[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF PRUDENTIAL REGULATORS:
ENSURING THE SAFETY, SOUNDNESS,
DIVERSITY, AND ACCOUNTABILITY
OF DEPOSITORY INSTITUTIONS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 4, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-70
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
42-630 PDF WASHINGTON : 2020
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
December 4, 2019............................................. 1
Appendix:
December 4, 2019............................................. 65
WITNESSES
Wednesday, December 4, 2019
Hood, Hon. Rodney E., Chairman, National Credit Union
Administration (NCUA).......................................... 5
McWilliams, Hon Jelena, Chairwoman, Federal Deposit Insurance
Corporation (FDIC)............................................. 6
Quarles, Hon. Randal K., Vice Chairman of Supervision, Board of
Governors of the Federal Reserve System (Fed).................. 8
APPENDIX
Prepared statements:
Hood, Hon. Rodney E.......................................... 66
McWilliams, Hon Jelena....................................... 89
Quarles, Hon. Randal K....................................... 113
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 121
McAdams, Hon. Ben:
Written statement of the National Association of Industrial
Bankers.................................................... 125
Hood, Hon. Rodney E.:
Written responses to questions for the record submitted by
Chairwoman Waters.......................................... 127
Written responses to questions for the record submitted by
Representative Ocasio-Cortez............................... 136
McWilliams, Hon Jelena:
Written responses to questions for the record submitted by
Chairwoman Waters.......................................... 143
Written responses to questions for the record submitted by
Representative McAdams..................................... 183
Written responses to questions for the record submitted by
Representative Ocasio-Cortez............................... 184
Written responses to questions for the record submitted by
Representative Hill........................................ 188
Written responses to questions for the record submitted by
Representative Gonzalez.................................... 190
Written responses to questions for the record submitted by
Representative Riggleman................................... 194
Quarles, Hon. Randal K.:
Written responses to questions for the record submitted by
Chairwoman Waters.......................................... 196
Written responses to questions for the record submitted by
Representative Barr........................................ 211
Written responses to questions for the record submitted by
Representative Beatty...................................... 213
Written responses to questions for the record submitted by
Representative Budd........................................ 214
Written responses to questions for the record submitted by
Representative Foster...................................... 215
Written responses to questions for the record submitted by
Representative Gonzalez.................................... 218
Written responses to questions for the record submitted by
Representative Luetkemeyer................................. 222
Written responses to questions for the record submitted by
Representative McAdams..................................... 223
Written responses to questions for the record submitted by
Representative Riggleman................................... 225
Written responses to questions for the record submitted by
Representative Steil....................................... 227
Written responses to questions for the record submitted by
Representative Timmons..................................... 228
Written responses to questions for the record submitted by
Representative Wagner...................................... 230
OVERSIGHT OF PRUDENTIAL
REGULATORS: ENSURING THE
SAFETY, SOUNDNESS, DIVERSITY,
AND ACCOUNTABILITY OF
DEPOSITORY INSTITUTIONS
----------
Wednesday, December 4, 2019
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2141, Rayburn Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Clay, Scott, Green, Cleaver, Perlmutter, Himes, Foster,
Beatty, Heck, Vargas, Gottheimer, Gonzalez of Texas, Lawson,
Tlaib, Porter, Axne, Casten, Pressley, McAdams, Ocasio-Cortez,
Wexton, Adams, Garcia of Illinois, Phillips; McHenry, Wagner,
Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Barr, Tipton,
Williams, Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson,
Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
Gooden, Riggleman, and Timmons.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
Today's hearing is entitled, ``Oversight of Prudential
Regulators: Ensuring the Safety, Soundness, Diversity, and
Accountability of Depository Institutions.'' I want to inform
all concerned that this hearing will end either at 1:30 p.m.,
or at the first series of votes on the House Floor.
I now recognize myself for 4 minutes to give an opening
statement.
Today, we are here to conduct oversight of the regulators
at the Federal Deposit Insurance Corporation (FDIC), the
Federal Reserve (Fed), and the National Credit Union
Association (NCUA), as well as to receive written testimony
from the Office of the Comptroller of the Currency (OCC). So, I
would like to welcome back Chair McWilliams, Vice Chairman
Quarles, and Chairman Hood.
I am very concerned that our banking regulators are
following the dangerous deregulatory blueprint that the Trump
Administration laid out in a series of Treasury reports, and
checking off deregulatory items one by one. For example, they
have moved to weaken capital stress testing and other
requirements for the largest financial institutions; taken
action to weaken the Volcker Rule, which prevents banks from
gambling with taxpayer dollars; and proposed weakening the swap
margin rule, which would threaten our economic stability for a
$40 billion giveaway to Wall Street megabanks. In rolling back
important reforms put in place in the Dodd-Frank Wall Street
Reform and Consumer Protection Act to protect consumers,
investors, and the economy, regulators are opening the door to
the bad practices that contributed to the devastating financial
crisis of 2008.
I am also very concerned that regulators are making a
brazen attempt to weaken the implementation of the Community
Reinvestment Act (CRA) under the guise of modernization. CRA is
an important law that was passed in 1977 to prevent redlining
and to ensure that banks are meeting the credit needs of the
communities where they are chartered. While the implementation
of the law needs updates to reflect the modern banking
landscape, those changes should make the law more effective,
not less. Ninety-eight percent of banks already receive a
passing grade on their CRA exam, which shows that the law needs
more teeth to get positive results for underserved communities.
In the wake of the regulators' approval of the SunTrust-
BB&T merger, which creates the 6th largest bank in the nation,
I would like to make it clear that this committee will continue
to closely scrutinize large bank merger proposals. Regulators
have a responsibility to ensure that bank mergers serve the
public interest and do not create megabanks that threaten our
economy and financial system. And it is not acceptable for bank
mergers with implications for communities across the country to
receive a cursory review or a rubber stamp from bank
regulators.
This committee has been very focused on diversity and
inclusion in the financial services sector, including through
the committee's historic new Subcommittee on Diversity and
Inclusion. Earlier this year, I, together with Congresswoman
Beatty, who Chairs the Subcommittee on Diversity and Inclusion,
wrote to the megabanks and requested their diversity and
inclusion data and policies. The information we received
reinforces what we already know, that these banks badly need to
improve their diversity and inclusion.
For example, less than 1 percent of megabank spending is
devoted to diverse asset managers and suppliers. Since each of
the agencies represented by our witnesses today has a dedicated
Office of Minority and Women Inclusion (OMWI), I expect to hear
today about their diversity and inclusion efforts. I look
forward to discussing these matters with our witnesses.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. McHenry. Thank you, Madam Chairwoman, for holding this
hearing today. It is a very important and necessary hearing.
It's good for our members to get this interaction with the
regulators, and I appreciate all of them being here. And so, I
want to thank Chairs Hood and McWilliams and Vice Chair Quarles
for appearing before the committee today.
And I want to thank each of you for taking the time not
just to testify, but for prioritizing the common-sense reforms
that are necessitated by the bipartisan law that we commonly
refer to as S.2155. The last time you testified before the
committee in May, we called on you to take swift action on
implementing this bill, and you have largely answered the call.
Clarifying the Volcker Rule, and tailoring requirements for
foreign banks, are just a few examples of regulatory
rightsizing that you have implemented to ensure that our
economy, small businesses, and consumers remain vibrant and
strong. However, there is more work to be done. There is
certainly more work to be done. And what we would like to see
from you is for the pace to go up and continue to go up so that
we are staying ahead of market conditions and economic
conditions. We need to make sure that the tools are there to
help serve consumers and communities.
I also want to take this opportunity to raise a number of
concerns that I continue to have. I am concerned with the trend
in the Federal Reserve's open market operations and the
wholesale funding markets. I appreciate Chairman Powell's
prompt response to my recent questions about the Federal
Reserve's repo market operations, and I understand there may be
further interventions necessary at the end of the year. The
Fed's intervention in the repo market raises the important
question of how regulatory changes to our financial system are
impacting its structure and function and impacting monetary
policy.
I think it is very important for the Federal Reserve to
have its independent monetary policy standards. I also think it
is very important for the global economy, the American economy,
and American consumers. But it is necessary for Congress to
have oversight of those regulatory changes. And in this
circumstance, if bad regulation is driving monetary policy, I
think that raises greater concerns about financial stability in
the market, and also economic growth. So in addition, the
combined impact of proposed capital requirements, including
Basel III revisions, and the stress capital buffer could have a
significant impact on required capital if not thoughtfully
implemented. This may further exacerbate the underlying issues
that we are seeing. So, it is important to consider the system
of capital requirements as a whole to ensure regulations are
appropriately calibrated to allow institutions to continue to
support economic growth.
In addition, in May, I voiced my concerns with the
transition from the London Interbank Offered Rate (LIBOR) to
the Secured Overnight Financing Rate (SOFR). Six months later,
I am still concerned that consumers will be impacted by this
transition. The repo market intervention is just one example of
why that is of concern and should be of concern to average,
everyday investors. As you know, LIBOR is the underlying bank
reference rate for approximately $200 trillion in financial
contracts worldwide and is to be phased out as a bank reference
rate by 2021, and replaced with SOFR. Given the volatility in
the repo markets, I am concerned about the consequences that
that volatility will have on mortgages, auto loans, business
loans, and other consumer loans as a new reference rate if that
is driving overnight financing. Transferring LIBOR-based legacy
contracts to SOFR will also require financial institutions to
renegotiate with consumers, customers, and expose banks to
litigation risk.
I hear clearly the tap, tap, tap of the gavel, and with
that, I will reserve the rest of my comments for my questions.
But thank you for being here, and I appreciate your attendance.
Chairwoman Waters. I now recognize the gentleman from New
York, Mr. Meeks, who is also the Chair of our Subcommittee on
Consumer Protection and Financial Institutions, for 1 minute.
Mr. Meeks. Thank you, Chairwoman Waters. I am glad we have
three of the prudential regulators before us today, but I am
very disappointed that Mr. Otting, the Comptroller of the
Currency, did not make himself available to testify today. One
of the issues I have spent the most time on this year,
including chairing subcommittee hearings, sending letters, and
leading a tour of my district in Queens this past summer, is
the modernization of the Community Reinvestment Act. It appears
that the Office of the Comptroller of the Currency (OCC) has
abandoned the joint agency process and will plow forward with
its approach to CRA modernization with a simple metric to
evaluate bank lending to formerly-redlined communities. This
approach is likely to decouple the link between CRA and the
very communities it was created to service, and discriminate
against whom it was meant to bring redress.
I look forward to engaging with the witnesses here today on
this and other issues, particularly dealing with non-bank
lenders, small-dollar loans, and broker deposits, and I look
forward to engaging with the witnesses shortly. I yield back
the balance of my time.
Chairwoman Waters. Thank you. I now recognize the
subcommittee's ranking member, Mr. Luetkemeyer from Missouri,
for 1 minute.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. I would also
like to thank the panel for testifying today. I look forward to
discussing multiple issues with you regarding our financial
system.
I would like to begin by reiterating my concern over the
Financial Accounting Standards Board's (FASB's) Current
Expected Credit Losses (CECL) accounting standard. Time and
time again in hearings before this committee, it has been
stated that CECL will have a detrimental effect on small
financial institutions and, specifically, low- to moderate-
income and minority consumers. Despite the numerous
testimonies, hearings, statements, and letters highlighting
these issues, this committee has remained silent. Not one
hearing examining CECL, and no congressional oversight on any
accounting standard that will prevent Americans from achieving
the American Dream of homeownership.
While I will discuss issues with the panel besides CECL, I
am hopeful that some of our witnesses who will be charged with
enforcing the standard will outline how they plan to protect
consumers in the absence of committee action. With that, I
yield back the balance of my time.
Chairwoman Waters. Thank you. I want to welcome today's
distinguished panel: the Honorable Rodney Hood, Chairman of the
National Credit Union Administration; the Honorable Jelena
McWilliams, Chair of the Federal Deposit Insurance Corporation;
and the Honorable Randal Quarles, Vice Chairman of Supervision
for the Board of Governors of the Federal Reserve System. I
note that the Comptroller of the Currency, Joseph M. Otting,
was invited to testify at today's hearing, but was unable to
appear. I intend to have him appear as soon as possible before
this committee, and he may be a single panel, but it is
important, Mr. Meeks, that we hear from him. I understand he
has submitted some written testimony, but that does not really
substitute for his appearance here today.
Each of you will have 5 minutes to summarize your
testimony. And without objection, all of your written
statements will be made a part of the record.
When you have 1 minute remaining, the yellow light will
appear. At that time, I would ask you to wrap up your testimony
so we can be respectful of both the witnesses' and the
committee members' time.
Chairman Hood, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE RODNEY E. HOOD, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION (NCUA)
Mr. Hood. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, good morning. As the 11th Chairman of
the National Credit Union Administration Board, I am honored to
testify before you this morning. In my brief opening statement,
I will be discussing 3 topics: first and foremost, the state of
America's credit union system; second, NCUA's efforts to foster
diversity and inclusion; and third, cybersecurity.
First and foremost, I'd like to note that strong growth
trends in federally-insured credit unions are continuing in
2019. Roughly 119 members are a part of the credit union
system. That represents roughly one-third of the American
public. Credit union assets through the third quarter are
approximately $1.54 trillion. Credit unions also have a really
strong net worth at the moment, an 11.39 percent aggregate net
worth, well above the 7 percent statutory requirement. The
National Credit Union Insurance Share Fund also remains well-
funded at $16.7 billion, and it should be noted that that is a
sizable increase from where it was at approximately at $10
billion, 10 years ago. Year-to-date operating results evidence
that the credit union system is solid and healthy.
I'd now like to focus my attention on discussing NCUA's
efforts to foster diversity and inclusion. I firmly believe
that financial inclusion is the civil rights issue of our time.
However, inclusion means not only broader access to financial
services, but also employment and business opportunities. NCUA
takes its responsibility seriously in implementing Dodd-Frank
Section 342. When I travel around the country, I mention the
importance of filling out the diversity survey. I also work
with the head of our Office of Minority and Women Inclusion
(OMWI), Monica Davy, to ensure that we are reaching out to
diverse minority businesses.
To that end, I'm pleased to report that NCUA supplier
diversity spend is 44.5 percent, to date. In addition, NCUA
just hosted its first-ever Diversity, Equity and Inclusion
(DEI) Summit. This summit took place just a few weeks ago, and
it really demonstrated the importance of diversity and
inclusion being more than a check-the-box exercise. Rather, our
diversity, Equity and Inclusion Summit demonstrated that this
should be viewed as a business and strategic imperative if
credit unions are going to respond nimbly to shifting demands
and demographics and to respond to today's dynamic marketplace.
Given the well-attended DEI event, I'm intending now to host
the DEI summit across the United States, so we're going to make
this a yearly event. And I, to the degree possible, would like
to invite you all on the House Financial Services Committee to
join us when we host these summits in your areas.
Minority depository institutions (MDIs) are the lifeline in
providing affordable financial services in communities of
color. NCUA provides capacity-building activities to help these
institutions reach and serve their mission. Capacity-building
activities at NCUA include ongoing education, technical
assistance, and our newly-launched mentoring program. I will in
turn be hosting an MDI summit in early 2020 so that these
institutions can continue to get the necessary support they
need to bring affordable financial services to communities of
color.
I'm very pleased to report that the NCUA board is also
supporting diversity and inclusion. We just recently, as a
board, developed a short-term ODAR product to provide
opportunities for people needing emergency loans. We're calling
it the PALs II Program, and it is a responsible alternative
loan product for people so that they will no longer need to go
to pernicious payday lenders to get their needs met. We also,
as an NCUA board, have approved the Second Chance Initiative.
The Second Chance Initiative works with individuals who have
had nonviolent criminal offenses in the past, and who have paid
their debt to society, so now these individuals can work with
federally-insured credit unions so they can have greater
opportunities for career success, and also have opportunities
for upward mobility and access to shared prosperity.
The third area I'd like to talk about is cybersecurity.
Cybersecurity is a high priority for me as chairman. Cyber
attacks are acute, and we are making sure that we leverage our
resources to provide credit unions with the support they need
to combat these challenges.
In closing, I would like to go back to my statement again
of financial inclusion being the civil rights issue of our
time. Ladies and gentlemen of the committee, I would like to
work in partnership with the House Financial Services Committee
to look for legislative solutions to help credit unions adopt
underserved areas. Thank you.
[The prepared statement of Chairman Hood can be found on
page 66 of the appendix.]
Chairwoman Waters. Chair McWilliams, you are now recognized
for 5 minutes to present your oral testimony.
STATEMENT OF THE HONORABLE JELENA MCWILLIAMS, CHAIRWOMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION
Ms. McWilliams. Thank you. Chairwoman Waters, Ranking
Member McHenry, and members of the committee and staff, thank
you for the opportunity to testify today. Exactly 18 months
ago, I began serving as the 21st Chairman of the FDIC, and I'm
happy to celebrate my half-birthday with all of you here today.
During this period, the FDIC has undertaken a great amount
of work with a particular emphasis on three overarching goals:
one, strengthening the banking system as it continues to
evolve; two, ensuring that FDIC-insured and supervised
institutions can meet the needs of consumers and businesses;
and three, fostering technology solutions and encouraging
innovation at community banks and the FDIC. The FDIC has made
significant progress in each of these areas, and I appreciate
the opportunity to share our progress with this committee.
Before discussing the FDIC's work to strengthen the banking
system, I would like to begin by providing context regarding
the current state of the industry. The U.S. banking industry
has enjoyed an extended period of positive economic growth. In
July, this expansion became the longest on record in the United
States. By nearly every metric, the banking industry is strong
and well-positioned to continue supporting the U.S. economy.
While the state of the banking industry remains strong, the
FDIC is continuing to monitor changes in the industry and to
work to further strengthen the banking system by modernizing
our approach to supervision, including outdated regulations and
increasing transparency, enhancing resolution preparedness,
assessing new and emerging risks, and creating the workforce of
the future. My written statement details the many actions the
FDIC has taken in each of these areas.
While these efforts are steps towards a stronger banking
system, there are certain areas in which the needs of consumers
and businesses must be addressed by more comprehensive reforms.
We have been working diligently to update our regulations
governing broker deposits, which were put in place over 30
years ago. In addition, we're working with our fellow
regulators to modernize the Community Reinvestment Act and
provide clarity for banks seeking to offer loans that meet
consumer small-dollar credit needs.
Finally, perhaps no issue is more important or more central
to the future of banking than innovation. Technology is
transforming the business of banking both in the way consumers
interact with their banks and the way banks do business.
Regulators cannot play catch-up, but must be proactive in
engaging with stakeholders, including banks, consumer groups,
trade associations, and technology companies to understand and
help foster the safe adoption of technology across the banking
system, especially at community banks.
Since 1933, the FDIC has played a vital role in maintaining
stability and public confidence in the nation's financial
system. This mission remains as critical today as it was 86
years ago. But if we are to achieve our mission in a modern
financial environment, the agencies cannot be stagnant. Last
year, I began a 50-State listening tour to engage with State
regulators, FDIC-regulated institutions, consumers, and other
stakeholders. At the outset of that effort, I emphasized the
need to reverse the trend of having those affected by our
regulations come to Washington to have their voices heard, but
instead to meet them on their home turf. With 26 State visits,
I'm now more than halfway through the listening tour, which has
been incredibly informative and has underscored the importance
of seeking perspectives outside of the Washington beltway.
I look forward to visiting the remaining States and
learning more about the issues that matter most to consumers
and communities across the nation, including your constituents.
Thank you again for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Chairwoman McWilliams can be
found on page 89 of the appendix.]
Chairwoman Waters. Thank you. Vice Chairman Quarles, you
are now recognized for 5 minutes to present your oral
testimony.
STATEMENT OF THE HONORABLE RANDAL K. QUARLES, VICE CHAIRMAN OF
SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(FED)
Mr. Quarles. Thank you. Chairwoman Waters, Ranking Member
McHenry, and members of the committee, thank you for the
opportunity to appear today. My colleagues and I join you on
the cusp of a significant and shared milestone: the full and
faithful implementation of Congress' effort to improve
financial regulation in the form of the Economic Growth,
Regulatory Relief, and Consumer Protection Act. Today, I'll
briefly review the steps we've taken toward this milestone,
share information on the state of the banking system, and
discuss the continuing need to ensure our regulatory framework
is both coherent and effective.
The Act was an effort to consolidate a decade of work on
financial reform and a targeted response to the conditions
facing today's banking organizations and their customers. It
was also rooted, however, in a longstanding constitutional
practice of reviewing the work done in the immediate aftermath
of a crisis, of addressing any gaps, and of ensuring that
public and private resources go toward their best and most
efficient use.
The Board's latest supervision and regulation report,
delivered in connection with my testimony today, confirms that
we have a stable, healthy, and resilient banking sector with
robust capital and liquidity positions, stable loan performance
and strong loan growth, steady improvements in safety and
soundness, and several areas of continued supervisory focus,
including operational resiliency and cyber-related risk. The
banking system is substantially better prepared to manage
unexpected shocks today than it was before the financial
crisis. And now, when the waters are relatively calm, is the
right time to examine the efficiency and effectiveness of our
protection against future storms.
With last year's reform legislation, Congress made a
significant down payment on that task, and in less than 18
months after the Act's passage, we have implemented all of its
major provisions. Earlier this year, we completed the
cornerstone of the legislation, tailoring our rules for
regional banks and building on our existing work that firms
with greater risks should meet higher standards and receive
more scrutiny. We previously relied heavily on a firm's total
assets as a proxy for these risks and for the cost that the
financial system would incur if a firm failed, and that simple
asset proxy was clear and critical. It was rough and ready, but
it was neither risk-sensitive nor complete. Our new rules
employ a broader set of indicators to assess the need for
greater supervisory scrutiny and maintain the most stringent
requirements and strictest oversight for the largest and most
complex firms.
We and our interagency colleagues have also worked on a
range of measures addressed to smaller banks, with particular
attention to the community bank business model. And our goal
through this intense period of regulatory activity has been to
faithfully implement Congress' instructions. Those instructions
also speak to a broader need, and one central to our ongoing
work, which is to ensure that our regulatory regime is not only
simple, efficient, and transparent, but also coherent and
effective.
Financial regulation, like any area of policy, is a product
of history. Each component dates from a particular time and
place, and it was designed, debated, and enacted to address a
particular set of needs. No rule can be truly evergreen. Gaps
in areas for improvement will always reveal themselves over
time. Our responsibility is to address those gaps without
creating new ones, to understand fully the interaction among
regulations, to reduce complexity where possible, and to ensure
our entire rulebook supports the safety, stability, and
strength of the financial system.
My colleagues and I are paying particular attention to
coherence in our capital regime and in the full set of post-
crisis reforms, to a smooth transition away from LIBOR and
other legacy benchmark rates, to sensible treatment of new
financial products and technologies, and to clear, consistent
supervisory communication which reflects and reinforces our
regulations and laws. My written testimony and the accompanying
supervision and regulation report cover each of these areas in
greater detail. And, again, I appreciate the opportunity to
discuss them with you today.
Thank you, and I look forward to answering your questions.
[The prepared statement of Vice Chairman Quarles can be
found on page 113 of the appendix.]
Chairwoman Waters. Thank you. I now recognize myself for 5
minutes for questions.
Earlier this year, my colleague, Representative Meeks, held
a subcommittee hearing focused on the Community Reinvestment
Act. We heard expert testimony demonstrating that more than 40
years after the passage of the CRA, 98 percent of banks
consistently pass their CRA exams, while at the same time we
have redlining in more than 60 metro areas across the country.
There is something out of sync. Instead of working together to
make CRA exams more stringent and taking steps to ensure banks
fairly serve all communities, we have at least the OCC, if not
also the FDIC, in a rush to get a rulemaking out this year in a
brazen attempt to weaken the CRA with or without the Federal
Reserve. As we have seen in the growing list of deregulatory
actions in recent months by these agencies, I am concerned that
this new CRA proposal will simply make life easier for banks
that have been making record profits.
So, Chair McWilliams, Comptroller Otting at the OCC, who
unfortunately was unable to testify today in person, seems to
be in a rush to get a proposed regulation out the door this
year, and it appears the Federal Reserve does not agree with
this proposal. Instead of signing onto the OCC's plan, would it
not be helpful to encourage Mr. Otting to take more time to
work with the Federal Reserve and see if there is a mutually-
agreeable path forward? If we have two different CRA
regulations, will that not lead to regulatory arbitrage and
inconsistent application of the law?
This was in his testimony. He said, ``The OCC is working
with our colleagues at the FDIC to issue it jointly. A joint
rule with the FDIC would cover all national banks and State
banks that are not members of the Federal Reserve System and
Federal/State savings associations.'' So, you are here today to
speak for yourself? Is that what you are doing?
Ms. McWilliams. Yes, we are engaged in interagency
negotiations on how to best modernize and improve the CRA.
Chairwoman Waters. Are you working with Mr. Otting and the
OCC to issue a joint proposal?
Ms. McWilliams. We have been working with both the Federal
Reserve and the OCC on--
Chairwoman Waters. The Federal Reserve does not agree with
you. How do you plan on resolving that?
Ms. McWilliams. I don't know how to resolve the Federal
Reserve not agreeing with us. It wouldn't be the first time
that the Federal Reserve and the FDIC have a difference of
opinion on a particular matter, but I do know that there is an
opportunity--since 1995, this Act has not been revised, and
there is an opportunity to do more for minority depository
institutions. There is an opportunity to do more--
Chairwoman Waters. That opportunity to do more for minority
institutions, how does that work?
Ms. McWilliams. That is a great question, and thank you for
that. Right now, the non-minority depository institutions can
qualify for CRA credit if they engage with a minority
depository institution. Right now, the definition of how that
partnership can be structured is more narrowly interpreted for
the purposes of the CRA, and I believe there is an opportunity
for us to expand what qualifies and what types of investments
in community development activities with MDIs would qualify for
CRA credit. There is also more to be done on small farms. There
is a whole lot more we can do on CRA for small businesses, for
Indian Country, and a number of different entities that,
frankly, the CRA could be doing more for.
Chairwoman Waters. Do you think it is important to work
with this committee on such a huge change dealing with the CRA
that is extremely important to so many communities? It seems as
if you and Mr. Otting have just made a decision, despite the
Federal Reserve and without any interaction with the committee.
Why do you want to work in that way without trying to get in
tune with all of the entities that are involved with trying to
make a decision of this magnitude?
Ms. McWilliams. Chairwoman Waters, I have nothing but the
utmost respect for this committee, and I look forward to
working with you on any issues that are important to your
constituencies. And as a former congressional staffer, I
certainly would pay a lot of deference to your opinions and
input on matters that are important.
Chairwoman Waters. You have not demonstrated that to date.
I appreciate your indicating that here at this hearing today.
We are very concerned about this, and we are not accepting of
any proposal that is being put together by you and Mr. Otting
that undermines the original mission of the CRA. With that, I
will--
Ms. McWilliams. If I may just add something?
Chairwoman Waters. Thank you very much. The gentleman from
North Carolina, the ranking member, Mr. McHenry, is recognized
for 5 minutes.
Mr. McHenry. So to that extent, Chair McWilliams, safety
and soundness is a primary obligation you have--economic
growth, safety, and soundness. When you are inhibiting economic
growth through old regulations on the books, that is bad,
right? But when you are also impacting financial stability by
not reviewing regulations, that is even worse, and I think that
is malpractice. So I would encourage you to review these old
regulations and take reasonable steps to ensure that we have
financial stability on a going-forward basis.
Vice Chair Quarles, in September, there was tremendous
volatility in the repo market. This is overnight lending. It is
a very technical aspect for most Americans, but it is of
concern to us as policymakers. Rates moved well beyond the
Fed's targeted rate, which prompted the Fed to intervene in a
pretty significant way, and for a significant amount of time
pledged going forward. So given that, if you could comment on
what policies might have contributed to the shortage of cash in
the repo market?
Mr. Quarles. Thank you. As you have noted, there was a
complex set of factors that contributed to those events in
September. Not all of them were related to our regulatory
framework. But I do think that as we have considered what were
the driving factors in the disruptions in the repo market in
September, we have identified some areas where our existing
supervision of their regulatory framework, less the calibration
or structure of the framework itself, may have created some
incentives that were contributors. They were probably not the
decisive contributors, but they were contributors, and I think
we need to examine them.
Particularly among them are the internal liquidity stress
tests that we run that create a preference or can create a
preference at some institutions for central bank reserves over
other liquid assets, including Treasury securities for the
satisfaction of their liquidity requirements under the
liquidity framework that is put in post-crisis.
Mr. McHenry. That would be considered an unintended
consequence of regulation rather than an intended consequence,
would it not?
Mr. Quarles. The regulation was intended to be structured
so that banks would be indifferent between central bank
reserves and other forms of liquid assets, particularly
Treasury securities, in satisfying their high-quality liquid
asset retention requirements, and the liquidity coverage ratio
itself does not make any distinction.
Mr. McHenry. But in practice, it appears that there is a
distinction.
Mr. Quarles. Some banks, from their internal assessment of
how their liquid assets will perform in a future period of
stress, have put a heavy emphasis on central bank reserves as
the most liquid assets. Treasury securities take a day to
settle. Markets can be disrupted in the event of extreme
unexpected events, so that does create a thumb on the scale for
central bank reserves. So I think that it is worth reviewing,
and we are reviewing some of these supervisory measures to see
how they contribute.
Mr. McHenry. I would encourage you to review the regulatory
and supervisory issues, and I think it is important for
Congress to also hear back on that review. We understand the
independence of monetary policy, but where regulatory policy is
impairing or impacting monetary policy, I think we need to make
sure that we are doing the right thing with these regulations.
Mr. Quarles. I completely agree.
Mr. McHenry. I want to pivot as briefly as we can to the
conversion from LIBOR to SOFR, and this change--the repo market
issues in September highlight the deficiencies of this new SOFR
standard. You commented publicly, Mr. Quarles, on some
challenges related to that, and I think it would be important
for Congress to hear back on the financial stability
challenges, and the intention of the Federal Reserve to ensure
that this new rate doesn't cause greater stress on the
financial system or unnecessarily create financial instability.
And so I would encourage that undertaking by the Fed, but I
know it also impacts the FDIC and the NCUA as well. So with
that, I yield back.
Chairwoman Waters. The gentleman from California, Mr.
Sherman, is recognized for 5 minutes.
Mr. Sherman. Shortly after you all testified in May, Daniel
Tarullo, the Federal Reserve Governor who spent 8 years
following the crisis, rewriting the Wall Street rulebook,
denounced what he reviewed as the Trump era's low-intensity
deregulation of the financial services industry. He described
it as, ``a large number of small tweaks to existing regulations
that individually gather little notice by the press, but taken
together will undermine the regulatory framework designed to
prevent another crisis.'' He said that somewhere down the line,
someone else will suffer the damage, and in all likelihood, it
will be the most vulnerable households and businesses. Vice
Chair Quarles, how do you respond to former Governor Tarullo's
comments? Do you have a concern that easing the Volcker Rule,
and dialing back on swap margin requirements, and reducing the
leverage ratio for megabanks will not push the system a little
closer to a crisis?
Mr. Quarles. As we have looked at the recalibration of some
of the post-crisis reform rulebook in order to ensure that we
are not creating sort of perverse regulatory incentives and
avoiding unintended consequences--it would be very surprising
if there weren't some of those in such a complex body of post-
crisis regulation--one of our principles has been to ensure
that we do not reduce in any material way the loss-absorbing
cushion of the institutions. And I think we have succeeded in
doing that. Statements like that, that there is a low intensity
deregulation, I think, have to be held to empirical account.
And we have maintained the quantitative resiliency of the
industry, and the changes that we have made, I think, actually
improve the safety and soundness of the industry because they
eliminate perverse regulatory--
Mr. Sherman. Obviously your predecessor, the Federal
Reserve Governor, disagrees, but I want to go on. Resolution
plans have been a valuable tool for improving resolvability
through bankruptcy. Living wills have helped large banks be
better organized, but now the FDIC seems to be dialing back
those requirements. Why should megabanks, like Wells Fargo,
only have to update their complete living wills in only 4
years?
Ms. McWilliams. Thank you for that question, Congressman.
The living will process has evolved since its inception in the
enactment of Title II of Dodd-Frank. For a couple of cycles, we
have received submissions that have been in the tens of
thousands of pages, and we now have enough information where we
can hone in and zoom in on the things that we actually think
are more essential to resolving a bank and better our
understanding of how that bank would be resolved. Frankly, what
we are trying to avoid is having these banks just update the
20,000-page submissions every few years and not really look at
some of the essential issues that are underlying. So I have
asked staff to identify the critical areas that we need to do a
deeper dive on, and to focus on those areas in particular.
Mr. Sherman. I would think that things change over years,
and you might want to require updating more currently. The
criteria for individuals seeking employment in the banking and
financial services industry with minor criminal offenses are
under review. First, Mr. Hood, what are you doing, and what
could Congress do?
Mr. Hood. Yes, sir. Thank you for that question. We, at
NCUA, recently put forth a final rule regarding the Second
Chance Act where we recognize that individuals who have
committed nonviolent criminal offenses, who have paid their
debt to society, should have opportunities to work in
federally-insured credit unions. We look forward, sir, to
partnering with you to see if opportunities exist to remove
barriers.
Mr. Sherman. Ms. McWilliams?
Ms. McWilliams. I believe that the policy you are
discussing--we are calling it our Section 19 policy at the
FDIC--is an important social justice issue. And we are
currently undertaking an effort to both publicly seek comments
on what more the Agency can do. We have made some revisions,
but I personally believe we can go a long way in enabling these
individuals to reenter the workforce, and also allowing more
prosperity in the economy by allowing them the opportunity to
have a job.
Mr. Sherman. I will ask you to focus on that, and I yield
back.
Ms. McWilliams. Thank you.
Chairwoman Waters The gentlewoman from Missouri, Mrs.
Wagner, is recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. Vice Chairman
Quarles, thank you for joining us today--and I thank all of you
for joining us today--in September of 2019, you delivered a
speech in which you reiterated the Fed's plans to finalize the
stress capital buffer proposal in time for the 2020
Comprehensive Capital Analysis and Review, or CCAR, which means
the rule would need to be proposed in the very, very near term.
The goal of the stress capital buffer is to provide clarity and
harmonization to the overall capital framework for financial
institutions that are subject to stress tests. Vice Chairman
Quarles, is it still the Federal Reserve Board's intention to
have the stress capital buffer finalized in time for the 2020
CCAR?
Mr. Quarles. We are still aiming to have that done in time
for this stress testing cycle. You are absolutely right. That
time is short.
Mrs. Wagner. Given a re-proposal would need at least a 60-
day comment period, and the CCAR instructions are typically
issued in January, it seems like it would be very difficult to
have that finalized. This proposal was originally released in
April of 2018, so what is the reason for the significant delay
in moving forward?
Mr. Quarles. The proposal raises a number of complex
issues. I think the most significant one is one that I have
talked about publicly, and which is part of the answer to a
previous question, which is that we do want to maintain the
quantitative aggregate level of loss absorbency in the system
to be the same, notwithstanding some of the incentive changes,
some of the, I think, unwarranted assumptions and practices in
the current stress testing regime. And calibrating and creating
the methodology for keeping that aggregate capital level the
same while addressing these incentives has proved to be
complex. You are absolutely right that the time is short, but
it is not impossible for us to get this done.
Mrs. Wagner. When we can we expect a re-proposal of the
stress capital buffer?
Mr. Quarles. We have not decided yet whether we would re-
propose or proceed in a different administrative procedure
fashion.
Mrs. Wagner. I have asked you this question before along
with many of my colleagues, but given that the stress capital
buffer will preserve the global systemically important bank's
(G-SIB's) surcharge, when does the board plan to update the
rule as it explicitly said it would in 2015?
Mr. Quarles. We are always looking at all of the elements
of the current regulatory framework to determine when a
particular calibration might be out of whack. We regularly look
at the calibration of the G--SIB surcharge, and we are
considering it in the context of the overall body of
regulation. In particular, as you know, there is the remainder
of the international Basel III agreement, the so-called Basel
III end game, or the banks sometimes call it Basel IV, that
remains to be implemented. I think that we should look at all
of this as a package. The implementation of that remainder of
Basel III could have the effect of significantly raising the
aggregate level of capital in the industry. As both I and
Chairman Powell have said, we think that that aggregate level
of loss absorbency should remain, and essentially is pretty
much proper where it is. And so as we consider that
implementation, I think we also then need to consider the
overall calibration of--
Mrs. Wagner. You told us, Vice Chairman--and pardon me for
interrupting--but it explicitly said that in 2015, you were
going to update the rule. When can we expect this? Given the
many post-crisis reforms that have been implemented, is now not
the logical time to recalibrate the surcharge to reflect
economic growth and reforms?
Mr. Quarles. I think we should not be considering these
issues piecemeal. That is one of the reasons why we are where
we are, in my view. We have the opportunity, and, I think, the
responsibility to look at the remaining implementation of this
Basel III endgame as a package, and we would look at that as a
package with the calibration of other existing elements of the
regulatory framework, which would include the G-SIB surcharge.
But we should look at that as a package, and that is a project
that we are actively underway on.
Mrs. Wagner. Well, I truly hope that you move
expeditiously. The CCAR is up in January of 2020. You have been
talking about this for years. Package or piecemeal, we need
these rules updated. I thank you, and I yield back.
Chairwoman Waters. The gentleman from New York, Mr. Meeks,
who is also the Chair of our Subcommittee on Consumer
Protection and Financial Institutions, is recognized for 5
minutes.
Mr. Meeks. Thank you, Madam Chairwoman. Ms. McWilliams, I
want to pick up briefly where the chairwoman left off, because
I am very concerned about recent reports, and I want to find
out and be clear, has the FDIC signed on to the OCC-led CRA
process and not doing it in an interagency process? Have you
signed onto that?
Ms. McWilliams. The FDIC board meets to vote on any
proposals before it, and that meeting has not taken place. So
if you ask, have we formally signed on, the board has not voted
on this yet, but we are--
Mr. Meeks. But it is likely that you will do that?
Ms. McWilliams. It is likely that we will present an
opportunity for the board to vote on the improvements to the
CRA.
Mr. Meeks. Just based on the OCC, without the interagency
process? So, that means that you agree with, which I don't
understand, the OCC's single ratio approach as the right way to
go with regards to CRA, even though that risk-breaking and
direct link between bank lending and the specific communities
that the CRA was intended to benefit? Have you all gone down
that path already?
Ms. McWilliams. No, that is incorrect. There is no single-
ratio, single-metric approach. I am not sure where that
information was derived from. The draft that I have seen, that
we have been working with, does not include a single metric.
Mr. Meeks. Well, some of this has come from my
conversations with the OCC.
Ms. McWilliams. I would have to defer to the OCC on those
conversations.
Mr. Meeks. But if you are joining on to them, then,
therefore, I just want to make sure that you are engaged more.
And that is why the interagency process is tremendously
important so that it is more than just one idea, multiple
ideas, on how we can make sure that are we moving forward with
the modernization of CRA so that we are not leaving out the
original intent of the CRA that was put forward. So I just
would urge the FDIC to re-look at how you are doing this to
make sure that you are working with the Fed also so that as we
come to a modernized CRA, we make sure that we are not undoing
the reason why the CRA was initially implemented.
Let me move on, because I want to ask you another question,
Ms. McWilliams, on brokered deposits. As you may know, I am
working on legislation now to address what I consider
antiquated rules which fail to account for the 30 years of
technology innovation and new organizational structures that we
can reasonably agree pose no systemic risk to the banking
sector. Which elements do you expect the FDIC to address in its
rulemaking, and which ones do you believe Congress needs to
address through legislative action?
Ms. McWilliams. Thank you for that question. If I may just
for a second go back to the CRA, I would not sign onto a
proposal that in any way undermines the original intent of the
law. And the proposal that I could sign onto is a proposal that
would actually yield more benefits for the communities that it
was intended to protect. So you have my assurance that I would
not sign onto anything that does not profess to do so.
On the brokered deposits, like you, I agree that it is an
antiquated law. We have not touched the FDIC brokered deposits
in about 30 years. I believe there are some things that
Congress could do as we are undertaking a review of the
existing regulations and the practices in the marketplace and
now technology has changed the way consumers do banking, and
banks do banking, frankly. I think there is an opportunity for
us to work together on improvements. We will try to do what we
can on the regulatory side, and to the extent that I have any
recommendations to Congress, I would like to take you up on
your offer and give you those as well. Thank you.
Mr. Meeks. Thank you for that. Mr. Quarles, let me ask you
quickly, the Fed published information that over half of the
supervisory findings issued in the past 5 years were related to
governance and risk management control issues. In 2017, I
submitted a letter in response to the Fed's request for
comments on its proposed guidance of supervisory expectation of
board directors advocating for the importance of picking
diverse nominees when picking board directors. Now, when I
looked at the Fed's guidance, it speaks of diverse experience,
but it says nothing about diversity of board members
themselves. So to my question to you is, what are you going to
do to deal with the urgent issue of making sure that there is
diversity in the board members themselves?
Mr. Quarles. I think that is the intention of referring to
diversity of experience, that as a board and as the
corporation, as the firm considers the composition of its
board, it will look to all the attributes of the board members
to ensure that they have that relevant diversity. That is the
purpose of that guidance.
Mr. Meeks. But it just seems to me that the language is
clear. It says, ``diverse experiences,'' not talking about the
diversity of the board members themselves. So someone could
come in and say, well, I have that experience because I worked
in it, but they are not diverse individuals. My concern is to
make sure that we have diverse individuals on those boards.
Chairwoman Waters. Thank you. The gentleman from Oklahoma,
Mr. Lucas, is recognized for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman. First, I would like
to thank all of you for your leadership in promoting
transparency and efficiency in supervising and recognizing our
financial institutions. This panel has implemented the major
provisions in the Economic Growth, Regulatory Relief, and
Consumer Protection Act, and I believe the resiliency of our
financial system is now greater than ever before.
Vice Chair Quarles, Chair McWilliams, we have discussed at
length on various occasions, inter-affiliate margin
requirements, and I am pleased to see your agencies have
recently proposed to amend these swap margin requirements.
Thank you. The recent rule to exempt inter-affiliate swaps from
initial margin requirements is an important step forward in
identifying which areas can be simplified, harmonized, and
streamlined to eliminate inconsistencies and overlap. And I
look forward to continuing our discussion as you develop a
final rule that will harmonize the treatment of margin
requirements. We have also discussed the commercial end user
concern with CCAR. Again, I am pleased to see your agencies
revise the rule to amend the capital requirements for
derivative contracts with commercial end users.
You all know the nature of my district. It is capital-
intensive. It is agriculture. It is energy. So, the actions of
the Federal Reserve and the FDIC have a tremendous impact back
home on my constituents. Now, in light of the CCAR rule, what
are the Agencies' plans for moving forward with the
implementation of Basel III? How do the Federal Reserve and the
FDIC plan to analyze the impact of those revisions across the
U.S. framework to ensure coherence and capital neutrality?
Mr. Quarles. I will start with that one. As I indicated, I
do think that there are a few principles that we will need to
keep in mind as we consider the implementation of the remainder
of Basel III. And those principles are that we will maintain
the current level of loss absorbency with the industry. We
don't believe that the aggregate level of loss absorbency needs
to be increased or that it needs to be decreased, and in order
to do that, we should look at this implementation as a package.
We should consider how the remaining elements work together,
and how they will work together with the already-enacted
elements. And while I think that each of them is a useful
addition to the overall regulatory framework because of the
incentives that they will create for particular actions, we
also need to ensure that they are maintaining capital level. I
should say that they are essentially capital neutral. I think
that we will be able to do that by looking at everything as a
whole rather than implementing them piecemeal.
Ms. McWilliams. If I may add, I do think that with the
efforts of Basel, we need to take a holistic and comprehensive
look at everything and not address the rulemakings piecemeal,
and I agree with Vice Chairman Quarles on that. I also think
that the Basel Committee can do a little bit more on analyzing
the impact of these rules. There are so-called quantitative
impact studies (QISs), that the Basel Committee can do, and
something that the U.S. delegation at the Basel Committee has
been insisting on for some time.
I can tell you this. When the Basel III rules were
promulgated on capital and liquidity, the initial rules, the
Basel Committee did do a QIS study, and that study, if I recall
correctly--the numbers may evade me, the correct numbers--but
it was done based on the balance sheets of banks on December
31, 2009, which was one of the worst times for their balance
sheets. And it took into account about 220 financial
institutions around the world, only 14 of which were U.S.
banks. If I were in this position where I do have
representation on the Basel Committee and the working groups, I
would have insisted on a more specific impact at home here in
the United States and analysis done by the regulatory agencies
on how these rules will impact our banks and not look at 14 out
of 228 banks on one of the worst days for their balance sheets
in their history.
Mr. Lucas. In a previous hearing, I raised an issue with
Chairman Powell that we have been watching here in the
committee for quite some time, and that is the implementation
of the Volcker Rule, and I laud the panel for taking on the
task of trying to improve the Rule. I suspect my colleagues
will raise this issue as well. Chairman Powell indicated at
that time that he does not consider long-term investments to be
an activity that causes safety and soundness concerns.
Vice Chair Quarles, you know I have a tendency to ask
things that are semi-reasonable and rational. So with that--
[laughter]
Yes, that is actually true. Can you commit to us that you
will take into consideration how important it is for banks to
make these long-term investments while you are working to
finalize this portion of the Rule?
Mr. Quarles. We will definitely take that into
consideration.
Mr. Lucas. See, it was reasonable. I yield back.
[laughter]
Chairwoman Waters. The gentleman from Missouri, Mr. Clay,
who is also the Chair of our Subcommittee on Housing, Community
Development, and Insurance, is recognized for 5 minutes.
Mr. Clay. Thank you, Madam Chairwoman. Last month, the FDIC
and the OCC issued a proposed rulemaking to clarify that when a
loan is nonusurious when originated by a bank, it remains
nonusurious if the loan is sold or signed or otherwise
transferred to a non-bank. In 2015, the Second Circuit held in
Madden v. Midland Funding that non-bank debt collectors that
had purchased debt originated by a national bank could not
benefit from the bank's exportation power. The OCC stated that
the proposal was intended to address confusion resulting from
the Madden decision. Consumer groups and legal experts have
raised serious concerns that the proposal will encourage
predatory rent-a-bank schemes that are designed to evade State
usury caps. Chairman McWilliams, what is the FDIC's intentions
with this proposed regulation? Is it intended in any way to
administratively override the Second Circuit decision in the
Madden case?
Ms. McWilliams. In fact, it is meant to clarify the
confusion that has been caused by the Madden decision. Since
1828, there has been Supreme Court precedent that if a loan is
not usurious at the time when the loan is made, nothing
subsequently makes that loan usurious. And in 1865, Congress,
this body, gave national banks the ability to adopt those
principles. In 1980, Congress gave the FDIC the ability to
approve the same principles for State-chartered banks, and
everything was going fine, frankly. We have had an existing
guidance in place for over 20 years on this issue until the
Second Circuit Court of Appeals in Madden decided to just
ignore the longstanding procedural and case precedent and
regulatory precedent in this area.
And we would not have had had to act at all, frankly, if it
were not for the decision in Madden. Once the decision in
Madden was made, we felt there was a necessity to re-uphold the
longstanding principles we have had, and to reissue our
statement that has been in existence for over 20 years.
Mr. Clay. Okay. So would your proposed regulation
effectively rent out these banks' charters to third parties,
hoping to evade State usury limits?
Ms. McWilliams. No. In fact, at the FDIC, and we have
stated this explicitly as well as implicitly, we look
unfavorably upon such arrangements, and in the cases where
there are such arrangements, we will take supervisory action
that is appropriate, if any State or Federal laws are being
violated.
Mr. Clay. So you will supervise the third party then, and
make sure that there is not an overcharging or--
Ms. McWilliams. We have a couple of different statutory
authorities that allow us to supervise third parties that do
business with banks or end up affiliating with banks in any
form.
Mr. Clay. I see. In November of 2019, the FDIC issued a
proposal seeking public comment to codify a statement of policy
related to Section 19 of the Federal Deposit Insurance Act,
which provides criteria for individuals seeking employment in
the banking industry with certain minor criminal offenses. In
addition, the NCUA board approved a final interpretive ruling
and policy statement allowing people convicted of certain minor
offenses to return to work in the credit union industry without
applying for the board's approval.
Chairman Hood and Chairman McWilliams, what steps can
Congress take to give ex-offenders who have minor offenses a
second chance, to be able to get a job in the credit union
industry? Mr. Hood, first?
Mr. Hood. First and foremost, this is an issue that I have
taken quite seriously since I became Chairman of the NCUA
board. I think it is possible for us to sit down and perhaps
discuss what happened--I'm sorry, I am fighting a cold.
Mr. Clay. I am too, but go ahead.
Mr. Hood. I would love to sit down with your staff and
maybe have some of our colleagues to discuss what have been
some of the barriers that continue to prevent these individuals
from seeking able employment. But we, as a board, are doing our
level best to at least create opportunities now for these
individuals who have paid their debt to society to get
meaningful employment so they can get access to financial
inclusion and have upward mobility. But we do look forward to
following up with you and your staff.
Mr. Clay. I look forward to that conversation.
Ms. McWilliams, quickly?
Ms. McWilliams. Oh, sure, and I will be very quick. Thank
you. As I mentioned, from my personal perspective it is a
social justice issue that we need to be focused on. I have
heard from civil rights groups, from community groups and
community activists, and we are soliciting comments on what
more we can do. And should we have any recommendations for
Congress, I would be more than happy to engage with you.
Mr. Clay. Thank you. My time is up.
Chairwoman Waters. The gentleman from Missouri, Mr.
Luetkemeyer, is now recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. CECL is
something the Fed will have to enforce, as you all know, and
you and I have spoken with other members as well about this,
what I regard as a terrible accounting standard. However, you
have remained on the sidelines as FASB has promulgated and
eventually implemented this standard. This morning, you have
talked a number of times about different new capital rules and
how you are going to be implementing them, and looking at them.
You made the statement a number of times, I believe, that the
average capital that is in the system today, as well as
reserves, is at an adequate level.
Now when you implement CECL, there are going to have to be
some additional reserves for most banks to be put in place. How
do you do the Fed's two-step on trying to make sure that you
continue to enhance the ability to be able to increase capital
yet not over-reserve, as you indicate this may happen?
Mr. Quarles. The effect that you describe is one that we
are very sensitive towards. There have been a lot of ex ante
assessments of the potential size of that effect. That is the
reason why the bank regulatory agencies together have said that
we would essentially phase in the effect of CECL. So when CECL
becomes effective--and it is now effective at different times
for different banks--as an accounting standard, we will phase
it in, over the course of 3 years, what the effect of that is
in the capital regime for the banks. And if we see that there
is a large increase in the reserve position of the banks, that
is one of the reasons why I have been emphasizing that we think
that the total amount of loss absorbency in the system is about
right.
I think, then, as part of this overall assessment of the
implementation of the remainder of Basel III, of the
implementation of CECL, of looking at the effect of the
existing framework, in order to ensure that we keep the
existing high level of loss absorbency without either lowering
it or increasing it, there will be recalibrations of a number
of things that may be appropriate and we will look at that as
it evolves.
Mr. Luetkemeyer. Thank you for that answer. I am sure I
agree with all that, but we will move on.
Ms. McWilliams, one of the top two issues of CECL and data
aggregators is data privacy. When I talk to banks and credit
unions, this is their number one and two issues. Data
aggregators is something we had a hearing on a couple of weeks
ago, and there was a big article in one of the political rags
just yesterday or the day before with regards to the hearing
that we had. And the concerns that are there with regards to
these data aggregators coming in, screen scraping--I have had
discussions with one bank, and in fact, it has been verified by
a couple of other banks I have talked to since then, that
basically 80 percent of the transactions and searches that are
done on their computers at night are done by these debt
aggregators, screen scraping. And they have actually had to
increase the amount of computer power to allow their own
customers to access their own accounts, as well as these data
aggregators.
Do you see the risk in this, because there have been some
huge losses in this already? What do you think you need to do,
as a regulator? Or is the industry going to take care of this?
Is technology going to take care of this? Where do you think
this is going? Does this concern you?
Ms. McWilliams. It does concern me and, frankly, it
concerns me both from a regulatory perspective but also from a
private citizen perspective. And having grown up in a system
that did not have and afford privacy protections for its
citizenry, I am concerned whenever anyone's privacy could be
invaded, even inadvertently.
From a regulatory perspective, there are a number of
different privacy laws that we can implement. A lot of those
privacy protection laws have been shifted to the Consumer
Financial Protection Bureau (CFPB) by Title X of Dodd-Frank. In
fact, 17 consumer protection statutes were sent over to the
CFPB. We have some ability to implement and protect consumers
in this space, but a lot of that ability now rests with the
CFPB and the Federal Trade Commission (FTC).
Mr. Luetkemeyer. Chairman Hood, do you have any concerns
with that at all?
Mr. Hood. Oh, I share those same concerns as Ms.
McWilliams. These are efforts that we all need to work together
on. We certainly work with the CFPB in addressing these issues.
Mr. Luetkemeyer. Okay. I see my time is about up here. Just
maybe a shake of your head would work here. But another issue
has come up to me with regards to the credit unions buying out
banks, and that is something that is on the radar in both
groups, and I am fearful of a war beginning to break out. Are
you at all concerned? Mr. Hood and Ms. McWilliams, are you
concerned at all?
Mr. Hood. Sir, these are voluntary, market-based
transactions.
Mr. Luetkemeyer. Ms. McWilliams?
Ms. McWilliams. About 28 banks have been acquired by credit
unions since 2011. There are additional mergers pending. Yes,
we are looking at this. The two entities are just not set up in
the same way, and Congress did it in a particular reason--
Mr. Luetkemeyer. Thank you.
Chairwoman Waters. The gentleman from Georgia, Mr. Scott,
is recognized for 5 minutes.
Mr. Scott. Thank you very much, Madam Chairwoman. This is
an important hearing, but we have a hole right in the middle of
it, and that is because Mr. Otting is not here, for whatever
reason. But let me just tell you why. We are dealing with this
burgeoning industry of fintechs. There is a crying need for us
to understand, and I hope, Madam Chairwoman, that we will get
Mr. Otting here.
Now, let me tell you why this is a missing hole. As you
know, Chairwoman Waters, the OCC has announced this special
order for non-bank fintech companies. However, that order has
been opposed by State regulators, and also failed to generate
any interest from the fintech industry itself. And that has
been likely due to a lot of concerns, and I want to get all of
your responses on what these concerns are, as much as you can.
There are some real concerns, and Mr. Otting not being here
creates a hole in our discussion. Some fintech companies are
disappointed in the OCC charter because of its limited purpose
nature. It does not allow fintech companies to hold deposits or
secure FDIC insurance for deposits. Then, we have legal
concerns. The OCC has been engaged in a lawsuit with the New
York Department of Financial Services regarding the charter.
And in October, the Federal judge sided with New York, against
the OCC, and said that the OCC does not even have the authority
to issue a charter for non-bank entities in fintech that cannot
secure FDIC insurance. Do you see why this is so important? And
the OCC says it will appeal. Mr. Otting should be here to give
us some answers to this, to speak to this.
I think it is also important, Madam Chairwoman, to find out
why he isn't here. Everything that I am saying, he knows. We
can't move forward. This is why there is a crying need for the
bill we are working on with Ms. Waters, Mr. Lynch, I think Mr.
Hill, as we are dealing with the need for you all to harmonize.
And here is the main actor not even here at this meeting.
Now I want you, Ms. McWilliams, to respond to some of these
concerns. Are you aware that the New York FLSA said that the
OCC doesn't even have the authority? Are you aware of the legal
ramifications here? Can you imagine if you were a fintech and
you have a charter, and there is no harmonization between you,
between the Fed, between the CFPB, between the CFTC? We have
seen all of these regulators here, biting at the bit to pounce
on these fintechs, and regulate them, and the chief regulator,
who has put forward an order that has been declared
unconstitutional, isn't even here.
Ms. McWilliams. Thank you for the question on fintechs. I
can't speak to OCC's intention or actions but I can tell you
this. At the FDIC we are very focused on making sure that there
is both harmonization of the rules and a comprehensive look at
our regulatory framework.
Fintechs are something that is happening. Financial
technology innovation is not new. But the ability of these
companies to actually both do business and evolve with
technology, and their agility, is something that is very new.
So at the FDIC we are looking at this. We are creating an
office of innovation to deal exactly with these issues. And I
can tell you also that any entity that seeks to collect
deposits has to go through our application process for deposit
insurance, and no matter what the entity's structure is, they
will be subject to the same statutory requirements.
Chairwoman Waters. The gentleman from Michigan, Mr.
Huizinga, is recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman, and I am going
to quickly move through a number of things.
Chairman Hood, I understand that credit unions purchasing
banks--traditional banks, I believe, was the phrase was that
you used--is a private-market transaction. I fully understand
that. The question is, do you see any problems with that?
Mr. Hood. Well, sir, these are transactions, again, that
are voluntary.
Mr. Huizenga. I understand that. Is there a problem with
those transactions?
Mr. Hood. These are transactions that must be approved by
both the FDIC and--
Mr. Huizenga. So, you see no problem with them. Okay. That
is fine if that is your answer. That is fine.
Chair McWilliams, if you could elaborate a little bit on
that?
Ms. McWilliams. I do believe that--and we have data to
support this--there is a great consolidation in the community
banking sector, and frankly, I am concerned about the
communities that are losing banking presence. We have over 120
counties that have a single banking presence in their county,
and we have--
Mr. Huizenga. I understand.
Ms. McWilliams. --30 counties. So with respect to the
credit unions and community banks, Congress set up credit
unions in a certain way. They are not subject to taxation and
they also don't have CRA requirements imposed on them.
Mr. Huizenga. So I think you are getting to that there
might be a problem?
Ms. McWilliams. I am getting to that the playing field may
not be exactly level.
Mr. Huizenga. Okay. Fair enough. Chair McWilliams, I want
to talk a little bit about industrial loan companies (ILCs).
The critics of ILCs claim that banks owned by non-financial
companies are unsafe because these parent companies might
conduct unsafe transactions with the subsidiary bank. Can you
describe the existing statutory and regulatory framework that
prevents such transactions?
Ms. McWilliams. Congress gave us the ability to approve ILC
applications based on the same statutory requirements that we
approve the deposit insurance applications for banks. So if a
bank or an ILC applies for deposit insurance, they have a set
of about five or six different statutory requirements which we
have interpreted through our regulations over time. We
certainly look to the parent. We want to make sure that the
parent is profitable. We also have the ability to ask for a
capital and liquidity agreement between the parent and the
subsidiary, so that the--
Mr. Huizenga. Okay. So at the end of the day, you believe
that the regulatory structure is there in place, correct?
Ms. McWilliams. I believe that Congress gave us enough to
successfully manage and regulate.
Mr. Huizenga. Well, I will just note that in 2007, former
FDIC Chair Sheila Bair had testified exactly to that, in that
they may actually contribute significantly to community
reinvestment. So, I would assume you believe that still applies
today?
Ms. McWilliams. I don't know exactly the full statement she
said, but in general--
Mr. Huizenga. She just said that they proved to be strong,
responsible parts of the nation's banking system and offered
innovative approaches to banking.
Ms. McWilliams. I would agree with that.
Mr. Huizenga. Okay. Chair McWilliams and Vice Chair
Quarles, your respective agencies study consumer financial
welfare, and your data has shown that nearly half of Americans
cannot afford a $400 emergency that could creep up into their
lives, and they simply don't have the cash to deal with that.
For many of these folks, including many in my district who are
not prime borrowers, this source of a small-dollar credit line
is a lifeline on those small-dollar loans. And based on your
experience and research, what do you believe would be the
impact of a national 36 percent APR cap on the access to this
type of credit for these consumers? Mr. Quarles?
Mr. Quarles. We haven't studied, in fact, what we think
that the quantitative impact on that would be.
Mr. Huizenga. Okay.
Ms. McWilliams. I believe that wherever Congress were to
set that cap, there would be a significant portion of small-
dollar borrowers who would be excluded from the ability to get
access to credit.
Mr. Huizenga. You certainly have been looking at the
validity of loan terms, I am assuming. It is my understanding
that you are tackling serious systemic issues on safety and
soundness. Is that true?
Ms. McWilliams. Yes. I will take a holistic look at the
underwriting standards to understand how they impact safety and
soundness and consumer protection.
Mr. Huizenga. And what does that mean for the greater
marketplace for those types of loans?
Ms. McWilliams. For small-dollar loans, in particular,
there is definitely a need.
Mr. Huizenga. Okay.
Ms. McWilliams. And that need has been identified by, I
believe, about 40 percent, if I recall that--
Mr. Huizenga. And how does the Madden decision figure into
that?
Ms. McWilliams. The Madden decision, frankly, disrupts the
over a century-long precedent that we have had, that allows--
Congress made it legal to allow banks to originate loans. And
basically, what Madden disrupted was the ability of a bank to
sell the loan and the ability of the purchaser to assume the
interest rate under which that loan was sold. Frankly, it is a
disruption in the secondary market which affects safety and
soundness.
Mr. Huizenga. Thank you.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Foster, is recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and thank you to
our witnesses here.
Prior to the last crisis, one of the fundamental mismodeled
risks was that the bond ratings produced by the rating agencies
were just flat-out wrong. And U.S. corporate debt has now
swelled to nearly $10 trillion, which is almost 50 percent of
GDP, and is well in excess of any previous record, and well in
excess of where it was pre-crisis. Experts from the IMF to
asset manager Blackrock to the Fed have recently warned that
the risk posed by ballooning allegedly investment-grade debt
may pose to our economy.
According to the IMF report on financial stability this
year, it was the weakest firms that accounted for most of the
growth and are increasingly using debt for financial risk-
taking, such as investor payouts that lever up the company, M&A
activity, rather than capital improvements such as plant and
equipment. And they are doing this, apparently, in response to
both interest rate and tax policy.
The problem is, of course, exacerbated by the fact that the
bond ratings remain fundamentally suspect due to Congress and
everyone's failure to deal with the fundamental conflict of
interest in the issuer-pays model for bond ratings.
So, Vice Chairman Quarles and Chairman McWilliams, would
you agree with this assessment of the increasingly risky nature
of corporate debt that has emerged over the last year?
Mr. Quarles. I think that is a complex question. Corporate
debt has been growing. The debt service burden has not been
growing, because of the low level of interest rates. The
structures in which the riskiest debts are held are generally
not runnable structures, by which I mean--
Mr. Foster. Could you elaborate on that?
Mr. Quarles. Yes. By which I mean that the terms of the--a
lot of this leverage lending is being sold into collateralized
loan obligation vehicles, and the holders of those vehicles,
the maturity of their obligations, their exposure, is longer
than the maturity of the exposure inside of the institution,
and therefore it is difficult for them to run from the
institute, from a precipitous change in the value of the
underlying assets.
So what does all of that mean? I look at that as saying
there is much less of a financial stability risk of this, but I
do think that there is a possibility that there could be a
decline in value of these assets, and that could exacerbate
some future business downturns.
Mr. Foster. Yes. So how do you model, in your stress
testing, the potential detonation of this $10 trillion
unexploded bomb?
Mr. Quarles. Our models take into account the expected
losses of different classes of assets. We do take the credit
quality of these assets into account.
Mr. Foster. Do you model the possibility that there are
just fundamental errors in the bond ratings?
Mr. Quarles. Our model does not rely entirely on the bond
ratings in determining the losses that are expected here, and
certainly not for the loans as opposed to the bonds that are
part of this phenomenon.
But I do think that there are supervisory actions that we
can take, and that the agencies together have taken through the
Shared National Credit Program to address this issue. We have
looked at leveraged lending in each of the last two Shared
National Credit examinations. It has been a particular focus.
And where we have seen origination practices that we don't
think are consistent with safety and soundness, we have taken
supervisory action against those as part of that process.
Mr. Foster. Chairman McWilliams?
Ms. McWilliams. As Vice Chairman Quarles said, it is a very
complicated issue. We have engaged in this so-called Shared
National Credit, or SNC, review every Q1 and Q3 of each year.
Our teams get together and do a review and we publish the
findings in January, so there should be a forthcoming review of
the Shared National Credit portfolios of the banks.
The $10 trillion that you mentioned, not all of that is
leveraged. That is corporate debt, in general. According to our
estimates, less than a quarter of that is so-called leveraged.
One of the issues that we are running into is that there is no
common definition of leveraged loan, and so, we--
Mr. Foster. It is sort of similar to what became toxic
assets, where there wasn't a clear definition of what was what
there.
Ms. McWilliams. I would say there is some distinction
there. And I know this is important to you. It is important to
us as well. I have instructed our examiners and supervisory
folks to go back and take a look at, what are these banks
claiming as leveraged lending? So when you look at the $10
trillion number, some of these definitions for leveraged
lending are 20 to 25 pages long. And some include indirect
exposure and some include only direct exposure. So we are
trying to get to a best place where we understand what is being
held directly by banks, which we know, versus what is being
held indirectly outside of the banks.
Mr. Foster. Thank you. I yield back.
Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is
recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I want to thank
you for holding this hearing. It is an important hearing and I,
like you, look forward to speaking with the Comptroller when he
does come before the committee, because I think it is an
important regulator. But I appreciate the three of you being
here.
My first couple of questions are for Vice Chair Quarles.
You recently had a conference in Abu Dhabi and the
International Association of Insurance Supervisors (IAIS), and
Treasury, and sort of Team USA was there. Treasury put out a
statement afterwards saying they couldn't support the IAIS
proposal on Version 2.0 because they didn't feel like U.S.
insurers should face pressure to participate in a reference
insurance capital standard (ICS) that is not expected to apply
to the United States and doesn't fit our markets. They also
thought that this current ICS could risk limiting U.S.
consumers' access to important long-term savings products.
Do you agree with the statements that the Treasury put out?
Mr. Quarles. I think that Treasury articulated serious
issues, and I agree that those are issues. As you know, the--
Mr. Stivers. And is Team USA together with one strategy and
goal at these meetings? That is the intention of the question
here.
Mr. Quarles. Yes, I mean, I think that--
Mr. Stivers. There we go.
Mr. Quarles. --the Team USA, the three elements of it--the
National Association of Insurance Commissioners, the Fed, and
the Treasury--continue to work to the same objective. As you
are aware, in Abu Dhabi the NAIC sort of took the lead in
negotiating a compromise. As with any compromise, there are
issues around it. I think that Treasury was correct in
highlighting those issues. The Fed believes that it was,
however, a compromise that allows us to continue to achieve
U.S. objectives in the ongoing IAIS process, and so we are
supportive of it.
Mr. Stivers. It at least moves the ball forward, but I
think we need to keep our eye on the ball and make sure that we
are all looking out for the American consumer and American
companies being competitive internationally. So I appreciate
that, Governor.
Mr. Quarles. Yes. I completely agree with that.
Mr. Stivers. Great. The other thing I want to talk about is
the aggregation method and buildings blocks approach that you
are working on. The Fed is developing a building blocks
approach for a number of insurers that are supervised by the
Federal Reserve Board, and it is significant in an
international context, given that the first proposal included a
realization that the aggregation method is being considered by
the IAIS.
And I am just curious, and I hope you will consider it,
because this is a pretty complicated thing. I believe the
Federal Reserve has gotten letters from the U.S. Chamber of
Commerce, the American Property Casualty Association (APCIA),
the American Council of Life Insurers (ACLI), the National
Association of Mutual Insurance Companies (NAMIC), and the
Insurance Coalition, asking you to extend your December 23rd
comment period deadline, because these are very complicated
proposals that affect a lot of people in a lot of different
ways.
And so, this is not a question so much as a statement. I
genuinely hope that you will consider their request to extend
the comment period, because these are very important outcomes
and very complicated matters.
Mr. Quarles. Thank you, and we will--
Mr. Stivers. And I am not going to put you on the spot to
ask you whether you will or won't, because you might say no and
I don't want you to say no. I want you to consider it.
Mr. Quarles. We will consider it.
Mr. Stivers. Great. And I want to follow up on something my
colleague from Missouri, Mr. Luetkemeyer, talked about, the
CECL rule. And I think his next grandson is going to be named
Cecil, because he talks about it so much.
But Governor Quarles, will the Fed consider giving
institutions credit for their CECL reserves in overall capital
standards as we move forward? That seems to be the way we can
make a change that allows what could be excessive reserves to
be normalized and still end up with the right amount of capital
and not deny these institutions the ability to lend and grow
our economy.
Mr. Quarles. Yes. While we haven't made any sort of
decision until we see exactly how CECL operates in the real
world as opposed to through modeling, I think that is something
that has to be on the table.
Mr. Stivers. Great. And really quick, down the line, should
we have a consolidated approach, an interagency review of CRA
to make sure it works for all institutions? I know it doesn't
apply to credit unions today, but frankly, a lot of big credit
unions, I think, do need it. So, I'm going to ask you to
comment anyway.
Mr. Hood. The credit unions' mission is based on the
premise of people helping people. They are serving people of
low to moderate incomes already through the products that they
are offering, through their activities in the community, by way
of investments. So I would say that credit unions do not need
government fiats if you encourage them to do the right thing.
Mr. Stivers. I will follow up in writing. Thanks, Madam
Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Missouri,
Mr. Cleaver, who is also the Chair of our Subcommittee on
National Security, International Development and Monetary
Policy, is recognized for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. Mr. Quarles, let
me make sure that I get a good understanding. A lot of us,
primarily our leader, were instrumental in getting Dodd-Frank
approved, and there were provisions in Dodd-Frank that gave the
responsibility to the Fed to implement a number of our
provisions, the provisions of Dodd-Frank, including the mandate
to preserve and promote MDIs.
The numbers are ugly: 66 MDIs have been lost since 2008. We
had 215 in 2008 compared to 149 in--I should have provided this
before we started. But this is a chart that deals with MDIs,
and it is not a pretty chart.
I am interested in you or someone explaining to me, how did
you handle the mandate to preserve, and maybe even more
importantly, promote MDIs?
Mr. Quarles. Thank you for that. We have taken that
responsibility very seriously. We have established what we call
the Partnership for Progress (PFP) throughout the Federal
Reserve System, which is a national outreach effort using the
resources of the Fed to help minority depository institutions
know how to address the unique challenges of their business
model. That PFP program, as we call it, is very active in all
of the reserve banks. And we have the resources behind it in
order to help majority institutions throughout the country.
Mr. Cleaver. So you are saying you have promoted and
continued to push for a reversal of the trend--
Mr. Quarles. Yes, absolutely.
Mr. Cleaver. So I am interested, if you did, why has it
failed? You would agree that--I will give you the shortest. It
is very ugly. So it means that something has not worked. If you
are putting forth an effort and we go from 215 in 2008, to 149,
we are hustling backward.
Mr. Quarles. The challenges that face minority institutions
and community banks, in general.
Chairwoman Waters. The gentleman will suspend.
Mr. Cleaver, I want to put your chart up, that you are
referring to, so everybody can see it. So just hold on for a
minute and we will get it up. I want to make sure that it is
available to both sides and to everybody.
Mr. Cleaver. I apologize. I didn't know I was going to go
there, until I listened to him.
Mr. Quarles. May I talk for a bit while the chart is going
up?
Chairwoman Waters. The gentleman will suspend.
[pause]
Chairwoman Waters. Please go right ahead.
Mr. Cleaver. Thank you, Madam Chairwoman. You can see this
FDIC-insured minority depository insurance, and then if you
look down you can clearly see, as time moves on, things get
worse. And hopefully, you can take this with you when you
leave.
But my question is, if that is correct, and I am 100
percent certain that it is, who is working on this?
Mr. Quarles. I believe that it is correct, and we are
concerned about that trend.
Mr. Cleaver. No. I don't like to interrupt people, but you
are saying you are concerned. I am, too.
Mr. Quarles. But we are regularly engaged with these
minority depository institutions. In addition to the
Partnership for Progress, where we provide them technical
assistance, we have other sorts of technical assistance
programs. We have a regular minority depository institution
leaders' forum that we host at the Fed. The interagency process
has a separate minority depository institution technical
assistance program that we provide, conferences that we provide
for them.
Mr. Cleaver. Okay. Thank you. Anybody else?
Ms. McWilliams. I would like to, if you don't mind, just
add something. Section 308 of the Financial Institutions
Reform, Recovery, and Enforcement Act (FIRREA) gave us the
responsibility to protect and preserve the minority depository
institutions and we take that mandate very seriously.
We have done a number of things at the FDIC to strengthen
the ability of the MDIs to survive. I, like you, am actually,
frankly, very concerned about the disappearing landscape of
American minority depository institutions, and, in particular,
of the African-American depository institutions. One of the
things that I asked our staff to do is to analyze exactly what
is the impact of our regulations, and do we understand how
these MDIs can be helped.
This is the bottom line. A lot of them need capital
infusion, and frankly, I think there is an opportunity to
address that in the CRA. And that is why I would just ask you
to be open-minded to the changes we can make in the CRA to
benefit the MDIs.
Chairwoman Waters. The gentleman's time has expired. The
gentleman from Kentucky, Mr. Barr, is recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman. To the witnesses, as
you know, Kentuckians have a deep history and interest in the
production, cultivation, and sale of industrial hemp. That
dates back to Speaker Henry Clay. The hemp industry in the
commonwealth is booming. However, despite the legalization of
industrial hemp in the 2018 Farm Bill, hemp farmers and
producers and hemp-related businesses have had trouble
accessing financial services.
As you may know, I authored an amendment on this issue that
was included in the Safe Banking Act, which the House passed in
September. My amendment would require your regulatory agencies
to issue guidance confirming that industrial hemp and hemp-
derived products are legal and that banks don't need to file
suspicious activity reports solely because a transaction
relates to hemp.
I want to thank you and your agencies, along with FinCEN
for issuing that very guidance--I believe it was issued
yesterday--along those lines that will help the hemp industry
in my district gain access to financial services.
Chairman McWilliams and Vice Chairman Quarles, your
agencies issued that guidance that clarifies the legality of
industrial hemp and states that banks are no longer required to
file suspicious activity reports simply because their customers
are engaged with hemp growth or production. I have heard from
Kentucky bankers about this. They welcome this guidance, and it
will go a long way toward helping the hemp industry to thrive.
Chair McWilliams, what plans do you have in place to train
your examiners about how they should supervise institutions in
light of hemp's legality and your guidance?
Ms. McWilliams. We do thank you for that question, and I
think that the guidance that we issued was crucial in making
sure that there is at least some form of a roadmap for banks
engaged in banking hemp-related businesses.
We have done training with our examiners, and we will
continue to do extensive training with our examiners to
understand exactly how to look at these filings and to make
sure that they understand that the suspicious activity report
filings are not required for hemp-related transactions.
Mr. Barr. Thank you. And Chairman Hood, thank you for being
first in line on this with your August 19th interim guidance on
credit unions serving hemp businesses. What is your timeline
for releasing updated guidance?
Mr. Hood. We are continuing now, sir, to work with the
industry to provide training to our examiners. We are also
working with the State supervisory authorities to engage them
in the process as well. We will now be working with the USDA
and other related parties to ensure that we get it right. We
will be hosting a series of roundtables to glean insight from
entities, particularly insight around best practices. So, we
are moving forward.
Mr. Barr. Thank you. Thank you to all of you on this. One
of the specific financial services which has been either
unreliable or unavailable is card processing services. Does
your guidance from yesterday clarify for card processing
businesses that they can freely serve customers of hemp-
related, and specifically CBD retailers, without any legal risk
or liability?
Ms. McWilliams. I don't have the guidance in front of me
but we can circle back. I don't recall.
Mr. Barr. I have read the guidance closely, as you can
tell, and I didn't see that in there, and that is the financial
service that has really been unreliable and spotty. And so if
you need to update that guidance to give more legal clarity to
card processing businesses, I think that might be in order. Do
you have a response to that?
Ms. McWilliams. We will certainly take a look and make sure
that we communicate to our regulated entities to see what is
working and what is not, vis-a-vis our guidance. And to the
extent that we need to do additional explaining, we are more
than happy to engage in that process.
Mr. Barr. I will just tell you that congressional intent is
not only that the regulators confirm the legality of industrial
hemp and hemp-related retailers under the Farm Bill, but that
those retailers and merchants can use card processing services
to sell the product itself, and that has been the financial
services issue for the most part. So I would ask all of you if
you need to revisit the guidance to do so, to make sure that
hemp-related businesses, legal under Federal law, can offer
those card processing services.
Ms. McWilliams. We will, and we will certainly make sure
that we implement congressional intent as intended.
Mr. Barr. Great. Thanks. Let me move on really quickly.
Vice Chairman Quarles, would you describe the criteria you use
to evaluate non-G-SIB firms for inclusion in the Large
Institution Supervision Coordinating Committee portfolio, the
LISCC portfolio? Would you describe the criteria?
Mr. Quarles. The issue with that question is that actually
the criteria are under active review, so we are in the middle
of developing a more concrete and transparent--
Mr. Barr. I would encourage a clear offramp that firms may
elect to exit the LISCC portfolio.
Finally, on leveraged lending, Vice Chair Quarles, do CLOs
provide liquidity in stress market environments as long-term,
market-to-market investors, and how might an overreaction to
leveraged lending undermine financial stability?
Mr. Quarles. I am not sure. I will follow up with you.
Mr. Barr. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from Ohio, Mrs. Beatty,
who is also the Chair of our Subcommittee on Diversity and
Inclusion, is recognized for 5 minutes.
Mrs. Beatty. Thank you so much, Madam Chairwoman, and I
thank the ranking member and our witnesses. Thank you for being
here. I have a few questions I am going to try to get through
in my time period, but first, after being in the anteroom and
hearing part of the testimony and questioning from Congressman
Cleaver, I would like to share with the witnesses that
Congressman Meeks and I both have a bill that deals with MDIs.
Since it was brought to my attention that you could not answer
the questions about the MDIs, would you be willing to send me a
briefing page on your analysis or whatever you have, and maybe
our staffs can work together. Is that a problem for anyone?
Ms. McWilliams. Our staffs can always work together, and we
would be happy to engage.
Mrs. Beatty. All right. Thank you.
Mr. Hood. Congresswoman, I just wanted to share that our
credit union data was not reflected in the chart. We at NCUA
are working with roughly 500 minority depositories. We continue
to marshal resources to ensure their viability, so they can
serve communities in need.
Mrs. Beatty. Thank you so much, Mr. Hood, for that, and we
will see if when you all get together, you can certainly
incorporate that data.
We have heard a lot about the role I play as Chair of the
Diversity and Inclusion Subcommittee, and it is very important
to me for a whole host of reasons, because I think it goes far
beyond Dodd-Frank and Section 342. I am very appreciative that
you have Office of Minority and Women Inclusion (OMWI)
Directors. But I think it goes over into other things, whether
that is MDIs, whether that is looking at what happens on
November the 19th, with the FDIC, when you voted unanimously to
issue a proposed rule to codify longstanding guidance that
allows applicants with minor criminal records to work in
banking.
And Ms. McWilliams, this question is going to be for you.
While I understand clearly the intent of the law, but it is a
lifetime ban for any criminal offense regarding dishonesty,
breach of trust. It seems to me that it goes far too far and
captures too many other minor offenses.
I was just at a meeting this morning when someone shared
with me that in college, their child's roommate had a fake ID,
and the consequences ended up being more than just a slap on
the wrist. And so as we talk about moving forward, let me just
be really direct: I really have a problem with the decision and
what you just did.
So, Ms. McWilliams, can you explain why the FDIC made the
decision to move forward with this rulemaking? And let me
remind you, it was a rulemaking from 1950.
Ms. McWilliams. I believe we have a common problem, and I
am not in disagreement with you. What we tried to do on Section
19 in the proposal we issued was basically to update, as you
mentioned, some of the archaic standards that Congress put in
place for the inability of persons who committed minor
infractions and have paid their debt to society and redeemed
themselves to be able to re-enter the workforce at banks.
I am in complete agreement with you that we can do more,
and our November initiative was exactly aimed at that, and the
initiative received a unanimous vote of the FDIC board. So, I
am not sure exactly where we are in disagreement.
Mrs. Beatty. Okay. We will take a look at that.
Can you tell me, Mr. Quarles, what is the topic of today's
hearing?
Mr. Quarles. Oversight of the bank regulatory agencies.
Mrs. Beatty. Everybody else had other words in there. It's
like safety and diversity. It was a long title. And so, let me
just make an observation. When I look at Mr. Hood's testimony
and what was sent out to all of us, it does say that it is the
oversight, but it says ensuring safety, soundness, diversity,
and accountability. And both of your colleagues took great
pains to write about diversity and inclusion, and to share
that.
So if I were doing just a mock little study, and I would
say we have an African American, and we have a female, and we
have a majority, I find it quite interesting that the female
and the minority talked about diversity and inclusion as it
related to soundness and as it related to regulations, and
nowhere in your written testimony did it say anything--
anything--about diversity, at all. But yet you had some very
interesting statements when you said financial regulation, like
any other policy, is a product of our history.
And so, I am going to use that and say back to you, I think
diversity, or lack of it, is a product of our history. I yield
back.
Chairwoman Waters. Thank you. The gentleman from Colorado,
Mr. Tipton, is recognized for 5 minutes.
Mr. Tipton. Thank you, Madam Chairwoman, and I appreciate
the panel taking the time to be here today. I did want to
follow up a little on my colleague, Mr. Luetkemeyer's,
questions in regard to CECL. There was a recent CSVS survey of
571 banks that found that only 60 percent of the banks think
that they have adequate internal controls to be able to handle
CECL; 22 percent think that they will need to obtain more, and
18 percent do not know.
Vice Chair Quarles, I guess one of the concerns that I have
is, some of the banks, 60 percent, think that they are going to
be able to handle it, but is the ultimate outcome in terms of a
downturn in the economy, the ability to be able to make loans
to consumers maybe when they need it the most? Is that part of
the equation being included in some formulation for CECL?
Mr. Quarles. As you know, there is a limit to what we can
do with the accounting standard, because we don't create the
accounting standard. But as we look at what the potential
effect will be, and as we monitor the implementation of the
accounting standard during this 3-year phase-in that we have
established, we obviously would be looking at all of the
effects that it has on the industry and on individual
institutions.
Mr. Tipton. One thing, just really to encourage--I come
from a rural area, and oftentimes, it is hard for businesses to
get access to capital to operate. Some of the impacts that this
could ultimately have on some of our regional banks, in
particular, they play a very critical role, is something that I
hope you will give a lot of consideration to.
And I did want to also be able to return to some of the
CRA. I appreciate the comments my colleague, Mr. Meeks, made.
But Chair McWilliams, we didn't really get to hear from you,
some of the goals of the CRA modernization that you would like
to see if you do, in fact, join with the OCC in putting forward
those proposals.
Ms. McWilliams. Thank you for the opportunity to clarify
that. From my personal perspective, the CRA reform--frankly,
the regulators have not touched the CRA regulations since 1995.
The way the banks do business has changed tremendously since
that time. We have more banks engaged in digital offerings and
yet the definition of the assessment area is decades old.
And so the goal that I have, personally, is to modernize
the provisions to address some of the digital lending channels,
to figure out how can we do more to encourage long-term
investments and not just have banks look at a 3-year cycle as
they look to make these investments. I believe if they have a
long-term view, they will have a bigger impact on their
communities.
I think there is a whole lot more we can do for rural
areas, for small family farms. There is more we can do for
small businesses, minority depository institutions, as I
discussed. There is certainty that we can provide in the
marketplace that, frankly, is now lacking. We do not want to
have, at least from my perspective, an exercise in Community
Reinvestment Act compliance where the banks just get the
numbers and check the box and they are done. We want to have
meaningful impact on the ground in the communities that they
serve.
Mr. Tipton. I appreciate that, and I really encourage
broadband development in rural America as probably one of the
more important issues that we need to have.
Vice Chair Quarles, could you explain some of the
reservations that you might have in joining the FDIC and the
OCC in regards to CRA modernization?
Mr. Quarles. I think it is important to stress that we have
been working jointly with the OCC and with the FDIC on CRA
modernization, and that there is a shared view among all of the
regulatory agencies, among community groups, among banks, among
everyone who is affected by this regulation, that the
regulation can be improved, that the implementation of the
statutory requirement is not as well-served as it could be by
existing practice.
And I wouldn't get too wrapped around the axle myself,
around the agencies potentially moving at different speeds. The
OCC came out with its advance notice of proposed rulemaking
(ANPR) by itself a while ago, without the FDIC or the Fed. The
Fed had a broad outreach in all of the reserve banks in order
to get input. The OCC chose to do it through an ANPR. We had a
different mechanism. The FDIC had its own mechanism. And then,
we all took that input and worked together to reach an
endpoint.
We are only at the point of whether a notice of proposed
rulemaking will go out. We are not at the point of a final
rule, and the objective ought to be that at the end, all three
agencies will join in a final rule, and we have our independent
processes for how we will get there. So, I think it is
premature to say that we are parting ways.
Mr. Tipton. I yield back. Thank you.
Chairwoman Waters. Thank you. The gentlewoman from
Michigan, Ms. Tlaib, is recognized for 5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman. I appreciate all of
you being here. I want to talk a little bit about rent-a-bank
schemes. Banks are generally exempted, as you all know, when
they offer credit from State rate caps that cover payday
lenders and other online lenders. For many years, these payday
lenders and others have attempted to take advantage of this
exception by entering into rent-a-bank schemes, where they
launder their loans through banks and then purchase those loans
back, but continue to charge the higher rates that would be
illegal under current State laws in those places.
Chairwoman McWilliams, you had expressed your desire to see
responsible lending take place inside banks. You have also said
the agency frowns upon arrangements between banks and non-bank
lenders for the sole purpose of evading State law. However, the
proposed rule, if I may submit it for the record, Chairwoman--
Chairwoman Waters. Without objection, it is so ordered.
Ms. Tlaib. Thank you. The proposed rule says the complete
opposite. You allow the exemption to continue under these
proposed rules from the OCC.
As we speak right now, FinWise Bank, in Utah, is
facilitating essentially a shadow banking scheme right now in
Michigan, where they--so the OppLoans, or whatever they call
them, make predatory lending 160 percent APR, but in Michigan,
we pass laws that basically say the rate installment loan
should be at 37 percent.
I am just curious, Chairwoman McWilliams, isn't the
OppLoans' rent-a-bank scheme's sole purpose to evade State law?
Ms. McWilliams. I can't speak for a specific bank or a
specific product. I can tell you that--and I hope that you have
the IDIC proposal in front of you--the only thing we are trying
to do in that proposal, and we did, was basically seek
information on almost 200 years of case law, extending to the
Supreme Court--
Ms. Tlaib. But isn't the sole purpose evading State law?
Ms. McWilliams. We did not touch on the issue that you are
discussing, which is the--
Ms. Tlaib. Why? You said that you wanted to focus on making
sure that we have responsible lending.
Ms. McWilliams. I don't--
Ms. Tlaib. My district is the third-poorest congressional
district. We are literally front-line communities for these
payday lenders. And we advocated, on the local level, within
the legislature for 6 years. We said we have to push back
because it is increasing the cycle of poverty, right? And we
are asking for us to know that when we see a scheme like this
that is targeting communities that we are supposed to be
protecting, that we are issuing proposed rules that basically
protect it, and to stop these schemes.
I know these are not folks on the street. These are
bankers. But these are so-called folks from the business sector
and corporations, but they should be treated the same way as
any criminal on the street would when they are trying to push
something that is obviously laundering money through a rent-a-
bank scheme. Correct?
Ms. McWilliams. There has been a lot of confusion about
what we did and what we didn't do, and I believe you are
talking about the doctrine of so-called true lender, which our
proposal did not touch. Our proposal, the only thing it did--if
you have the proposal in front of you, you will see the only
thing it did is, in fact, address our longstanding principles
that Congress gave us the authority to do in 1980, which is to
say that when a loan is made and the interest rates are not
usurious at a time when the loan is made, no subsequent event
makes those loans usurious, basically preserving the sanctity
of a contract to ensure that there is a secondary market for
the sale of these loans.
States do have an opportunity to opt out of that regime.
Congress, you, gave them that authority in Section 27 of the
FDIA Act as well. And, frankly, we frown upon and we look
disfavorably upon the schemes that you are talking about.
Ms. Tlaib. But why aren't we addressing that in the
proposed rule?
Ms. McWilliams. Do you have our rule in front of you?
Ms. Tlaib. Yes. No. It actually still does not allow--it
allows them to evade the State laws. It allows them to--
Ms. McWilliams. That is incorrect.
Ms. Tlaib. So right now, you are telling me these rent-a-
bank schemes are illegal?
Ms. McWilliams. The rent-a-bank schemes, what you are
referring to as rent-a-bank, is not a regulatory term.
Ms. Tlaib. I know. What do you call it?
Ms. McWilliams. Those schemes and arrangements are provided
under the so-called true lender doctrine, which we didn't
touch. It is up to States to decide what rate caps are
appropriate, if any, and whether or not the States want to opt
out of the ability of the interest rates to be preserved when
an out-of-State entity purchases that loan product.
Ms. Tlaib. I think we need to shut down these schemes. We
can call them whatever we want. My folks call them rent-a-bank
schemes. We need to shut them down. State laws out there,
across the country, are preventing this form of predatory
lending, and we, as the government, are not preventing it from
actually happening. We are not creating the safeguards that are
available.
So, Chairwoman, before I end, I would like to submit some
articles from the Center for Responsible Lending, as well as
the National Consumer Law Center, that are talking about where
around the country these schemes continue to target people that
we all represent. Thank you.
Chairwoman Waters. Without objection, it is so ordered.
Ms. McWilliams. We are certainly not in favor of predatory
lending.
Chairwoman Waters. The gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams. Thank you, Madam Chairwoman, and I thank all
of you for coming today. With last week being Thanksgiving, I
spent some time thinking about how blessed we are to live in
the greatest country in the world. We are a nation of
opportunity and incentive, and because of those principles, we
are a nation of hope where everyone can benefit.
At its core, it is capitalism and the free market that
helps make this country so great. So it is a system that
rewards innovation because it maintains demand for the best
products at the best price. I am a car dealer, and I can tell
you we have really good prices right now out there, so you need
to know that.
With that in mind, though, capitalism is the greatest force
in the history of our world for lifting people out of poverty,
and I pray that we will instill this virtue in future
generations.
Chairwoman McWilliams, back in May, when I asked you if you
were a capitalist or a socialist, you mentioned that you grew
up in communism, spent time in socialism, and now choose
capitalism. So, I would assume nothing has changed in your
decision since May?
Ms. McWilliams. Nothing has changed in my decision since
May. Correct.
Mr. Williams. So given your unique life experience with
these economic systems, can you quickly elaborate on the beauty
of capitalism?
Ms. McWilliams. I don't think that 5 minutes, or 3 minutes
and 38 seconds of your time is going to allow me an opportunity
to speak on my appreciation of this system, but I can tell you
that I am teaching my daughter about the privilege of being
born in the United States and the benefits bestowed upon anyone
who has that privilege. I can tell you that as I was growing
up, my father had to give up a small piece of farm land in
order for me to qualify for a free school lunch, which was then
revoked about 6 months later. And having the ability to protect
private property ownership rights and the ability to live in a
free and prosperous economic society that preserves the rights
of the individual is something that I think is the greatest
blessing in my life.
Mr. Williams. Well said. Thank you.
Vice Chairman Quarles, my colleague, Mr. Stivers, touched
on this earlier about the meeting in Abu Dhabi, and I think
that maybe we could talk about that a little bit more. I
understand that the IAIS agreed to enter a monitoring period
for its global insurance capital standard but did not formally
implement the ICS due to ongoing concerns raised by the
Department of the Treasury.
While last month's meeting seems to be a step in the right
direction, I still have some concerns, considering our State-
based regulatory system that has been effective for the last
150 years. We must do all we can to ensure that whatever
international standards are agreed to, it will not put the U.S.
insurance companies at a competitive disadvantage.
So I have two questions for you, Vice Chairman. First, will
you commit to staying engaged on this topic moving forward? And
second, do you feel as if the results of the meeting in Abu
Dhabi give us the ability to create our own domestic standard
for insurance regulations?
Mr. Quarles. I will definitely remain engaged on this going
forward, both through my work at the Federal Reserve and as
Chairman of the Financial Stability Board, of which the IAIS is
a member. Did the agreement in Abu Dhabi give us the ability to
continue to pursue American interests in this process? I think
that it did. As I indicated earlier, it was a compromise. It
was a compromise that was negotiated by the National
Association of Insurance Commissioners. By definition, no
compromise gives every side everything that it would want, but
I think that it gave us enough, the United States enough to
continue to ensure that the international process takes account
of our system.
Mr. Williams. Chairwoman McWilliams, in an op-ed you wrote
for the American Banker in October, you stated the following:
``If our regulatory framework is unable to evolve with
technological advances, the United States may cease to be a
place where ideas and concepts become the products and services
that improve people's lives.''
I completely agree with you, with your statement. I think
that one area that would be especially beneficial to update
would be the broker deposit rules and regulations. As you know,
these rules haven't been updated in over 30 years, and are so
overly broad that they capture a wide variety of new companies
that have been working to get more people to the traditional
financial system.
I know you have been working diligently on this issue and
can't comment on specifics, possibly, but I hope we will see
something soon out of the FDIC on broker deposits. So,
Chairwoman, other than the broker deposit rule, what has the
FDIC been doing in the fintech space to work innovation in the
banking system and modernize supervision?
Ms. McWilliams. Thank you for that question. Yes, I think
this is one of the underappreciated areas in the regulatory
world, because innovation seems to be happening and quite often
it seems to be happening outside of the regulated entities. We
want that innovation to happen inside the regulated entities,
and I will submit for the record some of the initiatives we
have undertaken.
Mr. Williams. Thank you very much. I yield back.
Chairwoman Waters. The gentlewoman from Massachusetts, Ms.
Pressley, is recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman, for ensuring
that oversight continues to be a priority for this committee.
We have a government structure to work one way for banks and
businesses and another for consumers and working families. That
is why I pushed the Federal Reserve to provide everyday
consumers with the same settlement services it already provides
for banks. Working families shouldn't have to wait 3 to 5 days
for a check to clear.
Now, Mr. Quarles, you were the lone dissenter in the
Federal Reserve's decision to develop FedNow, which was
heralded by small businesses and consumer groups alike. I do
believe how one chooses to spend their time reflects what they
value, and, more importantly, whom they value.
Mr. Quarles, over the weekend the New York Times published
a profile on your regulatory approach, and notably, you have
chosen to spend your time in this role--in your first 21 months
in office, you met with Goldman Sachs 24 times, you met with
JPMorgan 19 times, you met with Morgan Stanley 17 times, and
with Citi 12 times. In that same timeframe, how many consumer
groups did you meet with?
Mr. Quarles. Over the course of my first 21 months in
office, I met with approximately, at a conservative estimate,
15,000 to 20,000 people. The great majority of those--you have
noted that 26 of those were Goldman Sachs out of 15,000 to
20,000 people. That is, again, at a conservative estimate, 14/
100ths of 1 percent of my time was spent with that and the
other 99.86 percent of my time was spent with others.
Ms. Pressley. Okay. Consumers? Because again, who you spend
your time with speaks to whom you value.
Mr. Quarles. Yes.
Ms. Pressley. And the fact that you were the lone
dissenting voice about whether or not to expedite payments of
hardworking Americans, so that they can get what they have
worked for in a 3- to 5-day period, something banks already
have, I think is indicative of something else.
Mr. Quarles. But, ma'am, I dissented because I believed
that the proposal would harm those consumers.
Ms. Pressley. Reclaiming my time. Again, you were the lone
dissenter on that, and I asked, did you engage consumer groups,
and you didn't indicate any.
The Federal Reserve was notably missing from the recently
issued notice of proposed rulemaking on the Community
Reinvestment Act. A strong CRA is a top priority for civil
rights groups and many members of this committee. Mr. Quarles,
how many civil rights groups did you meet with in those first
21 months? Can you just name a few, specifically?
Mr. Quarles. I met with many.
Ms. Pressley. NAACP? ACLU?
Mr. Quarles. I don't remember the names of them. I met with
many of them and I will happy to provide that information.
Ms. Pressley. I would like to see that list, but I am
incredulous that you cannot immediately cite civil rights
organizations, knowing what a priority a strong CRA is to these
groups, and that you can't immediately detail or enumerate that
you have met with any of them. So, I look forward to that list.
When Chairman Powell was before us, I called on the Fed to
better reflect the interests of hardworking American people, a
sentiment I echo to all regulators, including those who could
not make it here today. However, when large banks have a
greater access to the Federal Reserve's leadership than even
sitting Members of Congress, we have a problem.
I want to be clear. My colleagues and I are paying very
close attention. Wherever gaps in oversight exist, we fill
them. Hundreds of thousands of hourly employees doing the
everyday business of banking--opening checking accounts,
originating loans, detecting fraud and money laundering--all
while complying with regulations.
However, we have seen how extractive sales quotas and
performance metrics can result in disaster for low-level
employees. The Wells Fargo scandal is a prime example of this.
So Ms. McWilliams, yes or no, do you track banks'
employment practices and metrics?
Ms. McWilliams. When you say employment practices, can you
elaborate?
Ms. Pressley. Well, some that I already cited. I spoke
about just the everyday business and practices of banking--
opening checking accounts, originating loans, detecting fraud
and money laundering--and again, these extractive sales quotas
and these performance metrics, according to those practices,
can result in disaster for low-level employees.
Ms. McWilliams. I don't disagree with you that certain bank
culture can certainly create problems for both the employees
and their customers. In terms of tracking performance, we do
have supervisory tools to which we look at the number of
accounts opened, we look at how banks are conducting the
business of banking. We make sure that they comply with the
consumer protection laws and statutes.
Ms. Pressley. Thank you. I'm sorry. I am running out of
time.
Mr. Quarles, do you track banks' employment practices and
metrics?
Mr. Quarles. We do.
Ms. Pressley. Okay. And in the wake of that scandal,
thousands of front-line workers lost their jobs, while only a
handful of more senior-level employees faced similar
consequences, and that is why, with the support of the AFL-CIO
and the Communication Workers--I'm sorry. That is my time?
Okay. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Arkansas,
Mr. Hill, is recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. Thanks for providing
us the opportunity to have oversight over the bank regulatory
system. I want to thank each of you for appearing today. Thanks
for spending time with us. And congratulations for the hard
work over the last few months to implement S.2155 across the
agencies. You met together. You had your checklists. You got
that work done and reported that to Congress in a timely way,
and all of us and our constituents. Thank you for that
attention.
Mr. Quarles, I wanted to follow up on a discussion that we
have had on and off over the last few weeks and talk briefly
about bank supervision by the Federal Reserve as it relates to
the September 16th, September 17th disruption in the repurchase
market. I know that is being studied by the Fed in earnest, led
by the New York bank, and I appreciated that.
But when you see the amount of reserves held by the banks,
they are extensive. They are far above any requirement of the
Dodd-Frank rules. There is very little chance of a foot fault
in those reserves that I think particularly the big banks hold.
In fact, looking at the numbers, the four largest banks,
collectively, have more cash at the Fed than the next 24
combined. So, there seems to be a lot of cash held at the Fed.
How does the Fed make clear to banks that inter-day lending
is a good thing, in other words, that banks have access to
those cash amounts that are far in excess of what they need
regulatorily?
Mr. Quarles. I think there are a variety of measures that
we can take. We are actively looking at what will be effective.
We do want to ensure that our supervisory, both the regulatory
system and our supervisory practices are not creating undue
incentives for the hoarding of central bank reserves by some
institutions. Part of that is simply communication, ensuring
that our supervisors are communicating clearly about what Fed
expectations are. Some of it can be taking measures to ensure
that banks are comfortable, that they will have access to
immediate liquidity from other forms of--if they are holding
other forms of liquid assets other than central bank reserves,
and all of that is under active consideration.
Mr. Hill. Certainly, before the financial crisis, having a
daylight overdraft at the Fed was considered a routine business
activity. Would you agree with that?
Mr. Quarles. Absolutely.
Mr. Hill. Has there been much to speak of in the ways of
daylight overdrafts by the banking industry since the crisis?
Mr. Quarles. Very little.
Mr. Hill. Would you say there is a stigma that has been
attached to having a daylight overdraft during an inter-day
process?
Mr. Quarles. I think that is inarguable. We hear that from
the industry.
Mr. Hill. That issue is curious to me, when I think Mr.
Dimon at JPMorgan Chase just reported something like $60
billion in cash was required that he keep that at the Fed but
his cash balance was like $120 billion, for example, on a daily
basis. That seems like a lot of room to participate in that
market if there was an economic incentive to do so. So assuming
there is an economic incentive to have a rising repo rate, I am
just curious why that stigma is so pronounced?
Mr. Quarles. Among the consequences of the increased
transparency after Dodd-Frank has been a decreasing willingness
of institutions to take advantage of some of the credit
provisions from the Federal Reserve and that has contributed,
although I do want to emphasize that we don't think that it is
the driving factor, but that it has contributed to some of--
Mr. Hill. Right. I have heard G-SIB surcharges might
contribute to it, and others. But do you think Section 1103 of
Dodd-Frank that requires the Fed to publicly disclose that
banks borrowed at the discount window should be reconsidered?
Mr. Quarles. I wouldn't go so far--I haven't concluded that
it should be--well, it depends on the definition of
``reconsidered.''
Mr. Hill. Should we repeal it?
Mr. Quarles. I certainly haven't concluded that it should
be repealed, but we should be aware of the full range of its
consequences.
Mr. Hill. Thank you. I want to touch on a couple of other
things. Chairman Luetkemeyer talked about screen scraping. I
would like each of you to answer this question: Do you support
the use of APIs by financial institutions that you regulate
exclusively for access to consumer data by data aggregators
that aren't part of the bank. Mr. Quarles?
Mr. Quarles. We do support the increased use of APIs as a
more secure way of dealing with--
Mr. Hill. Would you require it, do you think, in the
future, subject to a rulemaking and a process and all that?
Mr. Quarles. We should give consideration to that. We
haven't concluded we should require it.
Mr. Hill. Chair McWilliams?
Ms. McWilliams. I am generally in agreement, yes.
Mr. Hill. Mr. Hood?
Mr. Hood. I am in general agreement, but I would have to
study it for its impact on our smaller institutions.
Mr. Hill. Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you. The gentlewoman from New
York, Ms. Ocasio-Cortez, is recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Madam Chairwoman, and thank
you to all of our witnesses who have come here today to testify
and share your testimony.
I am here today, and my job here is to represent working
people, and my district is quite working class. Many of my
constituents are waitresses, they are teachers, they are
nurses, and I am here today to get to the bottom of a problem
that our taxi cab drivers have been facing.
As some of you may be aware, the New York City taxi
medallion crisis has driven many owner-drivers, targeted by
predatory loans, to financial ruin and suicide. Some of my
colleagues and I have called on the City to forgive the debt of
these drivers, and that has been met with resistance. But while
you are here before the committee, Mr. Hood, I would like to
discuss the role the NCUA played in the crisis and its ability
to potentially provide relief as we explore solutions.
Mr. Hood, you are the primary regulator for all federally-
insured credit unions. Correct?
Mr. Hood. Yes, ma'am.
Ms. Ocasio-Cortez. And as such you would have been the
primary regulator for Melrose Credit Union, LOMTO Federal
Credit Union, Bay Ridge Federal Credit Union, which all failed
because of a significant concentration of loans collateralized
by taxi medallions and safe and unsound lending practices.
Correct?
Mr. Hood. The credit unions that you mentioned, they had
pretty much an 80-year history of providing prudential
mortgages to the taxi medallion industry. So, they have been
doing it for 80 years, quite successfully.
Ms. Ocasio-Cortez. Yes. But they did fail because that
concentration became untenable for them.
Mr. Hood. It was a combination of concentration risk, but
again, those were performing well. It was the introduction of
the ride-sharing applications that really upended that
traditional business model.
Ms. Ocasio-Cortez. I think there is an issue there, because
the inspector general at your organization conducted a material
loss review, and they found that the examiners repeatedly noted
that these credit unions were engaged, and began to be engaged
in unsafe lending practices, including failure of the credit
unions to fully analyze borrower financial information,
insufficient detail in credit memoranda, risky loan terms. Some
of these drivers were making $30,000 a year and were given a
million-dollar loan.
Do you agree with the characterization of the IG's report,
Mr. Hood?
Mr. Hood. I certainly support the IG report in the sense
that we are taking some of those actions to date now.
Ms. Ocasio-Cortez. Great.
Mr. Hood. We are issuing information around guidance on
concentration risk. But I would like to note, ma'am, that also,
one of the first things I have done in the 7 months of being at
NCUA was to make sure that we have a senior leader whose sole
responsibility is to look for borrower solutions for the
individuals who have these loans. We are looking to provide
them with restructurings, reduction in interest rates--
Ms. Ocasio-Cortez. Great.
Mr. Hood. --all of the things it is going to take to make
them whole. And I would also like to note, my heart goes out to
them, and I empathize with the families who have been impacted.
With me, when I looked at the taxi medallion situation, I know
that behind every taxi medallion loan is a family who has been
impacted.
Ms. Ocasio-Cortez. Yes. And you are aware that the
examiners were sounding the alarm about this industry in 2012,
2013, and 2014, for 3 consecutive years, correct?
Mr. Hood. I am aware of it because I am now at the agency,
but those were activities that had already taken place, and
again, most of the institutions that you have recognized, those
have all been conserved. Those have all been merged into other
entities. First and foremost, the individuals who were credit
union members, their accounts will remain safe and sound. So,
they never once lost their insured deposits.
Ms. Ocasio-Cortez. And I greatly appreciate the actions
that have been taken to prevent some of these crises in the
future. My concerns now are with those who have been impacted
by these predatory loans. Do you believe the NCUA bears any
responsibility for the findings in the inspector general's
report?
Mr. Hood. I think it was important that the IG did note
some things that we can do to further enhance our supervision
efforts, not just with this one particular asset class. But, in
general, we are going to be looking at producing general
supervision, or guidance, coming up in the next few months, I
would say, around just concentration risk in general. The thing
is, there were so many other folks in the ecosystem involved
with originating these loans.
Ms. Ocasio-Cortez. Right.
Mr. Hood. As you reference in your remarks, the taxi
commission, you had State-chartered entities that were also
making their originations.
Ms. Ocasio-Cortez. Thank you. And I am sorry.
Mr. Hood. Of course.
Ms. Ocasio-Cortez. I just wanted to reclaim my time for the
purpose of questioning. And as you said, there is a broad
ecosystem. I am trying to figure out what we can do here, in
this slice of it. Entities are currently selling the loans off
to debt collectors at a discounted rate, yet owner-drivers are
still on the hook for the original amounts. So, in other words,
many of these predatory loans are being sold off for, say,
$150,000 to a debt collector, but still holding the owner-
driver to about a $600,000 debt for the loan.
Can I have your commitment before this committee that the
NCUA will do everything in its power to ensure that any
benefits extended to lenders could also be extended to owner-
drivers in the form of principal reduction?
Mr. Hood. We are looking at individual tailored solutions
to address the matter at hand. It is not a one-size-fits-all
approach. What I have instructed our staff to do is to work
with those individual borrowers. To the degree that they are
providing us with information, ma'am, we are able to reduce
their interest rates. We are able to provide them with loan
restructuring, so that they--
Ms. Ocasio-Cortez. And what about principal reduction,
specifically?
Mr. Hood. My statutory requirement is to protect the
National Credit Union Share Insurance Fund for the safety and
soundness of the overall system. We are now working within the
means that we have to date to support providing solutions--
Ms. Ocasio-Cortez. Would you consider principal reduction?
Mr. Hood. That is something that would be difficult to do
in managing my statutory requirements to the National Credit
Union Share Insurance Fund, but I am open to look at other
activities to provide borrower relief by way of loan
restructurings and interest rate reductions. I do want to work
with these individuals.
Ms. Ocasio-Cortez. Okay. Thank you. We will be following
up.
Mr. Hood. Yes, and thank you for your recent letter.
Ms. Ocasio-Cortez. Of course. Thank you.
Chairwoman Waters. The gentleman from Georgia, Mr.
Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. Thank you all
for being here today. I have three questions so I am going to
try to get through them in my limited time here.
First, Vice Chairman Quarles, I want to talk about LISCC. I
trust you received the letter I led with 24 members of the
committee regarding LISCC and the lack of clear, transparent
criteria for designating firms. As you know, the GAO determined
that three pieces of LISCC guidance are actually rules and must
follow the rulemaking process. And so my question is, what is
the Fed going to do to follow the required process and ensure
that LISCC is transparent?
Mr. Quarles. We are in the process right now of considering
refinements, revisions to the LISCC designation process that
will make it more concrete, more rules-based, and more
transparent, and we will be shortly working on those.
Mr. Loudermilk. So your intention is to follow the
rulemaking process in that?
Mr. Quarles. I don't know that it would go through sort of
the Administrative Procedure Act (APA) rule process, but when
we have completed re-looking, and re-thinking about how we can
make it again more concrete and constrained and transparent, at
that point then we will consider if it is--even if it is not an
APA rule, it could be a Congressional Review Act rule, that we
would send up.
Mr. Loudermilk. That was really a concern, is if it does go
under the CRA, we want to make sure that it is transparent,
that we are engaged and involved.
Mr. Quarles. Absolutely.
Mr. Loudermilk. So we will be following up with you on
that. And thank you for that.
Chairman McWilliams, I want to talk about the valid-when-
made issue a little further. I know that has been brought up
already. Since the Madden court decision in 2015, it has really
created a fragmented interpretation of banking laws and
regulations--valid-when-made has been in play for a century and
has brought stability.
Ranking Member McHenry and I sent a letter to you that was
signed by all of the Republicans on this committee, to you and
Comptroller Otting in September, asking if you would provide
clarity on the issue which will help keep credit accessible and
affordable. Some have made the argument, as you have heard,
that this rulemaking will allow non-bank lenders to evade State
interest rate laws. Can you explain how that is not the case?
Ms. McWilliams. It is not the case, and I will have to
correct you, that the original case was an 1820 Supreme Court
case.
Mr. Loudermilk. Okay.
Ms. McWilliams. So it is a little bit more than a century,
almost 2 centuries.
The only thing we did in our rulemaking, frankly, was take
the guidance we have had, based on the laws that Congress gave
us in 1980, to ensure that there is clarity, especially in the
secondary market, which we view as important for the ability of
banks to maintain safe and sound standards as they look to sell
the loans. That is all we did. We did not change the existing
status quo on the authorities Congress gave us in 1980.
Mr. Loudermilk. So based on what you are doing, you can say
that this rulemaking will not allow for non-bank lenders to
evade existing State laws?
Ms. McWilliams. That is correct. The issue that the
Congresswoman from Michigan mentioned is something that we did
not touch on in our rulemaking. In fact, we specifically said
the only even close reference that is we look unfavorably and
we will consider it unfavorably in our supervisory approach if
banks engage in the practices that basically are deemed as
predatory.
Mr. Loudermilk. Okay. And I appreciate that because I think
this is something that definitely needs to be done. It does
affect the lending especially between the fintech industry and
banks, and I appreciate the direction that you are taking on
it.
One last question for you, and it is regarding technology
and especially artificial intelligence. As the new ranking
member on the Artificial Intelligence Task Force, I sent you a
letter recently about the planning, that you are planning to
issue guidance regarding the bank's use of artificial
intelligence, I think it is really important that as we develop
the guidelines for banks regarding artificial intelligence,
that the efforts are coordinated among regulators. And so, will
you make every effort, really, to everybody up here, to work
together to make sure that whatever regulatory guidelines that
we put out there for the banking institutions regarding
artificial intelligence are coordinated, so we don't have
disparity between the different regulators?
Ms. McWilliams. Yes.
Mr. Hood. Yes.
Mr. Loudermilk. Thank you. Mr. Quarles?
Mr. Quarles. Absolutely.
Mr. Loudermilk. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from Virginia, Ms.
Wexton, is recognized for 5 minutes.
Ms. Wexton. Thank you, Madam Chairwoman, and thank you to
the witnesses for joining us here today. I would like to talk
about something that impacts every American, and especially my
constituents in the 10th Congressional District of Virginia,
and that is government shutdowns. The last shutdown that we had
lasted for 35 days. It was only a partial shutdown but it still
cost the economy billions of dollars, 800,000 Federal employees
went without pay, tens of thousands of contractors were laid
off, and unlike Federal workers, they did not receive any back
pay for their lost hours of work.
During this time, a lot of banks and financial institutions
stepped up and offered to help folks who were affected by the
shutdown. They offered things like flexible payment options,
no-interest loans, and this was really important to especially
people who work in the national security area, because
financial difficulties can impact their security clearance and
then that jeopardizes their livelihood.
It was great to see so many lenders take these proactive
steps, but there were still issues and confusion at some
financial institutions and regulatory guidance from your
agencies was very slow to come. In fact, it wasn't until the
20th day of the shutdown that joint guidance was released,
encouraging banks to work with borrowers who were affected by
the shutdown and let them know that such efforts would not be
subject to regulatory criticisms.
During the shutdown that we had in 2013, it wasn't until
the 9th day that guidance was issued. So this is not an
isolated problem and, believe me, I don't ever want to assume
that shutdowns are the new normal, but we, right now, are
operating under a Continuing Resolution that is only good
through December 20th. And I introduced a bill, the Shutdown
Guidance for Financial Institutions Act, which passed the House
of Representatives, that would basically automate the process
and require that financial regulators get that guidance out
within 24 hours of a shutdown.
Like hundreds of other wonderful bills that we have passed
in the House of Representatives, it is sitting over in the
Senate. It obviously won't become law in time for the December
20th deadline that we are facing.
So what I am seeking from each of you is an assurance to
not just me and the members of this committee, but to Federal
workers, contractors, and the financial institutions who are
looking for this guidance, that there will be a timely issuance
of guidance if we are not able to keep the government open come
December 20th. So can I get that assurance from each of you?
Mr. Hood?
Mr. Hood. The credit unions were not involved in that
particular guidance. I am pleased to report that our credit
unions were making emergency loans and providing financial
services without any regulatory guidance. They were doing it
under their own volition, because they wanted to help their
members have access to financial services during the shutdown.
Ms. Wexton. And you will make sure that continues in the
unlikely event it becomes necessary again?
Mr. Hood. They have done it with or without my imprimatur,
but, yes, I will certainly encourage them to continue serving
the needs of their member owners. But again, to date, they were
doing it without any prompting from our agency.
Ms. Wexton. Good.
Mr. Quarles. Thanks for highlighting the issue. We should
be able to move much faster.
Ms. McWilliams. As a fellow Virginian, and somebody who has
spent a decade in public service, prior to this job, dependent
on those Federal Government checks to make my mortgage
payments, I actually want to thank you personally for your
effort in this area. We took too long last time, and it
shouldn't repeat.
Ms. Wexton. Very good. Thank you very much, and I will
yield back with that.
Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
Davidson, is recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. I thank our
witnesses for your expertise and the service you are trying to
render to keep our banks and our markets sound. And as we look
at the hearing prior, one of my colleagues highlighted the
Fed's faster payment program, and Mr. Quarles, your ``no''
vote, as you said earlier you felt that it could harm
consumers, I would like to allow you a brief response.
Mr. Quarles. I think there are questions about the speed
with which a faster payment system can be implemented in the
United States and what measures will ultimately be effective in
doing that. At the end of the day, those arguments weren't
persuasive to my colleagues on the board. There, I do think
that one of the factors that was very reasonable for them to
take into account is that the Federal Reserve, with respect to
the payment system, generally does not have regulatory
authority, unlike most central banks in what we would consider
most of our peer central banks.
So in the absence of direct regulatory authority over the
payment system in order to address some of the concerns that
were being raised by consumer groups, it was felt that the only
way to really do that was through standing up a direct Federal
Reserve offering.
I didn't think that was the most effective way, but I do
think it highlights that weakness in our regulatory framework
that other than doing this we don't have a way of trying to
ensure that some of these concerns are addressed.
Mr. Davidson. Thank you for your explanation. Frankly, I
had hoped that you would talk about the Fed's previous
commitment that the private sector would take care of that, and
frankly, having invested substantial capital in that space, now
the Fed essentially wants to borrow that intellectual property
for their own use. And I thought it was highly inappropriate,
frankly, for the Fed to decide to move in on what they had
already signaled to the market they would not move in on.
And as you look at it, I hope that the Fed will continue to
look at ways to tokenize the dollar, digitize the dollar,
because that payment could be very swift, and could make use of
the underlying blockchain technology that is going to transform
central banking around the world, and hopefully doesn't leave
out the United States. And certainly, it is easier to implement
than some of these things.
Now, it does eliminate some intermediaries, which I
understand some of those intermediaries might like to make a
lot of money on the transaction, fees or carry trade or what
have you.
But that highlights one of the other things where liquidity
is just not happening the right way. Some of my colleagues have
already looked at the repo market, and I just am particularly
curious about the moral hazard of essentially the Fed
interjecting $100 billion or so a day, at times, into the repo
market. Do you see a moral hazard in that?
Mr. Quarles. It is an interesting question. I don't think
actually that there is a moral hazard there. Given the
operating framework for monetary policy that we have described,
and have said that we will be following going forward, we have
to ensure that there is an ample level of reserves. We always
expected that as the level of reserves shrank, at some point we
would know when we got there because we would see a price
response in the market. We hadn't expected that it would be so
dramatic.
Mr. Davidson. How would the price response happen correctly
if the Fed intervenes? And so you are preventing the market
from functioning, in a way, because of Fed intervention. And
when you look at the purpose of the hearing, I think nothing
highlights better the fact that we might not have a regulatory
framework dialed in correctly for financial institutions than
the fact that our repo market is in chaos right now, and the
only way to bridge that gap is to essentially print money.
Although we are not calling it quantitative easing, and it has
maybe a different intent, how does it have a different effect?
Mr. Quarles. I think it has a different effect because of
the nature of the intervention. We are only trying to ensure
that we get to that level of reserves that ensures that our
administrative right, in fact, is the price of money as opposed
to the--
Mr. Davidson. But rather than putting money into the
system, why wouldn't you look at the regulatory framework that
created the problem in the first place? And as we close in on
the end of the year, many people are anticipating another surge
in demand for liquidity. Is the Fed expecting that?
Mr. Quarles. I do think that we need to look at the
regulatory framework. I don't think that it is the only
contributor, probably not even the driving contributor to what
has happened. But we do need to look at it.
Mr. Davidson. Thank you. My time has expired.
Chairwoman Waters. Thank you. The gentlewoman from North
Carolina, Ms. Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman, and thank you to
all of the witnesses for being here today. My first question is
to you, Chairman Hood. In October of 2018, NCUA amended its
2015 risk-based capital rule to delay the effective date until
January 1, 2020, and raise the asset threshold from $100
million to $500 million in assets. In June of 2019, the NCUA
again delayed the effective date to January 1, 2022.
At this point, the proposed risk-based capital standards
have been postponed multiple times. So does the NCUA have a
timeline for finalizing the standards within the next 2 years?
Mr. Hood. Yes, ma'am. NCUA, first and foremost, the credit
union system to date has a very strong net worth of over 11.39
percent. Because of that reason, ma'am, the recent NCUA board
made the decision to delay implementation so the new members--
two-thirds of our board all started in April of this year. So
with that being said, we are studying solutions and we are
looking to provide a holistic approach to injecting capital
into the credit union system.
Were the aggregate net worth to date not at 11.39 percent,
we would not have the comfort in taking this necessary time to
study. But we do have the risk-based capital rule that is
already in effect today. In fact, we have a rule that is not
identical to that of the FDIC, but is comparable. So there is a
risk-based capital structure in place, and when credit unions
fall below the statutory cap of 7 percent, we take enforcement
and corrective action.
Ms. Adams. Okay. So we don't really need to be concerned
about the capitalization within the credit unions?
Mr. Hood. I would say that we are well-capitalized. We will
continue to look for innovative and adding new tools to
buttress its capital adequacy. But right now it is hovering
over 11.39 percent, 400 basis points, so 4 percent above the
statutory requirement. So we have time to pursue innovative
options, and I hope to present them to you when I next testify.
Ms. Adams. Okay. Thank you, sir.
Vice Chair Quarles, in S.2155, the Fed was directed to
undertake a formal study to determine if banks with less than
$250 billion in assets are not systemic. Is the Fed still
planning to conduct this study, and if you are not, then why
not?
Mr. Quarles. The reason I was looking back at my colleagues
there was that I wasn't aware that there was a study
requirement, and they have confirmed for me that we did not
believe there was a study requirement. We are always looking at
the systemic situation of the industry as a whole, but I don't
think that the law required us to conduct a study.
Ms. Adams. Okay. That is a fake question, I guess. So let
me ask you, in terms of the loophole, in 2016, the Fed issued a
report calling for the ILC loophole to be eliminated, that
generally exempts ILCs from the Bank Holding Company Act. So
does the Federal Reserve still support that recommendation?
Mr. Quarles. We have not had cause to address that. We have
not changed our official position on that.
Ms. Adams. Okay. Let me move on to the CRA. I think all of
us can agree that it has served as an important tool in helping
meet the credit needs of our underserved communities and
populations. This question is for everyone. Briefly, can you
speak to how we can better align financial profit incentives
and the CRA incentives to ensure that more low- to moderate-
income borrowers, small businesses, and entrepreneurs can have
access to affordable, prudent loan options?
So if each of you can quickly--
Mr. Hood. Credit unions aren't governed by CRA, but I
support all financial institutions serving people of modest
means.
Ms. Adams. Chair McWilliams?
Ms. McWilliams. I believe we can reform the CRA to get
exactly to the point you are addressing, and that is the effort
I am trying to engage in to make sure that there is a greater
impact on the communities that the CRA was supposed to and
intended to affect.
Ms. Adams. Thank you. Sir?
Mr. Quarles. Yes, absolutely. I share those sentiments. We
can do more and we can do it efficiently.
Ms. Adams. Thank you all for your testimony and your
responses. Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you. The gentleman from North
Carolina, Mr. Budd, is recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman. Chairman Hood, it's
great to see another North Carolinian in the room.
Mr. Hood. Thank you.
Mr. Budd. Vice Chair Quarles, welcome. One topic that I and
others continue to be concerned about is the proper calibration
of the overall capital framework. I have asked you and Chairman
Powell several times about plans to update the G-SIB surcharge,
given that the Fed said it would do so in the final rule in
2015. So we hope to see some progress on that in the very near
future so that the U.S. can continue to level the international
playing field.
Chairman McWilliams, thank you to you as well for being
here. I want to briefly echo the comments made earlier by my
friend, Mr. Tipton from Colorado, and add my support to the
FDIC to utilize its upcoming broker deposit rulemaking to make
some long-overdue changes in updating how it interprets that
area of the law, in particular, if the deposits are coming from
an affiliate of the bank.
And Vice Chair Quarles, back to you, regarding the topic of
insurance, last July I sent you a letter following a dialogue
that we had at a hearing very similar to this, where I asked a
number of questions about the Fed's activities at the
International Association of Insurance Supervisors, including
for evidence from a solvency standpoint to prove it is
necessary to construct a new capital requirement for U.S.
insurers.
In your response, you said that the Fed remains committed
to engaged dialogue and pursuits of outcomes on international
standards that are appropriate for U.S. insurers and their
policyholders.
Last month, representatives from the U.S., specifically the
Department of the Treasury, the Fed, and the National
Association of Insurance Commissioners, attended a meeting of
the International Association of Insurance Supervisors (IAIS)
in Abu Dhabi, and during the meeting, the IAIS agreed to enter
a monitoring period for its global insurance capital standards,
but did not formally adopt implementation.
Significantly, Treasury registered their official
opposition to the deal, and making it clear that the ICS, in
its current form, still does not work with the U.S. State-based
system of insurance regulation that has served American
consumers for nearly 2 centuries, while the Fed did not
register any official opposition at the same time.
The Treasury position was heard loud and clear on the
global stage. There is much more work to be done in my
legislation to ensure any international deal must recognize our
system will play an important role in this process.
Vice Chair Quarles, as you indicated in your response to my
letter last year, the one in July, going forward, is the Fed
committed to opposing any international proposal such as the
ICS that does not work with the State-based system of
regulation and the policyholders that it serves?
Mr. Quarles. Yes, we continue to believe that the
international process has to work for the U.S. It can't be
successful if it doesn't. As you know, the IAIS doesn't have
any ability to impose its decisions on the United States, so it
really, if it doesn't work for the U.S., it won't be
implemented here, and so it really can't be effective.
Mr. Budd. Just to be clear, so that I don't have any lack
of clarity leaving here, you do continue to oppose, in ICS,
anything that doesn't serve the State-based system of
regulation?
Mr. Quarles. Yes. We believe that the international
standard has to accommodate the U.S. system.
Mr. Budd. Thank you very much. Madam Chairwoman, I yield
back.
Chairwoman Waters. Thank you. The gentleman from Illinois,
Mr. Garcia, is recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman. And
thank you to all the panelists for being here today.
I want to address my first questions to the Federal Reserve
and the FDIC. Both the Federal Reserve and the FDIC approved
the merger between BB&T and SunTrust on November 19th, but the
Fed simultaneously issued a consent order against SunTrust for
unfair and deceptive practices. SunTrust repaid $8.8 million in
fees that they had charged customers for those misleading
practices, but the practice of misleading consumers was not
exactly out of character for either bank. SunTrust and BB&T
ranked 3rd and 12th, respectively, in the most banking-related
consumer complaints last year.
Did the Fed and the FDIC investigate those complaints in
the process of reviewing the merger proposal?
Ms. McWilliams. Are you referring to the--I'm sorry, which
customer database? I want to make sure I understand your
question correctly.
Mr. Garcia of Illinois. Did you investigate those practices
when they came forward with their merger proposal?
Ms. McWilliams. We looked at it generally. We are a primary
regulator for BB&T, at the FDIC, and we have extensively--
Mr. Garcia of Illinois. Did you investigate those things?
Ms. McWilliams. If you can just repeat, what's the database
or the survey? I don't want to--
Mr. Garcia of Illinois. I didn't mention a database. I
mentioned banking-related consumer complaints against those two
entities.
Ms. McWilliams. To the extent that we get consumer
complaints about our regulated entities, including BB&T, we do
investigate.
Mr. Garcia of Illinois. So you did investigate those? Is
that within the purview of what you do?
Ms. McWilliams. I would assume we did, because without a
list and understanding, did these complaints come through the
BB&T--
Mr. Garcia of Illinois. Governor Quarles?
Mr. Quarles. Yes. We certainly took into account consumer
complaints and looked into them. We have to take the
convenience and needs of the--
Mr. Garcia of Illinois. So, that is a yes? Okay. I think
that poor consumer compliance records of banks seeking to merge
should be a factor in whether big banks are allowed to get
bigger. I don't want to reward bad behavior. If the Fed and the
FDIC are going to scrutinize the consumer protection
implications of mergers, I think that the CFPB should be given
a formal say in the bank merger review process. That is why I
announced today that I am introducing the Bank Merger Review
Modernization Act, which strengthens the process for reviewing
bank mergers and gives consumers a voice in whether they are
approved.
Governor Quarles, is it fair to say, in that your
experience with bank mergers is quite extensive--a 1997 article
in the International Financial Law Review described your work
at Davis Polk as follows, ``He advises domestic and foreign
banks and bank holding companies on a broad variety of matters,
including mergers and acquisitions. He has been active in
advising bank holding companies and security firms in proposed
business combinations, including the merger of Morgan Stanley
with Dean Witter, Discover JPMorgan's investment in the
American Century mutual fund company, and Bank of America's
purchase of Robertson Stevens.'' You also worked on Deutsche
Bank's acquisition of Bankers Trust and JPMorgan's merger with
Chase Manhattan.
This past weekend, the New York Times, as I think was
mentioned previously, did a profile of you, and noted that you
have met 22 times with lawyers from your former employer, Davis
Polk, since October of 2017. Is it possible for you to be a
neutral arbiter when it comes to big bank mergers?
Mr. Quarles. Well, as you note, you were quoting from
something from 1997, which is almost a quarter of a century
ago. It has been 20 years since I had anything to do with Davis
Polk. I do think that I have a lot of expertise in the area,
but I have no particular--
Mr. Garcia of Illinois. Do you feel that you are a neutral
arbiter?
Mr. Quarles. Absolutely.
Mr. Garcia of Illinois. Have prospective bank mergers been
a topic of discussion during any of your meetings with Davis
Polk?
Mr. Quarles. Prospective bank mergers. I can't think of
any, but if there were, it would be confidential supervisory
information (CSI). So, maybe it's confidential supervisory
information for me to say that I can't think of any, but I
can't think of any.
Mr. Garcia of Illinois. Thank you. My time is about up, so
I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from Ohio, Mr.
Gonzalez, is recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, for
holding this important hearing, and thank you to our panel for
your contributions and your service.
I want to start with Vice Chairman Quarles and Chairman
McWilliams. I sent both the Federal Reserve and the FDIC a
letter this week about the importance of establishing a
regulatory framework that promotes investment opportunities in
startups and small businesses. I know the Volcker regulators
are considering revisions to the covered funds portion of the
Volcker Rule, and I just want to encourage you, as part of that
process, to allow banks to sponsor or invest in long-term and/
or venture capital funds that I believe are an important source
of funding for companies seeking to grow.
As someone who previously ran a startup in Silicon Valley,
which is awash with private capital, I think it is important
for companies that need capital but aren't located in capital-
rich centers like that, especially States like mine and regions
like mine, in northeast Ohio, I want them to have as many
opportunities as humanly possible, and I think that vision is
shared.
And so I guess my first question to both of you would be,
as you are looking through this, how do you think about the
covered fund definition and the ability for banks to be able to
provide this?
Mr. Quarles. We are looking at ways to try to ensure that
we effect the purposes of the statute, but in a way that allows
the greatest amount of financing for the real economy, as is
consistent with the purposes of the statute. I think there are
amendments that we can make that will do that. They are under
active discussion currently, and we will propose them and get a
lot of comments on them, so I don't want to prejudge where that
is going. But the considerations that you are raising are
considerations that are on the table for us.
Mr. Gonzalez of Ohio. Ms. McWilliams, same answer? Yes or
no?
Ms. McWilliams. Likewise. And I can also tell you, from my
experience in Silicon Valley, working with startups, that
capital investment is crucial.
Mr. Gonzalez of Ohio. It is unbelievable, yes.
Ms. McWilliams. Especially in the earliest stages. And we
are cognizant of the ability of small businesses to create
opportunities in America.
Mr. Gonzalez of Ohio. And then back to Mr. Quarles, with
the SOFR transition that is coming, does the Fed support an
extension of LIBOR beyond 2021 for existing contracts? Not for
new ones, but for existing contracts that are already out
there?
Mr. Quarles. The issue is, and there has been some
confusion about it, is that it is not a question of the
regulators prohibiting LIBOR beyond the end of 2021 for
existing contracts, but the risk that it simply won't be
available, because the banks that participate in the production
of LIBOR have indicated that they may be unwilling to continue
participating.
Mr. Gonzalez of Ohio. But if it is available, would you
support it?
Mr. Quarles. We would have to consider what that meant, how
it was being produced, how many banks had dropped out, how
arbitrary was it then, given the remaining production process.
But in connection with your question, the issue of how we
handle the legacy contracts, the existing contracts, is a big
one, and we are wrestling with an efficient way to do that,
that ideally would not require the renegotiating of millions of
contracts.
Mr. Gonzalez of Ohio. Yes. I think that would be chaotic,
to put it lightly.
And then one concern I also hear with SOFR is it could be
procyclical, just due to the nature of SOFR itself. Do you
believe in the creation of credit-sensitive overlays to SOFR or
an alternative rate with credit spreads?
Mr. Quarles. I think that is a question that we ought to
examine more than we have. I don't have a view, ultimately, as
to whether that is something that ought to be there, but I do
think that it deserves more examination than we have given it.
Mr. Gonzalez of Ohio. Thank you. And then with my final
question, I want to focus on the repo market, which has been
mentioned a little bit. I have heard--and I don't mean this as
a criticism, but I am just sharing my view--a lot of different
explanations of kind of, yes, it might be that, it might be
this, we are not entirely sure. Do you have a sense that the
Fed has a good grasp of what exactly has happened, what the
driving factors are, and how we can correct it going forward?
Mr. Quarles. I do think we have a good grasp on what the
driving factors have been. I think that it is a complex
question. I don't think that it is an easy answer to say this
was the factor, or here are the two factors. But I do think we
have a good grasp on the various factors that contributed, and
I think we have a good grasp on the measures to be taken to
address them, both the short-term measures and the longer-term
measures, and all of them are under consideration at the Fed.
Mr. Gonzalez of Ohio. Thank you. And I guess with my final
few seconds, I would just encourage you to share that with us,
because right now it feels like we are more in the dark than I
think is appropriate, given our role.
Thank you, and I yield back.
Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
Green, who is also the Chair of our Subcommittee on Oversight
and Investigations, is recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. I thank the
witnesses for appearing as well, and I am pleased to announce
that I have in my hands a statement from the CFPB. It is
styled, ``Federal Regulators Issue Joint Statement on the Use
of Alternative Data in Credit Underwriting.'' And the agencies
would include the three that are here, and it includes five of
the regulatory agencies.
My assumption is that some considerable amount of thought
went into this decision. Is that a fair statement, when you
issue a joint statement that considerable thought goes into it?
If you agree just raise your hand, please.
[Show of hands.]
Mr. Green. Okay. All agree. Let the record reflect that all
agree.
And my assumption is that you would not make this statement
unless you concluded it was absolutely something that could be
of benefit to our economy, to consumers. Is that a fair
statement? If so, would you kindly raise your hand.
[Show of hands.]
Mr. Green. All seem to agree.
I would like to read the last sentence. In fact, I will
read just a portion of it. It is a rather long sentence, but I
would like to read a portion of the last sentence in the
statement. It indicates that in doing this, it might improve
the speed and accuracy of credit decisions and it may help
firms evaluate creditworthiness of consumers who currently may
not obtain credit in the mainstream credit system.
Strong statement. So, let's have our person who is
representing NCUA, could you give some indication please, sir,
as to how this will do what I have just read, that you have
published?
Mr. Hood. Yes, sir. We are really hoping to bring
additional individuals into the mainstream economy by looking
at alternative means of credit such as how do they pay their
bills, utility, telephone payments. These are just other
options that it is going to take to give individuals an
opportunity to demonstrate their ability to repay.
So in signing onto that, we really want to make sure that
we are helping people who are low to moderate income. There are
many folks who are what we would call credit invisible. This is
one of the many tools, and one of many I hope to come that
would, again, enhance financial access and services to people
who have never been a part of the mainline economy.
Mr. Green. Thank you. If you concur with what was just
said, would you raise your hand, please?
Ms. McWilliams. With a caveat.
Mr. Green. With a caveat? Okay.
Ms. McWilliams. The caveat is that we have 24.2 million
unbanked and underbanked households in the United States, and I
believe it is 8.4 million who are unbanked. And a lot of these
householders are, frankly, first-generation immigrants with no
credit history and people who live in low- and moderate-income
areas, a lot of minorities. And for them, to the extent that
they don't have credit established, according to the
traditional understanding of credit underwriting criteria, we
would like to be able to allow companies to extend credit to
them based on their transactions such as cell phone bills and
utility bills, but our existing guidance in place made it
questionable exactly how entities would engage in that type of
extension of credit.
So I believe this is an issue that has a broad economic
impact, but I also believe it is an issue that is an equalizer
for a number of people who have not been able to obtain
traditional credit.
Mr. Green. If you agree with what was just said, would you
kindly raise your hands, please?
[Show of hands.]
Mr. Green. I assume you agree with your statement, so let
the record reflect that all agree with the statement that was
just made. Given that you all agree, and you seem to indicate
that this will have some positive impact on the economy, does
anyone have any thought as to what this impact might be? This
might be a question for the Fed. I am not sure. You do a lot of
paperwork at the Fed where you analyze data. Do you have any
thoughts please, sir?
Mr. Quarles. We do a lot of research, and I don't have that
research at hand, but we would be glad to provide you any work
that we have done on the quantification of that.
Mr. Green. In a broad sense, would you think that this
could have a positive impact on the economy overall?
Mr. Quarles. Absolutely.
Mr. Green. Thank you very much. I bring this up because we
passed a bill out of committee, H.R. 123, that addresses this
additional credit scoring, alternative additional credit
scoring. We have to go with ``alternative additional'' because
of the confusion with ``alternative,'' some people thinking
that it might replace the traditional system. And I am pleased
that you have come to this conclusion, and I am hopeful that we
will be able to get this bill to the Floor.
Thank you, and I will yield back the balance of my time.
Chairwoman Waters. Thank you. The gentleman from Virginia,
Mr. Riggleman, is recognized for 5 minutes.
Mr. Riggleman. Thank you, Madam Chairwoman, and thank you
all for being here. I want to first echo the sentiments of my
colleague, Mr. Barr, regarding the hemp statement issued
yesterday. I had some questions for you, Chair McWilliams, but
I will follow up in writing, because after hearing Ms.
Pressley's questions on FedNow, I want to spend my time focused
on that issue.
Ms. McWilliams. Thank you.
Mr. Riggleman. Thank you, ma'am.
[laughter]
Mr. Riggleman. I am not quite sure. That is a good thank
you, though.
[laughter]
Mr. Riggleman. Vice Chairman Quarles, you were the lone
dissenter at the vote in August to proceed with the development
of FedNow, and I understand why you voted that way at that
time. I introduced a bill that will require the Fed to adhere
to its own policy statement, including cost recovery. When will
we know the cost, as far as you can tell, Vice Chairman
Quarles?
Mr. Quarles. We obviously had estimates of the costs that
were considered as part of the approval. We would necessarily
need that because the ability to recover the cost is a
statutory requirement.
Mr. Riggleman. Yes.
Mr. Quarles. And we believe that we can recover the costs.
Mr. Riggleman. And do we know what that cost is right now?
Mr. Quarles. I can't tell you off the top of my head, but
we do have estimates of it.
Mr. Riggleman. Okay. Thank you. I would love to see that.
And when do you expect that cost recovery will be achieved?
Mr. Quarles. It would only be over an extended period of
time. I think the law requires 10 years, doesn't it? It is long
term, but it would be over a long period of time.
Mr. Riggleman. A long period of time? Thank you for that.
And I will have more questions on that later, but we have this
5-minute beautiful thing here. So on November 20th, in the FAQ
published by the Fed, your Agency states, ``The board does not
have plenary authority to regulate payments.'' What does that
mean exactly?
Mr. Quarles. It means that we don't have direct regulatory
authority. Among the concerns that were raised with the private
sector system was that they could have discriminatory pricing.
They could have pricing that disadvantaged some. And while they
had said that they would not do that, that they would have one
price for all, the Federal Reserve does not have the direct
regulatory authority to address that if, in fact, they change
their minds. That is what that meant.
Mr. Riggleman. Thank you. And as proposed by your Agency,
FedNow will be operational by 2024, give or take. Is that
correct?
Mr. Quarles. Give or take.
Mr. Riggleman. Give or take. Some of my colleagues have
introduced legislation that would dramatically expedite that
service despite the current operational and functional
existence of a private market platform. If Congress
arbitrarily, without understanding, required the Fed to move
ahead of its own timeline, what would be the effects,
particularly on consumers and markets, as we went forward with
that?
Mr. Quarles. I would be concerned about a significant
acceleration just because of the difficulty of execution. It is
a very, very big project. I am not sure that the laws of
physics would actually allow its acceleration very much from
what has been proposed.
Mr. Riggleman. Yes, sir. I love the law of physics, and we
are looking at the proposed regulation as far as the arbitrary
timeline. Do you still think 2024 is a valid date for execution
of FedNow?
Mr. Quarles. Yes, I think that is reasonable.
Mr. Riggleman. Reasonable? Here are the issues and why I am
asking these questions. On innovation--and my experience has
taught me, and that has really been my background is research
and development or quick reaction capabilities, things of that
nature, the Department of Defense has taught me that if you
want to solidify a monopoly or duopoly, then you should have
the Federal Government get involved. And in the payment space,
RTP is new, but it is likely not the ultimate or final
development. So how do you see the Fed's involvement as
potentially stifling innovation and even maybe hurting
consumers as we go forward?
Mr. Quarles. I think that it will be a task that we will
have to ensure that it doesn't do that. As you have noted,
innovation here is very rapid, and while I do have concerns,
they ended up not being shared by my colleagues on the board,
that we would not be able to keep up with the innovation. The
fact that the Federal Reserve was implementing something on the
basis of current technology could, in fact, be outdated by the
time that we were completed with it, that is a task that we
will have to address. The Federal Reserve will devote resources
to ensuring that we try to address that, and my colleagues were
convinced that we could.
Mr. Riggleman. Yes, and that is why I found it interesting,
Vice Chairman. We talked about the initial cost based on the
report and what that would cost. Is there any costing on the
sustainment cost of keeping up with technology after the
initial implementation of FedNow?
Mr. Quarles. With respect to all of that, we will be
required to recover the costs under the law, and so as we would
make amendments to that rapid payment system in the same way as
we make additions or refinements, improvements to the current
payment system that we provide, we will recover the cost of
those investments.
Mr. Riggleman. Thank you so much, and thanks for your time.
Chairwoman Waters. Thank you. The gentleman from Florida,
Mr. Lawson, is recognized for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman, and I welcome the
witnesses to the committee. I was happy to learn from your
discussion about what the institutions are doing to provide
credit to those who are underbanked, which I think has been
very successful. Unfortunately, many people are turning to
alternative sources of borrowing, including payday loans, in
order to get access to capital when they are turned away from
banks, sometimes including credit unions. Ms. McWilliams, can
you talk more about the payday alternative loans and how this
has helped bring more people into the banking sector?
Ms. McWilliams. I believe there is an opportunity for banks
to engage more in the small-dollar lending space. And as was
mentioned previously, there is a Federal Reserve study that
says that a large percentage of the population, about 40
percent, do not have $400 every month for emergencies. And
unfortunately, we don't have a lot of banks in the small-dollar
space, and the consumers are now going through alternative
channels for those products. We have ample consumer protection
laws at the banks and the bank regulatory agencies. And,
frankly, I would like to see some of those products return to
banks where we can make sure that the consumers are protected.
I also think that there is a lot of dichotomy in the
Federal regulatory framework with respect to small-dollar
loans. From the FDIC, there is a 2013 guidance. There is a
bulletin from the OCC, from 2017. There are supervisory letters
from the Federal Reserve. There is a rulemaking at the CFPB.
They are not all, quite frankly, synchronized, and I think
there is an opportunity for us to synchronize these rules to
make sure that consumers who need small-dollar credit and are
in dire need of responsible small-dollar credit can do so
through banks, which we regulate.
Mr. Lawson. Okay. Thank you. Mr. Hood, I have probably been
a member of credit unions for some 40 years, I guess, since I
first started off. In the area I am in, in the capital city,
there are a lot of credit unions and some small banks. But
there have been more concerns since I have been up here in
Congress from some of the smaller banks about the growth of
credit unions. And I know that when you are in a government
town, a university town and so forth, where I am, you don't
really think about that because people want to have access to
capital. Do you feel that the concern from the smaller banks is
going to continue to cause more regulations to be put on credit
unions?
Mr. Hood. I think that the important thing is that there
are banks and credit unions that are all competing in today's
dynamic marketplace where at the end of the day, it is the end
user, whether it is a credit union member or a bank customer,
they are getting access to regulated, affordable financial
services. I would much rather have banks and credit unions
continuing to grow in today's economy because we know what
happens if that doesn't occur. Then, it leaves all of these
communities that are underserved vulnerable to pernicious
payday lenders.
So I don't want to pit banks versus credit unions. I want
to say aye, and the credit unions, they are growing the credit
unions because of members wanting to have institutions where
they can get affordable capital. So when I made my opening
statement this morning, credit unions now serve a third of the
American public, and I think that is because of their
commitment to providing access.
Mr. Lawson. That is a very good answer, and my next
question would be, before my time runs out, credit unions now
take members from all over. Should there be any limitation on
the memberships outside of the institutions that they are
formulated on?
Mr. Hood. That is an area that we, first of all, we do have
field of membership restrictions. No matter which credit union
one joins, almost everyone in this room can join a credit
union, but just not the same one because of those field of
membership restrictions. So if there is a particular question
you have in mind, I would be happy to sit down with you. But,
no, the credit unions' models were based on, for instance, you
would have a plant or you would have a company. Now, as credit
unions and sometimes in some instances companies have left
markets, well, then those credit unions will apply for a
community charter and things of that nature. So at the end of
the day, credit unions still are governed by membership
restrictions.
Mr. Lawson. Should you be kept at a certain limit of the
number of memberships that you could have?
Mr. Hood. I think, sir, that is a free market decision, and
I think that is up to the credit union and the member of that
credit union. But, again, as long as that member has the field
of membership restrictions in mind, then as a regulator, I
can't impose that. I can only ensure the safety and soundness
of the credit union system and the shared insurance fund that
guarantees the deposits.
Mr. Lawson. But after you go to a certain level, the tax
implication or the tax exemption that you have, how does that
affect you?
Mr. Hood. Oh, you are talking about the tax-exempt status
of the credit unions in terms of their size. Well, sir, I,
again, am looking at the safety and soundness. Regardless of
whether you are a million-dollar credit union or a $100 billion
credit union, it is up to Congress to determine whether or not
credit unions maintain their tax-exempt status.
Mr. Lawson. Okay. With that, I yield back.
Chairwoman Waters. Thank you. The gentleman from Indiana,
Mr. Hollingsworth, is recognized for 5 minutes.
Mr. Hollingsworth. Mr. Quarles, I really appreciate you
being here. As you and I have talked about many times over the
past couple of years, CCAR is really important to me in
ensuring that we revise and become more transparent with some
of the stress capital buffer rules. And I was delighted to hear
earlier today, I think in response to Mrs. Wagner's question,
you say that you are still aiming to have that done in time for
next year's stress test cycle. I wondered if you would start
kind of daisy row today how we get there because you alluded
to, I think, in your answer to her question as well about how
challenging the timeline might be to do so, but it still felt
like it was reasonable.
Can you kind of walk us through, what does the comment
period look like? How long does it take to distill that into a
rule? How long does it take to get that rule out so that
there's some transparency in it beforehand given these large
institutions are relying a lot on that test, and with some of
their capital planning thereafter, we want to make sure that
they get adequate time beforehand to understand what that test
looked like?
Mr. Quarles. In order for it to be effective, at least for
the next cycle, at least some elements of it would have to go
final as opposed to being re-proposed.
Mr. Hollingsworth. Correct.
Mr. Quarles. And we have the ability to do that on the
basis of the comments we have received for the proposal that is
out there currently. Over the course of the next several weeks,
we can do that. We haven't determined if that is the right
approach, which is why I say we can do it, and it is still our
aim to do it, but we haven't finally decided if that is our
approach.
Mr. Hollingsworth. When do you expect to make that
decision? I guess what I am looking for is, when can I follow
up? When can other members of the committee, those who have a
significant stake in this, when can we follow up and say, okay,
this was the next point at which we expected a decision, the
next point at which we would expect a step taken by the Fed in
order to reach that outcome by that date certain? When is the
next step we can expect that we could follow up and find out
whether that step was taken?
Mr. Quarles. Whether we go final will be clear at the time
we go final. I think we have about another month if we were to
take that view.
Mr. Hollingsworth. Okay. And the decision would have to be
made before than obviously in order to lay that out, right?
Mr. Quarles. Right.
Mr. Hollingsworth. Okay. So it would be reasonable if we
followed up within the next couple of weeks, to ask whether a
decision was made to go forward with that and whether steps are
in place to be able to forward with that?
Mr. Quarles. Certainly.
Mr. Hollingsworth. I just believe that this is a really
important aspect of what I hear from large institutions today,
more transparency in this process, more clarity in this process
so that they can plan long term their own capital. And
hopefully, that continues to support the economy overall, so I
appreciate that answer.
Mr. Hood, you and I had a great conversation a couple of
weeks ago as we talked about how I have had some institutions
that have come into the office concerned about our recent trend
of credit unions purchasing smaller banks. But at the same
time, I have had some great Hoosiers who have come into the
office and said, were it not for that acquisition of a bank by
a credit union, my local branch probably wouldn't be here. That
community wouldn't be served by that. And I felt like, frankly,
you really articulated so well in that call how you think about
this, how you approach this, and the rubric by which you are
discerning those. I wonder if, in a minute-and-a-half, you
might give us all a preview and a review of how you think about
this.
Mr. Hood. Yes, sir. Thank you for the question, and thank
you for our recent call. Yes, to date, there have been 32
credit unions that have required bank assets, 32 over the past
7 years, or actually since 2013, whereas there have been
roughly 250 bank-on-bank acquisitions just over the past year
alone. I would like to note for the record that these are
voluntary market-based transactions.
At the end of the day, it is the FDIC and the NCUA who must
approve these transactions. In approving those transactions, we
at NCUA are going to look to ensure that the bank is going to
have the members that could qualify for the membership. We are
also going to ensure that other statutes of the Federal Credit
Union Act are implemented, such as the fact that business
lending is capped at 12.25 percent of assets, and also credit
unions are not allowed to have anything other than retained
earnings for their capital. The credit unions are not going to
be able to have any of the stock that an acquired institution
would have had.
Also, I would like to note that in many of these areas, as
you noted in your introduction, if it weren't for credit unions
acquiring some of these banks, the community would be left
without a financial institution. It would leave them vulnerable
to, again, pernicious payday lenders. I also would like to note
that at the end of the day, the bank does get to choose or
select who that acquiring entity is, and, again, let's note,
dual approval. Both the FDIC and the NCUA approve these, and
they are not happening arbitrarily and capriciously.
Mr. Hollingsworth. Right. I think that is important to
remember, and I really appreciate that. I knew your comments
would help give some comfort to those who think this is
happening in the absence of oversight, so I really appreciate
your thoughtfulness about that.
Mr. Hood. And we have had also a bank that has acquired a
credit union.
Mr. Hollingsworth. Fair enough, and I will follow up with
you, Mr. Quarles, as well. Thank you so much for your time.
Chairwoman Waters. Thank you. The gentleman from Utah, Mr.
McAdams, is recognized for 5 minutes.
Mr. McAdams. Thank you, Chairwoman Waters, and thank you to
our witnesses for being here today. Chair McWilliams,
previously when you testified before this committee, I asked
about whether the FDIC had the authority needed to properly
regulate and oversee ILCs. And you testified that you believed
that the FDIC did indeed have all the authority it needed to
regulate ILCs and to ensure that they operate in a safe and
sound manner. Do you still agree with that statement?
Ms. McWilliams. I do. I believe that Congress gave us ample
authority to supervise the ILCs, yes.
Mr. McAdams. Thank you. And you also stated that you would
not approve an ILC application for deposit insurance if you
believed that it would put the insurance fund or the financial
system at risk. Since that time, the topic of ILCs has gotten a
lot of press and legislative attention with some calling to
effectively end the ILC charter as we know it. Some of what I
hear in support of ending the ILC charter is that ILCs are
unregulated and pose a significant risk to the U.S. financial
system.
I would like to say that I strongly disagree with both of
those points, and I would like to use a bit of my time to
follow up on them. My State is home to many ILCs, and in our
experience, these institutions have proven to be remarkably
safe and well-regulated. First, in regards to the claim of ILCs
being unregulated because their parent companies are not
subject to the Bank Holding Company Act, isn't it correct that
the FDIC has authority to regulate the relationship and
transactions between the parent company and the ILC to ensure
that the ILC and our financial system remain safe?
Ms. McWilliams. In fact, we are actually able to require
the so-called CULMA agreement, which is an agreement that
provides for minimal capital and liquidity standards that the
parent would be obligated to bestow upon the ILC to ensure that
the ILC is safe and sound.
Mr. McAdams. Right, and I would also add that the FDIC has
authority to issue cease-and-desist orders. The bank-centric
model requires the bank to have an independent board and
management. Section 23(a) and 23(b) sets terms around the
transactions, et cetera. Do all of these provide the FDIC with
adequate authority over those relationships and transactions,
in your view?
Ms. McWilliams. On Sections 22 and 23, I would have to
defer to the Fed. But Congress gave us ample authority to
regulate the ILCs, and I certainly have staff I am paying to
regulate the ILCs.
[laughter]
Ms. McWilliams. So if we are not regulating them
adequately, I think some people are getting a lot of money for
not doing their job, but that is not the case. We have a lot of
experience recognizing the ILCs, and unless Congress decides to
treat ILCs otherwise, we will continue under the existing
congressional authorities.
Mr. McAdams. Thank you. And second, regarding the risk
posed by ILCs to the U.S. financial system, for decades, ILCs
have proven to be some of the safest and most stable banks in
the nation. Can you tell me how ILCs compare to most other
banks in the capital that they hold and in their failure rates
over the past 30 years?
Ms. McWilliams. They are generally better capitalized than
banks, and we don't have that many ILCs, frankly, so it is a
limited universe of entities we are talking about. They are all
capitalized. It is our experience that they are generally well-
managed. Again, it depends on an institution-by-institution
basis, but we have not experienced issues with the ILCs.
Mr. McAdams. Thank you. That is my understanding as well.
Moving to a different topic, I want to discuss CRA, and with
respect to the Community Reinvestment Act, more of a statement
than a question. I have spoken with you all previously about
the need to preserve the spirit and the intent of the CRA to
benefit low- and middle-income communities and individuals,
while also updating the CRA for a 21st Century financial
system. I understand that the OCC and the FDIC may be moving
forward on a proposal without current buy-in from the Fed, and
I do have concerns about this not being a unified rulemaking.
It is one thing for financial institutions to comply with
the CRA regulations, but CRA also involves numerous community
partners, as I know as a former mayor myself, many of which
don't have the resources or time to understand potentially
conflicting CRA regulations. So I would urge all of the
agencies to come together on a single proposal that strengthens
and modernizes CRA. And additionally, I share many of the
concerns that my colleagues have expressed with respect to CECL
and the impact that it may have on credit availability, in
addition to the compliance requirements for financial
institutions.
Moving on to another topic, Vice Chair Quarles, the Federal
Reserve has been contemplating, as my colleague, Mr.
Hollingsworth raised, the stress capital buffer for some time
now with the proposal released in 2018, more than a year-and-a-
half ago. Ensuring that we have rigorous stress tests and
appropriate capital levels is important, so I just want to
reiterate that I share my colleague, Mr. Hollingsworth's,
concern and goals about achieving this and having this
completed by 2020. And lastly, Mr. Quarles, it looks like I am
about of time, so I will yield back. I may have some additional
questions for the record, including on the Agency's future work
on covered funds and fund structures. So thank you, and I yield
back.
Chairwoman Waters. Thank you. The gentlewoman from
California, Ms. Porter, is recognized for 5 minutes.
Ms. Porter. Thank you. Chairwoman McWilliams, you told Mr.
Lawson, my colleague, that you want to return small-dollar
lending to banks. Were you referring to the FDIC's looking the
other way when FDIC-supervised banks are helping predatory
lenders charge up to 160 percent in 26 States and the District
of Columbia, where that rate is legal?
Ms. McWilliams. No.
Ms. Porter. Are you aware of this practice?
Ms. McWilliams. I am aware of some examples of the interest
rates that you cited.
Ms. Porter. Are you aware that FDIC banks that you
supervise are engaged in rent-a-bank schemes that are allowing
predatory lenders to make loans with those interest rates in
States that have chosen through the democratic process to
prohibit those rates?
Ms. McWilliams. I am aware of partnerships that banks have
created with entities that are offering those loans, and I am
also aware of the enforcement action that we engage in
specifically in institutions that do so in a manner that is not
consistent with consumer protection or Federal laws.
Ms. Porter. What is consistent with consumer protection
about lending at a rate that is prohibited under State law?
Ms. McWilliams. The rates are set by State law. Where we
look at consumer protection, as you all know, is, are there
issues with fair lending practices? Are there issues with
unfair and deceptive practices--
Ms. Porter. Pardon me, Chairwoman. I think I didn't make
myself clear. Today, FinWise Bank and Republic Bank are engaged
in partnerships with entities, like OppLoans and RISE/Elevate.
And what they are doing is making loans at rates like 160
percent APR in States that have banned that rate. How is it
consistent with the FDIC's supervision of consumer protection
rules to allow these State-chartered, FDIC-supervised
institutions to engage in these partnerships that evade State
law, democratically-passed State law regulations on interest
rates?
Ms. McWilliams. We don't regulate State interest rate caps
or what is permissible or usury under State law, and I can only
say this because we did have an enforcement action against one
of the entities you mentioned. It is a public enforcement
action--you can find it on our website--where we thought that
their consumer compliance record was not, frankly, of the
expectations and qualities we have of our supervised entities.
Ms. Porter. And so are you aware of statements made on
earnings calls by lenders in California in the wake of
California's new lending law? Several payday lenders announced
on their earnings calls that they plan to use rent-a-bank
schemes to evade California's new law that outlaws 100 to 200
percent installment loans.
Ms. McWilliams. I am not, and I, frankly, don't listen to
payday lenders' investors calls. I just don't have the time. I
can tell you that States actually have an opportunity to opt
out of the ability of out-of-State entities to provide interest
rates that are prohibited in that State, and that is up to
States to decide. Congress gave the States that authority, and
it is, frankly, implemented in Section 27(a) of the FDI Act.
Ms. Porter. Okay. Thank you. I wanted to follow up on what
my colleague, Mr. McAdams, was asking about with regard to the
Community Reinvestment Act. I am confused. I read the statement
of Mr. Otting on November 20th when he announced that the Fed
is not going to participate in the CRA modernization effort. I
then read the statement of the Federal Reserve spokesperson. I
am confused. Who here, and just feel free to raise your hand,
who here is the good guy?
[Hands raised.]
[laughter]
Ms. Porter. Okay. Now, you understand that you two are on
different sides of this, so I am concerned that--
Ms. McWilliams. Not necessarily.
Ms. Porter. I am pretty knowledgeable about the CRA, and I
can't tell which one of you is in favor of which proposal. I
share what Mr. McAdams said about, why is this coming
unraveled. I am very concerned that it isn't a joint
rulemaking, but I can't even tell which of you I should be
sending a letter to, to complain. And I think this obfuscation
is really unhelpful to the American people who need to be
engaged in the CRA process. Mr. Quarles?
Mr. Quarles. I think it is inaccurate that we are on
opposite sides. We have been pursuing a joint rulemaking, and
the objective will continue to be at the end of the day, we
will have final joint rule among the three agencies.
Ms. Porter. Okay. If I'm not mistaken, Comptroller Otting,
who is not here today, of course, announced that the Fed will
not participate in the CRA modernization. Are you contradicting
that?
Mr. Quarles. Fortunately, my time is up.
[laughter]
Chairwoman Waters. Do you yield back the balance of your
time?
Ms. McWilliams. Oh, there is time, right? No, there isn't.
Actually she is over, 19 seconds over.
Chairwoman Waters. We have indicated that you may answer
questions in writing and send your responses to any of our
Members who have not had the opportunity to have them answered
today.
I would like to thank our distinguished witnesses for their
testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 1:35 p.m., the hearing was adjourned.]
A P P E N D I X
December 4, 2019
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