[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
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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.
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\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).
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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.
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\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.
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\12\ Joint Release, OCC NR 2018-97, Agencies Issue Statement
Reaffirming the Role of Supervisory Guidance.
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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\
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\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\
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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\
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\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.
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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.
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\1\ https://www.reuters.com/article/us-wells-fargo-insurance-
exclusive/exclusive-us-regulators-reject-wells-fargos-plan-to-repay-
customers-sources-idUSKCN1LR2LG.
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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.
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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\
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\1\ https://www.bloomberg.com/news/articles/2018-09-27/wall-street-
s-riskiest-loans-flash-dangers-as-watchdogs-muzzled?srnd=premium.
\2\ Id.
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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.
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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\
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\1\ https://www.politico.com/story/2018/09/26/wall-street-too-big-
to-fail-podcast-842587.
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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\
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\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.
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------
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.
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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.
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\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.
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\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?
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\1\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20180706a1.pdf.
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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\
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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\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
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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.
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\3\ https://www.fdicgov/news/news/press/2018/pr18091a.pdf.
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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
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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.
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\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.
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\1\ 83 FR 55467 (Nov. 6, 2018).
\2\ 80 FR 66626 (Oct. 29, 2015).
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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\
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\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\
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\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.
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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\
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\7\ See 12 U.S.C. 1790d.
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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.
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\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.
---------------------------------------------------------------------------
\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
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
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\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.
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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.
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\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\
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\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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