them 
safer. Research indicates that bank capital is below the level 
needed to insulate taxpayers from risk. The Independent 
Community Bankers Association of America in an op-ed asked the 
Fed--in a letter asked the Fed not to lower the surcharge since 
big banks still benefit, they think and I think and most of the 
world thinks, from a ``too big to fail'' subsidy.
    Do you agree we should not lower big bank capital 
standards?
    Mr. Quarles. As I said before, Chairman Powell has also 
said, I think, that the capital levels, the total loss 
absorbency capacity in our system is roughly about right.
    Senator Brown. So if the Fed looks at the surcharge, as you 
have said to me on the phone that you would--and I cannot 
quarrel with that--will you consider the option that big bank 
capital should actually increase? Are you open to that 
possibility, as many have called for?
    Mr. Quarles. I think we should go where the analysis would 
lead it to go. We have taken actions during my tenure that have 
had the effect of increasing capital for the system and for the 
large banks. We ran the toughest stress tests in history over 
the course of last year, and that had the effective increase in 
capital in the system and for the largest banks.
    Senator Brown. Mr. Chairman, if I could do what you did, 
ask the last question, go a few seconds over and they can write 
the answer, Mr. Chairman?
    Chairman Crapo. Go ahead.
    Senator Brown. Thank you. Some of the sponsors of S. 2155 
and Chairman Powell have said in front of this Committee and 
other times they do not intend for the bill to benefit large 
foreign banks operating in the United States. You, Mr. Quarles, 
Vice Chair Quarles, have given speeches saying the Fed should 
take a look at reducing the regulatory burden on these banks, 
saying the Fed should reconsider its calibration of foreign 
bank rules.
    As you run to head the Financial Stability Board, a crucial 
position, obviously, leading international bank regulators, do 
you think it is important for the United States to offer a 
united perspective that we must maintain the post-crisis 
regulatory framework for all large banks? And you could either 
answer really briefly or give us the written answer.
    Chairman Crapo. We will have to take it in writing.
    Senator Brown. OK.
    Chairman Crapo. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Let me begin by just thanking the Chairman for holding this 
important hearing. I also appreciate the time that each of our 
witnesses have taken to come in and discuss the implementation 
of our legislation.
    Governor Quarles, I would also like to acknowledge your 
public comments and congressional testimony on making our 
regulatory system more efficient and transparent. A number of 
my colleagues from the Committee and I have also recently 
reached out to you regarding new capital rules that the Fed is 
considering, including the G-SIB surcharge. I just wanted to 
say a brief word of thanks for that response and for the Fed's 
commitment to continuing its review and recalibration of post-
crisis regulatory reforms.
    I am just curious with regard to that--and I want to follow 
up because I think this is one area in which we have--we are 
concerned about competition. And it is not so much about 
favoritism. It is about trying to level the playing field. And 
what our concern was is that we have competition on an 
international basis right now. What we did not want to have 
happen is that because of our regulatory purview that we be 
mandated that we increase the cost of operating for those 
organizations currently identified at G-SIBs.
    Could you comment just a little bit, please, in terms of 
the thought process that you intend to employ as you review the 
supplemental leverage ratio regarding this? And I think the 
important part about this and what I really wanted to give you 
an opportunity to do is to correct any misunderstanding that 
this is designed to be favoritism to a certain select group of 
institutions.
    Mr. Quarles. Thank you, Senator. So the G-SIB surcharge is 
part of a complex of regulations that apply to our largest 
firms and really needs to be considered as part of that overall 
complex--the capital framework, the liquidity rules, the 
special stress testing requirements that we have for those 
institutions, our proposal to change some of those frameworks, 
including particularly the stress testing framework to 
something called the ``stress capital buffer,'' which we have 
discussed as well. And so I think that to the extent that we 
consider that entire complex, the G-SIB surcharge will 
inevitably be part of considering whether we have appropriately 
calibrated this complex of rules to ensure that we have both 
protected the safety and soundness of those firms, that we have 
protected the ability of the financial sector in the United 
States, and it is relevant that we try to ensure that we have a 
level playing field internationally, not as a way of trying to 
seek a benefit for our firms, but because when you have an 
international system that has an unlevel playing field, over 
time pathologies will develop as activity moves to different 
areas of that global system, not on the basis of--or driven by 
incentives other than purely economic incentives, incentives by 
the cost of capital.
    So I think we have to consider all of that. It is a very 
complex question. As I indicated in my answer to Senator Brown, 
I do not think we should prejudge what the outcome of an honest 
consideration of that whole complex of rules will be, that it 
will move things in one direction or another. But I think that 
that principle is quite important in general as we consider all 
of those rules.
    Senator Rounds. Thank you, sir.
    Chair McWilliams, you referenced Section 103, which 
provides appraisal relief for rural borrowers, in your 
testimony. In particular, you mentioned the implementation of 
this section is ongoing. Can you please discuss how the FDIC 
intends to implement this section and what more can be done to 
provide appropriate relief when it is difficult for borrowers 
to find appraisals? We are not talking about just a couple of 
days. We are talking about months sometimes?
    Ms. McWilliams. Months.
    Senator Rounds. Can you please share your thoughts?
    Ms. McWilliams. Sure. Thank you, Senator. I believe it is 
very difficult for rural communities to find appraisals for in 
some cases both residential and certainly for commercial 
property and farmland. We are looking at ways in which we can 
go potentially even above and beyond--within our authority, 
above and beyond S. 2155 to ensure that the appraisal 
requirements as well as other burdens that we can deal with for 
rural communities can be addressed as soon as possible.
    We are looking at providing extended periods of time, 
looking at providing some more relaxed standards for appraisals 
in rural areas, and we will do what we can within our 
jurisdiction to address those issues.
    Senator Rounds. Thank you.
    Thank you, Mr. Chairman. I will yield back my last 5 
seconds.
    Chairman Crapo. I appreciate that, Senator Rounds.
    Senator Reed.
    Senator Reed. Well, thank you very much. Thank you, lady 
and gentlemen, for your testimony today.
    I want to focus in on a specific issue that has been of 
great concern to me for many, many years, and that is the 
Military Lending Act. Your colleagues over at the CFPB have 
indicated they are going to downgrade their review process by 
not reviewing their subject institutions for compliance with 
the Military Lending Act, which I find upsetting. Forty major 
veterans organizations took an ad out. They are upset. So I 
would like, if I could, your commitment, beginning with Mr. 
Otting and going down the line, to fully and vigorously enforce 
the Military Lending Act for the benefit of servicemembers.
    Mr. Otting. Senator Reed, you have our commitment. We are 
in full support of enforcing the Military Lending Act and the 
SCRA, which is another important provision for people that are 
serving our country.
    Senator Reed. Mr. Quarles, please.
    Mr. Quarles. Yes, absolutely, Senator.
    Senator Reed. Thank you.
    Ms. McWilliams. Yes, Senator.
    Senator Reed. Thank you very much.
    Mr. McWatters?
    Mr. McWatters. Yes, Senator. There are two very, very large 
credit unions, Navy and Penn Fed. This is a safety and 
soundness issue to the NCUA. It is also an issue of helping our 
soldiers, sailors, airmen, and marines, and we will enforce it.
    Senator Reed. Thank you. And are there any specifics that 
you could add as to how you are going to carry that out, 
messaging your member institutions or whatever? And I will ask 
the same question of everyone else.
    Mr. McWatters. We are on the job now doing that. And, if 
the CFPB, the Bureau, decides that they do not have the 
authority to examine or supervise, we are already there.
    Senator Reed. Thank you. Ma'am?
    Ms. McWilliams. Nothing changes for us. We will continue to 
do what we have done in the past, and servicemember protection 
is high on our list of priorities.
    Senator Reed. Governor?
    Mr. Quarles. Similarly, that has always been a high 
priority of the Federal Reserve, and where we have the 
enforcement authority to act, we will do that.
    Senator Reed. Thank you.
    Mr. Otting. You asked about how that is communicated. We do 
both bulletins and policies and procedure issuance, and that 
will be part of our normal examination cycle.
    Senator Reed. Thank you very much.
    We have all talked about the 10 years that have passed 
since the last great crisis, and, unfortunately, there is 
always--even though it seems to be clear sailing, always--maybe 
it is because I am Irish. There is always an iceberg out there 
someplace.
    Starting with the NCUA, what do you think is the systemic 
danger right now that we are facing?
    Mr. McWatters. Well, Senator, that is a great question. It 
is difficult to answer. If I go back during my 36 years of 
practicing law, starting with the S&L crisis, the LBO crisis, 
lesser developed country crisis, dot-com crisis, and then what 
happened 10 years ago, there are common denominators: one, is 
regulators missed every one of them; and, two, they were all 
caused by lending, improperly underwritten loans, and an 
overconcentration of those loans. So looking and trying to 
specifically identify today what that is is difficult. So I 
take a more simplistic view.
    What causes a bubble to inflate? What causes a bubble to 
inflate is money going after a certain deal. The first deals 
are very good. People make money on the deals. More money flows 
in. The deals get dumber and dumber. They are not underwritten. 
There is an overconcentration. So the answer to your question: 
Simply follow the money.
    Senator Reed. Thank you.
    Ms. McWilliams?
    Ms. McWilliams. I generally agree with the Chairman's 
comments. I would also add we need to be cognizant of potential 
exposures the companies have and the financial institutions 
have to cybersecurity and cyber breaches. A colossal breach 
could bring a financial institution down for a number of days. 
There are also issues with, in general, technology and how the 
companies are handling the technological issues as we move 
forward. An issue of a technological kind would not necessarily 
bring the company down, but it is going to be on the front line 
of the defense.
    Senator Reed. And very quickly, Mr. Quarles?
    Mr. Quarles. For me, cyber risk is the issue that we should 
be focusing on that we have not--you know, we have taken a 
number of measures with respect to the financial stability 
risk, and those have been effective in my view. And the risk 
that we really need to focus on is cyber.
    Senator Reed. Comptroller, please?
    Mr. Otting. Senator, we believe credit quality is a big 
determinant of the future, and so in our semiannual risk 
statements, we continue to be focused on that. We recently 
introduced what our 2019 priorities will be. It is definitely 
around the credit risk in the institutions. But I would echo my 
colleagues on cybersecurity. We do spend a significant amount 
of time looking at perimeter software updates, patches, 
hardware, and the ability to recover from a cybersecurity 
issue. But that is the one area that we would have concerns 
that consumers would be influenced if a bank they were banking 
with were shut down for a number of days.
    Senator Reed. And, again, I think Mr. McWatters pointed 
out, most of these have shocked the system. We are thinking 
about it, but it is a big surprise, and the best life 
preserver--my nautical analogy continuing--is capital. And so 
you should think very
carefully as you start thinking about reducing capital because 
we might not know what is around the corner.
    Thank you.
    Chairman Crapo. Thank you, Senator Reed.
    Senator Tillis.
    Senator Tillis. Thank you, Mr. Chairman. Welcome to all of 
you, and thank you for the work that you are doing.
    Mr. McWatters, you made a comment about additional 
congressional action you think would be helpful. Could you get 
a little bit more specific about your recommendations?
    Mr. McWatters. In my oral statement, there are really two 
recommendations. Credit unions want to serve the unserved and 
the underserved. There is a provision in the Federal Credit 
Union Act that says that only multiple common bond credit 
unions can add underserved areas. Since credit unions want to 
serve underserved areas, want to serve the unserved, it would 
be helpful if the Federal Credit Union Act was amended to allow 
credit unions to do what they want to do. Credit unions are not 
subject to the CRA, and one reason they are not subject to the 
CRA is that they actually want to extend credit to those 
individuals, those businesses that the CRA would require them 
to. They want to do it anyway. So it would be helpful to amend 
the Federal Credit Union Act accordingly.
    Also, there is a request for vendor authority. All of the 
other regulators at this table have the authority to regulate 
to examine and supervise vendors. Credit unions, many of them, 
are very small, so they operate sort of on an economy-of-scale 
basis by pulling together and hiring outside third parties to 
assist them. Particularly in cybersecurity, as my three 
colleagues just articulated, we really cannot go in and examine 
those vendors. Our hands are tied. It would be very helpful for 
that to happen.
    Senator Tillis. Ms. McWilliams, you mentioned you are 
starting a listening tour. Have you completed any of those yet?
    Ms. McWilliams. I have been to your State, Senator, and----
    Senator Tillis. What did you hear?
    Ms. McWilliams. Bankers generally have issues with some of 
the accounting changes through FASB. There are issues with some 
of the BSA/AML compliance which is very complicated for 
community banks to do. In general, in rural communities, they 
are struggling, as Mr. Rounds mentioned, with appraisals and 
some of the lending activity. The agricultural prices and the 
farmland prices are of concern to some folks. So it is a 
hodgepodge of things. In general, they are very appreciative 
for the regulatory changes that are ongoing, and I believe that 
in general the forum helped them in many ways.
    Senator Tillis. I have got several questions I am going to 
submit for the record, and I look forward to your responses. 
But in my remaining time, first off, I do not think that S. 
2155 was trying to do any favor to any bank. It was actually to 
do a favor to consumers, to do a favor to unserved and 
underserved areas to the people who actually need banking 
options that they do not have today, because we have seen the 
ecosystem and community banks, we have seen a lot of pressure 
on credit unions. We have simply got to get more access to more 
consumers. That was my reason for supporting S. 2155.
    But, also, when you have a bank that is spending almost 
$700 million a year related to stress testing, there is 
something wrong. We have to be able to understand the risks, 
but there is something fundamentally wrong with the regulatory 
process when you are spending that amount of money for nothing 
more than compliance. It is going out of any efforts to support 
or maybe serve underserved areas.
    So, Mr. Quarles, and for the rest of you in my remaining 
time, number one, we have not only got to get to the regulatory 
relief for the $250 billion threshold; I think we have to go 
beyond that. And part of that is just streamlining the 
regulatory process. And for all of you at any given point in 
time, you could be in the same bank taking a look at your piece 
of the regulatory responsibility, but what are you all doing to 
make sure that these examiners, the people that are going on 
board, are actually being as lean as they can possibly be to 
get their job done? I think there is a lot of inefficiency. I 
think there is a lot of uncertainty, there is a lot of costs 
associated with that. And at the end of the day, it is the 
consumer, it is the business, it is the small business that 
gets harmed. It is not doing a favor to these banks.
    So what are you doing to try to streamline and provide 
better regulatory certainty? I will not have enough time for 
all of you to answer the question, but I would really like to 
see how you amongst your organizations are working to show me 
real progress in leaner regulatory execution.
    I will yield back my 10 seconds and look for your response. 
I would like to know precisely what you are doing between the 
agencies to get better at what you do.
    Thank you.
    Chairman Crapo. Senator Menendez.
    Senator Menendez. Thank you.
    Chair McWilliams, during your confirmation hearing, you 
committed to adhering to the requirements that attend to the 
Community Reinvestment Act, and you added, and I will quote, 
``I can also assure you that on a personal level, as somebody 
who was part of a low- and moderate-income community, the 
mission of the CRA resonates profoundly with me on a personal 
level as well.'' This commitment is one of the reasons that I 
voted in support of your nomination.
    The OCC recently released a proposal without input from the 
FDIC or the Fed contemplating sweeping changes to 
implementation of the CRA. So I would like to ask you and Vice 
Chair Quarles about that.
    First, do you both agree that discrimination in lending 
exists?
    Ms. McWilliams. Senator, we actually look for 
discrimination, and if we find it, we send those referrals to 
DOJ. So, yes, occasionally we come across incidents of 
discrimination in banking, and those cases get promptly 
referred to DOJ for prosecution.
    Senator Menendez. Mr. Quarles?
    Mr. Quarles. Similarly, we have the same program of looking 
for fair lending violations, referring them to the DOJ. We do 
find them. We continue to find them. And so it does exist.
    Senator Menendez. Would you support a final rule that de-
emphasizes the importance of a bank's physical presence in 
terms of branches in low- and moderate-income communities?
    Ms. McWilliams. I am sorry. Did you say ``de-emphasizes''?
    Senator Menendez. That de-emphasizes.
    Ms. McWilliams. I think we need to take a look at the role 
branches are playing in today's community, banking in general, 
and the digital framework for banks. But, in general, I believe 
that branches are important, still important, and in a number 
of low- and moderate-income communities. To the extent that 
consumers rely on those branches, more so than they rely on 
digital devices, I would certainly want to make sure that 
emphasis remains a part of this debate.
    Mr. Quarles. I think place is important with respect to 
banking and the implementation of the CRA. I come from a part 
of the country that is fairly rural, and the importance of 
branches in rural communities is something that I have a 
special interest in.
    On the other hand, the financial system is evolving, and 
branches have a different role than they have had in the past, 
and so I do think we need to think creatively while not 
ignoring place as an issue with respect to----
    Senator Menendez. So are you both familiar with research 
that home and small business lending increases in low- and 
moderate-income neighborhoods with the presence of bank 
branches and decreases when branches close?
    Mr. Quarles. I think some of that research has been done by 
the Fed. I am familiar with it.
    Senator Menendez. You are familiar with it?
    Mr. Quarles. Yes.
    Senator Menendez. Are you familiar with it?
    Ms. McWilliams. I have heard. I cannot tell you the paper 
that it came from.
    Senator Menendez. Well, I will look forward to sending it 
to you so that you can look at it because that is the fact.
    Would you support a final rule that limits analysis of 
lending and investment activities in individual census tracts 
and instead relies heavily on a single ratio to calculate 
qualifying lending and investments? That is to both of you.
    Mr. Quarles. Can I start first?
    Ms. McWilliams. Please.
    Mr. Quarles. My view of the regulatory process is that we 
benefit enormously from input. The Comptroller of the Currency 
has put out an ANPR that will give us a lot more information 
than we currently have. We're going to work jointly together on 
the basis of that information to put out an NPR. So I do not 
want to front-run that process by committing now to something 
that I may find on the basis of information that comes in from 
a variety of sources ought to be more nuanced.
    Senator Menendez. Well, how about you?
    Ms. McWilliams. I would want the final rule to ensure that 
the original congressional intent behind the CRA is satisfied.
    Senator Menendez. Well, I appreciate that. Do you agree 
with the premise that the CRA is about measuring banks' 
contributions--lending, investment, and services--to local 
communities?
    Mr. Quarles. You can go first this time.
    Ms. McWilliams. Thank you. Local communities, yes, that is 
a part of the CRA's intent. The banks are supposed to serve the 
communities in which they operate. And to the extent that those 
local communities are low- and moderate-income communities, 
they are supposed to service those communities as well. To the 
extent that they have a footprint that is not included 
necessarily in their local presence, low- and moderate-income 
communities, but in their general footprint there are such 
communities, they are supposed to service those.
    Senator Menendez. Well, here is my concern. If regulators 
no longer look at activities in individual low- and moderate-
income communities or do so in a limited capacity and instead 
rely on the totality of a bank's actions, how is it that they 
will be able to monitor whether banks are meeting local credit 
needs, which vary from community to community? That is why the 
question that has been put out that suggesting that instead of 
looking at individual census tracts, that a single ratio to 
calculate qualifying lending and investments basically looking 
at the total of an action without looking at its disparate 
effects upon communities, that is at the heart of the CRA. That 
is at the heart of the CRA. And I would hope that after your 
review, you would make sure that what is at the heart of the 
CRA remains at the heart of the CRA.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. Thank you to the 
witnesses.
    Let me begin with Ms. McWilliams. You observed what I think 
has been a national embarrassment and a big economic 
opportunity cost when you referred to the decade or so during 
which we had fewer than a dozen de novo banks launched over an 
entire decade. That is just horrendous compared to what we used 
to do. So I do want to commend you for the attention you are 
putting on facilitating the application process.
    As we all know, a de novo bank is not a systemic risk to 
the United States, any particular State, or typically the 
negative in which they are headquartered. The idea that the 
Federal Government has to burden folks who are attempting to 
launch such a venture and provide capital in their community is 
just--I am relieved to hear that it is a priority of yours, and 
I thank you for that.
    Mr. Otting, I would like to direct this primarily to you, 
although it applies more broadly. I was pleased to see the 
September statement that you folks put out underscoring and 
confirming and clarifying that guidance is not the same thing 
as a rulemaking, that it is not binding. You know the history 
of our successful effort to get the GAO to confirm that the 
leverage lending rule really amounted to--guidance, I should 
say, really amounted to a rule. So I am pleased that our 
regulators have acknowledged that when you take the delegated 
authority that Congress has given, you actually have to follow 
the APA and then the CRA and abide by those measures.
    My question for you, Mr. Otting, is: What are you doing to 
make sure that this important idea makes its way to the 
examiner level? Because I have hard from banks that feel as 
though this somehow has not filtered down to the guys who are 
actually walking in the front door of the bank and doing 
examinations.
    Mr. Otting. Thank you very much for the question. I will 
admit that I am a little baffled by this guidance issue. It is 
fairly clear to me what the word ``guidance'' means, and we 
would hope that in the OCC people will take that to heart and 
understand that definition.
    The one area that I think over the years that has perhaps 
got us off the rails a little bit was on the leverage lending 
guidance. And so I think over the 10 months that I have been 
here, we have had a number of sessions with senior leaders, 
with Deputy Comptrollers, with examination staff. We have 
produced internal communication on this item. I am a little 
disappointed to hear that you have heard feedback that people 
are not recognizing guidance as guidance and that rules are 
rules. But I would hope that the next time we get together, the 
feedback that you receive would be completely the opposite. I 
think we have taken this issue on straightforward, and have had 
a lot of both written and verbal communication within the 
agency, all the way to the point that no regulatory or 
supervisory action can be based on guidance.
    Senator Toomey. Thank you. I appreciate that and I 
encourage your continuing that.
    Vice Chairman Quarles, I think it is almost a year now 
since you have been confirmed. You and I have had a number of 
conversations about the tailoring of the enhanced prudential 
standards. And I am encouraged once again in your testimony you 
point out the importance of that, the legitimacy of that. But I 
have to say I am frustrated because I just have not seen the 
progress that I thought we would have seen by now.
    As you know, I am particularly concerned about the 
liquidity coverage ratio as it applies to banks that are just 
above the $250 billion threshold but clearly not similar to the 
giant money center banks. So I thought we would have seen 
something a long time ago, frankly, and I am wondering if you 
can give us any assurance that there is something coming soon 
in the general category of tailoring but also specifically with 
respect to the LCR.
    Mr. Quarles. Yes, Senator, that is a perfectly comment. I 
have been surprised as well at the time that it has taken to 
move forward on that topic. But as I indicated in my testimony, 
we do view that as a priority, and we will be addressing it 
promptly.
    Senator Toomey. Any more color on the ``promptly''?
    Mr. Quarles. One of the issues with respect to the timing, 
which I know one could take different views about, but we did 
want to wait until the legislative instructions with respect to 
tailoring were clear before we completed that task. And so we 
are viewing it as a whole, and so it has been affected by that. 
But we are no longer--we are now working hard on that as part 
of the overall tailoring package, and so it should proceed at 
the same pace.
    Senator Toomey. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman and Ranking Member 
Brown, for holding this hearing. Thank you all for being here. 
I appreciate your testimony.
    Mr. Quarles, one of the provisions that I spent a lot of 
time on in S. 2155 was one related to international insurance 
capital standards. The provision intends to bring more 
transparency to the international standard-setting process. So 
could you give me an update on where the Federal Reserve is in 
terms of setting up an advisory committee on international 
insurance?
    Mr. Quarles. Well, we are working to increase the 
transparency of that process, and I do not think that we have 
an advisory committee stood up, but that is part of what we 
will be--you know, that is part of what we will be working on 
and ensuring that we have full input into----
    Senator Tester. Can you give me any--is there a timeline on 
when that advisory committee would be set up?
    Mr. Quarles. I cannot today, Senator, but I will respond 
promptly to you.
    Senator Tester. Perfect.
    Senator Tester. Mr. Quarles, is it your belief that the 
international standard-setting organization such as the 
International Association of Insurance Supervisors are 
embracing more transparency in their negotiations?
    Mr. Quarles. I do think that they are, yes. The information 
that I have received both from the international standard-
setting bodies themselves as well from our participants in them 
is that we are making progress on that front.
    Senator Tester. OK. Last year the Treasury Department 
recommended continued U.S. engagement in international forums 
to enable the promotion of U.S. industry competitiveness as 
international regulatory issues are debated and standards are 
crafted. Does the Federal Reserve support those priorities as 
part of Team USA's coordinated engagement in international 
forums? And by our participation, do you feel progress is being 
made in advancing the United States' interests?
    Mr. Quarles. Yes, I do think so. I think that both with 
respect to the insurance standard-setting bodies and with 
respect to the international financial bodies themselves, it is 
very much in our national interest to try to ensure that our 
views are made known, and they are being made known 
particularly with respect to insurance.
    Senator Tester. Well, thank you. I just want to say quickly 
for the record that I think S. 2155 has taken a big step 
forward in terms of transparency for international regulations, 
insurance regulations. And I know that there are some efforts 
in the House of Representatives to go far beyond what was 
recently signed into law with S. 2155. I believe those efforts 
are misguided and, quite frankly, counterproductive to the good 
work that this Committee has done. And I would just like to say 
to my colleagues in the Senate I would hope that we would give 
the provisions of S. 2155 a chance to play out before folks try 
to amend this section of the law.
    With regard to Section 401, you have already talked about 
implementation of that, Mr. Quarles, with banks with less than 
$100 billion in assets. For the other institutions--and you 
said that you
anticipated those would be out before the end of the year. I 
just want to clarify some stuff. S. 2155 directs the regulators 
to exempt all bank holding companies with less than $250 
billion from
enhanced prudential standards, that issues like CCAR and 
international holding companies are somehow changed by the 
statutory language of S. 2155.
    So my question for you, Governor Quarles, is this: Can you 
elaborate if the Federal Reserve views S. 2155 as directing you 
to eliminate all prudential standards for banks with less than 
$250 billion or require you to change CCAR or IHC thresholds?
    Mr. Quarles. So I think it is clear that we have been 
instructed for banks in that category, $100 to $250 billion, to 
tailor our regulations.
    Senator Tester. Yes.
    Mr. Quarles. And I think that is a clear instruction, and 
we are taking that seriously.
    Senator Tester. In regard to tailoring, let us say you find 
a bank that is in that--let us say you find any bank, by the 
way, that has got a pretty nonrisky profile, we will call it, 
and you have changed the standards on them because you find 
that their portfolio is pretty reasonable and lacks risk, and 
they change it. Do you have the ability to bring them in 
regardless of the size?
    Mr. Quarles. Absolutely. The statute certainly does not 
change our ability to prudentially regulate. We will continue 
to be focused on capital and liquidity for institutions in that 
size and complexity range. The instruction is to tailor, but it 
is not to eliminate prudential regulation.
    Senator Tester. So would it be fair to say--and then I will 
quite, Mr. Chairman. Would it be fair to say that as you look 
to tailor regulations, you are going to base it on a risk 
profile, and if that risk profile changes, you will change the 
regulations to meet that risk?
    Mr. Quarles. Absolutely.
    Senator Tester. Thank you.
    Chairman Crapo. Thank you, Senator Tester.
    Senator Shelby.
    Senator Shelby. Thank you.
    Governor Quarles, are capital and liquidity two of the most 
important, maybe not all but most important things in the 
banking community?
    Mr. Quarles. They are the foundation, yes.
    Senator Shelby. They are the foundation of the whole thing, 
are they not?
    Mr. Quarles. Yes.
    Senator Shelby. I will throw this question out because it 
is what you do every day. How do you balance the risk in the 
banking community? Do you do it bank by bank? Do you do it 
small banks versus big banks, everything in what we will call 
``systemic risk'' to our banking system, our economy, as to 
what will not, keeping in mind you want all banks, if they can 
be, to be healthy? How do you do that?
    Mr. Quarles. Well, as you note, we have to have a 
regulatory system that allows us to look both at the capital 
and liquidity position of individual institutions for their 
individual safety. And then we look at factors that affect the 
stability of the financial system, even apart from individual 
institution failure.
    Senator Shelby. I will ask this of the whole panel. How 
have and how will the agencies that you head up take cost-
benefit analysis into account when implementing regulations? 
And how important is that?
    Mr. Quarles. I am happy to start----
    Senator Shelby. Go ahead.
    Mr. Quarles.----with the fact that I think that that is an 
extremely important factor in any regulatory process. Looking 
at the cost of regulation versus the benefit of regulation, 
doing that seriously and honestly is something that we as 
regulators are, A, required to do by the law, and it is also 
very appropriate for us to do.
    Senator Shelby. Ms. McWilliams?
    Ms. McWilliams. I agree. Cost-benefit analysis is crucial 
for us to determine the outcome of the rulemaking process and 
to avoid unintended consequences that would in the end in some 
cases harm the very entities and consumers that we are trying 
to protect.
    Senator Shelby. Mr. McWatters?
    Mr. McWatters. Yes, Senator, we certainly pay attention to 
it. But in all candor, it is sometimes difficult to come up 
with a meaningful metric as to what is a cost and what is a 
benefit. It is back-of-the-envelope in many cases. It is a 
sincere, good-faith effort as to what are we really 
accomplishing here versus what it is going to cost. So it is a 
little more visceral than it is scientific, a little more art 
than science.
    Senator Shelby. Comptroller?
    Mr. Otting. Yes, Senator Shelby, we deploy a risk-based 
system, and accordingly with technology we can do more and 
provide more offsite-related analysis. We also spend a 
significant amount of our time doing outreach with CEOs and 
various executives of banks to gather data where they think 
there is an overabundance of both either interagency or within 
a particular agency of giving us feedback. And I think we have 
been able to take a lot of those things and try to become more 
efficient as we are implementing our regulatory oversight and 
authority.
    Senator Shelby. Mr. Quarles, I will start with you again. 
Is or will the methodology to do the analysis differ from the 
Fed, FDIC, Comptroller, credit union, or will it overlap? Will 
it be similar? I am sure there is no one standard.
    Mr. Quarles. Well, when we do a joint rulemaking, you know, 
we work together----
    Senator Shelby. Should you do a joint rulemaking dealing 
with cost-benefit analysis?
    Mr. Quarles. Well, I think the cost-benefit analysis that 
we undertake in connection with a joint rulemaking, we would 
coordinate on that as well. I think.
    Ms. McWilliams. So, to continue, we would look at each 
other's entities. For us, it would be State-chartered banks 
that are not members of the Federal Reserve System and what the 
impact of the rule would be on those banks. We would certainly 
solicit comment on that as well. We would ask our economists 
and researchers to work collaboratively with the other agencies 
to estimate what the aggregate cost will be on the financial 
framework, and then we would come up with something good, 
hopefully, all together.
    Mr. Otting. I think that is a creative and innovative 
thought process to do joint rulemaking on that issue, and in 
our weekly general calls we will bring that up and have 
dialogue around that subject.
    Senator Shelby. I know my time is moving on here, but 
Senator Toomey got into the de novo bank applications. There 
are not many of them. You are doing some analysis, all of you 
looking at that. What is the cause of this? Why are there fewer 
de novo applications? What is the implication for the banking 
system and ultimately the entire economy? Is there a connection 
there, or is this an ongoing analysis? Ms. McWilliams?
    Ms. McWilliams. I believe there is a connection there, and, 
frankly, we lost hundreds and thousands of banks in the last 
10, 20, 30 years. In order for us to replenish the ranks of 
especially community banks, we need to encourage de novo 
applications. They work well for their communities. They serve 
their communities. Usually they start with a very small staff, 
with several millions dollars in capital. It is usually a local 
banking activity, and it happens in places where there is not a 
whole lot of competition for banking services. So they serve 
the communities that are otherwise a little bit neglected or 
not at the forefront of the larger banks' business models.
    Senator Shelby. My time is up. Thank you.
    Chairman Crapo. Thank you.
    Senator Donnelly.
    Senator Donnelly. Thank you, Mr. Chairman. I want to thank 
all the witnesses for being here.
    I am proud to have worked closely with you and Senators 
Heitkamp and Tester and Warner, among others, to craft this 
bipartisan legislation. This law provides much needed 
regulatory relief to the Main Street community banks and credit 
unions vital to economic growth in our communities, 
particularly in rural areas where families and farmers and 
small businesses often lack access to borrowing.
    Today I want to focus on how this law benefits consumers 
across Indiana. Sections 301 and 302 of S. 2155 were partly 
inspired by the Equifax data breach, which compromised the 
personal information of more than 145 million Americans, 
including nearly 4 million Hoosiers. Sixty percent of Hoosiers 
were impacted, which is the highest percentage of any States, 
according to data from the Wall Street Journal. Americans 
deserve the ability to monitor and protect their credit files 
from criminals seeking to steal their identities.
    With that goal in mind, I will highlight three important 
new provisions I helped author.
    One, as of 10 days ago, every American can now freeze and 
unfreeze their credit files and set year-long fraud alerts, all 
free of charge.
    Two, starting next year, active-duty servicemembers will 
receive free credit monitoring to make sure their credit files 
are kept safe while they keep us safe.
    And, three, veterans will no longer be penalized by medical 
payment delays at the Department of Veterans Affairs and can 
more easily remove VA-related mistakes from their credit files.
    Due to these three provisions, consumers and servicemembers 
and vets can now better protect their credit files and 
safeguard their personal information against fraud and identity 
theft.
    The following questions will be for all four witnesses. 
Though the FTC and the CFPB are the agencies primarily focused 
on the provisions I highlighted, the Federal Reserve, OCC, 
FDIC, and NCUA are relevant as the primary regulators of 
financial institutions that report to and rely on credit files 
as part of the consumer lending process.
    So, first, how do you recommend consumers best take control 
of their financial information and protect themselves from 
fraud of identity theft? Mr. Otting, we will start with you?
    Mr. Otting. Thank you very much. First of all, I commend 
you on your efforts. I think this information is important for 
consumers to be aware of and have access to. On the OCC 
website, we parallel some of the activities that you described, 
where consumers have an educational format, where they can 
identify ways they can reach their credit reports, what is 
available to them for free so they understand the rules and the 
regulations.
    I do think it is important that consumers take advantage of 
some of the tools that are offered by financial institutions. 
Recently I lost my credit card for a day, and I was able to 
freeze my account, and then I found my card and I could 
reactivate it. Years ago that account would have been closed. 
They would have issued a new card, and I would have been 
without it for a week. So I think some of the provisions that 
we have recently put in under your leadership are going to make 
consumers more able to monitor risk and then be able to spot 
when there are activities associated with that.
    Senator Donnelly. Thank you.
    Mr. Quarles?
    Mr. Quarles. Thank you. At the Federal Reserve, through the 
Federal Reserve banks, we have an active financial education 
process to make consumers aware of their rights under the new 
legislation. And we also will be doing research as to the 
effect of some of these changes going forward.
    Senator Donnelly. Chair McWilliams?
    Ms. McWilliams. We have a very robust consumer education 
program at the FDIC, including the Money Smart publication that 
goes to the consumers. We have consumer newsletters. We have 
provided a newsletter on the credit freezes that are available 
by virtue of S. 2155, so I want to thank you for that. And, in 
general, we do extensive consumer outreach.
    Senator Donnelly. Thanks.
    Mr. McWatters?
    Mr. McWatters. Thank you, Senator, for your leadership in 
this very, very important area. We have a separate website, 
MyCreditUnion.gov, that covers many of these items. It helps
consumers understand what their identity is, how important 
their identity is, how to safeguard their identity, how to look 
at a statement from a financial institution, to determine 
whether statements are accurate, and if not, who to notify, and 
how to notify. So it is really the blocking and tackling, 
things that you may just know instinctively but that a lot of 
people do not actually know.
    Senator Donnelly. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman.
    Mr. Otting, can we agree that banks enjoy numerous 
advantages vis-a-vis nonbank competitors as a result of 
Government actions?
    Mr. Otting. Yes, we can.
    Senator Kennedy. For example, I could start a competitor to 
YouTube tomorrow, but if I want to start a bank, I have to get 
a charter, do I not?
    Mr. Otting. That is correct.
    Senator Kennedy. So that limits existing banks' 
competition. Can we agree on that?
    Mr. Otting. We can.
    Senator Kennedy. OK. Banks can lend nationwide, can they 
not?
    Mr. Otting. Depending upon their charter and where they are 
legally chartered to operate, that is correct.
    Senator Kennedy. Right, but Government has given them the 
privilege of lending nationwide--am I correct?--so long as they 
comply with the necessary rules.
    Mr. Otting. And depending on what charter they have, 
correct.
    Senator Kennedy. Right, OK. A nonbank like Prosper or 
Lending Club, they have to get a license from every single 
State, don't they?
    Mr. Otting. Yes, they do.
    Senator Kennedy. What about transferring money? Banks can 
transfer money across State lines, but nonbank competitors have 
to get State licenses, do they not?
    Mr. Otting. Well, are you saying where a bank has locations 
in multiple States?
    Senator Kennedy. Yes.
    Mr. Otting. Yes, they can.
    Senator Kennedy. OK.
    Mr. Otting. And nonbanks usually will use a financial 
institution to accomplish that.
    Senator Kennedy. How about Federal deposit insurance? Does 
that give a bank a competitive advantage over a nonbank 
competitor like a money market mutual fund?
    Mr. Otting. Up to a certain level it does, the maximums of 
the FDIC levels. It gives people confidence that the U.S. 
Government stands behind those deposits.
    Senator Kennedy. OK. In 2008 and 2009, the American 
taxpayer bailed out some of our larger financial institutions 
under TARP. You, of course, remember that.
    Mr. Otting. I do.
    Senator Kennedy. Do you think all those financial 
institutions would have survived had the American taxpayer not 
stepped up to the plate and bailed them out?
    Mr. Otting. I cannot speculate on that. I think it was very 
important in the eyes of Americans that the banking industry 
was stable.
    Senator Kennedy. Of course.
    Mr. Otting. And that there was capital there to ensure that 
those financial institutions would be available to support 
their needs.
    Senator Kennedy. Well, for example, under TARP and Federal 
loan guarantees, Citigroup got $475 billion from the American 
taxpayer. Bank of America got $336 billion in dollars and 
guarantees. Without those guarantees and loans from the 
American taxpayer, would they have made it?
    Mr. Otting. I did not do that analysis. I am assuming--if 
you want me to offer a general opinion, I think it could have 
been questionable.
    Senator Kennedy. OK. Well, when a bank uses Government-
provided market power to force social change, can we agree that 
that bank is effectively acting as a private regulator?
    Mr. Otting. Could you repeat that question for me? When a 
bank----
    Senator Kennedy. Yes, banks have competitive advantages as 
a result of Government.
    Mr. Otting. That is correct.
    Senator Kennedy. When they use that Government-provided 
market power to implement their version of appropriate social 
change, they are in effect acting as a private regulator, are 
they not?
    Mr. Otting. I do not know if I would say a private 
regulator. I think that they are deploying the management and 
the board's decision on markets that they wish to serve.
    Senator Kennedy. OK, or not serve.
    Mr. Otting. Or not serve.
    Senator Kennedy. All right. I am going to be introducing a 
bill called the ``No Red and Blue Banks Act'' that is going to 
block the GSA from awarding contracts to banks that 
discriminate against lawful companies based solely on social 
policy considerations. I would sure like you to take a close 
look at it.
    Mr. Otting. I would.
    Senator Kennedy. In the 30 seconds I have left, let me ask 
you this question: I just read an article where Bank of America 
was fined $30 million for manipulating a benchmark for interest 
rate products. They did it over 6 years to enhance--or to make 
money on their own derivatives positions. They were fined $30 
million. Their total assets are $2.3 trillion. Do you think 
that is really going to stop them?
    Mr. Otting. A fine is one aspect to regulatory oversight. 
In addition to a fine, usually there are critical factors 
around consent orders and various policies that are required to 
be adapted by the financial institution. So I do not think a 
fine solely will dictate, you know, whether the bank will not 
be involved in that activity going forward.
    Senator Kennedy. If you did that, you would have U.S. 
Attorneys hanging all over your neck, wouldn't you?
    Mr. Otting. Probably.
    Senator Kennedy. Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    So for decades, banks refused to lend to low-income 
minority neighborhoods and in rural communities, and this 
prevented a lot of working families from getting a loan either 
to buy a home or to start a small business. So in the 1970s, 
Congress passed the Community Reinvestment Act, or CRA, to 
level the playing field and to require the banks to ``meet the 
credit needs'' of all the communities in which they operate.
    So, Mr. Otting, your agency, the OCC, put out a proposal a 
few weeks ago to rewrite the CRA rules. Notably, the Fed and 
the FDIC did not join in that proposal, even though usually all 
three agencies work together on CRA.
    Now, that was a pretty sharp sign that there are problems 
with your proposal, and as I dug into the details, I saw some 
of these problems. So here is one example.
    Today banks get credit under CRA for all kinds of things--
making mortgages, providing financial education--and the amount 
of CRA credit they receive depends on the impact of the actions 
they take.
    Now, Mr. Otting, you suggest a new ``transformational 
approach'' that would count all these investments the same for 
CRA purposes. So a dollar to help a family buy a home is the 
same as a dollar to print a financial education pamphlet. Is 
that right?
    Mr. Otting. That is incorrect.
    Senator Warren. That is incorrect? So you do not stand 
behind the idea that you proposed?
    Mr. Otting. I do stand behind the ideas that I propose, but 
what we have offered in there is a concept. And recall this is 
an ANPR where we go out--it is a document to get feedback from 
people----
    Senator Warren. So you are backing off from what you put 
though in your document?
    Mr. Otting. No, I am not backing off. This is a document 
that we put out to receive feedback. We spent time with over 
1,100 people before that document was produced. We gathered 
that feedback from civil rights groups, community 
organizations----
    Senator Warren. And so now you will be rewriting it?
    Mr. Otting. Well, just for clarification, an ANPR goes out, 
we gather questions, we expect to have somewhere between 5,000 
and 10,000 feedback from that report to which then we will work 
with the other agencies----
    Senator Warren. So you are telling me you are not standing 
by what you wrote. All right.
    Mr. Otting. No.
    Senator Warren. The approach is designed----
    Mr. Otting. You know, if you do not understand the process 
of an ANPR----
    Senator Warren. I think I do understand----
    Mr. Otting.----I would be happy to explain it.
    Senator Warren. Please, please. I think actually I do 
understand.
    Mr. Otting. OK, good. Then I would be happy to have 
dialogue with you on that.
    Senator Warren. That is what we are doing right here. I am 
asking some questions, and I would like some answers. This
approach is designed to allow banks to invest even less in 
underserved communities than they do----
    Mr. Otting. I disagree with that statement.
    Senator Warren. Yeah, I am sure you do. Forty-one years 
after the CRA was passed to promote service in low-income 
neighborhoods and rural areas, it was supposed to reduce 
redlining, but a new report shows that in 2018 it is harder to 
get a mortgage in 48 large U.S. cities if you are black. 
Adjusted for inflation, lending in rural communities is below 
1996 levels. And yet 98 percent of banks pass CRA exams today, 
and you want to weaken those standards. Now, we----
    Mr. Otting. I do not want to weaken those standards. That 
is an inaccurate statement.
    Senator Warren. Look, all I can do is read the words that 
you have printed.
    Mr. Otting. Then we should spend time with you and clarify 
it.
    Senator Warren. Yeah, I am sure you should. We need to 
revise the CRA to make it stronger. Can you agree on that?
    Mr. Otting. We do agree with that.
    Senator Warren. All right. So you are going to try to make 
it stronger. You know, I have----
    Mr. Otting. We are going to make the measurement system 
clearer hopefully with my colleagues.
    Senator Warren. Yeah.
    Mr. Otting. We will identify what qualifies, because it is 
subjective and not accurate today.
    Senator Warren. Well, I have laid out in my housing bill 
last week concrete ways of doing that, of making the CRA 
stronger.
    Mr. Otting. I would enjoy speaking with you on that.
    Senator Warren. I am delighted to hear that. You know, but 
that really is the point here. This really is about families 
who cannot get access to credit. As Senator Kennedy just 
pointed out, the banks get an enormous advantage thanks to the 
Federal Government on lending, and one of the responsibilities 
in return for that is that they serve their communities. And 
when two other Federal agencies cannot agree with you the rules 
you are proposing do that, I think we have a serious problem.
    In the time I have left, I just want to ask about one other 
thing, and that is another rollback of financial rules.
    You know, in April, the Fed and the OCC proposed loosening 
the enhanced supplementary leverage ratio, a special capital 
requirement for the eight largest banks in this country. The 
FDIC did not join in the proposal, but that was before you got 
there. I want to ask you about this, Chairman McWilliams. I 
want to get your thoughts on it.
    Two of your most recent predecessors as FDIC Chair, Marty 
Gruenberg and Sheila Bair, opposed weakening the leverage 
ratio. Director Gruenberg said in a speech last month the 
proposal would reduce this important capital requirement at 
these eight federally insured banks by at least $121 billion, 
which represents a roughly 20-percent decrease relative to 
today. Do you agree with Chairman Gruenberg?
    Ms. McWilliams. I certainly appreciate his views on this 
proposal as well as I appreciate the views of all of our Board 
members. It is an open rulemaking. I was not privy to the 
process that went into consideration of the rulemaking, and I 
certainly would want to understand the logistics and the 
reasoning behind coming up with the proposal as it is.
    Senator Warren. All right. So this is an open question. I 
will quit because I recognize I am over time, but I just want 
to say again putting American taxpayers at risk again and 
weakening capital standards by $121 billion at a time when the 
banks are making record profits is insane. This is not what our 
banking regulators should be doing.
    Thank you, Mr. Chairman. I apologize for going over.
    Chairman Crapo. Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. Thank you to the 
panel for joining us this morning and sharing your expertise.
    I am not opposed to regulation. I am opposed to regulation 
for regulation's sake, however. It was congressional intent in 
S. 2155 to move away from the $50 billion asset threshold not 
just for capital standards but for resolution planning, the 
LCR, and stress test frequency. Comptroller Otting's work on 
the recovery planning rule is a good model to follow. I ask you 
all, especially Vice Chair Quarles, to act with a sense of 
urgency when it comes to exercising your discretion with an eye 
to a sensible regulatory approach and continued economic 
growth.
    I will also add that foreign banks are a welcome presence 
in our country. Seven percent of South Carolina's workforce are 
at foreign companies. That is about 130,000 workers working at 
1,200 foreign firms. And who often banks those employers? Well, 
it is foreign banks. Michelin deals with BNP Paribas, a French 
bank for a French company. BMW is served solely by Commerzbank, 
a German bank for a German company. And the list, of course, 
goes on.
    We should encourage FDI here at home and not vilify it. 
Please apply a tailored regulatory approach to these 
institutions when appropriate.
    On a different note, South Carolina has suffered its third 
major storm in 4 years. The flood insurance take-up rate is too 
low in South Carolina. Out of about 1.5 million households, 
only about 204,000 policies exist. According to a recent 
Milliman study, 60 percent of those in Hurricane Matthew's path 
did not have flood insurance. It was 80 percent for Hurricane 
Harvey. The same study found that a private market could 
increase the take-up rate in both low- and high-risk areas, 
improving the resilience, rebuilding, and recovery process.
    While there is nothing in Federal law that prohibits 
consumers from choosing a private flood insurance market, a 
robust private market still does not exist.
    I will ask Mr. Otting and Ms. McWilliams: What is the 
timeline on issuing the final rule Congress asked for back in 
2012? And are you deviating from the narrow and unworkable 2016 
proposed rule?
    Mr. Otting. Would you like me to answer first?
    Senator Scott. Sure.
    Mr. Otting. First of all, I do support the private 
insurance market, and you may or may not know that we have 
communicated that to the banks that we regulate. I think the 
point you made that, unfortunately, it is not a large enough 
market at this point to make it price competitive, we do 
support making the market larger by private insurance being 
able to enter into the market. We also collectively have had 
dialogue on this topic. We would hope that in early 2019 we can 
issue the rule. That I think can bring resolution to this 
issue. I look forward to having joint discussions with Jelena 
on the FDIC's perspective on this as we move forward.
    Senator Scott. Thank you.
    Ms. McWilliams. Likewise, we are looking to very promptly 
move--and I am sorry for the devastation in your State. I had 
an opportunity to be in North Carolina last week, and most of 
northern North Carolina was not affected. But I know some of 
the bankers from the southern parts could not make it for those 
reasons. We are looking to finalize a rule hopefully by as 
early as February of next year, and we have encouraged the 
banks to use private flood insurance in substitution of the 
Federal where possible or where available.
    Senator Scott. All right. Thank you.
    Thank you, Mr. Chairman.
    Chairman Crapo. Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thank you to all 
of you for being here and for your public service.
    I want to ask Mr. Otting a question first, and it is 
following up on a conversation we had last time I think that 
you were here. I asked you about OCC's CRA guidance, and I was 
concerned because the guidance limited the impact of 
discriminatory credit practices on a bank's CRA rating, and I 
thought we had a meeting on the minds because you said: ``We 
should never allow any discrimination in any kind of lending 
activities to occur, and if it does, it should have an impact 
on their CRA rating.'' And you promised to relook at that. But 
now the OCC is still not going to downgrade a bank's CRA rating 
for discriminatory lending practices that fall outside of the 
bank's CRA lending activities.
    I just want to register that I am confused. I thought we 
had a meeting of the minds. I am disappointed with what OCC 
does. I believe that you had the discretion to do what you did. 
I also believe that you had the discretion to not do what you 
did. I do not think the law required you to interpret your 
statutory mandate so narrowly.
    I do not want to waste the rest of the 5 minutes on that, 
but I would like to follow up for the record and through my 
staff.
    Senator Schatz. The second question is: Where are we with 
the 800,000 consumers who were ripped off by Wells Fargo by 
purchasing auto insurance that they did not need?
    Mr. Otting. Yes, first of all, thank you for the point on 
the 500-43. I do believe--and I will follow up with your staff 
and yourself personally, if you would like to have a dialogue 
on that. But I do think that we did bring clarification to that 
point.
    On the issue of Wells Fargo Bank, I would say that we 
continue to work with the management and the board. We are not 
comfortable where we are with them. In April, you may recall 
that we issued a consent order that clearly spelled out all the 
actions that we expected from the bank. We continue to monitor 
that. I have high confidence in our 100 examiners that are 
onsite at Wells Fargo, have confidence in their process to 
monitor.
    Senator Schatz. But if I am one of those 800,000 consumers, 
when can I expect to be made whole? When can I expect this to 
come to a resolution? Because I understand you are going 
through a process and kind of wrangling with their board of 
directors and working through your agency. But if I am one of 
those 800,000 people, I want to distill this into, well, when 
do I get my money back?
    Mr. Otting. I do not have the particular date in front of 
me because each of these supervisory activities are broken into 
timelines and activity. However, I will say it is not the 
wrangling with the board and the management and the OCC. It is 
accurately getting the data so you can determine the harm and 
the impact that needs to be----
    Senator Schatz. Fair enough. And let me just kind of raise 
a second question as it relates to Wells Fargo. We know that 
this is not an isolated scandal as it relates to Wells Fargo. 
They wrongly charged consumers for extensions of mortgage rate 
locks. They charged monthly fees to consumers for add-on 
products that they do not understand. They wrongly repossessed 
the vehicles of hundreds of servicemembers. They are being 
investigated for pushing customers into high-fee investment 
products and churning accounts to increase fees and wrongly 
denied mortgage loan modifications for more than 600 customers 
and foreclosed wrongly on 400 customers.
    The question I have is: Isn't this organization just too 
big? And I understand that you kind of analyze whether 
something is too big kind of in a strict statutory analysis, 
but you also analyze it in terms of your ability to supervise 
it. And if you look at the OCC, it has got, what--how many 
employees do you have?
    Mr. Otting. Four thousand.
    Senator Schatz. Four thousands employees. Wells Fargo has 
260,000. You have about $2.8 billion in revenue. They have $88 
billion in revenue. And here is the kicker: Besides the 
systemic risk, besides the systematic kind of growth model 
where you have a multi-trillion-dollar bank who depends on 
these business units, regardless of the business opportunity, 
regardless of the size of the economy, the growth of the 
economy, they have to grow, they have to report growth up. And 
then they cannot supervise themselves. It is very clear that 
they cannot supervise themselves. It is also very clear that we 
cannot supervise them.
    Then I ask the CEO about revoking their charter, and they 
say, ``No, you should not revoke our charter because we provide 
products and services to one out of every three American 
households.''
    So how is that not them actually saying we are too big to 
be taken down?
    Mr. Otting. It is our viewpoint there are other large 
financial institutions that have proven to be able to be 
regulated and to serve their customers in a satisfactory 
manner, so size does not necessarily dictate inability to be--
--
    Senator Schatz. But in this instance, it seems like their 
size is a problem. I get that there are other institutions that 
are not so egregiously harming customers and creating systemic 
risk. But this institution does seem beyond repair from the 
standpoint of the overall economy and also from the standpoint 
of how they systematically screw customers.
    And so it does have something to do with size, because at 
some point, you know, I--excuse me, Chairman. I will just--with 
your indulgence. I understand kind of the analysis of whether 
something is a monopoly, you know, vertical versus horizontal 
integration. I get all of that. What I am asking is if at some 
point an institution is so big that you cannot manage it, that 
it cannot manage itself, and also that its political influence 
is so massive that we cannot wrangle it to the ground on behalf 
of the health of the economy or the health of individual 
household economics. And I want you to think about that, not as 
a sort of partisan talking point but the extent to which its 
size makes it almost impossible to supervise.
    Thank you.
    Chairman Crapo. Senator Heitkamp.
    Senator Heitkamp. Just to follow on, we have heard many 
circumstances--in fact, one not partisan, but you cannot go 
after money laundering because the institution is too big. And 
if you attack them on money laundering, it might further rattle 
the credit markets. And so we hear this periodically, and this 
is a problem. And if you do not want action on not being too 
big to fail, then the regulation has to have some impact. But 
we keep hearing story after story, and there is not adequate 
explanation at this point. And so I think it is important that 
we follow up.
    But I want to first off thank you all for moving forward 
with the community bank provisions on some of the simplifying 
the complex capital requirements rules under 201. I understand 
Chairman Crapo asked that question when I was at a different 
hearing, and I just want to thank you for moving forward with 
those provisions.
    I think another provision that is important for local banks 
is Section 205, which eliminates paperwork for banks through an 
expanded short-form call report.
    Can anyone give me an expected timeline for rules regarding 
that section?
    Mr. Otting. We are expecting either late October or early 
November to be able to have the NPR----
    Senator Heitkamp. So notice of proposed rulemaking the end 
of October?
    Mr. Otting. That is correct--end of October or early 
November.
    Senator Heitkamp. OK. We will watch for those.
    I want to turn to appraisals because that was a big 
provision. I think a lot of people here have heard me say over 
and over again how difficult it is to get appraisals in rural 
communities, and this goes to you, Ms. McWilliams. Where are 
you at with setting out some guidelines or a process for 
appraisal waivers for residential property?
    Ms. McWilliams. We are looking to issue something very 
soon, Senator, in the next month or so.
    Senator Heitkamp. Next month?
    Ms. McWilliams. Yes. First of all, we need to comply with 
the law as promptly as we can. But, second of all, it is a huge 
issue for rural communities, and, frankly, the fact that 
sometimes they have to take months to approve transactions at a 
rural bank because of the lack of appraisers is not optimal.
    Senator Heitkamp. Yeah, we need to move forward. As people 
are looking at getting back into mortgage lending, that is a 
huge component.
    On a related matter, it is my understanding that the State 
banking commissioner and the Governor submitted a request to 
the Appraisal Subcommittee to exercise its discretion to 
initiate a temporary waiver regarding preexisting regulatory 
authority. Again, there is some dispute within my community in 
North Dakota whether that appraisal waiver is needed. But one 
of the things I would say without looking at the merits of 
their request, I am interested in knowing how these requests 
are reviewed and why so few waivers have been granted under the 
Appraisal Subcommittee's existing discretionary authority.
    Can you give me, Ms. McWilliams, an explanation of why 
these waiver requests have not been granted in the past and how 
the FDIC works with the Appraisal Subcommittee to ensure a 
fair, transparent, and timely process with input from everyone? 
And I think I will just tell you, there is some concern that it 
was just unilaterally denied and with no explanation for why 
that denial was issued.
    Ms. McWilliams. I would certainly hope that they were not 
denied without an explanation. I can go back and make sure that 
that was not the case, or if it was the case, I will personally 
make a call. Basically the process works through the Appraisal 
Committee at the FFIEC. These requests for waivers would be 
sent through, and they have to satisfy a certain number of 
requirements in order for them to be approved. If the waiver 
request is too broad and it is, frankly, outside of the 
authorities of the FFIEC's Subcommittee to grant, it will not 
be granted. It is my understanding we are working with the 
entities in your State to make sure that we can proceed.
    Senator Heitkamp. Ms. McWilliams, based on their 
experience, I really would ask you to go back and take a look 
at may be broader than just this one request from North Dakota, 
but go back and take a look at kind of the response and the 
lack of what they believe was transparency and basically making 
short shrift of the arguments that they made. I think you want 
to take a broader look than just North Dakota. But please get 
back to us and hopefully get back to the banking commissioner 
in North Dakota. Thank you.
    Ms. McWilliams. I will do that promptly. Thank you.
    Chairman Crapo. Thank you, Senator Heitkamp.
    Senator Van Hollen.
    Senator Van Hollen. Thank you, Mr. Chairman. I thank all of 
you for your testimony.
    Mr. Quarles, I had a question with respect to the lack of a 
real-time payment system in the United States. I wrote to the 
Fed last month and appreciate the letter I got back from the 
Chairman, because you have got lots of Americans who are living 
paycheck to paycheck, who send their check in, they think it is 
cashed, and they think they are getting credited for it, only 
to find out that they did not when they get overdraft fees. And 
we are talking, as you know, billions of dollars of overdraft 
fees for people who are, again, just trying to pay their bills. 
And that also leads some people to leave the banking system. 
They go to payday lenders and others.
    A lot of other countries--on my list I have got the United 
Kingdom, Poland, Mexico, South Africa, Denmark, and others--
have gone to a real-time payment system. Why are we not there 
yet? And when are we going to get there?
    Mr. Quarles. Well, Senator, working on the faster payment 
system has been a priority of the Fed, as you know, for some 
time. We have worked with the private sector on that topic to 
catalyze efforts to develop both the technology and the systems 
in order to move toward faster payment.
    Senator Van Hollen. If I could, again, I got your letter, I 
appreciate getting a letter back. My reading of it was a 
restatement of the problem, and, you know, we are working on 
it. As you said, you have been working on this for a while. It 
just seems to me in this era where you have got Venmo and 
PayPal and you have got the technology that allows people to 
make payments from their kitchens if they are on certain 
systems, that we as a country should be able to have 24/7 real-
time payment systems.
    And so my real question is: Why are we not there yet? Are 
there obstacles? You write in the letter that you do not have 
the authority to mandate it, but you have a lot of authorities. 
And so my question is: Why are we not using those authorities? 
My understanding was you may be coming out with something this 
quarter. We are in it now. Why are we not there yet? This is 
costing billions of dollars to people mostly who just are 
living paycheck to paycheck. I just do not understand why the 
United States cannot do what these other countries have done.
    Mr. Quarles. It is a fair question, Senator, but as you 
note, that is not something that we as the Federal Reserve can 
mandate. But we are using a lot of those powers that you have 
described, our convening power and our exhorting power, and I 
think effectively. It is not as though there has been no 
progress. There has been a lot of progress toward that, and I 
think that in the next short period you will see some further 
concrete steps that have been catalyzed by Federal Reserve 
action in the private sector that move us to a real-time 
payment system. I think that is an important goal for us.
    Senator Van Hollen. All right. I would like to follow up. 
It is just the pace of this change seems to be very sluggish, 
and in the meantime, a lot of people are paying a lot of 
unnecessary fees and a lot of people are collecting a lot of 
fees that they would not be able to collect absent the lack of 
a real-time payment system.
    Mr. Otting, I would just like to follow up with you on your 
sort of investigation with respect to some of the Wells Fargo 
practices. Specifically, I think it was July of last year that 
we discovered that about 800,000 people who took out car loans 
were charged for auto insurance that they did not need. And, 
nationally, that pushed about 274,000 Wells Fargo customers in 
delinquency, resulted in 25,000 wrongful vehicle repossessions, 
including a harrowing story of a Marylander who went out to go 
to work one day and discovered his car was gone, thought it was 
stolen, called the police. It turns out it was the Wells Fargo 
folks repossessing the car, and they had sort of wrongfully 
sold him unnecessary insurance.
    Now, I know that they sent you a report. My understanding 
is you rejected that report. Can you bring us up to date on 
what is going on and when Wells Fargo consumers can expect to 
be made whole?
    Mr. Otting. Thank you for the question. I cannot give 
specific examples because I do not have that information in 
front of me. But I will say there are a host of activities that 
Wells Fargo is framing up, the harm that was applied to 
consumers. There are timelines for them to be able to complete 
that process.
    You may have missed the earlier conversation where we 
talked a little bit about this, but I would say that we 
continue to not be comfortable with where they are. We have 
hundreds of examiners onsite following this process. We have 
high expectations for Wells Fargo to complete that process in a 
timely manner. And as you may recall, in the April consent 
order we put in very strong language that we expect compliance 
with those activities.
    Senator Van Hollen. Right. I know you were unsatisfied with 
the plan that they submitted recently. Is there any date where 
I can tell my consumers who have been wronged by these actions 
that they can expect to be made whole?
    Mr. Otting. We would be happy to follow up with the bank 
and then contact your office and be able to give them that 
date.
    Senator Van Hollen. All right. And I am not talking just 
about specific customers, although there are some of those, but 
I am talking about the people throughout the country.
    Mr. Otting. The whole project.
    Senator Van Hollen. Thank you. I appreciate that.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you, Senator Van Hollen.
    That concludes the questioning, but I would like to 
encourage each of you to quickly implement S. 2155 and 
significantly tailor regulations for banks with between $100 
billion and $250 billion in total consolidated assets, with a 
particular emphasis on tailoring the stress testing regime.
    In addition, an article in today's Wall Street Journal 
highlights the efforts underway at the Fed to revisit rules 
like the liquidity coverage ratio and advanced approaches rules 
to align the nature of our regulations with the nature of the 
firms being regulated. I commend those efforts and encourage 
the Fed to continue to move forward on those aggressively.
    Finally, yesterday some of my colleagues and I urged the 
agencies responsible for implementing the Volcker Rule to build 
on the work they have already begun in their notice of proposed 
rulemaking. Among other things, the letter notes the absence of 
proposed reforms in the covered funds provisions. We encourage 
you to use your discretion to address the overly broad 
application of these provisions to venture capital, other long-
term investments, and loan creation.
    So, with those suggestions, I will now give the final 
instructions to our Senators as well as our witnesses.
    For Senators wishing to submit questions for the record, 
those questions are due in 1 week, on Tuesday, October 9th. We 
ask the witnesses to please respond to these questions 
promptly.
    Once again, I thank you all for not only your efforts in 
implementing S. 2155, but for being here today, and this 
hearing is adjourned.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    Today, we will hear from four agencies responsible for the 
supervision and regulation of banks or credit unions.
    Each will provide an overview of its efforts, activities, 
objectives and plans to implement S. 2155, the Economic Growth, 
Regulatory Relief and Consumer Protection Act.
    Providing testimony will be Federal Reserve Vice Chairman for 
Supervision Randy Quarles; Federal Deposit Insurance Corporation Chair 
Jelena McWilliams; National Credit Union Administration Chairman Mark 
McWatters; and Comptroller of the Currency Joseph Otting.
    Each of these agencies plays an integral role in implementing key 
provisions of this law.
    As policymakers, it is our job to enact laws and regulations that 
not only ensure proper behavior and safety for our markets, but are 
also tailored appropriately.
    Shortly after Dodd-Frank was signed into law, we began to see some 
of the unintended cumulative regulatory burden it had on certain 
financial institutions.
    For years, I and many Members of the Committee, on both sides of 
the aisle, worked to find a solution to provide meaningful relief to 
small financial institutions, and we succeeded in crafting S. 2155.
    We are now approaching 5 months since S. 2155 was signed into law 
by the President, having passed both the House and Senate with 
significant bipartisan support.
    This law's primary purpose is to make targeted charges to simplify 
and improve the regulatory regime for community banks, credit unions, 
midsize banks and regional banks to promote economic growth.
    It right-sizes regulations for financial institutions, making it 
easier for consumers to get mortgages and obtain credit while also 
increasing important consumer protections for veterans, senior 
citizens, victims of fraud, and those who fall on hard financial times.
    For example, just over a week ago, the Federal Trade Commission and 
Bureau of Consumer Financial Protection announced as effective a 
provision of S. 2155 that provides consumers concerned about identity 
theft or data breaches the option to freeze and unfreeze their credit 
for free.
    A New York Times article commenting on this provision noted that, 
``one helpful change . . . will allow consumers to `freeze' their 
credit files at the three major credit reporting bureaus--without 
charge. Consumers can also `thaw' their files, temporarily or 
permanently, without a fee.''
    Susan Grant, director of consumer protection and privacy at the 
Consumer Federation of America expressed support for these measures, 
calling them ``a good thing.''
    Although agencies have started to consider this law in some of 
their statements and rulemakings, there is still a lot of work to do on 
the bill's implementation.
    It is imperative that agencies carry out all of their 
responsibilities under this law expeditiously so that consumers, 
homeowners, veterans and small businesses can begin to fully experience 
its benefits.
    In addition to timing, Members of this Committee are also deeply 
vested in the substance of agencies' specific actions to implement this 
law and other efforts by the regulators to provide regulatory relief.
    In particular, agencies should: significantly tailor regulations 
for banks with between $100 billion and $250 billion in total 
consolidated assets, with a particular emphasis on tailoring the stress 
testing regime (it should be noted that the primary reason we gave the 
regulators time to implement this provision was to develop a 
streamlined stress-testing regime, and I encourage you to move quickly 
here); tailor the Liquidity Coverage Ratio for regional banks with more 
than $250 billion in total consolidated assets; reassess the advanced 
approaches thresholds; provide meaningful relief from the Volcker Rule 
for all institutions, as I said in a letter to the regulators 
yesterday; and examine whether the regulations that apply to the 
standalone U.S. operations of foreign banks should also be tailored at 
the same time and in a similar manner as U.S. banks.
    S. 2155 raised the threshold for the application of enhanced 
prudential standards under Section 165 of the Dodd-Frank Act from $50 
billion, and in some cases $10 billion, to $250 billion.
    Regulators have applied the Section 165 asset thresholds in various 
rulemakings and guidance documents in the past.
    For example, the Fed's Comprehensive Capital Analysis and Review 
requires bank holding companies with more than $50 billion in total 
assets to submit capital plans to the Fed on an annual basis.
    In the final capital plan rule, the Fed notes that `` . . . the 
asset threshold of $50 billion is consistent with the threshold 
established by Section 165 of the Dodd-Frank Act relating to enhanced 
prudential standards and prudential standards for certain bank holding 
companies.''
    The OCC recently raised the threshold for requiring recovery plans 
from $50 billion to $250 billion.
    I encourage the regulators to revisit all regulation and guidance 
thresholds that were consistent with the outdated Section 165 threshold 
to an amount that reflects actual systemic risk.
    Regulators have two options: use a systemic risk factors-based 
approach, or raise all thresholds to at least $250 billion in total 
assets to be consistent with S. 2155.
    Many of this law's provisions require agency rulemakings.
    In order to avoid unnecessary delays in implementation, agencies 
should promptly issue notice of proposed rulemakings for all relevant 
aspects of this law.
    As S. 2155 is implemented, I suspect some of it may be implemented 
through guidance or other policy statements that do not go through 
formal notice and comment rulemaking.
    While I encourage the regulators to use notice and comment 
rulemaking generally, I recognize that sometimes policy must be 
communicated through more informal means.
    The Congressional Review Act, however, requires agencies to submit, 
with certain minor exceptions, all rules to Congress for review.
    By definition, a rule is ``the whole or a part of an agency 
statement of general or particular applicability and future effect 
designed to implement, interpret, or prescribe law or policy or 
describing the organization, procedure, or practice requirements of an 
agency.''
    That is a very broad definition.
    In order to ensure that Congress can engage in its proper oversight 
role, as well as ensure that future Congresses do not overturn the 
agencies' policy statements related to implementation of S. 2155, I 
encourage the regulators to follow the Congressional Review Act and 
submit all rules to Congress, even if they have not gone through formal 
notice and comment rulemaking.
    Our economy is finally getting back on track, and full 
implementation of S. 2155 will continue to drive growth and improve 
economic health to the benefit of families across America.
    I look forward to hearing more from each of you on how your 
agencies have begun and will continue to implement the Economic Growth, 
Regulatory Relief and Consumer Protection Act.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    This hearing was originally scheduled for September 13--the same 
week 10 years ago that Lehman Brothers declared bankruptcy, paving the 
way for the worst economic crisis since the Great Depression.
    We all know what happened next. The Bush administration put 
together an alphabet soup of programs to keep the financial sector 
afloat, but it wasn't enough. Ten years ago this week, taxpayers were 
forced to spend $700 billion to bail out Wall Street and save our 
economy from collapse. A New York Times headline from October 2, 2008--
10 years ago today--described those chaotic early days of the collapse 
with the headline, ``36 hours of Alarm and Action as Crisis Spiraled.''
    A decade after the most severe financial crisis since the Great 
Depression--today, we're discussing how the financial watchdogs will 
roll back rules put in place after that crisis.
    These are the same agencies that ignored the buildup to the 2008 
collapse, and in the case of the OCC, went to court to fight those who 
were trying to do something.
    In some cases, they are now led by the very people that failed to 
prevent or profited from the crisis.
    S. 2155 was described as an effort to reduce the burden of 
regulation on the Nation's smallest community banks and credit unions--
something many of us agreed we could improve. But in reality, this bill 
is littered with concessions to the biggest banks and offers virtually 
nothing for American consumers.
    And based on the questions and letters sent to officials by my 
Republican colleagues since passage of S. 2155, it seems they are most 
concerned about how the law will help the largest domestic and foreign 
banks--or ``regional banks with an international parent,'' to use a new 
Republican euphemism for firms like Deutsche Bank.
    These are the same banks that have been profitable every quarter 
since the second quarter of 2009. Last quarter profits at U.S. banks 
reached record levels--more than $60 billion dollars, a 25 percent jump 
from the year before. The five largest banks in this country recently 
announced more than $72 billion dollars in stock buybacks, a nearly 30 
percent increase from the year before. How many workers got a 30 
percent raise last year?
    While the banks have recovered, many Americans haven't.
    Nearly 10 million Americans lost their jobs during the crisis. The 
unemployment rate peaked at 11 percent in Ohio. More than a third of 
workers across the country were unemployed for 27 weeks or more.
    Losses in household wealth and income were devastating to families 
during the crisis, and African Americans and Latino Americans suffered 
even worse losses.
    Some want to argue that household wealth has recovered since the 
crisis, but these aggregate measures are misleading. Recent data from 
the Federal Reserve Board of Governors shows that the top 10 percent of 
households have seen big gains in household wealth, while the bottom 90 
percent have experienced no gains.
    The poverty rate rose 2.5 percentage points between 2007 and 2012, 
with 46.5 million people living in poverty by 2012.
    More than 8 million children were affected by the foreclosure 
crisis by 2012. That includes 6 percent of children in Ohio. We all 
know the lasting impact of childhood displacement.
    And some studies suggest a correlation between the Great Recession 
and the current opioid crisis.
    In August, the Federal Reserve Bank of San Francisco released 
research that said the financial crisis, quote, ``cost the average 
American $70,000 in lifetime income.'' The Federal Reserve Bank of 
Dallas estimated the loss was even higher. And numerous other studies 
estimate the impact of the crisis on the overall economy at over ten 
trillion dollars.
    But here we are today, talking about how Washington can do more to 
help the Nation's banks.
    We should be talking about how to increase wages, how to make 
housing more affordable and accessible, how to protect consumers, and 
how to build up capital at banks, which many academics and Fed 
researchers suggest is still too low, so that taxpayers and families 
won't be forced to bail out big banks again when the next crisis hits.
    I don't think we'll hear about any of these issues from today's 
witnesses.
    The collective amnesia in the Administration and Congress is 
astounding.
    Thank you, Mr. Chairman.
                                 ______
                                 
                 PREPARED STATEMENT OF JOSEPH M. OTTING
        Comptroller, Office of the Comptroller of the Currency *
---------------------------------------------------------------------------
    * Statement Required by 12 U.S.C.  250:

    The views expressed herein are those of the Office of the 
Comptroller of the Currency and do not necessarily represent the views 
of the President.
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                            October 2, 2018
I. Introduction
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the invitation to appear before you today to discuss the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(Economic Growth Act or Act). I am honored to join my colleagues from 
the Board of Governors of the Federal Reserve System (Board), the 
Federal Deposit Insurance Corporation (FDIC), and the National Credit 
Union Administration (NCUA).
    The Economic Growth Act is a testament to the bipartisan work of 
this Committee, under the leadership of Chairman Crapo, to provide 
prudent burden relief for the small- and mid-size financial 
institutions that need it most. The Office of the Comptroller of the 
Currency (OCC) recognizes the importance of this effort and is 
committed to implementing the Act quickly so that the national banks 
and Federal savings associations (banks) we supervise can continue to 
create jobs and promote economic opportunity in a safe, sound, and fair 
manner. The work needed to write the implementing regulations called 
for by the statute is well underway. In the meantime, the OCC has 
joined the Board and the FDIC (collectively, the agencies) to clarify 
our intention to regulate and supervise financial institutions 
consistent with the outcomes that the Act requires.
    Before I turn to the specific progress the OCC has made to 
implement the Economic Growth Act, I would like to describe briefly the 
current condition of the Federal banking system. The OCC has 
supervisory responsibility for over 1,300 banks. Together, these banks 
hold $11.8 trillion in assets--roughly 67 percent of the commercial 
banking system. They service 33 percent of the country's first-lien 
residential mortgages and issue 66 percent of all credit card balances. 
The vast majority of these 1,300 banks are smaller banks, with less 
than $10 billion in assets. These numbers show the important role that 
OCC-supervised institutions have in the Nation's economy and how 
essential it is for these banks, especially community and mid-size 
banks, to operate efficiently and effectively and to offer the products 
and services that their customers and communities need.
    The OCC works to promote a vibrant and diverse banking system that 
benefits consumers, communities, businesses, and the economy. We ensure 
that banks operate in a safe and sound manner, provide fair access to 
financial services, treat customers fairly, and comply with applicable 
laws and regulations. The dedication and commitment of the OCC, and 
that of the other agencies, have contributed to the strength and 
resiliency of the U.S. banking system. The overall capital position and 
the credit quality at large and small banks have strengthened 
considerably in recent years, as has liquidity and profitability. This 
environment has contributed to banks' abilities to develop innovative 
approaches to delivering their products and services. I am optimistic 
about the direction of the country's economy, in no small part because 
of the regulators' work to support and enable a strong and resilient 
banking system.
    I am well aware, however, that with opportunity comes risk. The OCC 
regulates banks to ensure that their boards of directors and management 
clearly understand and actively manage the risks they face. We are 
closely monitoring trends with respect to credit, interest rate, 
operational, and compliance risks, and we continue to share our 
insights and concerns with the banks we supervise. In addition, the OCC 
assesses new and emerging threats, including those related to 
cybersecurity. I believe that these efforts have made and will continue 
to make banks safer and stronger.
II. The Economic Growth Act
    The strength and vitality of the Nation's financial system depend, 
in large part, on the ability of financial institutions, particularly 
community and mid-size banks, to operate efficiently, effectively, and 
without unnecessary regulatory burden. The Economic Growth Act is a 
bipartisan, commonsense law that will significantly reduce regulatory 
burden for small- and mid-size institutions while safeguarding the 
financial system and protecting consumers. The Act includes several 
features that will benefit community banks in particular and are 
consistent with my priorities as Comptroller, including reducing the 
number of banks subject to the Volcker Rule and providing a simpler 
capital regime for highly capitalized community banks. These and other 
provisions in the Act will help the Federal banking system continue to 
foster job creation and promote economic opportunity. Today, I will 
outline the steps the OCC has taken to ensure that the relief provided 
by the Economic Growth Act is realized as quickly as possible.
A. Interagency Statement Regarding the Impact of the Economic Growth, 
        Regulatory Relief, and Consumer Protection Act\1\
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    \1\ Joint Release, OCC NR 2018-69, Agencies Issue Statement 
Regarding the Impact of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act, July 6, 2018 (Interagency Statement).
---------------------------------------------------------------------------
    Following passage of the Economic Growth Act and in response to 
questions from various stakeholders, the agencies issued an Interagency 
Statement to financial institutions to clarify how we would administer 
certain provisions of the Act. For example, a number of provisions of 
the Act were effective upon enactment or soon thereafter, but agency 
regulations had yet to be revised to reflect these changes in the law. 
In order to avoid confusion and the unnecessary use of institutions' 
compliance resources, the agencies issued the Interagency Statement to 
demonstrate our commitment to administering our regulations, during the 
interim period before we promulgate any necessary conforming 
regulations, in a manner consistent with the Act.
    The Interagency Statement provides direction and sets the table for 
upcoming regulatory revisions in a number of areas. For example, the 
Economic Growth Act at section 401 raises the threshold at which bank 
holding companies (BHCs) and depository institutions are required to 
perform company-run stress tests from $10 billion to $250 billion. This 
change was effective immediately for BHCs with less than $100 billion 
in total consolidated assets but not for similarly sized depository 
institutions. In order to provide parity and avoid unnecessary burden, 
the Interagency Statement explains that the agencies will not require 
depository institutions with less than $100 billion in total 
consolidated assets to perform company-run stress tests during this 
interim period.
    In addition, sections 203 and 204 of the Economic Growth Act make 
changes to the statutory provisions underlying the Volcker Rule, 
including reducing the number of institutions subject to its 
requirements. These changes provide regulatory relief to institutions 
that do not pose the types of risks the Volcker Rule was intended to 
limit. To address conflicts between the agencies' current Volcker Rule 
and these statutory changes, the Interagency Statement explains that 
the agencies will not enforce the Volcker Rule in a manner inconsistent 
with the Act.
B. Recently Completed Actions
    I am happy to report that we have made steady and significant 
progress implementing the Act since the agencies issued the Interagency 
Statement in early July. As discussed below, we have completed several 
actions and are engaged with our fellow regulators to move quickly on 
the remaining rulemakings.
    Thrift charter flexibility. On September 10, 2018, the OCC issued a 
notice of proposed rulemaking (NPR) to provide greater flexibility to 
Federal savings associations by implementing a new section of the Home 
Owners' Loan Act added by section 206 of the Economic Growth Act.\2\ 
This proposal would establish streamlined standards and procedures 
under which a Federal savings association with total consolidated 
assets of $20 billion or less can elect to operate as a ``covered 
savings association.'' A covered savings association would have the 
same rights and privileges and be subject to the same duties and 
restrictions as a similarly located national bank but would retain its 
charter and existing governance framework.
---------------------------------------------------------------------------
    \2\ OCC NR 2018-95, Office of the Comptroller of the Currency 
Invites Comment on Proposed Rule to Enhance Business Flexibility for 
Federal Savings Associations; 83 Fed. Reg. 47101 (Sept. 18, 2018).
---------------------------------------------------------------------------
    The Act, together with the OCC's rulemaking, will provide Federal 
savings associations with additional flexibility to adapt to evolving 
economic conditions and business environments and allow them to better 
serve the changing needs of their customers--without the burden and 
expense of changing charters. The public comment period on the NPR is 
open until November 19, 2018.
    HVCRE. Section 214 of the Economic Growth Act provides that the 
agencies can require an institution to assign a heightened risk weight 
to a high volatility commercial real estate (HVCRE) exposure only if it 
meets the Act's new definition of an HVCRE acquisition, development, 
and construction loan. To address conflicts among this provision, 
existing rules, and relevant Consolidated Reports of Condition and 
Income (Call Report) instructions, the Interagency Statement provides 
that institutions can choose either to rely on the Act's definition 
when risk-weighting and reporting HVCRE exposures or to continue to 
risk-weight and report HVCRE exposures consistent with current Call 
Report instructions. On September 18, 2018, the agencies jointly issued 
an NPR to implement the statutory definition.\3\ The public comment 
period is open until November 27, 2018.
---------------------------------------------------------------------------
    \3\ Joint Release, OCC NR 2018-100, Agencies Propose Rule Regarding 
the Treatment of High Volatility Commercial Real Estate; 83 Fed. Reg. 
48990 (Sept. 28, 2018).
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    Examination cycle. On August 23, 2018, the agencies jointly issued 
interim final rules implementing changes to their examination 
cycles.\4\ Section 210 of the Act increases the asset threshold for 
certain well managed and well capitalized insured depository 
institutions that are eligible for an 18-month examination cycle from 
institutions under $1 billion in total assets to institutions under $3 
billion. Under the interim final rules, the extended examination cycle 
is now available to a larger number of qualifying 1-and 2-rated 
institutions. This change, together with parallel changes to the onsite 
examination cycle for U.S. branches and agencies of foreign banks, will 
allow the agencies to better focus their supervisory resources on 
financial institutions that present capital, managerial, or other 
supervisory issues and thus enhance safety and soundness collectively 
for all financial institutions. The public comment period is open until 
October 29, 2018.
---------------------------------------------------------------------------
    \4\ Joint Release, OCC NR 2018-82, Agencies Issue Interim Final 
Rules Expanding Examination Cycles for Qualifying Small Banks and U.S. 
Branches and Agencies of Foreign Banks; 83 Fed. Reg. 43961 (Aug. 29, 
2018).
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    High quality liquid assets (HQLA). Section 403 of the Economic 
Growth Act directs the agencies to treat certain municipal obligations 
as HQLA for purposes of their regulations, including the liquidity 
coverage ratio (LCR). It further directs the agencies to amend their 
liquidity regulations to implement these changes within 90 days of 
enactment.
    In anticipation of this rulemaking, the agencies announced in the 
Interagency Statement that they will not require an institution subject 
to the liquidity regulations to exclude from the definition of HQLA 
those municipal obligations they believe meet the statutory criteria 
for inclusion in HQLA. Subsequently, on August 22, 2018, the agencies 
jointly issued interim final rules to implement this statutory 
provision, under which covered institutions will have additional 
flexibility in meeting the LCR requirements.\5\ The public comment 
period on this rulemaking is open until October 1, 2018.
---------------------------------------------------------------------------
    \5\ Joint Release, OCC NR 2018-81, Agencies Issue Interim Final 
Rule Regarding the Treatment of Certain Municipal Securities as High-
Quality Liquid Assets; 83 Fed. Reg. 44451 (Aug. 31, 2018).
---------------------------------------------------------------------------
C. Additional Actions Underway to Implement the Economic Growth Act
    The agencies, working both jointly and independently, continue to 
move forward with the remaining steps to fully implement the Economic 
Growth Act. The OCC is participating actively in interagency 
consultations related to the rulemakings and other efforts underway by 
the Bureau of Consumer Financial Protection (BCFP) to implement the 
Act's changes to Federal consumer financial protection laws. We are 
reviewing several other provisions of the Economic Growth Act to 
determine whether further action is necessary. We are also 
participating in interagency discussions on a rulemaking to implement 
the exemption in section 103 from the appraisal requirements for 
certain rural real estate transactions. As described below, we are also 
working diligently to address changes to the regulatory capital regime 
and the preparation of Call Reports. I expect that we will take action 
on all remaining rulemakings by the end of the year.
    Community bank leverage ratio. The agencies are working to 
implement section 201 of the Act, which addresses the complex and 
burdensome process--particularly for highly capitalized community and 
mid-size institutions--of calculating and reporting regulatory capital. 
In addition to providing much needed clarity regarding the capital 
treatment of HVCRE exposures (discussed above), the Act directs the 
agencies to draft regulations that allow certain institutions--those 
that exceed a ``community bank leverage ratio'' (tangible equity to 
average total consolidated assets of 8 percent to 10 percent) and 
engage only in traditional banking activities--to be deemed in 
compliance with current leverage and risk-based capital provisions.
    Staffs of the agencies are meeting frequently to develop rules to 
implement this provision, which represents an important new direction 
in capital regulation. A number of complex issues remain outstanding, 
including how to harmonize this provision of the Act with statutory 
provisions unaffected by the Act, and the agencies are working to 
resolve these issues. I am confident that a thoughtful implementation 
of this provision will lead to a substantial reduction in regulatory 
burden for highly capitalized, qualifying institutions while ensuring 
that these institutions continue to maintain appropriate capital 
levels.
    Asset threshold for short form Call Report. Section 205 of the Act 
provides for
reduced reporting requirements on Call Reports for the first and third 
quarters for institutions with less than $5 billion in total 
consolidated assets. This change
expands the number of community institutions that can benefit from the 
reduced burden associated with the short form Call Report, freeing up 
employees and other resources to serve customers and the operational 
needs of the institutions. The agencies are meeting regularly to 
discuss a framework to implement this change.
    Periodic stress testing. In addition to the changes to the company-
run stress testing thresholds discussed above, section 401 of the Act 
amends the required frequency of stress testing from annual to periodic 
and reduces the required number of scenarios from three to two. These 
agencies are working to implement all of these changes, which will 
reduce burden while maintaining this important supervisory tool. Stress 
testing serves a critical function for both regulators and financial 
institutions by ensuring that financial institutions consider potential 
economic events that could cause significant balance sheet disruptions 
and prepare to mitigate such disruptions if necessary.
    Supplementary leverage ratio. Section 402 of the Act directs the 
agencies to revise the leverage ratio requirements applicable to the 
largest U.S. banking organizations engaged in custody, safekeeping, and 
asset servicing activities. The agencies are determining how best to 
implement these changes, particularly in the context of other, proposed 
changes to the leverage ratio calculations.
D. Additional Efforts to Promote Economic Growth and Job Creation
    In parallel with our efforts to implement the Act, the OCC is 
considering additional ways that we can reduce unnecessary burden on 
the banks we supervise, an endeavor that we believe is consistent with 
the purpose of the Act and will fuel job creation and economic 
opportunity.
    Additional capital framework changes. The OCC is meeting with the 
Board and the FDIC to consider other options for reducing the 
compliance burden associated with the capital framework, including the 
changes described in the October 27, 2017 joint NPR.\6\ The NPR was 
issued in response to the agencies' commitment to Congress pursuant to 
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 to 
meaningfully reduce regulatory burden.\7\ The proposed changes include 
allowing smaller, noncomplex institutions to apply a simplified 
regulatory capital treatment to mortgage servicing assets, certain 
deferred tax assets, investments in the capital of unconsolidated 
financial institutions, and certain minority interests held by third 
parties. These changes would allow these institutions to more 
efficiently and effectively serve their customers.
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    \6\ 82 Fed. Reg. 49984.
    \7\ Federal Financial Institutions Examination Council, Joint 
Report to Congress: Economic Growth and Regulatory Paperwork Reduction 
Act (March 2017).
---------------------------------------------------------------------------
    Recovery planning. On September 19, 2018, the OCC issued an NPR to 
increase the threshold for the agency's enforceable guidelines 
establishing standards for recovery planning, which currently require a 
bank with average total consolidated assets of $50 billion or more to 
prepare a recovery plan.\8\ The proposal would raise the threshold for 
banks subject to the guidelines to $250 billion or more, providing 
regulatory relief to the mid-size banks currently covered by the 
guidelines. The public comment period is open until November 5, 2018.
---------------------------------------------------------------------------
    \8\ 83 Fed. Reg. 47313.
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III. Other Agency Priorities
    I would also like to take this opportunity to update the Committee 
on some of the other important work taking place at the OCC.
    Community Reinvestment Act of 1977 (CRA). While the communities 
that banks serve will benefit greatly from the economic opportunities 
that the Act makes possible, such progress does not always require 
congressional action. One area in which the agencies can achieve 
additional reforms on their own is the modernization of the CRA 
regulatory framework. I have seen firsthand how CRA activities 
reinvigorate financially distressed areas through community development 
and reinvestment, but stakeholders from all perspectives acknowledge 
the limitations of the current framework. Despite the best of 
intentions, the CRA regulatory framework, which has been pieced 
together over the past 40-plus years, is outdated, ambiguous, overly 
complex, and unnecessarily burdensome. These problems hinder banks' 
ability to fulfill the statute's goals.
    To continue the burden reduction and economic empowerment that 
Congress made possible with the Act and to address concerns about the 
CRA framework, on August 28, 2018, the OCC issued an Advance Notice of 
Proposed Rulemaking (ANPR) to solicit ideas to modernize the 
implementation of the CRA.\9\ A modernized framework would strengthen 
the CRA by encouraging more lending, investment, and activity where it 
is needed most-fulfilling the ultimate purpose of the CRA. We can 
achieve these goals by providing greater clarity regarding CRA-
qualifying activities; establishing clear and objective measures to 
assess CRA performance; rethinking the concept of the ``communities'' 
that banks serve in a more comprehensive manner; facilitating more 
consistent, timely, and transparent performance evaluations and CRA 
ratings; and encouraging increased community and economic development 
in low- and moderate-income areas. The public comment period on the 
ANPR is open until November 19, 2018. I look forward to reading the 
stakeholder comments we receive and working with my regulatory 
colleagues and other stakeholders as we move forward.
---------------------------------------------------------------------------
    \9\ OCC NR 2018-87, OCC Seeks Comments on Modernizing Community 
Reinvestment Act Regulations; 83 Fed. Reg. 45053 (Sept. 5, 2018).
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    Innovation. At the end of July, the OCC announced that it will 
accept applications for special purpose national bank charters from 
financial technology (fintech) companies that are engaged in the 
business of banking but do not take deposits, provided they meet the 
requirements and standards for obtaining a charter.\10\ This decision 
reflects the OCC's understanding that responsible innovation will 
enable banks to meet consumers', businesses', and communities' evolving 
needs; operate in a safe and sound manner; provide fair access to 
financial services; and treat customers fairly. Responsible innovation 
is important in order for banks to continue to promote economic 
opportunity and job creation going forward. Let me reiterate, however, 
that the OCC will supervise special purpose national banks like other 
similarly
situated national banks. They will be held to the same high standards 
applicable to any other national bank, including with respect to 
capital, liquidity, and financial inclusion commitments as appropriate.
---------------------------------------------------------------------------
    \10\ OCC NR 2018-74, OCC Begins Accepting National Bank Charter 
Applications From Financial Technology Companies, July 31, 2018.
---------------------------------------------------------------------------
    The OCC's decision to consider applications for special purpose 
national bank charters followed extensive outreach by the OCC over a 2-
year period. It also is consistent with bipartisan Government efforts 
at the Federal and State levels to promote economic opportunity and 
support innovation that can improve the provision of and access to 
financial services.
    In addition, fintech companies that provide banking services in 
innovative ways deserve the opportunity to pursue that business on a 
national scale as federally chartered banks. Contrary to what some have 
suggested, I believe that a special purpose national bank charter 
supports and enhances the dual banking system. A Federal charter 
provides companies interested in banking with another choice, alongside 
others such as becoming a State bank, operating as a State-licensed 
financial service provider, or pursuing a partnership or business 
combination with an existing bank. Competition between these options 
yields a wider range of products and services available to consumers, 
lower regulatory costs, and more effective supervision.
    Short-term, small-dollar lending. On May 23, 2018, the OCC issued a 
bulletin encouraging banks to offer responsible short-term, small-
dollar installment loans to help meet the credit needs of 
consumers.\11\ The bulletin reminds banks of the core lending 
principles for prudently managing the risks associated with this type 
of installment lending and is consistent with the OCC's support for 
responsible innovation by banks. Encouraging banks to offer these 
products will bring borrowers back into the regulated marketplace and 
will help improve their access to additional mainstream financial 
products, which will benefit these borrowers and the economy.
---------------------------------------------------------------------------
    \11\ OCC Bulletin 2018-14, Installment Lending: Core Lending 
Principles for Short-Term, Small-Dollar Installment Lending.
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    Bank Secrecy Act and Anti-money laundering (BSA/AML). The OCC has 
taken a leadership role in coordinating discussions among the FDIC, 
Board, NCUA, U.S. Department of Treasury (Treasury), and Financial 
Crimes Enforcement Network (FinCEN) to identify ways to improve the 
efficiency and effectiveness of BSA/AML regulations, supervision, and 
examinations. The financial institution regulators are working closely 
with Treasury and FinCEN to identify ways to enhance the risk-focused 
supervisory process while continuing to support law enforcement and 
reducing unnecessary burden currently associated with BSA/AML 
compliance. The agencies also encourage the use of innovative 
technologies and practices to assist financial institutions in 
achieving AML compliance. These proactive efforts toward BSA/AML reform 
are meant to yield efficiencies while improving the ability of the 
Federal banking system and law enforcement to safeguard the Nation's 
financial system from criminals and terrorists.
    Guidance. Finally, in response to recent inquiries suggesting the 
agencies clarify the differences between supervisory guidance and laws 
and regulations, on September 11, 2018, the OCC, FDIC, Board, NCUA, and 
BCFP issued a statement to explain the role of supervisory guidance and 
to describe policies related to the agencies' approach to supervisory 
guidance.\12\ This statement makes clear that guidance does not have 
the force and effect of law and that examiners may not criticize 
financial institutions for ``violations'' of guidance. At the OCC, we 
will reinforce this message by continuing to set clear expectations for 
how our examiners use guidance on examinations and the proper role that 
guidance plays in the supervisory process.
---------------------------------------------------------------------------
    \12\ Joint Release, OCC NR 2018-97, Agencies Issue Statement 
Reaffirming the Role of Supervisory Guidance.
---------------------------------------------------------------------------
IV. Conclusion
    I appreciate the opportunity to update the Committee on the OCC's 
work to implement the Economic Growth Act and to share with you the 
progress we have made in other areas. I believe that consumers, 
businesses, and communities alike will benefit from these efforts for 
many years to come. The OCC looks forward to keeping the Committee 
apprised of our work.
                                 ______
                                 
                PREPARED STATEMENT OF RANDAL K. QUARLES
   Vice Chairman for Supervision, Board of Governors of the Federal 
                             Reserve System
                            October 2, 2018
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
I appreciate this opportunity to testify on the Federal Reserve's 
implementation of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA or the Act). The Act calls on the Federal 
banking agencies to aid in promoting economic growth by further 
tailoring regulation to better reflect the character of the different 
banking firms that we supervise. While recognizing that the core 
objectives of the post-crisis regime--higher and better quality 
capital, stronger liquidity, and increased resolvability--have 
contributed to reducing the likelihood of another severe financial 
crisis, the Act also acknowledges that we should be seeking to improve 
the efficiency with which we achieve these objectives, and gives the 
Federal banking agencies the task of executing the thoughtful detail 
work necessary to enhance that efficiency.
    Of course, detail work can be challenging to get right. The Federal 
Reserve Board (Board) strongly supports the principle underlying the 
Act of tailoring regulation to risk, and we have embedded this 
principle in several aspects of our regulatory and supervisory 
framework. It is, however, fair to say that until recently our 
tailoring of regulations has been principally calibrated according to 
the asset size of an institution. Yet, while a useful indicator, asset 
size should be only one among several relevant factors in a tailoring 
approach. We continue to evaluate additional criteria allowing for 
greater regulatory and supervisory differentiation across banks of 
varying sizes, and the Act reflects similar goals. The legislation 
recognizes that banks have a variety of risk profiles and business 
models, and I believe that our regulation and supervisory programs can 
be flexible enough to accommodate this variety.
    The Federal Reserve's implementation of the Act's directives is 
underway. In my testimony today, I will describe progress we have made 
to date on tasks set out for the Federal Reserve in the Act. I will 
also highlight the work that will be our top priorities in the next few 
months: tailoring for firms with assets over $100 billion that are not 
global systemically important banks (G-SIBs) and developing a community 
bank leverage ratio.
Tailoring in Post-Crisis Supervision and Regulation
    In building the post-crisis framework, the Board designed its 
supervision and regulation to take on increased stringency the larger a 
firm's size and systemic footprint. This can be seen in larger or more 
complex banks facing stricter requirements in various elements of the 
regulatory capital framework, including the application of the 
supplementary leverage ratio, as well as certain buffers and 
surcharges, among others. And it can be seen in the specific set of 
more stringent prudential and resolution-related requirements that the 
Board has imposed on G-SIBs. By implication, these and other enhanced 
standards and supervisory tools have not been applied to smaller and 
community banks, resulting in a tailored and more appropriate 
regulatory framework for these institutions.
    We now have many years of experience with the body of post-crisis 
regulation, however, and it is clear that there is more that can and 
should be done to align the nature of our regulations with the nature 
of the firms being regulated. The Act provides for further tailoring of 
our banking rules while maintaining the Board's authority to promote 
financial stability and ensure the safety and soundness of supervised 
institutions.
Regulatory Relief for Community Banking Organizations
    Among the Act's key provisions are targeted tailoring measures to 
reduce the regulatory burden on community banks. The Federal Reserve is 
making substantial progress to implement these provisions. To provide 
clarity to the public, the Board and the Federal banking agencies in 
July issued public statements on the regulations and associated 
reporting requirements that the Act immediately affected, indicating 
that we would give immediate effect to those provisions even before the 
formal regulatory changes were fully implemented.\1\ And in August, the 
Board began implementing the Act with several interim final rules, 
which I will describe in more detail.\2\
---------------------------------------------------------------------------
    \1\ Board of Governors of the Federal Reserve System, ``Statement 
regarding the im-
pact of the Economic Growth, Regulatory Relief, and Consumer Protection 
Act (EGRRCPA),'' July 6, 2018, available at https://
www.federalreserve.gov/newsevents/pressreleases/files/bcreg
20180706b1.pdf; Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, and Office of the Comptroller of 
the Currency, ``Interagency Statement regarding the impact of the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(EGRRCPA),'' July 6, 2018, available at https://www.federalreserve.gov/
newsevents/press
releases/files/bcreg20180706a1.pdf.
    \2\ The Board found good cause for adopting the rules on an interim 
final basis, thereby implementing Congress's directives and reducing 
regulatory burden as soon as possible, providing further clarity to the 
public, and allowing affected financial institutions and agencies 
appropriate time to prepare for the changes. The Board invites comment 
on all aspects of the interim final rules.
---------------------------------------------------------------------------
Small Bank Holding Company Policy Statement
    The Act requires the Board to revise a part of its rules commonly 
known as the small bank holding company (BHC) policy statement.\3\ The 
small BHC policy statement permits certain small BHCs to incur debt 
levels higher than would be permitted for larger holding companies and 
exempts those small BHCs from the Board's minimum capital 
requirements.\4\ This element of the Board's rules aims to facilitate 
the transfer of ownership in small banks, which can require the use of 
acquisition debt, while maintaining bank safety and soundness. The Act 
directs the Board to raise the asset threshold from $1 billion to $3 
billion for BHCs to qualify for the policy statement, thereby expanding 
the reach of this regulatory relief. The Board completed this task on 
August 28, through an interim final rule. The rule renders most BHCs 
and savings and loan holding companies with less than $3 billion in 
assets exempt from the Board's regulatory capital rules, and provides 
corresponding relief from comprehensive consolidated financial 
regulatory reports.\5\
---------------------------------------------------------------------------
    \3\ The small BHC policy statement also covers savings and loan 
holding companies. 12 CFR part 225, appendix C.
    \4\ Of course, the subsidiaries of these firms remain subject to 
minimum capital requirements.
    \5\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board issues interim final rule expanding the applicability of 
the Board's small bank holding company policy statement,'' August 28, 
2018, available at: https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20180828a.htm.
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Expanded Eligibility for the Extended Exam Cycle
    The Act expands the eligibility for small firms to undergo 18-month 
examination cycles, rather than annual cycles. Previously, firms with 
less than $1 billion in total consolidated assets were eligible, but 
now firms with up to $3 billion in total consolidated assets are 
eligible.
    On August 23, the Federal banking agencies adopted an interim final 
rule to implement these provisions and make parallel changes for U.S. 
branches and agencies of foreign banks.\6\
---------------------------------------------------------------------------
    \6\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Agencies issue interim final rules expanding examination 
cycles for qualifying small banks and U.S. branches and agencies of 
foreign banks,'' joint news release, August 23, 2018, available at 
https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180823a.htm.
---------------------------------------------------------------------------
Community Bank Leverage Ratio
    The Act gives the Federal banking agencies the task of developing a 
community bank leverage ratio applicable to certain depository 
institutions and depository institution holding companies with total 
consolidated assets of less than $10 billion. Implementation of this 
provision is a high priority for the Board and our fellow regulators, 
and we have developed a work program to issue a regulatory proposal on 
this matter in the very near future.
Regulatory Relief for Banks with Less Than $100 Billion in Assets
Relief from Enhanced Prudential Standards
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank) originally mandated certain enhanced prudential standards 
for BHCs with greater than $50 billion in total consolidated assets as 
well as company-run stress tests for firms with greater than $10 
billion in assets. The Act exempted BHCs under $100 billion in assets 
from these requirements immediately upon enactment. To put these 
provisions into immediate effect, the Board has already stated that it 
will not take action to require BHCs with less than $100 billion in 
assets to comply with requirements related to resolution planning, 
liquidity risk management, internal liquidity stress testing, the 
liquidity coverage ratio, debt-to-equity limits, and capital
planning, even before formal revisions to the regulations that 
implement these requirements.\7\ The Board has also stated that it will 
not collect supervisory
assessments for calendar years after 2017 for holding companies with 
assets under $100 billion.\8\
---------------------------------------------------------------------------
    \7\ ``Statement regarding the impact of EGRRCPA,'' https://
www.federalreserve.gov/news
events/pressreleases/files/bcreg20180706b1.pdf.
    \8\ ``Statement regarding the impact of EGRRCPA,'' https://
www.federalreserve.gov/news
events/pressreleases/files/bcreg20180706b1.pdf.
---------------------------------------------------------------------------
Relief from Stress Testing Requirements
    The Act exempted BHCs under $100 billion in total assets from Dodd-
Frank requirements for supervisory stress tests and company-run stress 
tests immediately upon enactment. As a result, the Board did not 
include the three affected BHCs with less than $100 billion in assets 
in the results of this year's Dodd-Frank supervisory stress tests and 
the related Comprehensive Capital Analysis and Review.\9\ The Board has 
effectively eliminated application of Dodd-Frank company-run stress 
test requirements for BHCs and other financial companies regulated by 
the Board with less than $100 billion in total assets.\10\
---------------------------------------------------------------------------
    \9\ Board of Governors of the Federal Reserve System, ``Federal 
Reserve Board releases results of supervisory bank stress tests,'' news 
release, June 21, 2018, available at https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20180621a.htm.
    \10\ The Board announced that it will take no action to require 
BHCs with less than $100 billion in assets to comply with company-run 
stress test requirements. The Board effectively exempted other 
financial companies regulated by the Board by extending their deadline 
for compliance with company-run stress test requirements until these 
firms would benefit from the statutory exemption under the Act, which 
took effect later than the exemption for BHCs with assets less than 
$100 billion. See the ``Statement regarding the impact of EGRRCPA,'' 
https://www.federalreserve.gov/newsevents/pressreleases/files/
bcreg20180706b1.pdf.
---------------------------------------------------------------------------
Tailoring Regulations for Larger Banking Organizations
    The Act directs the Board to further tailor its supervision and 
regulation of large BHCs with more than $100 billion in assets that do 
not qualify as G-SIBs. For firms with total assets in the range of $100 
billion to $250 billion, the legislation gives us more flexibility to 
tailor or eliminate certain requirements that, under Dodd-Frank, were 
mandatory. The legislation directs us to consider factors other than 
size for differentiating our supervision and regulation. Moreover, for 
firms with more than $250 billion in total assets that are not G-SIBs, 
we are independently considering how these firms could be more 
efficiently regulated by applying more tailored standards.
BHCs with Assets between $100 Billion and $250 Billion
    The Board has placed our highest priority on issuing a proposed 
rule on tailoring enhanced prudential standards for banking firms with 
assets between $100 billion and $250 billion. Our task is not merely to 
reform the current regulation of the particular institutions that are 
affected by the Act at this moment, but to develop a framework that 
will describe in a principled way when future institutions may expect 
enhanced regulation and why, using objective measures that account for 
the relative complexity and interconnectedness among large banks. 
Considering the greater economic impact of the failure of larger banks 
versus smaller banks, it seems appropriate that tailoring supervision 
and regulation of large banks should not ignore size, but consider it 
as one factor among others. Additional factors that capture, for 
instance, larger banks' complexity and interconnectedness may--together 
with size--better serve as a basis for tailoring supervision and 
regulation rather than size alone.
    While the statute sets an 18-month deadline for this regulatory 
process, we expect to move much more quickly than this. Topics covered 
by such a proposal
could include, among other things, capital and liquidity rules, and 
resolution planning requirements for the less complex and 
interconnected of these firms. The statute requires ``periodic'' 
supervisory stress testing by the Federal Reserve, which I believe 
recognizes the value of stress testing but requires a more tailored 
frequency and requires us to think more carefully about the burden of 
these tasks. This is consistent with the Federal Reserve's long 
standing expectations that all banking organizations, regardless of 
size, should employ internal risk-management practices that 
appropriately assess their capital needs and vulnerabilities under a 
range of reasonably anticipated stress scenarios.
BHCs with Assets of $250 Billion or More
    Beyond thinking about how we will further tailor our regulation and 
supervisory programs for firms with assets between $100 billion and 
$250 billion, the Board is similarly reviewing our requirements for 
firms with more than $250 billion in total assets but below the G-SIB 
threshold. Through this review, the Board aims to ensure that our 
regulations continue to appropriately increase in stringency with the 
risk profiles of firms, consistent with the Act and the Board's extant 
focus on tailoring. Currently, some aspects of our regulatory regime-
liquidity regulation, for example--treat banks with more than $250 
billion in assets with the same stringency as G-SIBs. I can see reason 
to apply a clear differentiation.
Foreign Banking Organizations
    Under the Dodd-Frank Act, the application of enhanced prudential 
standards to foreign banks is determined based on total global 
consolidated assets. The Act raises the threshold for automatic 
application of enhanced prudential standards under section 165 of the 
Dodd-Frank Act from $50 billion in total global consolidated assets to 
$250 billion, but the Federal Reserve may continue to apply enhanced 
prudential standards to foreign banking organizations (FBOs) with total 
global consolidated assets between $100 billion and $250 billion. The 
Act does not require the Board to change the U.S. asset threshold for 
establishment of an intermediate holding company, which is currently at 
$50 billion in U.S. nonbranch assets.
    FBOs with significant U.S. operations have total global 
consolidated assets well in excess of the new statutory thresholds. We 
are not including any changes to the FBO regulatory scheme for FBOs 
with more than $250 billion in global assets as part of our 
implementation of tailoring mandated by the Act. We continue, as we 
always have, to review our regulatory framework to improve the manner 
in which we deal with the particular risks of FBOs in light of the 
distinct characteristics of such institutions.
Additional Measures in EGRRCPA
    The provisions I have highlighted focus on the Federal Reserve's 
tasks that the Board has completed or made a priority for the near 
term. Two additional measures for which the banking agencies have 
already issued rulemakings are the treatment of municipal securities in 
liquidity rules, and the capital treatment of high volatility 
commercial real estate exposures. Regarding the former, the Federal 
banking agencies completed this task on August 22 through an interim 
final rule that modified the agencies' liquidity coverage ratio rule to 
treat certain municipal obligations as high-quality liquid assets as 
required by the Act.\11\ And on the latter, the Federal banking 
agencies released an Interagency Statement allowing depository 
institutions and their holding companies to report only commercial real 
estate loans that would remain subject to the higher capital 
requirements after implementation of the Act. The Board and the other 
Federal banking agencies then followed up this announcement with a 
notice of proposed rulemaking on September 18, that seeks comment on 
changes to our regulation that would implement this statutory 
amendment.\12\
---------------------------------------------------------------------------
    \11\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Agencies issue interim final rule regarding the treatment 
of certain municipal securities as high-quality liquid assets,'' joint 
news release, August 22, 2018, available at https://
www.federalreserve.gov/newsevents/pressreleases/bcreg
20180822a.htm.
    \12\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Agencies propose rule regarding the treatment of high 
volatility commercial real estate,'' Joint Press Release, September 18, 
2018, available at: https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20180918a.htm.
---------------------------------------------------------------------------
    Under the Act, there is additional important work to be done on 
various other regulatory relief and refinements, including the 
provision in the Act regarding a custodial bank including central bank 
deposits in the denominator of its supplementary leverage ratio. We 
remain focused on completing these tasks in a timely fashion, while 
maintaining our commitment to engaging with stakeholders and other 
interested parties. In the appendix to this testimony, I have set out 
these tasks and the Board's latest thinking and actions on these 
topics.
Conclusion
    At this point in the aftermath of the financial crisis, we face an 
important opportunity to further tailor our supervision and regulation 
framework in a way that lets us be more risk-sensitive without 
sacrificing the increased post-crisis resiliency of the financial 
system. In implementing the Act, we should tailor regulation more 
broadly to take into account the business mix, complexity and 
interconnectedness, and risk profile of banking institutions. 
Implementing the Act is an important milestone in the Federal Reserve's 
continuing tailoring mandate. Thank you again for the opportunity to 
testify before you this morning, and I look forward to answering your 
questions.
Appendix to the Statement by Randal K. Quarles
    In my testimony, I focused on progress we have made to date on 
tasks set out for the Federal Reserve in the Economic Growth, 
Regulatory Relief, and Consumer Protection Act (the Act) as well as 
certain near-term priorities. In this appendix, I set out additional 
provisions in the Act and some of the Board's key considerations as to 
implementation.
Short Form Call Reports
    The Act prescribes a reduced reporting requirement for certain 
small depository institutions, specifically, a reduced reporting 
requirement every first and third quarter for qualifying depository 
institutions with total assets of less than $5 billion. The Board, in 
conjunction with the other Federal banking agencies, intends to provide 
relief in the short-term, with additional simplifying changes to follow 
at a later stage.
Volcker Rule Relief
    The Act exempts from the Volcker rule certain banks based on 
enumerated criteria. The Act also revises the statutory provisions 
concerning the naming of covered funds. Both changes took effect when 
the Act was signed into law. In light of these provisions, the relevant 
agencies immediately announced that they would limit enforcement of the 
final regulation implementing the Volcker rule consistently with the 
amendments made by the Act.\13\ The Board and the other agencies 
responsible for implementing the Volcker rule also intend to conform 
the implementing rule to these statutory amendments through a separate 
rulemaking process.
---------------------------------------------------------------------------
    \13\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and Office of the Comptroller of the 
Currency, ``Interagency Statement regarding the impact of the Economic 
Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA),'' 
July 6, 2018, available at https://www.federalreserve.gov/newsevents/
pressreleases/files/bcreg2018
0706a1.pdf.
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Other Measures Related to Capital and Liquidity
    Other provisions in the Act concerning capital and liquidity rules 
include requirements to eliminate the ``adverse'' scenario in stress 
testing for BHCs with total
assets of $250 billion or more and allow a custodial bank to exclude 
central bank deposits from the denominator of its supplementary 
leverage ratio. The Board continues to develop these refinements.
Additional Measures
    The Act contains a number of other provisions that may require 
agency implementation either through a rulemaking or other action. The 
Board is required to tailor supervisory assessments for BHCs with total 
assets between $100 billion and $250 billion. The Board is required to 
modify its engagement in international insurance standard setting, 
including through the establishment of an Insurance Policy Advisory 
Committee and through certain reports and testimony to Congress. In 
addition, the Board intends to assist the Treasury Department in 
analyzing how Federal banking agencies are addressing material risks of 
cyber threats to U.S. financial institutions and capital markets. The 
Board continues to develop policies, rulemakings, and other relevant 
steps to address these provisions, in conjunction with the other 
Federal banking agencies and Treasury as appropriate. Moreover, we 
intend to be highly engaged in the public feedback process in 
implementing all of the improvements to regulation and policymaking 
arising from the Act.
                                 ______
                                 
                PREPARED STATEMENT OF JELENA McWILLIAMS
            Chairman, Federal Deposit Insurance Corporation
                            October 2, 2018
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the opportunity to testify today on the Economic Growth, 
Regulatory Relief, and Consumer Protection Act (the ``Act''), which was 
signed into law on May 24th. I want to congratulate Chairman Crapo and 
other Members of the Committee who worked hard to craft this strong, 
bipartisan legislation, and former Chairman Shelby for his prior work 
in the area. The Act includes a number of directives that will help 
reduce the regulatory burden on small banks, while preserving the 
ability of financial regulators to ensure the safety and soundness of 
banks and the bank-
ing system. The Act also makes significant progress in appropriately 
tailoring
regulations to the size and risk profile of particular institutions, 
especially with respect to small banks.
    When I testified during my confirmation hearing, I told you that 
one of my top priorities would be the health of the Nation's community 
banks and their ability to effectively serve their communities. 
Community banks play a pivotal role in their local economies, and our 
regulatory regime must do what it can to ensure their continued 
vitality. Implementation of the Act will play a key role in delivering 
on this priority.
    My testimony will describe actions that the FDIC has taken or plans 
to take to implement the Act's reforms, along with a description of 
other initiatives and priorities aimed at rightsizing the regulatory 
requirements for community banks.
Implementation of the Act's Reforms
Interagency Statement
    The FDIC has taken a number of actions to implement the Act. With 
respect to interagency provisions that were effective immediately upon 
enactment, on July 6, 2018, the FDIC, the Office of the Comptroller of 
the Currency (OCC), and the Federal Reserve Board (FRB) (collectively, 
the ``agencies'') issued a statement describing the positions the 
agencies would take to implement statutory changes while working to 
amend existing regulations. Simply put, the statement made clear that 
we will not enforce existing regulations in a manner inconsistent with 
the Act.
    Among the issues addressed in the statement is the agencies' 
position on the company-run stress testing requirements of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank 
Act''). For depository institutions with average total consolidated 
assets of $100 billion or less, the agencies extended the deadlines for 
such stress tests until November 25, 2019, thereby eliminating 
requirements related to the Dodd-Frank Act company-run stress testing. 
This action was taken to avoid unnecessary burden for depository 
institutions and to maintain consistency between bank holding companies 
and depository institutions.
    The Interagency Statement also addressed a number of other issues, 
including resolution planning, the Volcker Rule, risk weighting of high 
volatility commercial real estate (HVCRE) exposures, the examination 
cycle for small banks, the treatment of municipal obligations under the 
liquidity coverage ratio (LCR), and an exemption from appraisal 
requirements for certain transactions.
Section 103: Appraisals for Residential Loans in Rural Areas
    Section 103 of the Act became effective immediately upon enactment 
and exempts certain loans secured by real property from the agencies' 
appraisal requirements. The exemption applies to federally related 
transactions under $400,000 and secured by a lien on properties located 
in rural areas. The exemption does not apply if a Federal financial 
institution's regulatory agency requires an appraisal for safety and 
soundness purposes or if the loan is a ``high-cost mortgage,'' as 
defined in the Truth in Lending Act. The agencies are currently working 
on changes to existing regulations.
Section 201: Small Bank Leverage Ratio
    Section 201 of the Act directs the agencies, in consultation with 
applicable State bank supervisors, to develop a community bank leverage 
ratio of not less than 8 percent and not more than 10 percent. Under 
the law, community banks that exceed the community bank leverage ratio 
will be considered compliant with all other capital and leverage 
requirements. This will substantially simplify compliance with capital 
rules for qualifying banks. This community bank leverage ratio will 
only be available to certain banks with total consolidated assets of 
less than $10 billion. The agencies are working expeditiously to 
develop a proposed rule to implement this provision.
Section 202: Reciprocal Deposits
    Section 202, which became effective upon enactment, provides that, 
under certain circumstances, reciprocal deposits will not be considered 
funds obtained, directly or indirectly, by or through a deposit broker 
under section 29 of the Federal Deposit Insurance Act.
    Reciprocal deposits are defined as deposits that a bank receives 
through a deposit placement network with the same maturity (if any) and 
in the same aggregate amount as deposits the bank submitted for 
placement through the deposit placement network. The FDIC, working with 
the Federal Financial Institutions Examination Council (FFIEC) members, 
revised the Call Report Instructions to reflect the reporting change 
from brokered to nonbrokered treatment of specified reciprocal deposits 
for the June 30, 2018, Call Report. Additionally, on September 12, 
2018, the FDIC issued a Notice of Proposed Rulemaking (NPR) to conform 
its brokered deposit regulation to section 202.
Sections 203 and 204: Volcker Rule
    Section 203 of the Act amends the definition of ``banking entity'' 
under section 13 of the Bank Holding Company Act to alter which 
institutions are subject to the requirements of the Volcker Rule. The 
term ``banking entity'' is defined under the Bank Holding Company Act 
to include an insured depository institution or a company that controls 
an insured depository institution. Following the passage of the Act, 
the term ``insured depository institution'' does not include an 
institution (A) that functions solely in a trust or fiduciary capacity 
(subject to certain conditions) or (B) that does not have and is not 
controlled by a company that has (i) more than $10 billion in total 
consolidated assets and (ii) total trading assets and trading 
liabilities that are more than 5 percent of total consolidated assets.
    Section 204 revises the statutory provisions related to the naming 
of covered funds, effective on the date of enactment. This revision 
removes certain naming restrictions on covered funds in a manner than 
enables hedge funds or private equity funds to share the same name as a 
banking entity that is an investment adviser to the fund under certain 
conditions.
Section 205: Short Form Call Reports
    Section 205 of the Act requires the banking agencies to issue 
regulations that allow for a reduced reporting requirement in the first 
and third quarter Call Reports for ``covered depository institutions'' 
that have less than $5 billion in total assets and satisfy other 
appropriate criteria established by the agencies. The agencies are 
developing a proposed rule to implement section 205 that we intend to 
issue for comment in the very near term.
    The agencies' efforts to implement section 205 will build on the 
work already done by the FFIEC's Community Bank Call Report Burden-
Reduction Initiative, which includes the introduction of a streamlined 
Call Report that, at present, is generally applicable to institutions 
with domestic offices only and total assets of less than $1 billion. 
The shorter Call Report reduced the length of the report for eligible 
small institutions from 85 to 61 pages, removed approximately 40 
percent of the nearly 2,400 data items required, and reduced the 
reporting frequency for approximately 100 additional data items. In 
implementing section 205, in addition to raising the asset threshold 
and expanding the number of eligible institutions, the agencies are 
exploring ways to further streamline Call Reports.
Section 210: Examination Cycle
    Section 210 of the Act raises the total asset threshold from $1 
billion to $3 billion for well-capitalized insured depository 
institutions to be eligible for an 18-month examination cycle, setting 
a longer examination cycle for a larger number of ``1-rated'' 
institutions and authorizing the agencies to make corresponding changes 
for ``2-rated'' institutions. On August 23, 2018, the FDIC issued an 
IFR with the OCC and the FRB to conform existing rules and to make the 
corresponding change for 2-rated institutions. Under the IFR, up to 420 
additional institutions will benefit from an 18-month examination 
cycle. Comments on the IFR were requested within 60 days of publication 
in the Federal Register.
Section 214: Revised Definition for HVCRE
    Prior to the enactment of the Act, the regulatory capital treatment 
of HVCRE exposures was a concern for many institutions. Under the 
standardized approach, banks were required to assign a 150 percent 
risk-weight to any loans that met the definition of HVCRE. Section 214 
provides that the agencies may only require a bank to assign a 
heightened risk weight to such an exposure if it is an ``HVCRE ADC 
Loan,'' as defined in the statute. While banks are currently able to 
report their HVCRE exposures using this new definition, the FDIC must 
amend its capital rules to align with the definition provided in the 
Act. On September 12, 2018, the FDIC issued a Notice of Proposed 
Rulemaking (NPR) to conform its capital regulation to section 214.
Section 403: Municipal Obligations as High-Quality Liquid Assets (HQLA)
    Section 403 of the Act requires the agencies to treat certain 
municipal obligations as HQLA for purposes of their final rules 
establishing the LCR and in other regulations incorporating the term 
HQLA. The section also requires the agencies to amend their liquidity 
regulations to implement these changes no later than 90 days after 
enactment. On August 22, 2018, the FDIC issued an IFR jointly with the 
OCC and the FRB that amends the agencies' LCR rule to treat liquid and 
readily marketable, investment grade municipal obligations as HQLA. 
Comments on the IFR were requested within 30 days of publication in the 
Federal Register.
Additional FDIC Initiatives
    In addition to implementation of the Act, the FDIC is also looking 
at additional ways to improve the effectiveness and efficiency of its 
supervision and regulation and to enhance its processes and 
communications.
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA)
    EGRPRA requires the agencies to conduct a joint review of 
regulations every 10 years and consider whether any of those 
regulations are outdated or unnecessary. The most recent EGRPRA cycle 
resulted in a Joint Report to Congress, submitted by the banking 
agencies and the National Credit Union Administration (NCUA) in March 
2017. Through this process, the agencies began to address issues 
related to regulatory burden, including reporting requirements, capital 
rules, and appraisal requirements. As a few examples stemming from the 
review, the agencies have implemented a short form call report, issued 
an NPR to simplify certain aspects of the regulatory capital rules, and 
raised the threshold for commercial real estate loans exempt from 
appraisal requirements.
Future Initiatives
    Since becoming Chairman, I have focused on reviewing the FDIC's 
organization and processes, approach to supervision, and existing 
regulations and policies. The FDIC has commenced work on a number of 
new initiatives, and others will be introduced in the near future. A 
few of my initial priorities include improving (1) the transparency and 
accountability of the agency, (2) the examination process, and (3) the 
de novo application process.
    Improving transparency at the FDIC will be a core component of my 
Chairmanship. Yesterday, the FDIC issued a request for comment on how 
the FDIC disseminates information to regulated institutions, and how to 
make these communications more effective, streamlined, and clear. 
Additionally, on September 10, 2018, the FDIC proposed to rescind more 
than 50 percent of the Financial Institution Letters (FILs) related to 
safety and soundness issues after determining they are outdated or that 
the information can be found elsewhere on the FDIC's website. We also 
plan to retire more than half of FILs related to consumer compliance as 
well. Overall, my goal is to make sure that supervisory guidance we 
provide is as clear and concise as possible, and that outdated or 
superseded supervisory communications are archived.
    As the current Chair of the FFIEC, the FDIC is leading an 
Examination Modernization Project to minimize burden to banks where 
possible, principally by reevaluating traditional processes and making 
better use of technology. Additionally, the FDIC has undertaken 
separate internal projects to improve the effectiveness, efficiency, 
and quality of community bank safety and soundness processes. These 
projects are focused on improving the examination planning process and 
further risk-focusing or tailoring examinations to a bank's business 
model, complexity, and risk profile.
    The FDIC is currently looking at how we can further improve the 
application process to encourage more de novo activity while ensuring 
that prospective banks are strong enough to survive, especially given 
industry consolidation over recent decades. Since January 2010, the 
number of insured depository institutions has declined by nearly 2,500, 
which includes mergers of non-affiliated banks (41 percent); 
consolidations within the same organization (27 percent); bank failures 
(15 percent); acquisitions of banks on the problem bank list (11 
percent); and self-liquidations (6 percent). Meanwhile, during that 
same time period, only 11 new charters have been approved and opened, 
most in the past 15 months.\1\ To ensure the long-term vibrancy of the 
banking industry, it is important to attract new startups and new 
capital. It is also important to clarify that the FDIC does not have a 
standard initial capital figure for de novos, but rather a prospective 
bank is expected to propose initial capital sufficient to support its 
business model.\2\
---------------------------------------------------------------------------
    \1\ This number does not include shelf charters (new banks formed 
to acquire a failed bank or another bank), conversions (which includes 
credit unions converting into banks, or new banks that are spin-offs of 
existing banks), or a new subsidiary by a banking organization that 
already has an affiliated bank.
    \2\ The FDIC's Statement of Policy on Applications for Deposit 
Insurance states that normally, the initial capital of a proposed 
depository institution should be sufficient to provide a Tier 1 capital 
to assets leverage ratio (as defined in the appropriate capital 
regulation of the institution's primary Federal regulator) of not less 
than 8.0 percent throughout the first 3 years of operation. In 
addition, the depository institution must maintain an adequate 
allowance for loan and lease losses. Initial capital should normally be 
in excess of $2 million net of any preopening expenses that will be 
charged to the institution's capital after it commences business. 
Overall, the amount of capital will be dependent on the prospective 
bank's size and proposed business model--there is no standard dollar 
amount required.
---------------------------------------------------------------------------
    The FDIC is also planning to address a number of additional 
regulatory priorities in the coming months, including revisiting those 
regulations that have not received recent or comprehensive public 
input. One example is a comprehensive look at the regulatory approach 
to brokered deposits and national rate caps, which will include seeking 
public comment later this year. The banking industry has undergone 
significant changes since these regulations were put into place, and we 
will consider the impact of changes in technology, business models, and 
products since the brokered deposit requirements were adopted.
Conclusion
    Thank you again for the opportunity to appear before you today, and 
I look forward to your questions.
                                 ______
                                 
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
                                 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM JOSEPH M. 
                             OTTING

    Some provisions of S. 2155 may be implemented through 
guidance or other policy statements that do not go through 
formal notice and comment rulemaking. The Congressional Review 
Act requires agencies to submit, with certain minor exceptions, 
all rules to Congress for review. Under the Congressional 
Review Act, a rule, by definition, is ``the whole or a part of 
an agency statement of general or particular applicability and 
future effect designed to implement, interpret, or prescribe 
law or policy or describing the organization, procedure, or 
practice requirements of an agency.'' This definition is very 
broad. In order to ensure Congress can engage in its proper 
oversight role, I encourage the regulators to follow the 
Congressional Review Act and submit all rules to Congress, even 
if they have not gone through formal notice and comment 
rulemaking.

Q.1. Can you commit to following the law by submitting all 
rulemakings and guidance documents to Congress as required by 
the Congressional Review Act?

A.1. The OCC will continue to comply with the Congressional 
Review Act, which requires Federal agencies to submit rules to 
Congress.

Q.2. On July 6, 2018, the Federal Reserve, Federal Deposit 
Insurance Corporation, and Office of the Comptroller of the 
Currency issued an Interagency Statement regarding the impact 
of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act.\1\ It is my understanding that the Interagency 
Statement would qualify as a rule under the Congressional 
Review Act.
---------------------------------------------------------------------------
    \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg201807061.pdf.
---------------------------------------------------------------------------
    Have the agencies submitted the Interagency Statement to 
Congress as required by the Congressional Review Act?

Q.3. If not, can you commit to submitting the Interagency 
Statement to Congress?

A.2.-A.3. The July 9, 2018, Interagency Statement regarding the 
impact of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) announced the Federal banking 
agencies' intentions regarding EGRRCPA implementation and 
described certain interim positions the agencies would take 
during implementation of EGRRCPA. The OCC will submit any rules 
it issues to implement EGRRCPA to Congress, as required by the 
Congressional Review Act.

Q.4. Section 165 of Dodd-Frank established a $50 billion, and 
in some cases a $10 billion, threshold in total consolidated 
assets for the application of enhanced prudential standards. 
Such thresholds have been applied in rulemakings and guidance 
documents
consistent with Dodd-Frank's requirements. As an example in 
2012, regulators issued jointly supervisory guidance on 
company-run stress testing for banks with more than $10 billion 
in assets. The regulators have also applied numerous other 
standards using either the $10 billion or $50 billion asset 
threshold to be consistent with Section 165 of Dodd-Frank. For 
example, banks with $50 billion or more in total assets have 
historically been subject to CCAR, a supervisory test not 
required by statute.
    Can you commit to reviewing all rules and guidance 
documents referencing thresholds consistent with Section 165 of 
Dodd-Frank, and revise such thresholds to be consistent with S. 
2155?

A.4. The OCC has already started reviewing those rules and 
guidance documents referencing thresholds consistent with 
section 165 of the Dodd-Frank Act in light of the provisions of 
S. 2155.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOSEPH M. 
                             OTTING

Q.1.a. Regarding section 206 of S. 2155, has the OCC estimated 
how many institutions may elect to operate as ``covered savings 
associations''?

A.1.a. As of June 30, 2018, there were 320 Federal savings 
associations. All but five are under $20 billion in assets and 
would be eligible to elect to operate as covered savings 
associations under the proposed rule.

Q.1.b. How many institutions do you believe will have to 
divest, conform, or discontinue nonconforming subsidiaries, 
assets, and activities not permitted by national banks?

A.1.b. Any institution that makes an election to operate as a 
covered savings association will have to divest, conform, or 
discontinue subsidiaries, assets and activities not permitted 
for national banks. Given the differences in authorities 
applicable to national banks and Federal savings associations, 
the OCC's proposal poses questions about the details of 
divestiture and/or conformance of activities that are not 
permitted for national banks. The estimated population of 
Federal savings associations that hold subsidiaries, assets, or 
activities not permitted for a national bank that will have to 
divest them will depend on the requirements of the final rule 
and the importance of the activities, investments, or 
subsidiaries to the operations of the Federal savings 
association and the communities served. As drafted, the 
proposed rule would require any Federal savings association 
that makes the election to divest, conform, or discontinue 
holding the subsidiary or the asset or engaging in the 
activity, within a specified period.

Q.1.c. For those institutions that elect to become ``covered 
savings associations,'' how will their examination and 
supervision differ from national banks and savings 
associations?

A.1.c. The examination and supervision of a Federal savings 
association that elects to become a covered savings association 
will not differ from other national banks or Federal savings 
associations. The majority of OCC examiners are commissioned to 
examine both national banks and Federal savings associations. 
The OCC will continue to use a risk-based examination 
philosophy that allows
examiners to tailor the scope of their supervision to the
strategic plan, risk profile, and complexity of the bank they 
are examining regardless of charter.

Q.2. Does the OCC plan on taking enforcement action against 
Wells Fargo related to the bank's ``calculation errors'' during 
the years 2010 to 2015 that led the bank to deny or not offer 
loan modifications to 625 homeowners, which led to 400 wrongful 
foreclosures?

A.2. The OCC cannot comment on supervisory activities underway 
and whether they may lead to enforcement actions. We generally 
evaluate the underlying issues or weaknesses that cause errors 
and determine the severity of deficient practices, including 
violations of law. The nature, extent, and severity of the 
bank's deficiencies, the board and management's ability and 
willingness to correct deficiencies within an appropriate 
timeframe and potential adverse impact to bank customers are 
some of the key factors considered when determining the 
appropriate supervisory response.

Q.3. When does the OCC expect Wells Fargo to conclude with the 
borrower remediation related to the applicable of unauthorized 
collateral protection insurance?

A.3. While the OCC cannot comment on our review of a specific 
remediation plan, we expect the bank's process for compensating 
harmed borrowers to identify the full population of customers 
that may have been harmed and to thoroughly analyze how such 
customers were harmed. The analysis, approval of the 
remediation plan, customer contact, and completion of 
remediation is sometimes a lengthy process as it may involve 
not only customers but also contact with and action by customer 
legal representatives, credit reporting agencies, insurance 
companies or other external parties.

Q.4. The Federal financial agencies often take intermediate 
steps to address problems in the financial institutions they 
regulate before formal enforcement actions are taken. For 
example, we know that the OCC had taken supervisory actions 
related to concerns about Wells Fargo's sales practices before 
the 2016 enforcement action.
    Please describe the process for how your agency determines 
what type of supervisory action to take when it finds a problem 
at a financial institution it regulates, how it expects the 
financial institution to address the problem, how much time a 
financial institution is given to address the problem, how the 
agency follows up with the financial institution on the 
problem, and how the agency makes a determination that a 
problem has not been addressed and warrants escalated action.

A.4. The OCC supervisory process is transparently described in 
the Comptroller's Handbook, and supplemented by the OCC 
Enforcement Policies and Procedures Manual, available on 
OCC.gov. The Handbook details supervisory procedures and 
authority provided in statute and regulation that the agency 
follows to examine regulated institutions and require 
corrective action when necessary. The Handbook includes 
procedures related to safety and soundness, as well as 
compliance. Supervisory action may range from supervisory 
conversations, documented exam findings, and matters requiring 
attention to formal enforcement action such as:

   LCease & Desist Orders (C&D): Banking organizations 
        subject to cease and desist orders are required to take 
        actions or follow proscriptions in the orders, which 
        may include comprehensive corrective changes to bank 
        procedures, practices, and controls as well as 
        providing remediation to individuals harmed by the 
        deficiencies identified in the order. 12 U.S.C.  
        1818(b).

   LCivil Money Penalty Orders (BCMP): Banking 
        organizations subject to civil money penalties must pay 
        fines. 12 U.S.C.  1818(i)(2).

   LFormal Agreements (FA): Banking organizations that 
        are subject to formal agreements agree to take actions 
        or follow proscriptions in the written agreement. 12 
        U.S.C.  1818(b).

   LNotices Filed (NFB): Banking organizations against 
        whom an ``OCC Complaint'' (in the form of a Notice of 
        Charges and/or Notice of Civil Money Penalty 
        Assessment) is filed have an opportunity to litigate 
        the matter before an Administrative Law Judge. 12 
        U.S.C.  1818(b) (Notice of Charges) and 12 U.S.C. 
        1818(i) (Notice of Civil Money Penalty Assessment).

   LPrompt Corrective Action Directives (PCAD): Banking 
        organizations that are subject to prompt corrective 
        action directives are required to take actions or to 
        follow proscriptions that are required or imposed by 
        the OCC, under section 38 of the FDI Act. 12 U.S.C.  
        1831.

   LSafety & Soundness Orders (SASO): Banking 
        organizations that are subject to safety and soundness 
        orders are required to take actions or to follow 
        proscriptions that are imposed by the OCC under section 
        39 of the FDI Act. 12 U.S.C.  1831p-l.

   LSecurities Enforcement Actions (SEB): Banking 
        organizations that are engaged in securities 
        activities, such as municipal securities dealers, 
        Government securities dealers, or transfer agents, can 
        be subject to various OCC sanctions, including 
        censures, suspensions, bars and/or restitution, 
        pursuant to the Federal securities laws.

    Specific corrective actions and the time required to 
implement those corrective actions vary according to the facts 
and circumstance of a particular matter. Examiners monitor 
corrective actions. Orders remain in force until the OCC 
confirms that the institution has fulfilled the terms of a 
particular order.
    When circumstances warrant, the OCC shares documents and 
information obtained through its supervisory and investigative 
processes with criminal law enforcement. When the OCC 
identifies evidence of a likely criminal violation of law, it 
will refer such matters to the Department of Justice.

Q.5. As you know, financial institution misconduct often 
continues for many years, and it raises concerns that the 
current supervisory process is ineffective in addressing 
problems. Given that the details about supervisory actions 
including ``matters requiring attention'' or ``MRAs'' are 
considered confidential supervisory information, please provide 
the Committee for each year starting in 2005 the aggregate 
number of outstanding MRAs from the OCC for the U.S. G-SIBs and 
the aggregate number of MRAs that were satisfactorily addressed 
and are no longer outstanding.

A.5. The number of MRAs identified and satisfactorily addressed 
varies over time and by institution. The life-cycle of an MRA 
will depend on the magnitude of the issue and the ability of 
management to develop and implement sustainable corrective 
actions. MRAs identified in the G-SIBs supervised by OCC are a 
subset of the MRAs published in the OCC's Semi-Annual Risk 
Perspective for all OCC banks. They are similar, in terms of 
trends over time in numbers and characteristics, to the top 
three MRA concern risk areas for all large banks--operational, 
compliance, and credit risk.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM JOSEPH M. 
                             OTTING

    Your agencies have been working on regulations to implement 
the Biggert-Waters Flood Insurance Reform Act of 2012 for the 
last 6 years. The rule regarding acceptance of private flood 
insurance has been proposed in draft form , the last time on 
January 6, 2017. Nearly all comments submitted on the two 
drafts expressed serious concerns over the proposals, and the 
unintended consequences that would result.

Q.1. What steps are each of your agencies taking to address the 
concerns expressed during the comment period?

A.1. The OCC is aware of the serious concerns raised by 
commenters on the proposals issued by the agencies to implement 
the private flood insurance provisions of the Biggert-Waters 
Flood Insurance Reform Act of 2012. The OCC, along with the 
other agencies, is working to address these concerns in the 
final rule. The OCC expects the agencies to finalize the rule 
in early 2019.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM JOSEPH M. 
                             OTTING

    There have been reports of fake or phony comments that have 
been filed with Federal agencies as part of the Federal 
rulemaking process.

Q.1. Considering that the OCC recently published an Advance 
Notice of Proposed Rulemaking (ANPR) seeking comments on 
potential changes to the Community Reinvestment Act (CRA), how 
will you ensure that all fake and phony comments will not be 
included as part of this CRA ANPR or any other rulemaking by 
the OCC?

A.1. The ANPR is an information gathering process. All relevant 
and germane information regarding the operation and improvement 
of the regulations implementing the Community Reinvestment Act 
are welcome. The OCC expects a robust comment period and looks 
forward to reviewing all of the comments.
    The OCC will review the content of each comment closely. 
Anonymous comments are accepted and the content of the letter 
is the focus of all submissions. Many groups conduct letter-
writing campaigns using form letters and stock information. 
There is high potential for stock information and data to be 
inaccurate, misrepresented, or presented out of context. In 
such cases, the letters do not inform the agency's decision-
making process in a meaningful way. Likewise, a large volume of 
identical form letters present very little additional 
information to inform a rulemaking process. Such identical 
letters are grouped and analyzed as a common comment. In 
analyzing submitted comments, the OCC employs subject matter 
experts in policy, law, and economics to review claims 
presented in the letters.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JOSEPH 
                           M. OTTING

Sales practices
    The Wells Fargo fraudulent account scandal exposed how 
abusive sales practices and incentive compensation place 
consumers at risk of harm. In the 2 years since the first Wells 
Fargo scandal, we've watched as bank executives blamed low-paid 
employees for sales practices gone wrong, but in reality, these 
scandals reflect a failure of risk management and bank culture 
that comes from the top. A new report by the National 
Employment Law Project found that 90 percent of bank employees 
surveyed stated that failure to meet sales quotas still results 
in bullying, disciplinary action or possible termination.

Q.1. Are your agencies incorporating reviews of sales practices 
and compensation programs into your supervision?

A.1. For the banks subject to the sales practices horizontal 
review, OCC supervisory offices have informed bankers we are 
continuing to conduct supervisory activities related to sales 
practices on an institution-specific basis, including follow up 
on the corrective actions implemented to address any Matters 
Requiring Attention (MRAs) identified during the review. This 
ongoing monitoring and follow up is being conducted as part of 
our regular oversight and supervision of these institutions. 
For other institutions, the OCC has made examiners aware of the 
risks and characteristics identified during the horizontal 
review and will apply that insight when they determine if the 
risk profile of a particular bank warrants further review or 
action.
    Examiners will consider the banks sales culture, the 
composition of products and services, the nature of incentive 
compensation programs, the presence of sales goals or quotas, 
and other relevant bank-specific considerations.

Q.2. If so, does that include any input or feedback from 
frontline employees?

A.2. We incorporate such information when reviewing a bank's 
policies, procedures, and controls, and its risk governance 
framework over sales practices, incentive compensation, and 
employee conduct. Examiners also assess any testing conducted 
by bank risk management, the results of any surveys, mystery 
shopping conducted by bank risk management, internal and 
external audit functions, and consultant evaluations 
commissioned by bank management. In instances where serious 
deficiencies are noted, either through OCC supervisory work or 
the banks' testing, examiners consider more in-depth analysis 
that could include additional
supervisory action as well as potentially requiring third-party 
interviews or surveys of frontline employees.

Q.3. If not, how are you monitoring possible misconduct related 
to sales practices?

A.3. Please refer to our responses to the previous two 
questions.
Bank of America
Q.4. Last week, I sent a letter to the CEO of Bank of America 
regarding recent customer reports that the bank has asked 
existing account holders for their citizenship status, and in 
some cases the bank has frozen accounts when customers fail to 
respond. Have any of your agencies directed or suggested to 
banks under your supervision to ask existing account holders 
for their citizenship status? Please provide any information 
about whether any institutions may have been asked or 
encouraged to collect citizenship information on existing 
customers.

A.4. There is no statutory requirement administered by the OCC 
for an individual to be a U.S. citizen to open or maintain an 
account with a national bank or Federal savings associations, 
and the OCC has issued no new guidance on this subject 
directing banks to query account holders for their citizenship 
status. Banks are
required by law, however, to document the identification of 
their customers. For certain customers, acceptable forms of 
identification include Government-issued documents evidencing 
nationality or residence, and these documentation standards 
differ for U.S. persons and non-U.S. persons.
Forced-place Insurance
Q.5. Last month, there was a report \1\ that the OCC rejected 
Wells Fargo's remediation plan to pay back more than 600,000 
drivers who were charged for auto insurance they never signed 
up for. The process has been going on for more than a year, but 
the bank can't seem to get it right.
---------------------------------------------------------------------------
    \1\ https://www.reuters.com/article/us-wells-fargo-insurance-
exclusive/exclusive-us-regulators-reject-wells-fargos-plan-to-repay-
customers-sources-idUSKCN1LR2LG.
---------------------------------------------------------------------------
    What problems did you see with the remediation plan, and 
why did you reject it?

A.5. While the OCC cannot comment on our review of a specific 
remediation plan, the agency typically reviews such plans to 
ensure they are complete, appropriate, achievable, and remedy 
consumer harm. Accordingly, there are many reasons why the OCC 
may reject a plan including flaws with a bank's methodology, 
timeframes or determination of harm, concerns about the 
methodology to remedy consumer harm, or other reasons.

Q.6. Would the OCC support handing over the remediation to a 
neutral third party so that we can make sure harmed consumers 
are finally repaid?

A.6. When appropriate, the OCC has required an institution to 
employ a third party to provide restitution to harmed 
consumers.
GAP Insurance
Q.7. What is the OCC doing to ensure Wells Fargo refunds 
customers who were overcharged for guaranteed asset protection 
(GAP) insurance?

A.7. OCC examiners are actively engaged with bank management 
and its directors regarding the bank's plans to remedy harmed 
customers to ensure plans are complete, appropriate, and 
achievable.
Bank of America
Q.8. Have there been any recent supervisory or enforcement 
actions that might have caused Bank of America to focus on the 
citizenship status of its existing account holders?

A.8. No. The OCC has not issued any actions to direct or 
suggest that Bank of America ask account holders for their 
citizenship status.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JOSEPH M. 
                             OTTING

    Thank you for your commitment to finalizing a rule on 
private flood insurance. As Congress clarified in its passage 
of the Biggert-Waters Flood Insurance Reform Act of 2012, 
consumers should have choices when it comes to obtaining flood 
insurance. While there is nothing in Federal Law prohibiting 
homeowners from
purchasing private flood insurance, there is regulatory 
uncertainty about what policies banks can accept for mandatory 
purchase requirements. The lack of a finalized rule on the 
topic for over 6 years has exacerbated this uncertainty. The 
November 2016 proposed rule is too narrow and raises obstacles 
to the participation of private flood insurers in the market, 
which runs directly counter to congressional intent. The prompt 
finalization of a rule adopting an identical approach to the 
Flood Insurance Market Parity and Modernization Act would 
address these concerns.
    If further delay would be necessary for the OCC and its 
peers to adopt the rule jointly, I urge the OCC to separately 
consider interim guidance or other approaches to promptly 
resolve the regulatory ambiguities that impede mandatory and 
discretionary acceptance of private flood insurance by banks.
    Please answer the following with specificity:

Q.1. Will you commit to looking at the Flood Insurance Market 
Parity and Modernization Act as a model for a final rule on 
private flood insurance?

A.1. The final rule must reflect the existing statutory 
framework governing flood insurance. The OCC continues to 
monitor congressional efforts to modify the Biggert-Waters Act, 
and staff is available to provide technical assistance, as 
requested.

Q.2. Will you commit to coordinating the finalization of the 
rule with those who have an expertise in insurance regulation, 
such as the National Association of Insurance Commissioners and 
representatives from the insurance industry?

A.2. The agencies received comment letters from the NAIC and 
others with expertise on the insurance industry in response to 
two proposals to implement the private flood insurance 
provisions of the Biggert-Waters Act. Please be assured that we 
are taking these comments into consideration in drafting the 
final rule.

Q.3. Can you provide a timeline for finalization of the rule?

A.3. The OCC is expecting to finalize the rule in early 2019.

Q.4. There is growing concern that the upcoming transition to 
the Current Expected Credit Loss accounting standard beginning 
in 2020 will adversely impact banks' ability or inclination to 
make certain types of loans, including many forms of consumer 
credit that are essential for a healthy economy--mortgages, 
auto loans, and student loans.
    I believe that the OCC, in conjunction with the Federal 
Reserve, SEC, and FASB, should act quickly to reevaluate this 
standard and assess its impact on financial institutions, 
consumers, and the overall health and stability of the 
financial sector. The analysis should account for how CECL may 
precipitate a change in regulatory capital requirements and pay 
special attention to the interaction between regulatory capital 
and the impact of increased loan loss
reserve requirements.
    Please answer the following with specificity:

    Does the OCC believe that the economic impacts of CECL have 
been adequately studied to date?

A.4. The Financial Accounting Standards Board (FASB), the 
independent body that sets accounting standards, followed a 
lengthy process to solicit public comment and analysis on the 
accounting change. The OCC supports an independent accounting 
standard-setting process. The OCC, along with the other 
agencies, proposed a regulatory capital transition rule that 
provides institutions the option to phase-in any day-one 
regulatory capital effects of CECL over three years. This 
transition period allows the agencies to further monitor and 
study the impact of the accounting standard before the full 
effect on regulatory capital is recognized.

Q.5. Would you support measures to delay implementation of CECL 
pending completion of a thorough quantitative impact study?

A.5. The OCC supports the continued study of CECL and is 
actively engaged with the other banking agencies to better 
understand its effect on regulatory capital. The agency 
supports a move to an expected credit loss methodology, as it 
improves the timely recognition of credit losses, which itself 
is foundational to our mission of ensuring national banks and 
Federal savings associations operate in a safe and sound 
manner.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM JOSEPH M. 
                             OTTING

AR Banks Wish They Could Service More of Their Customers' Mortgages--
        This is About Mortgage Sentencing Rights (MSR)
    One thing I hear from AR banks is that after they make a 
mortgage loan, they like keeping the mortgage servicing rights 
(MSR) even if they wind up selling the mortgage itself. Both 
current regulations, like the Basel III rules, make this 
difficult. These small lenders prefer to keep a relationship 
with their mortgage customers, which includes handling any 
issues with their mortgage. For these often-rural small banks, 
service is a competitive advantage for them over the big banks. 
So, as you might imagine, it's tough having to tell your 
longtime customer that she has to call some 1-800 number for 
questions about her mortgage.

Q.1. Last year, good news appeared on the way when regulators 
issued proposed rule that allowed for banks to keep a greater 
portion of their mortgage servicing rights, but it seems the 
rule got put on the backburner during the S. 2155 debate. So, 
can I tell my constituents that help is on the way and you plan 
to finalize the capital relief provisions soon? Any color on 
how soon?

A.1. Currently, the Federal banking agencies are focusing on 
implementing burden relief related to regulatory capital 
revisions included in S. 2155, but we continue to consider the 
comments on the simplification NPR, including the proposed 
simplifications to the treatment of mortgage servicing assets 
(MSAs). The agencies have provided banking organizations some 
relief from the more onerous standards of the regulatory 
capital rule, including the limitations on MSAs, through the 
November 21, 2017, final rule that froze the 2017 transitions 
(82 FR 55309). This freeze remains in effect until the agencies 
take further action on this issue.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JOSEPH M. 
                             OTTING

    The OCC recently issued a notice of proposed rulemaking on 
the recovery plans for national banks. In that proposal, the 
OCC increased the asset threshold for filers from $50 billion 
in assets to $250 billion in assets citing S. 2155 as the 
motivation for this change. While several of my colleagues on 
the Committee agree that the change in thresholds to $250 
billion in S. 2155 is beneficial, we also agree that 
operational risk should be a driving factor when regulating 
institutions above $250 billion.

Q.1. What was the OCC's motivation for this change in its 
rulemaking on recovery plans? Would you be open to considering 
operational risk as a determining factor for requiring recovery 
plans for institutions with more than $250 billion in assets 
and to tailoring regulations accordingly?

A.1. The OCC issued this proposal because raising the threshold 
for the recovery planning guidelines (Guidelines) allows us to 
better focus on those institutions that present greater 
systemic risk to the banking system. These larger, more 
complex, and potentially more interconnected bunks present the 
types of risks that could benefit most from having the types of 
governance and planning processes that identify and assist in 
responding to significant stress events.
    With respect to whether operational risk could be used as 
basis to further reduce the number of banks subject to the 
Guidelines, we welcome all comments on the proposal and will 
consider any received before issuing the final Guidelines.

Q.2. Based on a straightforward reading of Section 206 of S. 
2155, trust-only thrifts that make an election to operate as a 
national bank pursuant to Section 206 should be subject to the 
same requirements and enjoy the same benefits as trust-only 
national banks.
    When you finalize the rule implementing this section, will 
you follow the straightforward reading of the law and treat the 
small number of trust-only thrifts that don't take deposits or 
make loans the same as their national peers who aren't required 
to have deposit insurance or comply with the Qualified Thrift 
Lending requirement?

A.2. The OCC has issued a proposed rule outlining a process for 
Federal savings associations to elect to operate as covered 
savings associations with the rights, duties, and requirements 
set forth in the statute. The OCC has not prejudged any of the 
issues raised by the proposed rule and is very interested in 
understanding how the issues raised by the proposal may affect 
Federal savings associations with different business models. We 
are committed to carefully reviewing all comments received on 
this matter as we develop a final rule.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JOSEPH M. 
                             OTTING

    Under the agencies' proposal to simplify and tailor the 
regulations implementing the Volcker Rule, the proposed 
``accounting prong'' would cover all purchases or sales of 
financial instruments that are recorded at fair value on a 
recurring basis under applicable accounting standards, which 
would subject a significantly higher number of financial 
activities to the rule.

Q.1. Given the agencies' policy goals of simplification and 
tailoring, how do you intend to revise the proposal to remain 
faithful to these goals?

A.1. The Volcker agencies are currently exploring the scope of 
the proprietary trading regulatory framework, by proposing to 
simplify and clarify the definition of ``trading account'' in a 
manner consistent with section 13 of the Bank Holding Company 
Act (known as the Volcker Rule). The recent Notice of Proposed 
Rulemaking (NPR) included a robust request for comment on the 
proposed accounting prong, including questions as to whether it 
is over- or under-inclusive, and questions about available 
alternatives. I look forward to exploring these issues further 
with my counterparts at the other agencies.

Q.2. The proposed amendments to the Volcker Rule would also 
introduce new metrics that could result in a nearly 50 percent 
increase in metrics reporting. How do you intend to revise the
proposal to ensure that covered institutions are not subject to 
additional compliance burdens?

A.2. In the recent NPR, the Volcker agencies proposed to 
eliminate some current categories of metrics, and to replace 
other categories with simplified reporting of position data. 
The agencies also proposed a new electronic reporting format 
and proposed to collect a certain amount of descriptive 
information from each banking entity. The agencies requested 
comment whether these changes would materially reduce 
compliance costs, and whether any of the changes would have the 
opposite effect of increasing costs. The agencies will evaluate 
these considerations in deciding how to proceed with metrics 
revisions in the final rule.

Q.3. Recently the ``Interagency Statement Clarifying the Role 
of Supervisory Guidance'' was issued. I think this directive is 
a very important step in ensuring that the regulation and 
supervision of financial institutions is conducted pursuant to 
legal standards. Each of you is the leader of an organization 
that has thousands of employees and examiners and are 
responsible for its implementation.
    How are you making sure examiners on the ground are 
following this statement?

A.3. In advance of the Interagency Statement, the OCC reminded 
examiners of the role of supervisory guidance, reiterating the 
important distinction between statutes and regulations that can 
be enforced according to their terms and supervisory guidance, 
which does not impose legally binding constraints but rather 
outlines safe and sound banking or risk management principles. 
The principles on the use of guidance outlined in the 
Interagency Statement are incorporated into OCC training 
classes. We have discussed the use of supervisory guidance on 
all-hands calls with our examiners, and recently reiterated 
supervisory guidance's role to OCC managers.

Q.4. Have you considered a formal rulemaking so that staff take 
this important statement seriously?

A.4. Supervisory guidance clarifies the OCC's expectations and 
promotes transparency and consistency in its supervisory 
approach across banks. The principle outlined in the 
Interagency Statement, that supervisory guidance does not have 
the force and effect of law, is consistent with the OCC's use 
of supervisory guidance. As described above, the OCC has taken 
multiple actions to remind our examiners of the important 
distinctions between statutes/regulations and supervisory 
guidance. We do not believe that a rulemaking is necessary.

Q.5. How will you independently verify that this statement is 
followed (audits, surveys from supervised entities, other 
independent verification)?

A.5. The OCC maintains processes for reviewing written 
communications before they are sent to banks. This process 
includes checking for consistency with OCC policies. The OCC 
also has quality assurance programs that assess adherence to 
internal processes, policies, and procedures. In addition, the 
OCC's Ombudsman's Office oversees the administration of the 
Bank Appeals Program, in which bankers may appeal an agency 
decision, including if they think supervisory guidance was used 
incorrectly in forming material supervisory determinations and 
other conclusions in the report of examination.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                        JOSEPH M. OTTING

Wells Fargo Plans To Compensate Wrongs Auto Loan Borrowers
    Comptroller Otting, we know that Wells Fargo pushed as many 
as 600,000 of its auto loan customers into unnecessary auto 
insurance. As part of its settlement for its numerous frauds, 
Wells Fargo is required to provide financial compensation to 
borrowers who faced wrongful fees, damaged credit, and vehicle 
repossession. I understand that a Wells Fargo compensation plan 
was rejected by the OCC last month. I understand that Wells 
doesn't expect to finish contacting all defrauded customers 
until the end of 2019--more than 18 months after they got 
caught (consent order was issued by the CFPB/OCC in April 
2018).

Q.1. Why is it taking so long to compensate harmed borrowers?

A.1. While the OCC cannot comment on our review of a specific 
remediation plan, we expect the bank's process for compensating 
harmed borrowers to identify the full population of customers 
that may have been harmed and to thoroughly analyze how such 
customers were harmed. The analysis, approval of the 
remediation plan, customer contact, and completion of 
remediation is sometimes a lengthy process as it may involve 
not only customers, but also contact with and action by 
customer legal representatives, credit reporting agencies, 
insurance companies, or other external parties.

Q.2. The OCC has been closely monitoring Wells Fargo since at 
least September 2016, when the previous fake account scandal 
was uncovered. And yet the bank continues its misconduct and 
can't seem to make it right. What assurances can you provide to 
the Committee that Wells Fargo won't submit yet another 
insufficient plan that delays relief?

A.2. While the OCC cannot comment on our review of a specific 
remediation plan, examiners typically provide detailed feedback 
to bank management on deficiencies that must be addressed in 
order for the OCC to approve a plan to remedy consumer harm.
Section 104, Home Mortgage Disclosure Act (HMDA)
    I was the Attorney General of Nevada during the financial 
crisis and saw first-hand how big banks targeted vulnerable 
people and communities of color. This is exactly why it was so 
important that the CFPB required more data collection and more 
oversight over lending activities. The law signed by President 
Trump earlier this year eliminated some of the data we need to 
preserve this progress. Despite the loss of public HMDA data, 
each of your agencies still has a requirement to ensure that 
Latinos, African Americans, women, and other people are not 
rejected for loans due to their gender or ethnicity.

Q.3. How many lenders supervised by your agency will not 
publicly report the additional data that was to be required 
this year? This data includes loan characteristics like credit 
score, fees, points, and interest rates.

A.3. Based on data reported in 2017, approximately 80 percent 
of OCC regulated banks will be eligible for the partial 
exemption
(552 of 683) to report additional HMDA data. However, while the 
majority of bank HMDA reporters will qualify for the exemption 
to report the additional data, the OCC will collect the full 
expanded data set for the remaining national banks and Federal 
thrifts that do not qualify for the exemption, and those 
nonqualifying institutions make an estimated 95 percent of all 
closed-end mortgage loan originations by national banks and 
Federal thrifts. For those institutions that are exempt from 
the expanded data set, the bank regulators will still receive 
information added by the BFCP's 2015 HMDA rule, to report 
additional data about age, ethnicity, and certain other 
information.

Q.4. Would it have been easier to spot fair lending violations 
with transparent data reporting, rather than relying on your 
bank examiners to go bank by bank, loan by loan to root out 
discrimination?

A.4. The OCC can and will continue to effectively use HMDA data 
to identify fair lending risk in the banks we supervise. HMDA 
data is used to identify areas for further investigation or 
examination work, which can include loan file reviews and 
access to all information reported in the expanded data fields.

Q.5. Without the expanded HMDA data reporting slated to begin 
this year, what information will your agency's examiners have 
to trigger a review of potential discrimination?

A.5. The OCC does not believe the exemption for banks making 
fewer than 500 closed-end mortgage loans per year to provide 
expanded HMDA data will adversely affect our ability to 
identify
potential discrimination. The agency can and will continue to
effectively use HMDA reporting to screen the banks we supervise 
for fair lending violations.
Community Reinvestment Act
    We have a massive affordable rental housing crisis in 
Nevada: 119,854 families pay more than half their income for 
rent. One of the few resources we have is the Low Income 
Housing Tax Credit. The new tax law is already making it harder 
to finance low-income housing because the cost of the credit 
has fallen.

Q.6. Will you commit to ensure that any changes you consider to 
the Community Reinvestment Act make Federal tools like the Low 
Income Housing Tax Credit and New Market Tax Credit work better 
in communities?

A.6. Yes. The OCC's Advance Notice of Proposed Rulemaking 
(ANPR) on CRA is seeking input concerning whether a bank should 
be able to include in its CRA evaluation additional areas tied 
to the bank's business operations beyond its banking footprint 
(or broader Statewide or regional area). This is one approach, 
and we are inviting comments on other approaches that could 
promote the effectiveness of the CRA and related programs. 
Under such an approach, banks could include these additional 
areas in their assessment areas, enabling consideration of CRA 
activities conducted within these areas. Such an approach could 
address concerns that the current CRA assessment areas can 
restrict bank lending or investment in areas of need, by 
expanding the circumstances in which banks receive CRA 
consideration of CRA qualifying activities
conducted within these areas. Providing consideration for 
activities conducted in targeted areas or areas that have been 
largely excluded from consideration, such as remote rural 
populations or Indian Country, for example, could help promote 
services and activities in those areas as well. It may also 
accommodate banks that either operate with no physical branches 
or banks with services that reach far beyond the geographic 
location of their physical branches. By expanding the 
geographies where banks could undertake community development 
activities, banks would be provided greater opportunities to 
invest in Low Income Housing Tax Credits and New Markets Tax 
Credits in areas of need.

Q.7. Nonbanks provide more than half of all mortgages in this 
country. Six of the 10 largest mortgage lenders are not banks. 
Do you think nonbank mortgage lenders should be covered by the 
Community Reinvestment Act?

A.7. Expanding the CRA to apply to nonbank mortgage lenders 
would require a legislative change. We encourage Congress to 
explore expanding the coverage of the CRA to entities to which 
it currently does not apply, including nonbank mortgage lenders 
and credit unions.

Q.8. For generations, lenders understood that they should 
require property taxes and homeowners insurance be placed in 
escrow, so that those obligations are always paid on time. But 
in the run-up to the foreclosure crisis, lenders cut corners so 
that they could misrepresent monthly payments to homeowners and 
put them into obligations they couldn't afford. How will your 
agencies monitor the implementation of the escrow exemption? 
Will your examiners monitor foreclosure activities resulting 
from unpaid property taxes and/or property insurance?

A.8. Section 108 of the EGRRCPA directs the BCFP to provide, by 
regulation, the added escrow exemption for certain mortgage 
loans. The OCC looks forward to working with the BCFP as it 
initiates rulemaking in this area. Upon the BCFP's 
implementation of the rulemaking for this escrow exemption, the 
OCC is committed to working with the BCFP and the other FFIEC-
member agencies in updating interagency examination procedures 
to ensure a consistent examination approach across each agency.
    The OCC continuously monitors lending performance, 
including residential lending performance, across all OCC-
supervised institutions so it can identify and respond to 
trends and emerging risks, such as those that may be the cause 
of any future increases in mortgage foreclosure activities.

Q.9. How will you communicate any findings or concerns from the 
elimination of the escrow requirement to us in Congress?

A.9. The OCC provides the BCFP with annual reporting of 
Regulation Z violations of law cited. This annual reporting 
would include any violations related to Regulation Z escrow 
requirements. The BCFP includes this OCC-reported data in its 
periodic reporting to Congress. Additionally, the OCC routinely 
publishes information regarding emerging risks and industry 
trends via its website, www.occ.gov. Specific to residential 
mortgages, the OCC issues
a quarterly summary report of the previous quarter's first-lien
mortgage performance (including foreclosures). The most recent 
quarterly report was issued September 21, 2018, and can be 
found on our website.
Anti-Money Laundering/Bank Secrecy Act
Q.10. On page 12, you note innovative technologies and 
practices that the OCC is exploring to assist financial 
institutions better achieve Anti-Money Laundering compliance. 
Please describe those.

A.10. The OCC encourages banks to explore technology solutions 
that allow them to both maintain their risk focus and gain 
process and system efficiencies. Artificial intelligence and 
machine learning are among the technologies that may offer 
banks opportunities to potentially enhance the ability of 
transaction monitoring systems to identify suspicious activity, 
while reducing the number of false positive alerts and 
investigations. Other techniques, such as natural language 
processing may facilitate the automation of manual processes, 
thus improving the efficiency and effectiveness with which 
banks are able to measure and mitigate risk.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATORS WARNER, COTTON, 
            TILLIS, AND JONES FROM JOSEPH M. OTTING

    Comptroller Otting has testified before that ``the process 
for complying with current BSA/AML laws and regulations has 
become inefficient and costly.'' In talking with banks/credit 
unions it is clear that they do not object to the principle of 
complying with AML regulations, it is that they feel that much 
of the time, effort, and money spent on compliance is 
ineffective, and therefore, a waste of time. Banks/credit 
unions fill out forms invented in the 1970s and have little 
insight into whether it is doing any good. And we've heard from 
banks/credit unions that they believe AML examinations are done 
without respect to the riskiness of the institution or its 
activities.

Q.1. What improvements can be made so we have a cheaper & 
faster system that is better at catching criminals?

A.1. Many banks use automated suspicious activity monitoring 
systems. We can improve the BSA/AML regime by ensuring BSA/AML 
systems and tools are appropriately developed, implemented, 
tuned, and validated to address the unique risk profile of each 
bank. Banks would benefit greatly from additional insight and 
feedback from the law enforcement community regarding the value 
of BSA reports. Banks could use this type of feedback to tune 
AML system rules and parameters to hone in on specific 
transaction types or patterns, customer segments, and 
geographies to target money laundering typologies and illicit 
financiers. We also support responsible innovation, including 
industry efforts to improve AML systems through the use of 
advanced technology and analytics designed to enhance system 
efficiency and effectiveness. Improving AML system efficiency 
and effectiveness may yield better quality suspicious activity 
reporting that could enhance law enforcement efforts.

Q.2. Is there a place in a new AML regime for new technology, 
like artificial intelligence or machine learning?

A.2. Absolutely. There is significant potential for responsible 
technological innovation, including artificial intelligence and 
machine learning, to provide banks opportunities to better 
manage their costs and increase the ability of their 
transaction monitoring systems to identify suspicious activity, 
while reducing the number of false positive alerts and 
investigations. We have also seen innovation used in customer 
risk identification and risk scoring, as well as the 
development and use of Know Your Customer (KYC)/Customer Due 
Diligence (CDD) utilities. We encourage banks to explore 
technology that allows them to maintain their risk focus and at 
the same time gain process and system efficiencies.

Q.3. What do you, as a regulator, think that it means to have a 
risk-based AML program?

A.3. The OCC expects a bank to have a BSA/AML compliance 
program commensurate with its BSA/AML risk profile identified 
by its risk assessment. Bank management should understand the 
bank's BSA/AML risk exposure and develop appropriate policies, 
procedures, and processes to monitor and control identified 
BSA/AML risks. Independent testing should review the bank's 
risk assessment for reasonableness, and management should 
consider the staffing resources and level of training needed to 
promote adherence with its policies, procedures and processes. 
For those banks that assume a higher-risk BSA/AML profile, bank 
management should provide a more robust BSA/AML compliance 
program that specifically monitors and controls the higher 
risks that bank management and its board have accepted.

Q.4. How do you implement the risk-based AML program 
requirement through examinations?

A.4. As mentioned above, examiners assess the adequacy of each 
bank's BSA/AML program, relative to the risk profile of the 
bank, by evaluating the implementation and effectiveness of the 
bank's policies, procedures, systems and controls. The OCC 
expects banks to have an effective BSA/AML program consisting 
of a system of internal controls, independent testing, a BSA 
officer, and training.
    Examiners use the examination procedures contained within 
the FFIEC BSA/AML Examination Manual to evaluate the adequacy 
and effectiveness of banks' BSA/AML Program. Examiners are 
required to complete the core examination overview and 
procedures as well as any additional core or expanded 
procedures based on risk. Examiners determine whether banks 
have a satisfactory framework commensurate with the level of 
BSA/AML-related risks, to identify, measure, monitor and manage 
those risks. A bank's BSA/AML risk assessment framework and 
system should identify the risk within its banking operations 
(products, services, customers, transactions, and geographies) 
and incorporate these risks into the BSA/AML compliance 
program, including the suspicious activity monitoring program.
    The OCC's BSA/AML examination process follows a risk-based 
approach and, at a high level, consists of scoping, fieldwork, 
developing and vetting findings and conclusions, and reporting. 
The FFIEC BSA/AML Examination Manual provides for risk-based 
transaction testing, to evaluate the adequacy of the bank's 
compliance with regulatory requirements, determine the 
effectiveness of its policies, procedures, and processes, and 
evaluate suspicious activity monitoring systems. The scope and 
method of this testing is not prescriptive and is risk-based. 
One tool the OCC developed to help assess BSA/AML risk in 
community banks is the Money Laundering Risk (MLR) system; an 
annual data collection, review and assessment process that 
allows the OCC to identify potentially higher-risk areas within 
the community bank population.
    Examiners use the information collected through this tool 
to determine the bank's overall risk activities and to 
appropriately scope and plan bank examinations.

Q.5. How often does your agency meet with FinCEN and with the 
DOJ/FBI to discuss the usefulness of suspicious activity 
reports that are being filed?

A.5. There is currently a working group comprised of FinCEN and 
the Federal banking agencies that meets weekly to discuss BSA 
reforms. This working group is coordinating with FinCEN on 
various initiatives including to evaluate the usefulness of 
SARs filed. With regard to law enforcement discussions, the OCC 
is involved in discussions with law enforcement on the 
usefulness of SARs through the Bank Secrecy Act Advisory Group 
(BSAAG) process. The BSAAG is an advisory group, chaired by 
FinCEN and comprised of the Federal and State regulators, law 
enforcement, financial institutions and trade associations that 
provides a forum to discuss issues involving the BSA. The BSAAG 
holds plenary meetings twice a year, and working groups meet 
more regularly. A specific BSAAG working group formed in 2017, 
the SAR Metrics Working Group, is currently evaluating the 
value of SAR filings based upon data compiled by FinCEN. There 
is a second working group, the Structuring SAR Working Group, 
also formed in 2017, that is evaluating the value of 
structuring SARs and possible ways to improve the effectiveness 
of these filings. The OCC and law enforcement both participate 
in these working groups.

Q.6. When a bank/credit union files a SAR, or a regulator is 
examining a financial institution, how much feedback is there 
across the system about whether or not the SARs they filed were 
found to be useful, informative, or effective?

A.6. Currently there is no formal system that provides regular 
feedback to financial institutions on the SARs they filed. 
However, when examiners review a bank's suspicious activity 
monitoring system, they test for the content and timing of SARs 
filed and provide feedback on policies, procedures and 
practices. Also, FinCEN presents annual Law Enforcement Awards. 
FinCEN initiated this awards program to recognize significant 
criminal investigations in which information reported under the 
BSA was critical to law enforcement cases. Through this 
program, a wide variety of Federal and State law enforcement 
agencies nominate significant cases that utilized BSA reporting 
to investigate and prosecute a broad spectrum of criminal 
activity.

Q.7. What are the legal hurdles that prevent more effective and 
more regular feedback within the Federal Government and between 
the Federal Government and financial institutions?

A.7. Depending on the context of the proposed feedback to be 
shared among Federal Government agencies or between the
Federal Government and banks, different legal considerations 
would apply. For example, financial privacy considerations are 
a
significant legal issue that impacts feedback within the 
Federal Government. Certain Federal statutes that safeguard 
customer privacy impose limits on the sharing of information. 
Furthermore, section 314(b) of the USA PATRIOT Act, provides a 
safe harbor from liability from sharing and effectively 
preempts other Federal and State laws, however, the information 
that can be shared under section 314(b) is information 
regarding individuals, entities, and organizations engaged in 
or reasonably suspected based on credible evidence of engaging 
in terrorist acts or money laundering activities. The OCC has 
recommended expanding the safe harbor in Section 314(b) to also 
include mortgage fraud, cyber fraud and other financial crimes 
to make it more flexible and enable more sharing of
information.
    Privacy statutes that may have an impact in feedback 
between the Government and financial institutions, and between 
financial institutions, are listed below:

    Right to Financial Privacy Act (RFPA)--The RFPA was enacted 
to provide the financial records of financial institution 
customers a reasonable amount of privacy from Government 
scrutiny. The Act establishes specific procedures that 
Government authorities must follow when requesting a customer's 
financial records from a bank or other financial institution. 
The Act also imposes duties and limitations on financial 
institutions prior to the release of information sought by 
Government agencies.
    Title V of Gramm-Leach-Bliley Act (GLBA) and Regulation P--
The GLBA and its implementing regulations, Regulation P, 
establish a general rule that a financial institution may not 
disclose any nonpublic personal information about a consumer to 
any nonaffiliated third party unless the financial institution 
first provides the consumer with a notice that describes the 
disclosure (as well as other aspects of its privacy policies 
and practices) and a reasonable opportunity to opt out of the 
disclosure, and the consumer does not opt out. There are two 
specific exceptions specific to BSA and may be applicable to 
the AML Utility: (i) to the extent specifically permitted or 
required under other provisions of law and in accordance with 
the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401 et 
seq.) to law enforcement agencies, self-regulatory 
organizations, or for an investigation on a matter related to 
public safety and (ii) to protect against or prevent actual or 
potential fraud, unauthorized transactions, claims or other 
liability.
    Electronic Fund Transfer Act (EFTA)--The EFTA and its 
implementing regulations, require that banks make certain 
disclosures at the time a consumer contracts for an electronic 
fund transfer service or before the first electronic fund 
transfer is made involving the consumer's account. For example, 
the financial institution must disclose the circumstances under 
which, in the ordinary course of business, the financial 
institution may provide information concerning the consumer's 
account to third parties, whether or not the third party is 
affiliated with the bank. This disclosure must encompass any 
information that may be provided concerning the account (not 
just information relating to the electronic fund transfers 
themselves). The EFTA requirements apply to ``accounts,'' which 
include demand deposit, savings deposit, and other consumer 
asset
accounts.
    State Privacy Laws--A number of States have enacted privacy 
laws that specifically relate to the disclosure of consumer 
financial information, as well as laws that more generally 
target unfair and deceptive acts and practices. The GLBA 
maintains that State laws that afford greater protection for 
consumer privacy than that provided by the GLBA are not 
preempted by Title V of the GLBA. The FCRA, however, provides 
that State laws that prohibit or impose requirements on the 
exchange of information among affiliates are preempted unless 
enacted after January 1, 2004.

Q.8. Will you pledge to institutionalize feedback mechanisms 
wherein banks/credit unions both get and can give feedback on 
how to constantly improve the process?

A.8. The OCC will continue to work with FinCEN and law 
enforcement to improve two-way feedback on the value and 
construct of SAR reporting. We will work to make this issue a 
priority for discussion in the BSAAG as well as in other 
forums, including the FFIEC BSA working group.

Q.9. We hear from banks that they feel pressured to file SARs 
even when they believe the underlying transaction or activity 
does not rise to a level of suspiciousness that merits a 
filing. They say they do this because they are afraid of being 
second-guessed by examiners after the fact, and because there 
is no Government penalty for over-filing SARs--only a penalty 
for not filing a SAR. The filing of unnecessary SARs, however, 
results in unnecessary expense.
    What can be done to realign incentives so that banks/credit 
unions don't feel pressured to file SARs that they don't feel 
reflects activity warranting a filing?

A.9. Banks are only required to file SARs whenever a bank 
detects any known or suspected Federal criminal violation, or 
pattern of criminal violations, committed or attempted against 
the bank involving a transaction or transactions conducted 
through the bank, in any amount involving insider abuse, 
aggregating $5,000 or more where a suspect can be identified, 
and aggregating $25,000 or more when a suspect cannot be 
identified. OCC examiners are trained on the proper application 
of our SAR regulation (12 CFR 21.11), and a bank's suspicious 
activity monitoring program is evaluated in the context of the 
overall efficacy of the BSA/AML Program. Our examiners' 
evaluation of the overall effectiveness of the program does not 
require the filing of a specified number of SARs, and we do not 
hold bankers to SAR filing number benchmarks or other metrics. 
We also advise and train our examination staff that they should 
not cite SAR filing violations for difference of opinion or 
judgement between the examiner and the bank, provided there is 
no evidence of bad faith or lax judgment. Examination staffs 
have access to legal, policy, and supervision experts as they 
develop examination conclusions. All potential BSA Program-
related violations are formally vetted through senior 
management committees before finalizing to ensure consistency 
across the OCC.

Q.10. Banks/credit unions commonly use ``rules-based'' software 
to screen transactions and alert AML compliance teams to 
suspicious activities. While these rules-based systems can be 
effective, they might not be the most effective tool available 
given advances in data science and machine learning, and 
further, that there may be opportunities for criminals to 
manipulate these rules-based systems.
    We have heard concerns that many criminals have access to 
the exact same products that are used by financial 
institutions--is this true?

A.10. We do not have any evidence that supports that criminals 
have access to AML products used by financial institutions.

Q.11. If criminals have access to similar products, or can 
easily come to understand the rules-based system, how easy is 
it to manipulate these detection systems?

A.11. As stated in our response above, we do not have any 
evidence that criminals have access to AML products used by 
financial institutions. Any potential manipulation would 
generally be in the form of structuring transactions to avoid 
detection, which would be difficult since banks are expected to 
customize AML monitoring systems in a manner commensurate with 
their unique risk profile. Thus, vendor settings in AML systems 
generally are modified as banks customize transaction 
monitoring settings.

Q.12. If there was a proven model of using a ``learning,'' 
algorithmic system to flag potentially suspicious transactions, 
would this be an improvement on the current system? What are 
the hurdles to financial institutions adopting such systems?

A.12. Advanced AML systems may assist a bank in gaining 
efficiencies in suspicious activity monitoring by reducing the 
number of false positives requiring review as well as providing 
enhanced capabilities for identifying risk through anomaly 
detection. There are a number of hurdles to successfully 
implement advanced AML systems including those using machine 
learning. Some of these hurdles include the absence of 
sufficient data to fully ``train'' these systems, data 
integrity and inconsistent data formatting issues resulting 
from multiple platforms and other system issues, lack of 
reliable information on SAR productivity, and the cost of 
acquiring and properly implementing and validating such 
systems.

Q.13. In what ways is a bank's/credit union's ``safety and 
soundness'' implicated by its AML system?

A.13. The OCC considers BSA/AML examination findings in a 
safety and soundness context when assigning the management 
component rating of the FFIEC Uniform Financial Institutions 
Rating System (CAMELS ratings). Serious deficiencies in a 
bank's BSA/AML compliance create a presumption that the bank's 
management component rating will be adversely affected because 
its risk management practices are less than satisfactory. 
Please refer to OCC Bulletin 2012-30--Consideration of Findings 
in Uniform Rating and Risk Assessment Systems.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM RANDAL K. 
                            QUARLES

Q.1. Some provisions of S. 2155 may be implemented through 
guidance or other policy statements that do not go through 
formal notice and comment rulemaking. The Congressional Review 
Act requires agencies to submit, with certain minor exceptions, 
all rules to Congress for review. Under the Congressional 
Review Act, a rule, by definition, is ``the whole or a part of 
an agency statement of general or particular applicability and 
future effect designed to implement, interpret, or prescribe 
law or policy or describing the organization, procedure, or 
practice requirements of an agency.'' This definition is very 
broad. In order to ensure Congress can engage in its proper 
oversight role, I encourage the regulators to follow the 
Congressional Review Act and submit all rules to Congress, even 
if they have not gone through formal notice and comment 
rulemaking.
    Can you commit to following the law by submitting all 
rulemakings and guidance documents to Congress as required by 
the Congressional Review Act?

A.1. The Federal Reserve Board (Board) submits rules to 
Congress in accordance with the Congressional Review Act. As 
you know, the Board, along with other Federal financial 
agencies, recently issued an Interagency Statement clarifying 
the role of supervisory guidance. The statement explains that, 
unlike a law or regulation, supervisory guidance does not have 
the force and effect of law and that the agencies should not 
and will not take enforcement actions based on supervisory 
guidance. The Board will continue its practice of submitting 
all binding rules to Congress as required under the 
Congressional Review Act and will be clear internally and 
externally that our guidance documents are not binding rules.

Q.2. On July 6, 2018, the Federal Reserve, Federal Deposit 
Insurance Corporation, and Office of the Comptroller of the 
Currency issued an Interagency Statement regarding the impact 
of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act.\1\ It is my understanding that the Interagency 
Statement would qualify as a rule under the Congressional 
Review Act.
---------------------------------------------------------------------------
    \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20180706a1.pdf.
---------------------------------------------------------------------------
    Have the agencies submitted the Interagency Statement to 
Congress as required by the Congressional Review Act? If not, 
can you commit to submitting the Interagency Statement to 
Congress?

A.2. The July 6, 2018, Interagency Statement regarding the 
impact of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) did not modify any existing rule of 
the Board. Rather, the Interagency Statement indicated that the 
Board, the Federal Deposit Insurance Corporation (FDIC), and 
the Office of the Comptroller of the Currency (OCC) would not 
enforce certain regulations that were affected by EGRRCPA. As 
noted above, the Board will continue its practice of submitting 
all binding rules to Congress as required under the 
Congressional Review Act.

Q.3. Section 165 of Dodd-Frank established a $50 billion, and 
in some cases a $10 billion, threshold in total consolidated 
assets for the application of enhanced prudential standards. 
Such thresholds have been applied in rulemakings and guidance 
documents consistent with Dodd-Frank's requirements. As an 
example in 2012, regulators issued jointly supervisory guidance 
on company-run stress testing for banks with more than $10 
billion in assets. The regulators have also applied numerous 
other standards using either the $10 billion or $50 billion 
asset threshold to be consistent with Section 165 of Dodd-
Frank. For example, banks with $50 billion or more in total 
assets have historically been subject to CCAR, a supervisory 
test not required by statute.
    Can you commit to reviewing all rules and guidance 
documents referencing thresholds consistent with Section 165 of 
Dodd-Frank, and revise such thresholds to be consistent with S. 
2155?

A.3. On October 31, 2018, the Board issued two notices of 
proposed rulemaking, one together with the OCC and the FDIC, 
seeking comment on a framework for determining the prudential 
standards that apply to large U.S. banking organizations, based 
on the risk profiles of these firms. The proposals account for 
changes made by section 401 of EGRRCPA regarding enhanced 
prudential standards for these firms. As you suggest in this 
question, the Board also is evaluating changes to the 
prudential standards applicable to other large banking 
organizations, including rules that rely on a $50 billion total 
consolidated asset threshold but that were not affected by 
EGRRCPA. In addition, the Board is reviewing all guidance 
documents related to the statutory changes made by EGRRCPA.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RANDAL K. 
                            QUARLES

Q.1. While S. 2155 does not require the Fed to change the 
domestic asset threshold for the establishment of an 
intermediate holding company for a foreign banking 
organization, does the Fed have any plans to alter the current 
$50 billion U.S. nonbranch asset threshold?

A.1. As you note in this question, S. 2155 does not require the 
Federal Reserve Board (Board) to change the U.S. asset 
threshold for the establishment of an intermediate holding 
company (IHC), which is currently at $50 billion in U.S. 
nonbranch assets. Foreign banking organizations are subject to 
Section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) based on total global 
consolidated assets. In applying section 165 to foreign banks, 
the Board previously has tailored the enhanced prudential 
standards based, in part, on the size and nature of a foreign 
bank's activities in the United States. The IHC requirement and 
$50 billion U.S. nonbranch asset IHC threshold are examples of 
tailored standards based on the size and nature of a foreign 
bank's activities in the United States. Consistent with section 
165, as amended by the Economic Growth, Regulatory Reform, and 
Consumer Protection Act (EGRRCPA), and the Board's longstanding 
policy objectives, the Board's enhanced prudential standards 
generally treat the U.S. operations of a foreign banking 
organization similarly to a domestic banking organization of 
the same size and business model. As a general matter, the 
Board routinely evaluates whether changes to certain standards 
would be appropriate, and the Board anticipates that it will 
continue this practice, taking into account the structures 
through which foreign banking organizations operate in the 
United States.

Q.2. Recently, former Fed Chair Yellen said in an interview 
that ``regulators should sound the alarm,'' with regard to 
risks posed by leveraged corporate lending.\1\ Chair Yellen 
noted that regulators ``should make it clear to the public and 
the Congress there are things they are concerned about and they 
don't have the tools to fix it.''\2\
---------------------------------------------------------------------------
    \1\ https://www.bloomberg.com/news/articles/2018-09-27/wall-street-
s-riskiest-loans-flash-dangers-as-watchdogs-muzzled?srnd=premium.
    \2\ Id.
---------------------------------------------------------------------------
    Do you agree with this statement from Chair Yellen on the 
risks posed by growing leverage in corporate lending?

A.2. We continue to monitor and assess leveraged loan risk 
closely in the banks we supervise. The Federal Reserve Board, 
Federal Deposit Insurance Corporation, and Office of the 
Comptroller of the Currency (the Agencies) believe that 
supervised banks can continue to participate in leveraged 
lending activities and provide credit to this market segment, 
provided such activities, as with all lending activities, are 
conducted in a prudent manner, consistent with safety and 
soundness standards.
    Even when the direct risks posed to the banking sector are 
limited--principally because most leveraged loans originated by 
banks are promptly sold to other investors--indirect risks 
could arise if banks were separately exposed to those 
purchasers. The principal purchasers of leveraged loans from 
banks are collateralized loan obligation (CLO) vehicles, which 
are usually structured to reduce their susceptibility to runs 
by ensuring that the duration of their liabilities exceeds 
those of their assets. We monitor banks' exposures to such 
structures and take appropriate supervisory steps to reduce the 
risk that such exposures could rise to a level that might 
undermine confidence in a bank if the value of that bank's CLO 
holdings were to decline precipitously. At the same time, the 
Financial Stability Board under my chairmanship has begun 
analyzing the global distribution of exposure to CLOs, to 
understand whether such risks are arising elsewhere in the 
financial system.

Q.3.a. When Chairman Powell was a Fed Governor in 2015, he 
noted that the Fed's leveraged lending guidance from 2013 would 
``stand in the way of a return to pre-crisis conditions.''\3\
---------------------------------------------------------------------------
    \3\ https://www.federalreserve.gov/newsevents/speech/
powell20150218a.htm.
---------------------------------------------------------------------------
    Do you agree? If so, why has the Fed lessened the 
supervisory consequences for banks not in conformance with that 
guidance?

A.3.a. The Agencies issued the 2013 Interagency Leveraged 
Lending Guidance (2013 Guidance)\4\ to provide banks with 
principles that are particularly relevant when we evaluate 
leveraged loan risk management and prudent underwriting. As 
discussed in the 2013 Guidance, and consistent with banks' 
obligations to operate in a safe and sound manner,\5\ the 
Agencies continue to believe that banks engaged in leveraged 
lending activities should have underwriting standards that 
reflect the bank's risk appetite, and that consider covenant 
protections for expected financial performance, reporting 
requirements, and compliance monitoring. When assessing banks' 
practices, examiners focus on any weaknesses that could affect 
safety and soundness, taking into account each bank's 
individual circumstances.
---------------------------------------------------------------------------
    \4\ Board of Governors of the Federal Reserve System, Federal 
Deposit Insurance Corporation, and the Office of the Comptroller of the 
Currency, ``Interagency Guidance on Leveraged Lending,'' March 21, 
2013, https://www.federalreserve.gov/supervisionreg/srletters/
sr1303a1.pdf.
    \5\ Section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831 
p-1) requires each of the Agencies to prescribe bank standards relating 
to internal controls, information systems, and internal audit systems; 
loan documentation; credit underwriting; interest rate exposure; asset 
growth; compensation, fees, and benefits; and such other operational 
and managerial standards as it determines to be appropriate.
---------------------------------------------------------------------------
    As supervisory guidance, the 2013 Guidance does not have 
the force and effect of law, and the Agencies do not take 
enforcement actions based on supervisory guidance. Examiners 
may refer to the principles outlined in the 2013 Guidance when 
they assess any impact on safety and soundness posed by 
leveraged lending activities. If a bank has deficient practices 
relating to safety and soundness, the Agencies may take 
supervisory or enforcement actions, as appropriate, so that the 
institution addresses those deficiencies.

Q.3.b. How is the Fed protecting the banking sector from the 
risks of leveraged corporate lending? As a member of the 
Financial Stability Oversight Council, what is the Fed doing to 
protect against emerging risks among nonbank lenders?

A.3.b. The Agencies expect supervised banks to have prudent 
credit underwriting practices and commensurate risk management 
processes, as well as appropriate controls, transparency, and 
communication to senior management and the board of directors 
about leveraged lending risks. Deficient policies, procedures, 
or practices that relate to safety and soundness may result in 
supervisory actions.
    In addition, the Agencies will continue to perform semi-
annual interagency Shared National Credit (SNC) reviews. For 
some time, SNC reviews have been heavily weighted toward 
leveraged loans, and results are used by examiners when 
assessing credit quality and risk management practices at 
individual banks.
    The Agencies also evaluate the results of various stress 
tests performed by the banks we supervise. Leveraged loans are 
one of several asset classes stressed under different scenarios 
to assess whether capital levels are appropriate. Examiners 
will take supervisory action if adverse findings are revealed.
    The Financial Stability Oversight Council (FSOC) is able to 
analyze financial stability issues it may identify, as 
appropriate, including any related to leveraged lending 
markets. The FSOC has noted leveraged lending in some of its 
previous annual reports, including the most recent report.

Q.4. Fed officials, including yourself, have said the economy 
is performing robustly--for example, banks are more profitable 
than ever. Wall Street Reform required that bank capital 
requirements should increase in ``times of economic 
expansion,'' but Chairman Powell has said now is not the time 
to activate the countercyclical capital buffer.
    If not now, then when? Would increasing the capital buffer 
now give the Fed more room to lower it in the future, and 
soften the impact of the next downturn?

A.4. The countercyclical capital buffer (CCyB) is designed to 
increase the resilience of large banking organizations when 
there is an elevated risk of above-normal losses. The Federal 
Reserve finalized its policy statement on the CCyB in 2016, 
which spelled out a comprehensive framework for setting its 
level. The framework centers on the Board's assessment of the 
overall vulnerability of the financial system. It incorporates 
the Board's judgment of not only asset valuations and risk 
appetite, but also the level of three other key financial 
vulnerabilities that tend to vary with the economic cycle--
financial leverage, nonfinancial leverage, and maturity and 
liquidity transformation--and how all four of those 
vulnerabilities interact.
    Within that framework, asset valuations continue to be 
elevated, despite recent declines in the forward price-to-
earnings ratio of equities and the prices of corporate bonds. 
In the private nonfinancial sector, borrowing among highly 
levered and lower-rated businesses remains elevated, although 
the ratio of household debt to disposable income continues to 
be moderate.
    However, the financial system is substantially stronger 
than at similar points in previous cycles. Bank capital ratios 
and liquidity buffers are now substantially higher than they 
were a decade ago. The stress tests ensure that the largest 
banks can continue to support economic activity even in the 
face of a severe recession--importantly, one characterized by 
extreme declines in asset prices. Following our scenario design 
framework for the stress tests, the scenarios used this year 
were the most severe since the start of the CCAR program in 
2011, reflecting the framework's countercyclical elements. 
Outside the banking system, financial leverage does not appear 
to have risen to elevated levels, and the risks associated with 
maturity transformation by money market mutual funds are much 
reduced from the levels seen a decade ago.
    Thus, I believe that the financial system is quite 
resilient, with the institutions at the core of the system well 
capitalized and less risky. Central clearing of derivatives 
limits the amount of contagion from the distress of an 
institution.
    The CCyB is an important mechanism to build resilience 
among the largest banks should it become appropriate to do so, 
and we are carefully assessing relevant developments. If asset 
valuation pressures were to continue to build, especially if 
they were accompanied by increased leverage or increased 
maturity and liquidity transformation, activation of the CCyB 
could promote additional resilience among the largest U.S. 
banks, and then its later reduction during a downturn could 
support lending in that period.

Q.5. Some of the sponsors of S. 2155 and Chairman Powell have 
said that they do not intend for S. 2155 to benefit large 
foreign banks operating in the United States. But you've given 
speeches saying that the Fed should take a look at reducing the 
regulatory burden on these banks, saying that the Fed should 
``reconsider its calibration'' of foreign bank rules.
    As you run to head the Financial Stability Board--a crucial 
position leading international bank regulators--don't you think 
it's important for the United States to offer a united 
perspective that we must maintain the post-crisis regulatory 
framework for all large banks?

A.5. Post-financial crisis reforms have resulted in substantial 
gains in the resiliency of banking organizations and the 
financial system as a whole. We undoubtedly have a stronger and 
more resilient financial system due in significant part to the 
gains from those core reforms.
    In undertaking a review of the post-crisis body of 
regulations, however, in addition to ensuring that we are 
satisfied with the effectiveness of these regulations, we have 
an opportunity to evaluate whether we can improve the 
efficiency, transparency, and simplicity of regulation. If we 
can achieve the same outcome with more efficient regulations, 
that is a benefit for the entire financial system.
    The Board recognizes the important role that foreign 
banking organizations play in the U.S. financial sector and 
remains committed to the principles of national treatment and 
equality of competitive opportunity between the U.S. operations 
of foreign banking organizations and U.S. banking 
organizations. Consistent with section 165 of the Dodd-Frank 
Act, as amended by EGRRCPA, and the Board's longstanding policy 
objectives, the Board's enhanced prudential standards generally 
treat the U.S. operations of a foreign banking organization 
similarly to a domestic banking organization of the same size 
and business model. As a general matter, the Board anticipates 
that it would continue this practice, while taking into account 
the structures through which foreign banking organizations 
operate in the United States.

Q.6. At the hearing, you noted in response to a question 
regarding the G-SIB surcharge that the Fed will reconsider it, 
in part, ``to insure that we have a level playing field 
internationally not as a way of trying to seek a benefit for 
our firms, but because when you have an international system 
that has an unlevel playing field, over time pathologies will 
develop as activity moves to different areas of that global 
system not on the basis of--or driven by incentives other than 
purely economic incentives--incentives by the cost of 
capital.'' Currently, the G-SIB surcharge in the United States 
is higher than the surcharge mandated by the Basel Committee on 
Banking Supervision.
    Has this, to date, caused any pathologies to develop or 
caused activity to move out of U.S. banks and to other banks in 
the global system?

A.6. The Board's capital rules have been designed to 
significantly reduce the likelihood and severity of future 
financial crises by reducing both the probability of failure of 
a large banking organization and the consequences of such a 
failure were it to occur. Thus, the capital surcharge applied 
to U.S. global systemically important banking organizations (G-
SIBs) was calibrated so that each G-SIB would hold enough 
capital to lower its probability of failure so that the 
expected impact of its failure would be approximately equal to 
that of a non-G-SIB. In particular, the Board's ``method 2'' G-
SIB surcharge methodology takes into account the risks of 
short-term wholesale funding, and results in a higher surcharge 
than the international surcharge methodology designed by the 
Basel Committee on Banking Supervision (BCBS). Reliance on 
short-term wholesale funding is indicative of 
interconnectedness and makes firms vulnerable to large-scale 
funding runs.
    The Board has noted unintended consequences related to the 
leverage ratio requirements applied to U.S. G-SIBs, which may 
encourage them to reduce their activity in certain low-risk, 
but capital intensive, activities. For example, the Board is 
aware that the enhanced supplementary leverage ratio standards 
for U.S. G-SIBs may increase the costs for low-risk and low-
margin activities, such as custodial services. In direct 
response to the regulatory requirements, certain U.S. G-SIBs 
indicate that they have pursued a strategy of restricting the 
availability of their custodial services and passing along 
higher costs to customers.
    The bulk of post-crisis regulation largely complete, with 
the important exception of the U.S. implementation of the 
recently concluded BCBS agreement on bank capital standards. It 
is therefore a natural and appropriate time to step back and 
assess those efforts. The Board is conducting a comprehensive 
review of the regulations in the core areas of post-crisis 
reform, including capital, stress testing, liquidity, and 
resolution. The objective of this review is to consider the 
effect of those regulatory frameworks on the resiliency of the 
financial system, including improvements in the resolvability 
of banking organizations, and on credit availability and 
economic growth.
    In general, I believe overall loss-absorbing capacity for 
our largest banking organizations is at about the right level. 
Critical elements of our capital structure for these 
organizations include stress testing, the stress capital 
buffer, and the enhanced supplementary ratio. Work is underway 
to finalize the calibration of these fundamental building 
blocks, all of which form part of the system in which the G-SIB 
surcharge has an effect.

Q.7. Former Fed Governor Tarullo recently stated, ``there is 
still some legitimate question among people as to whether if 
one of [the largest U.S. banks] got into significant trouble--
and if one does the others will probably be at least under some 
stress--whether there still wouldn't be a view that they are 
too big to fail and that the Government should take 
extraordinary measures.''\1\
---------------------------------------------------------------------------
    \1\ https://www.politico.com/story/2018/09/26/wall-street-too-big-
to-fail-podcast-842587.
---------------------------------------------------------------------------
    Do you agree with this statement?

A.7. U.S. regulators have made a great deal of progress in our 
work to address the too-big-to-fail phenomenon. Notably, the 
statutory framework established by Congress and the efforts of 
financial regulators have made the largest banking firms more 
resilient and have significantly improved their resolvability. 
In particular, for the largest, most systemically important 
forms, the Federal Reserve has increased the quantity and 
quality of capital that they maintain, have established capital 
surcharges that are scaled to each firm's systemic risk 
footprint, have required hem to have more stable liquidity risk 
profiles, and have required them to carry long-term debt that 
can be converted to equity as part of a resolution.
    In this regard, I believe it is much more likely that the 
failure of one of our most systemically important financial 
institutions could be resolved without critically undermining 
the financial stability of the United States. Moreover, more of 
the losses from such a failure would fall on the firm's 
shareholders and bondholders, not the Deposit Insurance Fund or 
taxpayers. Investors have recognized this progress as well. For 
example, the major rating agencies have removed the ratings 
benefit associated with the perceived Government support that 
they once ascribed to the largest bank holding companies. That 
said, financial institutions and markets are always evolving, 
and therefore it is important to remain vigilant regarding 
changing systemic risks.

Q.8. The Federal financial agencies often take intermediate 
steps to address problems in the financial institutions they 
regulate before formal enforcement actions are taken. For 
example, we know that the OCC had taken supervisory actions 
related to concerns about Wells Fargo's sales practices before 
the 2016 enforcement action.
    Please describe the process for how your agency determines 
what type of supervisory action to take when it finds a problem 
at a financial institution it regulates, how it expects the 
financial institution to address the problem, how much time a 
financial institution is given to address the problem, how the 
agency follows up with the financial institution on the 
problem, and how the agency makes a determination that a 
problem has not been addressed and warrants escalated action.

A.8. The Federal Reserve's supervisory program is designed to 
focus on both individual firms and portfolio-wide risks in 
order to mitigate threats to a firm's safety and soundness and 
financial stability. Supervisors engage in continuous 
monitoring of firms and routinely meet with the firm's staff to 
discuss the operations of the firm, new issues, and remediation 
plans for previously identified weaknesses. Supervisors also 
conduct horizontal and firm specific examinations. The type of 
supervisory action taken is based on individual facts and 
circumstances and depends upon the number of violations, 
materiality to the safety and soundness of the firm, repeat 
nature of the deficiencies, and the ability of current 
management to connect the issues.
    Prior to a formal enforcement action, supervisors have a 
range of tools available to address identified problems at a 
firm. Informal enforcement actions that may be taken include 
issuing supervisory findings or entering into a memorandum of 
understanding. Supervisors consider the type of action to take 
based upon the severity, complexity, and impact of the 
weaknesses identified. A frequently used method is to issue 
supervisory findings to a firm after an examination. These 
include recommendations for follow-up action on the part of the 
organization's management. These ``matters requiring 
attention'' (MRA) call for action to address weaknesses in 
processes or controls that could lead to deterioration in a 
banking organization's soundness, may result in harm to 
consumers, or could lead to noncompliance with laws and 
regulations. When weaknesses are acute or protracted, Federal 
Reserve examiners may recommend that management take action 
more quickly by issuing a ``matter requiring immediate 
attention'' (MRIA). A high volume of these may prompt an 
examiner to assign a less than satisfactory annual composite 
rating to a holding company.
    Supervisory actions generally require that the institution 
submit a remediation plan that details how it expects to 
remediate issues identified by supervisors. Once a remediation 
plan is submitted, the Federal Reserve will notify the firm if 
the remediation plan is approved or whether changes are needed. 
Once agreement is reached on a remediation plan, the firm will 
implement the plan in accordance with designated timelines. 
Generally, after the firm believes that remediation is 
complete, the firm's internal audit function will validate 
implementation of the remediation plan. After internal audit 
validation, examiners also will confirm that implementation of 
remediation actions has taken place. If supervisors believe 
that a firm is not adequately addressing noted
deficiencies, then the matter may be escalated and stronger 
supervisory actions imposed. These actions may include formal 
enforcement actions and, in some cases, fines. Occasionally, if 
the
deficiencies result in the firm being in an unsafe or unsound 
condition or there is a violation of law or regulation, a 
formal or informal enforcement action may be pursued in the 
absence of previously communicated MRAs or MRIAs.

Q.9. As you know, financial institution misconduct often 
continues for many years, and it raises concerns that the 
current supervisory process is ineffective in addressing 
problems.
    Given that the details about supervisory actions including 
``matters requiring attention'' or ``MRAs'' are considered 
confidential supervisory information, please provide the 
Committee for each year starting in 2005 the aggregate number 
of outstanding MRAs from the Fed for the U.S. GIBs, and the 
aggregate number of MRAs that were satisfactorily addressed and 
are no longer outstanding.

A.9. On November 9, 2018, the Board released a Supervision and 
Regulation Report that provides data related to outstanding and 
addressed supervisory findings, including MRAs and MRIAs, since 
2013.\2\
---------------------------------------------------------------------------
    \2\ The Supervision and Regulation Report uses data since 2013 
given systems availability. In addition, data after this date is most 
relevant for large financial institutions, given the changes in the 
supervisory program following the crisis. See SR letter 12-17/CA letter 
12-14.
---------------------------------------------------------------------------
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM RANDAL K. 
                            QUARLES

Q.1. As I stated during the hearing, I greatly appreciated the 
recent Interagency Statement Clarifying the Role of Supervisory 
Guidance.

Q.1.a. Could you describe what, if any, additional steps you 
have taken to ensure that the content of the statement is 
understood and observed by your examination staff?

A.1.a. We have taken a number of steps to reaffirm the role of 
supervisory guidance in our communications to examiners and to 
supervised institutions. First, on October 4, 2018, we 
conducted an internal, mandatory training session for all our 
supervisory staff to reinforce the distinctions between laws 
and regulations versus guidance and to clarify the use of 
guidance in the supervisory process. Second, we are helping 
examiners with outreach to supervised institutions in answering 
questions about the policy statement. Third, we are reviewing 
the templates examiners use when they refer to supervisory 
guidance in their communications with supervised institutions. 
Fourth, we will continue to review supervisory findings to 
confirm that our examiners are referring to guidance 
appropriately. Finally, we regularly solicit the views of the 
forms we supervise on our supervisory process to include their 
views on our use of guidance in supervisory communications.

Q.1.b. Additionally, have past supervisory actions been 
reviewed to confirm that they are consistent with the 
statement? If so, have any problems been identified?

A.1.b. In connection with our ongoing scrutiny of supervisory 
practices, of which our clarification of the role of 
supervisory guidance forms a part, we look at existing 
supervisory actions to ensure that they are in line with 
developments in policy. At this point we have not found many 
instances where guidance has been used inappropriately in light 
of our clarifying statement, but in cases where we do discover 
that a reference to guidance in a supervisory action is 
inconsistent with our policy, we will address the error 
promptly.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER FROM RANDAL K. 
                            QUARLES

Q.1. Your agencies have been working on regulations to 
implement the Biggert-Waters Flood Insurance Reform Act of 2012 
for the last 6 years. The rule regarding acceptance of private 
flood insurance has been proposed in draft form twice, the last 
time on January 6, 2017. Nearly all comments submitted on the 
two drafts expressed serious concerns over the proposals, and 
the unintended consequences that would result.
    What steps are each of your agencies taking to address the 
concerns expressed during the comment period?

A.1. As you are aware, the National Flood Insurance Act (NFIA) 
makes the purchase of flood insurance mandatory in connection 
with loans made by a federally regulated lending institution, 
including a State member bank, and secured by improved real 
estate or mobile homes in an area designated by Federal 
Emergency Management Agency (FEMA) as a Special Flood Hazard 
Area (SFHA). Currently, most of the flood insurance policies 
purchased to comply with NFIA are issued under FEMA's National 
Flood Insurance Program (NFIP).
    The Federal Reserve, the Office of the Comptroller of the 
Currency (OCC), the Federal Deposit Insurance Corporation 
(FDIC), the Farm Credit Administration (FCA), and the National 
Credit Union Administration (NCUA) (the Agencies), which are 
responsible for writing Federal flood insurance rules, issued 
proposed rules in October 2013 and in November 2016 to 
implement the private flood insurance provisions of the 
Biggert-Waters Act (Act), but have not issued a final rule. The 
proposals incorporated the mandatory acceptance of private 
flood insurance policies that meet the criteria identified in 
the Act and clarified the applicable legal standards related to 
private flood insurance. Based on feedback from commenters, the 
Agencies re-proposed a rule in November 2016 that included 
``discretionary private flood insurance'' criteria, which would 
permit lenders to accept private flood insurance that met some, 
but not all, of the criteria provided for by the Act to satisfy 
the statutory mandatory purchase requirement.
    The comment period on the November 2016 proposal closed on 
January 6, 2017. Agency staff have carefully analyzed the 
written comments received in connection with both proposals and 
have also conducted further outreach with stakeholders to 
further understand concerns raised in the comments. Agency 
staff are working to publish a final rule in early 2019, 
balancing commenters' concerns with the requirements of the 
statute and principles of safety and soundness and consumer 
protection.

Q.2. By law the Federal Reserve and Treasury Department are 
supposed to submit a report and testify to Congress on efforts 
to increase transparency at the International Association of 
Insurance Supervisors within 180 days.
    Can you give an update on the progress of this mandated 
report and other requirements outlined in Section 212 of Public 
Law 115-174?

A.2. As a member of the International Association of Insurance 
Supervisors (IAIS), the Federal Reserve continues to work 
collaboratively in partnership with the National Association of 
Insurance Commissioners (NAIC) and the Federal Insurance Office 
(FIO), and remains committed to pursuing an engaged dialogue to 
achieve outcomes that are appropriate for the United States.
    The Federal Reserve supports transparency in the 
development of international insurance standards at the IAIS. 
With regard to the report on the efforts of the Board and U.S. 
Treasury to increase transparency at IAIS meetings, we remain 
committed to producing this report, and expect to do so in a 
timely manner. The other reports required of the Board under 
Section 211 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (EGRRCPA)--namely, the annual report 
``with respect to global insurance regulatory or supervisory 
forums'' and a joint report with the FIO required ``before 
supporting or consenting to the adoption of any final 
international insurance capital standard''--also remain high 
priorities for timely and accurate completion in accordance 
with EGRRCPA.
    Also, with regard to the EGRRCPA, we appreciate the 
opportunity to develop and engage with an Insurance Policy 
Advisory Committee on international capital standards and other 
issues, which we believe will be helpful in providing relevant 
information to both the domestic and international policy 
process. We are in the process of setting up that committee, in 
accordance with relevant Federal laws.
    It is important to recall that the IAIS has no ability to 
impose requirements on any national jurisdiction, and any 
standards developed through this forum is not self-executing or 
binding upon the United States unless adopted by the 
appropriate U.S. lawmakers or regulators in accordance with 
applicable domestic laws and rulemaking procedures.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM RANDAL K. 
                            QUARLES

Q.1. There is growing concern that the upcoming transition to 
the Current Expected Credit Loss accounting standard beginning 
in 2020 will adversely impact banks' ability or inclination to 
make certain types of loans, including many forms of consumer 
credit that are essential for a healthy economy--mortgages, 
auto loans, and student loans. I believe that the Federal 
Reserve, in conjunction with the OCC, SEC, and FASB, should act 
quickly to reevaluate this standard and assess its impact on 
financial institutions, consumers, and the overall health and 
stability of the financial sector. The analysis should account 
for how CECL may precipitate a change in regulatory capital 
requirements and pay special attention to the interaction 
between regulatory capital and the impact of increased loan 
loss reserve requirements.
    Please answer the following with specificity:

Q.1.a. Does the Federal Reserve believe that the economic 
impacts of CECL have been adequately studied to date?

A.1.a. The Financial Accounting Standards Board (FASB) is an 
independent, private sector organization that establishes 
financial accounting and reporting standards for public and 
private companies and not-for-profit organizations that follow 
Generally Accepted Accounting Principles (GAAP). Prior to 
finalizing the current expected credit loss (CECL) accounting 
standard, the FASB followed its established due process, which 
included cost-benefit analysis and extensive outreach with all 
stakeholders, including users, preparers, auditors and 
regulators. Economists, institutions and independent 
organizations have produced impact analyses of CECL. To address 
concerns about the potential initial impact stemming from CECL 
implementation, the Federal banking agencies have finalized a 
rule that provides a 3-year phase-in of CECL's day-one impact 
on regulatory capital. This will allow additional time to study 
the measure's effects as the agencies continue to monitor the 
impact of CECL adoption.

Q.1.b. Would you support measures to delay implementation of 
CECL pending completion of a thorough quantitative impact 
study?

A.1.b. Our supervised institutions are required by statute to 
apply GAAP as established by the FASB. We support an 
independent accounting standard-setting process, and as such, 
we defer to the FASB on the implementation timeline for 
financial reporting purposes. However, as mentioned in the 
response to question 1(a), the Federal banking agencies have 
finalized a rule that provides a
3-year phase-in of the effect on regulatory capital. This will 
allow additional time to study the measure's effects as the 
agencies continue to monitor the impact of CECL adoption.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDAL 
                           K. QUARLES

Sales practices
Q.1. The Wells Fargo fraudulent account scandal exposed how 
abusive sales practices and incentive compensation place 
consumers at risk of harm. In the 2 years since the first Wells 
Fargo scandal, we've watched as bank executives blamed low-paid 
employees for sales practices gone wrong, but in reality, these 
scandals reflect a failure of risk management and bank culture 
that comes from the top. A new report by the National 
Employment Law Project found that 90 percent of bank employees 
surveyed stated that failure to meet sales quotas still results 
in bullying, disciplinary action or possible termination.
    Are your agencies incorporating reviews of sales practices 
and compensation programs into your supervision? If so, does 
that include any input or feedback from frontline employees? If 
not, how are you monitoring possible misconduct related to 
sales practices?

A.1. One of the Federal Reserve's fundamental goals is to 
promote a financial system that is strong, resilient and able 
to serve a healthy and growing economy. We work to ensure the 
safety and soundness of the firms we supervise, as well as 
their compliance with applicable consumer protection laws, so 
that such firms may, even when faced with stressful financial 
conditions, continue serving consumers, businesses, and 
communities.
    The Federal Reserve applies high standards for risk 
management, internal controls, and consumer protection to 
organizations under its responsibility. To that end, we review 
compliance risk management and board oversight of bank holding 
companies and State member banks. We are focused on the 
compliance environment with respect to sales practices, and 
seek to ensure that internal controls, senior management 
oversight, and involvement of the board of directors are 
appropriately tailored to limit these risks according to each 
firm and the banking system as a whole.
    Recently, the Federal Reserve assessed our existing 
guidance related to sales practices, incentive compensation, 
and fraud, and we determined that the existing guidance is 
sufficient to cover supervisory expectations for large and 
regional banks.\1\ In addition, the Federal Reserve coordinated 
with other financial regulatory agencies to conduct a review of 
sales practices, incentive compensation, and fraud at some of 
the largest banking organizations under our supervision, which 
included reviewing audit reports related to sales practices, 
both internal and external as applicable, as well as interviews 
conducted with frontline employees.
---------------------------------------------------------------------------
    \1\ Supervision and Regulation (SR) Letter 12-17/CA 12-14, 
Consolidated Supervision Framework for Large Financial Institutions 
(Dec. 17, 2012); Interagency Guidance on Sound Incentive Compensation 
Policies, 75 Fed. Reg. 36,395 (June 25, 2010); SR Letter 08-09/CA 08-
12, Consolidated Supervision of Bank Holding Companies and the Combined 
U.S. Operations of Foreign Banking Organizations (Oct. 16, 2008); SR 
Letter 08-08/CA 08-11, Compliance Risk Management Programs and 
Oversight at Large Banking Organizations with Complex Compliance 
Profiles (Oct. 16, 2008).
---------------------------------------------------------------------------
    The Federal Reserve's review noted that some banks needed 
to strengthen policies and procedures, management information 
systems reporting to all levels of management, and training. 
More specifically, a few banks had inadequate programs for 
oversight escalation and investigations of unethical behavior, 
and complaints were not always adequately captured for 
resolution. Any matters detected at these banks are being 
reviewed through active continuous monitoring or through 
specific follow-up examinations being conducted by the Federal 
Reserve.
Bank of America
Q.2. Last week, I sent a letter to the CEO of Bank of America 
regarding recent customer reports that the bank has asked 
existing account holders for their citizenship status, and in 
some cases the bank has frozen accounts when customers fail to 
respond.
    Have any of your agencies directed or suggested to banks 
under your supervision to ask existing account holders for 
their citizenship status? Please provide any information about 
whether any institutions may have been asked or encouraged to 
collect citizenship information on existing customers.

A.2. The Federal Reserve is not aware of instances in which an 
institution we supervise has been directed by our examiners to 
request the citizenship status of an existing account holder. 
As you may know, banks are generally required under the Bank 
Secrecy Act (BSA) to have risk-based procedures to identify 
their customers at account opening and to conduct appropriate 
customer due diligence (CDD) throughout the lifespan of the 
account relationship. For example, under the Customer 
Identification Program (CIP) regulations adopted by the Federal 
Reserve and the Financial Crimes Enforcement Network (FinCEN), 
banks are required to obtain, at a minimum, the customer's 
name, date of birth, address, and identification number, and to 
verify the customer's identity using documentary or 
nondocumentary means. For a U.S. person, the identification 
number is their taxpayer identification number. For a non-U.S. 
person, the identification number may be a passport number, 
alien identification card, or any other Government-issued 
document evidencing nationality or residence and bearing a 
photograph or similar safe guard.
    In addition, under the CDD regulations adopted by FinCEN, 
banks are required to collect customer information commensurate 
with the customer's risk profile. Indeed, the level and type of 
customer information gathered under the CDD rule may vary from 
customer to customer. Although citizenship information is not 
expressly required by the CIP or CDD regulations, banks may 
choose to collect additional customer information in accordance 
with their own policies and procedures. The Federal Reserve's 
supervisory expectation is that banks can offer account 
services to law-abiding customers, including those who are not 
U.S. citizens, by applying risk-based policies, procedures, and 
processes as required under the BSA.

Q.3. In April, you said that the Section 956 incentive-based 
compensation rulemaking ``had not fallen behind the 
refrigerator.''\2\ In July, Chair Powell said that regulators 
had effectively ceased work on this rulemaking. He recently 
clarified in response to questions for the record that the 
agencies are continuing to consider the comments to the 
proposed rule.
---------------------------------------------------------------------------
    \2\ https://plus.cq.com/doc/congressionaltranscripts-5302844?3.
---------------------------------------------------------------------------
    Can you provide an update on this joint rulemaking? When 
can we expect to see a final rule?

A.3. The Federal Reserve Board, Office of the Comptroller of 
the Currency, Federal Deposit Insurance Corporation, Securities 
Exchange Commission, National Credit Union Association, and the 
Federal Housing Finance Agency (the agencies), jointly 
published and requested comment on the revised proposed rule in 
June 2016. The agencies received over one hundred comments and 
many raised important and complicated questions. The agencies 
continue to consider the complex issues raised in comments and 
do not have a projected date for completion of this rulemaking.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM RANDAL K. 
                            QUARLES

Q.1. Thank you for the dialogue during our recent hearing and 
for clarifying that the G-SIB surcharge will be a part of the 
Federal Reserve's larger regulatory review. As the sponsor of 
S. 366, the TAILOR Act, which would require Federal regulatory 
authorities to tailor regulations to the operational risk of a 
financial institution, I agree with you that reducing 
duplicative rules and regulatory inefficiencies is important.
    This past January when you were speaking before the 
American Bar Association you mentioned that you would be 
working toward simplifying the framework regarding loss 
absorbency requirements, including the G-SIB surcharge, and 
that the 24 total loss absorbency requirements you counted in 
the existing regulatory framework ``is too many.'' I appreciate 
your commitment and the commitment of Chairman Powell to 
engaging in a holistic review of these requirements and to 
examining the level of transparency in our regulatory process.
    As the Federal Reserve undertakes its review of existing 
regulations, will you commit to instilling a greater degree of 
transparency in regulations, including by requests for public 
comment on the Federal Reserve's analysis?

A.1. Transparency is central to the Federal Reserve's mission 
and is key to ensuring that the Federal Reserve remains 
accountable to the public. In the rulemaking process, the 
Federal Reserve is committed to using public notice and comment 
procedures to ensure that its policymaking decisions are open 
to public scrutiny and participation. In addition, a 
transparent approach to rulemaking has the practical benefit of 
allowing the Federal Reserve to improve its proposals based on 
public input. Accordingly, the Federal Reserve will remain 
committed to the use of public notice and comment procedures to 
ensure a high degree of transparency in the development of 
regulations.

Q.2. As you are aware, Section 201 of S. 2155 requires Federal 
regulators to develop a Community Bank Leverage Ratio. If a 
community bank meets that ratio then they would automatically 
be considered to be in compliance with leverage capital 
requirements, risk-based capital requirements, and any other 
capital or leverage requirements to which that particular bank 
is subject to. This relief is critical for small institutions 
that are burdened by Dodd-Frank's regulatory overreach and have 
a more difficult time complying with regulations than do their 
larger counterparts.
    When does the Federal Reserve intend to begin 
implementation of this section of the legislation?

A.2. As you indicate, the recent Economic Growth, Regulatory 
Relief, and Consumer Protection Act (EGRRCPA) requires the 
appropriate Federal banking agency to create a simple leverage 
ratio framework for community banks with less than $10 billion 
in total consolidated assets. The Federal Reserve, the Office 
of the Comptroller of the Currency (OCC), and the Federal 
Deposit Insurance Corporation (FDIC) (collectively, the 
Agencies) are working to issue a joint notice of proposed 
rulemaking that would seek feedback from community banks, 
consumers, and the broader public. The Agencies expect to issue 
the proposed joint rulemaking for public comment in the near 
future.

Q.3. Last spring the Federal Reserve proposed changes to the 
regulatory capital framework that were designed to simplify 
capital management and increase transparency. An important part 
of that proposal were changes to certain CCAR assumptions the 
Federal Reserve has previously made. Many of the proposed CCAR 
changes are improvements on the existing regulatory process and 
would be more accurate reflections of how companies and markets 
react during periods of economic stress.
    It would therefore seem to be unnecessary to delay making 
these improvements only because similar proposals made by the 
Federal Reserve like the stress capital buffer need additional 
improvements.
    Because the next iteration of the CCAR process is due to 
begin soon, will you commit to finalizing the CCAR changes that 
the Federal Reserve proposed and incorporate them into the 2019 
CCAR exercise?

A.3. The changes associated with the stress capital buffer 
proposal would simplify the Federal Reserve's capital rules for 
large banks, while preserving strong capital levels that would 
maintain their ability to lend to households and businesses 
under stressful conditions. The Federal Reserve Board (Board) 
is carefully reviewing comments received on the stress capital 
buffer proposal, including on the proposed modifications of 
several assumptions in the Comprehensive Capital Analysis and 
Review (CCAR) process to better align them with a film's 
expected actions under stress. The Board is working to complete 
its review in a timely manner.

Q.4. On July 12, 2018, I sent you written questions following 
the April 19th hearing before the Committee. The question 
related to how you were going to help farmers, ranchers and 
manufacturers in South Dakota that use derivatives markets to 
manage their risk.
    Specifically, I asked if you plan to recognize margin 
contributed by clients for cleared derivatives as offsetting 
under the leverage ratio.
    In response, you said you would look closely at adjusting 
the treatment of initial margin under the leverage ratio and 
that the Basel Committee on Banking Supervision is reviewing 
this issue to understand the impact of the leverage ratio on 
incentives to clear over the counter derivatives.
    The Financial Stability Board, the Basel Committee on 
Banking Supervision, the Committee on Payments and Market 
Infrastructures and the International Organization of 
Securities Commissions jointly considered incentives to clear 
derivatives. On behalf of the United States, the Federal 
Reserve and CFTC contributed to this effort. A follow-up report 
that was released on August 7th of this year found that the 
current regulatory treatment disincentivized client clearing.
    Europe has already proposed an offset of initial margin 
under the leverage ratio.
    Now that the issue has been studied, can you provide an 
update on the Federal Reserve's plan to provide an offset of 
initial client margin for cleared derivatives under the 
leverage ratio?

A.4. The Board is committed to domestic and international 
policy initiatives that support the use of well-regulated and 
well-managed central counterparties to clear derivative 
contracts. On October 30, 2018, the Agencies approved a joint 
proposal that would implement a new standardized approach for 
calculating the exposure amount of derivative contracts in the 
Agencies' risk-based and leverage capital rules. As part of 
that proposal, the Agencies are inviting comment on the 
recognition of initial margin provided by clearing member 
clients for purposes of the supplementary leverage ratio, and 
asking for comment on the recent Basel Committee on Banking 
Supervision proposal regarding the recognition of client 
collateral in the leverage ratio.\1\ The proposal allows for a 
60-day comment period, and the Board will review comments on 
the proposal after the comment period ends.
---------------------------------------------------------------------------
    \1\ See https://www.bis.org/bcbs/pub1/d451.pdf.
---------------------------------------------------------------------------
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM RANDAL K. 
                            QUARLES

Section 401 Regulations
Q.1. Vice-Chair Quarles, when Congress wrote Section 401 of S. 
2155, it amended Section 165 of Dodd-Frank to raise the SIFI 
threshold up from $50 billion to $250 billion, but granted the 
Board of Governors of the Federal Reserve the right to 
promulgate rules for bank holding companies between $100 
billion and $250 billion under certain circumstances. I would 
suggest that this is a forward looking provision that should 
serve as a safety valve should one of the firms become 
systemic. This is the logical course in light of the fact that 
you regulate these firms now and have repeatedly determined 
that they are not systemic to the financial system.

Q.1.a. Since the Board has determined that there must be rules 
for bank holding companies between $100 and $250 billion to 
mitigate risks to U.S. financial stability and promote safety 
and soundness, would you be sharing with us the empirical data 
that demonstrates that there is sufficient risk to the 
financial system poised by individual institutions between $100 
and $250 billion?

A.1.a. Section 401 of the Economic Growth, Regulatory Relief, 
and Consumer Protection Act (EGRRCPA) increased the minimum 
threshold for automatic application of enhanced prudential 
standards (EPS) from $50 billion to $250 billion. With respect 
to a bank holding company with total consolidated assets of 
between $100 billion and $250 billion, section 401 provides the 
Federal Reserve Board (Board) with discretion to apply EPS to a 
bank holding
company if the Board determines the application of the standard 
or standards is necessary to prevent or mitigate risks to 
financial stability or promote safety and soundness, and taking 
into consideration size, complexity, and other risk-related 
factors. Consistent with these legislative changes and building 
on the Board's prior tailoring of its regulations, the Board is 
seeking comment on two proposals, one with the other Federal 
banking agencies, which would establish four categories of 
prudential standards for large U.S. banking organizations. The 
proposed categories would set forth a framework for determining 
the application of prudential standards to firms with total 
consolidated assets of $100 billion or more but less than $250 
billion, and for differentiating the standards that apply to 
all firms subject to prudential standards based on their risk 
profile. The proposal would also implement section 401(e) of 
EGRRCPA, which requires the Board to conduct periodic 
supervisory stress tests for bank holding companies with $100 
billion or more, but less than $250 billion, in total 
consolidated assets.
    The failure of a bank holding company with total 
consolidated assets of $100 billion or more but less than $250 
billion could have a more significant negative effect on 
economic growth and employment relative to the failure or 
distress of smaller firms. In addition, the standards that 
would be applied to institutions of this size under the 
proposal would help promote the safety and soundness of these 
institutions and address weaknesses observed during the 
financial crisis. For example, the liquidity risk management 
and buffer requirements help to ensure that a large banking 
organization is equipped to manage its liquidity risk and to 
withstand disruptions in funding sources. These requirements 
address weaknesses observed during the financial crisis, when 
many banking organizations did not have adequate risk 
management practices to take into account the liquidity 
stresses of individual products or business lines, had not 
adequately accounted for draws from off-balance sheet 
exposures, or had not adequately planned for a disruption in 
funding sources.

Q.1.b. Under the proposed rule, is it the Board's intention to 
apply a tailored version of the enhanced prudential standard on 
every institution between $100 and $250 billion or will the 
Board conduct an activity based risk analysis on each 
institution and impose a tailored enhanced prudential standard 
on institutions deemed too risky?

A.1.b. Please see the response to question 1(a).
Recalibration of Thresholds
Q.2. Vice-Chair Quarles, S. 2155 raised the SIFI threshold 
under Section 165 of Dodd-Frank from $50 billion to $250 
billion.
    Do you believe that S. 2155 gives the Board the impetus to 
reevaluate whether or not it should readjust all other 
regulations where the Board relied upon Section 165's $50 
billion threshold figure?

A.2. On October 31, 2018, the Board issued two notices of 
proposed rulemakings, one jointly with the Office of the 
Comptroller of the Currency (OCC) and the Federal Deposit 
Insurance Corporation (FDIC), seeking comment on a framework 
for determining the
prudential standards that apply to large U.S. banking 
organizations, based on the risk profiles of these firms. The 
proposals would build on the Board's existing tailoring of its 
rules and account for changes made by section 401 of EGRRCPA 
regarding enhanced prudential standards for these firms. In 
particular, the proposals would modify the enhanced prudential 
standards applicable to large banking organizations, including 
domestic and foreign banking organizations with more than $250 
billion in total consolidated assets, based on the risk profile 
of these films. In addition, the proposals would modify the 
thresholds for application of other requirements that rely on a 
$50 billion asset threshold, but which were not affected by 
EGRRCPA, such as the capital plan rule.
FBO Treatment
Q.3. Vice-Chair Quarles, I understand from your testimony that 
the Board will continue to use the global consolidated assets 
for foreign banking organizations. FBO operations in the United 
States cover a wide spectrum of activities that encompasses 
consumer and commercial banking, wealth management, and capital 
markets.

Q.3.a. Will the Board tailor treatment for FBOs to 
differentiate based upon their active footprint in the United 
States for example will there be different treatment between an 
entirely depository IHC and one that is heavily invested in the 
capital markets?

A.3.a. As noted in the previous answer, on October 31, 2018, 
the Board issued two notices of proposed rulemaking, one 
together with the OCC and FDIC, seeking comment on a framework 
for determining the prudential standards that apply to large 
U.S. banking organizations, based on the risk profiles of these 
firms. As noted in the proposals, the Board is considering the 
appropriate application of the categories of prudential 
standards described in the proposal to the U.S. operations of 
foreign banking organizations, in light of the special 
structures through which these firms conduct business in the 
United States. The Board plans to issue a separate proposal for 
public comment regarding foreign banking organizations that 
would reflect the principles of national treatment and equality 
of competitive opportunity.

Q.3.b. After the Board released the U.S. IHC rules in 2014 that 
required foreign banks to hold additional capital and liquidity 
in the United States. Brussels retaliated in 2016 with 
reciprocal standards that eventually forced both sides to hold 
additional capital and liquidity. Does geographic ring fencing 
make the international banking system safer?

A.3.b. The prepositioning of capital and liquidity in local 
jurisdictions can minimize the temptation of host jurisdictions 
to restrict the transfer of assets (``ring fencing'') held 
locally of internationally active banking groups during a time 
of stress. Ring fencing of assets during stress can further 
exacerbate a stress event and destabilize a group. The Federal 
Reserve recognizes that an appropriate balance between 
centrally managed resources at the home country level and 
prepositioned capital and liquidity in host jurisdictions is 
the key to effective cooperation among home and host 
supervisors to resolve troubled banking groups.

Q.3.c. Is there a better solution than creating additional 
capital trapped on both sides of the Atlantic?

A.3.c. Across the globe supervisors recognize the benefits of 
efficient cross-border banking and efficient movement of 
capital and liquidity but are focused on minimizing the costs 
of cross-border resolutions given the experience with the 
recent financial crisis. The single-point-of-entry resolutions 
and bail-in concepts hold promise for minimizing resolution 
costs, but cooperation between home and host country 
supervisors is critical to achieving success. The Federal 
Reserve continues to be open to considering adjustments that 
would improve transparency and efficiency and will continue to 
reassess its regime relating to cross-border resolution.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM RANDAL K. 
                            QUARLES

Q.1. Under the agencies' proposal to simplify and tailor the 
regulations implementing the Volcker Rule, the proposed 
``accounting prong'' would cover all purchases or sales of 
financial instruments that are recorded at fair value on a 
recurring basis under applicable accounting standards, which 
would subject a significantly higher number of financial 
activities to the rule.

Q.1.a. Given the agencies' policy goals of simplification and 
tailoring, how do you intend to revise the proposal to remain 
faithful to these goals?

A.1.a. The accounting prong was intended to give banking 
entities greater certainty and clarity about what financial 
instruments would be included in firm trading accounts, and 
would therefore be subject to the requirements of the 
regulation. The proposal specifically requested comment as to 
whether the proposed accounting prong might be overly broad, 
and if there were alternatives or modifications to the 
accounting prong that may be more appropriate.
    The comment period for the proposal revising the rule 
implementing section 13 of the Bank Holding Company Act closed 
on October 17, 2018. The agencies received and are reviewing 
the comments addressing the accounting prong. Federal Reserve 
Board (Board) staff is currently in the process of carefully 
considering all comments received on the proposed rule, and 
will consider comments on the accounting prong and metrics 
reporting, as well as on other the aspects of the rule.

Q.1.b. The proposed amendments to the Volcker Rule would also 
introduce new metrics that could result in a nearly 50 percent 
increase in metrics reporting.
    How do you intend to revise the proposal to ensure that 
covered institutions are not subject to additional compliance 
burdens?

A.1.b. The proposal aims to streamline the metrics reporting 
and recordkeeping requirements under the current regulations by 
further tailoring or eliminating certain metrics and providing 
additional time for reporting. In furtherance of this goal, the 
proposal requested comment on a broad range of issues related 
to metrics reporting and recordkeeping requirements. As noted 
above, the comment period for the proposal closed on October 
17, 2018, and the Board is currently in the process of 
carefully considering all comments received on the proposal 
rule, including those related to the proposed metrics reporting 
and recordkeeping amendments.

Q.2. Your comments in both the hearing and your speech to the 
Utah Bankers Association seem to imply that banks between $100-
$250 billion in size will be subject to tailoring of the 
Section 165 Enhanced Prudential Standards (EPS). Tailoring, as 
you are aware, only applies to institutions subject to a given 
rule. As one of those involved in the drafting of S. 2155, my 
intent and that of my colleagues was that banks in that asset 
class be released from EPS application, hence the raising of 
the threshold to $250 billion. Therefore, tailoring would not 
need to apply to those institutions and was envisioned for 
those banks over the threshold that have substantially similar 
business models as those below the new $250 billion line.

Q.2.a. Why do you continue to use the term tailoring for 
institutions that are mandated to be carved out of EPS 
application?

A.2.a. When speaking of Federal Reserve regulatory policy, I 
often use the word ``tailoring'' to refer to the general 
concept of ensuring that the nature and stringency of 
regulation is appropriate to the nature and risk factors of the 
firms being regulated. Our objective should be that simpler and 
less risky firms are not subject to the regulatory burden of 
complying with measures more appropriate to larger and more 
complex firms. Section 165(a)(2) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act refers to this concept in 
requiring the Federal Reserve Board (Board) to tailor the 
application of enhanced prudential standards (EPS), but in my 
view this is a specific instance of the tailoring concept 
rather than the entire definition of it. Accordingly, my use of 
the word tailoring with regard to the treatment under the 
Economic Growth, Regulatory Relief, and Consumer Protection Act 
(BGRRCPA) of institutions with assets between $100 billion and 
$250 billion is not intended to suggest that those firms should 
necessarily remain subject to some form of modified or 
``tailored'' EPS, but rather that their treatment under BGRRCPA 
is an example of the tailoring concept, as is the framework we 
have proposed for determining when BPS would apply.
    Section 401 of BGRRCPA made a number of changes to the 
scope of application of BPS. For example, as you observe, 
section 401 increased from $50 billion to $250 billion the 
threshold for automatic application of BPS to bank holding 
companies. With respect to a bank holding company with total 
assets of between $100 billion and $250 billion, section 401 
provides the Board with discretion to apply EPS to a bank 
holding company if the Board determines that application of the 
standard or standards is necessary to prevent or mitigate risks 
to financial stability or promote safety and soundness, taking 
into consideration size, complexity, and other risk-related 
factors: Under section 401(e) of BGRRCPA, the Board is required 
to conduct periodic supervisory stress tests of bank holding 
companies with $100 billion or more, but less than $250 
billion, in total consolidated assets.
    In light of these amendments, and consistent with the 
Board's ongoing refinement and evaluation of its regulations 
and supervisory program, the Board is seeking comment on a 
proposal that would establish four categories of prudential 
standards for large U.S. banking organizations. The proposed 
framework would determine the application of prudential 
standards to firms with total consolidated assets of $100 
billion or more but less than $250 billion, and would 
differentiate the standards that apply to all firms subject to 
prudential standards based on their size, complexity, and other 
risk-based factors.

Q.2.b. Is it your view that the legislation begins with the 
presumption that those banks remain subject to EPS? Or, as the 
legislation clearly spells out, is it your understanding that 
those banks are out and that only through an empirically 
demonstrated determination can they be put back in?

A.2.b. As noted in my response to question 2(a), section 401 of 
EGRRCPA increased the threshold for automatic application of 
EPS from $50 billion to $250 billion. With respect to a bank 
holding company with total consolidated assets of between $100 
billion and $250 billion, section 401 provides the Board with 
discretion to apply EPS to a bank holding company if the Board 
determines the application of the standard or standards is 
necessary to prevent or mitigate risks to financial stability 
or promote safety and soundness, and taking into consideration 
size, complexity, and other risk-related factors. Consistent 
with these statutory changes, the Board is seeking comment on a 
proposed framework to determine the application of prudential 
standards for large U.S. banking organizations--those with $100 
billion or more in total assets-based on their risk profiles. 
Specifically, the proposed framework would take into 
consideration the risk profile of a large banking organization 
based on the following risk indicators: size, cross-
jurisdictional activity, weighted short-term wholesale funding, 
off-balance sheet exposure, and nonbank assets. By taking into 
consideration the relative importance of each risk factor, the 
proposal would provide a basis for assessing a banking 
organization's financial stability and safety and soundness 
risks. The proposal also would implement section 401(e) of 
EGRRCPA, which requires the Board to conduct periodic 
supervisory stress tests of bank holding companies with $100 
billion or more, but less than $250 billion, in total 
consolidated assets.

Q.3. After NASDAQ became an exchange in 2006, it is my 
understanding that the Federal Reserve has not undertaken any 
effort to update its rules to provide a pathway to margin 
eligibility for companies traded over-the-counter (OTC). Margin 
eligibility of OTC-traded stocks can be an important part of 
the growth of small and emerging companies, as it helps to 
improve the market quality of those securities, impact an 
investor's willingness to purchase those securities, and as a 
result have a direct impact on capital formation. In addition, 
U.S. investors in the American depositary receipts (ADR) for 
Roche [$10 billion yearly net income] and other large, 
international OTC-traded firms are also negatively impacted by 
the Federal Reserve's inaction on this issue.
    Will the Federal Reserve take action to revive the margin 
list for certain OTC securities? If not, please explain why.

A.3. Responding to your question above and as previously posed 
regarding the List of Over-the-Counter Margin Stocks (OTC List) 
that is no longer published by the Federal Reserve Board 
(Board), staff have continued to monitor OTC market 
developments in the years since the publication of the OTC List 
ceased. Any expansion of the types of securities that are 
margin eligible would require careful consideration by the 
Board of the benefits of such an approach weighed against 
potential increased burden on banks and other lenders.
    Please know that I appreciate your concerns as noted in 
your questions, and we are looking into potential approaches 
that may be considered while ensuring any changes would not 
pose additional regulatory burdens. By way of background, I am 
including a brief summary of the history of the Board's OTC 
List.
    In 1968, Congress amended section 7 of the Securities 
Exchange Act of 1934 (SEA) to allow the Board to regulate the 
amount of credit that may be extended on securities not 
registered on a national securities exchange, or those 
securities known as ``over-the-counter'' or ``OTC'' securities. 
The following year, the Board adopted criteria to identify OTC 
stocks that have ``the degree of national investor interest, 
the depth and breadth of market, the availability of 
information respecting the security and its issuer, and the 
character and permanence of the issuer'' to warrant treatment 
similar to equity securities registered on a national 
securities exchange. The Board's first periodically published 
OTC List became effective on July 8, 1969.
    In 1975, Congress further amended the SEA to direct the 
Securities and Exchange Commission (SEC) to facilitate the 
development of a ``national market system'' (NMS) for 
securities to accomplish several goals, including price 
transparency. The SEC's criteria for NMS securities came to 
cover both exchange-traded stocks (which were always 
marginable) and a subset of stocks traded on NASDAQ, the 
largest and most technologically advanced over-the-counter 
market at that time. The majority of the securities traded on 
NASDAQ's NMS tier were covered by the Board's OTC margin stock 
criteria and appeared on the Board's OTC List. The Board's 
analysis, however, indicated that the liquidity and other 
characteristics of NMS securities generally compared favorably 
with those of exchange-traded securities. Accordingly, the 
Board amended its margin regulations in 1984 to give immediate 
margin status to OTC securities that qualified as NMS 
securities without regard to whether the stock appeared on the 
Board's OTC List. This action established a precedent for 
relying on NMS status under SEC rules as a substitute for 
identifying margin-eligible OTC securities through the 
application of Board-established criteria.
    The Board ceased publication of its OTC List in 1998, and 
provided margin status to all securities listed on the NASDAQ 
Stock Market, after NASDAQ raised the listing standards for 
non-NMS securities trading on its market, making them 
comparable to those traded on national securities exchanges. 
Indeed, NASDAQ subsequently became a national securities 
exchange.

Q.4. Recently the ``Interagency Statement Clarifying the Role 
of Supervisory Guidance'' was issued. I think this directive is 
a very important step in ensuring that the regulation and 
supervision of financial institutions is conducted pursuant to 
legal standards. Each of you is the leader of an organization 
that has thousands of employees and examiners and are 
responsible for its implementation.

Q.4.a. How are you making sure examiners on the ground are 
following this statement?

A.4.a. We have taken a number of steps to reaffirm the role of 
supervisory guidance in our communications to examiners and to 
supervised institutions. First, on October 4, 2018, we 
conducted an internal, mandatory training session for all our 
supervisory staff to reinforce the distinctions between laws 
and regulations versus guidance and to clarify the use of 
guidance in the supervisory process. Second, we are helping 
examiners with outreach to supervised institutions in answering 
questions about the policy statement. Third, we are reviewing 
the templates examiners use when they reference supervisory 
guidance in their communications with supervised institutions. 
Fourth, we will continue to review supervisory findings to 
confirm that our examiners are referencing guidance 
appropriately. Finally, we regularly solicit the views of the 
firms we supervise on our supervisory process to include their 
views on our use of guidance in supervisory communications.

Q.4.b. Have you considered a formal rulemaking so that staff 
take this important statement seriously?

A.4.b. We have not yet assessed whether this matter should be 
the subject of a formal rulemaking, but we will consider this 
question in conjunction with our fellow regulators. This is an 
important issue. We are taking steps to ensure our examiners 
understand the issues and are acting in accordance with the 
public statement. We have a range of tools to ensure that 
examiners are following directives and instructions from the 
Board. As indicated above, we have already employed some of 
those tools in this particular case. If we determine that the 
steps we have employed so far are not sufficient, we will 
escalate the issue and take additional steps. But so far, we 
have evidence that our examiners understand the issues and are 
acting in accordance with the public statement.

Q.4.c. How will you independently verify that this statement is 
followed? (audits, surveys from supervised entities, other 
independent verification)

A.4.c. As described above, we will review samples of 
supervisory findings to confirm that our examiners are 
appropriately referencing supervisory guidance. As also noted, 
we regularly solicit feedback from supervised firms regarding 
our supervisory process, to include their views on our use of 
guidance in supervisory communications.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                       RANDAL K. QUARLES

Q.1. I was the Attorney General of Nevada during the financial 
crisis and saw first-hand how big banks targeted vulnerable 
people and communities of color. This is exactly why it was so 
important that the CFPB required more data collection and more 
oversight over lending activities. The law signed by President 
Trump earlier this year eliminated some of the data we need to 
preserve this progress. Despite the loss of public HMDA data, 
each of your
agencies still has a requirement to ensure that Latinos, 
African Americans, women and other people are not rejected for 
loans due to their gender or ethnicity.

Q.1.a. How many lenders supervised by your agency will not 
publicly report the additional data that was to be required 
this year? This data includes loan characteristics like credit 
score, fees, points, and interest rates.

A.1.a. With respect to Home Mortgage Disclosure Act (HMDA), the 
Federal Reserve supervises approximately 800 State member 
banks. Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA) exempts certain institutions from 
reporting the additional HMDA data fields required by the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act).\1\ However, institutions exempted by EGRRCPA that 
meet HMDA's data reporting threshold \2\ must continue to 
report the HMDA data fields that are not the additional fields 
required by the Dodd-Frank Act. Based on previous HMDA 
reporting, approximately 350 of the Federal Reserve's 
supervised institutions will not be required to report the 
additional HMDA data fields.
---------------------------------------------------------------------------
    \1\ See EGRRCPA,  104(a), Pub. L. No. 115-174, 132 Stat. 1296 
(2018).
    \2\ In general, if a financial institution has assets exceeding $45 
million and originated at least 25 closed-end mortgage loans in each of 
the two preceding calendar years, or originated at least 500 open-end 
lines of credit in each of the two preceding calendar years, it must 
meet the HMDA reporting requirements for its asset size. See A Guide To 
HMDA Reporting: Getting it Right!, Federal Financial Institutions 
Examination Council (Eff. Jan. 1, 2018), https://www.ffiec.gov/Hmda/
pdf/2018guide.pdf.

Q.1.b. Would it have been easier to spot fair lending 
violations with transparent data reporting, rather than relying 
on your bank examiners to go bank by bank, loan by loan to root 
---------------------------------------------------------------------------
out discrimination?

A.1.b. The Federal Reserve's fair lending supervisory program 
reflects our commitment to promoting financial inclusion and 
ensuring that the financial institutions under our jurisdiction 
fully comply with applicable Federal consumer protection laws 
and regulations. For all State member banks, we enforce the 
Fair Housing Act, which means we can review all Federal 
Reserve-regulated institutions for potential discrimination in 
mortgages, including potential redlining, pricing, and 
underwriting discrimination. For State member banks of $10 
billion or less in assets, we also enforce the Equal Credit 
Opportunity Act, which means we review these State member banks 
for potential discrimination in any credit product. Together, 
these laws prohibit discrimination on the basis of race, color, 
national origin, sex, religion, marital status, familial 
status, age, disability, receipt of public assistance, and the 
good faith exercise of rights under the Consumer Credit 
Protection Act (collectively, the ``prohibited basis'').
    We evaluate fair lending risk at every consumer compliance 
exam based on the risk factors set forth in the 2009 
Interagency Fair Lending Examination Procedures 
(Procedures).\3\ The Procedures set forth risk factors for 
several types of potential fair lending issues. For example, a 
risk factor for potential discrimination in pricing is the 
presence of a financial incentive for loan officers or brokers 
to charge higher prices for loans. Provisions in EGRRCPA 
related to HMDA data collection requirements for certain 
institutions will not affect the Federal Reserve's ability to 
fully evaluate the risk of mortgage pricing or underwriting 
discrimination. If warranted by risk factors, the Federal 
Reserve will request any data related to relevant pricing and 
underwriting criteria, such as the interest rate and credit 
score. These data can be requested from any Federal Reserve-
supervised institution, including the institutions that were 
exempted from reporting additional HMDA data by EGRRCPA. The 
Federal Reserve's analysis then incorporates the additional 
data to determine whether applicants with similar 
characteristics received different pricing or underwriting 
outcomes on a prohibited basis (for example, on the basis of 
race), or whether legitimate pricing or underwriting criteria 
can explain the differences.
---------------------------------------------------------------------------
    \3\ See Interagency Fair Lending Examination Procedures (August 
2009), available at: https://www.ffiec.gov/pd/fairlend.pdf.

Q.1.c. Without the expanded HMDA data reporting slated to begin 
this year, what information will your agency's examiners have 
---------------------------------------------------------------------------
to trigger a review of potential discrimination?

A.1.c. As previously noted, the Federal Reserve is committed to 
promoting financial inclusion and a fair and transparent 
financial service market place. We take seriously our 
responsibilities to ensure that the financial institutions 
under our jurisdiction comply with applicable Federal consumer 
protection laws and regulations and evaluate fair lending risk 
at every consumer compliance exam based on the risk factors set 
forth in the Procedures.\4\ With respect to potential 
discrimination in the pricing or underwriting of mortgages, if 
warranted by risk factors, the Federal Reserve will request 
data beyond the public HMDA data, including any data related to 
relevant pricing or underwriting criteria, such as applicant 
interest rates and credit scores. As noted in response to the 
subpart above, the Federal Reserve's practice of requesting 
data relevant to pricing and underwriting criteria, where 
warranted by risk factors, pre-dates EGRRCPA's enactment, and 
the practice will continue.
---------------------------------------------------------------------------
    \4\ Id.
---------------------------------------------------------------------------
    As noted in the prior response, exemptions of HMDA data 
reporting under EGRRCPA will not affect the Federal Reserve's 
ability to fully evaluate the risk of mortgage pricing or 
underwriting discrimination at these institutions, as data can 
be requested from any Board-supervised institution, including 
the institutions that were exempted from reporting additional 
HMDA data by EGRRCPA. Such additional data inform analysis that 
helps to determine whether applicants with similar 
characteristics received different pricing or underwriting 
outcomes on a prohibited basis (for example, on the basis of 
race), or whether legitimate pricing or underwriting criteria 
can explain the differences.
Community Reinvestment Act
Q.2. We have a massive affordable rental housing crisis in 
Nevada: 119,854 families pay more than half their income for 
rent.
    One of the few resources we have is the Low Income Housing 
Tax Credit. The new tax law is already making it harder to 
finance low-income housing because the cost of the credit has 
fallen.

Q.2.a. Will you commit to ensure that any changes you consider 
to the Community Reinvestment Act make Federal tools like the 
Low Income Housing Tax Credit and New Market Tax Credit work 
better in communities?

A.2.a. The Federal Reserve is committed to supporting efforts 
to facilitate credit flows to support creditworthy consumers 
and businesses in all communities, including in low- and 
moderate-income areas, to further economic development. We 
recognize the important role that tax credit programs have 
played in bringing private capital to lower-income communities 
for the financing of housing and other community projects. A 
bank can receive credit under its performance evaluation under 
Community Reinvestment Act (CRA) when the investments primarily 
benefit low- and moderate-income populations or communities.
    Given that the Low Income Housing Tax Credit and the New 
Market Tax Credit programs provide important investment 
vehicles to support affordable housing and community economic 
development, our objective in modernizing the CRA regulations 
will be to ensure that they will continue to receive CRA 
consideration.

Q.2.b. Nonbanks provide more than half of all mortgages in this 
country. Six of the 10 largest mortgage lenders are not banks. 
Do you think nonbank mortgage lenders should be covered by the 
Community Reinvestment Act?

A.2.b. We recognize that the financial services marketplace is 
highly competitive and has many more nonbank participants than 
there were when the CRA was enacted, which has resulted in more 
retail lending activity taking place outside insured depository 
institutions. An expansion of coverage of the CRA would require 
congressional action. The Federal Reserve stands ready to 
implement any statutory changes that Congress may deem 
appropriate.
Section 108: Escrow Requirements
Q.3. For generations, lenders understood that they should 
require property taxes and homeowners insurance be placed in 
escrow, so that those obligations are always paid on time. But 
in the run-up to the foreclosure crisis, lenders cut corners so 
that they could misrepresent monthly payments to homeowners and 
put them into obligations they couldn't afford.

Q.3.a. How will your agencies monitor the implementation of the 
escrow exemption? Will your examiners monitor foreclosure 
activities resulting from unpaid property taxes and/or property 
insurance?

A.3.a. Section 108 of the EGRRCPA directs the Bureau of 
Consumer Financial Protection (``Bureau'') to issue rules to 
adjust the threshold below which an institution is exempt from 
escrow requirements related to higher-priced mortgage loans. 
The Bureau has indicated in its Fall 2018 Unified Agenda that 
it is currently in a pre-rulemaking phase with respect to this 
provision. Once the Bureau engages in the rulemaking process, 
the Board will fulfill our consultative role as required by the 
Dodd-Frank Act.
    The Federal Reserve monitors conditions in the residential 
real estate market, including mortgage performance trends 
associated with foreclosures. We remain committed to 
supervising for safety and soundness and enforcing applicable 
consumer protection laws. We also expect the financial 
institutions we supervise to underwrite residential mortgage 
loans in a prudent fashion and to address key risk areas in 
their residential mortgage lending programs, including borrower 
payment obligations.

Q.3.b. How will you communicate any findings or concerns from 
the elimination of the escrow requirement to us in Congress?

A.3.b. As you know, supervisory findings of examinations at 
individual banks are confidential. To the extent that the Board 
identifies areas for supervisory risk or concern at a broader 
level, we note such issues in various mediums, including our 
Annual Report, recently published Supervision and Regulation 
Report, Consumer Compliance Supervision Bulletin, as well as 
the Semi-Annual Supervision testimony and webinars such as 
``Ask the Fed'' and ``Outlook Live'' to inform the industry, 
policymakers, and the public of such concerns.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATORS WARNER, COTTON, 
            TILLIS, AND JONES FROM RANDAL K. QUARLES

Q.1. Comptroller Otting has testified before that ``the process 
for complying with current BSA/AML laws and regulations has 
become inefficient and costly.'' In talking with banks/credit 
unions it is clear that they do not object to the principle of 
complying with AML regulations, it is that they feel that much 
of the time, effort, and money spent on compliance is 
ineffective, and therefore, a waste of time. Banks/credit 
unions fill out forms invented in the 1970s and have little 
insight into whether it is doing any good. And we've heard from 
banks/credit unions that they believe AML examinations are done 
without respect to the riskiness of the institution or its 
activities.

Q.1.a. What improvements can be made so we have a cheaper & 
faster system that is better at catching criminals?

A.1.a. The Federal Reserve supports efforts to review the 
efficiency and effectiveness of the Bank Secrecy Act (BSA) and 
anti-money laundering (AML) compliance framework for the 
banking organizations we supervise. To that end, the Federal 
Reserve is participating in a Treasury-led working group that 
will examine the BSA/AML framework, including the risk-focused 
approach to the examination process, and potential innovative 
ways in which financial institutions identify, detect, and 
report financial crime while still meeting the requirements of 
the statute and supporting law enforcement. Furthermore, in 
2017, the Federal Reserve and other Federal banking agencies 
completed a review of regulations prescribed by the agencies to 
identify outdated, unnecessary, or overly burdensome 
regulations, consistent with the statutory mandate under the 
Economic Growth and Regulatory Paperwork Reduction Act 
(EGRPRA). As part of this review, several commenters suggested 
changes to the reporting requirements imposed under the 
regulations issued by Treasury's Financial Crimes Enforcement 
Network (FinCEN). The Federal banking agencies have referred 
these EGRPRA comments to FinCEN as the agency with the
responsibility and authority to amend the reporting obligations 
for banks under the BSA.

Q.1.b. Is there a place in a new AML regime for new technology, 
like artificial intelligence or machine learning?

A.1.b. The Federal Reserve recognizes that innovation by the 
private sector, including new ways of using existing tools and 
adopting new technologies, has the potential to improve the 
efficiency and effectiveness of a regulated institution's BSA/
AML compliance program. While the Federal Reserve supports 
efforts by the banks we supervise to innovate, banks should 
also be prudent in evaluating the risks associated with any new 
technology and address information security issues, third-party 
risk management, and compliance with other applicable laws and 
regulations, including those related to customer notifications 
and privacy.

Q.1.c. What do you, as a regulator, think that it means to have 
a risk-based AML program?

A.1.c. A BSA/AML compliance program begins with a well-
developed and documented risk assessment that identifies and 
limits the banking organization's risk exposure through its 
products, services, customers, and geographic locations. The 
Federal Reserve expects banking organizations to structure 
their BSA/AML compliance programs to adequately address their 
risk profiles, as identified by the risk assessment. Banking 
organizations should understand their BSA/AML risk exposure and 
develop the appropriate policies, procedures, and processes to 
monitor and control BSA/AML risks. It is essential that banking 
organizations make a judgment with respect to the level of risk 
customers pose. For example, the bank monitoring systems to 
identify, research, and report suspicious activity should be 
risk-based, with particular emphasis on higher-risk products, 
services, customers, entities, and geographic locations as 
identified by each bank's BSA/AML risk assessment.

Q.1.d. How do you implement the risk-based AML program 
requirement through examinations?

A.1.d. The Federal Reserve's BSA/AML examinations are risk-
focused, so that supervisors apply the appropriate level of 
scrutiny to higher-risk business lines. To ensure consistent 
design and execution of our BSA/AML examinations, the Federal 
Reserve uses procedures developed jointly with the Federal 
Financial Institutions Examination Council (FFIEC),\1\ FinCEN, 
and the Department of Treasury's Office of Foreign Assets 
Control (OFAC). The findings of the Federal Reserve's BSA/AML 
reviews are taken into account in determining examination 
ratings. The scoping and planning of an exam, such as the 
number of examiners and the length of the exam, is informed by 
the money laundering and terrorist financing risk profile of 
the supervised entity.
---------------------------------------------------------------------------
    \1\ The FFIEC is an interagency body made up of the Federal 
Reserve, the Federal Deposit Insurance Corporation, the Office of the 
Comptroller of the Currency, the Consumer Financial Protection Bureau, 
and the National Credit Union Administration, as well as a State 
liaison committee comprised of State supervisors.
---------------------------------------------------------------------------
    The Federal Reserve reinforces its supervisory program by 
conducting targeted examinations of financial institutions 
vulnerable to illicit financing. Banks are selected for such 
examinations based on a variety of factors including our 
analysis of the institution's payments activity, suspicious 
activity reports (SARs), currency transaction reports, and law 
enforcement activity.

Q.2. One common criticism of the current AML regime is the lack 
of feedback given to banks/credit unions after they file their 
SARs. The current system is extremely segmented, and as a 
consequence, it is not the ``fault'' of any one entity that 
there is little feedback given. But without a system to provide 
feedback, the quality of SARs suffer. A system that doesn't 
focus on the quality of reports being filed is one that is not 
optimized to catch criminals. Many banks/credit unions wish 
that they had an idea of what FinCEN is really trying to find, 
because then their cooperation and input might be more helpful 
and effective.

Q.2.a. How often does your agency meet with FinCEN and with the 
DOJ/FBI to discuss the usefulness of suspicious activity 
reports that are being filed?

A.2.a. As you know, the Federal Reserve does not have the 
authority to conduct criminal investigations or to prosecute 
criminal cases. Rather, the Federal Reserve and other Federal 
banking agencies ensure that suspected criminal activity is 
referred to the appropriate criminal authorities for 
prosecution, and the BSA rules are intended to achieve this 
purpose. Accordingly, the Federal Reserve relies on the Justice 
Department, other law enforcement agencies, and FinCEN as the 
primary liaison for law enforcement, to communicate whether the 
reporting obligations of banks are furthering law enforcement's 
objectives. Indeed, communication among law enforcement, 
FinCEN, and the banking industry is important to maintaining a 
high degree of usefulness in SAR reporting.
    The Federal Reserve has regular contact with the agencies 
that have responsibility for the administration and enforcement 
of the BSA, including through participation in the FFIEC. The 
FFIEC has a BSA working group that meets monthly to discuss 
relevant issues and that includes representatives from FinCEN. 
In addition, the Federal Reserve participates in the Bank 
Secrecy Act Advisory Group (BSAAG), a public-private 
partnership established by Congress for the purpose of 
soliciting advice on the administration of the BSA, which 
facilitates sharing of information on regulatory policies and 
initiatives, industry developments, and emerging money 
laundering threats. As part of these ongoing initiatives, as 
well as other collaborations between FinCEN and the Federal 
banking agencies, the Federal Reserve has encouraged FinCEN to 
further consider ways to facilitate appropriate information 
sharing between the agencies and supervised institutions 
related to suspicious activity reporting.

Q.2.b. When a bank/credit union files a SAR, or a regulator is 
examining a financial institution, how much feedback is there 
across the system about whether or not the SARs they filed were 
found to be useful, informative, or effective?

A.2.b. The Federal Reserve examines, on a regular basis, 
institutions for which we have been granted supervisory 
authority from Congress and, through that activity, we provide 
feedback to institutions regarding their BSA/AML programs and 
their policies and procedures for monitoring, identifying and 
reporting suspicious activity to law enforcement. Federal 
Reserve examiners routinely discuss with management any 
supervisory concerns that arise during the examination with 
respect to the institution's BSA/AML program. These types of 
less formal communications are well-suited to address any 
deficiencies or violations of law that can be addressed while 
examiners are still onsite. Problems that cannot be easily 
corrected are formally reported to the institution in an 
examination report or supervisory letter as a matter requiring 
management's attention. Supervision staff will subsequently 
follow up on management's actions and engage in additional 
dialogue with the institution as needed to address our 
concerns. Importantly, the Justice Department is the agency 
with the authority to prosecute any suspected criminal activity 
identified and reported by the institutions we supervise. 
Accordingly, Federal Reserve examiners are not in a position to 
discuss with management the value of any information the 
institution has presented as part of a SAR.

Q.2.c. What are the legal hurdles that prevent more effective 
and more regular feedback within the Federal Government and 
between the Federal Government and financial institutions?

A.2.c. As described above, the Federal Reserve has exercised 
the authority provided by Congress to examine the BSA/AML 
compliance programs of the institutions we supervise and to 
provide feedback at appropriate points during the examination 
process. Notwithstanding our supervisory role, the Federal 
Reserve, like other Federal banking agencies, does not have 
unrestricted access to the information obtained by law 
enforcement officials during a criminal investigation that 
results from the filing of a SAR, nor does it have the 
authority to interpret the policies and regulations that govern 
the protection and release of information that Justice 
Department officials obtain in the course of these 
investigations.

Q.2.d. Will you pledge to institutionalize feedback mechanisms 
wherein banks/credit unions both get and can give feedback on 
how to constantly improve the process?

A.2.d. The Federal Reserve will continue to carry out its 
mandate from Congress to examine the BSA/AML programs of the 
institutions we supervise, and to provide feedback at 
appropriate points during the supervisory process. As noted 
above, the Federal Reserve relies on the Justice Department, 
other law enforcement agencies, and FinCEN to communicate 
whether the reporting obligations of banks are furthering law 
enforcement's objectives. We also support efforts by these 
agencies to share information with the financial institutions 
as appropriate.

Q.3. We hear from banks that they feel pressured to file SARs 
even when they believe the underlying transaction or activity 
does not rise to a level of suspiciousness that merits a 
filing. They say they do this because they are afraid of being 
second-guessed by examiners after the fact, and because there 
is no Government penalty for over-filing SARs--only a penalty 
for not filing a SAR. But banks bear the significant cost of 
filing unnecessary SARs.
    What can be done to realign incentives so that banks/credit 
unions don't feel pressured to file SARs that they don't feel 
reflects activity warranting a filing?

A.3. When conducting a BSA/AML examination, the Federal Reserve 
utilizes procedures contained in the interagency examination 
manual that was developed jointly between the Federal Reserve 
and the other members of the FFIEC in consultation with FinCEN. 
The FFIEC manual describes the regulatory expectations for 
suspicious activity reporting requirements and explains how 
examinations will be performed. The interagency examination 
manual
recognizes that the decision to file a SAR under the reporting 
requirement is an inherently subjective judgment. The manual 
directs examiners to focus on whether the institution has an 
effective SAR decision-making process, not individual SAR 
decisions. The Federal Reserve, along with the other Federal 
banking agencies, provides ongoing training opportunities to 
its examiners regarding BSA topics and various aspects of the 
BSA examination process.
    The Federal Reserve recognizes that existing regulatory 
requirements governing the filing of SARs have prompted 
criticism due to the concern that they encourage institutions 
to report transactions that are unlikely to identify unlawful 
conduct. Recently, the Federal Reserve and the other Federal 
banking agencies completed a review of regulations consistent 
with the statutory mandate under EGRPRA. As part of this 
review, several commenters suggested regulatory changes to SAR 
and other reporting requirements, which were referred to 
FinCEN. FinCEN is the delegated administrator of the BSA, and 
any changes to SAR or other reporting requirements would 
require a change in FinCEN's regulations.

Q.4. Banks/credit unions commonly use ``rules-based'' software 
to screen transactions and alert AML compliance teams to 
suspicious activities. While these rules-based systems can be 
effective, we have concerns that they might not be the most 
effective tool available to us given advances in data science 
and machine learning, and further, that there may be 
opportunities for criminals to manipulate these rules-based 
systems.

Q.4.a. We have heard concerns that many criminals have access 
to the exact same products that are used by financial 
institutions--is this true?

A.4.a. Some financial institutions have implemented 
commercially available suspicious activity monitoring systems 
that use rules to identify suspicious activity, based on 
certain thresholds, geographies, and other factors. These rules 
may be common among multiple financial institutions or 
developed from publicly available lists of red flags, high-risk 
jurisdictions and other data. That does not, however, mean that 
these systems are not effective in monitoring for suspicious 
activity. Many systems have overlapping and complementary rules 
that are designed to resist manipulation. Moreover, financial 
institutions are periodically required to independently test 
the effectiveness of their suspicious activity monitoring 
systems.

Q.4.b. If criminals have access to similar products, or can 
easily come to understand the rules-based system, how easy is 
it to manipulate these detection systems?

A.4.b. Please see answer to 4(a) above.

Q.4.c. If there was a proven model of using a ``learning,'' 
algorithmic system to flag potentially suspicious transactions, 
would this be an improvement on the current system? What are 
the hurdles to financial institutions adopting such systems?

A.4.c. As stated above, the Federal Reserve recognizes that 
innovation has the potential to augment aspects of banks' BSA/
AML compliance programs, such as risk identification, 
transaction monitoring, and suspicious activity reporting. As 
with all applications and technologies that firms employ, the 
Federal Reserve expects financial institutions to innovate in a 
responsible manner and to consider and address information 
security issues, third-party risk management, and compliance 
with other applicable laws and regulations, including those 
related to customer notifications and privacy.

Q.4.d. In what ways is a bank's/credit union's ``safety and 
soundness'' implicated by its AML system?

A.4.d. A review of an institution's compliance with the BSA has 
been part of the Federal Reserve's supervision of banks for 
many years, and is integrally related to our assessment of an 
institution's safety and soundness. The Federal Reserve expects 
the institutions we supervise to identify, measure, monitor, 
and control the risks of an institution's activities. The 
inability to properly manage legal and compliance risk, for 
example, can compromise a bank's safety and soundness by 
reducing the confidence of its customers and counterparties and 
result in loss of capital, lower earnings, and weakened 
financial condition. For these reasons, Congress amended the 
Federal Deposit Insurance Act in 1986 to require the Federal 
Reserve and other Federal banking agencies to review the BSA/
AML compliance program of the banks we supervise at each 
examination.
    Under current interagency ratings guidance, the capability 
of the board of directors and management to identify, measure, 
monitor, and control the risks of an institution's activities 
and to ensure a financial institution's safe, sound, and 
efficient operation in compliance with applicable laws and 
regulations is reflected in the management or ``M'' component 
rating of banking agencies' CAMELS supervisory rating system. 
The Federal Reserve has established procedures to ensure that 
BSA/AML deficiencies are fully considered as part of an 
institution's management rating. Moreover, we direct our 
examiners to view serious deficiencies in a bank's BSA/ AML 
compliance area, including program violations, as presumptively 
adversely affecting a bank's management component rating.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM JELENA 
                           McWILLIAMS

    Some provisions of S. 2155 may be implemented through 
guidance or other policy statements that do not go through 
formal notice and comment rulemaking. The Congressional Review 
Act
requires agencies to submit, with certain minor exceptions, all 
rules to Congress for review. Under the Congressional Review 
Act, a rule, by definition, is ``the whole or a part of an 
agency statement of general or particular applicability and 
future effect designed to implement, interpret, or prescribe 
law or policy or describing the organization, procedure, or 
practice requirements of an agency.'' This definition is very 
broad. In order to ensure Congress can engage in its proper 
oversight role, I encourage the regulators to follow the 
Congressional Review Act and submit all rules to Congress, even 
if they have not gone through formal notice and comment 
rulemaking.

Q.1.a. Can you commit to following the law by submitting all 
rulemakings and guidance documents to Congress as required by 
the Congressional Review Act?

A.1.a. The Federal Deposit Insurance Corporation (FDIC) is 
committed to submitting all rulemakings and any guidance or 
other agency documents that meet the definition of ``rule'' 
under the Congressional Review Act (CRA) to Congress as 
required by the CRA.

Q.1.b. On July 6, 2018, the Federal Reserve, Federal Deposit 
Insurance Corporation, and Office of the Comptroller of the 
Currency issued an Interagency Statement regarding the impact 
of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (EGRRCPA).\1\ It is my understanding that the 
Interagency Statement would qualify as a rule under the 
Congressional Review Act. Have the agencies submitted the 
Interagency Statement to Congress as required by the 
Congressional Review Act?
---------------------------------------------------------------------------
    \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20180706a1.pdf.
---------------------------------------------------------------------------
    If not, can you commit to submitting the Interagency 
Statement to Congress?

A.1.b. The FDIC is committed to submitting all rulemakings and 
any guidance or other agency documents that meet the definition 
of ``rule'' under the CRA. The FDIC is currently reviewing the 
application of the CRA to documents such as the Interagency 
Statement issued on July 6.
    Section 165 of Dodd-Frank established a $50 billion, and in 
some cases a $10 billion, threshold in total consolidated 
assets for the application of enhanced prudential standards. 
Such thresholds have been applied in rulemakings and guidance 
documents consistent with Dodd-Frank's requirements. As an 
example in 2012, regulators issued jointly supervisory guidance 
on company-run stress testing for banks with more than $10 
billion in assets. The regulators have also applied numerous 
other standards using either the $10 billion or $50 billion 
asset threshold to be consistent with Section 165 of Dodd-
Frank. For example, banks with $50 billion or more in total 
assets have historically been subject to CCAR, a supervisory 
test not required by statute.

Q.2. Can you commit to reviewing all rules and guidance 
documents referencing thresholds consistent with Section 165 of 
Dodd-Frank, and revise such thresholds to be consistent with S. 
2155?

A.2. Please reference my letter to Chairman Crapo dated October 
17, 2018, in response to this question, discussing the FDIC's
ongoing holistic review of its rules, regulations, guidance 
documents, and policies.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JELENA 
                           McWILLIAMS

Q.1. Did these two applications raise issues that warrant the 
FDIC to review the current application process? If so, please 
describe those issues.

A.1. The Federal Deposit Insurance Corporation (FDIC) cannot 
comment on any specific applications. The FDIC is committed to 
working with any group interested in starting a de novo 
financial institution. Since beginning my tenure as Chairman, I 
have made it a priority to improve the de novo application 
process, provide additional technical assistance to applicants, 
and ensure the FDIC gives due consideration to deposit 
insurance applications that meet the statutory requirements of 
the FDIA. The FDIC evaluates all deposit insurance 
applications--including applications from entities that seek to 
be ILCs--under the framework of the statutory factors 
enumerated in section 6 of the Federal Deposit Insurance Act 
(FDIA), 12 U.S.C.   1816.

Q.2. As the FDIC reviews industrial loan company (ILC) 
applications, please describe how the FDIC will consider: the 
risks posed to the Deposit Insurance Fund (DIF) by mixing 
banking and commerce; how ILC charters may create an unlevel 
playing field when compared to holding companies of banks and 
thrifts subject to consolidated supervision; and how the FDIC's 
examination, regulation and supervision authorities may or may 
not be sufficient to protect the DIF when the ILC is held by a 
commercial firm.

A.2. As with all other charter types, ILCs are considered 
depository institutions and such applications are reviewed 
under the framework of the statutory factors enumerated in 
Section 6 of the FDIA. ILCs may be insured if the application 
satisfies the statutory factors, including any potential risk 
to the DIF, and other requirements for deposit insurance. 
Applications should reflect, among other characteristics, a 
stand-alone, value-building franchise; viable long-term 
strategies; reasonable growth projections; appropriate 
diversification; acceptable capitalization and funding 
strategies; capable management; and appropriate risk management 
strategies given the underlying business model.
    The safety and soundness of a given institution, including 
an ILC, depends on the characteristics of the institution. The 
risks posed depend on the appropriateness of the business plan, 
management's competency, risk-management processes, and the 
level of capital, among other factors. The FDIC uses a risk-
focused supervision approach and assesses the condition and 
trends of each ILC using the CAMELS rating system using on- and 
off-site monitoring.
    Because ILCs are not ``banks'' for purposes of the Bank 
Holding Company Act (12 U.S.C. 1841(c)(2)), the parent 
companies of ILCs are not holding companies regulated by the 
Federal Reserve. The FDIC, in its examination and supervision 
of a given ILC, will
pursue strategies to mitigate any potential risks related to 
the parent company structure. These include the use of parent 
company
agreements, as well as capital and liquidity maintenance 
agreements. Additionally, when a parent company of an ILC has 
become troubled, the FDIC has successfully insulated the 
insured institutions from the troubled parent by imposing 
controls through Cease and Desist Orders. One common provision 
in such orders is to require prior regulatory approval of any 
affiliate transactions to prevent any improper actions by the 
parent.
    Past experience, including the recent financial crisis, 
suggests that the FDIC's supervisory and enforcement 
authorities are
sufficient to protect the DIF when the ILC is held by a 
commercial firm. Despite the failure and bankruptcy of a number 
of ILCs' parents, only two ILCs failed during the recent 
crisis, neither as a result of problems at the parent level. 
Other ILCs' parent companies or affiliates experienced severe 
stress, but their ILCs did not fail.

Q.3. In your testimony you indicated that the FDIC will seek 
comments on the current brokered deposit regulations later this 
year. Section 202 did not require the FDIC to take a broader 
look at the regulations for brokered deposits.
    What led the FDIC to decide begin a process to take 
comments on brokered deposits regulation more generally?

A.3. As I said in my opening statement at the hearing, I am 
particularly interested in revisiting FDIC regulations that 
have not received recent or comprehensive public input. The 
FDIC's approach to brokered deposits and interest rate 
restrictions is one example. On December 18, the FDIC issued an 
advanced notice of proposed rulemaking seeking comments on 
brokered deposits and interest rate restrictions.
    The banking industry has undergone significant changes 
since the law restricting brokered deposits and interest rates 
was first enacted in 1989. The regulations implementing the 
brokered deposit restrictions have not been revised since 1992, 
and the regulations implementing the interest rate restrictions 
were last revised in 2009. As such, the FDIC is soliciting 
comments on whether and how the regulations should be updated.

Q.4. In your testimony you stated that the FDIC will rescind 
more than one-half of its financial institution letters (FILs), 
over 400 letters.
    Please outline the process that the agency will undertake 
to review each FIL, and how it will determine that the FIL is 
no longer needed or superseded.

A.4. The FDIC staff began reviewing the Financial Institution 
Letters (FILs) listed on the FDIC's public website to determine 
whether each FIL should remain active or be moved to an 
inactive status on the FDIC's website because it is no longer 
applicable, redundant, or has been replaced by more recent 
guidance. This comprehensive review found 664 active FILs 
issued between 1995 and the end of 2017 that relate to Risk 
Management Supervision. The FILs that had outdated content, or 
content that had been incorporated into a regulation or an 
examination policy manual/handbook, or were otherwise available 
on the FDIC website were proposed to be retired and moved to 
archived inactive status. This review identified 374 risk 
management FILs that were proposed to be retired.
    On September 10, 2018, the FDIC solicited public comment on 
the proposed retirement of the 374 FILs. Sixteen comments were 
received, the majority of which support rescinding the 374 
FILs. Because these 374 FILs are no longer applicable, 
redundant, or have been replaced by more recent guidance and 
public comments raised no additional issues with such FILs 
being archived, the FDIC has moved those FILs to archived 
inactive status.
    In addition to the retirement of the 374 risk management 
FILs, the FDIC also reviewed the contents of the remaining FILs 
to
identify those that need to be updated, revised, or 
consolidated with other outstanding FILs. For example, the FDIC 
worked with the other banking agencies to update and streamline 
a FIL issued in 2015 regarding Frequently Asked Questions on 
Appraisals.
    The FDIC's Division of Depositor and Consumer Protection 
(DCP), which is responsible for the FDIC consumer compliance 
supervision program, began a similar FIL review process in the 
summer of 2018. FDIC staff members with subject matter 
expertise in the FIL topic areas were asked to review the FILs 
and to determine whether they should remain active or if they 
should be moved to archived inactive status, similar to their 
Risk Management Supervision counterparts. After the review 
process, 119 FILs have been moved to archived inactive status.

Q.5. The FDIC has previously dedicated resources to research on 
the current state of community banks--the Community Banking 
Initiative.
    Under your leadership, will this continue, what issues will 
it prioritize, and what is the ongoing research it is 
conducting?

A.5. The FDIC will continue to place a high priority on 
understanding trends affecting community banks. Community 
banks, as defined by the FDIC for research purposes, are 
general-purpose financial institutions that take deposits and 
make loans within a relatively small geographic area. The vast 
majority of FDIC-insured institutions are community banks, and 
every quarter since 2014, the FDIC has published analysis in 
the Quarterly Banking Profile specifically addressing the 
condition and performance of this important segment of the 
banking industry.
    Community banks play a very important role in meeting the 
credit needs of their local communities. As of June 30, 2018, 
community banks held 13 percent of the assets of insured banks 
but 42 percent of small loans to businesses and farms. As of 
the same date, about 73 percent of the banking offices in rural 
counties were operated by community banks, and in 627 U.S. 
counties, community banks provided the only physical banking 
presence.
    Further study of banking industry consolidation and branch 
closings, and the effects of these developments on local 
economies, will remain a priority at the FDIC. Work in process 
includes an analysis of branching trends to reflect more recent 
data; an analysis of how best to measure the performance over 
time of groups of institutions given ongoing consolidation; an 
exploration of how mergers and acquisitions are affecting 
banks' small business lending and other types of lending; and 
an analysis of the relationship between bank capital 
requirements and lending activity.
    As deposit insurer, and as Federal supervisor for the 
majority of community banks, the FDIC also has a continuing 
interest in the evolving financial performance and risk-profile 
of these institutions. This work will remain a priority as 
well.

Q.6. Please describe recent trends in bank consolidation and 
the role historically low interest rates have had on 
consolidation in the industry and the formation of new bank 
charters.

A.6. The number of FDIC-insured institutions stood at a little 
more than 18,000 in 1985 and has declined substantially since. 
During the post-crisis period from the end of 2013 to mid-2018, 
the number of FDIC-insured institutions decreased from 6,812 to 
5,542, an annualized percentage decrease of 4.5 percent per 
year.
    What distinguishes the recent post-crisis period from 
earlier periods has been the relative lack of new charter 
formation. From 1980 through 2007, the smallest number of new 
commercial banks chartered in any year was 40 in 1992. Since 
2010, only 11 new banks have been chartered.
    A number of factors may explain the reduction in the 
chartering of new banks. The prolonged period of low interest 
rates is one example. During much of the post-crisis period, 
low interest rates compressed the net interest margins 
available to banks. A study by Federal Reserve economists found 
a strong correlation between the number of new charters in a 
given year and the Federal funds rate.
    Another factor that may have contributed to a reduction in 
new bank chartering was a significant supply of failing and 
troubled banks that needed capital during and after the crisis. 
Acquiring an existing bank may have been a cheaper way to enter 
the banking business rather than starting a new bank. Support 
for this idea is that price to book ratios for bank 
acquisitions declined substantially during the crisis and 
remained below their post-2006 average until 2016.
    Finally, it is generally more expensive now to charter a 
new bank than it used to be. Challenges facing new banks in the 
areas of information technology and cyber-security are more 
complex than they have ever been, and the body of extant 
regulation has increased considerably since the crisis. While 
it is difficult to quantify the effects of these developments 
on the resources needed to establish a new bank, it is likely 
that the effect has not been negligible.
    In this regard, one of my priorities as Chairman is to 
ensure that the FDIC is not placing needless obstacles in the 
way of new bank formation.

Q.7. Recently, former FDIC Chair Gruenberg noted that the Fed 
and OCC's proposal with regard to the enhanced supplemental 
leverage ratio (eSLR) would ``significantly weaken constraints 
on financial leverage in systemically important banks put in 
place in response to the crisis'' and that it would ``make the 
banks themselves more vulnerable to disruption and 
failure.''\1\
---------------------------------------------------------------------------
    \1\ https://www.fdic.gov/news/news/speeches/spsep0618.html.
---------------------------------------------------------------------------
    Do you agree with these comments? Does the FDIC plan to 
join the Fed and the OCC on the eSLR proposal?

A.7. Strengthening capital requirements for our Nation's 
largest banks has been an important post-crisis reform which 
resulted in a complex, multifaceted framework that includes 
numerous risk-based requirements as well as multiple leverage 
ratio requirements for these banks. Because of the complexity 
of this framework, it is important to ensure that the various 
elements work in cohesion and are appropriately calibrated to 
achieve the intended goal, including a careful consideration of 
any unintended consequences. At this time, I am reviewing the 
enhanced supplementary leverage ratio (eSLR) proposal issued by 
the Federal Reserve and the OCC to better understand the policy 
objective.
    Additionally, section 402 of the Economic Growth, 
Regulatory Relief, and Consumer Protection Act also impacts the 
eSLR. The banking agencies should faithfully implement what the 
law requires and consider the interaction of section 402 with 
the eSLR proposal issued by the Federal Reserve and OCC.

Q.8. Do you agree that the FDIC would be best served by a 
having a full board?

A.8. The FDIC Board of Directors currently has sufficient 
membership to conduct its important business. We are prepared 
to welcome new members as they are nominated by the President 
and approved by Congress.

Q.9. The Federal financial agencies often take intermediate 
steps to address problems in the financial institutions they 
regulate before formal enforcement actions are taken. For 
example, we know that the OCC had taken supervisory actions 
related to concerns about Wells Fargo's sales practices before 
the 2016 enforcement action.
    Please describe the process for how your agency determines 
what type of supervisory action to take when it finds a problem 
at a financial institution it regulates, how it expects the 
financial institution to address the problem, how much time a 
financial institution is given to address the problem, how the 
agency follows up with the financial institution on the 
problem, and how the agency makes a determination that a 
problem has not been addressed and warrants escalated action.

A.9. The FDIC is the primary Federal supervisor for all State 
nonmember banks and State-chartered savings institutions. 
Examinations are conducted according to statutorily established 
timeframes. These examinations assess an institution's overall 
financial condition, management practices and policies, 
compliance with applicable laws and regulations, and the 
adequacy of internal control systems to identify, measure, and 
control risks.
    The goal of the FDIC's supervisory process is to identify 
problems and seek solutions early enough to enable remedial 
action that will prevent serious deterioration in a bank's 
condition and reduce risk to the FDIC's deposit insurance fund. 
When problems are detected, examiners and other supervision 
staff must determine the severity along with the timing and 
form of necessary corrective actions. The FDIC uses a number of 
tools to address supervisory concerns which are tailored to 
each situation.
    The FDIC uses supervisory recommendations to inform the 
bank of the FDIC's views about changes needed in the bank's 
practices, operations, or financial condition. The FDIC Board 
directs staff to make supervisory recommendations when a bank's 
practices, operations, or financial condition could have a 
detrimental effect on the financial institution or could result 
in customer harm if left unaddressed. Each supervisory 
recommendation is tailored to the concern identified, including 
the corrective action needed and the timeframe in which it 
should occur. Supervisory recommendations are not formal or 
informal enforcement actions, are generally correctable in the 
normal course of business, and include items highlighted in a 
report of examination as a Matter Requiring Board Attention 
(MRBA). The remediation of supervisory recommendations is 
checked through the institution's response to the report of 
examination and by examiners at the next onsite examination. 
Institution responses to MRBAs are formally tracked and 
reported on in the FDIC's Annual Performance Plan.
    The FDIC initiates informal corrective action, such as a 
Board Resolution, Memorandum of Understanding, or Compliance 
Plan under Section 39 of the FDI Act, as a structured way to 
correct problems at institutions that have moderate weaknesses, 
but have not deteriorated to a point requiring formal 
corrective actions.
    The FDIC initiates formal corrective action to remedy 
practices or conditions determined by the FDIC Board of 
Directors to be unsafe or unsound. Similar to informal actions, 
formal actions contain specific corrective action requirements 
and timeframes, and require quarterly progress reporting by the 
institution. The FDIC monitors an institution's progress in 
achieving the requirements of an outstanding formal action 
through offsite monitoring of progress reports, visitations, 
and examinations. Formal actions are enforceable in a court of 
law and an institution and its management may be assessed civil 
money penalties for failing to comply with the requirements of 
such an action.

Q.10. As you know, financial institution misconduct often 
continues for many years, and it raises concerns that the 
current supervisory process is ineffective in addressing 
problems.
    Given that the details about supervisory actions including 
``matters requiring attention'' or ``MBAs'' are considered 
confidential supervisory information, please provide the 
Committee for each year starting in 2005 the aggregate number 
of outstanding MBAs from the FDIC for the U.S. G-SIBs, and the 
aggregate number of MBAs that were satisfactorily addressed and 
are no longer outstanding.

A.10. The FDIC is not the primary Federal regulator for 
depository institutions owned by the U.S. G-SIBs and, 
therefore, does not directly open or close MBAs for any of 
these institutions.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM JELENA 
                           McWILLIAMS

Q.1. As I stated during the hearing, I greatly appreciated the 
recent Interagency Statement Clarifying the Role of Supervisory 
Guidance.
    Could you describe what, if any, additional steps you have 
taken to ensure that the content of the statement is understood 
and
observed by your examination staff? Additionally, have past
supervisory actions been reviewed to confirm that they are
consistent with the statement? If so, have any problems been 
identified?

A.1. The Federal Deposit Insurance Corporation (FDIC) has 
issued instructions to supervision staff emphasizing that 
supervisory communications should distinguish clearly and 
accurately between the requirements of laws and regulations, 
which are legally binding and enforceable, and supervisory 
guidance. These instructions were reinforced through an 
examiner all-hands conference call and again through twelve, 
in-person, training sessions covering more than 1,000 
commissioned examiners. The instructions were additionally 
incorporated into the FDIC's core training curriculum for pre-
commissioned examiners. This training is delivered through five 
in-person courses delivered multiple times per year at the 
FDIC's Seidman Center training facility.
    More generally, the FDIC takes many steps to ensure that 
its onsite examination activity is carried out consistently and 
that the findings of examinations are presented in a manner 
that is consistent with FDIC rules and regulations, policies, 
and procedures. For example, each report of examination goes 
through at least one level of review by a case manager or 
review examiner, who is trained to conduct those reviews and 
ensure that reports of examination are consistent with FDIC 
policy. In the case of more complex or troubled--institutions, 
a report of examination goes through additional levels of 
review by an assistant regional director, deputy regional 
director, or regional director.
    Each final report of examination mailed to an institution 
is accompanied by a survey to obtain banker feedback about the 
pre-examination process, the examiners' knowledge and 
responsiveness, the examination process, and the content and 
utility of the examination report. The survey also affords 
bankers the opportunity to provide written commentary and 
request a follow-up contact.
    Each region's implementation of FDIC policy, including its 
review of reports of examination, is subject to triannual 
internal review by an independent staff from the Washington 
Office.
    Finally, the FDIC's supervision process is subject to audit 
by the OIG and GAO. The FDIC also regularly conducts internal 
reviews of all FDIC regional offices where independent staff 
from the Washington Office verify compliance with existing FDIC 
policies and procedures. To the extent those policies and 
procedures are not followed, including instances with respect 
to the treatment of guidance, regional offices are directed to 
correct the issue.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM JELENA 
                           McWILLIAMS

    Your agencies have been working on regulations to implement 
the Biggert-Waters Flood Insurance Reform Act of 2012 for the 
last 6 years. The rule regarding acceptance of private flood 
insurance has been proposed in draft form twice, the last time 
on January 6, 2017. Nearly all comments submitted on the two 
drafts expressed serious concerns over the proposals, and the 
unintended consequences that would result.

Q.1. What steps are each of your agencies taking to address the 
concerns expressed during the comment period?

A.1. The agencies have given careful consideration to the 
comments received in response to the private flood insurance 
notice of proposed rulemaking. The Federal Deposit Insurance 
Corporation (FDIC) received 60 comments from members of the 
public with important experience and insights related to these 
issues, including lenders, insurers, consumer organizations, 
State regulators, and trade associations. The agencies are 
taking the feedback seriously and are drafting a final rule 
that is intended to achieve the legislative goals of 
effectively and efficiently while minimizing regulatory burdens 
on the banking industry and public.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JELENA 
                           McWILLIAMS

Sales practices
    The Wells Fargo fraudulent account scandal exposed how 
abusive sales practices and incentive compensation place 
consumers at risk of harm. In the 2 years since the first Wells 
Fargo scandal, we've watched as bank executives blamed low-paid 
employees for sales practices gone wrong, but in reality, these 
scandals reflect a failure of risk management and bank culture 
that comes from the top. Anew report by the National Employment 
Law Project found that 90 percent of bank employees surveyed 
stated that failure to meet sales quotas still results in 
bullying, disciplinary action or possible termination.

Q.1.a. Are your agencies incorporating reviews of sales 
practices and compensation programs into your supervision?

A.1.a. Yes. Incentive compensation programs are reviewed as 
part of the examination process to ensure that they provide 
employees incentives that appropriately balance risk and 
reward; are compatible with effective controls and risk-
management; and are supported by strong corporate governance, 
including active and effective oversight by the organization's 
board of directors.
    The Federal Deposit Insurance Corporation (FDIC) conducted 
a horizontal review of sales practices at larger FDIC-
supervised institutions in 2016 and 2017, subsequent to 
findings at Wells Fargo. This review focused on 17 FDIC-
supervised institutions with total assets greater than $10 
billion, and was part of a collaborative effort among the FDIC, 
the Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, and the Consumer 
Financial Protection Bureau. FDIC staff also participated in 
reviews of OCC-supervised institutions.
    In addition, FDIC's Division of Depositor and Consumer 
Protection performs risk-focused consumer compliance 
examinations, based on the potential for compliance issues that 
have or may have an adverse impact on banking customers. As 
part of the examination process, FDIC consumer compliance 
examiners review consumer complaints that the bank has received 
from customers as well as complaints made directly to the FDIC. 
Examiners may also look to external sources for complaints such 
as other regulatory agencies, blogs, or social media. Based on 
the findings of the complaint review process, compliance 
examiners may seek additional information about a bank's sales 
practices and incentive compensation plans to determine if the 
potential for consumer harm exists.

Q.1.b. If so, does that include any input or feedback from 
frontline employees? If not, how are you monitoring possible 
misconduct related to sales practices?

A.1.b. On-site supervisory reviews typically include 
discussions with multiple levels of institution staff and 
management, including frontline employees. This is an important 
part of the supervisory process as it allows for identification 
of any discrepancies in the implementation of written policies 
and procedures, or if statements made by management differ from 
actual practice. As an example, client-facing employees, 
including those under incentive compensation programs, may be 
interviewed by examiners.
Bank of America
    Last week, I sent a letter to the CEO of Bank of America 
regarding recent customer reports that the bank has asked 
existing account holders for their citizenship status, and in 
some cases the bank has frozen accounts when customers fail to 
respond.

Q.2. Have any of your agencies directed or suggested to banks 
under your supervision to ask existing account holders for 
their citizenship status? Please provide any information about 
whether any institutions may have been asked or encouraged to 
collect citizenship information on existing customers.

A.2. The FDIC is the primary Federal supervisor for State-
chartered nonmember financial institutions, most of which are 
community banks. The FDIC has not instructed staff and is not 
aware of instances where staff have directed or suggested to 
its supervised banks that they are required to request 
citizenship status from existing account holders. Under Bank 
Secrecy Act and anti-money laundering requirements and 
guidelines, financial institutions are required to gather 
customer information at account opening, but there are no 
requirements to request citizenship status at account opening 
or thereafter. The requirement to identify beneficial 
ownership, which became effective in May 2018 and required 
financial institutions to update individual customer 
information for certain accounts, also does not require 
citizenship status as part of identification requirements. 
Financial institutions must also comply with Office of Foreign 
Assets Control (OFAC) restrictions. OFAC maintains ongoing 
lists of individuals in addition to countries and other 
entities where the U.S. Government has implemented sanctions, 
and financial institutions are prohibited from transacting with 
these parties.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JELENA 
                           McWILLIAMS

    Thank you for your commitment to finalizing a rule on 
private flood insurance. As Congress clarified in its passage 
of the Biggert-Waters Flood Insurance Reform Act of 2012, 
consumers should have choices when it comes to obtaining flood 
insurance. While there is nothing in Federal law prohibiting 
homeowners from purchasing private flood insurance, there is 
regulatory uncertainty about what policies banks can accept for 
mandatory purchase requirements. The lack of a finalized rule 
on the topic for over 6 years has exacerbated this uncertainty.
    The November 2016 proposed rule is too narrow and raises 
obstacles to the participation of private flood insurers in the 
market, which runs directly counter to congressional intent. 
The prompt finalization of a rule adopting an identical 
approach to the Flood Insurance Market Parity and Modernization 
Act would address these concerns.
    If further delay would be necessary for the FDIC and its 
peers to adopt the rule jointly, I urge, the FDIC to separately 
consider interim guidance or other approaches to promptly 
resolve the regulatory ambiguities that impede mandatory and 
discretionary acceptance of private flood insurance by banks.
    Please answer the following with specificity:
Q.1. Will you commit to looking at the Flood Insurance Market 
Parity and Modernization Act as a model for a final rule on 
private flood insurance?

A.1. The Federal Deposit Insurance Corporation (FDIC) continues 
to monitor congressional activity regarding private flood 
insurance and has been mindful of it during the interagency 
private flood insurance rulemaking process.

Q.2. Will you commit to coordinating the finalization of the 
rule with those who have an expertise in insurance regulation, 
such as the National Association of Insurance Commissioners and 
representatives from the insurance industry?

A.2. The FDIC, along with the other Federal regulatory 
agencies, has reached out to the NAIC, insurance commissioners 
from 12 States, and other groups (e.g., the Independent 
Community Bankers of America, the American Bankers Association, 
the Florida Office of Insurance Regulation, the International 
Underwriting Association, and the Consumer Federation of 
America) during its rulemaking process. The agencies have also 
received comment letters from NAIC, the States, insurance 
companies, and other insurance professionals, and have taken 
their comments into consideration when drafting the final rule.

Q.3. Can you provide a timeline for finalization of the rule?

A.3. The FDIC expects to complete the final rule for private 
flood insurance by February 2019.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM JELENA 
                           McWILLIAMS

AR Banks Wish They Could Service More of Their Customers' Mortgages--
        This is About Mortgage Servicing Rights (MSR)
    One thing I hear from AR banks is that they after they make 
a mortgage loan, they like keeping the mortgage servicing 
rights (MSR) even if they wind up selling the mortgage itself. 
But current regulations, like the Basel III rules, make this 
difficult. These small lenders prefer to keep a relationship 
with their mortgage customers, which includes handling any 
issues with their mortgage. For these often-rural small banks, 
service is a competitive advantage for them over the big banks. 
So, as you might imagine, it's tough having to tell your 
longtime customer that she has to call some 1-800 number for 
questions about her mortgage.

Q.1. Last year, good news appeared on the way when regulators 
issued proposed rule that allowed banks to keep a greater 
portion of their mortgage servicing rights, but it seems the 
rule got put on the backburner during the S. 2155 debate. So, 
can I tell my constituents that help is on the way--and you 
plan to finalize the capital relief provisions soon? Any color 
on how soon?

A.1. The agencies should move quickly to finalize the capital 
simplification proposal, and I have begun discussions with the 
other agencies to accomplish that. I discussed this issue 
during a speech on November 16, in which I said ``I see no 
reason to delay any further. Finalizing the capital 
simplification proposal will provide certainty and clarity to 
community banks and take a step toward simplifying the risk-
based capital rules.''\1\ I also plan to simplify the capital 
rules for community banks more broadly. We recently issued for 
public comment a proposal to implement section 201 of the 
Economic Growth, Regulatory Relief, and Consumer Protection 
Act, the community bank leverage ratio (CBLR), which will 
substantially simplify the agencies' regulatory capital rules 
for qualifying community banks. We also are looking closely at 
the agencies' rules implementing the Basel III standardized 
approach for banks that do not qualify for the CBLR, beyond the 
capital simplification rule proposed last September, to find 
ways to further simplify the rules.
---------------------------------------------------------------------------
    \1\ https://www.fdic.gov/news/news/speeches/spnov1618html.
---------------------------------------------------------------------------
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JELENA 
                           McWILLIAMS

    Recently, the ``Interagency Statement Clarifying the Role 
of Supervisory Guidance'' was issued. I think this directive is 
a very important step in ensuring that the regulation and 
supervision of financial institutions is conducted pursuant to 
legal standards. Each of you is the leader of an organization 
that has thousands of employees and examiners and are 
responsible for its implementation.

Q.1. How are you making sure examiners on the ground are 
following this statement?

A.1. The Federal Deposit Insurance Corporation (FDIC) has 
issued instructions to supervision staff emphasizing that 
supervisory communications should distinguish clearly and 
accurately between the requirements of laws and regulations, 
which are legally binding and enforceable, and supervisory 
guidance. These instructions were reinforced through an 
examiner all-hands conference call and again during 12, in-
person, training sessions covering more than 1,000 commissioned 
examiners. The instructions were additionally incorporated into 
the FDIC's core training curriculum for pre-commissioned 
examiners. This training is delivered through five in-person 
courses delivered multiple times per year at the FDIC's Seidman 
Center training facility.

Q.2. Have you considered a formal rulemaking so that staff take 
this important statement seriously?

A.2. The FDIC received a petition for rulemaking on the role of 
supervisory guidance on November 5, 2018, from the Bank Policy 
Institute and the American Bankers Association under Section 
553(e) of the Administrative Procedure Act. The FDIC is 
currently considering this petition, as required by law.

Q.3. How will you independently verify that this statement is 
followed (audits, surveys from supervised entities, other 
independent verification)?

A.3. FDIC takes many steps to ensure that its onsite 
examination activity is carried out consistently and that the 
findings of examinations are presented in a manner that is 
consistent with FDIC rules and regulations, policies, and 
procedures. For example, each report of examination goes 
through at least one level of review by a case manager or 
review examiner, who is trained to conduct those reviews and 
ensure that reports of examination are consistent with FDIC 
policy. In the case of more complex or troubled institutions, a 
report of examination goes through additional levels of review 
by an assistant regional director, deputy regional director, or 
regional director.
    Each final report of examination mailed to an institution 
is accompanied by a survey to obtain banker feedback about the 
pre-examination process, the examiners' knowledge and 
responsiveness, the examination process, and the content and 
utility of the examination report. The survey also affords 
bankers the opportunity to provide written commentary and 
request a follow-up contact.
    Each region's implementation of FDIC policy, including its 
review of reports of examination, is subject to triannual 
internal reviews by an independent staff from the Washington 
Office.
    Finally, the FDIC's supervision process is subject to audit 
by the OIG and GAO.

Q.4. Under the agencies' proposal to simplify and tailor the 
regulations implementing the Volcker Rule, the proposed 
``accounting prong'' would cover all purchases or sales of 
financial instruments that are recorded at fair value on a 
recurring basis under applicable accounting standards, which 
would subject a significantly higher number of financial 
activities to the rule.

Q.4.a. Given the agencies' policy goals of simplification and 
tailoring, how do you intend to revise the proposal to remain 
faithful to these goals?

A.4.a. The comment period for the agencies' proposal to 
simplify and tailor the Volcker Rule has recently closed. The 
FDIC has received more than 50 unique comment letters that are 
currently under review. The FDIC will be coordinating with the 
other Volcker Rule agencies as we review the comments and 
develop a way forward. As such, it is too early in the process 
to determine how the Volcker Rule may be modified.

Q.4.b. The proposed amendments to the Volcker Rule would also 
introduce new metrics that could result in a nearly 50 percent 
increase in metrics reporting. How do you intend to revise the
proposal to ensure that covered institutions are not subject to 
additional compliance burdens?

A.4.b. The agencies are currently considering the public 
comments received on the proposed changes to the metrics 
reporting requirements in the recent Volcker Rule NPR. As the 
agencies consider the comments, we will carefully consider any 
incremental burden that the proposed changes to the metrics 
reporting requirements may introduce.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM 
                       JELENA McWILLIAMS

Section 104, Home Mortgage Disclosure Act (HMDA)
    I was the Attorney General of Nevada during the financial 
crisis and saw first-hand how big banks targeted vulnerable 
people and communities of color. This is exactly why it was so 
important that the CFPB required more data collection and more 
oversight over lending activities. The law signed by President 
Trump earlier this year eliminated some of the data we need to 
preserve this progress. Despite the loss of public HMDA data, 
each of your agencies still has a requirement to ensure that 
Latinos, African Americans, women and other people are not 
rejected for loans due to their gender or ethnicity.

Q.1. How many lenders supervised by your agency will not 
publicly report the additional data that was to be required 
this year? This data includes loan characteristics like credit 
score, fees, points, and interest rates.

A.1. The Federal Deposit Insurance Corporation (FDIC) estimates 
that of the roughly 1,850 FDIC-supervised institutions that 
reported HMDA data in 2017, approximately 240 will be required 
to publicly report the additional HMDA data that was to be 
required this year. Therefore, approximately 1,610 will not be 
required to report the additional data.

Q.2. Would it have been easier to spot fair lending violations 
with transparent data reporting, rather than relying on your 
bank examiners to go bank by bank, loan by loan to root out 
discrimination?

A.2. Evaluating lending practices to identify potential 
discrimination, bank-by-bank, is an important part of the 
FDIC's examination program. The FDIC performs a fair lending 
review as part of every consumer compliance examination we 
conduct. Even with the changes enacted under S. 2155, more than 
1,600 FDIC-supervised banks will still report most of the same 
HMDA data points they did prior to the passage of the Dodd-
Frank Act. Moreover, our examiners typically have full access 
to the information necessary to conduct an effective fair 
lending review, as they did before the additional HMDA 
reporting requirements were adopted.
    When data are not available through a HMDA Loan Application 
Register (LAR), examiners can aggregate information from a 
variety of internal bank data sources or by conducting loan 
file reviews.
    This approach is familiar to examiners, who are used to 
performing fair lending reviews in the absence of HMDA data. 
(For
example, HMDA data are not available for banks that are not 
HMDA reporters or when reviewing nonmortgage lending, such as 
unsecured installment lending and auto lending.)

Q.3. Without the expanded HMDA data reporting slated to begin 
this year, what information will your agency's examiners have 
to trigger a review of potential discrimination?

A.3. As mentioned, FDIC-supervised banks still will report most 
of the same HMDA data points they have reported in the past. In 
addition, examiners typically can use information in internal 
bank records and reports, such as a loan trial balance or loan 
reconciliation reports. FDIC examiners will continue to have 
tools necessary to identify potential underwriting, pricing, 
redlining, and some steering discrimination. When necessary, 
examiners will be able to follow up and perform in-depth 
analysis, as they did prior to the enactment of the new law.
Community Reinvestment Act
    We have a massive affordable rental housing crisis in 
Nevada: 119,854 families pay more than half their income for 
rent.
    One of the few resources we have is the Low Income Housing 
Tax Credit. The new tax law is already making it harder to 
finance low-income housing because the cost of the credit has 
fallen.

Q.4. Will you commit to ensure that any changes you consider to 
the Community Reinvestment Act make Federal tools like the Low 
Income Housing Tax Credit and New Market Tax Credit work better 
in communities?

A.4. The agencies have been meeting to discuss potential 
changes to the CRA regulations, including the ideas put forward 
by the Treasury Department. In addition, on August 28, 2018, 
the Office of the Comptroller of the Currency (OCC) published 
an advance notice of proposed rulemaking (ANPR) inviting public 
comment on ways to ``transform or modernize'' the CRA 
regulations. We look forward to reviewing feedback provided by 
the public in response to the OCC's ANPR and to further 
engagement with the OCC and the Federal Reserve Board (FRB) on 
opportunities to improve the CRA's effectiveness. Any potential 
changes will focus on achieving the congressional intent of the 
CRA.

Q.5. Nonbanks provide more than half of all mortgages in this 
country. Six of the 10 largest mortgage lenders are not banks.
    Do you think nonbank mortgage lenders should be covered by 
the Community Reinvestment Act?

A.5. An expansion of the coverage of the CRA is a legislative 
question for Congress and the President.
Section 108: Escrow Requirements
    For generations, lenders understood that they should 
require property taxes and homeowners insurance be placed in 
escrow, so that those obligations are always paid on time. But 
in the run-up to the foreclosure crisis, lenders cut corners so 
that they could misrepresent monthly payments to homeowners and 
put them into obligations they couldn't afford.

Q.6. How will your agencies monitor the implementation of the 
escrow exemption? Will your examiners monitor foreclosure 
activities resulting from unpaid property taxes and/or property 
insurance?

A.6. The FDIC conducts consumer compliance examinations of 
supervised institutions to assess whether financial 
institutions are meeting their responsibilities to comply with 
applicable Federal consumer protection laws and regulations. 
During examinations, examiners monitor, review, and become 
aware of issues related to banks' implementation of statutory 
and regulatory requirements. Issues related to escrow 
requirements are among the many supervisory issues the FDIC 
reviews through the risk-based examination approach.
    The FDIC monitors activities in the financial services 
industry related to consumer compliance issues, including 
foreclosure issues, in a number of ways. Among other things, it 
meets with and engages stakeholders such as trade associations, 
consumer groups, and bank representatives; reviews consumer 
complaints from a number of sources; and monitors publications.

Q.7. How will you communicate any findings or concerns from the 
elimination of the escrow requirement to us in Congress?

A.7. As previously described, the FDIC will monitor this issue 
and, of course, be prepared to answer any questions that may 
come from Congress regarding this issue.
Section 103. Rural Appraisal Exemption (exemptions less than $400,000)
    Chair McWilliams, in your written testimony, you say that 
the appraisal exemption will not apply if the regulator 
requires an appraisal for safety and soundness reasons.

Q.8. What would be your agency's standard to step in and curb 
loans made without appraisals? How will you communicate any 
concerns to members of Congress?

A.8. The FDIC may require a financial institution to obtain 
appraisals to address safety and soundness concerns on a case-
by-case basis. For example, the FDIC may require a financial 
institution to obtain appraisals after documenting weak 
underwriting practices, identifying weaknesses in its valuation 
program, or ascertaining that declining property values in its 
primary markets have significantly increased its risk profile. 
The FDIC could communicate any concerns to members of Congress 
through ongoing dialogue, as needed.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATORS WARNER, COTTON, 
            TILLIS, AND JONES FROM JELENA McWILLIAMS

    Comptroller Otting has testified before that ``the process 
for complying with current BSA/AML laws and regulations has 
become inefficient and costly.'' In talking with banks/credit 
unions it is clear that they do not object to the principle of 
complying with AML regulations, it is that they feel that much 
of the time, effort, and money spent on compliance is 
ineffective, and therefore, a waste of time. Banks/credit 
unions fill out forms invented in the 1970s and have little 
insight into whether it is doing any good. And we've heard from 
banks/credit unions that they believe AML examinations are done 
without respect to the riskiness of the institution or its 
activities.

Q.1. What improvements can be made so we have a cheaper and 
faster system that is better at catching criminals?

A.1. The Federal Deposit Insurance Corporation (FDIC), together 
with the Federal banking agencies \1\ and the U.S. Department 
of the Treasurys,\2\ has established a working group to 
identify ways to ensure the Bank Secrecy Act (BSA)/anti-money 
laundering (AML) regime fosters a financial system that is 
efficient, transparent, and resilient to illicit financial 
activity. The working group is looking at ways to:
---------------------------------------------------------------------------
    \1\ The Federal banking agencies are the Board of Governors of the 
Federal Reserve System, Federal Deposit Insurance Corporation, National 
Credit Union Administration, and Office of the Comptroller of the 
Currency.
    \2\ Specifically, the Office of Terrorism and Financial 
Intelligence (TFI) and the Financial Crimes Enforcement Network 
(FinCEN).

  (i) Limprove the efficiency and effectiveness of the BSA/AML 
---------------------------------------------------------------------------
        regulations;

  (ii) Limprove supervision and the examination process;

  (iii) Lcontinue to fully support law enforcement; and

  (iv) Lfacilitate innovation and responsible integration of 
        technology.

    On October 3, 2018, the working group issued a statement to 
address instances in which certain banks and credit unions may 
decide to enter into collaborative arrangements to share 
resources to manage their BSA/AML obligations more efficiently 
and effectively.
    On December 3, 2018, the working group issued a joint 
statement to encourage banks and credit unions to consider, 
evaluate, and, where appropriate, responsibly implement 
innovative approaches to meet their BSA/AML compliance 
obligations.
    The working group is also drafting a statement to clarify 
instructions for risk-focused BSA/AML examinations.

Q.2. Is there a place in a new AML regime for new technology, 
like artificial intelligence or machine learning?

A.2. The Federal banking agencies, together with the Treasury 
Department's Financial Crimes Enforcement Network (FinCEN), 
issued a joint statement \3\ to encourage innovative approaches 
to detect and report financial crime and meet other regulatory 
obligations related to AML and countering the financing of 
terrorism (CFT). The statement recognizes that private sector 
innovation, including new ways of using existing tools or 
adopting new technologies can help banks and credit unions 
identify and report money laundering, terrorist financing, and 
other illicit financial activity by enhancing the effectiveness 
and efficiency of banks' BSA/AML compliance programs. The 
statement points out the Federal banking agencies and FinCEN's 
commitment to engage with the private sector and other 
interested parties.
---------------------------------------------------------------------------
    \3\ https://www.fdicgov/news/news/press/2018/pr18091a.pdf.
---------------------------------------------------------------------------
    Artificial intelligence and machine learning, for example, 
may enhance the effectiveness and efficiency of banks' and 
credit unions' BSA/AML compliance programs.

Q.3. What do you, as a regulator, think that it means to have a 
risk-based AML program?

A.3. A risk-based BSA/AML program is one for which the 
institution's management team has a well-developed risk 
assessment that documents and supports the institution's BSA/
AML risk profile, while also ensuring the BSA/AML program meets 
the minimum regulatory requirements. The risk profile is 
institution-specific and should be based on a risk assessment 
that properly considers all risk areas, including products, 
services, customers, entities, transactions, and geographic 
locations. The risk assessment format may vary, but should be 
easily understood by all appropriate parties, which includes 
staff, management, and directorate, as well as auditors and 
regulators. This risk assessment process enables management to 
better identify and mitigate gaps in the institution's 
controls.
    A depository institution's BSA/AML compliance program 
should be commensurate with the institution's overall risk 
profile and based on a comprehensive assessment of money 
laundering and terrorist financing risks. The BSA/AML 
compliance program must be written, approved by the board of 
directors, and includes six components:

   La system of internal controls to ensure ongoing 
        compliance,

   Lindependent testing of BSA/AML compliance,

   La designated individual or individuals responsible 
        for managing BSA compliance,

   Ltraining for appropriate personnel,

   Lan established customer identification program, and

   Lprocedures for customer due diligence.\4\

    \4\ 31 CFR  1020.310 and 31 CFR  1020.320.

    The cornerstone of a strong BSA/AML compliance program is 
the adoption and implementation of risk-based customer due 
diligence (CDD) policies, procedures, and processes for all 
customers, particularly those that present a higher risk for 
money laundering and terrorist financing. The objective of CDD 
is to enable the depository institution to understand the 
nature and purpose of customer relationships, which may include 
understanding the types of transactions in which a customer is 
likely to engage. These processes
assist the institution in determining when transactions are 
---------------------------------------------------------------------------
potentially suspicious.

Q.4. How do you implement the risk-based AML program 
requirement through examinations?

A.4. Examiners assess the adequacy of the bank's BSA/AML 
compliance program and determine whether the institution has 
developed, administered, and maintained an effective program 
for compliance with the BSA and its implementing regulations. 
FDIC examiners tailor the BSA/AML examination plan according to 
the bank's business model, complexity, and risk profile. Tools 
that can be used include the bank's risk assessment which 
should be comprehensive and cover all customer types, products, 
services, and geographies in which the bank operates and 
transacts business. Similarly, examiners evaluate the adequacy 
of a bank's independent test of the BSA/AML compliance program 
so that they can determine what level of reliance they can 
place on them, and then evaluate the results of the independent 
tests to initially understand the risk profile along with 
supervisory materials.

Q.5. One common criticism of the current AML regime is the lack 
of feedback given to banks/credit unions after they file their 
SARs. The current system is extremely segmented, and as a 
consequence, it is not the ``fault'' of any one entity that 
there is little feedback given. But without a system to provide 
feedback, the quality of SARs suffer. A system that doesn't 
focus on the quality of reports being filed is one that is not 
optimized to catch criminals. Many banks/credit unions wish 
that they had an idea of what FinCEN is really trying to find, 
because then their cooperation and input might be more helpful 
and effective.
    How often does your agency meet with FinCEN and with the 
DOJ/FBI to discuss the usefulness of suspicious activity 
reports that are being filed?

A.5. The FDIC is a member of the Bank Secrecy Act Advisory 
Group (BSAAG), which is chaired by the Financial Crimes 
Enforcement Network (FinCEN). The BSAAG is a forum for the 
regulators, law enforcement, and the private sector to have 
shared input on multiple BSA/AML regulatory, supervisory, and 
implementation issues. The BSAAG holds two plenary meetings 
each year, and has committees that meet to consider money 
laundering risk compared to regulatory obligations, as well as 
feedback to industry on the use of and potential improvements 
to suspicious activity reports (SARs).
    The FDIC also participates in regional SAR Review teams, 
which are comprised of IRS--Criminal Investigations, ICE, DEA, 
FBI, U.S. Secret Service, U.S. Attorney's Offices, regulatory 
agencies, and State & local law enforcement. These teams meet 
at least monthly and review SARs from their respective 
geographic locations. The teams discuss SAR filings and 
periodically provide presentations to banks on the importance 
of SAR filings and ways to improve the filing process.
    In addition, I have personally met with FinCEN Director Ken 
Blanco on several occasions to discuss improvements to the BSA/
AML reporting requirements.

Q.6. When a bank/credit union files a SAR, or a regulator is 
examining a financial institution, how much feedback is there 
across the system about whether or not the SARs they filed were 
found to be useful, informative, or effective?

A.6. Law enforcement would be the appropriate agency to 
determine the usefulness and effectiveness of SARs in 
initiating or supplementing money laundering or terrorist 
financing investigations and other criminal cases.
    There is no communication mechanism in place for the FDIC 
to know when a SAR filed by a bank was useful, informative or 
effective for law enforcement purposes.

Q.7. What are the legal hurdles that prevent more effective and 
more regular feedback within the Federal Government and between 
the Federal Government and financial institutions?

A.7. The FDIC may share SAR information ``as necessary to 
fulfill official duties consistent with Title II of the Bank 
Secrecy Act.''\5\ The FDIC shares SAR information with Federal 
law enforcement and other Federal banking agencies as 
necessary.
---------------------------------------------------------------------------
    \5\ 31 CFR 1020320(e)(2).

Q.8. Will you pledge to institutionalize feedback mechanisms 
wherein banks/credit unions both get and can give feedback on 
---------------------------------------------------------------------------
how to constantly improve the process?

A.8. The BSAAG offers a BSA/AML feedback mechanism. As 
mentioned above, the FDIC is a member of the BSAAG, which is 
chaired by FinCEN. The Annunzio-Wylie Anti-Money Laundering Act 
of 1992 required the Secretary of the Treasury to establish a 
BSAAG consisting of representatives from Federal regulatory and 
law enforcement agencies, financial institutions, and trade 
groups with members subject to the requirements of the BSA. The 
BSAAG is the means by which the Treasury receives advice on the 
operations of the Bank Secrecy Act. Relevant issues are placed 
before the BSAAG for review, analysis, and discussion. The 
BSAAG is a major vehicle for the regulators, law enforcement, 
and the private sector to have shared input on multiple BSA/AML 
regulatory, supervisory, and implementation issues. Non-
Government participants represent financial sectors with BSA 
obligations, though it is heavily oriented to the depository 
institutions reflecting the significant role of banks as the 
primary gatekeepers of the financial system. The BSAAG holds 
two plenary meetings each year, and has committees that meet to 
consider money laundering risk compared to regulatory 
obligations as well as feedback to industry on the use of and 
potential improvements to suspicious activity reports.

Q.9. We hear from banks that they feel pressured to file SARs 
even when they believe the underlying transaction or activity 
does not rise to a level of suspiciousness that merits a 
filing. They say they do this because they are afraid of being 
second-guessed by examiners after the fact, and because there 
is no Government penalty for over-filing SARs--only a penalty 
for not filing a SAR. But banks bear the significant cost of 
filing unnecessary SARs.
    What can be done to realign incentives so that banks/credit 
unions don't feel pressured to ale SARs that they don't feel 
reflects activity warranting a filing?

A.9. Examiners follow the FFIEC BSA/AML Examination Manual when 
performing BSA/AML examinations. Examiners focus on whether the 
depository institution has an effective SAR decision-making 
process, not individual SAR decisions. Examiners may review 
individual SAR decisions as a means to test the effectiveness 
of the SAR monitoring, reporting, and decision-making process. 
The regulators are currently reviewing the risk-focused 
approach to BSA/AML supervision and will consider this concern 
in our review.
    Additionally, FinCEN is undertaking a project to evaluate 
the usefulness of BSA data. As a stakeholder of this data, the 
FDIC has provided feedback regarding suspicious activity 
reports. We are committed to working with FinCEN and law 
enforcement to improve the suspicious activity reporting 
regime.

Q.10. Banks/credit unions commonly use ``rules-based'' software 
to screen transactions and alert AML compliance teams to 
suspicious activities. While these rules-based systems can be 
effective, we have concerns that they might not be the most 
effective tool available to us given advances in data science 
and machine learning, and further, that there may be 
opportunities for criminals to manipulate these rules-based 
systems.
    We have heard concerns that many criminals have access to 
the exact same products that are used by financial 
institutions--is this true?

A.10. Companies that sell AML software used to screen 
transactions for suspicious activity may sell their products to 
the public. Because there is no contractual obligation or 
authority to require these companies to disclose to the Federal 
regulators who purchase their products, we are not able to 
confirm this statement.

Q.11. If criminals have access to similar products, or can 
easily come to understand the rules-based system, how easy is 
it to manipulate these detection systems?

A.11. Financial institutions use various static (fixed) rules 
within screening software programs to review transactions for 
potential suspicious activity. Generally, financial 
institutions do not rely exclusively on these static rules 
within software programs. Institutions deploy other manual and 
automated risk techniques and controls to help them identify a 
suspicious transaction that otherwise passes the static rules 
review.
    The software programs allow each financial institution to 
select its own unique thresholds and other features for the 
static screening rules, based on the financial institution's 
unique risk assessment. Accordingly, even if a criminal has 
access to the screening rules options available within a 
particular software program, the criminal would not necessarily 
know how a particular financial institution implemented those 
rules options for its own transaction screening.
    Financial institutions and the technology service providers 
that support financial institutions are starting to enhance 
their traditional transaction screening software programs with 
new techniques, such as machine learning/artificial 
intelligence and statistical analyses of customers' payments 
and deposits activity. These new techniques should decrease the 
likelihood that a criminal can avoid detection by structuring a 
transaction to avoid the static rules automated review.

Q.12. If there was a proven model of using a ``learning,'' 
algorithmic system to flag potentially suspicious transactions, 
would this be an improvement on the current system? What are 
the hurdles to financial institutions adopting such systems?

A.12. Innovative companies are in the process of building and 
offering these types of systems to flag potentially suspicious 
transactions. ``Learning'' algorithmic systems (algorithmic 
systems) may be cost prohibitive for some depository 
institutions to implement. While an algorithmic system may 
assist depository institutions in the identification of or 
alert to unusual activity, the SAR decision-making process 
requires human decision-making expertise, experience, and 
training.

Q.13. In what ways is a bank's/credit union's ``safety and 
soundness'' implicated by its AML system?

A.13. The Federal banking agencies adopted a uniform 
interagency system for rating the safety and soundness of the 
Nation's depository institutions. The Uniform Financial 
Institutions Rating System involves an assessment of six 
components of a depository institution's condition and 
operations. Management is one of those components. In this 
area, examiners incorporate the results of the BSA/AML 
examination when evaluating the board of directors and 
management's capability to identify, measure, monitor, and 
control the risks of an institution's activities and to ensure 
a depository institution's safe, sound, and efficient operation 
in compliance with applicable laws and regulations.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM J. MARK 
                           McWATTERS

Q.1. Some provisions of S. 2155 may be implemented through 
guidance or other policy statements that do not go through 
formal notice and comment rulemaking. The Congressional Review 
Act requires agencies to submit, with certain minor exceptions, 
all rules to Congress for review. Under the Congressional 
Review Act, a rule, by definition, is ``the whole or a part of 
an agency statement of general or particular applicability and 
future effect designed to implement, interpret, or prescribe 
law or policy or describing the organization, procedure, or 
practice requirements of an agency.'' This definition is very 
broad. In order to ensure Congress can engage in its proper 
oversight role, I encourage the regulators to follow the 
Congressional Review Act and submit all rules to Congress, even 
if they have not gone through formal notice and comment 
rulemaking.
    Can you commit to following the law by submitting all 
rulemakings and guidance documents to Congress as required by 
the Congressional Review Act?

A.1. The NCUA is committed to following the law by submitting 
to Congress all rulemakings and any guidance documents required 
by the Congressional Review Act.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM J. MARK 
                           McWATTERS

Q.1. You and Board Member Metsger have proposed a revision to 
the NCUA's risk-based capital rule. You and Mr. Metsger have 
been able to compromise and reach unanimous votes on all issues 
the Board has considered for over 2 years--while you have been 
Chair and when he was Chair.
    What are the principal changes to the rule this revision 
makes and when does the agency plan to finalize the rule? Why 
is this compromise preferred to legislation currently being 
considered in Congress?

A.1. The NCUA Board approved the final risk-based capital 
supplemental rule (Supplemental Rule) on October 18, 2018.\1\ 
The Supplemental Rule delays the implementation of the 2015 
final risk-based capital rule (2015 Final Rule)\2\ one year 
from January 1, 2019 to January 1, 2020 and increases the 
definition of complex credit union (those subject to the risk-
based capital requirement) from $100 million to $500 million in 
total assets. This definitional change exempts nearly 90 
percent of all credit unions, while still subjecting 76 percent 
of the total assets in the credit union system to the risk-
based capital requirement. The amended definition reduces 
burden while not subjecting the National Credit Union Share 
Insurance Fund (NCUSIF) to undue risk. The delay provides 
covered credit unions and the NCUA with additional time to 
prepare for the rule's implementation.
---------------------------------------------------------------------------
    \1\ 83 FR 55467 (Nov. 6, 2018).
    \2\ 80 FR 66626 (Oct. 29, 2015).
---------------------------------------------------------------------------
    The proposed legislation before Congress is limited to 
delaying the effective date of the 2015 Final Rule. While the 
legislation provides for a 2-year delay, it does not lessen the 
impact of the risk-based capital rule. Further, with the delay 
adopted by the NCUA Board in the Supplemental Rule, credit 
unions will have over 4 total years to prepare for the new 
risk-based capital requirement. The NCUA Board does not believe 
further delay is necessary.

Q.2. The Federal financial agencies often take intermediate 
steps to address problems in the financial institutions they 
regulate before formal enforcement actions are taken. For 
example, we know that the OCC had taken supervisory actions 
related to concerns about Wells Fargo's sales practices before 
the 2016 enforcement action.
    Please describe the process for how your agency determines 
what type of supervisory action to take when it finds a problem 
at a financial institution it regulates, how it expects the 
financial institution to address the problem, how much time a 
financial institution is given to address the problem, how the 
agency follows up with the financial institution on the 
problem, and how the agency makes a determination that a 
problem has not been addressed and warrants escalated action.

A.2. The NCUA's supervisory actions vary depending on the 
severity of the problems identified at a credit union and its 
management's willingness and ability to correct the problems. 
The extent and severity of the concerns also affect a credit 
union's CAMEL rating and the frequency of supervision.\3\
---------------------------------------------------------------------------
    \3\ The CAMEL rating system is based upon an evaluation of five 
critical elements of a credit union's operations: capital adequacy; 
asset quality; management; earnings; and liquidity/asset-liability 
management.
---------------------------------------------------------------------------
    Typically, upon identification of significant violations 
and safety and soundness problems, the agency initially takes 
informal action. Informal enforcement actions can include the 
issuance of a Document of Resolution (DOR),\4\ Preliminary 
Warning Letter (PWL),\5\ or Letter of Understanding and 
Agreement (LUA).\6\
---------------------------------------------------------------------------
    \4\ A DOR is similar to the other Federal banking agencies' 
``Matters Requiring Attention,'' as a DOR outlines the problem(s) 
identified and corrective action(s) needed to resolve the problem(s).
    \5\ A PWL is a warning of potential formal enforcement action if 
corrective action is not taken.
    \6\ An LUA is a written agreement between the NCUA and the credit 
union signed by both parties. An LUA lists a credit union's specific 
material problems and the corrective actions necessary to resolve them.
---------------------------------------------------------------------------
    Some violations and safety and soundness problems are so 
serious or egregious, however, that the NCUA pursues a formal
enforcement action at the outset. A formal enforcement action 
will also be used when a credit union fails to remedy serious 
problems on a timely basis. Formal enforcement actions include 
such actions as a published LUA, cease and desist order, civil 
money penalty, involuntary liquidation, conservatorship, 
prohibition, or termination of insurance. Decisions to use 
formal enforcement actions, including in cases where serious 
problems have not been timely addressed and escalated action is 
required, are vetted by agency counsel and headquarters staff. 
These actions typically require the NCUA Board's approval. 
Relatedly, the Federal Credit Union Act's (FCU Act) ``prompt 
corrective action'' provisions also require the NCUA to take 
certain actions when a credit union's net worth level falls 
below certain thresholds.\7\
---------------------------------------------------------------------------
    \7\ See 12 U.S.C.  1790d.
---------------------------------------------------------------------------
    In terms of secondary steps, the NCUA's National 
Supervision Policy Manual (NSPM) requires field staff to 
follow-up on all significant supervisory matters within 120 
days after the due date(s) for corrective action.\8\ The 
timeframe for each corrective action vary depending on the 
nature and severity of the issues identified, as well as 
practical considerations for how long it will take for the 
issue to be resolved.
---------------------------------------------------------------------------
    \8\ Follow-up for significant recordkeeping issues or Bank Secrecy 
Act (BSA) deficiencies are required to be completed within 90 days.

Q.3. As you know, financial institution misconduct often 
continues for many years, and it raises concerns that the 
current supervisory process is ineffective in addressing 
problems.
    Given that the details about supervisory actions including 
``matters requiring attention'' or ``MRAs'' are considered 
confidential supervisory information, please provide the 
Committee for each year starting in 2005 the aggregate number 
of outstanding MRAs from the NCUA for the credit unions you 
regulate, and the aggregate number of MRAs that have been 
satisfactorily addressed and are no longer outstanding.

A.3. 


Note: The increasing number of unresolved DORs in recent years 
properly reflects the problem resolution life cycle for credit 
unions and is a normal occurrence. The NCUA only clears issues 
as resolved during onsite examinations. Additionally, the 
majority of well-run credit unions are on an 18-month extended 
examination cycle. Due to the timing of examinations and the 
extended examination cycle, it may take more than one exam 
cycle, and sometimes two or more years, for the NCUA to 
classify an issue as resolved.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM J. MARK 
                           McWATTERS

Q.1. I understand that the NCUA is pursuing a number of 
examination modernizations initiatives.
    Could you describe your modernization priorities and 
explain how they will lead to more efficient and effective 
oversight?

A.1. The NCUA Board approved the following five initiatives to 
modernize the agency's exam processes:

   LThe Flexible Examination Pilot Program (FLEX);

   LOffice of National Examinations and Supervision 
        (ONES) Data Driven Supervision;

   LThe Shared NCUA-State Regulator federally Insured 
        State-Chartered Credit Union (FISCU) Program;

   LThe Enterprise Solution Modernization Program 
        (ESM); and

   LThe Virtual Examination Program

These five initiatives are interrelated and complement each 
other. As these initiatives support and build upon each other, 
they will ultimately result in a fully modernized examination 
and supervision program with various incremental improvements 
occurring along the way.
    The FLEX pilot program was developed to allow examiners to 
perform certain existing exam procedures offsite. From mid-2016 
through August 2018, 58 participants completed 87 FLEX pilot 
exams. Based on the results of the pilot, which ended in 
December 2018, the agency plans to roll out the ability for all 
examiners to perform more exam work offsite. This will reduce 
burden to credit unions and improve quality of life for 
examiners, with the added benefit of travel cost savings to the 
agency.
    The ONES Data Drive Supervision initiative began in 2018 as 
an effort to move to a continuous supervision model for the 
largest credit unions, which are supervised by the NCUA's 
Office of National Examinations and Supervision (ONES). The 
continuous
supervision model will use data-driven analytics to monitor and 
identify credit union risk and support the transition to credit 
union-driven stress testing. This work may lead to analytical 
advancements that can be adapted for use in the supervision of 
some or all other insured credit unions.
    In 2017, the NCUA created the Joint NCUA-State Supervisor 
Working Group (working group). This working group is tasked 
with collaborating to improve coordination and scheduling of 
joint exams, provide scheduling flexibility, and reduce 
redundancy where possible. The goal is to minimize the burden 
on FISCUs resulting from having a separate regulator and 
insurer. In addition, the group is tasked with evaluating the 
efficacy, appropriateness, and feasibility of adopting an 
alternating examination approach for FISCUs. The working group 
is developing a pilot program to explore and evaluate the 
effectiveness of an alternating examination program. A pilot 
will allow the NCUA, State regulators, and stakeholders to 
evaluate benefits and challenges prior to finalizing a decision 
on an alternating exam program. Such a pilot will need to run 
about 3 years in order to evaluate one full alternating exam 
cycle.
    The ESM initiative was designed to replace legacy 
applications such as the examination system (AIRES) and the 
Call Report data collection tool (CU Online). ESM will also 
introduce emerging and secure technology that supports the 
NCUA's examination, data
collection, and reporting efforts. The result will be a 
flexible technology architecture that integrates modernized 
systems and tools across the agency. The new systems will 
streamline processes and procedures helping create a more 
effective, less burdensome process.
    In 2017, the NCUA Board approved the Virtual Examination 
Program and associated resources to research methods to conduct 
offsite as many aspects of examinations as possible. By 
identifying and adopting alternative techniques to remotely 
analyze much of the financial and operational condition of a 
credit union, with equivalent or improved effectiveness 
relative to current examinations, it may be possible to 
significantly reduce the frequency and scope of onsite 
examinations. Onsite examination activities could potentially 
be limited to periodic data quality and governance reviews, 
interventions for material problems, and meetings or other 
examination activities that need to be handled in person. The 
scope of the Virtual Examination Program includes research, 
planning, design, development, testing, and the transition from 
the existing examination program to the Virtual Examination 
Program. The project team is currently in the research phase of 
the project, which is expected to last 24 months.

Q.2. As I stated during the hearing, I greatly appreciated the 
recent Interagency Statement Clarifying the Role of Supervisory 
Guidance.
    Could you describe what, if any, additional steps you have 
taken to ensure that the content of the statement is understood 
and observed by your examination staff? Additionally, have past 
supervisory actions been reviewed to confirm that they are 
consistent with the statement? If so, have any problems been 
identified?

A.2. Shortly after issuance of the Interagency Statement, the 
NCUA's leadership provided all field staff with additional 
reinforcement of the principles outlined in the Interagency 
Statement and the NCUA's long-standing position on the use of 
supervisory guidance. Additionally, the direction provided 
further explained the role agency guidance plays in the 
examination and supervision process, particularly as it relates 
to educating examiners and ensuring consistency of application. 
The agency incorporates these policies in examiner training. 
The NCUA will remain diligent in holding examination staff 
accountable for following agency policies as part of its 
quality control processes for examinations and supervision 
contacts. In addition, credit unions can take advantage of the 
NCUA's extensive informal and formal appeals options to address 
any improper use of supervisory guidance. As this has been the 
long-standing policy of the NCUA, the agency did not conduct 
any additional reviews of prior supervisory actions.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR HELLER FROM J. MARK 
                           McWATTERS

Q.1. Your agencies have been working on regulations to 
implement the Biggert-Waters Flood Insurance Reform Act of 2012 
for the last 6 years. The rule regarding acceptance of private 
flood insurance has been proposed in draft form twice, the last 
time on January 6, 2017. Nearly all comments submitted on the 
two drafts expressed serious concerns over the proposals, and 
the unintended consequences that would result.
    What steps are each of your agencies taking to address the 
concerns expressed during the comment period?

A.1. In November 2016, the NCUA, the Office of the Comptroller 
of the Currency, the Board of Governors of the Federal Reserve 
System, the Federal Deposit Insurance Corporation, and the Farm 
Credit Administration (the Agencies) issued a joint notice of
proposed rulemaking to implement the private flood insurance 
provisions of the Biggert-Waters Flood Insurance Reform Act of 
2012.\1\
---------------------------------------------------------------------------
    \1\ 81 FR 78063 (Nov. 7, 2016).
---------------------------------------------------------------------------
    The Agencies received approximately 60 comments on the 
proposed rule from a wide range of commenters, including: 
financial institutions; the insurance industry; various trade 
associations; individuals; a flood risk management association; 
a State-regulatory organization; a Federal agency; and others.
    In developing a final rule, the Agencies have carefully 
considered all of the comments received and deliberated on the 
various views expressed. The Agencies are working toward a 
final rule with the goals of reducing regulatory burden and 
achieving efficiency.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM J. MARK 
                           McWATTERS

    As part of S. 2155, Congress approved extended 18-month 
examination cycles for well-run banks below $3 billion in 
assets. It's my understanding that credit unions were not 
included in this section because the NCUA already has authority 
to provide any credit union an extended examination cycle and 
the Administration has adopted a policy that any well-run 
credit union under $1 billion in assets should have an extended 
exam cycle--much like what was in place for banks before S. 
2155.
    I'd also like to applaud your proposal to delay 
implementation of the Risk-Based Capital rule, which is 
functionally unnecessary and will hurt the ability of credit 
unions to serve their communities.
    Please answer the following with specificity:

Q.1. Has the extended examination cycle for credit unions under 
$1 billion been carried out in practice by the NCUA, and to 
what degree?

A.1. The NCUA has been very successful in implementing its 
Examination Flexibility Initiative approved in 2016. After an 
initial transition period, the NCUA is now fully carrying out 
the extended examination cycle. As of the second quarter of 
2018, 650 of 730 qualifying credit unions, or 89 percent, 
received an extended examination cycle.

Q.2. Has the NCUA taken any steps to align its policy on exam 
cycles to what is now in place for banks and raise the $1 
billion threshold/or extended exam cycles?

A.2. The agency is going to look into whether the exam cycle 
should be extended for credit unions with assets greater than 
$1 billion. We have to consider the risk to the National Credit 
Union Share Insurance Fund (NCUSIF) against any relief this 
could
provide. It is important to remember that the NCUSIF is much 
smaller than the FDIC's deposit insurance fund and has a 
different funding structure. This funding structure provides 
less loss absorbing capacity before costs are passed on to 
insured institutions. Thus, adopting the same threshold as used 
for banks would represent much higher relative risk to the 
NCUSIF and the credit union community.
    Credit unions with assets between $1 billion and $3 billion 
represent 26 percent of total insured shares. Banks with assets 
between $1 billion and $3 billion only represent 5.9 percent of 
total insured bank deposits. Also, total assets in credit 
unions with assets less than $3 billion are over 42 times the 
size of the NCUSIF--the comparable statistic for the FDIC's 
fund is only about 12 times. Even with the current extended 
examination threshold of $1 billion, total assets in these 
institutions are 25 times the size of the NCUSIF.
    Given the difference in relative loss absorbing capacity 
between the NCUSIF and the FDIC's deposit insurance fund, the 
NCUA Board needs to consider additional supplemental 
supervisory methods as part of any decision to extend the exam 
cycle for larger institutions.

Q.3. What is the Administration's timing for acting on the 
proposed delay of the Risk-Based Capital rule? Do you believe 
there could be additional improvements to the rule made by the 
NCUA or an act of Congress?

A.3. On October 18, 2018, the NCUA Board approved the final 
risk-based capital supplemental rule (Supplemental Rule).\1\ 
The Supplemental Rule delays the implementation of the 2015 
final risk-based capital rule (2015 Final Rule)\2\ from January 
1, 2019 to January 1, 2020 and increases the definition of 
complex credit union from $100 million to $500 million in total 
assets.
---------------------------------------------------------------------------
    \1\ 83 FR 55467 (Nov. 6, 2018).
    \2\ 80 FR 66626 (Oct. 29, 2015).
---------------------------------------------------------------------------
    Providing credit unions an additional year before 
implementing the 2015 Final Rule, a total implementation period 
of 4 years, is more than sufficient to allow credit unions to 
incorporate the changes in the definition of complexity made 
under the Supplemental Rule. The change made by the 
Supplemental Rule to the definition of complex credit unions 
will exclude approximately 90 percent of credit unions from the 
risk-based capital requirement, while still covering 
approximately 76 percent of the assets held by federally 
insured credit unions.
    Since the 2015 Final Rule was approved in October 2015, the 
cumulative net worth of credit unions with more than $500 
million in assets has grown by more than 34 percent. Credit 
unions that meet the definition of complex already hold, on 
average, more than 17 percent capital, or 70 percent more than 
the 10 percent required to be well-capitalized under the risk-
based capital rule. As such, the rule will not impair the 
ability of credit unions to serve their communities.
    The NCUA is planning to propose a rule to allow complex 
credit unions to issue subordinated debt that counts as capital 
for purposes of the risk-based capital requirement. The goal is 
to finalize this authority before the January 2020 effective 
date of the risk-based capital rule.
    The NCUA Board does not anticipate any additional changes 
to the risk-based capital rule at this time. However, the Board 
will continue to periodically review all of the NCUA's 
regulations to ensure they remain up-to-date and impose the 
least possible burden to achieve the desired outcomes.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR ROUNDS FROM J. MARK 
                           McWATTERS

Q.1. In August of this year, you outlined an extensive exam 
modernization project that you indicated had the intended 
benefits of creating more efficient examinations and 
supervision, reducing regulatory burdens, and creating more 
consistent and accurate supervisory determinations.
    Can you provide an update on this project and outline how 
you expect it will lead to fewer regulatory burdens on credit 
unions?

A.1. The NCUA Board approved the following five initiatives to 
modernize the agency's exam processes:

   LThe Flexible Examination Pilot Program (FLEX);

   LOffice of National Examinations and Supervision 
        (ONES) Data Driven Supervision;

   LThe Shared NCUA-State Regulator federally Insured 
        State-Chartered Credit Union (FISCU) Program;

   LThe Enterprise Solution Modernization Program 
        (ESM); and

   LThe Virtual Examination Program

These five initiatives are interrelated and complement each 
other. As these initiatives support and build upon each other, 
they will ultimately result in a fully modernized examination 
and supervision program with various incremental improvements 
occurring along the way.
    The FLEX pilot program was developed to allow examiners to 
perform certain existing exam procedures offsite. From mid-2016 
through August 2018, 58 participants completed 87 FLEX pilot 
exams. Based on the results of the pilot, which ended in 
December 2018, the agency plans to roll out the ability for all 
examiners to perform more exam work offsite. This will reduce 
burden to credit unions and improve quality of life for 
examiners, with the added benefit of travel cost savings to the 
agency.
    The ONES Data Drive Supervision initiative began in 2018 as 
an effort to move to a continuous supervision model for the 
largest credit unions, which are supervised by the NCUA's 
Office of National Examinations and Supervision (ONES). The 
continuous supervision model will use data-driven analytics to 
monitor and identify credit union risk and support the 
transition to credit union-driven stress testing. This work may 
lead to analytical
advancements that can be adapted for use in the supervision of 
some or all other insured credit unions.
    In 2017, the NCUA created the Joint NCUA-State Supervisor 
Working Group (working group). This working group is tasked 
with collaborating to improve coordination and scheduling of 
joint exams, provide scheduling flexibility, and reduce 
redundancy where possible. The goal is to minimize the burden 
on FISCUs resulting from having a separate regulator and 
insurer. In addition, the group is tasked with evaluating the 
efficacy, appropriateness, and feasibility of adopting an 
alternating examination approach for FISCUs. The working group 
is developing a pilot program to explore and evaluate the 
effectiveness of an alternating examination program. A pilot 
will allow the NCUA, State regulators, and stakeholders to 
evaluate benefits and challenges prior to finalizing a decision 
on an alternating exam program. Such a pilot will need to run 
about 3 years in order to evaluate one full alternating exam 
cycle.
    The ESM initiative was designed to replace legacy 
applications such as the examination system (AIRES) and the 
Call Report data collection tool (CU Online). ESM will also 
introduce emerging and secure technology that supports the 
NCUA's examination, data collection, and reporting efforts. The 
result will be a flexible technology architecture that 
integrates modernized systems and tools across the agency. The 
new systems will streamline processes and procedures helping 
create a more effective, less burdensome process.
    In 2017, the NCUA Board approved the Virtual Examination 
Program and associated resources to research methods to conduct 
offsite as many aspects of examinations as possible. By 
identifying and adopting alternative techniques to remotely 
analyze much of the financial and operational condition of a 
credit union, with equivalent or improved effectiveness 
relative to current examinations, it may be possible to 
significantly reduce the frequency and scope of onsite 
examinations. Onsite examination activities could potentially 
be limited to periodic data quality and governance reviews, 
interventions for material problems, and meetings or other 
examination activities that need to be handled in person. The 
scope of the Virtual Examination Program includes research, 
planning, design, development, testing, and the transition from 
the existing examination program to the Virtual Examination 
Program. The project team is currently in the research phase of 
the project, which is expected to last 24 months.
                                ------                                


 RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM J. MARK 
                           McWATTERS

    Recently the ``Interagency Statement Clarifying the Role of 
Supervisory Guidance'' was issued. I think this directive is a 
very important step in ensuring that the regulation and 
supervision of financial institutions is conducted pursuant to 
legal standards. Each of you is the leader of an organization 
that has thousands of employees and examiners and are 
responsible for its implementation.

Q.1. How are you making sure examiners on the ground are 
following this statement?

A.1. Shortly after issuance of the Interagency Statement, the 
NCUA's leadership provided all field staff with additional 
reinforcement of the principles outlined in the Interagency 
Statement and the NCUA's long-standing position on the use of 
supervisory guidance. Additionally, the direction provided 
further explained the role agency guidance plays in the 
examination and supervision process, particularly as it relates 
to educating examiners and ensuring consistency of application. 
The agency incorporates these policies in examiner training. 
The NCUA will remain diligent in holding examination staff 
accountable for following agency policies as part of its 
quality control processes for examinations and supervision 
contacts. In addition, credit unions can take advantage of the 
NCUA's extensive informal and formal appeals options to address 
any improper use of supervisory guidance.

Q.2. Have you considered a formal rulemaking so that staff take 
this important statement seriously?

A.2. The NCUA issues various internal instructions and policy 
manuals related to conducting examinations and supervising 
credit unions, which create binding requirements for staff. 
Additionally, the NCUA provides continuous training through 
various core classes and specialized training for examiners to 
further reinforce the roles of regulation and guidance. Agency 
staff are held accountable for following internal policies, 
which include the proper use of agency guidance.

Q.3. How will you independently verify that this statement is 
followed? (audits, surveys from supervised entities, other 
independent verification)

A.3. The NCUA has an established quality control program in 
place to ensure compliance with agency policy. In fact, the 
agency is in the process of expanding its quality control 
process before examination reports are released to credit 
unions. As noted above, the agency will remain diligent in 
holding examination staff accountable if they fail to use 
guidance in accordance with policy.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM J. 
                         MARK McWATTERS

Section 104, Home Mortgage Disclosure Act (HMDA)
    I was the Attorney General of Nevada during the financial 
crisis and saw first-hand how big banks targeted vulnerable 
people and communities of color. This is exactly why it was so 
important that the CFPB required more data collection and more 
oversight over lending activities. The law signed by President 
Trump earlier this year eliminated some of the data we need to 
preserve this progress. Despite the loss of public HMDA data, 
each of your agencies still has a requirement to ensure that 
Latinos, African Americans, women and other people are not 
rejected for loans due to their gender or ethnicity.

Q.1. How many lenders supervised by your agency will not 
publicly report the additional data that was to be required 
this year? This data includes loan characteristics like credit 
score, fees, points, and interest rates.

A.1. As noted in your question, the partial exemption granted 
in Section 104 of S. 2155 does not eliminate the need for HMDA 
filing. Rather, it exempts some credit unions from reporting on 
additional data points. All HMDA filers continue to report 
major loan characteristics.
    As of June 30, 2018, there were 5,480 federally insured 
credit unions. Approximately 30 percent (1,675) of all 
federally insured credit unions file annual HMDA reports. The 
NCUA estimates that, of the 1,675 credit unions required to 
file annual HMDA reports, two-thirds (1,125) qualify for the 
partial HMDA exemptions provided in S. 2155. These 1,125 credit 
unions will still file annual HMDA reports, containing all the 
data points specifically identified in the Dodd-Frank Act and 
the original HMDA regulation.

Q.2. Would it have been easier to spot fair lending violations 
with transparent data reporting, rather than relying on your 
bank examiners to go bank by bank, loan by loan to root out 
discrimination?

A.2. HMDA data is an important supervisory tool to assist in 
identifying possible discriminatory lending patterns and 
enforcing antidiscrimination statutes. The NCUA uses HMDA data 
as a starting point to evaluate fair lending risks in our 
regulated credit unions. With HMDA data, the NCUA is able to 
determine if a particular credit union approves and prices 
their mortgage loans at rates similar to other financial 
institutions that operate in the same market, and it can 
compare data based on gender, race, and ethnicity. While HMDA 
data is a valuable risk evaluation tool, the NCUA cannot use 
HMDA data alone to prove illegal discrimination. NCUA examiners 
will continue to evaluate credit unions institution-by-
institution and loan-by-loan in order to identify illegal 
discrimination.

Q.3. Without the expanded HMDA data reporting slated to begin 
this year, what information will your agency's examiners have 
to trigger a review of potential discrimination?

A.3. The NCUA uses HMDA data, consumer complaints, compliance 
risk assessments, compliance violations, and regional 
recommendations to identify and conduct necessary fair lending 
examinations in federally insured credit unions. The 
information that the NCUA receives directly from consumers is 
critically important when evaluating credit unions for fair 
lending reviews because it describes actual interactions 
between consumers and their credit unions. The NCUA also relies 
heavily on district examiner observations when evaluating 
credit unions for fair lending oversight. District examiners 
evaluate each credit union's compliance risk based on the 
credit union's overall compliance profile. They may cite 
violations of consumer regulations, suggesting that a detailed 
fair lending review is appropriate.
Section 108: Escrow Requirements
    For generations, lenders understood that they should 
require property taxes and homeowners insurance be placed in 
escrow, so that those obligations are always paid on time. But 
in the runup to the foreclosure crisis, lenders cut comers so 
that they could misrepresent monthly payments to homeowners and 
put them into obligations they couldn't afford.

Q.4. How will your agencies monitor the implementation of the 
escrow exemption? Will your examiners monitor foreclosure 
activities resulting from unpaid property taxes and/or property 
insurance?

A.4. Section 108 of S. 2155 amended the Truth in Lending Act by 
adding new criteria for a consumer credit transaction (secured 
by a principal dwelling) to be exempt from escrow requirements. 
Essentially, the changes establish a broad exemption, with 
criteria different than the Consumer Financial Protection 
Bureau (CFPB) previously established by regulation for 
exemption from some escrow requirements. Under the new law, 
credit unions with assets of less than $10 billion that, 
together with their affiliates, originated 1,000 or fewer first 
lien mortgages during the preceding calendar year may qualify 
for the expanded exemption. At this point, the CFPB has not 
indicated when it plans to issue a proposed rule on 
implementing the new criteria for exempting escrow 
requirements.
    The NCUA, as the primary regulator of Federal credit 
unions, will monitor implementation of the escrow exemption and 
foreclosure activities through the quarterly call report 
function and the agency's risk-focused examination program. 
Examinations of these institutions routinely encompass 
assessing controls over material lending programs, including 
reviewing loan policies, underwriting, portfolio management 
procedures, governance, and tools/models used to evaluate and 
report credit risk. Loan data queries are typically performed 
to identify anomalies or unusual trends in consumer accounts. 
At Federal credit unions with total assets of $10 billion or 
less,\1\ baseline reviews include, but are not limited to: 
loans granted during the prior 6 months, including a sample 
from identified loan concentrations; riskier loan types, such 
as residential real estate; insider loans; extensions; loan 
modification programs; delinquency and collection procedures, 
including analysis of foreclosure activities; and management's 
due diligence over third-party service providers.
---------------------------------------------------------------------------
    \1\ The CFPB has supervision and enforcement responsibility for 
financial institutions, including credit unions, with total assets of 
more than $10 billion.

Q.5. How will you communicate any findings or concerns from the 
---------------------------------------------------------------------------
elimination of the escrow requirement to us in Congress?

A.5. The NCUA issues examination reports to credit union 
officials. These reports provide the financial data and 
narrative information necessary to concisely communicate the 
NCUA's analysis, conclusions, and recommendations. Any findings 
or concerns related to the escrow requirements would be 
documented in these reports. Examination reports are exempt 
from public disclosure, but the agency's findings or concerns 
related to escrow requirements could be communicated to Members 
of Congress if requested.
Section 103. Rural Appraisal Exemption (exemptions less than $400,000)
    Recently, the NCUA announced appraisal exemptions for some 
loans of up to a million dollars in rural areas. I met recently 
with half a dozen credit union leaders from Nevada and they 
were not likely to make such a large loan without an appraisal.

Q.6.a. Why is NCUA considering allowing loans up to $1 million 
for some loans without appraisals?

A.6.a. At its September 2018 meeting, the NCUA Board approved a 
notice of proposed rulemaking to amend the agency's real estate 
appraisal requirements for certain transactions.\2\ The 
proposed rule would provide a measure of regulatory relief and 
increased clarity by:
---------------------------------------------------------------------------
    \2\ 83 FR 49857 (Oct. 3, 2018).

   LIncreasing the threshold for required appraisals in 
        nonresidential real estate transactions from the 
---------------------------------------------------------------------------
        current $250,000 to $1 million;

   LReorganizing the appraisal regulation to make it 
        easier to determine when a written estimate or an 
        appraisal is required; and

   LIncorporating the rural exemption contained in S. 
        2155.

The proposal did not include a change to the residential real 
estate appraisal threshold, which is set at $250,000. 
Additionally, it is worth noting that the appraisal rules 
adopted by the other Federal banking agencies do not require an 
appraisal for qualifying business loans under $1 million.
    In proposing the single, $1 million threshold for 
commercial real estate transactions that provides more 
flexibility for credit unions to use their judgment about when 
to obtain an appraisal for commercial real estate-related 
transactions, the NCUA considered the following factors:

   LFor commercial lending, cash-flow and the 
        resiliency of the business are the primary underwriting 
        factors, not the real estate collateral. The cash-flow 
        of the business ultimately depends on the success of 
        its business model. Thus, the precision that goes into 
        the estimate of the collateral value is not as 
        important as the rigor that goes into the analysis of 
        the cash-flows and resiliency of the business. It is 
        also important to remember that an appraisal is only a 
        point-in-time estimate of value, and the collateral 
        value is subject to future changes in market 
        conditions. Advancements in the availability of data 
        and analytical techniques make it possible to produce 
        more reliable estimates of market value without 
        obtaining an appraisal.

   LCommercial real estate lending relative to net 
        worth is relatively low for credit unions. Commercial 
        real estate lending comprises 46 percent of net worth 
        in credit unions offering commercial real estate loans. 
        In comparison, commercial real estate lending 
        represents 138 percent of tier 1 capital in the banking 
        industry. Commercial real estate loans represent 5 
        percent of total assets in credit unions compared to 13 
        percent in banks. In addition, under the Federal Credit 
        Union Act, most credit unions are restricted to holding 
        no more than 1.75 times the credit union's total net 
        worth for member business loans.\3\ The statutory 
        ceiling of 1.75 times net worth limits risk for credit 
        unions granting all forms of commercial loans, of which 
        nonresidential real estate transactions are a subset. 
        Therefore, increasing the threshold to $1 million would 
        not pose the same safety and soundness risk to credit 
        unions as it would to similarly situated banking 
        organizations, which do not have the same commercial 
        lending restrictions.
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    \3\12 U.S.C.  1757a.

   LThe analysis of supervisory information concerning 
        losses on commercial real estate transactions suggests 
        that faulty valuations of the underlying real estate 
        collateral have not been a material cause of losses. In 
        the last three decades, the banking industry suffered 
        two crises in which poorly underwritten and 
        administered commercial real estate loans were a key 
        feature in elevated levels of loan losses, and bank and 
        credit union failures. Supervisory experience and an 
        examination of material loss reviews covering those 
        decades suggest that factors other than faulty 
        appraisals were the cause(s) for an institution's loss 
        experience. For example, larger acquisition, 
        construction, and development transactions were more 
        likely to be troublesome. This is due to the lack of 
        appropriate underwriting and administration of issues 
        unique to larger
        properties, such as longer construction periods, 
        extended ``lease up'' periods (the time required to 
        lease a building after construction), and the more 
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        complex nature of the construction of such properties.

   LThe agency's analysis suggests that increasing the 
        threshold to $1 million would significantly increase 
        the number of commercial real estate transactions 
        exempted from appraisal requirements. However, the 
        total dollar amount of commercial real estate 
        transactions that the proposal would exempt is 
        relatively small and would not expose credit unions to 
        undue risk. The total dollar volume of exempted 
        commercial real estate transactions would only increase 
        from 1.8 percent to 13 percent. The estimated 
        percentage of the number of commercial transactions 
        that would be exempted from the appraisal requirement 
        would increase from 27 percent to 66 percent. Exempting 
        an additional 39 percent of commercial real estate 
        transactions would provide significant burden relief to 
        credit unions, but would still cover almost 90 percent 
        of the total dollar volume of such transactions. This 
        incremental risk can be addressed through sound risk 
        management practices.

   LUnder the proposal, even though an appraisal may 
        not be required, credit unions would be required to 
        obtain a written estimate of market value performed by 
        a qualified and experienced individual that possesses 
        the necessary degree of independence.

At the present time, the agency believes statutory limits, 
combined with appropriate prudential and supervisory oversight, 
sufficiently mitigate the incremental risk of raising the 
appraisal threshold for commercial real estate-related 
transactions. The NCUA Board will thoughtfully consider 
stakeholder comments on the proposed rule and carefully 
evaluate the benefits and risks before finalizing the rule.

Q.6.b. What risks would credit unions take on if they began 
doing most of their lending in rural areas without appraisals?

A.6.b. If credit unions in rural areas comply with the 
independence, qualification, and experience requirements for 
individuals performing written evaluations for commercial real 
estate-related transactions, and follow the 2010 Interagency 
Appraisal and Evaluation Guidelines, the incremental risk 
exposure in these credit unions should be minimal.

Q.7. What feedback mechanism does NCUA have in place if more 
foreclosures occur due to inflated appraisals that lead to 
underwater borrowers? How will NCUA let us know if you see such 
a problem?

A.7. Title XI of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989 (FIRREA) directs each Federal 
financial institutions regulatory agency to publish appraisal 
regulations for federally related transactions.\4\ To guard 
against inflated appraisals,  722.4 of the NCUA's regulations 
outlines minimum appraisal standards, including the 
requirements that appraisals conform to generally accepted 
appraisal standards as evidenced by the
Uniform Standards of Professional Appraisal Practice, and be 
performed by State-licensed or State-certified appraisers.\5\
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    \4\ 12 U.S.C.  3331 et seq.
    \5\ 12 CFR 722.4.

    Additionally, the NCUA monitors individual credit unions' 
performance through quarterly Call Reports and examination and 
supervision contacts. If real estate loan delinquencies and 
loan losses rise to a level of concern, the NCUA can take steps 
to address this and report it to Congress.
                                ------                                


  RESPONSES TO WRITTEN QUESTIONS OF SENATORS WARNER, COTTON, 
            TILLIS, AND JONES FROM J. MARK McWATTERS

    Comptroller Otting has testified before that ``the process 
for complying with current BSA/AML laws and regulations has 
become inefficient and costly.'' In talking with banks/credit 
unions it is clear that they do not object to the principle of 
complying with AML regulations, it is that they feel that much 
of the time, effort, and money spent on compliance is 
ineffective, and therefore, a waste of time. Banks/credit 
unions fill out forms invented in the 1970s and have little 
insight into whether it is doing any good. And we've heard from 
banks/credit unions that they believe AML examinations are done 
without respect to the riskiness of the institution or its 
activities.

Q.1. What improvements can be made so we have a cheaper and 
faster system that is better at catching criminals?

A.1. An interagency working group led by the U.S. Department of 
Treasury's Financial Crimes Enforcement Network (FinCEN) has 
begun to identify ways to reduce regulatory burden and improve 
the effectiveness of BSA/AML requirements and compliance 
reviews. This review process includes considering the impact 
innovation and technology have on financial institutions' BSA/
AML compliance efforts and the role they could play in 
regulatory reviews of this area during examinations.
    On October 3, 2018, the NCUA, FinCEN and the Federal 
banking agencies issued joint guidance on the appropriate use 
of shared BSA resources to enhance the effectiveness of BSA/AML 
programs while limiting or reducing costs associated with 
meeting BSA/AML compliance obligations.\1\
---------------------------------------------------------------------------
    \1\ NCUA et. al., Interagency Statement on Sharing Bank Secrecy Act 
Resources (2018), available at https://www.ncua.gov/files/press-
releases-news/interagency-statement-sharing-bsa-resources.pdf.
---------------------------------------------------------------------------
    Subsequently, on December 3, 2018, the NCUA, FinCEN, and 
the Federal banking agencies issued a joint statement 
encouraging financial institutions to ``consider, evaluate, and 
where appropriate, responsibly implement innovative approaches 
to meet their [BSA/ AML] compliance obligations, in order to 
further strength the financial system against illicit financial 
activity.''\2\ In the joint statement, the agencies noted their 
commitment to continued engagement with the private sector and 
other interested parties to help financial institutions in 
their innovation efforts. The agencies also provided a separate 
electronic means for the financial services industry to provide 
feedback on how the regulators can best support innovative 
efforts.
---------------------------------------------------------------------------
    \2\ NCUA et. al., Joint Statement on Innovative Efforts to Combat 
Money Laundering and Terrorist Financing (2018), available at https://
www.ncua.gov/newsroom/Documents/joint-statement-bsa-innovation.pdf.

Q.2. Is there a place in a new AML regime for new technology, 
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like artificial intelligence or machine learning?

A.2. New technology likely will have a place in a new AML 
regime and will have the power to transform the way we conduct 
business. Technology firms are exploring how new technology, 
such as artificial intelligence and machine learning, as well 
as identity management, could be used to enhance BSA/AML 
compliance efforts. These and other technological developments 
may help credit unions more efficiently monitor transactions 
and accounts for suspicious activity as the technologies become 
more mainstream and cost effective.

Q.3. What do you, as a regulator, think that it means to have a 
risk-based AML program?

A.3. A credit union's BSA/AML program should appropriately 
scale to address the specific risks involved in the 
institution's business model and practices. BSA/AML compliance 
programs are not ``one-size-fits-all'' and should be customized 
to the risks presented by the products and services offered, 
the geographic area in which the credit union is located and 
conducts business, the field of membership served, the types of 
members (business entities or individuals), and the volume of 
activity running through the credit union.

Q.4. How do you implement the risk-based AML program 
requirement through examinations?

A.4. Examiners are trained to start with core statutory BSA/AML 
requirements and then amend the scope of examinations based on 
the unique characteristics of each credit union, using 
historical information, ongoing risk analysis, and other risk 
indicators such as products, services, customer base and 
geographic region in which the credit union does business. 
During each examination, an examiner will review a credit 
union's risk assessments and testing of its overall BSA/AML 
risk and risks of specific products, services, operations and 
customer types, such as money services businesses (MSBs), for 
adequacy and appropriateness.
    Risk assessments determined to be inadequate or 
inappropriate require more in-depth assessment of risk and 
potentially expanded reviews of BSA policies, processes, and 
procedures, as well as additional transaction testing. An 
examiner will address incomplete risk assessments, or risk 
assessments that are not commensurate with the credit union's 
complexity and operations, in the appropriate section of the 
examination report provided to officials. Prior to issuing the 
report, an examiner will communicate with credit union 
management to ensure they fully understand the concern and 
agree to take appropriate action to resolve it.

Q.5. One common criticism of the current AML regime is the lack 
of feedback given to banks/credit unions after they file their 
SARs. The current system is extremely segmented, and as a 
consequence, it is not the ``fault'' of any one entity that 
there is little feedback given. But without a system to provide 
feedback, the quality of SARs suffer. A system that doesn't 
focus on thequality of reports being filed is one that is not 
optimized to catch criminals. Many banks/credit unions wish 
that they had an idea of what FinCEN is really trying to find, 
because then their cooperation and input might be more helpful 
and effective.
    How often does your agency meet with FinCEN and with the 
DOJ/FBI to discuss the usefulness of suspicious activity 
reports that are being filed?

A.5. The new interagency working group, which meets monthly, is 
exploring how to improve the usefulness of SARs and better 
convey to financial institutions the important role SARs play 
in law enforcement activities. Further, the FBI or DOJ may 
reach out to the NCUA if they have questions or need more 
information about a specific credit union.

Q.6. When a bank/credit union files a SAR, or a regulator is 
examining a financial institution, how much feedback is there 
across the system about whether or not the SARs they filed were 
found to be useful, informative, or effective?

A.6. During an examination an examiner may review a sample of 
the SARs filed by a credit union. As part of this review, the 
examiner may provide recommendations as to what information 
should be included in future SARs to maximize their utility to 
law enforcement. Law enforcement does not generally provide 
feedback or contact a financial institution unless more 
information is needed.

Q.7. What are the legal hurdles that prevent more effective and 
more regular feedback within the Federal Government and between 
the Federal Government and financial institutions?

A.7. The NCUA is not aware of specific legal barriers, other 
than those intentionally designed to preserve the 
confidentiality of SARs and not jeopardize the activities of 
law enforcement. That said, there has been a greater emphasis 
in recent years on privacy generally, and avoiding sharing 
personal information unless necessary. There is also the need 
to keep investigations confidential. The need for confidential 
investigations coupled with the greater privacy emphasis 
certainly discourage feedback, especially as it relates to a 
particular SAR. Additionally, while not a ``legal'' hurdle, 
finite law enforcement resources may limit the time dedicated 
to providing SARs feedback as that time is devoted to 
investigating useful leads.

Q.8. Will you pledge to institutionalize feedback mechanisms 
wherein banks/credit unions both get and can give feedback on 
how to constantly improve the process?

A.8. The NCUA will work with FinCEN and law enforcement 
agencies to identify feasible methods for credit unions to 
receive and provide feedback on BSA filings in order to improve 
the information contained therein. Information sharing between 
institutions and between regulators may also provide 
opportunities to identify efficiencies that can be incorporated 
into the BSA reporting process. Additionally, as part of the 
joint Interagency Statement on
innovative efforts to combat money laundering and terrorist 
financing, issued on December 3, 2018, the issuing agencies 
encouraged industry feedback on how the agencies can support 
innovative BSA/AML efforts and provided a means for submission 
of electronic feedback.\3\
---------------------------------------------------------------------------
    \3\ NCUA et. al., Joint Statement on Innovative Efforts to Combat 
Money Laundering and Terrorist Financing (2018), available at https://
www.ncua.gov/newsroom/Documents/joint-statement-bsa-innovation.pdf.

Q.9. We hear from banks that they feel pressured to file SARs 
even when they believe the underlying transaction or activity 
does not rise to a level of suspiciousness that merits a 
filing. They say they do this because they are afraid of being 
second-guessed by examiners after the fact, and because there 
is no Government penalty for over-filing SARs--only a penalty 
for not filing a SAR. But banks bear the significant cost of 
filing unnecessary SARs.
    What can be done to realign incentives so that banks/credit 
unions don't feel pressured to file SARs that they don't feel 
reflects activity warranting a filing?

A.9. Credit unions are encouraged to document their rationale 
for not filing a SAR after reviewing the facts of what, on its 
face, may appear to be suspicious activity. While a SAR filing 
is required in certain circumstances, many other situations 
call for credit union management's judgment regarding whether 
to file. In addition to financial institutions bearing the cost 
of filing unnecessary SARs, these unnecessary filings also 
create a burden for law enforcement, which may take valuable 
resources away from reviewing and investigating SARs more 
likely to involve criminal activity. Historically, 
comparatively few credit unions have been penalized for 
insufficient SAR filing. We believe that the NCUA has 
implemented an effective and balanced risk-based approach to 
our supervisory processes. NCUA staff will generally rely on 
the procedures, controls, risk assessments, and testing of the 
credit union provided they are appropriately aligned with the 
risk posed by the credit union's unique characteristics. 
Testing performed by examiners are limited samples to validate 
the integrity of a credit union's controls. The issue of 
insufficient SAR filing would typically only arise if there is 
a clear red flag, such as ineffective or insufficient resources 
or controls for the given level of risk.

Q.10. Banks/credit unions commonly use ``rules-based'' software 
to screen transactions and alert AML compliance teams to 
suspicious activities. While these rules-based systems can be 
effective, we have concerns that they might not be the most 
effective tool available to us given advances in data science 
and machine learning, and further, that there may be 
opportunities for criminals to manipulate these rules-based 
systems.
    We have heard concerns that many criminals have access to 
the exact same products that are used by financial 
institutions--is this true?

A.10. The NCUA does not maintain the requisite expertise to 
opine on these sorts of criminal activities and largely relies 
on information shared by those charged with investigating and 
prosecuting these criminal activities.

Q.11. If criminals have access to similar products, or can 
easily come to understand the rules-based system, how easy is 
it to manipulate these detection systems?

A.11. The NCUA does not maintain the requisite expertise to 
opine on these sorts of criminal activities and largely relies 
on information shared by those charged with investigating and 
prosecuting these criminal activities.

Q.12. If there was a proven model of using a ``learning,'' 
algorithmic system to flag potentially suspicious transactions, 
would this be an improvement on the current system? What are 
the hurdles to financial institutions adopting such systems?

A.12. The NCUA, FinCEN and the banking agencies recently issued 
guidance on the adoption of innovation and innovative 
technologies to enhance and improve AML programs. We encourage 
institutions to embrace technology and innovation in their 
approach toward BSA. Such systems may be useful in suspicious 
activity and transaction monitoring, permitting human BSA 
compliance resources to review more complex and higher-risk 
activities as well as those transactions and activities that 
are close/judgment calls. The NCUA does not endorse any 
particular systems, products, or models. Credit unions use 
different methods to monitor suspicious activity.
    In terms of barriers to adoption, approximately three-
fourths of all federally insured credit unions are ``small,'' 
defined as under $100 million in assets and generally represent 
a low risk of illicit finance. Many of these credit unions 
simply lack the resources and/or the need to acquire such high-
tech monitoring systems.

Q.13. In what ways is a bank's/credit union's ``safety and 
soundness'' implicated by its AML system?

A.13. AML systems can impact a credit union's safety and 
soundness in a number of ways. Publicized BSA violations may 
negatively affect how a credit union's members view the 
institution. Negative publicity can cause members and potential 
members to lose confidence in credit union management and the 
safety of their deposits and data. Additionally, with the size 
and velocity of transactions, a significant violation can 
result in monetary penalties significant enough to threaten the 
ongoing viability of small- and medium-sized credit unions. The 
risk of insolvency because of large penalties or the seizure of 
illicit funds is higher in some small credit unions.
    Many credit unions are very small and represent a very low 
risk of monetary system compromise through undetected money 
laundering activities. An overly burdensome set of statutory 
requirements can contribute to significant regulatory burden in 
the design and implementation of a credit union's AML systems. 
These costs can impact profitability in credit unions already 
operating on very narrow margins.
    Further, if criminals are able to launder money 
successfully through a credit union, there is a chance they may 
be exploiting the credit union in other ways--or will before 
they move on to the next institution. In other words, 
inadequate controls may result in insufficient risk assessment 
and monitoring for BSA/AML compliance, as well as poor 
monitoring of financial transactions and accounting records in 
general.

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