    [Senate Hearing 116-]
    [From the U.S. Government Publishing Office]

                       OVERSIGHT OF FINANCIAL REGULATORS

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

                                    HEARING

                                   before the

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

      EXAMINING THE EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF FEDERAL
         FINANCIAL REGULATORY AGENCIES WITH RESPECT TO REGULATORY AND
     SUPERVISORY ACTIVITIES FOR FINANCIAL INSTITUTIONS, CREDIT UNIONS, AND
                                    ENTITIES

                                   __________

                                DECEMBER 5, 2019

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
    TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
    BEN SASSE, Nebraska                  JON TESTER, Montana
    TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
    MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    MARTHA McSALLY, Arizona              DOUG JONES, Alabama
    JERRY MORAN, Kansas                  TINA SMITH, Minnesota
    KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                         Gregg Richard, Staff Director

                    Laura Swanson, Democratic Staff Director

                            Catherine Fuchs, Counsel

                    Brandon Beall, Professional Staff Member

                     Sarah Brown, Professional Staff Member

                     Elisha Tuku, Democratic Chief Counsel

               Corey Frayer, Democratic Professional Staff Member

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                           THURSDAY, DECEMBER 5, 2019

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    32

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    33

                                   WITNESSES

    Randal K. Quarles, Vice Chairman for Supervision, Board of
      Governors of the Federal Reserve System........................     5
        Prepared statement...........................................    34
        Responses to written questions of:
            Senator Brown............................................    79
            Senator Tillis...........................................    82
            Senator Kennedy..........................................    85
            Senator Tester...........................................    85
            Senator Menendez.........................................    90
            Senator Warren...........................................    91
            Senator Cortez Masto.....................................   112
            Senator Cramer...........................................   113
            Senator Jones............................................   115
    Jelena McWilliams, Chairman, Federal Deposit Insurance
      Corporation....................................................     7
        Prepared statement...........................................    37
        Responses to written questions of:
            Senator Brown............................................   116
            Senator Rounds...........................................   120
            Senator Tillis...........................................   125
            Senator Kennedy..........................................   126
            Senator Tester...........................................   128
            Senator Moran............................................   134
            Senator Menendez.........................................   135
            Senator Warren...........................................   136
            Senator Cortez Masto.....................................   149
            Senator Cramer...........................................   151
    Rodney E. Hood, Chairman, National Credit Union Association......     8
        Prepared statement...........................................    55
        Responses to written questions of:
            Senator Brown............................................   153
            Senator Rounds...........................................   166
            Senator Moran............................................   172
            Senator Tester...........................................   173
            Senator Menendez.........................................   175
            Senator Warren...........................................   175
            Senator Cortez Masto.....................................   177
            Senator Cramer...........................................   180
            Senator Jones............................................   180

                  Additional Material Supplied for the Record

    Statement of the Credit Union National Association (CUNA),
      submitted by Chairman Crapo and Senator Brown..................   182
    Statement of the National Association of Federally-Insured Credit
      Unions (NAFCU), submitted by Chairman Crapo....................   186

                       OVERSIGHT OF FINANCIAL REGULATORS

                                  ----------

                           THURSDAY, DECEMBER 5, 2019

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10 a.m. in room SD-538, Dirksen Senate
    Office Building, Hon. Mike Crapo, Chairman of the Committee,
    presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. The Committee will come to order.
        Today we will receive testimony from the Honorable Randal
    Quarles, Federal Reserve Vice Chairman for Supervision; the
    Honorable Jelena McWilliams, Chairman of the FDIC; and the
    Honorable Rodney Hood, Chairman of the NCUA. Welcome to all of
    you.
        This hearing provides the Committee an opportunity to
    examine the current state of and recent activities related to
    the regulatory and supervisory activities of these agencies.
        It has been over a year now since the enactment of S. 2155,
    the Economic Growth, Regulatory Relief, and Consumer Protection
    Act, and the work of the agencies to implement most of the
    law's provisions, including the tailoring rules for U.S. banks
    and U.S. operations of foreign banks.
        Your agencies should also carefully review the existing
    supervisory frameworks and make any necessary adjustments to
    appropriately align them with the tailoring rules and
    requirements.
        On July 30, 2019, all of the Republican Banking Committee
    Members and I sent a letter to the Federal banking regulators
    urging your agencies to finalize several outstanding provisions
    of S. 2155, such as the Community Bank Leverage Ratio and
    short-form call reports, and further tailor regulations to
    promote economic growth, including addressing the Current
    Expected Credit Losses accounting standard, the Volcker Rule,
    the inter-affiliate margin, and Madden.
        Thank you for acting on many of these priorities. I
    encourage you to continue exploring additional opportunities to
    tailor these rules.
        In that July letter, as well as an October 2018 letter to
    your agencies, several Banking Committee Republicans and I
    urged your agencies to revise the Volcker Rule, including using
    your discretion granted by Congress to address the current
    ``covered funds'' overly broad definition.
        Although your agencies have joined the SEC and CFTC to
    issue a proposal revising several aspects of the Volcker Rule,
    which is appreciated, the ``covered funds'' provision was left
    relatively untouched.
        I encourage your agencies to take quick action to address
    the ``covered funds'' issue by revising the definition's overly
    broad application to venture capital, other long-term
    investments, and loan creation.
        Separately, in September, short-term borrowing rates spiked
    as a result of a large corporate tax payment coming due and
    $300 billion in Treasurys hitting the market, even in light of
    banks holding a surplus of cash at the Fed, currently around
    $1.4 trillion.
        In light of these events, banks could have stepped in to
    alleviate the volatility in those markets by lending some of
    the excess cash that they hold at the Fed. So why didn't they
    do that?
        Some have suggested that certain aspects of the Fed's
    supervision and regulations imposed after the 2008 financial
    crisis may have exacerbated this problem, specifically the
    treatment of cash versus Treasurys.
        Although the Fed has taken some steps to address the issue
    in the short term by buying Treasurys and lending funds, it is
    important that the Fed review the details of its current
    regulatory and supervisory regime for potential long-term
    fixes.
        Now, quickly turning to guidance, Senators Tillis, Perdue,
    Rounds, Cramer, and I wrote to the GAO in February asking for
    its legal opinion as to whether three Federal Reserve
    Supervision and Regulation Letters constitute a rule under the
    Congressional Review Act.
        In its October response, GAO concluded that two of the
    letters, including one providing a new supervision framework
    for large financial institutions and another related to
    recovery planning, are rules under the CRA and are required to
    be submitted to Congress for review.
        During the Banking Committee's April hearing on this very
    issue, I urged your agencies to follow the CRA and submit all
    rules to Congress, even if they have not gone through a formal
    notice-and-comment rulemaking to continue providing more
    clarity about the applicability of guidance.
        I encourage the Federal banking regulators to take a more
    deliberate approach going forward and take any necessary steps
    to rectify informal guidance that has not been submitted to
    Congress.
        In January 2019, the NCUA announced the portion of
    regulations that would be reviewed as a part of the process
    through which the agency reexamines all of its existing
    regulations every 3 years.
        The comment period for that review process has since
    closed, and I look forward to learning more about the
    regulatory recommendations provided to the NCUA and the road
    map for actions going forward.
        Finally, the Banking Committee has been exploring digital
    currencies over the last few Congresses, especially in light of
    the recent development of the Libra digital currency, started
    by Facebook.
        In July, I asked Federal Reserve Chairman Powell about his
    understanding of and the Fed's role in the project.
        Although Chairman Powell noted that the Fed has set up a
    working group to focus on Libra and is in contact with the
    other regulatory agencies, he also said that, ``There is not
    any one agency that can stand up and have oversight over
    this.''
        Given its scope, regulators across the globe continue to
    evaluate Libra, its potential impact in the marketplace, and
    consider appropriate and necessary regulatory responses.
        It seems that digital currencies are inevitable, and the
    United States needs to lead by providing clear rules of the
    road.
        During this hearing, I look forward to learning more about
    the status of addressing the overly broad covered funds
    definitions in the Volcker Rule, especially with respect to
    long-term investments; how the agencies are thinking through
    the recent turmoil in the repo market, and what adjustments may
    be appropriate for a long-term fix; whether the supervisory
    framework that applies to banks currently needs to be updated
    to better reflect changes made in the tailoring rules; and how
    the agencies are thinking about the Libra project digital
    currencies, including what the U.S. regulatory framework merits
    consideration to balance innovation and protect users and
    privacy.
        I thank each of you for your willingness to join the
    Committee today to discuss your agencies' regulatory and
    supervisory activities and these important issues.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman. Welcome to the
    three regulators here.
        I want to start by noting that typically when we have the
    financial regulators testify, the Comptroller of the Currency
    is also here. Mr. Otting had a conflict today. I believe him.
    He is expected to announce changes to the Community
    Reinvestment Act shortly, changes that the civil rights
    community and others are very concerned about. I share those
    concerns. I expect that we will have him up before this
    Committee, Mr. Chairman, to talk about this proposal and other
    activities at the OCC soon.
        We all saw how Wall Street's financial schemes hurt regular
    people when they blow up in bankers' faces, like they did 11
    years ago.
        You all saw the devastation of the crisis. Whether you were
    a staffer in the Senate, whether you were serving at the agency
    you now lead, or whether you were at a private equity firm
    after a stint at Treasury, you had a front-row seat. You can
    argue about or discuss responsibility. We can talk about that
    later.
        That is why I am concerned about the collective amnesia you
    all appear to have as you make changes in bank rules--changes
    that allow Wall Street to go back to its old tricks that I fear
    will again cost Americans their jobs, their homes, their life
    savings, and wreak the kind of devastation in neighborhoods
    like mine in Cleveland the next time that complicated bets blow
    up in bankers' faces.
        But what is sometimes harder to see are the schemes that
    hurt families and the economy even when they work exactly the
    way Wall Street intended them to work.
        My State is the setting of one of those Wall Street
    schemes. Twelve years ago, just before the financial crisis, a
    giant private equity firm bought a nursing home company based
    in Toledo, Ohio, that operated facilities nationwide.
        Soon that nursing home company was being strangled by debt
    from risky leveraged loans. It laid off hundreds of staff. It
    let its patients suffer under negligent, horrifying conditions.
        According to the Washington Post, staffing cuts meant there
    were not enough nurses to respond to patients.
        Health code violations rose dramatically.
        In Pennsylvania, a patient broke her hip and crashed to the
    floor when a single staffer tried to do a two-person job and
    move her on his own.
        Patients faced other living conditions that no human should
    have to endure, waiting in soiled clothing and dirty beds for
    help that was never going to come.
        And all the while, that Wall Street private equity firm was
    extracting more and more profits.
        Last year, the nursing home company went bankrupt. That did
    not stop the private equity firm from making huge profits on
    their investment.
        That is what happens when leveraged loans, collateralized
    loan obligations, and leveraged buyouts work as designed,
    designed by Wall Street. Wall Street extracts the profits out
    of the company; the rest of us--workers, patients, families,
    and communities--pay for it.
        Today Wall Street looks for profits anywhere it can find
    them. These schemes squeeze money out of every part of the
    economy. It is not only health care. It may be a hospital in
    Philadelphia, Pennsylvania, or it may be a hospital in
    Massillon, Ohio; but it is also manufactured home communities
    in Iowa--and I have seen some of those where private equity
    came in and raised the rent 50 percent, and people are captive,
    having to live there and much higher rent that they did not
    expect. Manufactured-home communities in New Hampshire also,
    not just harming individual families but entire communities.
        Imagine how bad it will be if these complex financial
    transactions blow up like the subprime mortgages did in 2008.
        This is just one of so many challenges working families
    face.
        We got a report this week showing that almost half of
    American workers are stuck in low-wage jobs. One-in-four
    families spend more than half their income on rent and
    utilities. I know people sing about this economy, but think of
    this 10-year economy where growth has actually declined a bit
    in the last couple of years. Think about that. Almost half of
    American workers are stuck in low-wage jobs. One-in-four
    families spend more than half their income in rent and
    utilities, and you know what that means. If one thing goes bad
    in their lives, they lose their home. Forty percent of
    Americans are so short on cash they would be forced to borrow
    money to cover a $400 expense. Those are the people the three
    of you work for. You do not work for this President. You do not
    work for Wall Street. You do not work for the banks. You work
    in part for half the population that cannot come up with--40
    percent of the population that cannot come up with $400.
        More and more families have to borrow just to get by--
    credit card debt, student loan debt, and mortgage debt, all
    higher than before the crisis. Wall Street squeezes more out of
    every one of their paycheck, adding to their billions.
        If regular Americans are struggling 10 years into this so-
    called recovery, when the stock market is booming, what will
    happen when there is a recession?
        This cannot be how the financial system should work.
        The regulators' job is not to protect profits for big banks
    and big companies. It is to protect our economy and our
    financial system and the ordinary families that the system is
    supposed to serve, not the other way around.
        I guess when the President, when Candidate Trump talked
    about ``draining the swamp,'' he really meant betraying workers
    and giving Wall Street free rein, as we have seen begin to
    happen, betraying workers and giving Wall Street free rein to
    prey on them and wring every last cent out of our communities.
        The President uses his phony populism--racism, anti-
    Semitism, anti-immigrant slander--to divide us, to distract
    from all the ways he and his hand-picked cronies have betrayed
    working families and left them struggling more than ever.
        That is not how a democracy should function. I am deeply
    worried that if you as the regulator do not stand up for
    workers and families, so much in our economy and our democracy
    is at risk.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        We will now turn to our witnesses, and I would ask you to
    give your remarks in the order I introduced you. We will turn
    to you first, Mr. Quarles.

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

        Mr. Quarles. Thank you very much. Chairman Crapo, Ranking
    Member Brown, 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, which is the full and faithful
    implementation of Congress' efforts to improve financial
    regulation in the form of the Economic Growth, Regulatory
    Relief, and Consumer Protection Act. Today I will briefly
    review the steps we have 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 specific targeted response to the
    conditions facing today's banking organizations and their
    customers. It was also rooted, however, in longstanding
    congressional 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, which
    is 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 risks.
        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 downpayment 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 a 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 those risks and for the costs that the financial system
    would incur if a firm failed. This simple asset proxy was clear
    and critical, was rough and ready. 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 to address the issues facing smaller banks,
    with particular attention to the community bank business model.
    And our goal through this period of intense regulatory activity
    has been to faithfully implement Congress' instructions, but
    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 and 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, enacted to address a
    particular set of needs. No rule can ever be truly evergreen.
    Gaps and 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 that is possible, and
    to ensure that our entire rule book 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 I appreciate the opportunity to discuss them with you
    today.
        Thank you, and I look forward to answering your questions.
        Chairman Crapo. Thank you very much.
        Chair McWilliams.

       STATEMENT OF JELENA McWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Ms. McWilliams. Chairman Crapo, Ranking Member Brown,
    Members of the Committee, and fellow staff, thank you for the
    opportunity to testify today.
        Eighteen months ago, I began serving as the 21st Chairman
    of the FDIC. During this period, the FDIC has undertaken a
    great amount of work with a particular emphasis on three
    overarching goals: strengthening the banking system as it
    continues to evolve; ensuring that FDIC-supervised institutions
    can meet the needs of consumers and businesses; and 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 United States economy.
        While the state of the banking system remains strong, the
    FDIC is continuing to monitor changes in the industry and 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 toward 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 brokered deposits, which were put in place over 30
    years ago. In addition, we are working with our fellow
    regulators to modernize the Community Reinvestment Act and
    provide clarity for banks seeking to offer loans that meet
    consumers' small-dollar credit needs.
        Finally, perhaps no issue is more important or more central
    to the future of banking--and, frankly, to the present--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 the modern
    financial environment, the agency 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 this effort, I emphasized
    the need to reverse the trend of having those affected by our
    regulations come to Washington to have their voices heard, and
    instead to go and meet with them on their home turf. With 26
    State visits in 18 months, I am now more than halfway through
    this 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.
        Thank you again for the opportunity to testify today, and I
    look forward to your questions.
        Chairman Crapo. Thank you.

     STATEMENT OF RODNEY E. HOOD, CHAIRMAN, NATIONAL CREDIT UNION
                              ASSOCIATION

        Mr. Hood. Chairman Crapo, Ranking Member Brown, and Members
    of the Committee, as the 11th Chairman of the National Credit
    Union Administration, I am honored to appear before you this
    morning, and thank you for the invitation. I have written a
    very detailed statement that you all have for the record, but
    in my brief moment to speak with you this morning for my
    opening comments, I would like to talk about three areas where
    I think we have mutual interests. One is the current state of
    the credit union system; second, I would like to talk about
    NCUA efforts to foster greater financial inclusion; and then,
    third, I would like to talk about cybersecurity.
        Ladies and gentlemen of the Committee, strong growth trends
    in federally insured credit unions are continuing in 2019.
    Roughly 119 million members are part of America's credit union
    system today. That accounts for roughly one-third of America
    being a part of a credit union. Credit union assets approximate
    $1.54 trillion through the end of the third quarter of 2019.
    Credit unions have also recorded a very strong aggregate net
    worth ratio of 11.39 percent, roughly 400 basis points above
    the 7-percent statutory requirement.
        The Credit Union Share Insurance Fund is also healthy at
    this time, with roughly assets of $16.7 billion, well above the
    $10 billion level that the fund was at just over a decade ago.
    We also have posted a very strong equity ratio. Overall, year-
    to-date operating results evidence a very healthy and solid
    Federal credit union system.
        I would now, ladies and gentlemen, like to talk about
    NCUA's efforts to foster greater financial inclusion. I deeply
    believe that financial inclusion is indeed the civil rights
    issue of our time. Inclusion means not only broader access to
    financial services, but also to employment and business
    opportunities. We at NCUA have just launched the Second Chance
    Initiative where our board voted on that final rule just
    recently for nonviolent criminal offenders to have employment
    opportunities with credit unions. This creates opportunities
    for these individuals to climb the economic ladder and have
    opportunities for greater financial inclusion and shared
    prosperity.
        I agree with you, Senator Brown. It is troubling to read in
    a recent Federal Reserve survey that nearly 40 percent of
    American households cannot afford to pay for a $400 emergency.
    Even more troubling is that that percentage increases to 60
    percent for families with a disability. This is why I am
    definitely pleased that NCUA and its Board has approved PALs
    II, a short-term, small-dollar loan product that serves as a
    responsible alternative to pernicious payday loans. These loans
    that we are creating through the PALs program are often being
    coupled with our credit unions financial education, financial
    counseling, and coaching, further helping these individuals
    achieve access to broader financial services.
        Rural America must also be involved and included in
    financial expansion and inclusion. That is why I am also
    pleased that NCUA has worked to provide guidance to the
    agriculture community to help individuals learn how to work
    with this emerging business trend and remind them of the
    importance of following the FinCEN guidance. Also, we recently
    provided regulatory relief regarding the Commercial Real Estate
    Appraisal Rule, increasing that appraisal requirement from
    $250,000 to $1 million in response to some of the rural
    communities not being able to get appraisals done in a timely
    manner.
        Third, I would like to focus on cybersecurity.
    Cybersecurity is a high priority for my chairmanship. Cyber
    attacks are, indeed, an acute threat that we as regulators must
    combat and face every day. I care about this issue so
    passionately that I have appointed a senior adviser to advise
    me and the industry on how do we in the credit union industry
    safeguard our defense mechanisms and really go to the extra
    efforts to protect member-owner data. This individual who is
    spearheading this effort is also providing cybersecurity
    training and outreach to assist our small credit unions, also
    utilizing new tools to better assist our examiners on looking
    at the levels of preparation, of cybersecurity preparedness in
    our credit unions, and also working in concert with some of the
    other Federal regulators here today.
        In closing, I would like to inform the Committee that we
    are very grateful and appreciative of the work that you all did
    in passing Senate bill 2155. I am also pleased to report that
    NCUA has met all of the provisions that retain to credit unions
    and especially the actions that we could take unilaterally. So
    if I look for opportunities to work with you in the days ahead,
    I would like to look for opportunities to promote greater
    financial inclusion, economic mobility, and shared prosperity
    in America's underserved areas.
        Thank you.
        Chairman Crapo. Thank you very much, Mr. Hood. And as I
    begin my questions, I have got a lot of them, more than we will
    be able to cover in my 5 minutes, so I ask you--first of all,
    you should expect to get some written questions from me
    following the hearing; but, second, I ask you to be as precise
    as you can in your responses.
        The first one is to Chairman Quarles and Chairman
    McWilliams, and I hope it will just require a yes answer
    quickly from both of you. It is on the covered funds issue, and
    I just wanted to ask if each of you--yes, got it already--if
    each of you would just commit that you will respond and resolve
    this issue quickly.
        Ms. McWilliams. Yes.
        Mr. Quarles. Yes.
        Chairman Crapo. All right. Thank you. We have got a good
    start there.
        Chairman McWilliams, on Madden, you indicated when the
    Madden decision came down that it has interjected uncertainty,
    significant uncertainty, into the secondary markets for loan
    sales in the Second Circuit and raises safety and security
    concerns. How does the FDIC's proposal address the confusion
    around the valid-when-made doctrine and support safety and
    soundness?
        Ms. McWilliams. Thank you for that question. The FDIC's
    proposal basically does not change the framework we had before
    Madden. Since 1828, there was a Supreme Court precedent that
    basically said if a loan is not usurious when made, nothing
    subsequently makes that loan usurious. Congress gave national
    banks that treatment as well in 1865, and then 115 years later,
    in 1980, the FDIC got the opportunity to implement that into
    our statute. So we have had long existing guidance implementing
    basically exactly that. It is the so-called valid-when-made
    doctrine that the Court in Madden frankly ignored. They ignored
    almost 200 years of both regulatory and legal history.
        And so we were compelled to provide clarity, restating what
    we have had in place since 1980 at the FDIC, and our proposal
    does not change anything that we have had since 1980.
        The concern with Madden is that there are going to be
    implications for the secondary market that are frankly going to
    undermine safety and stability of the system and the soundness
    of our banks. If banks are unable to sell loans in the
    secondary market and have the sanctity of the contract carry
    over, there is going to be a disruption in the ability of the
    banks to basically be able to offload those loans if they need
    liquidity at a time of stress. And it is something that we from
    the regulatory perspective are quite concerned about.
        Chairman Crapo. All right. Thank you, and I appreciate your
    attention to this.
        Ms. McWilliams. Thank you.
        Chairman Crapo. Mr. Hood, this summer you publicly stated
    that the NCUA Board intends to release a proposed rule to allow
    subordinated debt to be counted as regulatory capital for a
    broad range of credit unions by the end of the year. Can you
    provide the Committee with a quick update on your progress on
    this rulemaking?
        Mr. Hood. Yes, thank you for that question, Senator Crapo.
    This has proven to be a very complex issue, so we are still
    working diligently on the proposal because we really want to
    get it right. I really am, though, delighted that our aggregate
    network ratio for credit unions today is about 11.39 percent,
    so we really do have a strong capital position now, and I want
    to introduce other tools to further buttress that level of
    capital. But right now we are still studying that and making
    sure we get a proposal right before we give it to stakeholders
    for comment.
        Chairman Crapo. All right. Thank you, and I appreciate your
    attention to this as well.
        Mr. Hood. Yes, sir.
        Chairman Crapo. And finally, Mr. Quarles, we do not have
    nearly enough time left to get into this issue as deeply as I
    would like to, but I want to talk about digital currencies. I
    understand that you are basically the lead at the Fed on
    dealing with our other regulators around the globe and working
    with others as they look at Libra and, frankly, at the digital
    currency issue. Correct?
        Mr. Quarles. Yes, the G-20 has given the Financial
    Stability Board the task of considering the stablecoin issue,
    and as I chair the Financial Stability Board, that is my
    responsibility, yes.
        Chairman Crapo. Well, I am very concerned. You know, the
    Libra issue and Facebook presents one set of issues, but the
    digital currency issue is much broader, as I see it. And one of
    the big concerns I have is that the potential for digital
    currencies based on blockchain technology could ultimately
    undermine the role of the U.S. dollar in global markets. Do you
    share that concern?
        Mr. Quarles. I think that would be a very long-term concern
    if you consider the current proposals for stablecoins, those
    that rely on a basket of currencies to anchor their value
    include a very heavy weight toward the dollar just given the
    role of the dollar internationally currently, and that would
    not be likely to be the case for some time. But over a long
    period of time, that would be an issue we would need to think
    about.
        Chairman Crapo. Well, if other nations, for example, were
    to pursue that, wouldn't that give them the ability to
    basically try to start shifting away from the dollar to the
    utilization of other currencies?
        Mr. Quarles. If other currencies were more useful in the
    payment system or more useful forms of payments, again, I think
    it would not be an immediate effect, but over a long period of
    time, that would be a factor, yes.
        Chairman Crapo. All right. Well, thank you. My time is up.
    I have got a lot more I want to talk with you about this, so
    both in conversation as well as in questions. I will get
    further information to you on that. This is something I think
    we need to take a really deep dive on, and rapidly. So thank
    you.
        Chairman Crapo. Senator Brown.
        Senator Brown. And I would hope, Mr. Chairman, we can get a
    second round, too. Thank you.
        The private equity firm I mentioned in my opening
    statement, Mr. Quarles, is the one that cut staff, the one that
    cut staff at nursing homes and documentation of endangering
    patients is your former employer, the Carlyle Group. You were a
    partner when this was happening, so I have to assume you were
    aware of it as Carlyle reaped huge profits from this.
        Do you think a system that allowed the Carlyle Group to
    load up a company with debt and extract management fees and cut
    corners and put patients at risk is a good system?
        Mr. Quarles. I actually was not involved in that
    transaction at all, so not wanting to speak about the details
    of that transaction, I do think that it is important that we
    have a system where private equity is bringing benefits to the
    companies it invests in and not otherwise.
        Senator Brown. Not otherwise, meaning if they are not
    bringing benefits, thy should not be allowed to do it? What do
    you mean ``not otherwise?''
        Mr. Quarles. We should have a system that creates
    incentives so that investors are improving the companies that
    they invest in.
        Senator Brown. So even though you--I mean, I heard your
    involvement in the Bush administration, you did not seem to be
    too responsible for the economy imploding in those years. And
    now you are saying you were at Carlyle--I mean, the Carlyle
    Group benefited financially a great deal in its takeover of
    that company, Manor Care, in Toledo. So I guess I would ask
    this then: What steps do you take now then at the Fed to rein
    in risks and make sure financial companies are investing in the
    real economy and creating jobs rather than this
    financialization and making reckless bets that hurt families?
        Mr. Quarles. Safety and soundness of the financial system
    is the responsibility of the Fed. That is an element of our
    supervision and examination of firms and I think an appropriate
    element.
        Senator Brown. That does not seem very proactive. I mention
    private equity because they are the biggest users of the
    riskiest kind of leveraged loans, as you know, which they dump
    on companies that they got for profits. It has been 6 months
    since I raised concerns in letters and in hearings over
    leveraged lending. You have shifted from it is not a problem,
    earlier answers, to we need more data.
        What specific abuses that are not already happening in the
    leverage lending market would you have to see to convince you
    to crack down on these risks?
        Mr. Quarles. Well, we have taken supervisory action with
    respect to leverage lending, Senator. Earlier, it is not that
    we had said that it is not a problem. I think we have been
    trying to draw a distinction between is there a financial
    somebody risk versus is there a potential contribution to a
    future business cycle downturn of current underwriting
    practices.
        With respect to the latter, a focus of the last two shared
    national credit examinations where all of the regulators
    together look at the largest loans that are shared among a
    number of institutions has focused--a focus has been leverage
    lending and the evolution of underwriting practices as to which
    we have had a concern. And I think they are familiar to most
    people here.
        In the first cycle, we indicated which of those practices
    we had concerns about, and then in the second cycle, if they
    were continuing, we took appropriate supervisory action against
    the firms that were underwriting leveraged loans in this
    fashion.
        Senator Brown. I guess, Mr. Quarles, because of the
    background of you and other regulators, because of your
    experience prior to these jobs and your general support for
    Wall Street, I just do not share in the confidence that you are
    going to proactively do something about this. I mean, I
    understand you say if it is risk to the financial system, to
    the stability, that is one thing. But it is obviously more than
    that.
        Let me shift to Chairman Hood, if I could for a moment. The
    NCUA is an independent Federal agency, right?
        Mr. Hood. Yes, sir.
        Senator Brown. Independent, OK. Do you agree that you as
    Chair of the NCUA must act without control or influence from
    the White House?
        Mr. Hood. I am deeply committed, sir, to maintaining NCUA's
    independence as a regulator.
        Senator Brown. From the White House?
        Mr. Hood. As an independent regulatory agency, it is my
    duty to uphold that.
        Senator Brown. Including from the White House?
        Mr. Hood. I am committed to ensuring that NCUA----
        Senator Brown. You do not seem to want to say yes to that.
    OK. I get it.
        I sent you a letter in October because I was concerned
    about the photo ops you were doing with President Trump at the
    White House and at his golf course. Then I got this letter from
    your office this past Tuesday. Can you tell me who you were
    posing with in those pictures--in the first picture that you
    sent to us?
        Mr. Hood. I am sorry----
        Senator Brown. You have a picture right there. Can you tell
    us--it is a letter you sent us as a peculiar, perhaps, but a
    response. I am not sure if the letter is supposed to be a
    response to my concerns or not. So could you identify the
    people in that picture?
        Mr. Hood. Oh, these are speaking engagements. What I sent
    you, Senator Brown, was a listing of my activities in my first
    6 months of meeting with stakeholders to talk about credit
    union issues, to foster greater financial inclusion and shared
    prosperity. There is a picture of me being sworn in, it looks
    like, with one of the leaders of the SBA, and then my swearing-
    in was conducted by the Vice President of the United States.
    But those are pictures showing stakeholder engagement, but then
    I also provided activities of the 7 months of activities where
    we have kept America's credit unions safe and sound, and the
    letter was meant to be an opportunity to meet with you to talk
    about regulatory accomplishments as well as any other issues
    you would like to discuss.
        Senator Brown. OK. I just am not sure you understand what
    ``independent regulator'' means from your letter back to us,
    from your statements about speaking as a body, from the NCUA as
    a body, and from your other activities with the President. So I
    hope the lesson you take from that, Chairman Hood, is that you
    are, in fact, independent from the person who appointed you,
    the Administration that sponsored you, from anybody that might
    have influence on you. Thank you.
        Chairman Crapo. Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman. Thank you all for
    being here, and thank you for giving so much to our country.
        I would like to use my first couple of minutes, Madam
    Chair, talking to you about industrial loan companies. You know
    what those are. They are basically banks, but they are not
    regulated like other banks. They are authorized at the State
    level. Some of our largest companies are starting to use these
    industrial loan companies to take deposits, for example, and I
    think competition is good. Competition is a moral good. But I
    worry that they are not regulated like the other banks, and I
    have a bill called the ``Eliminating Corporate Shadow Banking
    Act'' just to make sure that these industrial loan companies
    are on a level playing field with everybody else and are
    properly regulated, you know, not too hot, not too cold, just
    right.
        Could you give me about a minute of your thoughts on that?
        Ms. McWilliams. I have not had an opportunity to take a
    look at your bill, and as a former staffer----
        Senator Kennedy. It is a good one. Trust me.
        [Laughter.]
        Ms. McWilliams. I know your staff, and I believe it is
    probably a good bill. Congress gave us authorities to regulate
    ILCs, and, frankly, as we look at the ILCs, we only have a
    couple dozen ILCs in existence right now. The ILCs of the past
    are looking different than probably--well, the applications we
    are getting at this point in time, that is true.
        At the depository institution level, Congress gave us ample
    authorities to regulate the ILCs, and when----
        Senator Kennedy. But they are not regulated the same as
    banks. Is that correct?
        Ms. McWilliams. They have a different regulatory structure,
    so we regulate the depository institution that----
        Senator Kennedy. Why don't they just have the same
    regulatory structure? Wouldn't it save money if you did them
    all the same way, just economies of scale?
        Ms. McWilliams. From the perspective of the depository
    institution, the ILC is regulated the same way as a bank. In
    fact, when Congress gave us authorities to approve deposit
    insurance for ILCs, it gave us the same statutory standards as
    it did for banks.
        Senator Kennedy. Let us talk further about this.
        Ms. McWilliams. Sure.
        Senator Kennedy. I disagree with you on that. I do not
    think they are regulated the same, and I just do not understand
    why everybody is not treated the same.
        I want to go to Chairman Quarles for a second. I think our
    community banks are doing very well in large part or in
    substantial part as a result of the work of most of the Members
    of this Committee when we passed Senate bill 2155. I am still
    concerned about our large banks. We all remember 2008. From my
    standpoint, in 2008 the leadership of some of our largest banks
    took their banks to Hell, and the Government rode shotgun.
        They have not been tested. Our economy is much better, and
    it is still healthy, but we now at some point we will have a
    recession. I think had we not passed the Jobs and Tax Cuts Act,
    we would be in a recession now. I think it was Buffett who
    said, ``You do not know who is swimming naked until the tide
    goes out.''
        Mr. Chair, do we still have banks that are too big to fail?
        Mr. Quarles. I think that the regulatory response, the
    post-crisis body of regulation, will have given future
    regulators in the event of stress at a large institution many
    more options than they had before to resolve that institution
    or to take other actions rather than bailing them out.
        Senator Kennedy. Do you think we still have banks that are
    too big to fail?
        Mr. Quarles. I think that the way that I look at that
    question is will regulators in the future, will the Government
    in the future, when it is faced with stress at a large
    institution, have an option other than providing support for
    the continued life of that institution. I think those options
    will exist, yes.
        Senator Kennedy. Will one of those options be come to
    Congress and we appropriate a bucketload of money to bail them
    out?
        Mr. Quarles. I hope that does not happen. The purpose of
    the framework is to ensure that regulators have options so they
    do not do that. But unless I am one of them, I will not be able
    to control their future actions as to what they might ask for.
    I would say now, however, that if they come up and ask you for
    that, you should be aware that they will have many other
    options in front of them than they had at the time of the last
    crisis.
        Senator Kennedy. OK. Thank you.
        Chairman Hood, if you have a few minutes afterwards, I
    would like to get a photo, OK?
        [Laughter.]
        Chairman Crapo. Senator Menendez.
        Senator Menendez. Thank you, Mr. Chairman.
        Chair McWilliams, I understand that when you first came to
    the United States you only had $500 in your pocket.
        Ms. McWilliams. I did.
        Senator Menendez. And you used that $500 to open a checking
    account and, importantly, get a secured credit card. You stated
    that, ``With each swipe of that credit card, I felt more
    integrated into the very fiber of American society.'' So do
    banks get CRA credit for offering a secured credit card?
        Ms. McWilliams. To tell you the truth, the answer is not
    that simple. You have to go through a complex formula to figure
    out what qualifies and not under the CRA, the current CRA----
        Senator Menendez. Well, let me share with you that,
    according to the Government Accountability Office, banks that
    offer secured credit cards designed to establish or rebuild
    credit histories receive credit under the CRA. So what we have
    here is a real-life example of someone benefiting from the CRA.
    You yourself said that this secured credit card opened up ``a
    world of opportunities'' for you. So I would hope that as you
    decide how to move forward on potential changes to the CRA, you
    will take to heart the need to strengthen the CRA so that more
    Americans can benefit from this important civil rights law just
    as you did when you first came to the United States.
        So let me relay one concern I have with how things are
    going. Recently, Politico reported that the FDIC could give the
    smaller banks it regulates the choice of opting into this new
    OCC-led CRA regulatory framework or continuing to be examined
    under the current system. That could lead to a situation where
    banks themselves choose to participate in the model that gives
    them the best grade and not the one that best measures whether
    their activities are effectively addressing the needs of their
    communities.
        If adopted, do you know what percentage of FDIC-regulated
    banks would have the choice to opt into the OCC approach?
        Ms. McWilliams. So the proposal is still being worked on.
    One of the options we considered was the opt-out for small
    banks--I am sorry, opt-in, opting into the new regime or
    keeping the existing regime. The main reason for the opt-in
    opportunity would be to provide an ability for small banks not
    to have to change their reporting requirements and how they go
    through the analysis of what qualifies for the CRA.
        The number of small banks, if they decide to opt in, would
    depend on what threshold we pick for the cutoff, so if they----
        Senator Menendez. So you do not know yet what number
    because you have not decided on the threshold?
        Ms. McWilliams. It is not firm. We are looking at numbers
    and making sure----
        Senator Menendez. But I hope that other than--you know, we
    want small banks, yes, to have less necessity in terms of
    paperwork, but we do not want them to have less necessity or
    obligation in terms of creating a portal of opportunity under
    the CRA.
        Ms. McWilliams. I agree with you.
        Senator Menendez. If most FDIC-regulated banks would be
    able to opt in, if that is what happens, then aren't you simply
    making a political calculation that best protects the interest
    of the banks you are charged with regulating over those who
    stand to benefit from a strong CRA rule? Isn't it in essence
    the threshold that will determine whether that is the reality
    or not?
        Ms. McWilliams. No, actually, it is not. The reason that I
    am willing to consider reform to the Community Reinvestment Act
    is because the Act has not been revisited since 1995 by the
    regulators and Congress. You gave us the authority to take a
    look at the Act and make sure it serves its intended purpose.
    Currently, we have digital delivery channels for banks that are
    not necessarily accounted for appropriately in the current
    assessment areas. The way the deposit taking now takes place is
    everything gets attributed to a branch, and now with the
    digital channels, there is a lot of deposit taking that is
    taking place outside of this area, and we want to make sure
    that under the reform of the CRA, those areas where the digital
    banks are functioning and taking deposits and offering services
    are covered by the CRA.
        Senator Menendez. Well, let me just say that age itself is
    not a reason to review the Act. Certainly to improve and
    strengthen the Act is something worthy, but you do not want to
    at the end of the day use the time in which the Act has not
    been reviewed to weaken it. So I am concerned that you are all
    trying to have it both ways, not fully endorsing the flawed OCC
    plan that allows most of the FDIC-regulated banks to choose
    which system they are measured under, but also not standing up
    and fighting for a better CRA standard than what Comptroller
    Otting has proposed.
        So I hope that the end result is that I am wrong on that,
    but I am going to be looking with incredible intensity.
        Ms. McWilliams. I look forward to proving you wrong,
    Senator.
        Senator Menendez. I am always happy to be proven wrong when
    it is a benefit to consumers.
        Vice Chair Quarles, 5 years ago--I want to follow up on
    comments that Senator Kennedy raised to you about banks--the
    regulators adopted the liquidity coverage ratio to require
    banks to hold additional capital that they could draw upon in a
    crisis and thereby reduce the risk of another taxpayer bailout.
    But in October, the Federal Reserve finalized a rule that would
    reduce the liquidity coverage ratio by 15 percent for big Wall
    Street banks.
        Now, S. 2155 did not require the Federal Reserve to reduce
    the LCR, and the banking sector has not gone through a full
    economic cycle while the previous LCR rule was in place. So at
    a time in which we see record growth among the banks, the
    fantastic times, the banking sector reported $62 billion in
    profits in the second quarter of 2019, a 4.1-percent jump from
    2018, why is now not the time to assure a bank's liquidity, not
    reduce it? We saw what happened in the repo market, and I have
    real concerns that instead of taking the moment of strength to
    strengthen the banks, you are just giving them more running
    room to get into trouble.
        Mr. Quarles. Do I have time to respond briefly, Chairman?
        Chairman Crapo. Yes, please. Briefly.
        Mr. Quarles. Thank you. So for the large Wall Street banks,
    we did not change their liquidity requirements at all. Those
    remain the same for the G-SIBs. S. 2155 did include--while it
    gave specific instructions for tailoring under 250, there was
    also a mandate, a ``shall,'' that we would tailor for all
    institutions, and so for regional banks, not the large Wall
    Street banks but below that, we tailored their liquidity
    requirements, and then it goes down so that there are lower
    liquidity requirements for firms that pose even less risk to
    the financial sector.
        So the concept of tailoring and I think the instruction in
    S. 2155 was to evaluate the risks that different categories of
    institutions posed to the financial sector and then tailor for
    each of those categories of institutions. It is not a dramatic
    reduction in liquidity. All of those institutions still have
    much, much more liquidity than they had before the crisis, and
    I do not think it is--and the largest institutions, the Wall
    Street banks, still have every bit of coverage under the LCR
    that they did before S. 2155.
        Senator Menendez. Well, I hope we do not have to revisit
    what we did in the Great Recession and then remind you of your
    comments that, instead of strengthening the liquidity reserves,
    we actually weakened them.
        Chairman Crapo. Senator Tillis.
        Senator Tillis. Thank you, Mr. Chairman.
        Mr. Hood, it is great to see somebody that hails from my
    neck of the woods in North Carolina. I want to thank you for
    the work you have done on affordable housing long before you
    got into your current post, and it was all that work you did
    for the community that made me proud to have you a member of
    the Board of Governors. You were giving back to a great
    educational institution.
        Mr. Hood. Thank you.
        Senator Tillis. You do great work. I have got a picture
    with you, but I would be proud to have another one.
        Mr. Quarles and Chair McWilliams----
        Senator Kennedy. I get to go first.
        [Laughter.]
        Senator Tillis. First, I want to thank you all for the work
    and the progress that we are making on the inter-affiliate
    margin. It is going to free up, I think, almost $50 billion in
    capital. It is a long time coming. Somebody is going to have to
    work hard to make that a partisan issue since that is something
    that has been in place under Democrat and Republican
    administrations in the past, so thank you for that.
        I want to go on to the Community Reinvestment Act and the
    update, and specifically, I know that the OCC is taking the
    lead. I should also say I am looking forward to the work on the
    Volcker Rule. I am trying to get this done and stay within my
    time, so I am talking fast.
        On the rewrite, Chair Quarles, is the Fed going to play a
    role in the CRA rewrite along with the FDIC and the OCC?
        Mr. Quarles. We have been very actively engaged with the
    OCC and the FDIC in----
        Senator Tillis. At the Governor level?
        Mr. Quarles. At the Governor level, absolutely. We have
    been very actively engaged, and the proposal that is evolving
    has benefited from a lot of Fed input.
        Senator Tillis. Well, if you look at that, I do not think
    that that has been touched since about 1977? Is that about
    right? No, no, I am sorry. About 30 years.
        Ms. McWilliams. It was 1995.
        Senator Tillis. So I was young back then, so hopefully we
    can take into account this thing, the Internet has come on
    board, online banking, and a number of other changes in the
    banking system that hopefully we can modernize, and I look
    forward to what you all do there.
        Chair McWilliams, I wanted to ask you a question. You in
    particular took a fairly aggressive posture in going through
    and looking at all the clutter, guidances, one-off advisory
    letters, secret memos, facts that have long been used to
    regulate and supervise banks. Can you give me an idea of where
    we go from here?
        Ms. McWilliams. When I took the office of Chairman at the
    FDIC, I frankly thought that we could do our supervision in a
    more transparent and accountable manner. You know, quite often
    we look at the regulations and instructions we give to
    companies, and I have been surprised at how many ways we
    communicate with the companies, our regulated entities, and not
    always make that a standard for everybody, but do one-off
    letters here and there. My goal for the staff at the FDIC has
    been to comb through and tell us what regulations need
    updating, and not only because of the passage of time but
    because technology has simply changed, and the way the banks do
    business has changed. We also need to take a look at whether we
    are being transparent and uniform in our application of the
    laws. And to the extent that we are not or that we have done
    things that are one-offs, I believe there is an opportunity for
    us to, you know, apply the good sunshine policy and go public,
    solicit public comment and move forward with rulemakings and
    guidances that are applicable to everybody and so people have a
    clear road map as to how to do business.
        Senator Tillis. Well, I appreciate the very thoughtful and
    assertive approach that you have used there. I think that it is
    a model that a number of regulatory agencies even outside of
    the banking space should take note of, because it is a way that
    we can take needless burdens off of business and put that back
    into making houses more affordable, making banking more
    affordable, and making the private sector grow.
        Vice Chairman Quarles, you testified on the House side
    yesterday, and I believe you were asked about the concerns the
    private sector system could have in discriminatory pricing for
    the payment system. The private sector has made a commitment in
    writing to have flat pricing. If the Fed is concerned about
    discriminatory pricing, pricing that would disadvantage smaller
    banks, why has the Fed refused to make the same commitment to
    flat pricing for the FedNow platform? And why does that make
    sense?
        Mr. Quarles. So, as you know, Senator, the Federal Reserve,
    in connection with standing up operations in the payment
    system, is required by law to recover our costs, and I think as
    the proposal evolves and as we continue to develop the faster
    payment system that we have committed to undertake, we will
    have a better sense of exactly what will be required in order
    to recover all of those costs, and at that time we will be able
    to evaluate what the pricing will be.
        Senator Tillis. Thank you. I yield back 3 seconds.
        Chairman Crapo. Thank you.
        Senator Warner.
        Senator Warner. Thank you, Mr. Chairman. Great to see the
    witnesses.
        Vice Chairman Quarles, I want to start with you again and
    pick up on some of the line of questioning about CRA. I think
    you have been quoted as saying you feel like the CRA is a
    little formulaic and ossified, and I tend to agree that it is--
    you know, since 1995, I do not think we have taken a major look
    at how we need to be modernized.
        I am concerned, as I think other colleagues are, with the
    notion that the OCC and the FDIC would move forward on a
    regulation without the Fed's impact, and I think that would be
    a huge mistake because we would leave a series of the community
    out.
        Yesterday during the House Financial Services Committee,
    you were asked a question, but I do not think I got--at least
    in my review of the question, I did not get a full answer about
    whether you feel like you will be proceeding and will be
    participating in the OCC's modernization efforts. And I wish
    Comptroller Otting was here, where he has basically said he
    thought the Fed was not going to be involved.
        So, for the record and for my colleagues, can you clear up
    whether you intend to have the Fed involved in this much-needed
    reform process?
        Mr. Quarles. Well, this is a continuing effort to look at
    CRA modernization. There is agreement among all the agencies as
    well as everyone who considers the issue--community groups, the
    banks, I think among many here--that the implementation of the
    Community Reinvestment Act can be improved given evolution in
    the banking industry and given, you know, as I have said, kind
    of the ossification of practice over time. The Federal Reserve
    is committed to that and has been working together with the
    other agencies as part of this process.
        Now, the issue that is immediately at hand is when will a
    Notice of Proposed Rulemaking come out, but that is an interim
    step to any final rule. At the outset of the process, the OCC
    went forward independently of both the FDIC and the Fed with an
    Advance Notice of Proposed Rulemaking. We all benefited from
    the information that they received. The Fed also had a broad
    information-gathering process at all of our Reserve Banks. At
    the same time as that Advance Notice of Proposed Rulemaking was
    happening, the FDIC had its separate process. And all of that
    has come into now the consideration of the Notice of Proposed
    Rulemaking.
        So while it has not 100 percent been decided yet whether at
    this next step, the Notice of Proposed Rulemaking, all three
    agencies will go together or some may go separately, in the
    same way as that first step was done separately by each of the
    agencies but it was all part of a joint process, I would not
    draw too much from if that is again one or two agencies going
    separately on the Notice of Proposed Rulemaking because we will
    continue to be working together on trying to get to a final
    rule, and my expectation is still that when we get to that
    final rule, it will be all three agencies together.
        Senator Warner. Because, you know, obviously if we have OCC
    and FDIC, you guys not involved, we end up with a new set of
    rules and regulations that would cover 80 percent of the market
    but not the very critical component that you guys cover, you
    know, we are not going to be able to bring that consistency
    modernization in what I think is a very, very important role
    that CRA plays.
        Mr. Quarles. I completely agree.
        Senator Warner. So I am going to take your answer as yes,
    you guys will be involved; there will not be a hodgepodge of
    rules; there will be a uniform final answer that will include
    all three regulatory agencies.
        Mr. Quarles. That is the objective.
        Senator Warner. OK. So that is a yes, as I tried to put as
    many words as possible in your mouth, it will be all three?
        Mr. Quarles. Well, ``yes'' would be one of the words that I
    would say. But, yes, that is the objective, that we are aiming
    to get to a final rule all together, and if it happens that the
    interim steps happen at different speeds, I would not draw too
    much from that.
        Senator Warner. One of the things that I know also is, in
    your role as chair of the Financial Stability Board, I know you
    have been conducting this in-depth analysis of CLOs, and
    obviously we have seen the numbers grow. We realize this has
    both a national but also international implication in terms of
    involved with the G-20. When do you think that study is going
    to be done? When we are going to get a chance to look at that?
        Mr. Quarles. We should be making that public very shortly,
    I think early in the new year. It is being circulated among the
    members of the Financial Stability Board, the results of it
    currently, for final sign-off.
        Senator Warner. My time has expired, although I could not
    get away without my colleagues being here and saying there is a
    broad bipartisan work being done on this Committee on what we
    call the ``Illicit Cash Act,'' which deals with AML, beneficial
    ownership, I think issues that have been long in need of
    review. The Chair and the Ranking Member are going to, I know,
    take some of the work that we have done and buildupon it. My
    really strong hope is that we can move sooner than later on
    that really long overdue piece of reform and regulation.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Shelby.
        Senator Shelby. Thank you.
        I will pose this question to all of you as regulators: What
    is your current assessment of the overall health of the U.S.
    financial system compared to conditions, say, in 2007-08? We
    will start with you, Chairman Quarles.
        Mr. Quarles. Absolutely. It is a much healthier banking
    system. We have significantly higher levels of capital and
    liquidity. We have a focus on the resolvability of institutions
    to address the too big to fail question that was not there
    before. Financially, it is much stronger.
        Senator Shelby. Chairman McWilliams?
        Ms. McWilliams. Absolutely much stronger, both for the
    large banks and small banks. In the meantime, the regulators
    have put in a number of capital and liquidity rules on these
    banks, and the capital levels are at a healthier level than
    they were, a much healthier level than they were before the
    crisis.
        Senator Shelby. And what about the credit unions?
        Mr. Hood. Yes, Senator Shelby, the credit union system is
    strong and robust. I mentioned a lot of that in the opening
    remarks. Capital now is at 11.39 percent, far beyond the 7-
    percent capital requirement, and also we have a very strong
    Insurance Share Fund of $16.7 billion, which is far beyond the
    $10 billion coming out of the recession.
        Senator Shelby. As regulators, have any of you ever known a
    financial institution to fail, to go under, that is well
    capitalized, well managed, and well regulated?
        Mr. Quarles. It would be difficult for it to fail if it
    were well capitalized, absolutely.
        Senator Shelby. Well capitalized is important to the health
    of a situation, also liquidity, being liquid at times, right?
        Mr. Quarles. Exactly.
        Senator Shelby. Ms. McWilliams?
        Ms. McWilliams. Nothing comes to mind.
        Mr. Hood. Nothing comes to mind at the moment.
        Senator Shelby. So there is no substitute for capital, in a
    sense, when something is under stress, or liquidity. Is that
    right?
        Mr. Quarles. Capital is key, although it is a useful factor
    of the post-crisis framework that we also focus on liquidity.
    But we do have that focus now on liquidity, and the two
    together are key.
        Senator Shelby. Would you say that the overall health of
    our banking system is as good as you have known it in the last
    20 years or more?
        Mr. Quarles. I would go farther and say I think my career
    has lasted for about 35 years, and it is as good as it has been
    during that entire time--better, much better.
        Senator Shelby. Do you agree?
        Ms. McWilliams. I agree, and I am fortunate to be the
    Chairman of the FDIC at this time.
        Senator Shelby. Well, I commend all of you for trying to
    keep it that way, too.
        Vice Chairman Quarles, how do we maintain simplicity in
    financial regulation considering that the scope and complexity
    has just grown so much? How do you balance that?
        Mr. Quarles. So I think, you know, all the points that you
    have just raised, because we have such a resilient and strong
    financial sector now, we have the benefit to take some time and
    to look at the overall structure of regulation and to determine
    where we can make it simpler and more efficient while still
    maintaining that resilience.
        One of the things we proposed at the Federal Reserve, for
    example, is to take our 24 different measures of loss
    absorbance, resiliency, various capital measures, TLAC, et
    cetera, and to combine them into our stress capital buffer that
    would be much simpler and yet retain exactly the same level of
    resiliency.
        Senator Shelby. Ms. McWilliams, do you have a comment on
    that?
        Ms. McWilliams. I think it is important that we are able to
    maintain a level of liquidity and capital that functions well
    for the market and the financial stability overall. There is
    always a balance. It is a see-saw of how much capital and
    liquidity do you need versus how much should you release in the
    economy to ensure that the economy is stable, because in the
    end if the economy is not stable, these banks are not going to
    be stable. So there is a symbiotic relationship, and we are
    constantly monitoring the levels at which these banks need to
    be in terms of capital and liquidity. And to your prior
    question, I would add that it is capital, liquidity, and
    management. I believe good management is key to the success of
    a bank.
        Senator Shelby. Do you have a comment, sir?
        Mr. Hood. I was just going to say I agree with Chairwoman
    McWilliams wholeheartedly. It is about balancing capital with
    liquidity. Balance sheet management is key.
        Senator Shelby. Thank you for what you do.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. Thank you all for
    being here.
        Vice Chair Quarles, at the last oversight hearing, we
    talked about the financial risks caused by climate change, and
    we discussed the prospect of the Fed joining the group of now
    42 central bankers and regulators thinking about and working on
    accurately accounting for the risks related to climate change.
    Do you have any updates on that?
        Mr. Quarles. Thank you, Senator. As we discussed, as I
    think I mentioned at that last hearing, we have been
    exploring--I wanted us to explore joining the Network for
    Greening the Financial System. For a variety of reasons under
    their charter, that requires some adjustments in order for us
    to join as an observer, but we are continuing to discuss with
    them how that can be done. In the meantime, we have attended
    meetings, sort of auditing the class before formally
    registering with the NGFS, and I think that is entirely
    appropriate.
        Senator Schatz. Is there a timeframe?
        Mr. Quarles. They have a meeting, their annual general
    meeting or the equivalent of an annual general meeting, in
    April, which is when they would be able to address some of
    these governance issues, if they are able to address them. So I
    think, you know, it is over that time. But what I would stress
    is that in the meantime we are engaged with them, involved in
    attending working groups, et cetera.
        Senator Schatz. The U.K. regulator recently issued guidance
    that recommends steps that banks take to demonstrate that they
    are taking climate risks seriously. They are encouraged to
    assign a senior manager the responsibility for managing climate
    risks and to demonstrate in writing how the firms' risk
    management practices address climate risks.
        Are you asking banks to do anything similar? And if yes,
    could you elucidate? If not, why not?
        Mr. Quarles. So we do ask banks that are exposed to severe
    weather events, which can be generated by climate change, to
    account for us their risk management practices around that. And
    as you know, we continue to do a lot of research on the effect
    of climate change on the financial sector as to how that is
    likely to evolve, and as we continue to learn from that, we
    incorporate that into our supervisory practices.
        We have also been very closely engaged; I was just in
    London a couple weeks ago talking with them about how they are
    looking at climate change regulation and supervision.
        Senator Schatz. The challenge, I think, for both investors
    and for firms is that it is not yet apples to apples--right?--
    in terms of how the disclosures go because everyone is puzzling
    through it, including the Fed, including the Network for the
    Greening of the Financial System. And so I think as soon as
    possible, for the sake of investors having clarity across the
    market, we are going to need some kind of common instrument to
    understand, and I think that has got to come from you, because
    companies, firms, investors are all trying to figure out how to
    account for climate financial risk, but they are all doing it
    in unique ways, which makes it super difficult, if you are an
    investor, to figure out who is accounting for it accurately and
    how to compare one investment opportunity from the other.
        Mr. Quarles. Yeah, I think that those are very good points.
    One of the things at the Financial Stability Board that we have
    done--it was a process that was begun before I began to chair
    the Financial Stability Board, but that I re-upped when I took
    over the chairmanship--is this TCFD, which is under the aegis
    of the Financial Stability Board. Private sector companies are
    encouraged to think about what climate change risks they may
    face and then to disclose how they are addressing them if they
    see them. And we are learning from that. We will be able to
    learn from that. I think we will be able to take that
    information and see, OK, well, are there best practices? Is
    there a common thread that we are beginning to see out of all
    of this that will be helpful to everyone?
        Senator Schatz. But you agree that at some point we are
    going to need a common platform?
        Mr. Quarles. Well, I think that would be useful. You know,
    at the moment I do not know either what the forum would be or
    certainly what the content would be of that common platform
    because, as you note, all of this is in pretty early stages.
    Even the Bank of England, which is--the Bank of England, I
    would say, and the Dutch central bank are probably sort of the
    most committed or have done the most thinking, are farthest
    along in their thinking about this, and even both of them are
    really at quite early stages as to concretely how you would
    address this. And you would need something concrete in order to
    have a common platform.
        Senator Schatz. Thank you.
        Chairman Crapo. Senator Cortez Masto.
        Senator Cortez Masto. Thank you.
        Vice Chairman Quarles, let me start with you, and thank you
    for visiting with me earlier. We know that the Russian
    government continues to attack our Nation with a device of
    inaccurate propaganda in order to weaken Western democracies,
    and I know just this morning the U.S. and the U.K. law
    enforcement officials announced charges against two Russians
    allegedly responsible for what DOJ deemed ``two of the worst
    computer hacking and bank fraud schemes of the past decade.''
    The Treasury Department's Office of Foreign Assets Control
    announced sanctions against the gang, these two that they
    dubbed ``Evil Corporation''--that is the name that the two have
    taken on--led by one of the Russians who also provides direct
    assistance to the Russian government's malicious cyber efforts,
    highlighting the Russian government's enlistment of cyber
    criminals for its own malicious purposes.
        So I guess my question to you is: If Russia does not stop
    these attacks on our Nation, should we work with our allies to
    ban Russian financial institutions from using the SWIFT
    interbank payment system?
        Mr. Quarles. I would say I have not given any thought to
    that question, whether that would be an appropriate remedy. In
    our enforcement practices at the Fed with respect to financial
    institutions and the abuse of the financial system, we do work
    closely with the Department of Justice. Frequently Department
    of Justice actions arise from referrals from us of things that
    we see with respect to the financial system. So that is
    something that we are--the issue is something that we are
    heavily engaged with, but I would be happy to talk with you
    more about that.
        Senator Cortez Masto. I would appreciate that. I know it
    just broke this morning, so thank you.
        Then just for purposes of follow-up on the Chairman's
    conversation with digital currency, this is also something I am
    very, very interested in as well. Can you just talk a little
    bit about what you are doing in this space right now or what
    you anticipate looking at when it comes to digital currency, if
    anything?
        Mr. Quarles. So that is at very early stages. I would say
    that until the recent international focus on stablecoins, there
    was a general sense among most of the central banks of the
    advanced financial economies, with isolated exceptions such as
    Sweden, that digital currencies would not--you know, were not
    really necessary. They were not addressing a serious need in
    those economies. They would be something that might be more
    rapidly adopted in emerging markets for a variety of reasons,
    maybe the same way as emerging markets sort of jumped over
    landlines to cell phones, but that we would--however, since the
    focus on stablecoins, we have geared up a process to think
    through the issues. There are a lot of issues, some of the
    technological, some of them, you know, having to do with
    monetary policy, some of them having to do with other types of
    regulatory policy that would have to be worked through,
    international coordination with respect to it. We are at early
    stages there in part because up until, I would say, this
    summer, it was an assessment, and I think the right ex ante
    assessment, that it was not sort of a high priority for the
    United States, and most advanced financial economies shared
    that view.
        Senator Cortez Masto. OK. But it is something that is
    obviously--and here is my concern. I appreciate that it is in
    its initial stages, but I do not think it is something we can
    assume nothing is going to happen with, and so we at least have
    to put resources behind it to start looking at and addressing
    this. And that is what I am hearing you are doing.
        Mr. Quarles. Absolutely.
        Senator Cortez Masto. Great.
        Mr. Quarles. Absolutely.
        Senator Cortez Masto. Thank you.
        Chairwoman McWilliams, studies show that without the
    Community Reinvestment Act the homeownership rate in our
    country, and especially for Latinos and African Americans,
    would be much lower. And I understand the FDIC is considering
    proposed changes to the Community Reinvestment Act. So how
    would proposed changes to the CRA close the racial, ethnic
    homeownership gap? And is that something that is on your radar
    as you look at making these changes?
        Ms. McWilliams. It is absolutely on my radar as we are
    looking to make the changes. I think the Act frankly can be
    revised to do more for those communities, and it can do a whole
    lot more for rural communities, for small businesses, small
    farms, family farms, Indian Country. The Act has not been
    updated since 1995, and all I am asking from folks is to be
    open-minded when these proposed changes come through, and give
    us feedback. If there is something that you are concerned about
    that is not in the proposal, let us know. The intent of the
    proposal is basically to solicit comment from stakeholders,
    including Members of Congress and their constituents. The
    intent here is not to undermine the purpose of the Act and what
    Congress intended. In fact, the intent, my personal intent, is
    to strengthen it and make sure that the things that were not
    existent in 1995 but that do actually help low- and moderate-
    income and minority communities get enhanced credits under the
    CRA and are accounted for appropriately. And, you know, Senator
    Menendez had a line of questions. I was a member of the low-
    and moderate-income community, and it is not with any malice or
    bad intent that I would like to take a look at this Act, but
    more so to make sure that the banks, especially large banks--
    national banks account for about 70 percent of the CRA
    activity--are doing their part and doing it in a way that makes
    sense and clarity for them, but also gets added benefit to
    those communities.
        Senator Cortez Masto. Thank you.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Van Hollen.
        Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
    you for your testimony today.
        Vice Chairman Quarles, I know you and I have a difference
    of opinion on this, but since I have raised it in all the
    hearings we have had with your colleagues, I do want to say
    that I fully support the overall decision of the Fed to move
    forward on a real-time payment system under the FedNow
    umbrella. And I hope that you will all move with speed on that
    effort.
        Mr. Quarles. That is the intention, Senator.
        Senator Van Hollen. Thank you.
        Chair McWilliams, I have some questions related to the
    issue of rent-a-bank schemes to evade State usury laws. I know
    this was an issue addressed in the House yesterday and here in
    this hearing a little bit. I understand that the OCC and FDIC
    proposed the rule to supposedly provide clarity on this issue
    in the wake of the Second Circuit decision in Madden v.
    Midland.
        My view is that it is probably premature to move forward. I
    think in the preamble of that rule, you say the FDIC is not
    aware of any widespread or significant negative effects on
    credit availability or securitization markets having occurred
    at this point as a result of the Madden decision. And what I
    worry about--and I know that your fellow Commissioner Marty
    Gruenberg shared my concern--is that you have sort of put your
    foot on the scale in a blunt way, which I think will be
    interpreted by some to give a green light to some of these
    schemes.
        You stated in the House yesterday that your only purpose
    was to address a longstanding principle Congress gave that when
    a loan is made and the interest rates are not usurious at the
    time the loan was made, that subsequent events do not make
    those loans usurious, right? But my question is this: Would it
    be usurious at the time of the loan if the sole purpose of that
    loan was to evade the interest rates under State laws of the
    entities' licensing State?
        Ms. McWilliams. It is a great question. The position we
    have taken at the FDIC under our existing authorities is that
    we basically determine what is the home State for the bank, and
    there is a test we go through. This is the issue that I think
    people are convoluting, the so-called true lender issue versus
    value-when-made, which are two different, separate legal
    doctrines.
        The proposal we issued literally took what we had pre-
    Madden and put it on paper and opened it up for public comment,
    and that is all we did. So this is based on the authorities
    Congress gave to the FDIC in 1980, gave to the OCC in 1865, and
    the language I quoted yesterday--probably poorly--on usurious
    rates is from a Supreme Court case from 1828.
        Senator Van Hollen. Here is the issue, if I may. There is a
    report that one of the--and this problem has gotten worse
    because we have a lot of nonbank lenders now who are taking
    advantage of the current system. So a CEO for one of those
    nonbank lenders said on an earnings call recently, and I
    quote--he was talking about a California law:

            As you know, in California a piece of legislation would limit
            the amount of interest that could be charged on loans from
            $2,500 to $10,000. Similar to our recent experience in Ohio, we
            expect to be able to continue to serve California consumers via
            bank sponsors that are not subject to the same proposed State-
            level rate limitations.

        Clearly telling folks on his earnings call that they were
    going to use this scheme to evade State usury laws.
        So my question is: Why not provide guidance in your rule as
    to what the test is, instead of just sort of sending a green
    light that is saying, you know, go for it? Because that is the
    way a lot of people are interpreting it. Why not provide some
    standard for what you would believe does not constitute a valid
    loan, a loan that does violate State usury laws?
        Ms. McWilliams. A couple of things on that, and those
    people who are saying that we gave them a green light, go for
    it, are mistaken both on legal principle and the regulatory
    framework we have, including congressional language that was
    given to us in 1980.
        States have an opportunity to opt out under Section 27 of
    the FDI Act, 27(a) in fact. Congress gave States an opportunity
    to opt out of the interest rate portability regime. That is,
    again, not an issue for the FDIC or the issue that we have
    addressed in this rulemaking.
        And the second thing is that we actually specifically said
    in the preamble to our rule that we look unfavorably upon the
    so-called rent-a-bank charter, as you referenced it. The
    purpose here is not to evade the law, and we are not going to
    allow banks to evade the law.
        Senator Van Hollen. But saying you are going to look at
    something unfavorably without specifying exactly what standard
    you are going to apply in determining whether it is unfavorable
    it seems to me creates a green light. That is the concern. You
    are going to look unfavorably, but you do not clarify what the
    standard there may be. You know, I understand someone can bring
    a case and spend a lot of time trying to dig up the evidence,
    but a rule from all of you would be helpful, it seems to me, in
    clarifying this.
        Mr. Chairman, I have some questions on the CRA, but I will
    submit them for the record.
        Chairman Crapo. Thank you.
        Senator Tester.
        Senator Tester. Thank you, Mr. Chairman. Thanks for holding
    the hearing, to you and Senator Brown. And I want to thank all
    of you for being here. I appreciate your work.
        I will say leading off that I am disappointed Mr. Otting is
    not here. I think it is critically important we hear from all
    the regulators. I have no dog or fight with him. I voted for
    all you guys, and I voted for him, too, and it would be nice to
    have him here. I think it is important.
        Chairman Crapo. We will get him here.
        Senator Tester. OK. For the last 18 months, I have heard
    from bankers that come into my office that, Montana being a
    State where agriculture is the number one industry, if things
    do not change with the ag prices at the farm gate, people are
    going to be in trouble in the next 18 months or at the end of
    that 18-month period. And we still see ag commodity prices in
    the tank. We still see these silly trade wars going on that I
    do not think are going to end up doing anything different than
    we had to begin with. But that is just a sidebar. That is not
    your problem.
        But what is a problem for us and you is the fact that there
    are farms right now--and I say this as just a matter of fact--
    that have been in families for generations and generations and
    generations. It is more than a job. It is part of who they are
    as human beings. And they are going to go broke, and the banks
    are not going to be able to do much about it. But I do want to
    pose a question to you. What can they do about it? When the
    prices are down and your collateral goes down because land
    prices go down with the commodity prices if they stayed down
    for a period of time, is there anything that the banks can do
    and still remain viable in times where the prices are at lows--
    I have been in the business for 42 years. If you want to use
    inflation-adjusted, they are way, way, way lower than they have
    ever been. Any ideas? Who wants to be first? And, by the way,
    Rodney does not have to respond to this because I do not think
    it is in his bailiwick, but if you want to, you can. Go ahead.
        Mr. Quarles. Obviously, what you are describing is a
    serious issue. It is one that we do give a lot of thought to at
    the Federal Reserve. As I think most of you know, I come from
    the West. I come from an agricultural family. That is something
    that I think about personally a lot as well.
        We have at the Federal Reserve a long history, a lot of
    experience with the cyclicality of the agricultural economy and
    the special problems that that raises for agricultural banks.
    We have examiners that are, you know, specialty focused on
    those issues. We stand ready to work with banks that are
    working with their borrowers during periods, so it is a
    different sort of response than if we had a bank that had a
    non-agricultural borrower, you know, a different history, a
    different industry that might be in the same financial
    position. Just as a matter of risk management, a different
    response might be appropriate. And so we do have a lot of
    experience with that. As you have identified, the situation is
    as bad as it has ever been, and obviously if it goes on long
    enough, the institution will be required to take the steps that
    it needs to in order to recover on the loan. But we do not
    require agricultural banks to do that without any sort of
    consideration of the circumstances and, again, with a lot of
    long experience in how to handle that cyclicality.
        Senator Tester. OK. Do you want to comment?
        Ms. McWilliams. I have a couple of things I think I can add
    to the discussion. We do a quarterly banking profile where we
    collect call report data from banks on a quarterly basis, and
    we have seen a modest decline in the agricultural sector, and
    some of these ag businesses and farmland businesses have gone
    from net depositors to net borrowers.
        Senator Tester. Right.
        Ms. McWilliams. And as we look at that we looked at what
    can be done, what can we do, and our examiners were instructed
    to encourage banks to do workouts in conformance with the
    safety and soundness standards. But also I think there is an
    opportunity for us under the existing framework that Congress
    gave us in the Community Reinvestment Act to do a little bit
    more, provide more credit for the investments that go to small
    farms, family farms, rural areas, small businesses, Indian
    Country. So there is more we can do, I think, frankly, for
    farmers through the CRA, and that has been one of my
    instructions to staff as we are considering proposals.
        Senator Tester. Right. So what I am really concerned about
    here moving forward is just the whole viability of our food
    system, and family farm agriculture is the basis. You know
    that. And as we cut bigger checks and farmers become more
    dependent on the Federal Government--which I do not think any
    of them want to do, and we can talk about socialism all we
    want, but that is socialism. And it is just not healthy. You
    have to deal with the results of poorly thought-out trade wars,
    but the fact of the matter is, when it comes to losing the
    farm, it is a big deal.
        I have got some questions that I want to give to the record
    on affordable housing because I think it is one of the biggest
    barriers we have in this country today, and just there is a lot
    of stuff going on. But I would love to get your opinion on what
    we can do to make affordable housing more available across the
    board, because it is a big issue in urban areas, it is a big
    issue in rural areas, too.
        Senator Tester. Thank you, Mr. Chairman.
        Chairman Crapo. Thank you. And before we wrap up, Senator
    Brown has asked to have another 5 minutes for questions.
        Senator Brown. Thank you. And I concur with what Senator
    Tester said. Housing is everything.
        This is a question for Vice Chair Quarles and for Chair
    McWilliams, if I could. When we were considering the Chairman's
    bill, S. 2155, to deregulate the largest banks, Federal Reserve
    Chairman Powell promised the bill did not require getting rid
    of rules for foreign mega banks. Your agencies then loosened
    the rules on foreign banks, anyway, including on bad actors
    like Deutsche Bank, which is by all indications President
    Trump's ATM.
        Did the bill require you to loosen rules--this goes first
    to you, Ms. McWilliams, then Mr. Quarles. Did the bill require
    you to loosen the rules for those banks? Yes or on.
        Ms. McWilliams. The FDIC only has backup provisions for the
    largest banks, including foreign banks.
        Senator Brown. I understand.
        Ms. McWilliams. What I have instructed staff is to look at
    different capital and liquidity rules that cross-reference
    sections that are referenced in S. 2155. And to the extent that
    the agencies rely on, say, the authorities in Section 165, this
    would be with the Federal Reserve on those rulemakings to tell
    me if there is an opportunity to amend it and to amend those
    rules as well.
        Senator Brown. Mr. Quarles, did the bill require you to do
    that with----
        Mr. Quarles. S. 2155 did not itself instruct or require
    that we make those adjustments. Other elements of the banking
    law do require that we take national treatment into account.
    But in taking it into account, that does not mean that the
    frameworks will be the same, and they are not identical. There
    are some material
    differences between the two frameworks for domestic and foreign
    banks, although, again, in accordance with the law, we have
    tried to ensure that it is--you know, that we do take national
    treatment into account with respect to those frameworks.
        Senator Brown. I think a lot of us were surprised by that
    action, especially after Chairman Powell said it to a number of
    us personally and said it to the Committee.
        Let me ask a follow-up. One of my Republican colleagues
    asked about too big to fail. And, again, to the two of you, Ms.
    McWilliams and Mr. Fall, you had recently relaxed requirements
    for living wills. Dodd-Frank requires the largest banks to
    submit living wills that demonstrate they can credibly be
    resolved under normal bankruptcy procedures without harming the
    economy.
        I will start with you, Mr. Quarles. Do you believe that
    every bank holding company in the United States, even Bank of
    America, JPMorgan Chase, Citi, can be resolved in an ordinary
    bankruptcy without harming the economy?
        Mr. Quarles. I think that the honest answer to that has to
    be similar to the answer that I gave to Senator Kennedy
    earlier, which is I believe that there are many more options
    for the resolution even of the largest institutions than
    existed before. I think that the work that has been done on
    resolvability has been useful. I think that it could be
    possible. They are complex institutions, and the situation in
    which that issue would arise in the future is difficult to
    describe precisely, and so I would not want to say that you
    would always be able to do it. But I think we are closer to
    being able to do it, much closer than we were before.
        Senator Brown. Ms. McWilliams?
        Ms. McWilliams. So bankruptcy is the preferred route.
    Actually, it is a statutory mandate as well. We have to
    consider bankruptcy first. Congress gave the FDIC additional
    authorities in Title II of Dodd-Frank through the Orderly
    Liquidation Authority, and a fund I never hope to use and I
    never want to use, the Orderly Liquidation Fund, to resolve
    these large banks. But, generally, bankruptcy would be our
    preferred route, and we have engaged a number of bankruptcy
    judges in understanding exactly how that would be done and
    could be done for some of these large entities.
        Senator Brown. Thank you both. The point of the law a
    decade ago was to make giant banks simpler and smaller so they
    could go through an orderly bankruptcy. The point was not to
    make bankruptcy more complicated or special for mega banks. We
    are seeing not only the biggest banks, even bigger than before
    the crisis, your agencies just approved another big merger. The
    merger creates a bank twice as large as Washington Mutual was
    at that time when it caused the biggest loss to the Deposit
    Insurance Fund in history, and I think we need to be cautious.
        One last statement, Mr. Chairman. I heard the comment
    earlier about the most--your 35 years of experience, Mr.
    Quarles, and the banking system is, you said, bigger, stronger,
    more stable. It is certainly more profitable, but the more
    profitable should not be the measure of any of our work. The
    measure should be the safety and soundness of the financial
    system with all that that means. And as you continue to move
    toward less regulation, it is hard to believe it is making it
    stronger. It seems to me your agencies are making the market
    less competitive by weakening rules for the largest banks,
    allowing them to make risky leveraged bets rather than
    requiring them to provide banking services in the places where
    it is needed most, and weakening and gutting regulations, you
    claim to be making the economy work better for small businesses
    and farmers and workers and small banks, but your actions pave
    the way for mega banks and Wall Street to make the same risky
    bets that shut our businesses and banks, and those action I
    think betray this economy.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you, Senator Brown, and I again
    appreciate our witnesses and the attention that you have
    brought to these issues here today. And as I said at the
    outset, I appreciate the work you have been doing to
    effectively implement Senate bill 2155 and also basically frame
    our regulatory approach in the ways that best strengthen our
    economy, strengthen our opportunities for strong housing and
    for jobs and benefits and growth in our economy. And I look
    forward to the next time we have an opportunity to bring you
    before us.
        Again, thank you for being here. This hearing is adjourned.
        [Whereupon, at 11:34 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follows:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today we will receive testimony from: the Honorable Randal Quarles,
    Federal Reserve Vice Chairman for Supervision; the Honorable Jelena
    McWilliams, Chairman of the FDIC; and the Honorable Rodney Hood,
    Chairman of the NCUA.
        This hearing provides the Committee an opportunity to examine the
    current state of and recent activities related to the regulatory and
    supervisory activities of these agencies.
        It has been over a year now since the enactment of S. 2155, the
    Economic Growth, Regulatory Relief and Consumer Protection Act, and the
    work of the agencies to implement most of the law's provisions,
    including the tailoring rules for U.S. banks and U.S. operations of
    foreign banks.
        Your agencies should also carefully review the existing supervisory
    frameworks and make any necessary adjustments to appropriately align
    them with the tailoring rules and requirements.
        On July 30, 2019, all of the Republican Banking Committee Members
    and I sent a letter to the Federal banking regulators urging your
    agencies to finalize several outstanding provisions of S. 2155, such as
    the Community Bank Leverage Ratio and short-form call reports, and to
    further tailor regulations to promote economic growth, including
    addressing the Current Expected Credit Losses accounting standard, the
    Volcker Rule, inter-affiliate margin and Madden.
        Thank you for acting on many of these priorities. I encourage you
    to continue exploring additional opportunities to tailor rules.
        In that July letter, as well as an October 2018 letter to your
    agencies, several Banking Committee Republicans and I urged your
    agencies to revise the Volcker Rule, including using your discretion
    granted by Congress to address the current covered funds overly broad
    definition.
        Although your agencies joined the SEC and CFTC to issue a proposal
    revising several aspects of the Volcker Rule, the `covered funds'
    provision was left relatively untouched.
        I encourage your agencies to take quick action to address the
    ``covered funds'' issue by revising the definition's overly broad
    application to venture capital, other long-term investments and loan
    creation.
        Separately, in September, short-term borrowing rates spiked as a
    result of a large corporate tax payment coming due, and $300 billion in
    Treasuries hitting the market, even in light of banks holding a surplus
    of cash at the Fed, currently around $1.4 trillion.
        In light of these events, banks could have stepped in to alleviate
    the volatility in those markets by lending some of the excess cash that
    they hold at the Fed. So, why did they not do that?
        Some have suggested that certain aspects of the Fed's supervision
    and regulations imposed after the 2008 financial crisis may have
    exacerbated this problem, specifically the treatment of cash versus
    treasuries.
        Although the Fed has taken some steps to address the issue in the
    short-term by buying Treasuries and lending funds, it is important that
    the Fed review the details of its current regulatory and supervisory
    regime for potential long-term fixes.
        Now quickly turning to guidance, Senators Tillis, Perdue, Rounds,
    Cramer and I wrote to GAO in February asking for its legal opinion as
    to whether three Federal Reserve Supervision and Regulation Letters
    constitute a rule under the congressional Review Act (CRA).
        In its October response, GAO concluded that two of the letters,
    including one providing a new supervision framework for large financial
    institutions and another related to recovery planning, are rules under
    the CRA, and are required to be submitted to Congress for review.
        During the Banking Committee's April hearing on this very issue, I
    urged your agencies to follow the CRA and submit all rules to Congress,
    even if they have not gone through a formal notice-and-comment
    rulemaking to continue providing more clarity about the applicability
    of guidance.
        I encourage the Federal banking regulators to take a more
    deliberate approach going forward, and take any necessary steps to
    rectify informal guidance that has not been submitted to Congress.
        In January 2019, the NCUA announced the portion of regulations that
    would be reviewed as a part of the process through which the agency
    reexamines all of its existing regulations every 3 years.
        The comment period for that review process has since closed, and I
    look forward to learning more about the regulatory recommendations
    provided to the NCUA and its roadmap for actions going forward.
        Finally, the Banking Committee has been exploring digital
    currencies over the last few Congresses, especially in light of the
    recent development of the Libra digital currency, started by Facebook.
        In July, I asked Federal Reserve Chairman Powell about his
    understanding of and the Fed's role in the project.
        Although Chairman Powell noted that the Fed has set up a working
    group to focus on Libra and is in contact with the other regulatory
    agencies, he also said that ``There is not any one agency that can
    stand up and have oversight over this.''
        Given its scope, regulators across the globe continue to evaluate
    Libra, its potential impact in the marketplace, and consider
    appropriate and necessary regulatory responses.
        It seems that digital currencies are inevitable, and the United
    States needs to lead by providing clear rules of the road.
        During this hearing, I look forward to learning more about the
    status of addressing the overly broad covered funds definitions in the
    Volcker Rule, especially with respect to long-term investments; how the
    agencies are thinking through the recent turmoil in the repo market,
    and what adjustments may be appropriate for a long-term fix; whether
    the supervisory framework that applies to banks currently needs to be
    updated to better reflect changes made in the tailoring rules; and how
    the agencies are thinking about the Libra project, including what U.S.
    regulatory framework merits consideration to balance innovation and
    protect its users and privacy.
        I thank each of you for your willingness to join the Committee
    today to discuss your agencies' regulatory and supervisory activities,
    and these important issues.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        Thank you, Mr. Chairman. I want to start by noting that typically
    when we have the financial regulators testify, the Comptroller of the
    Currency is also here. Mr. Otting had a conflict today. He is expected
    to announce changes to the Community Reinvestment Act shortly, changes
    that the civil rights community and others are very concerned about. I
    share those concerns, and I expect that we will have him up before this
    Committee to talk about this proposal and other activities at the OCC
    soon.
        We all saw how Wall Street's financial schemes hurt regular people
    when they blow up in bankers' faces, like they did in 2008.
        You all saw the devastation of the crisis. Whether as a staffer in
    the Senate, while serving at the agency you now lead, or at a private
    equity firm after a stint at Treasury--you had a front row seat.
        That's why I'm concerned about the collective amnesia you all
    appear to have as you make changes to the bank rules--changes that
    allow Wall Street to get back to its old tricks, and that I fear will
    cost Americans their jobs, homes, and savings the next time complicated
    bets blow up in bankers' faces.
        But what is sometimes harder to see are the schemes that hurt
    families and the economy even when they work exactly how Wall Street
    intends.
        Unfortunately, Ohio is the setting of one of these Wall Street
    schemes. Twelve years ago, just before the financial crisis, a giant
    private equity firm bought a nursing home company based in Toledo that
    operated facilities nationwide.
        Soon that nursing home company was being strangled by debt from
    risky leveraged loans. It laid off hundreds of staff and let its
    patients suffer under negligent, horrifying conditions.
        According to the Washington Post, staffing cuts meant there weren't
    enough nurses to respond to patients.
        Health code violations rose dramatically.
        In Pennsylvania, a patient broke her hip and crashed to the floor
    when a staffer tried to do a two-person job and move her on his own.
        Patients faced other living conditions that no human should have to
    endure, waiting in soiled clothing and dirty beds for help that was
    never going to come.
        And all the while, that Wall Street private equity firm was
    extracting more profits.
        Last year, the nursing home company went bankrupt. But that didn't
    stop the private equity firm from making huge profits on their
    investment.
        This is what happens when leveraged loans, collateralized loan
    obligations, and leveraged buyouts work as designed. Wall Street
    extracts all the profits out of the company, and the rest of us--
    workers, patients, our families--we pay for it.
        Today Wall Street is looking for profits anywhere it can find them,
    and these schemes squeeze money out of every part of the economy--from
    hospitals in Philadelphia, Pennsylvania, and Massillon, Ohio, to
    manufactured home communities in Iowa and New Hampshire--not just
    harming individual families, but entire communities.
        Imagine how bad it will be if these complex financial transactions
    blow up like the subprime mortgage ones did in 2008.
        This is just one of so many challenges working families are facing.
        We got a report this week showing that almost half of all American
    workers are stuck in low-wage jobs. One-in-four families spend more
    than half of their income on rent and utilities. Forty percent of
    Americans are so short on cash they would be forced to borrow money to
    cover a $400 expense.
        More and more families have to borrow just to get by--credit card
    debt, student loan debt, and mortgage debt--are all higher than before
    the crisis. Wall Street squeezes more out of every paycheck, adding to
    their billions.
        If regular Americans are struggling 10 years into a so-called
    recovery--when the stock market is booming--what will happen in a
    recession?
        This can't be how the financial system should work.
        The regulators' job isn't to protect profits for big banks and big
    corporations. It's to protect our economy and our financial system, and
    the ordinary families that the system is supposed to serve.
        I guess when the President says ``draining the swamp,'' he really
    means betraying workers and giving Wall Street free rein to prey on
    them and wring every last cent out of profit of our communities.
        This President uses his phony populism--racism, antisemitism, anti-
    immigrant slander--to divide us, to distract from all the ways he and
    his hand-picked cronies have betrayed working families and left them
    struggling.
        That's not how a democracy should function, and I am deeply worried
    that if you don't stand up for workers and families, so much in our
    economy and our democracy is at risk.
        Thank you, Mr. Chairman.
                                     ______

                    PREPARED STATEMENT OF RANDAL K. QUARLES
                           Vice Chair for Supervision
                Board of Governors of the Federal Reserve System
                                December 5, 2019
        Chairman Crapo, Ranking Member Brown, Members of the Committee,
    thank you for the opportunity to appear today, alongside my colleagues
    from the regulatory community. We join you on the cusp of a significant
    and shared milestone: the full and faithful implementation of
    Congress's efforts to improve financial regulation, in the form of the
    Economic Growth, Regulatory Relief, and Consumer Protection Act
    (EGRRCPA).\1\ Today, I will briefly review the steps we have taken
    toward this milestone; share information on the state of the banking
    system, from the report that accompanies my testimony; and discuss the
    continuing need to ensure our regulatory framework is both coherent and
    effective.\2\
    ---------------------------------------------------------------------------
        \1\ EGRRCPA, Pub. L. No. 115-174, 132 Stat. 1296 (2018).
        \2\ Board of Governors of the Federal Reserve System, ``Supervision
    and Regulation Report,'' November 26, 2019, https://
    www.federalreserve.gov/publications/files/201911-supervision-and-
    regulation-report.pdf.
    ---------------------------------------------------------------------------
        Roughly 18 months ago, Congress passed legislation to consolidate a
    decade of work on financial reform, and to better tailor financial
    regulation and supervision to the risks of the institutions being
    regulated. The EGRRCPA was a specific, targeted response to the
    conditions facing today's banking organizations and their customers. It
    was also rooted, however, in longstanding congressional 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, most efficient use. This approach informed the
    Banking Acts of 1933 and 1935, on issues from shareholder liability to
    deposit insurance.\3\ It informed the bills passed after the savings-
    and-loan crisis, requiring ``prompt corrective action'' at struggling
    firms and reducing the examination burden at strong ones.\4\ And it
    continues to inform our efforts now, from the passage of the Dodd-Frank
    Wall Street Reform and Consumer Protection Act to today.\5\
    ---------------------------------------------------------------------------
        \3\ See Gary Richardson, Alejandro Komai, and Michael Gou,
    ``Banking Act of 1935,'' Federal Reserve History (website), Federal
    Reserve Bank of Richmond, November 22, 2013, https://
    www.federalreservehistory.org/essays/banking-act-of-1935.
        \4\ See Noelle Richards, ``Federal Deposit Insurance Corporation
    Improvement Act of 1991,'' Federal Reserve History (website), Federal
    Reserve Bank of Richmond, November 22, 2013, https://
    www.federalreservehistory.org/essays/fdicia.
        \5\ Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
    ---------------------------------------------------------------------------
        The Board's latest Supervision and Regulation Report, which we
    published last week, confirms the current health of the banking system.

        It depicts a stable, healthy, and resilient banking sector,
            with robust capital and liquidity positions.

        It details stable loan performance and strong loan growth,
            particularly among regional banks, whose share of overall bank
            lending continues to grow.

        It describes steady improvements in safety and soundness,
            with a gradual decline in outstanding supervisory actions at
            both the largest and smallest organizations.

        And it identifies areas of continued supervisory focus,
            including operational resiliency and cyber-related risks, which
            are among our top priorities for the year to come.

        The banking system is substantially better prepared to manage
    unexpected shocks today than it was before the financial crisis. Now,
    when the waters are relatively calm, is the right time to step back and
    examine the efficiency and effectiveness of our protection against
    future storms. With the EGRRCPA, Congress made a significant down
    payment on that task. In less than 18 months after the Act's passage,
    we implemented all of its major provisions.
        Earlier this year, we completed a cornerstone of the legislation to
    tailor our rules for regional banks, which was entirely consistent with
    a principle at the heart of our existing work: firms that pose greater
    risks should meet higher standards and receive more scrutiny. Our
    previous framework relied heavily on a firm's total assets as a proxy
    for these risks and for the costs the financial system would incur if a
    firm failed. This simple asset proxy was clear and critical, rough and
    ready, but neither risk-sensitive nor complete. Our new rules employ a
    broader set of indicators, like short-term wholesale funding and off-
    balance-sheet exposures, to assess the need for greater supervisory
    scrutiny.\6\ They maintain the most stringent requirements and
    strictest oversight for the largest, most complex organizations--the
    collapse of which would do the most harm.
    ---------------------------------------------------------------------------
        \6\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic
    and Foreign Banks to More Closely Match Their Risk Profiles; news
    release, October 10, 2019, https://www.federalreserve.gov/newsevents/
    press
    releases/bcreg20191010a.htm.
    ---------------------------------------------------------------------------
        We and our interagency colleagues also have worked on a range of
    measures addressed to smaller banks, with particular attention to
    better capturing and reflecting the characteristics of the community
    bank business model. These include elements of last year's legislation,
    and other steps we have taken in the same spirit, intended to help
    community banking organizations survive and thrive:

        We adjusted the scope of our supervisory assessments, our
            stress-testing requirements, our appraisal regulations, and the
            Volcker rule--all aimed at the activities of large, complex
            institutions, not small local banks.\7\
    ---------------------------------------------------------------------------
        \7\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies Issue Final Rule to Exempt Residential Real Estate
    Transactions of $400,000 or Less from Appraisal Requirements,'' news
    release, September 27, 2019, https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg20190927
    a.htm; Board of Governors of the Federal Reserve System, Commodity
    Futures Trading Commission, Federal Deposit Insurance Corporation,
    Office of the Comptroller of the Currency, and Securities and Exchange
    Commission, ``Agencies Finalize Changes to Simplify Volcker Rule,''
    news release, October 8, 2019, https://www.federalreserve.gov/
    newsevents/pressreleases/bcreg2019
    1008a.htm; Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic
    and Foreign Banks to More Closely Match Their Risk Profiles,'' news
    release, October 10, 2019, https://www.federalreserve.gov/news
    events/pressreleases/bcreg20191010a.htm; Board of Governors of the
    Federal Reserve System, ``Federal Reserve Board Invites Public Comment
    on Proposal That Would Modify Company-Run Stress Testing Requirements
    to Conform with Economic Growth, Regulatory Relief, and Consumer
    Protection Act,''news release, January 8, 2019, https://
    www.federalreserve.gov/news
    events/pressreleases/bcreg20190108a.htm; and Board of Governors of the
    Federal Reserve System, ``Federal Reserve Board Issues Statement
    Describing How, Consistent with Recently Enacted EGRRCPA, the Board
    Will No Longer Subject Primarily Smaller, Less Complex Banking
    Organizations to Certain Board Regulations,'' news release, July 6,
    2018, https://www.fed
    eralreserve.gov/newsevents/pressreleases/bcreg20180706b.htm.

        We clarified our capital treatment of commercial real
            estate loans, which are central to the credit books of many
    ---------------------------------------------------------------------------
            community banks.

        We detailed our approach to anti-money-laundering exams,
            and our goal of prioritizing high-risk activities over routine
            matters.\8\

        \8\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies Propose Rule Regarding the Treatment of High
    Volatility Commercial Real Estate,'' news release, September 18, 2018,
    https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20180918a.htm; and Board of Governors of the Federal Reserve
    System, Federal Deposit Insurance Corporation, Financial Crimes
    Enforcement Network, National Credit Union Administration, and Office
    of the Comptroller of the Currency, ``Federal Bank Regulatory Agencies
    and FinCEN Improve Transparency of Risk-Focused BSA/AML Supervision,''
    news release, July 22, 2019, https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg20190722a.htm.

        We expanded eligibility for our small bank holding company
            policy statement, opening the door to simpler funding
            requirements for a broader range of small banking firms.\9\ We
            also increased the scope of banks eligible for longer
            examination cycles.\10\
    ---------------------------------------------------------------------------
        \9\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board Issues Interim Final Rule Expanding the Applicability of
    the Board's Small Bank Holding Company Policy Statement,'' news
    release, August 28, 2018, https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg20180828a.htm.
        \10\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies Issue Final Rules Expanding Examination Cycles for
    Qualifying Small Banks and U.S. Branches and Agencies of Foreign
    Banks,'' news release, December 21, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20181221c.htm.

        We revised a management-interlock rule for the first time
            since 1996, removing a governance barrier for more small banks
            and their holding companies.\11\
    ---------------------------------------------------------------------------
        \11\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies Issue Final Rule to Update Management Interlock
    Rules,'' news release, October 2, 2019, https://www.federalreserve.gov/
    newsevents/pressreleases/bcreg20191002a.htm.

        We made our short-form call report shorter, removing items
    ---------------------------------------------------------------------------
            that were often ancillary to filers' core lending activities.

        And we finalized a new community bank leverage ratio,
            giving small, strong banking organizations a much simpler way
            to meet their capital requirements.\12\
    ---------------------------------------------------------------------------
        \12\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Federal Bank Regulatory Agencies Issue Final Rule to
    Simplify Capital Calculation for Community Banks,'' news release,
    October 29, 2019, https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg20191029a.htm.

        Our goal, through this period of intense regulatory activity, has
    been to faithfully implement Congress's instructions. However, those
    instructions also speak to a broader need, and one central to our
    ongoing work: to ensure our regulatory regime is not only simple,
    efficient, and transparent, but also coherent and effective.\13\
    ---------------------------------------------------------------------------
        \13\ Randal K. Quarles, ``Early Observations on Improving the
    Effectiveness of Post-Crisis Regulation'' (speech at the American Bar
    Association Banking Law Committee Annual Meeting, Washington, DC,
    January 19, 2018), https://www.federalreserve.gov/newsevents/speech/
    quarles20180119a.htm.
    ---------------------------------------------------------------------------
        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 and areas for improvement
    will always reveal themselves over time. Our responsibility--among the
    most challenging and essential we have--is to address those gaps
    without creating new ones; to understand fully the interaction among
    regulations; to reduce complexity where possible, before it becomes its
    own source of risk; and to ensure our entire rulebook supports the
    safety, stability, and strength of the financial system.
        Looking ahead, my colleagues and I are paying particular attention
    to coherence in our capital regime. We are reviewing public input into
    proposed changes to the stress capital buffer, which would simplify our
    regime by integrating our stress-test and point-in-time capital
    requirements and maintain our current strong levels of capital.\14\ As
    we move forward, we also understand the need to thoughtfully finalize
    implementation of Basel III, in a way that preserves aggregate capital
    and liquidity levels at large banking organizations, avoids additional
    burden at smaller ones, and upholds our standards for transparency and
    due process.
    ---------------------------------------------------------------------------
        \14\ Randal K. Quarles, ``Refining the Stress Capital Buffer''
    (speech at the Program on International Financial Systems Conference,
    Frankfurt, Germany, September 5, 2019), https://www.federalreserve.gov/
    newsevents/speech/quarles20190905a.htm; and Randal K. Quarles, ``Stress
    Testing: A Decade of Continuity and Change'' (speech at the ``Stress
    Testing: A Discussion and Review'' research conference sponsored by the
    Federal Reserve Bank of Boston, July 9, 2019), https://
    www.federalreserve.gov/newsevents/speech/quarles20190709a.htm.
    ---------------------------------------------------------------------------
        We also understand the need to ensure a smooth transition away from
    LIBOR, and other legacy benchmark rates, so institutions can manage
    risks comprehensively and effectively.\15\ And we understand the need
    for clear, consistent supervisory communication on these and other
    matters, which invites dialogue, reflects and reinforces our
    regulations and laws, and gives banks necessary transparency into
    supervisory views on safety and soundness.\16\
    ---------------------------------------------------------------------------
        \15\ Randal K. Quarles, ``The Next Stage in the LIBOR Transition''
    (speech at the Alternative Reference Rates Committee Roundtable,
    cohosted by the Alternative Reference Rates Committee and the New York
    University Stern School of Business and Its Salomon Center for the
    Study of Financial Institutions, New York, June 3, 2019), https://
    www.federalreserve.gov/newsevents/speech/quarles20190603a.htm.
        \16\ Randal K. Quarles, ``Law and Macroeconomics: The Global
    Evolution of Macroprudential Regulation'' (speech at the ``Law and
    Macroeconomics'' conference at Georgetown University Law Center,
    Washington, DC, September 27, 2019), https://www.federalreserve.gov/
    newsevents/speech/quarles20190927a.htm.
    ---------------------------------------------------------------------------
        We also understand the need to thoughtfully address new financial
    products and technologies. Innovation has the potential to improve
    access to financial services, lower costs, and support the competitive
    health of the banking sector. Its promise, however, inevitably comes
    with risk--and as the financial crisis showed, risks that lie outside
    the banking system can have consequences within it. Our approach to
    innovation should be both open and careful, engaging thoughtfully with
    both the public and private sectors, to understand the benefits and
    costs that such fundamental changes can bring.
        Finally, we understand the need for coherence across borders. Over
    the last decade, working with supervisors around the world, we have
    built a common understanding of the crisis, its causes, and its
    consequences. Now, as the full set of post-crisis reforms comes into
    effect, we should renew our focus on assessing their implementation and
    their overall impact. The financial system is truly global, and the
    structures and incentives that govern it are critical to its stability
    and resilience.\17\ The regulatory community has started significant
    work to examine those structures and incentives as a whole, from their
    effect on ``too-big-to-fail'' subsidies to their impact on market
    fragmentation.\18\ We are participating actively in that work, as a way
    to ensure the global financial system supports, rather than inhibits,
    American growth.
    ---------------------------------------------------------------------------
        \17\ Randal K. Quarles, ``Government of Union: Achieving Certainty
    in Cross-Border Finance'' (speech at the Financial Stability Board
    Workshop on Pre-Positioning, Ring-Fencing, and Market Fragmentation,
    Philadelphia, September 26, 2019), https://www.federalreserve.gov/
    newsevents/speech/quarles201909?6a.htm.
        \18\ Randal K. Quarles, ``The Financial Stability Board at 10
    Years--Looking Back and Looking Ahead'' (speech at the European Banking
    Federation's European Banking Summit, Brussels, Belgium, October 3,
    2019), https://www.federalreserve.gov/newsevents/speech/quarles2019
    1003a.htm; see also, Financial Stability Board, ``FSB Launches
    Evaluation of Too-Big-to-Fail Reforms and Invites Feedback from
    Stakeholders,'' news release, May 23, 2019, https://www.fsb.org/2019/
    05/fsb-launches-evaluation-of-too-big-to-fail-reforms-and-invites-
    feedback-from-stakeholders/; and Financial Stability Board, ``FSB
    Publishes Report on Market Fragmentation,'' news release, June 4, 2019,
    https://www.fsb.org/2019/06/fsb-publishes-report-on-market-
    fragmentation/.
    ---------------------------------------------------------------------------
        I appreciate the chance to discuss this work with you, and I look
    forward to answering your questions. Thank you.
                                     ______

                    PREPARED STATEMENT OF JELENA McWILLIAMS
                Chairman, Federal Deposit Insurance Corporation
                                December 5, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for the opportunity to testify before the Senate Committee on
    Banking, Housing, and Urban Affairs.
        Exactly 18 months ago, I began serving as the 21st Chairman of the
    Federal Deposit Insurance Corporation (FDIC). During this period, the
    FDIC has undertaken a significant amount of work with a particular
    emphasis on three overarching goals:

        Strengthening the banking system as it continues to evolve;

        Ensuring that FDIC-supervised institutions can meet the
            needs of consumers and businesses; and

        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 with the Committee how we will
    continue to move each of them forward.
    I. State of the U.S. Banking Industry
        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, the economic expansion became the
    longest on record in the United States. By nearly every metric--net
    income, net interest margin, net operating revenue, loan growth, asset
    quality, loan loss reserves, capital levels, and the number of
    ``problem banks''--the banking industry is strong and well-positioned
    to continue supporting the U.S. economy.
        With respect to profitability, banks of all sizes are performing
    well. In the third quarter of 2019, the 5,256 FDIC-insured banks and
    savings institutions reported net income of $57.4 billion.\1\ Nearly 62
    percent of institutions reported annual increases in net income, and
    only about 4 percent of institutions were unprofitable. Notably,
    community banks reported net income of $6.9 billion, an increase of 7.2
    percent from a year earlier. Net interest margin also remained stable,
    with an average of 3.35 percent across the industry and a particularly
    strong average of 3.69 percent among community banks. Finally, net
    operating revenue totaled over $208 billion, an increase of 2.2 percent
    from a year earlier.
    ---------------------------------------------------------------------------
        \1\ See FDIC Quarterly Banking Profile, Third Quarter 2019,
    available at https://www.
    fdic.gov/bank/analytical/qbp/2019sep/qbp.pdf. Unless otherwise
    indicated, all statistics are derived from this report as of the third
    quarter of 2019.
    ---------------------------------------------------------------------------
        Key balance sheet indicators are similarly robust. Total loan
    balances increased by 4.6 percent, up from the 4.5 percent growth rate
    reported the previous quarter. Again, community banks performed
    particularly well in this area, with an annual rate of loan growth that
    was stronger than the overall industry. Asset quality also remained
    strong, as the rate of noncurrent loans (i.e., loans that are 90 days
    or more past due) declined to 0.92 percent. Finally, the industry's
    capacity to absorb credit losses improved from a year earlier, as the
    reserve coverage ratio (i.e., loan-loss reserves relative to total
    noncurrent loan balances) rose to 131 percent.
        Although the current interest rate environment may result in new
    challenges for banks in lending and funding, the industry is well-
    positioned to remain resilient throughout the economic cycle,
    principally as a result of greater and higher-quality equity capital.
    Equity capital across the industry rose to $2.1 trillion, up $3.5
    billion from the previous quarter. This capital increase translated to
    an aggregate common equity tier 1 capital ratio of 13.25 percent.
        The number of institutions on the FDIC's ``Problem Bank List''
    declined from 56 to 55, the lowest number since the first quarter of
    2007, and four new banks opened during the third quarter for a total of
    10 new banks in 2019.
        Four banks failed during 2019--the first failures since December
    2017. It is important to recognize that, even in a healthy economy,
    some banks will inevitably fail. The economic expansion we have
    experienced resulted in an anomalous stretch in which there were zero
    bank failures. This expansion and consequent absence of failures cannot
    endure forever. It is normal--and indeed expected--for some banks to
    fail, and our job at the FDIC is to protect depositors and ensure that
    banks can fail in an orderly manner.
        The key to the FDIC's ability to protect depositors is the
    administration of the Deposit Insurance Fund (DIF), which increased to
    a record $108.9 billion in the third quarter.\2\ The DIF's reserve
    ratio (i.e., the fund balance as a percent of estimated insured
    deposits) increased to 1.41 percent, the highest level since 1999.
    ---------------------------------------------------------------------------
        \2\ See FDIC Deposit Insurance Fund Trends, Third Quarter 2019,
    available at https://www.fdic.gov/bank/analytical/qbp/2019sep/
    qbpdep.html.
    ---------------------------------------------------------------------------
        In 2010, Congress instituted the DIF Restoration Plan, which
    required the FDIC to raise the DIF minimum reserve ratio from 1.15
    percent to 1.35 percent by September 30, 2020. Although we continue to
    work toward our 2 percent target, the FDIC has met the statutory
    requirement and formally exited the DIF Restoration Plan. Accordingly,
    we have awarded $764.4 million in credits to banks with less than $10
    billion in assets for the portion of their assessments that contributed
    to the increase.\3\
    ---------------------------------------------------------------------------
        \3\  Id.
    ---------------------------------------------------------------------------
        In addition, the FDIC recently proposed a rule \4\ that would amend
    our deposit insurance assessment regulations to continue to apply small
    bank credits as long as the DIF remains at least 1.35 percent rather
    than the current 1.38 percent. This proposal seeks to make the
    application of small bank credits to quarterly assessments more stable
    and predictable for smaller institutions and simplify the FDIC's
    administration of these credits without impairing our ability to
    maintain the required minimum reserve ratio of 1.35 percent.
    ---------------------------------------------------------------------------
        \4\ See Assessments, 84 Fed. Reg. 45443 (Aug. 29, 2019), available
    at https://www.govinfo.gov/content/pkg/FR-2019-08-29/pdf/2019-
    18257.pdf.
    ---------------------------------------------------------------------------
        The FDIC will continue to manage the DIF prudently and responsibly
    in pursuit of our statutory mission to maintain stability and public
    confidence in the Nation's financial system.
    II. Strengthening the Banking System
        While the state of the banking system remains strong, the FDIC is
    not standing idly by. We continue to monitor changes in the industry
    and work to further strengthen the banking system by:

        Modernizing our approach to supervision and increasing
            transparency;

        Tailoring regulations;

        Enhancing resolution preparedness;

        Assessing new and emerging risks; and

        Creating the workforce of the future.

    I will address each of these efforts in turn.

    A. Modernizing Supervision and Increasing Transparency
        As the primary supervisor of the majority of the Nation's small and
    medium-size banks, the FDIC oversees a segment of the banking system
    that plays a vital role in communities across the country.\5\ Through
    our back-up examination authority, the FDIC also has the ability to
    examine the Nation's largest banks.
    ---------------------------------------------------------------------------
        \5\ As of September 30, 2019, the FDIC insures the deposits of
    5,256 institutions and acts as the primary supervisor of 3,384 State-
    chartered institutions that are not members of the Federal Reserve
    System.
    ---------------------------------------------------------------------------
        Having worked both as a regulator and at a regulated entity before
    arriving at the FDIC, I have spent a great deal of time thinking about
    effective supervision and examination. Our supervisory approach should
    achieve the following objectives: (1) ensure that institutions are safe
    and sound; (2) provide clear rules of the road; (3) be consistent in
    its application; (4) be fair, effective, and holistic in the
    consideration of regulatory issues; (5) be timely and contemporary in
    providing feedback; (6) respect the business judgment of an
    institution's management team; and (7) promote an open, two-way
    dialogue between the regulated and the regulators.
        In furtherance of these objectives, the FDIC has undertaken a
    number of reforms to modernize our approach to supervision and increase
    the transparency of our programs.
    1. CAMELS Ratings
        The FDIC and the Federal Reserve Board (FRB) recently issued a
    notice and request for comment on the consistency of ratings assigned
    under the Uniform Financial Institutions Rating System (UFIRS),
    commonly known as CAMELS ratings because of the six evaluation
    components (i.e., Capital, Asset Quality, Management, Earnings,
    Liquidity, and Sensitivity to Market Risk).\6\ This system, which was
    established in 1979, is critical to our supervisory efforts. Despite
    vast changes in technology, industry practices, and regulatory
    standards, the system has not been materially updated in nearly 25
    years. We are seeking feedback on how CAMELS ratings are assigned to
    supervised institutions and the implications of such ratings in the
    application and enforcement action processes. This request is
    consistent with our commitment to increase transparency, improve
    efficiency, support innovation, and provide opportunities for public
    feedback. We look forward to receiving public comments and engaging
    further with stakeholders and the other banking agencies on this
    effort.
    ---------------------------------------------------------------------------
        \6\ See Request for Information on Application of the Uniform
    Financial Institutions Rating System, 84 Fed. Reg. 58383 (Oct. 31,
    2019), available at https://www.govinfo.gov/content/pkg/FR-2019-10-31/
    pdf/2019-23739.pdf.
    ---------------------------------------------------------------------------
    2. ``Trust through Transparency''
        With the goal of increasing the transparency of our supervisory
    programs, my first major initiative as Chairman was ``Trust through
    Transparency,'' which builds upon the agency's solid foundation of
    public trust and accountability by fostering a deeper culture of
    openness. As part of this initiative, we launched a new public section
    of our website where we publish FDIC performance metrics, including
    turnaround times for examinations and bank charter applications, call
    center usage and response times, and data on the status of supervisory
    and assessment appeals.\7\
    ---------------------------------------------------------------------------
        \7\ See FDIC Transparency & Accountability, available at https://
    www.fdic.gov/transparency.
    ---------------------------------------------------------------------------
        This program is not just about publishing more information.
    Instead, we are using the heightened public scrutiny of our work to
    hold ourselves publicly accountable to high standards, and our effort
    is already yielding positive results.
    3. Supervision Modernization
        As part of our efforts to modernize supervision, FDIC examination
    teams are leveraging technology to reduce the amount of time they spend
    onsite at supervised institutions. This reduces the compliance burden
    for institutions--especially community banks--without sacrificing the
    quality of our supervision.
        As a result, our examination turnaround time (i.e., the time from
    when field work begins to when the examination report is sent to the
    bank) has significantly improved. During the 12 months ended September
    30, 2019, more than 87 percent of safety and soundness examinations
    were conducted within our 75-day goal and more than 96 percent of
    consumer compliance and Community Reinvestment Act (CRA) examinations
    were conducted within our 120-day goal. Similarly, examination report
    processing time (i.e., the time from when field work is complete to
    when the report is sent to the bank) has improved, with more than 92
    percent of safety and soundness reports and more than 98 percent of
    consumer compliance and CRA reports processed within our 45-day goal.
        We recently established a new Subcommittee on Supervision
    Modernization--which reports to our Community Bank Advisory Committee
    (CBAC)--to make recommendations for improving our supervisory
    activities. The Subcommittee, which is comprised of 15 bankers,
    technologists, former regulators, and legal experts, is tasked with
    considering how the FDIC can further leverage technology and refine its
    processes to improve the efficiency of the examination program, while
    managing and training a geographically dispersed workforce.
    4. De Novo Application Process
        Another key focus of our supervisory modernization effort has been
    the de novo application process. De novo banks are an important source
    of new capital, talent, and ideas, and many offer products and services
    to underserved communities and fill gaps in overlooked markets. The
    need for these institutions is underscored by the uneven distribution
    of banking offices across the country. As of June 30, 2019, 620
    counties--or 20 percent of the counties across the Nation--were served
    only by community banking offices, 127 counties had only one banking
    office, and 33 counties had no banking offices at all.\8\
    ---------------------------------------------------------------------------
        \8\ See FDIC Summary of Deposits, available at https://
    www7.fdic.gov/SOD.
    ---------------------------------------------------------------------------
        In the decade immediately following the financial crisis, very few
    new banks opened due to the challenging economic environment and
    regulatory constraints. During my first year as Chairman, the FDIC
    emphasized the need for greater de novo activity, and the FDIC has
    taken several actions to support this objective, including:

        Revising our process for reviewing deposit insurance
            proposals to provide initial feedback to organizers on draft
            applications prior to submission;\9\
    ---------------------------------------------------------------------------
        \9\ See FDIC FIL-82-2018, Review Process for Draft Deposit
    Insurance Proposals (Dec. 6, 2018), available at https://www.fdic.gov/
    news/news/financial/2018/fil18082.html.

        Updating two manuals related to the deposit insurance
            application process;\10\
    ---------------------------------------------------------------------------
        \10\ See FDIC FIL-83-2018, FDIC Issues an Update to its Publication
    Entitled Applying for Deposit Insurance--A Handbook for Organizers of
    De Novo Institutions, Finalizes its Deposit Insurance Applications
    Procedures Manual, and Establishes a Designated Applications Mailbox
    (Dec. 6, 2018), available at https://www.fdic.gov/news/news/financial/
    2018/fil18083.html.

        Issuing a request for information to solicit additional
            ideas for improvement;\11\ and
    ---------------------------------------------------------------------------
        \11\ See Request for Information on the FDIC's Deposit Insurance
    Application Process, 83 Fed. Reg. 63868 (Dec. 12, 2018), available at
    https://www.govinfo.gov/content/pkg/FR-2018-12-12/pdf/2018-26811.pdf.

        Engaging with stakeholders at seven roundtables across the
    ---------------------------------------------------------------------------
            country.

        Results we have seen thus far are encouraging. Organizers have
    expressed renewed interest in de novo charters, and we approved 14 de
    novo banks in 2018--more than the total number of approvals in the
    eight previous years combined.\12\ This momentum has continued
    throughout 2019, and we have approved eight de novo banks thus far.
    ---------------------------------------------------------------------------
        \12\ See FDIC Decisions on Bank Applications, available at https://
    www.fdic.gov/regulations/laws/bankdecisions/depins/index.html.
    ---------------------------------------------------------------------------
    5. Interagency Statement on Alternative Data
        Earlier this week, the FDIC, FRB, Office of the Comptroller of the
    Currency (OCC), Consumer Financial Protection Bureau (CFPB), and
    National Credit Union Administration (NCUA) jointly issued a statement
    \13\ encouraging the responsible use of alternative data (i.e., data
    not typically found in the consumer's credit files of the nationwide
    consumer reporting agencies or customarily provided as part of
    applications for credit) for use in credit underwriting.
    ---------------------------------------------------------------------------
        \13\ See Federal Regulators issue joint statement on the use of
    alternative data in credit underwriting (Dec. 3, 2019), available at
    https://www.fdic.gov/news/news/press/2019/pr19117.html.
    ---------------------------------------------------------------------------
        The agencies recognize that the use of alternative data may improve
    the speed and accuracy of credit decisions and may help firms evaluate
    the creditworthiness of consumers who currently may not obtain credit
    in the mainstream credit system. The statement also emphasizes that, if
    firms choose to use alternative data, they must comply with applicable
    consumer protection laws, including fair lending laws and the Fair
    Credit Reporting Act.
    6. Federal Interest Rate Authority
        Our push for modernization is not limited to supervision and
    examination programs, but also includes work to provide clarity on key
    legal issues. One specific example of this approach is an ongoing
    effort to address marketplace uncertainty regarding the enforceability
    of the interest rate terms of loan agreements following a bank's
    assignment of a loan to a nonbank. In 2015, the United States Court of
    Appeals for the Second Circuit issued a decision \14\ that called into
    question such enforceability by holding that 12 U.S.C. Sec. 85--which
    authorizes national banks to charge interest at the rate permitted by
    the law of the State in which the bank is located, regardless of other
    States' interest rate restrictions--does not apply following assignment
    of a loan to a nonbank. Although this decision concerned a loan made by
    a national bank, the statutory provision governing State banks'
    authority with respect to interest rates is patterned after and
    interpreted in the same manner.\15\
    ---------------------------------------------------------------------------
        \14\ See Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir.
    2015), cert. denied, 136 S. Ct. 2505 (2016).
        \15\ 12 U.S.C. Sec. 1831d.
    ---------------------------------------------------------------------------
        Last month, we proposed a rule \16\ that would clarify the law
    governing the interest rates State banks may charge. Among other
    things, the proposal would provide that whether interest on a loan is
    permissible under section 27 of the Federal Deposit Insurance Act (FDI
    Act) would be determined at the time the loan is made, and interest on
    a loan permissible under section 27 would not be affected by subsequent
    events, such as a change in State law, a change in the relevant
    commercial paper rate, or the sale, assignment, or other transfer of
    the loan.
    ---------------------------------------------------------------------------
        \16\ See FDIC Proposes New Rule Clarifying Federal Interest Rate
    Authority (Nov. 19, 2019), available at https://www.fdic.gov/news/news/
    press/2019/pr19107.html.
    ---------------------------------------------------------------------------
    7. Cooperation with State Regulators
        In an effort to facilitate and increase dialogue between the FDIC
    and our State regulatory partners on a host of important regulatory
    issues, the FDIC approved the establishment of a new Advisory Committee
    of State Regulators (ACSR).\17\ The committee will allow the FDIC and
    State regulators to discuss a variety of current and emerging issues
    that have potential implications for the regulation and supervision of
    State-chartered financial institutions. Once fully established, ACSR
    will facilitate discussions of: safety and soundness and consumer
    protection issues; the creation of new banks; the protection of our
    Nation's financial system from risks such as cyberattacks or money
    laundering; and other timely issues.
    ---------------------------------------------------------------------------
        \17\ See FDIC Board Approves Establishment of Advisory Committee of
    State Regulators (Nov. 19, 2019), available at https://www.fdic.gov/
    news/news/press/2019/pr19105.html.
    ---------------------------------------------------------------------------
    B. Tailoring Regulations
        As we continue to think about ways to strengthen the banking
    system, the appropriate calibration of our regulatory framework remains
    a top priority. Given the wide range of risk profiles across banking
    organizations, it is critical that regulators continuously evaluate
    whether our rules are being applied properly and not imposing
    unnecessary regulatory burdens that might impede safe and sound banking
    activities. As such, the FDIC has taken numerous actions to tailor our
    regulatory framework while maintaining safety and soundness, financial
    stability, and consumer protection.
    1. Enhanced Prudential Standards
        In May 2018, Congress enacted the Economic Growth, Regulatory
    Relief, and Consumer Protection Act (EGRRCPA),\18\ which set forth
    specific legislative instructions for regulatory tailoring, including
    by raising the statutory asset threshold for the application of
    enhanced prudential standards to $250 billion (while giving the FRB the
    discretion to apply such standards to firms with assets between $100
    billion and $250 billion). Last month, the FDIC, FRB, and OCC finalized
    a rule that implements a key part of EGRRCPA by establishing four risk-
    based categories for determining capital and liquidity
    requirements.\19\ Under the rule, requirements for Category I firms
    (i.e., U.S. global systemically important banks, or G-SIBs) are
    unchanged, and these institutions remain subject to the most stringent
    standards. Requirements for Category II, Category III, and Category IV
    firms (i.e., all other banking organizations with greater than $100
    billion in assets) are tiered based on each bank's risk profile.
    ---------------------------------------------------------------------------
        \18\ Pub. L. 115-174 (May 24, 2018), available at https://
    www.govinfo.gov/content/pkg/PLAW-115publ174/pdf/PLAW-115publ174.pdf.
        \19\ See Changes to Applicability Thresholders for Regulatory
    Capital and Liquidity Requirements, 84 Fed. Reg. 59230 (Nov. 1, 2019),
    available at https://www.govinfo.gov/content/pkg/FR-2019-11-01/pdf/
    2019-23800.pdf.
    ---------------------------------------------------------------------------
        Beyond the tailoring rule, the FDIC has completed all of its
    EGRRCPA-mandated rules. Appendix A to this testimony contains a full
    list of these rules.
    2. Company-Run Stress Testing
        Just as EGRRCPA raised the asset threshold for the application of
    enhanced prudential standards from $50 billion to $250 billion, it
    raised the asset threshold for company-run stress testing requirements
    from $10 billion to $250 billion. We recently finalized a rule \20\ to
    reflect this statutory change. We are also working on amendments to our
    interagency stress testing guidance \21\ that would further tailor
    supervisory expectations. Specifically, we are considering raising the
    asset threshold under the guidance to $100 billion in assets, among
    other potential changes.
    ---------------------------------------------------------------------------
        \20\ See Company-Run Stress Testing Requirements for FDIC-
    Supervised State Nonmember Banks and State Savings Associations, 84
    Fed. Reg. 56929 (Oct. 24, 2019), available at https://www.govinfo.gov/
    content/pkg/FR-2019-10-24/pdf/2019-23036.pdf.
        \21\ See Supervisory Guidance on Stress Testing for Banking
    Organizations With More Than $10 Billion in Total Consolidated Assets,
    77 Fed. Reg. 29458 (May 17, 2012), available at https://
    www.govinfo.gov/content/pkg/FR-2012-05-17/pdf/2012-11989.pdf.
    ---------------------------------------------------------------------------
    3. Resolution Planning
        In 2011, the FDIC and FRB finalized a rule \22\ establishing new
    resolution planning requirements. Over the past 8 years, large firms
    have improved their resolution strategies and governance, refined their
    estimates of liquidity and capital needs in resolution, and simplified
    their legal structures. Consistent with the new statutory asset
    threshold under EGRRCPA and the agencies' experience with resolution
    planning, the FDIC and FRB recently issued a final rule \23\ to improve
    the efficiency and effectiveness of the process and exempt smaller
    regional banks from the requirements. Under the rule, our underlying
    standards for reviewing resolution plans will not change. With respect
    to timing, the rule formalizes the agencies' existing practice of
    requiring U.S. G-SIBs to submit resolution plans every 2 years and
    requiring other filers to submit plans every 3 years. The rule also
    introduces a new ``targeted resolution plan'' that will allow filers to
    submit a subset of information required by a full resolution plan. Such
    targeted plans will be submitted every other cycle.
    ---------------------------------------------------------------------------
        \22\ See Resolution Plans Required, 76 Fed. Reg. 67323 (Nov. 1,
    2011), available at https://www.govinfo.gov/content/pkg/FR-2011-11-01/
    pdf/2011-27377.pdf.
        \23\ See Resolution Plans Required, 84 Fed. Reg. 59194 (Nov. 1,
    2019), available at https://www.govinfo.gov/content/pkg/FR-2019-11-01/
    pdf/2019-23967.pdf.
    ---------------------------------------------------------------------------
    4. Incentive-Based Compensation
        In June 2010--a month prior to the enactment of the Dodd-Frank Wall
    Street Reform and Consumer Protection Act (Dodd-Frank Act)\24\--the
    FDIC, FRB, and OCC issued guidance \25\ to help ensure that incentive
    compensation policies at banking organizations do not encourage
    imprudent risk-taking and are consistent with the safety and soundness
    of the organization. In connection with the guidance, then-FRB Governor
    Daniel Tarullo noted that many large banking organizations had
    already implemented certain changes in their incentive compensation
    policies.\26\ Section 956 of the Dodd-Frank Act subsequently directed
    the FDIC, FRB, OCC, NCUA, Securities and Exchange Commission (SEC), and
    Commodity Futures Trading Commission (CFTC) to jointly prescribe,
    within 9 months of the enactment of the law, regulations or guidelines
    that prohibit any types of incentive-based pay arrangement that
    encourages inappropriate risks, based on the standards established in
    the FDI Act.\27\ Proposals to implement this statute were issued in
    2011 \28\ and 2016,\29\ but neither was finalized. Although the banking
    agencies' 2010 guidance remains fully intact--and firms have made
    further changes to their incentive compensation policies following this
    guidance--the agencies continue to engage in discussions regarding how
    best to implement the statute.
    ---------------------------------------------------------------------------
        \24\ Pub. L. 111-203 (July 21, 2010), available at https://
    www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
        \25\ See Guidance on Sound Incentive Compensation Policies, 75 Fed.
    Reg. 36395 (June 25, 2010), available at https://www.govinfo.gov/
    content/pkg/FR-2010-06-25/pdf/2010-15435.pdf.
        \26\ See Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on
    Incentive Compensation (June 21, 2010), available at https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20100621a.htm.
        \27\ Section 956(c) of the Dodd-Frank Act specifically requires the
    regulators to ``take into consideration standards described in section
    39(c) of the FDI Act'' (12 U.S.C. 2 1831p-1 and 12 U.S.C. 1831p-9
    1(c)).in establishing standards.
        \28\ See Incentive-Based Compensation Arrangements, 76 Fed. Reg.
    21170 (Apr. 14, 2011), available at https://www.govinfo.gov/content/
    pkg/FR-2011-04-14/pdf/2011-7937.pdf.
        \29\ See Incentive-Based Compensation Arrangements, 81 Fed. Reg.
    37670 (June 10, 2016), available at https://www.govinfo.gov/content/
    pkg/FR-2016-06-10/pdf/2016-11788.pdf.
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    5. Volcker Rule
        One of the most challenging post-crisis reforms for regulators and
    institutions to implement has been the Volcker Rule, which restricts
    banks from engaging in proprietary trading and from owning hedge funds
    and private equity funds. As written and originally implemented, the
    rule was so complex that it required regulators to issue 21 responses
    to frequently asked questions (FAQs) within 3 years of its adoption.
    This complexity has resulted in uncertainty and unnecessary burden,
    especially for smaller, less-complex institutions.
        To address some of these concerns, EGRRCPA exempted from the
    Volcker Rule all banks below $10 billion in consolidated assets that do
    not engage in significant trading activity. Earlier this year, the five
    agencies responsible for implementing the Volcker Rule finalized a rule
    \30\ to codify this exemption.
    ---------------------------------------------------------------------------
        \30\ See Revisions to Prohibitions and Restrictions on Proprietary
    Trading and Certain Interests In, and Relationships With, Hedge Funds
    and Private Equity Funds, 84 Fed. Reg. 35008 (July 22, 2019), available
    at https://www.govinfo.gov/content/pkg/FR-2019-07-22/pdf/2019-
    15019.pdf.
    ---------------------------------------------------------------------------
        In addition, the agencies issued a larger set of revisions \31\ to
    the Volcker Rule--sometimes referred to as ``Volcker 2.0''--that tailor
    the rule's compliance requirements by establishing three tiers of
    banking entities based on level of trading activity for purposes of
    applying compliance requirements: (1) significant trading assets and
    liabilities, (2) moderate trading assets and liabilities, and (3)
    limited trading assets and liabilities.
    ---------------------------------------------------------------------------
        \31\ See Prohibitions and Restrictions on Proprietary Trading and
    Certain Interests in, and Relationships With, Hedge Funds and Private
    Equity Funds, 84 Fed. Reg. 61974 (Nov. 14, 2019), available at https://
    www.govinfo.gov/content/pkg/FR-2019-11-14/pdf/2019-22695.pdf.
    ---------------------------------------------------------------------------
        Banking entities with significant trading assets and liabilities,
    which hold approximately 93 percent of total trading assets and
    liabilities across the U.S. banking system, will continue to be subject
    to the most stringent compliance standards. The revisions also provide
    greater clarity, certainty, and objectivity about what activities are
    prohibited under the Volcker Rule. These changes, which apply
    specifically to the Volcker Rule's proprietary trading prohibition,
    will improve compliance with the rule and reduce unnecessary burdens
    while maintaining the statutory prohibition on proprietary trading by
    covered banking entities.
        Additionally, the agencies are currently working on a forthcoming
    proposal to address the overly broad restrictions associated with
    covered funds, which the agencies plan to issue for comment as soon as
    possible.
    6. Appraisals
        Last year, the FDIC, FRB, and OCC finalized a rule \32\ that raised
    the appraisal threshold for federally related commercial real estate
    transactions from $250,000--the threshold established in 1994--to
    $500,000. Earlier this year, the agencies
    finalized a related rule \33\ that raised the appraisal threshold for
    federally related residential real estate transactions from $250,000--
    also the threshold established
    in 1994--to $400,000. These changes balance current market realities
    and price
    appreciation, including needs in rural communities where access to
    appraisal services can be limited, with the need to ensure the safety
    and soundness of our institutions.
    ---------------------------------------------------------------------------
        \32\ See Real Estate Appraisals, 83 Fed. Reg. 15019 (Apr. 9, 2018),
    available at https://www.govinfo.gov/content/pkg/FR-2018-04-09/pdf/
    2018-06960.pdf.
        \33\ See Real Estate Appraisals, 84 Fed. Reg. 53579 (Oct. 8, 2019),
    available at https://www.govinfo.gov/content/pkg/FR-2019-10-08/pdf/
    2019-21376.pdf.
    ---------------------------------------------------------------------------
    C. Enhancing Resolution Preparedness
        In addition to supervising small and medium-sized banks and
    appropriately tailoring regulations for banks of all sizes, one of the
    FDIC's most important responsibilities for strengthening the banking
    system is ensuring that, in the event of financial distress, large and
    complex banks are resolvable in a rapid and orderly manner under the
    Bankruptcy Code. In furtherance of this critical goal, we have taken
    several steps to enhance resolution preparedness.
    1. New FDIC Division
        Earlier this year, we announced the centralization of our
    supervision and resolution activities for the largest and most complex
    banks in a new Division of Complex Institution Supervision and
    Resolution (CISR).\34\ This move is more than just an organizational
    realignment. Rather, combining these key functions will create a
    stronger, more coherent approach for bank resolution and supervision by
    enabling us to take a more holistic approach. On the supervision side,
    CISR is responsible for overseeing banks with more than $100 billion in
    assets for which the FDIC is not the primary Federal regulator. On the
    resolution side, CISR is responsible for executing the FDIC's
    resolution planning mandates for these institutions. In conjunction
    with this new division, we established a new position--Deputy to the
    Chairman for Financial Stability--to focus on financial stability
    issues, including the resolvability of large banks.
    ---------------------------------------------------------------------------
        \34\ See FDIC to Centralize Key Aspects of Its Large, Complex
    Financial Institution Activities (June 27, 2019), available at https://
    www.fdic.gov/news/news/press/2019/pr19056.html.
    ---------------------------------------------------------------------------
    2. Cross-Border Cooperation
        Given the cross-border activities of the largest, most systemically
    important banks, we continue to work with our international
    counterparts on resolution preparedness. For example, earlier this year
    we hosted a series of exercises with senior officials in the United
    States, United Kingdom, and European Banking Union to strengthen
    coordination on cross-border resolution and enhance understanding of
    one another's resolution regimes for G-SIBs.\35\ In addition, we have
    established Crisis Management Groups that have brought together firms
    and home and host authorities to discuss resolution planning. We have
    developed information-sharing
    arrangements to support this work and engaged in a number of
    international operational exercises to test and improve our readiness.
    ---------------------------------------------------------------------------
        \35\ See United States, European Banking Union, and U.K. Officials
    Meet for Planned Coordination Exercise on Cross-Border Resolution
    Planning (Apr. 9, 2019), available at https://www.fdic.gov/news/news/
    press/2019/pr19033.html.
    ---------------------------------------------------------------------------
    D. Assessing New and Emerging Risks
        The FDIC has a long tradition of identifying, analyzing, and
    addressing key risks in the economy, financial markets, and the banking
    industry. Through numerous publications, including an annual Risk
    Review, we advance the goal of strengthening the banking system by
    highlighting risks at a stage when policymakers, bankers, and the
    public can act to mitigate their scope and impact.
    1. Cyber and Resiliency
        The FDIC continues to actively monitor cybersecurity risks in the
    banking industry. FDIC examiners conduct examinations to ensure that
    financial institutions are appropriately managing their exposure to
    cybersecurity risk. Our examiners verify that bank management has
    considered how cyber events could disrupt their operations and has
    designed resilience into their operations.
        Working with our regulatory partners through the Federal Financial
    Institutions Examination Council (FFIEC), we recently issued an updated
    Business Continuity Management booklet, which describes key principles
    and practices in this area.\36\ The booklet also helps examiners to
    evaluate the adequacy of an entity's business continuity management
    program and to determine whether management adequately addresses risks
    related to the availability of critical financial products and
    services. The FDIC will continue to engage with other regulators and
    the private sector to monitor and respond to the risks posed by cyber
    threats.
    ---------------------------------------------------------------------------
        \36\ See FDIC FIL-71-2019, Updated FFIEC IT Examination Handbook--
    Business Continuity Management Booklet (Nov. 14, 2019), available at
    https://www.fdic.gov/news/news/financial/2019/fil19071.html.
    ---------------------------------------------------------------------------
    2. Bank Secrecy Act/Anti-Money Laundering (BSA/AML)
        BSA/AML laws and regulations are a vital component of U.S. efforts
    to prevent unlawful financial transactions that help fund criminals,
    terrorists, and other illicit actors. As these actors use increasingly
    sophisticated methods to conceal their transactions in an evolving
    financial, technological, and regulatory landscape, the FDIC continues
    to work with other regulators and the law enforcement and intelligence
    communities to help supervised institutions respond to these threats.
        At the same time, BSA/AML laws and regulations impose significant
    compliance costs on the entire system and on the individual
    institutions that shoulder the
    reporting burdens. For example, although the information gathered by
    suspicious activity reports (SARs) can be useful, it can be burdensome
    for institutions--particularly community banks--to file SARs. Federal
    regulatory agencies are working to develop better ways to communicate
    the value of SARs to the bankers that incur the reporting cost. The
    government also must continue to examine the rules it imposes to ensure
    that the system is effective and the obligations imposed on
    institutions are not unduly burdensome. It is also essential that we
    support the use of technology to both prevent illicit activity and to
    strengthen the collaboration among banks, regulators, and the law
    enforcement and intelligence communities.
        To advance the parallel goals of cost effectiveness and greater
    system-wide efficiency, the FDIC, FRB, OCC, NCUA, and the U.S.
    Department of Treasury's Financial Crimes Enforcement Network (FinCEN)
    jointly issued a statement \37\ to address instances in which banks may
    decide to enter into collaborative arrangements to share resources to
    manage their BSA/AML obligations more efficiently and effectively. For
    example, banks use such arrangements to pool human, technology, or
    other resources to reduce costs, increase operational efficiencies, and
    leverage specialized expertise. In addition, the FDIC, FRB, OCC, NCUA,
    and FinCEN issued a statement \38\ to encourage banks to consider,
    evaluate, and, where appropriate, responsibly implement innovative
    approaches to meet their BSA/AML obligations. The agencies recognized
    that innovation has the potential to help banks address these risks.
    ---------------------------------------------------------------------------
        \37\ See FDIC FIL-55-2018, Bank Secrecy Act: Interagency Statement
    on Sharing Bank Secrecy Act Resources (Oct. 3, 2018), available at
    https://www.fdic.gov/news/news/financial/2018/fil18055.html.
        \38\ See FDIC FIL-79-2018, Bank Secrecy Act: Interagency Statement
    on Innovative Efforts to Combat Money Laundering and Terrorist
    Financing (Dec. 3, 2018), available at https://www.fdic.gov/news/news/
    financial/2018/fil18079.html.
    ---------------------------------------------------------------------------
    3. Leveraged Lending and Corporate Debt
        Nonfinancial corporate debt as a share of gross domestic product
    (GDP) has reached a record level of 49.6 percent.\39\ The increase has
    been driven by corporate bonds and leveraged loans, which have grown
    faster than other types of corporate debt. Although banks do not hold a
    significant amount of corporate bonds, direct bank exposure to
    corporate debt is concentrated in leveraged loans, collateralized loan
    obligations (CLOs), commercial and industrial loans, and commercial
    mortgages. In addition, indirect exposures, such as those arising from
    loans to CLO arrangers, could transmit stress from the corporate sector
    into the banking system. The FDIC is carefully monitoring these risks.
    We recently published a paper \40\ discussing the growth in corporate
    debt and examining bank exposure to the growth of leveraged loans and
    continue to engage with other regulatory agencies on this issue.
    ---------------------------------------------------------------------------
        \39\ See FDIC Annual Publication Examines Potential Credit and
    Market Risks (July 30, 2019), available at https://www.fdic.gov/news/
    news/press/2019/pr19070.html.
        \40\ See Leveraged Lending and Corporate Borrowing: Increased
    Reliance on Capital Markets, With Important Bank Links, available at
    https://www.fdic.gov/bank/analytical/quarterly/2019-vol13-4/fdic-v13n4-
    3q2019-article2.pdf.
    ---------------------------------------------------------------------------
    4. Growth in Nonbank Mortgage Origination and Servicing
        As the FDIC remains vigilant to the risks facing banks, we also
    monitor the evolution of the financial system, including the migration
    of certain financial activities to nonbanks. Perhaps the most prominent
    example of this shift has been in mortgage origination and servicing.
    We recently published a paper \41\ analyzing this dynamic and
    associated risks. Among other things, the paper finds that the growth
    of nonbanks in mortgage origination and servicing has largely been
    attributed to the rapid expansion by nonbanks, mortgage-focused
    business models and technological innovation of nonbanks, litigation
    regarding financial crisis-era legacy portfolios at the largest bank
    originators, large bank sales of legacy servicing portfolios, and
    changes to the capital treatment of mortgage servicing assets
    applicable to banks. As regulators and policymakers seek to better
    understand the implications of this migration, we must consider both
    the benefits and the risks.
    ---------------------------------------------------------------------------
        \41\ Trends in Mortgage Origination and Servicing: Nonbanks in the
    Post-Crisis Period, available at https://www.fdic.gov/bank/analytical/
    quarterly/2019-vol13-4/fdic-v13n4-3q2019-article3.pdf.
    ---------------------------------------------------------------------------
    E. Creating the Workforce of the Future
        It goes without saying that the FDIC's ability to fulfill its
    mission depends on having an experienced, knowledgeable, and agile
    workforce. To this end, I am honored to work alongside 6,000 dedicated
    FDIC employees who come to work every day focused on protecting
    consumers and strengthening the banking system. As banks have evolved
    with the use of new technology and delivery channels, however, so
    should the FDIC's workforce. In order to maintain and reinforce the
    quality of our workforce--and improve its diversity--in this constantly
    changing environment, we have taken several steps I would like to
    highlight.
    1. Retention
        We are seeking to bolster retention by striving to reduce our
    examiners' travel time, which is one of the primary reasons examiners
    leave the agency. When I joined the FDIC, safety and soundness
    examiners spent an average of 89 nights per year away from home. We are
    striving to reduce that number, and our supervision modernization
    efforts will help. Employing better technology provides our team the
    flexibility to perform significant portions of the examination offsite,
    whether at home while teleworking or in a local field office. Using
    enhanced technology will help us strike the right balance between
    onsite and offsite supervision activities, thereby providing better
    work-life balance for employees and reducing the supervisory burden for
    institutions.
    2. Recruiting
        To support our supervision modernization efforts, we looked at how
    to build the workforce of the future. Our goal is to attract, retain,
    and promote a diverse and engaged workforce with the knowledge, skills,
    and abilities to effectively execute the mission of the FDIC, keeping
    pace with industry changes. Examiners represent about one-third of our
    workforce and are tasked with performing the core business function of
    the agency.
        Until recently, we typically hired generalists into a commissioned
    examiner training program. That program did not meet our business
    needs; attrition outpaced our commissioning process, the protracted
    speed-to-commissioning time resulted in significant attrition, and we
    were challenged to get our work done.
        This year, we pulled together a team of executives to conduct a
    review of our entry-level examiner hiring and corporate perspective
    training to recommend changes to improve efficiency and effectiveness.
    We changed the way we recruit, hire, and train to meet the needs of a
    changing industry and workforce and to speed the time to commission by
    up to 1 year.
    3. Specialists
        Earlier this year, the FDIC established a new office of innovation,
    the FDIC Tech Lab (FDiTech), with a focus on how to best utilize
    technology to meet consumer demands while maintaining safety,
    soundness, and consumer protection. The success of this office will
    depend on the caliber of its personnel. We are seeking a wide range of
    technologists to join the agency, including a Chief Innovation Officer,
    data scientists, process engineers, software developers, and network
    security experts who can reshape our supervisory approach in a rapidly
    evolving digital world.
        We are also supplementing our examiner cadre with specialists and
    analysts in both information technology and loan review. These
    individuals will complement our workforce by providing assistance on
    critical areas of the examination. Although they will never replace
    commissioned examiners as our primary hiring target, they will
    contribute significantly to our supervision program.
    4. Diversity
        My personal and professional experiences have underscored the
    importance of a workplace that is free from discrimination and that
    supports diversity and inclusion. In furtherance of the FDIC's
    longstanding commitment to diversity and inclusion, we have created an
    executive-level taskforce on diversity. The taskforce will help to
    ensure our recruiting resources, hiring decisions, interviewing
    processes, retention efforts, and advancement pools reflect a
    purposeful and intentional effort to leverage diversity to maintain a
    high-performing examination workforce.
        The racial, ethnic, and gender diversity of the FDIC workforce
    continues a steady increase since 2010 with minority representation at
    nearly 30 percent and with women comprising nearly 45 percent of
    permanent employees. We have also continued our efforts to promote the
    participation of Minority and Women-Owned Businesses in FDIC
    contracting actions. We will work to consistently improve the
    representation of women and minorities at all levels of the agency and
    seamlessly integrate veterans and people with disabilities. We will
    continue to foster an environment without barriers in which all
    employees feel welcomed, valued, respected, and engaged.
    5. New Compensation Agreement and New Benefits
        Earlier this year, the FDIC and the National Treasury Employees
    Union (NTEU) reached a new compensation agreement that includes two
    significant new benefits to enhance work-life balance for employees.
        First, the FDIC will provide 6 weeks of paid parental leave for the
    birth, adoption, or foster care of a child.\42\ This benefit, which
    will be in addition to any leave entitlement under the Family and
    Medical Leave Act, will enable growing families to thrive and help to
    ensure that no FDIC employee feels forced to choose between work and
    family. I am proud that the FDIC is a leader in this space as one of
    the first Federal Government agencies to offer this benefit.
    ---------------------------------------------------------------------------
        \42\ See FDIC Announces New Paid Parental Leave Benefit for
    Employees (Oct. 9, 2019), available at https://www.fdic.gov/news/news/
    press/2019/pr19089.html.
    ---------------------------------------------------------------------------
        Second, the agreement calls for a Pilot Student Loan Repayment
    Program, which will target commissioned examiner employees over a 3-
    year period. During these 3 years, up to 100 employees each year will
    be eligible to have their student loans paid directly, up to $500 per
    month for a total of up to $18,000 per employee. The pilot is designed
    to provide meaningful financial assistance to employees and contribute
    to FDIC retention goals. If successful, the FDIC will consider
    expansion of the program to other categories of positions with
    recruitment or retention challenges.
        In addition to these work-life benefits, the agreement includes
    compensation increases for the next 3 years and shifts a portion of an
    employee's annual pay increase to a bonus component, which will help
    the FDIC reward its highest performers in a sustainable and fiscally
    responsible manner. To improve performance management and support the
    new bonus component of pay, the agreement also provides for a
    simplified, two-level performance management system, which will replace
    the current five-level rating system. The new system will be designed
    to enhance communication between employees and their supervisors, and
    it will also help identify and reward outstanding performance under the
    new bonus structure.
    III. Ensuring That FDIC-Supervised Institutions Can Meet the Needs of
            Consumers and Businesses
        Economic growth across the Nation is predicated on the ability of
    banks to provide safe and secure financial products and services to
    consumers and businesses. Although modernizing our supervisory and
    enforcement programs and tailoring regulations based on an
    institution's risk profile are matters of good government and steps
    toward a stronger banking system, there are certain areas in which the
    needs of consumers and businesses must be addressed by more
    comprehensive reforms.
        I have embarked on a 50-State listening tour to hear from banks
    directly about their challenges and to learn about the needs of the
    consumers and businesses that banks serve. At the outset of this
    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 am now more than halfway through this listening tour, which
    has provided valuable feedback and has underscored the importance of
    seeking perspectives outside of the ``beltway.'' The following issues
    represent an attempt to address some of the concerns that have been
    brought to our attention.
    A. Brokered Deposits and Interest Rate Caps
        The FDIC is undertaking a comprehensive review of our longstanding
    regulatory approach to brokered deposits and the interest rate caps
    applicable to banks that are less than well capitalized. Since the
    statutory brokered deposit and rate restrictions applicable to less
    than well capitalized banks were put in place in 1989 (and amended in
    1991), the financial services industry has seen significant changes in
    technology, business models, and products. In February, we issued an
    advance
    notice of proposed rulemaking (ANPR)\43\ to seek public comment on all
    aspects of these regulations.
    ---------------------------------------------------------------------------
        \43\ See Unsafe and Unsound Banking Practices: Brokered Deposits
    and Interest Rate Restrictions, 84 Fed. Reg. 2366 (Feb. 6, 2019),
    available at https://www.govinfo.gov/content/pkg/FR-2019-02-06/pdf/
    2018-28273.pdf.
    ---------------------------------------------------------------------------
        After considering feedback from the ANPR, we expedited the interest
    rate cap component of this review and proposed a rule \44\ that would
    amend the methodology for calculating the national rate and national
    rate cap for specific deposit products. Under the proposal, the
    national rate cap for particular products would be set at the higher of
    the 95th percentile of rates paid by insured depository institutions
    (IDIs) weighted by each institution's share of total domestic deposits,
    or the proposed national rate plus 75 basis points. The proposed rule
    would also greatly simplify the current local rate cap calculation and
    process by allowing less than well capitalized institutions to offer up
    to 90 percent of the highest rate paid on a particular deposit product
    in the institution's local market area.
    ---------------------------------------------------------------------------
        \44\ See Interest Rate Restrictions on Institutions That Are Less
    Than Well Capitalized, 84 Fed. Reg. 46470 (Sep. 4, 2019), available at
    https://www.govinfo.gov/content/pkg/FR-2019-09-04/pdf/2019-18360.pdf.
    ---------------------------------------------------------------------------
        We have also been working to propose a rule regarding our brokered
    deposits framework. We are preparing an updated framework with several
    goals in mind, including encouraging innovation to allow banks to reach
    customers using emerging technology and through new channels,
    minimizing risk to the DIF, consistency with the statute, and
    establishing a transparent, consistent process. We expect to issue that
    proposal later this month.
    B. CRA Regulations
        The regulations implementing the CRA have not been updated in 20
    years. During this period, the banking industry has undergone
    transformative changes. As the industry continues to evolve, many
    stakeholders believe that the current regulations implementing the CRA
    do not fully achieve their statutory purpose (i.e., encouraging banks
    to help meet the credit needs of the communities they serve, including
    low- and moderate-income areas). As part of an effort to update these
    regulations, the OCC issued an ANPR \45\ last year seeking feedback on
    how the CRA could be modernized to improve the effectiveness of the law
    and provide much needed clarity to financial institutions on what
    activities receive CRA ``credit.'' The banking agencies have reviewed
    the comment letters received by the OCC, and the FDIC is currently
    engaged with the OCC and FRB on how to revise the regulatory framework
    that can help meet these dual goals.
    ---------------------------------------------------------------------------
        \45\ See Reforming the Community Reinvestment Act Regulatory
    Framework, 83 Fed. Reg. 45053 (Sept. 5, 2018), available at https://
    www.govinfo.gov/content/pkg/FR-2018-09-05/pdf/2018-19169.pdf.
    ---------------------------------------------------------------------------
    C. Small-Dollar Lending
        According to a recent FRB study, nearly 4-in-10 households cannot
    cover a $400 emergency expense with cash.\46\ Moreover, according to
    our unbanked and underbanked study, over 20 million households in
    America are underbanked and over 8 million are unbanked.\47\ While some
    banks offer small-dollar lending to help those in need, many banks have
    chosen not to offer such products, in part, due to regulatory
    uncertainty.\48\ As a result, many families rely on nonbank providers
    to cover these emergency expenses, or their needs go unmet. To solicit
    feedback on these products and consumer needs, the FDIC issued a
    request for information \49\ last year to learn more about small-dollar
    credit needs and concerns. We have reviewed more than 60 comments and
    are reviewing our existing guidance and policies to ensure that they do
    not impose impediments to banks considering the extension of
    responsible small-dollar credit to consumers.
    ---------------------------------------------------------------------------
        \46\ See Federal Reserve Board Report on the Economic Well-Being of
    U.S. Households in 2017 (May 2018), available at https://
    www.federalreserve.gov/publications/files/2017-report-economic-well-
    being-us-households-201805.pdf.
        \47\ See 2017 FDIC National Survey of Unbanked and Underbanked
    Households, available at https://www.fdic.gov/householdsurvey/2017/
    2017report.pdf. A household is classified as unbanked if no one in the
    household has a checking or savings account. A household is classified
    as underbanked if it has a checking or savings account and used one of
    the following products or services from an alternative financial
    services provider in the past 12 months: money orders, check cashing,
    international remittances, payday loans, refund anticipation services,
    rent-to-own services, pawn shop loans, or auto title loans.
        \48\ The FDIC, FRB, and OCC have taken separate approaches to
    small-dollar lending at the institutions they regulate. See FDIC Issues
    Final Guidance Regarding Deposit Advance Products (Nov. 21, 2013),
    available at https://www.fdic.gov/news/news/press/2013/pr13105.html;
    FDIC FIL-50-2007, Affordable Small-Dollar Loan Guidelines (June 19,
    2007), available at: https://www.fdic.gov/news/news/financial/2007/
    fil07050.pdf; OCC Bulletin 2018-14, Core Lending Principles for Short-
    Term, Small-Dollar, Installment Lending (May 23, 2018), available at:
    https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-
    14.html; Federal Reserve Statement on Deposit Advance Products (April
    25, 2013), available at: https://www.
    federalreserve.gov/supervisionreg/caletters/caltr1307.htm.
        \49\ See Request for Information on Small-Dollar Lending, 83 Fed.
    Reg. 58566 (Nov. 20, 2018), available at https://www.govinfo.gov/
    content/pkg/FR-2018-11-20/pdf/2018-25257.pdf.
    ---------------------------------------------------------------------------
    D. Initial Margin
        In the aftermath of the financial crisis, Congress mandated that
    regulators establish capital and margin requirements for noncleared
    swaps. In 2015, the banking agencies adopted regulations implementing
    these requirements.\50\ In addition to requiring the exchange of
    initial and variation margin with unaffiliated counterparties, the rule
    requires that IDIs collect initial and variation margin from
    affiliates. After carefully reviewing these regulations, the agencies
    issued a proposal \51\ to repeal the requirement that IDIs collect
    initial margin from affiliates while retaining the requirement that
    IDIs exchange variation margin with affiliates. The proposal, which
    would harmonize the banking agencies' framework with the rules
    finalized by international regulators, the SEC, and the CFTC, does not
    change the margin requirements for transactions with unaffiliated
    counterparties, but covers only transactions between an IDI and its
    affiliates. The removal of the inter-affiliate initial margin
    requirement would provide banking organizations with additional
    flexibility for internal allocation of collateral. We believe that such
    risk management practices often improve the safety and soundness of a
    covered swap entity.
    ---------------------------------------------------------------------------
        \50\ See Margin and Capital Requirements for Covered Swap Entities,
    80 Fed. Reg. 74840 (Nov. 30, 2015), available at https://
    www.govinfo.gov/content/pkg/FR-2015-11-30/pdf/2015-286
    71.pdf.
        \51\ See Margin and Capital Requirements for Covered Swap Entities,
    84 Fed. Reg. 59970 (Nov. 7, 2019), available at https://
    www.govinfo.gov/content/pkg/FR-2019-11-07/pdf/2019-235
    41.pdf.
    ---------------------------------------------------------------------------
    E. Minority Depository Institutions
        Preserving and protecting minority depository institutions (MDIs)
    remains a priority for the FDIC, and we have undertaken a number of
    initiatives to support MDIs, with a specific emphasis on partnerships.
    In June, we hosted a roundtable in Washington with 10 large banks and
    seven minority banks.\52\ Each participant outlined in advance the
    types of partnerships they were seeking and, during the roundtable,
    MDIs and large banks met one-on-one to explore partnership
    opportunities. Following the roundtable, several large banks expressed
    appreciation for the opportunity to find mutually beneficial
    partnerships and eagerness to begin working with MDIs to help them have
    a greater impact on their communities. One of the large banks drafted a
    proposal to expand its partnerships beyond the seven MDIs at the
    roundtable, and one of the MDIs reported that it had partnered with
    three larger banks from the event on a variety of technical assistance
    efforts. This is exactly the type of outcome we were hoping for, and
    the FDIC stands ready to serve as a resource for any MDI that wants to
    partner with large banks--or any other bank that wants to partner with
    MDIs--and has questions about next steps. Based on the success of the
    June event, the FDIC held similar roundtables in Atlanta and Chicago
    this year and plans to host additional events in the Midwest and on the
    West Coast next year.
    ---------------------------------------------------------------------------
        \52\ See FDIC Hosts Roundtable on Collaborations with Minority
    Depository Institutions (June 27, 2019), available at https://
    www.fdic.gov/news/news/press/2019/pr19057.html.
    ---------------------------------------------------------------------------
        In addition, the FDIC appointed additional minority bankers to our
    CBAC and established a new MDI Subcommittee to the CBAC to highlight
    MDI efforts in their communities and to provide a platform for MDIs to
    exchange best practices.\53\
    ---------------------------------------------------------------------------
        \53\ See FDIC Hosts Interagency Conference Focusing on Minority
    Depository Institutions (June 25, 2019), available at https://
    www.fdic.gov/news/news/press/2019/pr19054.html.
    ---------------------------------------------------------------------------
        Like many other community banks, MDIs face challenges from the
    evolving financial services landscape. The boards and management of
    institutions must successfully navigate economic, technological,
    competitive, and regulatory circumstances to be profitable and serve
    their communities. For many MDIs, these challenges can be amplified if
    they serve economically distressed communities that do not fully
    recover during economic growth cycles. As the supervisor of nearly 100
    MDIs--two-thirds of all MDIs nationwide--the FDIC is committed to
    promoting and sustaining the
    vibrant role these banks play in their communities. Increasing our
    engagement with MDIs enables us to understand their unique needs and
    provide tools and resources so they can help create jobs, grow small
    business, and build wealth in their communities.
    IV. Fostering Technology Solutions and Encouraging Innovation at
            Community Banks
        While the modernization efforts I have discussed are critical,
    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 bank and the way
    banks do business. I recently discussed several important ways
    technology could further transform banking, including digitization,
    data access and open banking, machine learning and artificial
    intelligence, and personalization.\54\ Given these and other
    developments, regulators cannot play ``catch up,'' but must be
    proactive in engaging with all 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.
    ---------------------------------------------------------------------------
        \54\ See FDIC Chairman Jelena McWilliams, ``The Future of
    Banking,'' speech before the Federal Reserve Bank of St. Louis (Oct. 1,
    2019), available at https://www.fdic.gov/news/news/speeches/
    spoct0119.html.
    ---------------------------------------------------------------------------
    A. Encouraging Innovation and Partnerships
        Banks know that if they do not innovate, they will lose in the long
    run. At the FDIC, we have asked, if banks know that they must innovate,
    why more community banks are not developing or utilizing new
    technologies.
        We have received two principal explanations: (1) cost and (2)
    regulatory uncertainty. In many cases, the cost to innovation is
    prohibitively high for community banks, which often lack the expertise,
    information technology, and research and development budgets to
    independent develop and deploy their own technology. As a result,
    partnerships with financial technology companies, or fintechs, that
    have already developed, tested, and rolled out new technology are often
    critical for these banks and their communities. Yet, if our regulatory
    framework does not evolve with technological advances in a manner that
    enables partnerships between banks and fintechs, such innovation may
    not occur at community banks.
        Regulatory modernization is not optional for the FDIC. We must lay
    this foundation because the survival of our community banks depends on
    it. These banks face challenges from industry consolidation, economies
    of scale, and competition from their community bank peers, larger
    banks, credit unions, fintechs, and nonbanks lenders. My goal is for
    the FDIC to lay the foundation for the next chapter of banking by
    encouraging innovation and partnerships, allowing banks and their
    communities to benefit from new products and services that improve
    people's lives.
        With this goal in mind, FDiTech, the FDIC's new office of
    innovation, will collaborate with community banks on how to deploy
    technology in delivery channels and back office operations to better
    serve customers. Many of the institutions we supervise are already
    innovating, but a broader adoption of new technologies will allow
    community banks to stay relevant in the increasingly competitive
    marketplace.
        We have identified three key ways in which FDiTech can work to
    encourage innovation and partnerships at community banks. First,
    through engagement and technical assistance we can help eliminate the
    regulatory uncertainty that prevents some banks from adopting new
    technologies. Second, through tech sprints--which are designed to
    challenge innovators to develop technological solutions to address
    specific challenges--we can help encourage the market to develop
    technology that improves the operations of financial institutions and
    how the FDIC functions as a regulatory agency. Third, through pilot
    programs we can work with developers to pilot products and services for
    truly innovative technologies. Over the coming months, the FDIC will
    play a convening role to encourage community bank consideration of how
    technological developments could impact their businesses and to ensure
    community bank perspectives are considered in industry-led efforts to
    establish standards. We will also host a series of community bank-
    focused stakeholder roundtables on digitization, data access and
    ownership, machine learning and artificial intelligence, and
    personalization of the banking experience.
    B. Reducing Regulatory Burden
        As we consider these medium-to-long-term ways to encourage
    innovation and partnerships, we have simultaneously taken important
    short-term steps to reduce the regulatory burden at community banks.
    These changes should enable innovation at community banks by allowing
    them to spend less time navigating complex regulatory issues and more
    time managing their businesses.
        Last month, the FDIC, FRB, and OCC finalized a rule \55\ that
    implements EGRRCPA by establishing a simple leverage ratio for
    qualifying community banks. Under the rule, qualifying banks that elect
    to maintain a leverage ratio of greater than 9 percent will be
    considered to have satisfied the generally applicable risk-based and
    leverage capital requirements in the agencies' capital rules and, if
    applicable, will be considered to have met the well-capitalized ratio
    requirements for purposes of section 38 of the FDI Act. Notably, the
    agencies estimate that over 80 percent of community banks will qualify
    to use the community bank leverage ratio. The rule provides meaningful
    regulatory compliance burden relief by allowing these banks to avoid
    complex risk-based capital calculations and reporting.
    ---------------------------------------------------------------------------
        \55\ See Regulatory Capital Rule: Capital Simplification for
    Qualifying Community Banking Organizations, 84 Fed. Reg. 61776 (Nov.
    13, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-11-
    13/pdf/2019-23472.pdf.
    ---------------------------------------------------------------------------
        Earlier this year, the FDIC, FRB, and OCC finalized a separate rule
    \56\ that implements EGRRCPA by simplifying the Call Report for
    community banks for the first and third calendar quarters and expanding
    the eligibility to file the most streamlined Call Report to include
    most IDIs with less than $5 billion in total assets.
    ---------------------------------------------------------------------------
        \56\ See Reduced Reporting for Covered Depository Institutions, 84
    Fed. Reg. 29039 (June 21, 2019), available at https://www.govinfo.gov/
    content/pkg/FR-2019-06-21/pdf/2019-12985.pdf.
    ---------------------------------------------------------------------------
    V. Conclusion
        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 more than 86 years ago, but
    if we are to achieve our mission in the modern financial environment,
    while still allowing the industry to evolve and innovate, the agency
    cannot be stagnant.
        Thank you again for the opportunity to testify today, and I look
    forward to answering your questions.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

    Q.1. In November 2019, the Federal Reserve issued a report on
    bank branch access in rural communities.[1] The report found
    that most rural counties experienced a significant decline in
    bank branches between 2012 and 2017, but small businesses and
    certain consumers prefer using local banks and cannot find
    comparable financial products and services elsewhere. How does
    the decline in bank branches or loss of all banks in a
    community affect the local economy? What policy steps will the
    Federal Reserve take to address the decline in bank branches?
    How did this analysis affect the Board's decision on the BB&T-
    SunTrust merger that will result in more branch closures?

    [1] https://www.federalreserve.gov/publications/files/bank-
    branch-access-in-rural-communities.pdf.

    A.1. As noted in the report, the takeaways from the listening
    sessions indicated that the loss of a bank branch in a
    community appears to have a community-level effect that goes
    beyond the effects on particular individuals or businesses.
    Examples of such effects included declines in access to local
    financial advice, loss of important civic leadership, and the
    loss of a banker's personal touch. Research cited in the report
    also noted that when local bank branches close there is a
    negative effect on access to credit for local small businesses.
    To the extent that this decrease in credit access causes those
    businesses to reduce their overall level of economic activity,
    such a bank branch closure could have a corresponding negative
    effect on the local economy. Further research would be needed
    to assess the economic impacts of the loss of branches on local
    communities.
        As with all merger applications, the Federal Reserve Board
    (Board) considered comments on the proposal from the public,
    including comments expressing concerns that the proposal could
    result in branch consolidations and closures. The Board's
    analysis with respect to these comments is detailed in the
    Board's order.\1\
    ---------------------------------------------------------------------------
        \1\ FRB Order No. 2019-16, pgs. 29-53 (November 19, 2019).

    Q.2.a. Recently, the Federal Reserve approved the merger of
    BB&T and SunTrust--two institutions with a significant
    overlapping branch footprint. Many commenters on the
    application expressed concern that the proposal would result in
    branch consolidations and closures, which could negatively
    affect LMI and rural communities. The Federal Reserve's Order
    Approving the Merger states that BB&T has committed that Truist
    Bank would not have any merger-related branch closures for 1
    year and would not have any merger-related branch closures in
    rural areas with populations under 2,500 for 3 years following
    consummation of the merger. BB&T also represented that Truist
    Bank would seek to open at least 15 new branches throughout its
    footprint in LMI and/or majority-minority census tracts through
    ---------------------------------------------------------------------------
    2022.

       LHow does the Federal Reserve plan to enforce these
            commitments and representations? Will Truist be subject
            to any similar restrictions after 2022? Will the
            Federal Reserve reject any application to close a
            branch submitted by Truist Bank under these parameters?
            Will the Federal Reserve take action against Truist
            Bank if it does not open at least 15 new branches in
            LMI and majority-minority census tracts?

    A.2.a. Truist Bank is a State nonmember bank supervised by the
    Federal Deposit Insurance Corporation (FDIC), so the
    appropriate Federal supervisory agency for purposes of the
    branch closure requirements and Community Reinvestment Act
    examination is the FDIC.

    Q.2.b. In addition, please provide a list of the rural areas
    with populations under 2,500 described in the Order.

    A.2.b. As indicated, BB&T represented that it will not close
    branches within rural communities of 2,500 or fewer persons, as
    determined by the U.S. Census Bureau, for 3 years. The Federal
    Reserve has not compiled a list of all such communities in the
    Truist service area. Any branch that Truist proposes to close
    in the future can be evaluated at that time to determine
    whether it is in keeping with the commitment. See Appendix A.

                                    ------

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

    Q.1. The U.S. regulatory agencies with jurisdiction over the
    Volcker Rule (the ``Volcker Agencies'') have long recognized
    the problems under the covered funds provisions for so-called
    ``foreign excluded funds.'' Specifically, these funds that are
    not ``covered funds'' under the Volcker Rule because they are
    organized and operated outside the United States by a Foreign
    Banking Organization. However, foreign exempt funds are treated
    as banking entities to the extent they are controlled by a bank
    subject to the Volcker Rule. The Volcker Agencies have taken
    several steps, through FAQs and time-limited relief, to address
    this issue. In the July 2019 final rulemaking, the Volcker
    Agencies state that they are considering how to more
    permanently address the treatment of foreign excluded funds as
    part of the ongoing covered fund proposal and rulemaking.

    Q.1.a. Therefore, as part of any forthcoming proposal on
    Volcker Covered Funds, will you provide relief for ``foreign
    excluded funds'' on a permanent basis?

    A.1.a. On January 30, 2020, the Board of Governors of the
    Federal Reserve System, the Federal Deposit Insurance Agency,
    the Office of the Comptroller of the Currency, the Securities
    and Exchange Commission, and the Commodity Futures Trading
    Commission (the Agencies) jointly issued a notice of proposed
    rulemaking (NPR)\1\ addressing the covered funds provisions of
    the Volcker Rule regulations. The NPR, which was developed
    jointly by the Agencies,
    includes provisions that would give banking entities increased
    flexibility to invest in and sponsor venture capital funds and
    funds that extend credit.
    ---------------------------------------------------------------------------
        \1\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
    files/volcker-rule-fr-notice-
    20200130.pdf.

    Q.1.b. Additionally, it is known that the prohibition of bank
    investment into venture capital funds has reduced the amount of
    capital available to American entrepreneurs and resulted in a
    disproportionate impact on communities located outside of
    Silicon Valley and other traditional tech hubs. It has also
    ---------------------------------------------------------------------------
    considerably hurt GDP and investment.

    Q.1.c. Should venture capital be included in the definition of
    a ``covered fund''?

    A.1.a.-c. The January 30, 2020, NPR includes provisions that
    would give banking entities increased flexibility to invest in
    and sponsor venture capital funds. The Agencies welcome public
    comment on the NPR, including potential effects on startup
    investment and economic impact.

    Q.1.d. Is the Fed considering startup investment and economic
    impact during this reform process?

    A.1.d. Please see the response to question 1.c.

    Q.2. In 2014, Congress passed and the President signed the
    Insurance Capital Standards Clarification Act of 2014 (S. 2270)
    that amended section 171 of the Dodd-Frank Act to permit the
    Fed to create a tailored nonbank centric capital regime for Fed
    supervised insurance groups. Under S. 2270, banking activities
    of insurers are subject to bank capital rules, but the law
    states that insurance standards should apply to insurance
    activities. However, the Fed continues to ignore the direction
    of Congress and the letter of the law and wants to apply a
    consolidated, bank centric capital requirement on Fed
    supervised insurance groups (section 171 calculation). The
    Fed's other group capital standard for Fed supervised insurers,
    the Building Blocks Approach (BBA), is tailored to the business
    of insurance.

    Q.2.a. Why is the Fed pursuing an additional ``section 171
    calculation'' that will apply in addition to the BBA
    calculation, when section 171 itself does not require this
    additional calculation?

    Q.2.b. This layering approach increases complexity for no
    reason or gain and is a drag on economic growth. Please explain
    how the Fed will act in compliance with the Insurance Capital
    Standards Clarification Act of 2014.

    A.2.a.-b. Section 171 of the Dodd-Frank Act requires the Board
    to establish minimum risk-based capital requirements for
    depository institution holding companies on a consolidated
    basis. The Insurance Capital Standards Clarification Act of
    2014 (the Clarification Act) amended section 171 to permit the
    Board to exclude State-regulated insurers from this
    consolidated minimum risk-based capital requirement. The
    Clarification Act, however, does not allow a blanket exemption
    for an entire holding company structure. In particular, it
    explicitly does not allow the Federal Reserve to exempt a
    depository institution holding company from calculating its
    capital requirements for non-insurance entities in the
    corporate chain.
        In September 2019, the Board issued a proposal on risk-
    based capital requirements for certain depository institution
    holding companies significantly engaged in insurance activities
    (the proposal). The proposal would establish an enterprise-wide
    risk-based capital framework, known as the Building Block
    Approach, which is intended to facilitate the assessment of
    overall risk-based capital adequacy for a depository
    institution holding company that is significantly engaged in
    insurance activities by measuring aggregate capital while
    taking into consideration State insurance capital requirements.
    The proposal also includes a minimum risk-based capital
    requirement for the non-insurance entities within the holding
    company structure required by section 171, as amended by the
    Clarification Act (section 171 calculation). The section 171
    calculation would use the flexibility afforded by the
    Clarification Act and exclude State-regulated insurers from
    minimum risk-based capital requirements to the extent permitted
    by law.
        The Board recently invited public comment on all aspects of
    the proposal, including the section 171 calculation. Consistent
    with the Administrative Procedure Act, the Board will consider
    this and other comments before making a final rule.

    Q.3. In your testimony before the House Financial Services
    Committee you stated that the Fed is currently considering how
    best to implement the remainder of the international Basel III
    agreement and that the Fed is aware that the impact of
    implementing Basel III revisions into the U.S. framework may
    result in ``significantly raising the aggregate level of
    capital in the industry.'' You also stated that the Fed
    ``regularly looks at the calibration of the G-SIB surcharge and
    we are considering it in the context of the overall body of
    regulation.'' Additionally, Chair McWilliams noted that the
    Basel Committee conducted a quantitative impact study in 2009
    at one of the worst times for banks' balance sheets that
    included only 14 U.S. banks. Chair McWilliams suggested that
    she would support an analysis focused on a more specific impact
    in the United States. I strongly agree that a holistic and
    comprehensive review of the capital framework in the United
    States is necessary to ensure that capital levels are
    calibrated appropriately to maintain a level playing field with
    our international counterparts, especially given the many post-
    crisis reforms that we have discussed.

    Q.3.a. When does the Fed plan to complete the comprehensive
    review and publish the results so that they may be made
    available to lawmakers and to the public?

    Q.3.b. If the nature of the review is ongoing and long-term,
    when can we expect an initial set of findings to be released
    based on provisions that are currently being implemented?

    A.3.a.-b. As noted, I think it is important for the Board to
    consider the remaining elements of the Basel III framework
    (especially the operational risk element and the fundamental
    review of the trading book) as a whole, and then examine that
    whole in the context of the existing framework. As a number of
    my colleagues and I have noted, the existing regulatory regime
    has established a robust level of loss-absorbing capacity for
    the industry. Thus, if a sensible calibration of these final
    elements of Basel III would result in a material increase in
    the industry's aggregate capital level, that could suggest that
    some of the existing elements may be appropriately re-
    calibrated to the international norms. We will not be able to
    make a judgment about whether these final elements of Basel III
    would materially increase capital levels or, if they do, about
    which elements of the existing framework (if any) might merit
    reconsideration until we have done the very detailed work of
    preparing the regulatory text for all the remaining elements of
    Basel III, which is a large task.
        At the beginning of the year, I had hoped that we might be
    in a position to propose NPRs for comment on this package of
    issues by the end of the year--although such a schedule would
    have been quite aggressive and well in advance of the
    internationally agreed timetable for implementation of the
    remaining Basel III measures. That aspirational schedule has
    now necessarily been delayed by the need to focus staff
    resources on responding to the economic distress created by
    Government isolation measures intended to address current
    public health concerns. As the depth and duration of the
    Government constraint of the economy remains highly uncertain,
    I cannot now estimate when I will be able to ask Federal
    Reserve staff to reengage on the preparation of NPRs for the
    implementation of Basel III. The Basel Committee itself has
    extended the internationally agreed implementation timeline by
    a full 2 years. I do not believe that the U.S. process will
    need to be delayed this long, and it remains a high priority of
    mine to resume this process, and complete it as a package for
    the United States well in advance of the international
    deadline.
                                    ------

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

    Q.1.a. In response to my question Chairman McWilliams noted
    that the FDIC regulates banks the same way it regulates ILCs.
    From the FDIC perspective that may be accurate, but ILCs are
    not subject to regulation or supervision at the parent holding
    company level. ILCs may be owned by a nonfinancial company not
    subject to the BHC Act, which introduces important policy
    questions. In particular, the lack of capital and liquidity
    standards at the holding company, no real requirements that the
    holding company act as a source of strength to the ILC, no
    ongoing supervision or regulation, and no other prudential and
    risk management standards applied to the holding company can
    really expose the financial system and Deposit Insurance Fund
    to risk.
        Aside from what the FDIC does, what potential concerns do
    these regulatory gaps present?

    A.1.a. In general, institutions that are similar to one another
    in function should be subject to similar regulation. When the
    same economic activity can be conducted through different legal
    structures subject to different regulatory restrictions, this
    can create an incentive for risky activities to concentrate in
    specific parts of the financial system, rather than to be
    distributed across a variety of institutions with the attendant
    resilience that such diversity usually promotes. Congress has
    provided a statutory exemption from the Bank Holding Company
    Act for industrial loan companies (ILC) which places those
    institutions outside of the Federal Reserve Board's supervision
    and regulation. Thus, whether and ILC is subject to
    substantially similar regulation as a bank holding company
    (BHC) when they engage in similar activities will be a function
    of the Federal Deposit Insurance Corporation's (FDIC) oversight
    of these firms, including any commitments made by the firms to
    the FDIC as part of the FDIC's approval of the ILC's
    application for deposit insurance.

    Q.1.b. What are some of the supervisory issues that could be
    left unaddressed if an especially large commercial firm gets
    access to an ILC charter absent Fed supervision, which is a
    standard feature for large bank holding companies?

    A.1.b. As noted above, whether the relevant activities of an
    ILC will be subject to substantially similar supervision and
    regulation as those of a BHC engaged in the same activities
    will be a function of the FDIC's oversight. There is no
    inherent reason that the FDIC cannot impose appropriate
    conditions to the approval of an ILC's application for deposit
    insurance that would address some of the key disparities that
    you cite in your letter. Federal Reserve supervision of holding
    companies is complex, however, and it would be difficult to
    replicate the regulatory framework fully to create a truly
    level playing field between BHCs and ILCs.
                                    ------

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

    Q.1.a. Montana, and many areas of the country, face challenges
    of housing availability, affordability, and aging housing
    stock. As you know, this is a significant issue for rural as
    well as urban areas and is one of the largest barriers to
    success nationally. In Montana, lack of workforce housing is
    one of the greatest inhibitors of economic development.
        What can be done to increase workforce housing and
    encourage more affordable housing to be built?

    A.1.a. A wide range of factors and policies outside of the
    purview of the Federal Reserve Board (Board) affect the
    availability and affordability of housing in the United States.
    The Board monitors developments in housing and labor markets to
    assist in our understanding of the broader economy.
        Since 2008, the number of housing units constructed in the
    United States has remained well below historical averages
    resulting in a shortage of two million to three million units.
    Various industry reports cite shortages and rising costs in the
    factors of production. Regulation also reportedly restricts new
    construction in many parts of the country and we are aware that
    many State and local governments are now pursuing various
    interventions (such as subsidies, land grants, zoning changes,
    and other incentives) to encourage the production of new
    housing units.
        In light of the evolving impacts of the current public
    health crisis, the Board is monitoring housing and related
    conditions through surveys and outreach to gain insight into
    new challenges that may be arising with regard to building
    workforce and affordable housing in rural communities.

    Q.1.b. What do you see as the largest barrier to affordable
    housing, particularly in rural areas?

    A.1.b. The cost of housing does appear to weigh on the budgets
    of households living in rural areas. For example, almost half
    of households that rent in rural areas are ``cost-burdened,''
    meaning they spend more than 30 percent of their income on
    rent.\1\ Among owner-occupied households in rural areas, the
    cost-burdened share is much lower, though home ownership may
    still feel unaffordable for households with low income, low
    wealth, or imperfect credit histories. One potential barrier to
    affordable housing in rural areas is constraints on the
    production of new housing. For example, construction sector
    data and various industry reports suggest that construction
    labor for the country as a whole is in short supply. Regulation
    or constraints on other construction inputs may also restrict
    new construction in rural areas. These constraints may be
    pushing up the cost of housing. Indeed, median gross rent in
    rural areas increased 64 percent between 2000 and 2017, far
    more than inflation.\2\
    ---------------------------------------------------------------------------
        \1\ See https://ipums.org. Calculation from the 2017 American
    Community Survey. Rural areas are areas that are not in an identifiable
    metropolitan area, as defined by the Office of Management and Budget.
        \2\ Id. Calculations from the 2000 Census and 2017 American
    Community Survey.
    ---------------------------------------------------------------------------
        Another barrier to affordable housing is stagnant incomes
    for many households. Inflation-adjusted median household income
    among both rural and nonrural households changed little between
    2000 and 2017. A variety of factors, many related to
    developments in the labor market, have weighed on income growth
    for the typical household. Even if rents in rural areas had not
    grown as robustly as they did over the past couple decades,
    many households likely would have still faced housing
    affordability pressures due to a lack of income growth.
        Preliminary data suggests that employment losses due to the
    COVID-19-induced economic slowdown have disproportionately
    affected sectors primarily comprised of low-wage workers,
    including retail sales and hospitality. We know that workers in
    these sectors faced significant affordability challenges even
    prior to the current downturn. We are closely monitoring
    ongoing changes in employment and housing markets to assess the
    effects of these developments on overall housing affordability,
    including with an eye toward understanding new or increasing
    disparities that may exist for certain vulnerable groups.

    Q.1.c. How has the [Fed/FDIC/NCUA] worked to support housing?
    Where is there room for additional efforts?

    A.1.c. Over the last several years, the Board and Reserve Banks
    have conducted research to help shed light on obstacles in the
    marketplace, as well as highlight innovative approaches aimed
    at overcoming roadblocks. Examples of the Board's research into
    the increasing prevalence of housing affordability issues
    include staff papers entitled ``Rural Affordable Rental
    Housing: Quantifying Need, Reviewing Recent Federal Support,
    and Assessing the Use of Low Income Housing Tax Credits in
    Rural Areas''\3\ and ``Rental Housing Affordability in the
    Southeast: Data from the Sixth District.''\4\ Board economists
    have also researched the effect of State and local regulatory
    impediments, as published in a piece entitled ``Regulation and
    Housing Supply.''\5\ Additionally, the Board has brought
    together local, State, and national stakeholders to discuss
    potential causes of, and solutions for addressing, the current
    high incidence of housing affordability challenges.
    Furthermore, in light of the impact on household finances
    related to COVID-19, staff are working to conduct research,
    field surveys, and engage with a broad cross-section of
    stakeholders to gain insight into the implications for housing
    markets.
    ---------------------------------------------------------------------------
        \3\ See Dumont, Andrew; Rural Affordable Rental Housing:
    Quantifying Need, Reviewing Recent Federal Support, and Assessing the
    Use of Low Income Housing Tax Credits in Rural Areas, at https://
    www.federalreserve.gov/econres/feds/files/2018077pap.pdf.
        \4\ See Carpenter, Ann; White, Douglas; Hirt, Mary; Assessing the
    Use of Low Income Housing Tax Credits in Rural Areas and Rental Housing
    Affordability in the Southeast: Data from the Sixth District, at
    https://www.frbatlanta.org/community-development/publications/
    discussion-papers/2018/02-rental-housing-affordability-in-the-
    southeast-2018-07-19.aspx.
        \5\ See Gyourko, Joseph E., and Raven Molloy (2015). ``Regulation
    and Housing Supply,'' in Duranton, Gilles, J. Vernon Henderson, and
    William C. Strange eds., Handbook of Regional and Urban Economics.
    Volume 5B. Handbook of Regional and Urban Economics. Amsterdam; San
    Diego and Oxford: Elsevier, pp. 1289-1337.

    Q.2. I appreciated the responses to my questions during the
    hearing, and the focus on supporting our farmers and ranchers
    and their families through the current challenges facing the
    agriculture sector while continuing to prioritize the safety
    and soundness of our community financial institutions.
        Is there anything that you would like to add on this topic?

    A.2. The Federal Reserve continuously monitors agricultural
    conditions, loan volumes, and agricultural credit risk
    indicators as well as how conditions affecting the agriculture
    sector may impact the banks and bank holding companies we
    supervise. As conditions evolve, the Board will continue to
    monitor developments in agriculture and the potential for
    implications in other segments of the national or regional
    economy. Prior to the emergence of global economic developments
    related to COVID-19, growth in farm lending continued to show
    signs of slowing. We recognize that the sector-related weakness
    we had seen has been compounded by COVID-19, and that
    agricultural borrowers may experience hardships in meeting all
    of their contractual obligations. Our long-standing practice
    has been to encourage financial institutions to work
    constructively and proactively with borrowers, including
    agricultural borrowers, and to consider prudent loan
    modifications consistent with safe and sound lending practices
    to strengthen the credit and mitigate credit risk.
        As a complement to our ongoing monitoring of agricultural
    conditions and lending, and routine supervisory activities, the
    Federal Reserve also hosts biannual National Agricultural
    Credit (NAC) conferences. The NAC conferences serve as an
    exchange of information in Washington, DC. and across all of
    the Federal Reserve Districts on developments in agricultural
    finance among institutions involved in various aspects of
    agricultural lending, regulation, and research. Among other
    conferences focused on the agriculture sector, the NAC meetings
    serve as an important source of information and have been of
    great value. The Washington meetings concentrate on policy-
    related matters that have an effect on agricultural finance
    conditions and lending. Discussions may focus on a wide range
    of policies, including farm, energy, trade, regulatory,
    monetary or other areas as conditions evolve. The Federal
    Reserve District meetings focus on agricultural and lending
    conditions within the region that a meeting takes place, and
    include academic researchers focusing on issues related to
    agricultural finance.

    Q.3. I recently wrote to Comptroller Otting, with colleagues on
    this Committee, to express the importance of considering the
    many unique challenges in accessing financial services in rural
    America. It is imperative that the CRA work for communities
    throughout America, and that the process for potential reforms
    to this vital rule should reflect that. Any updates to the CRA
    should be done in coordination between your three agencies, and
    must be consistent with the original purpose of this Civil
    Rights-era law to bringing financial services and credit access
    to low- and moderate-income and underserved communities
    throughout our country.
        As you consider changes to the Community Reinvestment Act,
    how are you considering and engaging rural America?

    A.3. As we have explored Community Reinvestment Act (CRA)
    reform options, we have engaged with rural stakeholders in a
    number of ways. First, we partnered with the Federal Reserve
    Banks to hold 29 external roundtables in 2018 and early 2019
    with attendees that included representatives of consumer and
    community organizations and banks. The Board published a
    summary of the key findings from these roundtables in June of
    2019.\6\ These roundtables also included organizations and
    financial institutions focused on rural concerns and reflected
    a number of recommendations related to rural communities.
    ---------------------------------------------------------------------------
        \6\ Board of Governors of the Federal Reserve System,
    ``Perspectives from Main Street: Stakeholder Feedback on Modernizing
    the Community Reinvestment Act,'' (PDF) (Washington: Board of
    Governors, June 2019).
    ---------------------------------------------------------------------------
        We also continue to conduct research that helps inform our
    understanding of rural issues. For example, a Federal Reserve
    report issued in November 2019 focused on branch access in
    rural areas and helped inform our CRA regulatory approach on
    retail services.\7\ This report found that just over 40 percent
    of rural counties lost bank branches between 2012 and 2017,
    with 39 rural communities being ``deeply affected'' by the loss
    of more than half of their bank branches.
    ---------------------------------------------------------------------------
        \7\ Board of Governors of the Federal Reserve System,
    ``Perspectives from Main Street: Bank Branch Access in Rural
    Communities,'' (PDF) (Washington: Board of Governors, November 2019).
    ---------------------------------------------------------------------------
        The Federal Reserve also reviewed the more than 1,500
    comments submitted in response to the Advance Notice of
    Proposed Rulemaking (ANPR) that the Office of the Comptroller
    of the Currency (OCC) published in 2018. A number of the
    comments submitted in response to the ANPR focused on ways to
    improve the CRA to better meet the needs of rural communities.
    In considering any CRA reforms, we will continue to focus on
    ensuring the needs of rural communities are well-served. We are
    reviewing the comments that have been submitted to the OCC and
    Federal Deposit Insurance Corporation on their Notice of
    Proposed Rulemaking (NPR), and we expect to learn much--
    including much related to the aspects of the NPR that reflect
    our own input--from the review.

    Q.4. I would like an update on an issue I've followed and
    written to the Federal Reserve and FDIC about, the ``covered
    funds'' definition in the Volcker Rule. As drafted, banks are
    prevented from activities that they are regularly allowed to do
    directly on their balance sheets. Oftentimes clients, such as
    large pension funds, want their banks to provide long-term
    investments or loans in these fund structures to have some skin
    in the game. I continue to strongly support the Volcker Rule's
    purpose of preventing speculative trading that is at odds with
    the public interest. As your agencies continue their process
    here, I encourage you to work toward an outcome that allows
    capital for growing and innovating companies and the ability to
    invest in long-term investment vehicles, while keeping a focus
    on preventing the activities that the rule is intended to stop.
        As your agencies look at the impact of rules and any
    potential changes, will you consider activities that are
    considered safe and allowable elsewhere in banks? And
    especially the impact on the availability of funding for
    companies in the middle of America looking to grow?

    A.4. On January 30, 2020, the Board, the Federal Deposit
    Insurance Corporation, the OCC, the Securities and Exchange
    Commission, and the Commodity Futures Trading Commission (the
    Agencies) jointly issued a notice of proposed rulemaking (NPR)
    \8\ addressing the covered funds provisions of the Volcker Rule
    regulations. The NPR, which was developed jointly by the
    Agencies,
    includes provisions that would give banking entities increased
    flexibility to invest in and sponsor venture capital funds and
    funds that extend credit.
    ---------------------------------------------------------------------------
        \8\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
    files/volcker-rule-fr-notice-20200130.pdf.

    Q.5. Thank you all for your updated guidance on providing
    financial services to the hemp industry. As you know, this is
    an issue that has been very important to me. Montana leads the
    country in hemp production, and this guidance will help our
    producers and the financial institutions that are now able to
    ---------------------------------------------------------------------------
    serve them.

    Q.5.a. What will your agencies be doing to educate your
    examiners and the institutions that you oversee to adapt to
    working with hemp-related businesses?

    A.5.a. The Federal Reserve will provide training to examiners
    on this topic through our regular Systemwide Bank Secrecy Act
    (BSA) trainings, as well as in conjunction with the other
    Federal banking regulators through classes and seminars
    provided by the Federal Financial Institutions Examination
    Council.

    Q.5.b. Are there areas that you anticipate will require
    additional guidance?

    A.5.b. As stated in the December 3, 2019, statement,\9\ the
    Financial Crimes Enforcement Network (FinCEN) will issue
    additional guidance on BSA requirements for hemp businesses
    after further reviewing and evaluating the U.S. Department of
    Agriculture interim final rule. Some banks, for example, have
    asked questions that involve interpretations of FinCEN's
    customer due diligence rule with respect to hemp (e.g., a
    bank's obligation to determine whether a hemp producer in a
    customer's supply chain is operating lawfully).
    ---------------------------------------------------------------------------
        \9\ See https://www.fincen.gov/sites/default/files/2019-12/
    Hemp%20Guidance%20 %28Final% 2012-3-19%29%20FINAL.pdf.
    ---------------------------------------------------------------------------
                                    ------

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

    Q.1. Earlier this year, Comptroller Otting said that the Office
    of the Comptroller of the Currency (OCC) was taking the lead on
    writing a rule to rein in risky incentive-based compensation
    practices at large financial institutions that reward senior
    bank executives for irresponsible risk-taking. Additionally, at
    a House Financial Services Committee hearing in May, Otting
    said that the OCC shared its proposal with the Securities and
    Exchange Commission (SEC).
        Chair McWilliams and Vice Chair Quarles, has Comptroller
    Otting shared the OCC's proposal with either of your agencies?

       LIf yes, what does the proposal contain?

       LIf yes, are all six regulators on board with the
            proposal?

       LIf yes, when can we expect to see a notice of
            proposed rulemaking posted?

    A.1. Section 956 of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act requires the Federal Reserve Board,
    Office of the Comptroller of the Currency, Federal Deposit
    Insurance Corporation, Federal Housing Finance Agency,
    Securities and Exchange Commission, and National Credit Union
    Agency (the agencies) to jointly establish regulations or
    guidelines that require disclosure related to incentive
    compensation arrangements, and that prohibit incentive
    compensation arrangements that could provide excessive
    compensation or lead to material financial loss. Federal
    Reserve staff has been working with staff from these other
    agencies to draft a regulation that would meet this statutory
    mandate.

    Q.2. Have all six regulators (FDIC, Fed, NCUA, SEC, OCC, and
    FHFA) sat down together to discuss this rulemaking?

       LIf yes, when did these discussions take place?

       LIf yes, have all six regulators decided to move
            forward with a proposed rule?

    A.2. Staff of all six regulators have been meeting regularly to
    determine a way to move forward. These discussions are
    continuing.

    Q.3. If the OCC decides to move forward on executive
    compensation rule without all six regulators, are you concerned
    the OCC will create two different standards, encouraging banks
    to shop for the regulator with the weakest requirements?

    A.3. There is a longstanding practice of Federal financial
    regulators working together on issues related to incentive-
    based compensation. For example, the Federal banking agencies
    jointly issued Guidance on Sound Incentive Compensation
    Policies in June 2010. The agencies also jointly issued
    proposed rules on incentive-based compensation in 2011 and
    2016, and are working together on recent discussions concerning
    these issues. We fully anticipate that the agencies will
    continue to work jointly on this topic.
                                    ------

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

    BB&T-SunTrust Merger
    Competitive Effects
    Q.1. The Fed evaluated how the transaction would affect
    competition in 81 geographic markets.[1] These geographic
    markets are the areas used to measure the concentration of the
    relevant banking products. Were the definitions of any
    predefined markets altered from the time the merger application
    was filed to the time of the merger approval?

    [1] Federal Reserve System, ``Order Approving the Merger of
    Bank Holding Companies,'' https://www.federalreserve.gov/
    newsevents/pressreleases/files/orders20191119a1.pdf.

    A.1. In evaluating merger proposals, Federal Reserve staff
    considers whether pre-existing geographic market definitions
    are
    appropriate. It is common for Federal Reserve staff to consider
    redefining markets as part of its review of merger proposals.
    The Federal Reserve evaluates its existing geographic market
    definitions under the relevant legal standard set out in
    Supreme Court precedents, which require that the relevant
    geographic market reflect the area where ``the effect on
    competition will be direct and immediate.''\1\ In reassessing
    its geographic markets, the Federal Reserve looks to demand and
    substitution--that is, possible consumer responses to changes
    in rates, fees, or other characteristics of banking
    services.\2\ Local conditions, including commuting patterns and
    economic activity, are closely evaluated as part of this
    analysis. For this merger proposal, the Board examined
    available data for the relevant geographic markets and, as a
    result, redefined 16 markets to more accurately reflect current
    local competitive conditions, including with respect to
    commuting patterns and consumer economic activity. Some markets
    increased in concentration, while others decreased, as a result
    of the market re-definitions. Three markets were absorbed by
    other markets due to updated commuting data.
    ---------------------------------------------------------------------------
        \1\ See Philadelphia National Bank and Phillipsburg National Bank &
    Trust Co., supra note . . . [sic].
        \2\ See Federal Reserve and Department of Justice Frequently Asked
    Questions, question 10, available at https://www.federalreserve.gov/
    bankinforeg/competitive-effects-mergers-acquisitions-faqs.htm#faq10.

    Q.2. Approval Order mentions that the ``Board has considered
    the relative shares of total deposits in insured depository
    institutions that BB&T would control.''[2] Did the Fed conduct
    a competitive analysis of any other product markets, such as
    small business lending or home mortgage lending? If not, why
    ---------------------------------------------------------------------------
    not?

    [2] Id.

    A.2. As required by Supreme Court precedent, the Board
    considered the cluster of products and services provided by
    commercial banks--that is, commercial banking--in evaluating
    the proposal by BB&T.\3\ According to the Supreme Court in
    Philadelphia National Bank, ``the cluster of products (various
    kinds of credit) and services (such as checking accounts and
    trust administration) denoted by the term `commercial bank' . .
    . composes a distinct line of commerce.''\4\ Indeed, the
    Supreme Court in Phillipsburg National Bank & Trust Company
    explicitly rejected ``submarkets'' in the product market for
    evaluating the effect of competition of a merger between
    commercial banks because they were ``not a basis for the
    disregard of a broader line of commerce that has economic
    significance.''\5\ In light of this precedent, the Board
    focused its competition review of the BB&T-SunTrust merger
    proposal on the commercial banking line of commerce.
    ---------------------------------------------------------------------------
        \3\ See Philadelphia National Bank, supra n. Error! Bookmark not
    defined . . . [sic]; see also United States v. Connecticut National
    Bank, 418 U.S. 656 (1974); Phillipsburg National Bank & Trust Co.,
    supra n. Error! Bookmark not defined . . . [sic]
        \4\ Philadelphia National Bank, supra n. Error! Bookmark not
    defined . . . [sic] at 356.
        \5\ Id. at 360. In Phillipsburg, the Supreme Court overturned a
    lower court decision, which focused its attention on ``different
    groupings within'' the commercial banking line of commerce.
    ---------------------------------------------------------------------------
        While the Board is required to focus its competitive
    inquiry in bank merger applications on the cluster of products
    and services that constitute commercial banking, it may
    investigate the competitive effects in submarkets if the
    parties or outside commenters raise a specific submarket as a
    potential issue. In the BB&T-SunTrust merger proposal, the
    Board reviewed competitive effects in mortgage lending in
    response to concerns raised by a commenter.

    Q.3. According to the Approval Order, in 13 of the geographic
    markets, the Herfindahl Hirschman Index (HHI) levels for
    deposits would exceed one or both of the 1800/200 thresholds,
    meaning that the expected change in market concentration is
    significant.[4]

        [4] Id.

    Q.3.a. For the six markets where credit unions or thrifts
    mitigated the competitive concerns, please identify which
    credit unions and thrifts were included in the analysis, the
    dollar amount of their deposits, and any weights used for these
    institutions.

       LNorth Lake-Sumter, Florida: Four credit unions were
            included at 50 percent weight:

         LSuncoast Credit Union: $120 million

         LInsight Credit Union: $103 million

         LCampus USA Credit Union: $79 million

         LCentral Florida Educators Federal Credit Union:
            $75 million

       LAtlanta, Georgia: Two thrifts were included at 100
            percent weight and six credit unions were included at
            50 percent weight:

         LNewton Federal Bank (thrift): $219 million

         LCornerstone Bank (thrift): $209 million

         LDelta Community Credit Union: $4.5 billion

         LGeorgia's Own Credit Union: $1.8 billion

         LAssociated Credit Union: $1.2 billion

         LIBMSECU: $431 million

         LFirst Tech Federal Credit Union: $196 million

         LWings Financial Credit Union: $156 million

       LMilledgeville Area, Georgia: Two credit unions were
            included at 50 percent weight:

         LRobins Financial Credit Union: $97 million

         LMidsouth Community Credit Union: $50 million

       LLexington, Virginia: Two credit unions were
            included at 50 percent weight:

         LDuPont Community Credit Union: $24 million

         LBeacon Credit Union, Inc.: $18 million

       LNorfolk-Portsmouth, Virginia-North Carolina: One
            thrift was included at 100 percent and eight credit
            unions were included at 50 percent:

         LDollar Bank (thrift): $131 million

         LChartway Federal Credit Union: $1.1 billion

         LLangley Federal Credit Union: $567 million

         LABNB Federal Credit Union: $482 million

         LBayPort Credit Union: $437 million

         LNAE Federal Credit Union: $110 million

         LNorthern Star Credit Union: $72 million

         LBronco Federal Credit Union: $55 million

         L1st Advantage Federal Credit Union: $43 million

       LRichmond, Virginia: One credit union was included
            at 50 percent weight:

         LVirginia Credit Union, Inc.: $2.3 billion

        Unlike banks and thrifts, credit unions are not required to
    report deposits on a branch-level. Please indicate how the Fed
    obtained the deposit levels for credit union branches. If
    estimates were used, please describe the methodology.

    A.3.a. As a general matter, when the Federal Reserve includes
    credit unions as a mitigating factor in its competitive
    analysis, it takes the total deposits of the credit union and
    divides the deposits by the total number of branches of the
    credit union to estimate the deposits held at each branch.
    However, in some cases, the Department of Justice (DOJ) obtains
    specific information about deposits held at branches by
    particular credit unions. When exact deposit information is
    available, the Board relies on that more specific information
    in its competitive analysis.

    Q.3.b. For the seven markets with divestitures, do any of these
    markets still approach either of the HHI thresholds even after
    considering the divestitures? If so, please indicate the
    geographic market and the HHI-levels before and after the
    merger.

    A.3.b. The competitive effects of the proposal in these seven
    markets are described in extensive detail in the Board's public
    order. Each of these markets satisfied the DOJ Bank Merger
    Guidelines taking into consideration the divestitures--in each
    market the HHI increase would be less than 200 points or the
    pro forma HHI would be less than 1800 points. Specifically,
    pages 17 through 24 of the Board's order provide the pro forma
    HHI calculations and increase in HHI in each of the seven
    markets with divestitures. The pro forma HHI calculations are
    reproduced below for each of these markets:

       LEastern Shore, Virginia (page 19 of the Board's
            order): HHI increase of 3 points to 2043.

       LMartinsville, Virginia (page 19 of the Board's
            order): HHI would decrease by 2 points to 2125.

       LSouth Boston, Virginia (page 20 of the Board's
            order): HHI would increase 1 point to 1638. The Board
            required a divestiture in this market while the DOJ did
            not require a divestiture.

       LLumpkin County, Georgia (page 21 of the Board's
            order): HHI would decrease by 36 points to 2248.

       LWayne County, Georgia (page 22 of the Board's
            order): HHI would increase 4 points to 2057. The Board
            required a divestiture in this market while the DOJ did
            not require a divestiture.

       LWinston-Salem, North Carolina (page 23 of the
            Board's order): HHI would increase by 30 points to
            6429.

       LDurham-Chapel Hill, North Carolina (page 24 of the
            Board's order): HHI would increase 29 points to 2162.

    Financial, Managerial, and Other Supervisory Conditions
    Q.4. Please describe the process by which the Fed evaluated the
    financial soundness of the resulting institution.

    A.4. Staff thoroughly reviewed the information provided in the
    application, as well as supplemental information provided by
    the
    organizations. Staff also considered the Federal Reserve's
    supervisory reviews, follow-up work, and ongoing monitoring
    activities. In addition, staff consulted with relevant
    financial supervisory agencies and reviewed confidential
    supervisory information, including examination reports on the
    bank holding companies and the depository institutions
    involved. Staff also reviewed the financial condition of the
    organizations on both parent-only and consolidated bases, as
    well as information regarding the financial condition of the
    subsidiary depository institutions and the organizations'
    significant nonbanking operations. The review included, but was
    not limited to, the capital adequacy, asset quality, liquidity,
    and earnings performance of both BB&T and SunTrust.
    Additionally, staff considered the future prospects of the
    combined organization, its pro forma financial condition, the
    proposed business plan, and its ability to absorb the costs of
    the proposal and effectively integrate the institutions'
    operations. Staff also considered an updated capital plan
    provided by BB&T and the ability of the combined company to
    maintain adequate capital levels in baseline and stressed
    conditions.

    Q.5. Please describe the process by which the Fed evaluated the
    management of the resulting institution.

    A.5. Staff considered information provided by BB&T relative to
    its proposed personnel appointments, managerial structure, and
    oversight plans, to assess managerial resources and plans for
    operating the combined organization. Similar to our financial
    analysis, staff reviewed the confidential supervisory records
    of BB&T, SunTrust, and their subsidiary depository
    institutions, including assessments of their management, risk-
    management systems, operations, and compliance with banking
    laws and regulations. Staff also considered the policies,
    procedures, and controls in place at the organizations, as well
    as the risk-management program under development for the
    combined organization, the proposed integration plans, and the
    combined organization's ability to meet the enhanced regulatory
    requirements applicable to bank holding companies with $250
    billion or more in total consolidated assets.

    Q.6. On the same day the merger was approved, the Federal
    Reserve issued a consent order against SunTrust as a result of
    misleading or inaccurate statements to business customers about
    the operation and billing of certain add-on products.

    Q.6.a. Are any executives who were in the chain of command
    responsible for these violations in a leadership position of
    the new Truist Bank?

    A.6.a. As noted on pages 52-53 of the Board's order, a newly
    hired Chief Compliance Officer (CCO) at Truist Bank reports
    directly to Truist's Chief Risk Officer (CRO), formerly the
    BB&T CRO, who leads the Truist Bank risk management function.
    The CRO and CCO's direct report, the leader of the Fair Lending
    and Responsible Banking team, also a legacy BB&T employee, is
    primarily responsible for unfair and deceptive practices (UDAP)
    compliance, as well as implementation of an enhanced, firm-wide
    compliance risk management program. For these reasons, and
    other reasons explained in the Board's approval order, the
    Board found that the UDAP compliance program of the combined
    company would be consistent with approval of the proposal.

    Q.6.b. In the last 5 years, SunTrust was the subject of
    multiple enforcement actions, including by the Fed, the
    Securities and Exchange Commission, the CFPB, the DOJ and
    multiple State attorneys general.[5] Are any executives who
    were in the chain of command responsible for these violations
    in leadership positions of the new Truist Bank?

        [5] Good Jobs First, https://
    violationtracker.goodjobsfirst.org.

    A.6.b. The enforcement actions brought by the Board and other
    financial regulators were taken against SunTrust or its
    subsidiaries, rather than any individuals. Individuals may be
    subject to enforcement actions by the Board, if the relevant
    legal standards are met. Please see response to question 3(a)
    above regarding leadership at Truist Bank.

    Q.6.c. In the last 5 years, BB&T has been the subject of five
    enforcement actions by the Securities and Exchange
    Commission.[6] Are any executives who were in the chain of
    command responsible for these violations in leadership
    positions of the new Truist Bank?

    [6] Good Jobs First, https://
    violationtracker.goodjobsfirst.org.

    A.6.c. The enforcement actions brought by the Securities and
    Exchange Commission were taken against BB&T subsidiaries,
    rather than any individuals. Individuals may be subject to
    enforcement actions by the Board if the relevant legal
    standards are met.
    Convenience and Needs Considerations
    Q.7. The Fed is required by the Bank Holding Company Act to
    note and consider each institution's performance under the
    Community Reinvestment Act (CRA). As stated in the Approval
    Order, while BB&T has an outstanding record of meeting
    community credit needs, SunTrust only has a satisfactory
    record. ``With respect to SunTrust Bank, [CRA] examiners noted
    that some branch closures and consolidations by SunTrust Bank
    may have adversely affected the accessibility of banking
    services in some of the bank's [Assessment Areas].''[7] This
    effect on accessibility included eight branch closures in low-
    income tracts and 21 closures in moderate-income tracts.

    [7] Id.

    Q.7.a. Does the Fed find it appropriate to reward an
    institution for failing to meet the credit needs of the
    communities it serves?

    A.7.a. As indicated in the Board's order, SunTrust had a
    satisfactory CRA record, including high satisfactory ratings
    for the Lending and Investment tests. More importantly, BB&T,
    the successor institution, has an overall outstanding CRA
    rating.

    Q.7.b. How will the Fed ensure that Truist does not engage in
    similar practices in the future?

    A.7.b. As indicated in the Board's order, the Federal banking
    supervisory agencies evaluate a bank's record of opening and
    closing branches, particularly branches located in LMI
    geographies or primarily serving LMI individuals, as part of
    the CRA examination process.\6\
    ---------------------------------------------------------------------------
        \6\ See, e.g., 12 CFR 228.24(d)(2). In addition, the Board noted
    that the FDIC, as the primary Federal supervisor of Truist Bank, would
    continue to evaluate the bank's branch closures in the course of
    conducting CRA performance evaluations.

    Q.7.c. During the merger review process, BB&T and SunTrust
    agreed to a ``3-year, $60 billion community benefits plan,''
    that will ``increase financial resources for low- and moderate-
    income (LMI) communities across the eastern United States.''
    How will the Fed ensure that Truist complies with this
    ---------------------------------------------------------------------------
    agreement?

    A.7.c. Neither the CRA nor the Federal banking agencies' CRA
    regulations require depository institutions to make pledges or
    enter into commitments or agreements with any organization.\7\
    Lending, investments, or services that Truist Bank provides,
    including those in furtherance of its community benefits plan,
    will be taken into account as part of the FDIC's CRA evaluation
    of Truist Bank.
    ---------------------------------------------------------------------------
        \7\ See, e.g., CIT Group, Inc., FRB Order No. 2015-20 at 24 n.54
    (July 19, 2015); Citigroup Inc., 88 Federal Reserve Bulletin 485
    (2002); Fifth Third Bancorp, 80 Federal Reserve Bulletin 838, 841
    (1994).

    Q.7.d. Of all the merger applications that have been withdrawn,
    how many were withdrawn because of a bank's CRA performance
    ---------------------------------------------------------------------------
    record?

    A.7.d. The Federal Reserve System has released publicly its
    approach to applications that may not satisfy requirements for
    approval or that otherwise raise supervisory or regulatory
    concerns.\8\ Potential applicants with supervisory issues,
    including with respect to CRA or consumer compliance, may
    therefore choose not to file applications until the issues are
    resolved.\9\ Applications can be withdrawn at the request of
    the applicant for any number of reasons. For example, an
    applicant may withdraw for technical or procedural reasons, for
    reasons regarding the statutory factors that must be considered
    by the Federal Reserve that could include supervisory issues,
    or because an applicant has decided not to pursue the
    application for business or strategic reasons. In many cases,
    applicants do not provide specific reasons for withdrawing
    filings and are not required to do so. As a result, the Board
    does not have sufficient information to provide the number of
    cases withdrawn due to CRA considerations.
    ---------------------------------------------------------------------------
        \8\ This approach is reflected in SR 14-2 supra n. Error! Bookmark
    not defined . . . [sic]
        \9\ For example, financial holding companies with less-than-
    satisfactory CRA ratings are prohibited from acquiring companies
    engaged in financial activities in reliance on section 4(k) of the BHC
    Act. 12 U.S.C.  1843(l)(2).

    Q.8. The Approval Order states that ``several commenters
    alleged that BB&T and SunTrust were not meeting the credit
    needs of minority and LMI communities and borrowers,
    particularly in Florida and Durham, North Carolina, or unbanked
    and underbanked populations. One commenter alleged that BB&T
    made a disproportionately low number of home purchase loans to
    African American and Latino borrowers in the Houston, Texas,
    New York, New York, and Charleston, West Virginia, areas based
    ---------------------------------------------------------------------------
    on data reported for 2017 under HMDA.''[8]

    [8] Id.

        Following this statement, the Approval Order explains how
    BB&T denies the commenters' allegations. It later states that
    ``The Board is concerned when HMDA data reflect disparities in
    the rates of loan applications, originations, and denials among
    members of different racial or ethnic groups in local areas.
    These types of disparities may indicate weaknesses in the
    adequacy of policies and programs at an institution for meeting
    its obligations to extend credit fairly. However, other
    information critical to an institution's credit decisions is
    not available from HMDA data.''[9]

    [9] Id.

    Q.8.a. Did the Fed rely on BB&T's denials to determine that
    these allegations of lending discrimination not take place?

    A.8.a. In evaluating bank applications, the Federal Reserve
    relies on the banks' overall compliance record, including
    recent fair lending examinations. In addition, the Federal
    Reserve considers the CRA records of the relevant depository
    institutions, assessments of other relevant supervisors, the
    supervisory views of examiners, and information provided by the
    applicant and public commenters. Regarding the BB&T-SunTrust
    application, the Board considered all comments, including the
    specific allegations raised by the commenters that you
    reference. To evaluate the comments, as well as to consider
    whether the relevant institutions are helping to meet the
    credit needs of their communities and the potential effects of
    the proposal on the convenience and needs of the communities to
    be served, the Board considers the information provided by the
    applicant, public comments, and the institutions' examination
    records, including fair lending.

    Q.8.b. Does HMDA data indicate that these disparities do exist?
    If so, what information was used to reach the conclusion that
    these concerns did not warrant further scrutiny and denial of
    the merger?

    A.8.b. As indicated in the Board's order, Home Mortgage
    Disclosure Act (HMDA) data disparities must be evaluated in the
    context of other information regarding the lending record of an
    institution. Publicly available HMDA data do not provide a
    sufficient basis for conclusively determining whether an
    institution has engaged in discriminatory practices.\10\ Public
    2017 HMDA data available for the evaluation of this application
    did not include consumer credit scores, debt-to-income ratios
    and loan-to-value ratios.
    ---------------------------------------------------------------------------
        \10\ Lee v. Board, supra n. Error! Bookmark not defined . . . [sic]
    at 915 (holding that the Board carefully considered the concerns
    expressed by the commenters and properly resolved the HMDA data-related
    allegations).
    ---------------------------------------------------------------------------
        In evaluating bank applications, the Federal Reserve relies
    on the banks' overall compliance record, including recent fair
    lending examinations, assessments of other relevant
    supervisors, and the supervisory views of examiners.

    Q.8.c. What additional information that is ``critical to an
    institution's credit decision'' would the Fed have needed to
    make a
    decision about whether BB&T was ``meeting its obligations to
    extend credit fairly?''

    A.8.c. As mentioned above, public 2017 HMDA data available for
    the evaluation of this application did not include consumer
    credit scores, debt-to-income ratios and loan-to-value ratios.
    When warranted by risk factors, examiners obtain additional
    information when conducting fair lending examinations to
    evaluate an institution's compliance with fair lending laws and
    regulations.

    Q.9. On the same day the merger was approved, the Federal
    Reserve issued a consent order against SunTrust as a result of
    misleading or inaccurate statements to business customers about
    the operation and billing of certain add-on products.[10]

    [10] United States of America before the Board of Governors of
    the Federal Reserve System, ``Consent Order,'' https://www.fed-
    eralreserve.gov/newsevents/pressreleases/files/orders201911
    19a2.pdf.

    Q.9.a. When did the Fed first become aware of the activities
    SunTrust was engaging in that led to the consent order being
    issued?

    A.9.a. Federal Reserve staff became aware of the practices
    addressed in the Consent Order beginning in 2016.\11\ Those
    practices were terminated by SunTrust Bank around the same
    time.
    ---------------------------------------------------------------------------
        \11\ See In the Matter of SunTrust Bank, Docket No. 19-028-B-SM
    (Nov. 19, 2019), available at https://www.federalreserve.gov/
    newsevents/pressreleases/files/orders20191119a2.pdf.

    Q.9.b. When was it decided that it would be appropriate to
    publicly release the consent order at the same exact time as
    the announcement of the Fed approval of the merger? Who made
    ---------------------------------------------------------------------------
    that decision?

    A.9.b. The Consent Order and merger application were voted on
    and approved by the Board at the same time. Staff's
    investigation of the matters underlying the Consent Order was
    completed prior to the Board's consideration of action on the
    application. Further, aligning the processing of these two
    matters was reasonable because the issues identified in the
    Consent Order needed to be addressed as part of the Board's
    consideration of the statutory factors for determining whether
    to approve the application.

    Q.10. In assessing the convenience and needs factor, the Fed
    considered the supervisory views of the Consumer Financial
    Protection Bureau.[11]

    [11] Federal Reserve System, ``Order Approving the Merger of
    Bank Holding Companies,'' https://www.federalreserve.gov/
    newsevents/pressreleases/files/orders20191119a1.pdf.

    Q.10.a. What were those views?

    A.10.a. As indicated in the Board's order, the Board considered
    the views of the CFPB regarding the consumer compliance records
    of both Branch Banking and Trust Company (Branch Bank) and
    SunTrust Bank. These interagency discussions and views are
    considered confidential supervisory information. The CFPB
    Director voted to approve the merger in the Director's capacity
    as a member on the FDIC board of directors.

    Q.10.b. Did the Fed review the Bureau's Consumer Complaint data
    base in evaluating the merger?

    A.10.b. As mentioned above, the Board considered the views of
    the CFPB regarding the consumer compliance records of both
    Branch Bank and SunTrust Bank.

    Q.10.c. A recent study has shown that SunTrust and BB&T ranked
    third and 12th in the most consumer complaints that year.[12]
    Does the Fed find those statistics concerning?

    [12] American Banker, ``BankThink: CFPB should have a say in
    bank mergers,'' Jeremy Kress, September 03, 2019, https://
    www.americanbanker.com/opinion/cfpb-should-have-a-say-in-bank-
    mergers.

    A.10.c. Consumer complaints are taken seriously by the Federal
    banking agencies. Complaints that implicate fair lending and
    other consumer protection laws and regulations are taken into
    account as part of the assessment of an institution's consumer
    compliance record. The Board considered the views of the FDIC
    and the Federal Reserve Bank of Atlanta regarding the consumer
    compliance record of Branch Bank and SunTrust Bank,
    respectively. In addition, the Board considered the views of
    the CFPB regarding the consumer compliance records of both
    Branch Bank and SunTrust Bank.
    Financial Stability Factor
    Q.11. The Approval Order states that ``In light of all the
    facts and circumstances, this transaction would not appear to
    result in meaningfully greater or more concentrated risks to
    the stability of the U.S. banking or financial system.''

    Q.11.a. Countrywide was a $200 billion institution when it
    failed.[13] Washington Mutual was $307 billion.[14] Together,
    they had the potential to do significant damage to the deposit
    insurance fund. Why does the Fed believe that the failure of a
    $450 billion institution would not present risks to the
    financial system?

    [13] New York Times, ``Bank of American to buy Countrywide,''
    Gretchen Morgenson and Eric Dash, January 11, 2008, https://
    www.nytimes.com/2008/01/11/business/worldbusiness/lliht-bofa.
    3.9157464.html.

    [14] M. Reuters, ``WaMu is largest bank failure,'' Elinor
    Comlay and Jonathan Stempel, https://www.reuters.com/article/
    us-wash
    ingtonmutual-jpmorgannews1/wamu-is-largest-u-s-bank-failure-idU
    STRE48P05I20080926.

    A.11.a. As described in detail on pages 54-60 of the Board's
    public order, the Board conducted an extensive analysis of the
    risks to stability of the United States banking and financial
    system. In particular, the Board considered the combined
    organization's size, the extent to which BB&T and SunTrust
    engaged in activities that were critical to the functioning of
    the U.S. financial system and whether there would be adequate
    and timely substitute providers of such activities, data
    regarding potential financial instability being transmitted to
    other institutions or markets within the U.S. banking and
    financial system, the extent to which the combined organization
    would contribute to the overall complexity of the U.S. banking
    or financial system, and the cross-border activities of each of
    BB&T and SunTrust.
        Based on each of these factors individually and in
    combination, the Board concluded that the transaction would not
    appear to result in meaningfully greater or more concentrated
    risks to the stability of the U.S. banking or financial system.
    In particular, the Board noted that the combined organization
    would have a de minimis share of payment activities, assets
    under custody, and underwriting activities; have limited
    reliance on wholesale funding; have limited over-the-counter
    derivatives exposures and holdings of Level 3 assets; and
    engage in limited cross-border activities. In addition, the
    Board noted that both BB&T and SunTrust were predominately
    engaged in retail commercial banking activities with little
    reliance on short-term funding. The Board found that the
    combined organization would have minimal cross-border
    activities and would not exhibit an organizational structure,
    complex interrelationships, or unique characteristics that
    would complicate resolution of the firm in the event of
    financial distress. In addition, the Board found that the
    combined organization would not be a critical services provider
    or so interconnected with other firms or the markets that it
    would pose significant risk to the financial system in the
    event of financial distress.

    Q.11.b. In a July 2018 speech advocating for deregulation of
    regional banks, you favorably cited Fed research showing that
    the failure of a single $250 billion bank would be far worse
    for the economy than the failure of five $50 billion banks
    failed separately. And yet you concluded last month that the
    $450 billion BB&T-SunTrust merger would not materially increase
    risks to financial stability. Was this research considered in
    the context of the BB&T-SunTrust merger?[15]

    [15] ``Remarks by Randal K. Quarles, Vice Chairman for
    Supervision, Board of Governors of the Federal Reserve System
    at American Bankers Association Summer Leadership Meeting,''
    July 18, 2018.

    A.11.b. The Board considers the resulting size of a financial
    institution when assessing the risks to financial stability,
    because larger financial firms generally pose a greater risk to
    the financial system and broader economy than smaller financial
    firms. However, asset size itself is not dispositive, and the
    Board considers additional factors to evaluate the potential
    threat to financial stability, including interconnectedness,
    complexity, cross-border activity, and substitutability for
    critical services.\12\ Each of these factors was discussed in
    detail on pages 54-60 of the Board's order.
    ---------------------------------------------------------------------------
        \12\ See supra n. Error! Bookmark not defined . . . [sic]
    ---------------------------------------------------------------------------
        The July 2018 speech discussed tailoring regulation
    applicable to banks in the United States to reflect the variety
    of business models and risk profiles of those institutions. In
    particular, the Board's framework for supervision and
    regulation is designed to increase in stringency in tandem with
    the firm's size and systemic footprint. To offset risk, the
    Board requires larger firms to be subject to additional
    supervisory and regulatory requirements. In its consideration
    of the BB&T application, the Board considered these additional
    regulatory standards and requirements that would apply to the
    combined organization given the size of its total assets. As
    noted in the Board's order, BB&T represented that it had
    allocated additional staff resources to satisfy the additional
    regulatory requirements that would apply to bank holding
    companies with $250 billion or more in total consolidated
    assets. In addition, the combined organization would be subject
    to annual supervisory stress tests, company-run stress tests
    every other year, the countercyclical capital buffer, a
    supplementary leverage ratio, a liquidity coverage ratio
    requirement, and other reporting and liquidity requirements.
    These requirements would be more stringent than the
    requirements that would have applied to each of BB&T and
    SunTrust on a standalone basis.

    Q.11.c. Please describe the extent to which the Fed considered
    the cost of failure of the merged institution in its review.

    A.11.c. As noted in the Board's order, the Board considered the
    degree of difficulty in resolving the resulting firm. The Board
    noted that BB&T and SunTrust do not engage in complex
    activities, such as being a core clearing and settlement
    organization for critical financial markets, that might
    complicate the resolution process by increasing the complexity,
    costs, or timeframes involved in a resolution. Because the
    structure and scope of activities at the combined organization
    were not complex, the resulting firm would not engage in
    significant cross-border activities, and the combined
    organization would be predominately engaged in retail
    commercial banking activities, the resolution of the firm would
    be less complicated than that of the largest U.S. financial
    institutions.\13\
    ---------------------------------------------------------------------------
        \13\ See BB&T Corporation, FRB Order No. 2019-16, at 59-60 (Nov.
    19, 2019).

    Q.12. The Approval Order also listed various metrics considered
    when evaluating the financial stability factor, including size
    and the availability of substitute providers. For each metric,
    please indicate if the Fed has established numeric thresholds
    to evaluate whether or not it is triggered. If so, please
    identify the thresholds. If not, please describe how those
    ---------------------------------------------------------------------------
    factors were evaluated?

    A.12. As required by statute, the Federal Reserve considers the
    impact on financial stability of every bank holding company
    merger proposal.\14\ The metrics discussed in the Board's order
    are evaluated in every proposal. Specifically, these metrics
    include measures of the size of the resulting firm, the
    availability of substitute providers for any critical products
    and services offered by the resulting firm, the
    interconnectedness of the resulting firm with the banking or
    financial system, the extent to which the resulting firm
    contributes to the complexity of the financial system, and the
    extent of the cross-border activities of the resulting
    firm.\15\ Because these categories are not exhaustive, the
    Board may consider additional categories to inform its
    decision. In addition to using quantitative measures, the Board
    also considers qualitative factors, such as the opaqueness and
    complexity of an institution's internal organization, that are
    indicative of the relative degree of difficulty of resolving
    the resulting firm.
    ---------------------------------------------------------------------------
        \14\ 12 U.S.C. Sec.  1842(c)(7).
        \15\ See Capital One Financial Corp., supra n. Error! Bookmark not
    defined . . . [sic]
    ---------------------------------------------------------------------------
        In this case, the Board also considered the Globally
    Systemic Important Bank (``G-SIB'') Surcharge score of the
    combined organization. The G-SIB Surcharge score is a measure
    of a firm's systemic importance.\16\ On consummation of the
    proposal, the combined organization would have a G-SIB method 1
    score of approximately 30 basis points, well below the minimum
    threshold (130 basis points) that identifies a financial
    institution as a G-SIB.
    ---------------------------------------------------------------------------
        \16\ See 80 Fed. Reg. 49082 (Aug. 14, 2015).
    ---------------------------------------------------------------------------
    Transparency
        This bank merger is the largest to occur since the
    financial crisis and consumers deserve to have a complete
    understanding of the decisionmaking process that led to its
    approval.

    Q.13. The depository data used for the anticompetitive analysis
    is nonconfidential information. As such, when will the Fed be
    publishing the full anticompetitive analysis it undertook when
    reviewing the merger?

    A.13. The full anticompetitive analysis for review of the
    merger is published on pages 7-24 and 63-80 of the Board's
    order.

    Q.14. American Banker published an interview with the top
    executives of BB&T and SunTrust in which Truist's chairman and
    CEO, Kelly King stated, ``I was told by several senior
    regulators there was no legal reason to object to the
    deal.''[16]

    [16] American Banker, ``Truist rising: With mega-merger clone,
    pressure to deliver,'' Paul Davis, December 9, 2019, https://
    www.americanbanker.com/news/truist-rising-with-mega-merger-
    done-pressure-on-to-deliver.

       LWere you one of those senior level regulators?

       LDid any Fed staff have conversations with the
            executives, or their representatives of either
            institution before the merger application was filed?

         LIf so, please disclose the date, participants,
            and substance of the conversation.

         LDid the Fed provide any comment regarding the
            likelihood of the approval of the deal, including
            whether the Fed anticipated there being any legal
            barriers to approval?

    A.14. The quote from Mr. Kelly King was published in an article
    on December 9, 2019, and appears to have been made after the
    Board's approval on November 19, 2019.\17\ The Board concluded
    that all statutory factors that it was required to consider
    were consistent with approval based on its analysis of the
    application record.
    ---------------------------------------------------------------------------
        \17\ See supra n. Error! Bookmark not defined . . . [sic]
    ---------------------------------------------------------------------------
        As explained in Section III of my letter to you dated May
    8, 2020, prospective applicants sometimes request to meet with
    Board staff before filing an application or prefiling and the
    Board considers it appropriate for staff to grant these
    requests. At the request of BB&T and SunTrust, members of Board
    staff met with representatives of the companies on February 22,
    2019. Representatives from BB&T and SunTrust included members
    of senior management as well as external counsel for each
    company. Representatives from the Board included staff from the
    Division of Consumer and Community Affairs, the Division of
    Supervision and Regulation, the Division of Research and
    Statistics, and the Legal Division. BB&T and SunTrust
    representatives presented high-level information on a number of
    topics, including pro forma financial projections, information
    on geographic overlap, considerations related to the
    convenience and needs of affected communities, and early stage
    risk management and technology integration plans. Board staff
    listened to the presentation and shared absolutely no
    information regarding the likelihood of approval or legal
    barriers to approval.
        In addition, members of Board staff attended a meeting at
    the DOJ on February 19, 2019, wherein representatives of BB&T
    and SunTrust presented their competitive analysis and initial
    proposed divestitures. Meeting participants included
    representatives from senior management at BB&T and SunTrust,
    BB&T's external counsel, SunTrust's external counsel, staff at
    the DOJ, and Board staff from the Legal Division and the
    Division of Research and Statistics. Once again, Board staff
    listened to the presentation made by BB&T and SunTrust
    representatives and shared absolutely no information regarding
    the likelihood of approval or legal barriers to approval.
    Community Investment Act Reform
        In response to questioning during the December 5, 2019,
    hearing, you stated that the proposal to modify the Community
    Reinvestment Act (CRA) released this week by the FDIC and OCC
    ``has benefited from a lot of Fed input.''

    Q.15. Please describe which aspects of the proposal were based
    on input from the Fed.

    A.15. The Federal Reserve has shared detailed analysis, data,
    and proposals related to possible metrics-based approaches with
    our counterparts at the Federal Deposit Insurance Corporation
    (FDIC) and the Office of the Comptroller of the Currency (OCC)
    in an effort to forge a common approach. The FDIC and OCC have
    considered this information and included in their proposal
    multiple metrics at the assessment level. For example, the OCC/
    FDIC metrics would evaluate a bank's distribution of the number
    of its retail loans to low-income tracts and low-income
    households.

    Q.16. Please describe why the Federal Reserve declined to join
    the FDIC and the OCC in their proposed rulemaking.
    Specifically:

    Q.16.a. Did career Fed staff disagree with or were otherwise
    unable to independently verify the analysis on the expected
    effects of the proposal?

    A.16.a. We have had considerable engagement with the FDIC and
    OCC throughout the CRA reform process and have conducted
    research and analysis of various proposals. We are committed to
    getting CRA reform right and that is why we have focused so
    much on understanding the underlying data and potential impact
    of any proposal. We continue to believe the best outcome would
    be a joint interagency final rule which strengthens the CRA
    regulations to help banks better meet the credit needs of the
    local low- and moderate-income communities they serve and more
    closely align with changes in the ways financial products and
    services are delivered.

    Q.16.b. Does the Fed believe the proposed rule could negatively
    impact credit availability and affordability among low-income
    and minority populations?

       LIf so, which aspects of the proposal trigger those
            negative effects? Please include any qualitative or
            quantitative analysis done by the Fed.

    A.16.b. We are focused on developing a set of CRA reform ideas
    that are consistent with a few key principles. Specifically, we
    believe that revisions to the CRA regulations should reflect
    the credit needs of local communities and work consistently
    through the business cycle. They should be tailored to banks of
    different sizes and business strategies. They should provide
    greater clarity in advance about how activities will be
    evaluated. They should encourage banks to seek opportunities in
    distressed and underserved areas. And, they should recognize
    that the CRA is one of several related laws to promote an
    inclusive financial sector.

    Q.16.c. When in the rulemaking process did the Fed determine
    that it would not join the proposal? Were there any issues not
    addressed by the questions above that contributed to the
    proposal?

    A.16.c. While the Board did not join the FDIC and the OCC in
    their Notice of Proposed Rulemaking (NPR) revising elements of
    CRA regulation, the Board shared detailed analysis and
    proposals on CRA reform with our counterparts at the OCC and
    FDIC in the preparation of the NPR, and the NPR reflects much
    input from the Board. We are reviewing the comments that have
    been submitted to the FDIC and OCC on the NPR, and we expect to
    learn much--including much related to the aspects of the NPR
    that reflect our own input--from the review. As a result, it
    would be premature to identify any specific areas of
    disagreement--rather, we are all in the process of working to
    determine the best path forward. We continue to view a common
    approach as the best outcome, but we have not yet determined
    the best next steps to achieve that outcome.

    Q.17. Will the Fed be releasing a separate reform proposal? Is
    it a possibility that the Fed will join the agencies in issuing
    a final rule? If so, what assurances would the Fed need to feel
    comfortable joining?

    A.17. Please see the response to question 16.c.

    Q.18. What are the consequences of different banks having a
    different set of CRA requirements to follow based on their
    regulator?
        How would CRA changes impact the Fed's review of CRA-
    performance for bank mergers? If CRA-ratings are based on
    different sets of standards for each regulator, how will the
    Fed be able to objectively compare CRA-performance among the
    banks?

    A.18. We continue to view a common approach to CRA reform as
    the best outcome. The proposed regulatory changes would not
    change how the Federal Reserve reviews CRA performance for bank
    mergers. The CRA statute requires the Board to take into
    account the CRA performance record of an institution in mergers
    and acquisitions applications and the Board will continue to
    abide by this requirement, consistent with the law.
    Climate Change Risk
    Q.19. On January 25, I signed a letter to Chairman Jay Powell
    regarding information on the Federal Reserve's steps to
    identify and manage climate-related risks in the U.S. financial
    system.[17] Chairman Powell's response on April 18 was
    disappointing, deferring responsibility to climate-related
    actions to other agencies.[18]

    [17] Letter from 20 Senators to Chairman of the Board of
    Governors of the Federal Reserve System Jerome Powell, January
    25, 2019, https://www.schatz.senate.gov/imo/media/doc/
    Letter%20to
    %20Federal%20Reserve,%20OCC,%20FDIC%20re%20Climate%20
    Change.pdf.

    [18] Letter from Chairman of the Board of Governors of the
    Federal Reserve System Jerome Powell to Senator Warren, April
    18, 2019. https://www.schatz.senate.gov/imo/media/doc/
    Chair%20Powell
    %20to%20Sen.%20Schatz%204.18.19.pdf.

        Chairman Powell's April 18 response stated, ``The Board's
    framework provides a systemic way to assess financial
    stability; however, some potential risks do not fit neatly into
    that framework.''[19] However, central banks around the world,
    including the Bank of England are far more aggressive in is
    taking steps to incorporate climate-related risks in their
    financial stress tests.[20] The Network for Greening the
    Financial System, a group of 18 central banks and bank
    supervisors has also acknowledged that ``climate-related risks
    are a source of financial risk [and it is] within the mandates
    of Central Banks and Supervisors to ensure the financial system
    is resilient to these risks.''[21]

    [19] Id.

    [20] Reuters, ``BOE to stress test its financial system against
    `climate pathways': Carney,'' Kanishka Singh, October 8, 2019,
    https://www.reuters.com/article/us-climate-change-boecarney/
    boe-to-stress-test-its-financial-system-against-climate-
    pathways-carney
    idUSKBN1WN0GS.

    [21] Network for Greening the Financial System, ``NGFS First
    Progress Report,'' October 2018, https://www.banque-france.fr/
    sites/default/files/media/2018/10/11/818366-ngfs-firstprogress-
    report-20181011.pdf.

        Please explain why the Federal Reserve System's framework
    does not currently incorporate climate-related risks in
    assessing financial stability, despite other international
    efforts to do so.

    A.19. It is not correct to say that the Federal Reserve's
    framework for assessing financial stability does not
    incorporate climate-related risks or that we are disconnected
    from international efforts in this area.
        First, staff across the Federal Reserve System conduct
    extensive research on a range of issues related to the effects
    of climate change, including how climate-related risks can be
    amplified by the financial system. Through their research,
    staff are exploring new sources of climate-related data and
    developing methods to link this climate data with existing
    financial data. This research helps inform our supervision and
    outreach to market participants by enhancing our understanding
    of connections between climate risks and financial stability.
    These efforts involve nearly every division of the Board of
    Governors, as well as several Reserve Banks. These efforts
    improve our ability to assess the ways climate-related risks
    may affect the economy, financial stability, and the safety and
    soundness of financial institutions.
        Second, Federal Reserve personnel contribute integrally to
    efforts by the Financial Stability Board (FSB), which I chair,
    and other standard-setting bodies to assess climate-related
    financial risks. The FSB's Standing Committee on the Assessment
    of Vulner-
    abilities evaluates as part of its mandate the potential for
    technological and policy shocks related to climate change. I
    have directed the FSB to continue its sponsorship of the Task
    Force for Climate-related Disclosures, which engages with
    companies to promote consistent public disclosures related to
    the risks of climate change. And the G20 has made the FSB
    responsible for coordinating the work of these international
    bodies related to the effect of climate change on the financial
    sector, recognizing that a patchwork of sector-specific groups
    could miss the emergence of critical financial vulnerabilities.
    Federal Reserve staff and I remain in frequent contact with our
    supervisory colleagues in other jurisdictions, following
    closely their own climate-related projects.
        Third, in addition to this work on the long-term analysis
    of climate-change risk, the Federal Reserve's near-term
    supervisory framework captures a series of potential near-term
    risks related to severe weather events. One example includes
    the possibility of large losses to property and casualty
    insurers from historically atypical timing, intensity, or
    frequency of severe weather damages. The loss-absorbing
    capacity of insurers and their connections to the broader
    financial system is an important part of our financial
    stability framework. In addition, we look at the potential
    operational disruptions at large financial institutions,
    including network outages or other weather-related
    disturbances, which could present a near-term risk to financial
    stability.
        With regard to the Network for Greening the Financial
    System (NGFS), as I have stated publicly for over a year,
    including twice at previous hearings of the Senate Banking
    Committee, I have urged the NGFS to accept comprehensive
    participation from the Federal Reserve. Federal Reserve staff
    have attended many NGFS discussions and will continue to do so.
    We are exploring how the NGFS might allow us to participate
    further in a way that is consistent with the full range of our
    responsibilities.

    Q.20. On November 8, the Federal Reserve Bank of San Francisco
    held a conference on ``The Economics of Climate Change,'' which
    focused on ``[discussing] quantifying the climate risk faced by
    households, firms, and the financial system; measuring the
    economic costs and consequences of climate change; accounting
    for the effects of climate change on financial asset prices;
    and understanding the potential implications of climate change
    for monetary, supervisory, and trade policy.''[22]

    [22] Federal Reserve Bank of San Francisco, ``The Economics of
    Climate Change,'' November 8, 2019, https://www.frbsf.org/
    economicresearch/events/2019/november/economics-of-climate-
    change/.

    Q.20.a. In her speech at the conference, President and Chief
    Executive Officer of the Federal Reserve Bank of San Francisco
    Mary Daly stated, ``The Federal Reserve's job is to promote a
    healthy, stable economy. This requires us to consider current
    and future risks--whether we have a direct influence on them or
    not. Climate change is one of those risks.''[23]

    [23] Federal Reserve Bank of San Francisco, ``Why Climate
    Change Matters to Us,'' Mary Daly, November 8, 2019, https://
    www.frbsf.org/our-district/press/presidents-speeches/maryc-
    daly/2019/november/why-climate-change-matters-to-us/.

       LDoes the Board of Governors of the Federal Reserve
            System disagree with President Daly's remarks that
            state that Federal Reserve is required to consider
            climate-related risks?

         LIf so, please explain the position that the
            Federal Reserve is not required to consider climate-
            related risks.

         LIf not, why has the Federal Reserve System not
            considered climate-related risks in its oversight of
            the financial system thus far?

    A.20.a. Please see the response to question 19.

    Q.20.b. During the conference, Federal Reserve Governor Lael
    Brainard stated that ``Climate risks are projected to have
    profound effects on the U.S. economy and financial system,''
    and that the ``Federal Reserve has important responsibilities
    for safeguarding the stability of our financial system so that
    it can continue to meet household and business needs for
    financial services when hit by negative shocks. Similar to
    other significant risks, such as cyberattacks, we want our
    financial system to be resilient to the effects of climate
    change.''[24]

    [24] Board of Governors of the Federal Reserve System, ``Why
    Climate Change Matters for Monetary Policy and Financial
    Stability,'' Lael Brainard, November 8, 2019, https://
    www.federalreserve.gov/newsevents/speech/brainard20191108a.htm.

       LHas the Federal Reserve System formally assessed
            the systemic risks that climate change could pose to
            the financial system? If so, what tools and models does
            the Federal Reserve System use to inform those
            assessments?

       LHas the Federal Reserve System assessed if the
            financial system is resilient to climate-related risks
            or taken any actions to increase the financial system's
            resilience to climate change?

    A.20.b. As I stated previously, the Federal Reserve's framework
    for monitoring financial stability assesses several potential
    vulnerabilities to the financial system. These vulnerabilities,
    in turn, could be susceptible to a series of near-term climate-
    related risks. Assessments of the resilience of the U.S.
    financial system conducted by Federal Reserve staff are
    published biannually in our Financial Stability Report.
        For the Federal Reserve's near-term macroeconomic analysis,
    we do take into account information on the severity of weather
    events. When a severe weather event occurs, we closely monitor
    the effects on local economies, assess the implications for
    broader measures of economic production and employment, and
    adjust our economic forecasts accordingly.
        For example, our staff has relied on data from the Federal
    Emergency Management Agency and the Department of Energy to
    gauge the disruptions to oil and gas extraction, petroleum
    refining, and petrochemical and plastic resin production in the
    wake of hurricanes that have affected the Gulf region. Our
    staff regularly uses daily measures of temperatures and
    snowfall from the National Oceanic and Atmospheric Association
    weather stations to better understand how severe weather may be
    affecting measured and real economic activity in specific
    areas.
        Our understanding of which economic activities will be
    affected by a severe weather event depends critically on data
    produced by the Federal statistical agencies, such as the
    Census Bureau's County Business Patterns data, as those data
    provide information on economic activity in different
    geographic locations. In addition, our staff uses credit and
    debit card transactions data for gauging how specific types of
    severe weather might be affecting consumer spending in areas
    affected by those events.
        At present, neither we, or any other major central bank,
    directly models how changes in temperatures over long periods
    of time affect economic activity (modeling being a separate
    matter from the extensive economic analysis of this question
    that we do). But given that--the evolution of climate over time
    affects the economic data on which our models are built--
    including the trends and the cyclical behavior of investment,
    consumption, production, and employment--then climate change is
    incorporated in our macroeconomic analysis.
    Other Topics
    Q.21. A report released by the Financial Stability Board, of
    which you are currently chair, highlighted the risks of
    technology companies entering the banking sphere to the broader
    financial system.

    Q.21.a. Can you please describe how both the FSB on an
    international level and the Federal Reserve on a domestic level
    are monitoring and evaluating these risks?

    A.21.a. The FSB has published multiple reports on financial
    stability topics related to technology companies' roles in the
    financial sector. These include notes on cloud service
    provision, ``BigTech'' financial service provision, and use of
    decentralized financial technologies.\18\ The FSB's 2020 work
    plan includes further work on BigTech service provision in
    emerging markets, a stock-take of financial regulators' and
    supervisors' use of technology, an update to the FSB's crypto-
    asset monitoring framework to incorporate stablecoins, and
    continuance of work underway on the Regulatory Issues of
    Stablecoins (RIS).\19\ The RIS work was mandated by the G20 and
    will examine the regulatory issues of so-called ``stablecoins''
    with the potential to reach a global scale--such as the Libra
    initiative--and will advise on multilateral responses as
    needed. This work picks up from the G7 Working Group on
    Stablecoins 2019 report.\20\ The RIS working group issued a
    consultative document in April and is scheduled to submit a
    final report to the G20 during the third quarter of 2020.
    ---------------------------------------------------------------------------
        \18\ https://www.fsb.org/2019/12/third-party-dependencies-in-cloud-
    services-considerations-on-financial-stability-implications/; https://
    www.fsb.org/2019/12/bigtech-in-finance-market-developments-and-
    potential-financial-stability-implications/; https://www.fsb.org/2019/
    02/fintech-and-market-structure-in-financial-services-market-
    developments-and-potential-financial-stability-implications/; https://
    www.fsb.org/2019/06/decentralised-financial-technologies-report-on-
    financial-stability-regulatory-and-governance-implications/.
        \19\ https://www.fsb.org/wp-content/uploads/P171219.pdf.
        \20\ https://www.bis.org/cpmi/publ/d187.pdf.
    ---------------------------------------------------------------------------
        In addition to contributing to FSB work, Federal Reserve
    staff are also active participants in work on related topics
    being conducted by the Basel Committee on Banking Supervision
    and the Committee on Payments and Market Infrastructures.
        Domestically, Federal Reserve staff from multiple functions
    are following the interaction between banks and technology
    companies, including partnerships and third-party
    relationships, to assess potential consumer protection risks;
    risks to banks' safety and soundness; and financial stability
    risks.
        In 2016, the Federal Reserve created two working groups
    with the task of with monitoring and analyzing financial
    technology (``fintech'') and related emerging technology trends
    and undertaking related market intelligence. These working
    groups also conduct research related to our supervisory and
    payment system responsibilities. Several of the Board's
    divisions now have staff dedicated to policy and research
    around fintech and digital innovations in their respective
    areas of focus.
        The Federal Reserve also coordinates regularly with the
    other Federal banking agencies on innovation-related matters in
    the supervision area. Our Consumer and Community Affairs
    division has convened an interagency fintech discussion forum
    to facilitate information sharing between Federal banking
    regulators on fintech consumer protection and financial
    inclusion issues. The Federal Reserve also engages in
    interagency discussion of fintech-related issues through the
    FFIEC's Task Force on Supervision and its Task Force on
    Consumer Compliance. One current area of focus is the Federal
    banking agencies' existing guidance on controls around
    partnerships and third-party relationships aimed at ensuring
    those activities are conducted in a manner consistent with safe
    and sound banking practices. The Federal Reserve staff are
    reviewing this guidance to determine whether any adjustments or
    clarifications would be helpful to promote responsible
    innovation.
        Additionally, as noted by Chair Powell previously in
    congressional testimony, the Board has set up a
    multidisciplinary working group to analyze risk and policy
    implications of the Libra initiative which would help organize
    Federal Reserve input into the work of the FSB in this area.
    Areas of focus include monetary policy, payment system risks,
    consumer protection, Bank Secrecy Act/Anti-money Laundering
    compliance, and financial stability. The working group also has
    been meeting with other regulators, both domestic and
    international.
        Last, Federal Reserve staff routinely meet with technology
    companies and banks, engaging with these companies to better
    understand how their products work and the associated risks.
    The Federal Reserve held its first in a series of office hour
    sessions with banks and financial technology companies to
    provide two-way learning opportunities for the companies and
    Federal Reserve staff.\21\ Given the impact of the current
    economic stress, future office hour sessions have been
    postponed temporarily.
    ---------------------------------------------------------------------------
        \21\ https://www.federalreserve.gov/newsevents/pressreleases/
    other20191217a.htm.

    Q.21.b. Does the Federal Reserve have the sufficient tools to
    monitor and address these risks under the current regulatory
    ---------------------------------------------------------------------------
    framework?

    A.21.b. The FSB report highlighted a diverse set of potential
    benefits and risks from the provision of financial services by
    large technology firms. The Board has tools to monitor and
    address certain of the identified potential risks, while others
    fall outside of the authorities of the Federal Reserve.
        As a general matter, the Federal Reserve does not directly
    regulate or supervise technology companies. Our regulatory and
    supervisory authority generally focuses on State member banks
    and bank holding companies.
        However, the Federal Reserve does have some authority over
    technology companies that provide certain financial services
    to, or in partnership with, banks we supervise. Of most
    relevance is the Bank Service Company Act, which grants the
    Board (and the other Federal banking agencies) the authority to
    regulate and examine third-party service providers that perform
    certain services for depository institutions we supervise.
    Also, under the Federal Deposit Insurance Act, the Board has
    the enforcement authority to address unsafe and unsound
    practices, violations, and breaches of fiduciary duty by
    depository institutions we supervise and their institution-
    affiliated parties.
        From a broader financial stability perspective, the Federal
    Reserve monitors risks to the financial system and works,
    usually with agencies at home and abroad, to help ensure the
    system supports a healthy economy for U.S. households,
    communities, and businesses. This monitoring includes
    vulnerabilities assessments, extensive research, and
    collaboration with other domestic agencies directly and through
    the Financial Stability Oversight Council (FSOC) to monitor
    risks to financial stability and to undertake supervisory and
    regulatory efforts to mitigate the risks and consequences of
    financial instability.

    Q.22. On the Frequently Asked Questions page regarding the
    proposed FedNow services, it states that additional analysis is
    required to fully evaluate the relevant operational, risk, and
    policy considerations for both the Federal Reserve Banks and
    service participants.
        When does the Fed expect to complete this analysis?

    A.22. This language refers to the expansion of the Fedwire
    Funds Service and National Settlement Service (NSS) hours. The
    Federal Reserve Board (Board) is currently analyzing an
    expansion of operating hours for the National Settlement
    Service (NSS) and the Fedwire Funds Service, up to 24x7x365, to
    support a wide range of payment activities, including liquidity
    management for faster retail payments. As part of its analysis,
    the Board is engaging with industry participants in order to
    understand the industry's specific needs and readiness related
    to expanded hours.
        In addition, the Board intends to publish at least two
    Federal Register notices in order to seek public comment on
    issues related to, and potential approaches for, expanding the
    Fedwire Funds Service and NSS operating hours, and announce its
    progress and any decisions related to expanded hours. The
    timeline for the Board's analysis will depend in part on the
    diversity and complexity of issues that the Board identifies
    during its review. Given the systemic importance of the Fedwire
    Funds Service, any decisions on expanding hours could have
    significant effects on market participants. The Board is
    committed to carefully evaluating the potential benefits,
    risks, and costs of any decision to expand hours of the Fedwire
    Funds Service and NSS.
        As the Board considers expanding operating hours for NSS
    and the Fedwire Funds Service broadly, the Board will continue
    to assess the appropriateness of incremental changes to
    relevant operating hours in response to specific industry
    needs. For example, the Board recently completed analysis of an
    expansion of operating hours for NSS and the Fedwire Funds
    Service in order to allow for a third same-day automated
    clearinghouse (ACH) processing and settlement window. In
    December 2019, the Board announced an expansion of operating
    hours for NSS and the Fedwire Funds Service that will be
    implemented in March 2021 in order to add a third sameday ACH
    processing and settlement window.\22\
    ---------------------------------------------------------------------------
        \22\ See https://www.federalreserve.gov/newsevents/pressreleases/
    other20191223a.htm.
    ---------------------------------------------------------------------------
                                    ------

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

    Q.1.a. This spring, the Office of Management and Budget issued
    a memorandum that for the first time required independent
    regulatory agencies such as yours to submit final rules to the
    Administration before publishing them.
        Has the Federal Reserve submitted its final rules and
    guidance to OMB? If so, which ones?

    A.1.a. Pursuant to the Congressional Review Act (Act), the
    Federal Reserve Board (Board) requests a determination from the
    Office of Information and Regulatory Affairs (OIRA), which is
    within the Office of Management and Budget (OMB), as to whether
    a rule is a major rule for purposes of the Act (i.e., does the
    rule have an $100 million annual effect, or other substantial
    effect, on the economy). We submit these requests to OIRA for
    all final regulations that the Board issues, with the exception
    of regulations that fall within one of the exemptions under the
    Act.
        The Board is currently reviewing OMB's 2019 memorandum on
    compliance with the Act with regard to the suggested procedures
    for submitting rules to OIRA in connection with its major rule
    determinations. We are considering how the 2019 memorandum
    applies to the Board's procedures for submitting rules under
    the Act. More broadly, in consultation with the other Federal
    banking agencies, we continue to assess the scope of
    supervisory guidance documents to send to OIRA and Congress
    under the Act.

    Q.1.b. Did OMB ask you to make changes to any rulemaking?

    A.1.b. With regard to requests submitted to OIRA pursuant to
    the Act, OIRA has not asked the Board to make any changes to
    any rulemakings.

    Q.2. Without the Community Reinvestment Act, the homeownership
    rate in our country, and especially for Latinos and African
    Americans, would be much lower. UnidosUS published a report,
    Latino Homeownership 2007-2017: A Decade of Decline for
    Latinos, which found that that the CRA helped facilitate
    between 15 percent to as much as 35 percent of home loans to
    Latinos. How would proposed changes to CRA close the racial and
    ethnic homeownership gap?

    A.2. As you noted, the Community Reinvestment Act (CRA) is an
    important law that ensures banks help meet the credit needs in
    all of the communities they serve. Throughout the reform
    process, the Federal Reserve has emphasized a set of core
    principles to guide our work and I believe that carrying out
    CRA reform consistent with these principles could help address
    homeownership credit needs for underserved families, including
    for communities of color. For example, any revisions to the CRA
    regulations should reflect the credit needs of local
    communities and work consistently through the business cycle.
    They should be tailored to banks of different sizes and
    business strategies. They should provide greater clarity in
    advance about how activities will be evaluated. They should
    encourage banks to seek opportunities in distressed and
    underserved areas. And they should recognize that the CRA is
    one of several related laws to promote an inclusive financial
    sector.
                                    ------

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

    Q.1. One issue impacting banks in rural areas of my State are
    the limitations Regulation O places on the financial
    institution being able to serve the banking needs of their
    senior leadership. The regulation put in place in the late
    1970s and its $100,000 limitation on extensions of credit to
    executives is most problematic. In most cases, a boat loan and
    an agriculture loan leave an officer in violation of this rule.
    An employee's children could not have all their car loans--or
    credit cards--with the bank that employs them. These banks have
    executive officers who have had to take out loans at other
    financial institutions because they've crossed the threshold,
    which is unfortunate. It is like forcing a Nike employee to
    wear Under Armor to work.
        Because this issue affects so few individuals, it likely
    doesn't get much attention. Where does the Fed stand on
    modernizing this 40-year-old regulation by simply raising the
    threshold from the current $100,000 to $500,000, or an
    increased limit based on percentage of capital held by the
    bank--when inflation alone from the 1970s would place the limit
    well above these suggestions?

    A.1. Regulation O (which implements sections 22(h) and (g) of
    the Federal Reserve Act) is intended to address the potential
    for conflicts of interest and self-dealing by bank executive
    officers. As you know, extensions of credit to executive
    officers of banks are limited because these individuals are in
    a position to have significant influence over the bank's credit
    decisions which can be improperly used to benefit the executive
    officer to the detriment of the bank. There is currently some
    important flexibility to the rule: banks are able to lend to
    executive officers to finance a child's education or to
    purchase or improve a home without limit, and the $100,000
    lending limit only applies to loans for other purposes when the
    loans are not secured by liquid assets. Nonetheless, the
    problems you identify definitely merit our attention.
        The Federal Reserve Board (Board) periodically reviews
    regulations to ensure that regulatory thresholds are set at an
    appropriate amount to support the objective of the rule. The
    Board expects to review Regulation O and as part of that
    review, it will consider whether the applicable threshold for
    extensions of credit to executive officers warrants adjustment.
    Obviously, any proposed change in the threshold would involve
    consultations with the other banking agencies.

    Q.2. According to recent news accounts, the Federal Reserve
    does not plan to join the OCC and the FDIC in issuing a
    proposed rule to modernize CRA.

    Q.2.a. Does the Fed believe that the CRA regulations should be
    updated? If so, how do you plan to proceed?

    A.2.a. It is important to strengthen the Community Reinvestment
    Act (CRA) regulations to help banks better meet the credit
    needs of the local low- and moderate-income communities they
    serve, provide more clarity and consistency in our evaluations
    of banks, and more closely align with changes in the ways
    financial products and services are delivered.
        The Board has shared detailed analysis and proposals with
    our counterparts at the Office of the Comptroller of the
    Currency (OCC) and the Federal Deposit Insurance Corporation
    (FDIC) in an effort to forge a common approach on CRA reform.
    We have spent a lot of time on research and analysis, and we
    are working to determine the best path forward. We continue to
    view a common approach as the best outcome, however, at this
    time, the Board has made no decisions regarding next steps.

    Q.2.b. Do you believe that a consistent, interagency CRA
    regulation is preferable? Since the Fed does not plan to join
    the OCC/FDIC proposal, what is the likelihood that the Fed will
    be able to join its sister agencies in issuing an interagency
    final rule?

    A.2.b. I continue to believe that a strong common set of
    interagency standards is the best outcome. As we work to
    develop a common regulatory approach, all of the agencies will
    benefit from the public comments on the current OCC and FDIC
    notice of public rulemaking.

    Q.3. This Committee is considering legislation that would aim
    at providing some regulatory certainty to banks working with
    cannabis-related companies in the 47 States that have taken
    various steps toward legalization. Would legislation such as
    the SAFE Banking Act be a constructive step toward providing a
    framework for financial institutions to serve companies that
    comply with State cannabis laws?

    A.3. In general, questions about legislative policy are the
    purview of Congress. It is our understanding that the Secure
    and Fair Enforcement Banking Act would provide that a bank that
    offers services to a marijuana-related business in a State that
    has legalized marijuana may not be held liable under Federal
    law solely for providing those services. Such legislation could
    provide financial institutions with some legislative clarity on
    the conflict between Federal and some State laws related to the
    legalization of marijuana. However, other aspects of Federal
    law and State law would likely
    remain in conflict, such as, for example, laws concerning
    certain types of use and distribution of marijuana.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR JONES FROM RANDAL K.
                                QUARLES

    Q.1. The Federal Reserve conducts the Small Business Credit
    Access Survey every year. The Survey shows that many small
    business owners use personal credit cards to pay for business
    expenses. Small businesses have struggled to receive loans from
    traditional institutions and some have turned to online based
    loan servicers to fulfill their financing needs.
        How have small businesses utilized financing from loan
    providers that are exclusively online? Are small businesses
    likely to return to traditional financial institutions after
    successfully receiving financing from internet based
    businesses?

    A.1. As documented in the Federal Reserve Banks' Small Business
    Credit Survey, small business applications to online lenders
    have been increasing over the past few years.\1\ The 2018
    report \2\ found that approximately 14 percent of all employer
    films, or 32 percent of those employer firms that had applied
    for financing over the previous 12 months, applied to at least
    one online lender. These data in the 2018 report demonstrate an
    increase from the data in the 2017 report, which found that
    approximately 10 percent of all employer firms, or 24 percent
    of those employer firms that had applied for credit in the
    previous year, applied to an online lender. This increase may
    reflect a growing awareness among small business owners of the
    existence of online lenders as a potential source of funding.
    ---------------------------------------------------------------------------
        \1\ It is important to note that the Small Business Credit Survey
    is conducted using a convenience sample of small firms rather than a
    random sample.
        \2\ See 2018 Small Business Credit Survey: Rep ort on Employer
    Firms at https://www.newyorkfed.org/smallbusiness/small-business-
    credit-survey-2018.
    ---------------------------------------------------------------------------
        A more detailed analysis of the 2018 Small Business Survey
    data with respect to use of online lenders is provided in a
    report published by the Federal Reserve Bank of Cleveland.\3\
    ---------------------------------------------------------------------------
        \3\ See Click, Submit 2.0: An Update on Online Lender Applicants
    from the Small Business Credit Survey at https://www.clevelandfed.org/
    en/community-development/reports-by-topic/small-business.aspx.
    ---------------------------------------------------------------------------
        Nearly two-thirds of small businesses that applied to an
    online lender during the previous year also applied for credit
    from a traditional lender during the same period. Small
    businesses that applied to online lenders differ from those
    that applied only to traditional lenders along several
    dimensions. Businesses that applied to online lenders tended to
    be younger (but at least 3 years old), smaller with regard to
    both revenue and number of employees, less profitable, and
    riskier (as measured by self-reported credit scores) than small
    businesses that applied only to traditional lenders. Businesses
    seeking funding from online lenders were much more likely than
    those applying only to traditional lenders to report that they
    sought funds to cover operating expenses.
        Applicants with medium- or high-credit risk were more
    likely to have their applications approved by online lenders
    than by small banks or large banks. Survey respondents reported
    that the most important factors leading them to apply for loans
    from online lenders were the speed with which they would be
    provided a decision regarding their application or would
    receive funding, the probability of obtaining funding, and the
    absence of a collateral requirement.
        We do not have data to respond to the question of whether
    small businesses that receive loans from online lenders are
    likely to subsequently apply for loans from traditional
    financial institutions.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JELENA
                               McWILLIAMS

    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from May 15, 2019, to present.

    A.1. The FDIC Chairman's official calendar is available through
    the FDIC's website and is updated on a periodic basis. It can
    be viewed at https://www.fdic.gov/about/freedom/chairmansched
    ule.html.

    Q.2. Recently, the FDIC approved the merger of BB&T and
    SunTrust--two institutions with a significant overlapping
    branch footprint. In November 2019, the Federal Reserve issued
    a report on bank branch access in rural communities.\1\ The
    report found that most rural counties experienced a significant
    decline in bank branches between 2012 and 2017, but small
    businesses and certain consumers prefer using local banks and
    cannot find comparable financial products and services
    elsewhere.
    ---------------------------------------------------------------------------
        \1\ https://www.federalreserve.gov/publications/files/bank-branch-
    access-in-rural-communities.pdf.
    ---------------------------------------------------------------------------
        The FDIC's Order and Basis for Corporation Approval of the
    merger states that the bank did not identify specific branches
    that would be closed or consolidated as a consequence of the
    merger, but have committed that Truist Bank would not have any
    merger-related branch closures for one year and would not have
    any merger-related branch closures in rural areas with
    populations under 2,500 for three years following consummation
    of the merger. How does the FDIC plan to enforce this
    commitment? Will the FDIC reject any application to close a
    branch submitted by Truist Bank under these parameters? In
    addition, please provide a list of the rural areas with
    populations under 2,500 described in the Order.

    A.2. In evaluating any merger, section 18(c)(5) of the Bank
    Merger Act (BMA) directs the FDIC to consider the convenience
    and needs of the community to be served. In addition, the
    Community Reinvestment Act (CRA) requires the FDIC to take into
    account the CRA records of the institutions involved in the
    transaction.
        The FDIC found that Truist Bank's (Truist) ability to meet
    the convenience and needs of the community to be served
    supported approval of the application. This finding was
    informed by, among other things, Truist's commitment to not
    pursue any merger-related branch closures for one year and to
    not pursue any merger-related branch closures in rural areas
    with populations under 2,500 for three years following
    consummation of the merger.
        The FDIC has an inventory of Truist branches located in
    such rural communities (attached), which will enable the FDIC
    to monitor the continued operation of these branches over the
    next three years as part of the FDIC's continuous examination
    program.\2\ A failure to satisfy commitments made to the FDIC
    in connection with an application could give rise to adverse
    findings made in the examination process. In addition, as
    described below, the FDIC may make adverse findings and/or take
    appropriate enforcement action against an FDIC-supervised
    institution for failing to comply with the branch closing
    notice requirements of section 42 of the Federal Deposit
    Insurance Act (FDI Act).
    ---------------------------------------------------------------------------
        \2\  See Appendix A: Response to Question 2 from Ranking Member
    Sherrod Brown.
    ---------------------------------------------------------------------------
        Insured depository institutions (IDIs) must provide notice
    of proposed branch closings to customers and the appropriate
    Federal banking agency, but such closings are not subject to
    application requirements or regulatory approval. Section 42 of
    the FDI Act requires IDIs to give written notice to customers
    and the appropriate Federal banking agency no later than 90
    days prior to the date of the proposed branch closing.\3\
    ---------------------------------------------------------------------------
        \3\ 12 U.S.C.  1831r-1(a)-(b). IDIs must also post a notice on the
    premises of a branch proposed to be closed for a period of at least 30
    days prior to the proposed closing. 12 U.S.C.  1831r-1(b)(2)(A).
    ---------------------------------------------------------------------------
        Section 42 imposes additional notice requirements on
    interstate banks that propose to close any branch in a low- or
    moderate-income (LMI) area, and, under certain circumstances,
    authorizes the appropriate Federal banking agency to take
    action to convene a meeting of stakeholders in the affected
    area.\4\ However, section 42 clarifies that such action may not
    affect the authority of the bank to close the branch so long as
    the notice requirements of section 42 are satisfied.\5\ The
    FDIC is the primary Federal regulator for Truist and, as such,
    will ensure through its examination and supervisory processes
    that Truist satisfies the notice requirements of section 42,
    consistent with the Interagency Policy Statement Concerning
    Branch Closing Notices and Policies (Policy Statement).\6\ As
    noted above, the FDIC may make adverse findings and/or take
    appropriate enforcement action against an FDIC-supervised
    institution for its failure to comply with the requirements of
    section 42.
    ---------------------------------------------------------------------------
        \4\ 12 U.S.C.  1831r-1(d).
        \5\ 12 U.S.C.  1831r-1(d)(3).
        \6\ See Branch Closings, 64 Fed. Reg. 34845 (June 29, 1999),
    available at https://www.govinfo.gov/content/pkg/FR-1999-06-29/pdf/99-
    16471.pdf.
    ---------------------------------------------------------------------------
        Consistent with the Policy Statement, the FDIC will examine
    Truist for compliance with section 42 to determine whether it
    has adopted a branch closing policy and whether it has provided
    the required notices in connection with any applicable branch
    closings. In this regard the FDIC will examine Truist for
    compliance with section 42 just as it would with respect to any
    of its supervised institutions. As appropriate, the FDIC will
    take action to convene stakeholder meetings in connection with
    the proposed closings of branches in LMI areas in response to
    requests made in accordance with section 42.

    Q.3. The FDIC's proposed rule on Federal Interest Rate
    Authority states that it is not based on the claimed common law
    ``valid-when-made'' doctrine, merely consistent with it.\7\ In
    Director McWilliams' December 4, 2019, testimony before the
    House Financial Services Committee, however, she stated that
    the proposed rule is just codifying ``long-standing
    principles.'' What long-standing principles is the FDIC
    codifying if the proposed rule is not based on ``valid-when-
    made'' doctrine?
    ---------------------------------------------------------------------------
        \7\ 84 Fed. Reg. 66845, 66848 (Dec. 6, 2019).

    A.3. On December 6, 2019, the FDIC published a notice of
    proposed rulemaking that would clarify the law governing the
    interest rates State banks may charge,\8\ which Congress put in
    place for FDIC-regulated institutions in 1980.\9\ This
    provision of the FDI Act has been interpreted in two published
    opinions of the FDIC's General Counsel in 1998.\10\ The
    proposed rule would codify the guidance provided in those
    published opinions, which has been in effect for over 20 years.
    The proposal would provide that whether interest on a loan is
    permissible under section 27 of the FDI Act would be determined
    at the time the loan is made, and interest on a loan
    permissible under section 27 would not be affected by
    subsequent events, such as a change in State law, a change in
    the relevant commercial paper rate, or the sale, assignment, or
    other transfer of the loan. In addition, the proposed rule is
    consistent with the common law ``valid when made'' doctrine
    (i.e., usury must exist at the inception of the loan for a loan
    to be deemed usurious), which the Supreme Court has recognized
    for nearly 200 years.\11\
    ---------------------------------------------------------------------------
        \8\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
    6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
    06/pdf/2019-25689.pdf.
        \9\ See Section 2[27(b)] of the Act of September 21, 1950 (Pub. L.
    No. 81-797), effective September 21, 1950, as added by section 521 of
    title V of the Act of March 31, 1980 (Pub. L. No. 96-221; 94 Stat.
    164), effective March 31, 1980, provides that ``[i]in order to prevent
    discrimination against State-chartered insured depository institutions,
    including insured savings banks, or insured branches of foreign banks
    with respect to interest rates, if the applicable rate prescribed in
    this subsection exceeds the rate such State bank or insured branch of a
    foreign bank would be permitted to charge in the absence of this
    subsection, such State bank or such insured branch of a foreign bank
    may, notwithstanding any State constitution or statute which is hereby
    preempted for the purposes of this section, take, receive, reserve, and
    charge on any loan or discount made, or upon any note, bill of
    exchange, or other evidence of debt, interest at a rate of not more
    than 1 per centum in excess of the discount rate on 90-day commercial
    paper in effect at the Federal Reserve bank in the Federal Reserve
    district where such State bank or such insured branch of a foreign bank
    is located or at the rate allowed by the laws of the State, territory,
    or district where the bank is located, whichever may be greater.''
        \10\ See FDIC General Counsel's Opinion No. 10, 63 Fed. Reg. 19258
    (Apr. 17, 1998); FDIC General Counsel's Opinion No. 11, 63 Fed. Reg.
    27282 (May 18, 1998).
        \11\ See Nichols v. Fearson, 32 U.S. (7. Pet.) 103, 109 (1833) (``a
    contract, which in its inception, is unaffected by usury, can never be
    invalidated by any subsequent usurious transaction''); see also Gaither
    v. Farmers & Merchants Bank of Georgetown, 26 U.S. 37, 43 (1828)
    (``[T]he rule cannot be doubted, that if the note free from usury, in
    its origin, no subsequent usurious transactions respecting it, can
    affect it with the taint of usury.'')

    Q.4. On November 19, 2019, the FDIC announced a new rule on
    Federal Interest Rate Authority to ``clarify the Federal law
    governing interest rates State-chartered banks may charge their
    customers.''\12\ As justification for the proposed rule, the
    FDIC claims it is necessary because of ``uncertainty'' created
    by the Second Circuit's decision in Madden v. Midland Funding,
    LLC, 786 F.3d 246 (2d Cir. 2015).\13\ The proposed rule,
    however, only discusses potential impact of ``uncertainty''
    does not establish that there has been any actual impact. For
    example, the FDIC claims in the proposed rule that
    ``uncertainty regarding the enforceability of interest rate
    terms may hinder or frustrate loan sales, which are crucial to
    the safety and soundness of State banks'' and ``uncertainty has
    the potential to chill State banks' willingness to make the
    types of loans affected by the proposed rule.''\14\
    ---------------------------------------------------------------------------
        \12\ https://www.fdic.gov/news/news/press/2019/pr19107.html.
        \13\ https://www.fdic.gov/news/board/2019/2019-11-19-notice-dis-c-
    fr.pdf.
        \14\ 84 Fed. Reg. 66845, 66850 (Dec. 6, 2019).

    Q.4.a. Does the FDIC have any quantifiable evidence of actual
    uncertainty resulting from the Second Circuit's decision in
    ---------------------------------------------------------------------------
    Madden? If so, please provide that evidence.

    Q.4.b. Does the FDIC have any quantifiable evidence of actual
    impact--positive or negative--resulting from the Second
    Circuit's decision in Madden? If so, please provide that
    evidence.

    A.4.a.-b. The preamble explained that an important benefit of
    the proposed rule is to uphold long-standing principles
    regarding the ability of banks to sell loans, an ability that
    has significant safety-and-soundness implications, and included
    an extensive discussion of the FDIC's legal reasoning. Further,
    one way the FDIC fulfills its mission to maintain stability and
    public confidence in the Nation's financial system is by
    carrying out all of the tasks triggered by the closure of an
    FDIC-insured institution. This includes attempting to find a
    purchaser for the institution and the liquidation of the assets
    held by the failed banks.
        As it stands, the Madden decision could significantly
    impact the losses to the Deposit Insurance Fund (DIF) in a
    failed bank resolution and disposition of assets. Following a
    bank closure, the FDIC as Conservator or Receiver (FDIC-R) is
    often left with large portfolios of loans. The FDIC-R has a
    statutory obligation to maximize the net present value return
    from the sale or disposition of such assets and minimize the
    amount of any loss, both in order to protect the DIF.\15\
    ---------------------------------------------------------------------------
        \15\ Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1821(d).
    ---------------------------------------------------------------------------
        The DIF would be significantly impacted in a large bank
    failure scenario if the FDIC-R were forced to sell loans at a
    large discount to account for impairment in the value of those
    loans as a result of legal uncertainty. This uncertainty would
    also increase legal and business risks to potential purchasers
    of bank loans, which in turn would likely reduce overall
    liquidity in loan markets, further limiting the ability of the
    FDIC-R to sell loans.
        The proposal also discusses concerns of market observers
    and ratings agencies regarding the liquidity and marketability
    of certain types of bank loans, and noted published research on
    potential effects on credit availability in the Second
    District.\16\ The comment period closed on February 4, 2020,
    and the FDIC has received
    numerous comments expressing concerns about the potential
    effects on financial markets and concerns regarding
    availability of credit for high-risk consumers.
    ---------------------------------------------------------------------------
        \16\ See Michael Marvin, ``Interest Exportation and Preemption:
    Madden's Impact on National Banks, the Secondary Credit Market, and P2P
    Lending,'' Columbia Law Review, Vol. 116 (January 15, 2016), available
    at https://ssrn.com/abstract=2753899 (focusing on the potentially
    deleterious effects of Madden on credit availability and the pricing of
    instruments tied to debt originated by a national bank in the secondary
    credit market); see also Colleen Honigsberg, Robert J. Jackson Jr., and
    Richard Squire, ``How Does Legal Enforceability Affect Consumer
    Lending? Evidence from a Natural Experiment,'' The Journal of Law and
    Economics 60, number four (November 2017): 673-712, available at
    https://www.journals.uchicago.edu/doi/abs/10.1086/695808, (finding that
    the decision in Madden not only reduced credit availability for higher-
    risk borrowers in the Second Circuit's jurisdiction, but affected the
    pricing of certain notes in the secondary market); see also Piotr
    Danisewicz and Ilaf Elard, ``The Real Effects of Financial Technology:
    Marketplace Lending and Personal Bankruptcy,'' July 5, 2018, available
    at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3208908 (finding
    that Madden led to an increase in bankruptcy rates arising
    predominately from changes in marketplace lending).

    Q.5. You have stated that FDIC takes an ``unfavorable'' view of
    predatory rent-a-bank arrangements. If so, why has the FDIC
    failed to take action against Republic Bank and FinWise Bank
    for their rent-a-bank arrangements with Elevate Financial, and
    Bank of Lake Mills, Wisconsin, for its rent-a-bank arrangement
    ---------------------------------------------------------------------------
    with World Business Lenders, LLC?

    Q.6. What is the FDIC's position on bank partnership
    transactions that are primarily designed to enable nonbanks to
    originate or purchase loans at interest rates that are illegal
    under State usury laws and which they could not have made
    themselves?

    A.5.-A.6. The proposed rule affirms that the FDIC views
    unfavorably entities that partner with a State bank with the
    sole goal of evading a lower interest rate established under
    the law of the entity's licensing State(s). Although I am
    unable to address any confidential supervisory information or
    provide institution-specific information, I would note that the
    FDIC issued a public enforcement action \17\ in October 2018
    against Republic Bank & Trust Company for failing to clearly
    and conspicuously disclose required information related to the
    bank's Elastic line of credit product offered pursuant to a
    contract with Elevate@Work, L.L.C. The FDIC will continue to
    examine supervised institutions for compliance with all
    applicable laws and regulations.
    ---------------------------------------------------------------------------
        \17\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
    (November 30, 2018) available at https://www.fdic.gov/news/news/press/
    2018/pr18089.html.
    ---------------------------------------------------------------------------
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JELENA
                               McWILLIAMS

    Q.1. As members of the Financial Stability Oversight Council
    (FSOC), I would like to express my gratitude for FSOC's
    finalization of its revised interpretive guidance on nonbank
    financial company designations. As the lead sponsor of the
    Financial Stability Oversight Council Improvement Act of 2019,
    I am well aware of the need to reform the process for
    designating financial institutions as systemically important
    financial institutions (SIFIs). Although no revised guidance or
    regulation can take the place of reforming the ill-conceived
    designation process that came about as a result of Dodd-Frank,
    I am nonetheless grateful that FSOC has taken a step to this
    end.

       LThe Financial Stability Oversight Council
            Improvement Act of 2019 shares many goals with the
            guidance. Can you expand on why you chose to prioritize
            an activities-based approach?

    A.1. On December 30, 2019, the FSOC issued its final
    interpretive guidance on nonbank financial company
    designations, which describes the approach the Council intends
    to take in prioritizing its work to identify and address
    potential risks to U.S. financial stability using an
    activities-based approach.\1\ This approach reflects two
    priorities: (1) identifying and addressing potential risks and
    emerging threats on a system-wide basis, thereby reducing the
    potential for competitive distortions among financial companies
    and in markets that could arise from entity-specific
    determinations; and (2) allowing relevant financial regulatory
    agencies, which generally possess greater information and
    expertise with respect to company, product, and market risks,
    to address potential risks. The FSOC expects that, in many
    cases, relevant financial regulatory agencies will have
    authority to address risks identified by the Council under the
    activities-based approach.
    ---------------------------------------------------------------------------
        \1\ See Authority to Require Supervision and Regulation of Certain
    Nonbank Financial Companies, 84 Fed. Reg. 71740 (Dec. 30, 2019),
    available at https://www.govinfo.gov/content/pkg/FR-2019-12-30/pdf/
    2019-27108.pdf.

    Q.2. As one of the original sponsors of the Improving
    Laundering Laws and Increasing Comprehensive Information
    Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH)
    Act, I am well aware of the pitfalls associated with our
    current anti-money laundering systems as well as the challenges
    that financial services institutions have in complying with
    current antimoney laundering rules and regulations.
        Financial institutions trying to understand and comply with
    our existing anti-money laundering rules frequently rely on the
    Federal Financial Institutions Examination Council's (FFIEC)
    Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Examination
    Manual. This manual was last updated in November 2014, before
    substantial changes like the finalization of the Customer Due
    Diligence Rule.

    Q.2.a. When will the manual be updated to reflect changes made
    after November 2014?

    A.2.a. The FFIEC released the Customer Due Diligence (CDD) and
    Beneficial Ownership sections of the Bank Secrecy Act (BSA)/
    Anti-Money Laundering (AML) Examination Manual (Manual) on May
    11, 2018.\2\ These updates to the Manual were released in
    conjunction with the compliance date for the CDD and Beneficial
    Ownership rules to promote transparency in the examination
    process.
    ---------------------------------------------------------------------------
        \2\ See FFIEC, ``FFIEC Issues New Customer Due Diligence and
    Beneficial Ownership Examination Procedures'' (May 11, 2018), available
    at https://www.ffiec.gov/press/pr051118.htm.
    ---------------------------------------------------------------------------
        Currently, the FFIEC plans to release several updated
    sections and related examination procedures to the Manual
    during the second quarter of 2020. The revised sections will
    provide instructions to examiners for assessing banks' BSA/AML
    compliance programs as well as the risk assessment process. The
    Federal banking agencies, State banking representatives, FinCEN
    and the Office of Foreign Assets Control (OFAC) continue to
    review and revise the remaining sections of the Manual.

    Q.2.b. In future updates, how will the manual promote
    consistency among each of the regulatory agencies that are
    members of the FFIEC?

    A.2.b. The development of the Manual is a collaborative effort
    of the Federal and State banking agencies to ensure consistency
    in the assessment of banks' compliance with and application of
    the BSA/AML requirements. The FFIEC member entities are
    responsible for maintaining current instructions for examiners
    and accomplishing that objective through the Manual. Updates
    are completed in collaboration with FinCEN, the administrator
    of the BSA, and OFAC. FinCEN and OFAC contribute directly to
    the sections that address compliance with the regulations and
    sanctions programs that FinCEN and OFAC administer and enforce.

    Q.3. When Congress gave the Federal Deposit Insurance
    Corporation (FDIC) the ability to regulate brokered deposits
    with the
    enactment of the Financial Institutions Reform, Recovery, and
    Enforcement Act of 1989 (FIRREA), there was concern about
    brokers moving significant amounts of unstable deposits or
    ``hot money'' from bank to bank. One key exception in FIRREA
    excludes certain categories of deposits like prepaid accounts
    from the definition of brokered deposit.
        Prepaid accounts in particular were rightfully excluded
    from the definition of brokered deposit until 2015 when the
    FDIC released its Frequently Asked Questions on Brokered
    Deposits (FAQs). The FAQs, which were written prior to your
    assumption of the duties of Chairman of the FDIC, disrupted
    nearly 30 years of established policy regarding the treatment
    of brokered deposits. More specifically, the FAQs' findings
    that prepaid deposits are generally brokered, and the increased
    supervisory and deposit insurance thresholds inherent therein,
    are burdensome and will have the effect of both stifling
    innovation and limiting consumer access to these financial
    products.

    Q.3.a. Under the FDIC's forthcoming brokered deposits rule,
    will a prepaid provider, fintech, or digital bank that partners
    with a traditional financial institution to accept deposits be
    considered a broker because of how they reach consumers? With
    the pace of innovation disrupting traditional methods of
    banking, many entrepreneurs partner with traditional financial
    institutions to expand the reach of new products and services.

    Q.3.b. Lack of clarity with respect to the ``primary purpose
    exception'' could result in an unacceptable outcome in which
    any third-party relationship that results in a deposit could be
    considered brokered. This unintended outcome is particularly
    problematic because many innovative fintech products are
    structured in a similar fashion or built on similar
    technologies. That could, in turn, result in classifying
    practically all payment solutions not issued directly by a bank
    as brokered deposits.

       LAre deposits into regulated prepaid accounts
            through mobile wallets brokered deposits under the
            FDIC's current definition?

       LWill that change with the forthcoming rule on
            brokered deposits?

    Q.3.c. As you're aware, according to the FDIC's latest National
    Survey of Unbanked and Underbanked Households, 6.5% of American
    households or about 8.4 million total households are totally
    unbanked while an additional 18.7% of American households or
    24.2 million total households are underbanked. An overly broad
    definition of brokered deposits, particularly as it applies to
    prepaid accounts, will cause depository institutions to stop
    offering these products to millions of low-income consumers who
    find them to be helpful tools with which to manage their day-
    to-day banking needs.

       LHow will the FDIC mitigate these concerns in its
            forthcoming proposal?

    A.3.a.-A.3.c. On December 12, 2019, the FDIC approved a notice
    of proposed rulemaking (NPR)\3\ that would modernize its
    brokered deposit regulations. Among the goals of this
    rulemaking process are to (1) develop a framework that
    encourages innovation, and (2) provide more clarity and
    consistency in what is and what is not a brokered deposit.\4\
    The accessibility of banking services to unbanked and
    underbanked populations is a key motivation of the proposal.
    ---------------------------------------------------------------------------
        \3\ See Unsafe and Unsound Practices: Brokered Deposits
    Restrictions, 85 Fed. Reg. 7453 (Feb. 10, 2020), available at https://
    www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2019-282
    75.pdf.
        \4\ See FDIC Chairman Jelena McWilliams, ``Brokered Deposits in the
    Fintech Age,'' speech before the Brookings Institution (Dec. 11, 2019),
    available at https://www.fdic.gov/news/news/speeches/spdec1119.html.
    ---------------------------------------------------------------------------
        Under the NPR, a prepaid provider, fintech, or digital bank
    that partners with an insured depository institution will not
    be considered a deposit broker if (1) the third-party entity is
    not engaged in the business of placing deposits or engaged in
    the business of facilitating the placement of deposits, based
    on the criteria laid out in the proposal, or (2) the third-
    party entity satisfies one of the exceptions to the deposit
    broker definition, one of which is the primary purpose
    exception. The NPR proposes a new interpretation of the primary
    purpose exception that focuses on the business relationship
    between the third-party entity and its customers. In addition,
    in the NPR, the FDIC proposes that certain business
    relationships, including those in which a third-party places
    funds into transactional accounts to enable payments, would be
    deemed to meet the primary purpose exception (subject to
    certain criteria and an application process). My staff would be
    happy to discuss the proposal in further detail, and we look
    forward to receiving robust comments on the proposal.

    Q.4. When does the FDIC intend to finalize its insured
    depository institution resolution planning rule? The lack of
    clarity about when the rule is to be finalized is problematic
    given that many institutions have been left wondering whether
    or not resolution plans will be required in 2020. The FDIC's
    finalization of this rule in early 2020 would leave
    institutions that are required to submit resolution plans with
    only a short amount of time to prepare.

    A.4. On April 22, 2019, the FDIC issued an advance notice of
    proposed rulemaking (ANPR) seeking comment on potential changes
    to the resolution planning rule for IDIs.\5\ The next step is
    to issue a notice of proposed rulemaking (NPR). Following the
    issuance of the NPR, the FDIC will provide a period of time for
    the public to comment, and then the FDIC will review comments
    prior to issuing a final rule. In connection with approving the
    ANPR last year, the FDIC Board voted to delay the next IDI
    resolution plans until the rulemaking process is completed.
    Once a final rule is issued, the FDIC will ensure that firms
    have adequate time to prepare and submit any required
    resolution plans.
    ---------------------------------------------------------------------------
        \5\ See Resolution Plans Required for Insured Depository
    Institutions With $50 Billion or More in Total Assets, 84 Fed. Reg.
    16620 (Apr. 22, 2019), available at https://www.govinfo.gov/content/
    pkg/FR-2019-04-22/pdf/2019-08077.pdf.

    Q.5. I've taken note of legislation introduced in the House
    that would preempt State legislation and impose price controls
    on virtually all types of consumer credit, from small dollar
    loans to revolving credit. This would represent an unacceptable
    expansion of Government control into the financial services
    sector that could prevent consumers from obtaining the types of
    products they need to establish, build, or re-build credit--
    including the credit card that you mentioned obtaining when you
    were a newly arrived immigrant in the United States.
        While I empathize with the sponsors of the House
    legislation in wanting to promote consumers' access to credit
    products that are affordable, I'm concerned that the
    legislation being contemplated could do the exact opposite and
    hurt the already underbanked and unbanked. My concern is driven
    particularly by a test program the FDIC ran in 2008 that
    studied the ability for banks to offer small dollar loans with
    a 36% interest rate cap. Unfortunately, banks that participated
    in the test found that such loans were unprofitable and thus
    unsustainable.

       LIs capping interest rates a good idea?

       LWhat are the consequences of the caps contemplated
            by the legislation I've referenced?

    A.5. I defer to Congress on whether legislation should be
    adopted to address this matter. The FDIC is looking for ways to
    encourage banks to meet consumers' small-dollar credit needs in
    a manner that makes sense for both the bank and the consumer.
    The FDIC issued a request for information \6\ in November 2018
    to learn more about small-dollar credit needs. We received more
    than 60 comment letters, including a response \7\ from former
    FDIC Chairman Sheila Bair noting that the FDIC's two-year pilot
    program on small-dollar lending in 2008-2009 showed that
    ``flexibility on pricing is necessary'' for short-term, small-
    dollar loans and that rates above 36% ``may be necessary for
    loans of just a few hundred dollars to stimulate more
    competition.'' We are reviewing our existing guidance and
    considering steps to address this issue in a manner that does
    not limit credit availability for borrowers.
    ---------------------------------------------------------------------------
        \6\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
    58566 (Nov. 20, 2018), available https://www.govinfo.gov/content/pkg/
    FR-2018-11-20/pdf/2018-25257.pdf.
        \7\ https://www.fdic.gov/regulations/laws/federal/2018/2018-small-
    dollar-lending-3064-za04-c-049.pdf

    Q.6. Following up on my previous question, I understand the
    FDIC is participating in a forthcoming rulemaking on small-
    dollar lending. It's encouraging to see our regulators taking a
    proactive approach to extending credit to underserved
    ---------------------------------------------------------------------------
    consumers.

       LWhen will your joint rule be proposed?

       LWill it include a recession of the FDIC's guidance
            on small dollar loans that was issued in 2013?

    A.6. According to the FDIC's unbanked and underbanked study,
    over 20 million households in America are underbanked and over
    8 million are unbanked.\8\ While some banks offer small-dollar
    lending to help those in need, many banks have chosen not to
    offer such products, in part, due to regulatory uncertainty \9\
    As a result, many families rely on nonbank providers to cover
    these emergency expenses, or their needs go unmet. To solicit
    feedback on these products and consumer needs, the FDIC issued
    a request for information \10\ in November 2018 to learn more
    about small-dollar credit needs and concerns. We have reviewed
    more than 60 comments and are reviewing our existing policies,
    including the 2013 guidance on deposit advance products. On
    March 26, 2020, the FDIC, OCC, FRB, NCUA, and CFPB issued a
    statement to encourage financial institutions to offer
    responsible small-dollar loans to consumers and small
    businesses.\11\ We continue working closely with the other bank
    regulatory agencies to coordinate policies and plan to take
    additional action in this area in the near future.
    ---------------------------------------------------------------------------
        \8\ See 2017 FDIC National Survey of Unbanked and Underbanked
    Households, available at https://www.fdic.gov/householdsurvey/2017/
    2017report.pdf. A household is classified as un
    banked if no one in the household has a checking or savings account. A
    household is classified as underbanked if it has a checking or savings
    account and used one of the following products or services from an
    alternative financial services provider in the past 12 months: money
    orders, check cashing, international remittances, payday loans, refund
    anticipation services, rent-to-own services, pawn shop loans, or auto
    title loans.
        \9\ The FDIC, FRB, and OCC have taken separate approaches to small-
    dollar lending at the institutions they regulate. See FDIC Issues Final
    Guidance Regarding Deposit Advance Products (Nov. 21, 2013), available
    at https://www.fdic.gov/news/news/press/2013/pr13105.html; FDIC FIL-50-
    2007, Affordable Small-Dollar Loan Guidelines (June 19, 2007),
    available at: https://www.fdic.gov/news/news/financial/2007/
    fil07050.pdf; OCC Bulletin 2018-14, Core Lending Principles for Short-
    Term, Small-Dollar, Installment Lending (May 23, 2018), available at:
    https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-
    14.html; Federal Reserve Statement on Deposit Advance Products (April
    25, 2013), available at: https://www.federal-
    reserve.gov/supervisionreg/caletters/caltr1307.htm.
        \10\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
    58566 (Nov. 20, 2018), available https://www.govinfo.gov/content/pkg/
    FR-2018-11-20/pdf/2018-25257.pdf.
        \11\ See FDIC FIL-26-2020, Statement Encouraging Responsible Small-
    Dollar Lending to Consumers and Small Businesses in Response to COVID-
    19 (March 26, 2020), available at: https://www.fdic.gov/news/news/
    financial/2020/fil20026.pdf.

    Q.7. South Dakotans have been closely monitoring developments
    in Madden v. Midland, including the recently released proposed
    rules from the FDIC and OCC that would provide additional
    certainty surrounding the valid-when-made doctrine. Critics of
    your proposal claim that it could serve as a vehicle for
    ---------------------------------------------------------------------------
    nonbanks to evade State interest rate caps.

       LHas the FDIC discussed this scenario in the past?
            If so, what was the outcome?

       LDoes the FDIC have the legal authority necessary to
            prevent this from occurring?

    A.7. The proposed rule affirms that the FDIC views unfavorably
    entities that partner with a State bank with the sole goal of
    evading a lower interest rate established under the law of the
    entity's licensing State(s). Although I am unable to address
    any confidential supervisory information or provide
    institution-specific information, I would note that the FDIC
    issued a public enforcement action \12\ in October 2018 against
    Republic Bank & Trust Company for failing to clearly and
    conspicuously disclose required information related to the
    bank's Elastic line of credit product offered pursuant to a
    contract with Elevate@Work, L.L.C. The FDIC will continue to
    examine supervised institutions for compliance with all
    applicable laws and regulations.
    ---------------------------------------------------------------------------
        \12\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
    (November 30, 2018) available at https://www.fdic.gov/news/news/press/
    2018/pr18089.html.
    ---------------------------------------------------------------------------
                                    ------

      RESPONSE TO WRITTEN QUESTION OF SENATOR TILLIS FROM JELENA
                               McWILLIAMS

    Q.1. Thank you for your ongoing study of the FDIC-brokered
    deposit rules. As you continue to consider amendments to how
    these rules impact brokerage cash sweeps, can you comment on
    establishing a level playing field between broker-dealers
    affiliated with banks and brokerage firms without bank
    affiliates? Will these brokerage sweeps receive equal treatment
    under any future rule?

    A.1. On December 12, 2019, the FDIC issued a notice of proposed
    rulemaking \1\ that would modernize its brokered deposit
    regulations. The proposal does not differentiate between third
    parties that offer cash sweep accounts that are affiliated with
    banks and third parties that offer cash sweep accounts that are
    not affiliated with banks. An entity that applied for a primary
    purpose exception would be analyzed based on the same criteria
    regardless of whether or not the entity is affiliated with a
    bank.
    ---------------------------------------------------------------------------
        \1\See Unsafe and Unsound Practices: Brokered Deposits
    Restrictions, 85 Fed. Reg. 7453 (Feb. 10, 2020), available at https://
    www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2019-282
    75.pdf.
    ---------------------------------------------------------------------------
        The FDIC looks forward to receiving comments on the
    proposal and finalizing the rule.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JELENA
                               McWILLIAMS

    Q.1. In response to my question you noted that the FDIC
    regulates banks the same way it regulates ILCs. From the FDIC
    perspective that may be accurate, but ILCs are not subject to
    regulation or supervision at the parent holding company level.
    ILCs may be owned by a nonfinancial company not subject to the
    BHC Act, which introduces important policy questions. In
    particular, the lack of capital and liquidity standards at the
    holding company, no real requirements that the holding company
    act as a source of strength to the ILC, no ongoing supervision
    or regulation, and no other prudential and risk management
    standards applied to the holding company can really expose the
    financial system and Deposit Insurance Fund to risk.

      a. LAside from what the FDIC does, what potential concerns do
            these regulatory gaps present?

      b. LDo you view any risks to approving ILCs that do not have
            a nexus to the financial services industry?

      c. LHow does the FDIC plan to address or mitigate these risks
            as it considers what we understand to be a high volume
            of interest in potentially applying for an ILC charter?

      d. LWhat is the FDIC's plan to ensure that ILC charter
            applicants have robust data protection and privacy
            standards akin to the ones that bank holding companies
            are subject to?

      e. LWhat kind of governance requirements will the FDIC impose
            on ILC applicants for proper cyber security processes,
            protocols and controls?

      f. LWhat risks do commercial firms pose to the Deposit
            Insurance Fund?

      g. LDoes the FDIC have sufficient personnel to supervise a
            potentially large platform technology firm with
            international operations?

      h. LHow would the FDIC work with the State regulators or
            other regulators to address potential consumer risks?

    A.1. Industrial loan companies (ILCs) and Industrial Banks are
    State-chartered, FDIC-supervised financial institutions that
    can be owned by financial or commercial firms.\1\ Congress
    authorized Federal deposit insurance for ILCs and Industrial
    Banks in 1982,\2\ and exempted ILCs and Industrial Banks from
    the definition of ``bank'' under the Bank Holding Company Act
    (BHCA) in 1987.\3\ As of December 31, 2019, there were 23 ILCs
    and Industrial Banks with approximately $141 billion in
    aggregate total assets. These ILCs and Industrial Banks are
    subject to the same FDIC statutory standards as other insured
    depository institutions (IDIs) for which the FDIC is the
    primary supervisor.
    ---------------------------------------------------------------------------
        \1\ See FDIC Supervisory Insights, Supervision of Industrial Loan
    Companies (Summer 2004), available at https://www.fdic.gov/regulations/
    examinations/supervisory/insights/sisum04/sisu
    m04.pdf.
        \2\ See Garn-St Germain Depository Institutions Act of 1982, Pub.
    L. No. 97-320, 96 Stat. 1469 (1982).
        \3\ See Competitive Equality Banking Act of 1987, Pub. L. No. 100-
    86, 101 Stat. 552 (Aug. 10, 1987).
    ---------------------------------------------------------------------------
        In determining whether to grant deposit insurance to an ILC
    or Industrial Bank, the FDIC must consider the same statutory
    factors under section 6 of the Federal Deposit Insurance Act
    (FDI Act)\4\ that it considers for all other applications for
    deposit insurance, including traditional banks: (1) the
    financial history and condition of the depository institution;
    (2) the adequacy of its capital structure; (3) future earnings
    prospects; (4) the general character and fitness of management;
    (5) the risk presented by such depository institution to the
    DIF; (6) the convenience and needs of the community to be
    served by the depository institution; and (7) whether the
    depository institution's corporate powers are consistent with
    the purposes of the FDI Act. The FDIC must also consider
    whether the parent company can serve as a source of strength to
    the IDI, as required by Section 616 of the Dodd-Frank Act.
    ---------------------------------------------------------------------------
        \4\ 12 U.S.C.  1816.
    ---------------------------------------------------------------------------
        Although a financial or commercial firm that owns an ILC or
    Industrial Bank is not subject to regulation or supervision by
    the Federal Reserve Board at the parent holding company level
    because of the exemption from the BHCA, an ILC or Industrial
    Bank is required to enter into legally enforceable commitments
    with the FDIC as a required condition of approval for an ILC or
    Industrial Bank and their parent companies. Beginning in 2000,
    the FDIC has required ILCs or Industrial Banks and their parent
    companies to enter into Capital and Liquidity Maintenance
    Agreements (CALMAs) and Parent Company Agreements (PAs), which
    have proven to be useful as part of a comprehensive supervisory
    strategy to protect the IDI and address potential risks to the
    DIF.
        CALMAs are designed to ensure that the parent financially
    supports the IDI and serves as a source of strength in terms of
    capital and/or liquidity. CALMAs require that capital
    contributions be made in the form of cash unless other assets
    are approved. Liquidity provisions in a CALMA require financial
    support to meet any ongoing liquidity obligations, and may
    require the top-tier parent company to establish a line of
    credit on which the IDI can draw. As a general matter, ILCs and
    Industrial Banks have higher capital and liquidity requirements
    than traditional de novo community banks.
        PAs are designed to address a variety of circumstances
    regarding corporate governance and control exercised over the
    IDI and include consent of the nonbank parent to agree to
    examination by the FDIC. Among other items, PAs help ensure
    that the IDI's board and executive officers are independent of
    the parent company and any affiliates, that the IDI operates
    under a separate and distinct business plan, and that the IDI
    maintains separate books and records. The PAs also require the
    ILC or Industrial Bank to abide by the limitations on
    transactions with affiliates under Section 23A and 23B of the
    Federal Reserve Act and Regulation W. Further, the FDIC
    requires the ILC or Industrial Bank to adhere to the anti-tying
    requirements under the BHCA, insider lending limitations under
    Regulation O, and restrictions on conflicts of interest.
        In addition to the requirements under the PA and CALMA,
    FDIC examiners conduct supervisory examinations of both the ILC
    or Industrial Bank focusing on safety and soundness, Bank
    Secrecy Act and Anti-Money Laundering (BSA/AML) compliance,
    information technology (including cybersecurity), and consumer
    protection. With regard to consumer protection, all ILCs and
    Industrial Banks are subject to the same consumer protection
    laws the FDIC supervises and enforces compliance with for all
    FDIC State nonmember banks.
        For example, ILCs and Industrial Banks are subject to
    Section 5 of the Federal Trade Commission Act (FTC Act), which
    provides that unfair and deceptive acts and practices (UDAPs)
    affecting commerce are illegal.\5\ Under Federal Trade
    Commission (FTC) and FDIC precedent, supervisory enforcement
    actions require companies to take reasonable and appropriate
    measures to protect consumers' personal data. The FTC and FDIC
    actions have focused on consumer deception either through false
    representations of data security or misappropriations of
    private data and failure to properly protect consumer data from
    data breaches. Further, the Gramm-Leach-Bliley Act (GLBA)
    applies to all companies that provide financial services, so if
    it is any type of financial service provider (which is broadly
    defined), it is subject to Federal privacy and data security
    standards. Additionally, ILCs and Industrial Banks are subject
    to fair lending laws, including fair credit reporting, truth in
    lending, and the Community Reinvestment Act (CRA).
    ---------------------------------------------------------------------------
        \5\ See 15 U.S.C.  45(a) (Section 5 FTC Act).
    ---------------------------------------------------------------------------
        On March 17, 2020, the FDIC Board unanimously approved a
    proposed rule \6\ that would impose these required conditions
    on all future ILC applicants.
    ---------------------------------------------------------------------------
        \6\ See Parent Companies of Industrial Banks and Industrial Loan
    Companies, 85 Fed. Reg. 17771 (Mar. 31, 2020), available at https://
    www.govinfo.gov/content/pkg/FR-2020-03-31/pdf/2020-06153.pdf.
    ---------------------------------------------------------------------------
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JELENA
                               McWILLIAMS

    Q.1. Montana, and many areas of the country, face challenges of
    housing availability, affordability, and aging housing stock.
    As you know, this is a significant issue for rural as well as
    urban areas and is one of the largest barriers to success
    nationally. In Montana, lack of workforce housing is one of the
    greatest inhibitors of economic development.

    Q.1.a. What can be done to increase workforce housing and
    encourage more affordable housing to be built?

    Q.1.b. What do you see as the largest barrier to affordable
    housing, particularly in rural areas?

    Q.1.c. How has the [Fed/FDIC/NCUA] worked to support housing?
    Where is there room for additional efforts?

    A.1.a.-A.1.c. The FDIC's mission of promoting stability and
    public confidence in the Nation's financial system is
    accomplished by, among other things, encouraging financial
    institutions to help meet the credit needs of the communities
    they serve and by promoting laws, regulations, policies, and
    programs that protect and inform consumers. Every year, the
    FDIC's Community Affairs branch conducts numerous events
    focused on affordable mortgage lending. In 2019, FDIC Community
    Affairs convened, hosted, and facilitated 50 events and
    activities nationwide, drawing about 800 intermediaries. These
    events addressed Affordable Single Family Housing, Community
    Stabilization, Affordable Mortgage Credit, Affordable Housing
    (Rental and Single Family), Disaster Recovery and Rural
    Housing, and the Community Reinvestment Act (CRA).
        In addition, FDIC Community Affairs complements the work of
    FDIC bank examiners and helps to enhance FDIC-supervised banks'
    understanding of potential CRA community collaboration
    opportunities related to housing. The FDIC's Affordable
    Mortgage Lending Center (AMLC)\1\ serves as a resource for
    community banks. The AMLC helps banks to identify the steps
    necessary to expand or initiate affordable mortgage lending and
    compares affordable mortgage programs from Federal, State,
    Federal Home Loan Banks, and other sources. The AMLC is updated
    regularly and the number of subscribers has grown steadily with
    about 18,000 subscribers to date. Other FDIC venues to educate
    consumers on affordable mortgage lending are provided through
    the FDIC's free financial education curriculum Money Smart \2\
    and Consumer News publications, including articles for multiple
    consumer segments focused on home buying or renting.
    ---------------------------------------------------------------------------
        \1\ See FDIC, Community Affairs--Affordable Mortgage Lending
    Center, available at https://www.fdic.gov/consumers/community/
    mortgagelending/index.html.
        \2\ See FDIC, Money Smart--A Financial Educational Program,
    available at https://www.fdic.gov/consumers/consumer/moneysmart/
    index.html.
    ---------------------------------------------------------------------------
        Mortgage lending is an important element of many community
    banks' business and CRA strategies, and the FDIC aims to help
    strengthen the role of community banks in the affordable
    mortgage market by amplifying awareness of current programs and
    highlighting innovative practices. Examples of affordable
    housing efforts by FDIC Community Affairs include the
    following:

       LThe FDIC San Francisco Regional Office hosted an
            interagency Banker Roundtable regarding affordable
            housing solutions, where participants discussed
            strategies such as amending local policy to increase
            Accessory Dwelling Units and Transit Oriented
            Development.

       LThe FDIC Dallas Regional Office, along with the
            Oklahoma Affordable Housing Coalition, hosted five
            regional forums regarding the assessment of the
            affordable housing needs of each county in the State.
            The information gathered in these forums led to
            programs in targeted geographies and evolved into an
            annual Housing Conference where stakeholders continue
            to learn and collaborate to address the specific needs
            of their Oklahoma communities.

       LThe FDIC Atlanta Regional Office co-sponsored an
            Innovative Housing Symposium in Panama City, Florida,
            aimed at identifying housing strategies to retain the
            workforce and strengthen the housing stock.

    More generally, the FDIC also addresses specific economic
    inclusion challenges in Indian Country, Appalachia, and rural
    areas and identifies opportunities for targeted resources to
    assist and educate Minority Depository Institutions and
    community banks serving rural areas and Indian Country.

    Q.2. I appreciated the responses to my questions during the
    hearing, and the focus on supporting our farmers and ranchers
    and their families through the current challenges facing the
    agriculture sector while continuing to prioritize the safety
    and soundness of our community financial institutions.
        Is there anything that you would like to add on this topic?

    A.2. I deeply appreciate the challenging environment faced by
    farmers and ranchers and the community banks that serve them.
    The FDIC is the primary Federal regulator for most agricultural
    banks and thus understands these challenges firsthand. For
    example, between 1980 and 2010, more than half of all rural
    counties across the United States lost population, and the
    rural counties that experienced outflows lost 14.8 percent of
    their population on average.\3\ Although community banks in
    depopulating areas have been resilient in meeting the
    challenges posed by these demographic trends, the eroding size
    of the local customer base makes it harder to raise deposits
    and attract loan customers.
    ---------------------------------------------------------------------------
        \3\ See FDIC, Long-Term Trends in Rural Depopulation and Their
    Implications for Community Banks, available at https://www.fdic.gov/
    bank/analytical/quarterly/2014-vol8-2/article2.pdf.
    ---------------------------------------------------------------------------
        The FDIC continues to focus on agricultural lending and the
    ability for farm banks, which represent nearly one-quarter of
    all FDIC-insured institutions, to manage amid changing industry
    conditions.\4\ In June 2019, the FDIC hosted an Agriculture
    Banking Conference in Kansas City, which brought together
    regulators, bankers, policymakers, academics, and industry
    participants to discuss short-term risks and long-term
    challenges across the industry.\5\ In addition, the FDIC
    recently issued an advisory \6\ regarding the prudent
    management of agricultural lending during economic cycles. The
    FDIC will continue to engage with farm banks and other
    stakeholders on this issue.
    ---------------------------------------------------------------------------
        \4\ See FDIC 2019 Risk Review, available at https://www.fdic.gov/
    bank/analytical/risk-review/full.pdf.
        \5\ See FDIC Agriculture Banking Conference, available at https://
    www.fdic.gov/bank/analytical/ag/.
        \6\ See FDIC FIL-5-2020, Advisory: Prudent Management of
    Agricultural Lending During Economic Cycles (January 28, 2020),
    available at https://www.fdic.gov/news/news/financial/2020/
    fil20005.html.

    Q.3. In response to my question during the hearing you included
    that you believe there are ways to benefit small family farms,
    rural small businesses, rural areas, and Indian Country through
    increased CRA credit.
        Can you expand on this?

    A.3. The FDIC recognizes that small businesses, farms, and
    other entrepreneurs play a vital role in supporting the
    economic growth of rural communities. Such organizations and
    individuals, in turn, can only play such a role if banks lend
    and invest in these areas. The rule\7\ recently proposed by the
    FDIC and OCC to modernize the CRA would incentivize greater
    lending and investment in areas in need of financial resources,
    with a particular emphasis on rural areas and Indian Country.
    We know that these areas often have the greatest need for
    financial services, and the proposal seeks to encourage banks
    to increase their engagement in these communities across our
    Nation. For example, under the proposal, the size of loans to
    small businesses and small farms that would qualify for CRA
    credit would be increased to $2 million. By increasing the loan
    size for small loans to farms, which was last updated 25 years
    ago, and increasing the revenue size threshold for small farms,
    the proposed rule would encourage economic development and job
    creation and help the U.S. agricultural industry survive. In
    addition, the proposal would provide CRA credit for retail and
    community development activities in Indian Country. The FDIC
    believes that these provisions will help to create greater
    lending and investment in these communities.
    ---------------------------------------------------------------------------
        \7\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
    (Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
    2020-01-09/pdf/2019-27940.pdf.

    Q.4. I recently wrote to Comptroller Otting, with colleagues on
    this Committee, to express the importance of considering the
    many unique challenges in accessing financial services in rural
    America. It is imperative that the CRA work for communities
    throughout America, and that the process for potential reforms
    to this vital rule should reflect that. Any updates to the CRA
    should be done in coordination between your three agencies, and
    must be consistent with the original purpose of this Civil
    Rights-era law to bringing financial services and credit access
    to low- and moderate-income and underserved communities
    throughout our country.
        As you consider changes to the Community Reinvestment Act,
    how are you considering and engaging rural America?

    A.4. I recognize the unique challenges in accessing financial
    services facing many rural areas, especially given the
    continuing trend of depopulation that makes it more difficult
    for community banks headquartered in these areas to grow their
    balance sheets.\8\ In addition, as of June 30, 2019, 620
    counties--or 20 percent of the counties across the Nation--were
    served only by community banking offices, 127 counties had only
    one banking office, and 33 counties had no banking offices at
    all.\9\
    ---------------------------------------------------------------------------
        \8\ See FDIC, Long-Term Trends in Rural Depopulation and Their
    Implications for Community Banks, available at https://www.fdic.gov/
    bank/analytical/quarterly/2014-vol8-2/article2.pdf.
        \9\ See FDIC Summary of Deposits, available at https://
    www7.fdic.gov/SOD.
    ---------------------------------------------------------------------------
        The interagency process to modernize the CRA seeks to
    address the need for greater lending and investment in rural
    communities by incentivizing CRA activity in these areas. This
    process has included extensive outreach and engagement with
    community banks and consumers in rural America. I have
    personally embarked on a 50-State listening tour \10\ to hear
    from banks directly about challenges they face and to learn
    about the needs of the consumers and businesses that banks
    serve. In my conversations with rural bankers and their
    customers, I have often heard concerns that the current CRA
    framework fails to incentivize CRA activity in many rural areas
    and that assessment areas have not kept pace with how consumers
    bank and how banking services are delivered today.
    ---------------------------------------------------------------------------
        \10\ See Transparency and Accountability--FDIC Chairman State
    Visits (Last Updated 02/20/2020), available at https://www.fdic.gov/
    transparency/visits.html.
    ---------------------------------------------------------------------------
        The proposal approved by the FDIC and OCC in December 2019
    reflects this extensive outreach and engagement. The proposal
    seeks to address these concerns by encouraging banks to lend
    and invest in these communities across our Nation and requiring
    banks to add assessment areas where they have significant
    concentrations of retail domestic deposits. The agencies will
    continue to engage with all stakeholders throughout the
    rulemaking process.

    Q.5. I would like an update on an issue I've followed and
    written to the Federal Reserve and FDIC about, the ``covered
    funds'' definition in the Volcker Rule. As drafted, banks are
    prevented from activities that they are regularly allowed to do
    directly on their balance sheets. Oftentimes clients, such as
    large pension funds, want their banks to provide long-term
    investments or loans in these fund structures to have some skin
    in the game. I continue to strongly support the Volcker Rule's
    purpose of preventing speculative trading that is at odds with
    the public interest. As your agencies continue their process
    here, I encourage you to work towards an outcome that allows
    capital for growing and innovating companies and the ability to
    invest in long-term investment vehicles, while keeping a focus
    on preventing the activities that the rule is intended to stop.
        As your agencies look at the impact of rules and any
    potential changes, will you consider activities that are
    considered safe and allowable elsewhere in banks? And
    especially the impact on the availability of funding for
    companies in the middle of America looking to grow?

    A.5. On January 30, 2020, the FDIC Board approved a proposed
    rule\11\ that would amend the regulations implementing Section
    619 of the Dodd-Frank Act (the Volcker Rule) by modifying and
    clarifying the ``covered fund'' provisions. Among other things,
    the proposal would establish a new exclusion from the covered
    fund definition for venture capital funds, which would allow
    banking entities to acquire or retain an ownership interest in,
    or sponsor, certain venture capital funds to the extent the
    banking entity is permitted to engage in such activities under
    otherwise applicable law. This proposed exclusion would help
    ensure that banking entities can fully engage in this important
    type of development and investment activity, which may
    facilitate capital formation and provide important financing
    for small businesses, particularly in areas where such
    financing may not be readily available.
    ---------------------------------------------------------------------------
        \11\ See Prohibitions and Restrictions on Proprietary Trading and
    Certain Interests in, and Relationships With, Hedge Funds and Private
    Equity Funds, 85 Fed. Reg. 12120 (Feb. 29, 2020), available at https://
    www.govinfo.gov/content/pkg/FR-2020-02-28/pdf/2020-02707.pdf.

    Q.6.a. Thank you all for your updated guidance on providing
    financial services to the hemp industry. As you know, this is
    an issue that has been very important to me. Montana leads the
    country in hemp production, and this guidance will help our
    producers and the financial institutions that are now able to
    serve them.
        What will your agencies be doing to educate your examiners
    and the institutions that you oversee to adapt to working with
    hemp-related businesses?

    A.6.a. In 2019, the FDIC conducted internal training for all
    commissioned safety and soundness bank examiners, case
    managers, management, and large bank staff. Among other things,
    the training addressed the legal status, commercial growth, and
    production of hemp, as well as Customer Due Diligence (CDD)
    requirements for hemp-related customers, which is consistent
    with other commercial customers. During 2019, the FDIC also
    provided two hemp-related informational sessions for members of
    the Advisory Committee on Community Banking. Those sessions
    were webcast and are available to augment formal examiner
    training. Going forward, the FDIC will continue to provide
    internal training that will include examiner instruction for
    assessing a bank's BSA/AML compliance program when providing
    services to hemp-related businesses.
        In December 2019, the Federal banking agencies and FinCEN,
    in consultation with the Conference of State Bank Supervisors,
    issued a statement on hemp-related businesses.\12\ The
    statement highlighted that hemp is no longer a Schedule I
    controlled substance under the Controlled Substances Act, and
    as such, banks are not required to file a Suspicious Activity
    Report (SAR) on customers solely because they are engaged in
    the growth or cultivation of hemp in accordance with applicable
    laws and regulations.\13\ The statement also emphasized that it
    is generally a bank's business decision as to the types of
    permissible services and accounts to offer.
    ---------------------------------------------------------------------------
        \12\ See FDIC, ``Agencies Clarify Requirements for Providing
    Financial Services to Hemp-Related Businesses'' (Dec. 3, 2019),
    available at https://www.fdic.gov/news/news/press/2019/pr19115.html.
        \13\ See FDIC FIL-5-2015, Statement on Providing Banking Services
    (January 28, 2015), available at https://www.fdic.gov/news/news/
    financial/2015/fil15005.html.

    Q.6.b. Are there areas that you anticipate will require
    ---------------------------------------------------------------------------
    additional guidance?

    A.6.b. I have heard about this issue during every single State
    visit I have made so far. I recognize that banks have been put
    in a difficult position between complying with Federal law and
    what is permissible at a State level. We understand that FinCEN
    may be developing more comprehensive guidance with respect to
    the hemp industry. We are also referring some inquiries to the
    U.S. Department of Agriculture (USDA) for up-to-date
    information regarding the national regulatory structure
    governing hemp growth and cultivation. The USDA issued an
    interim final rule in October 2019, and maintains hemp-related
    information on its public website. We have also referred
    matters to the U.S. Food and Drug Administration (FDA) when
    they apply to the FDA's authority (such as hemp infused
    ``medication'' or food products).
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JELENA
                               McWILLIAMS

    Q.1. We've had positive Committee discussions of late about the
    prospect of marking up legislation on bills introduced with
    bipartisan support and one which I hope will fall within that
    category is S. 2649, dealing with the bank examination review
    process.
        We continue to hear from community banks that the
    examination process is cumbersome and largely without any
    practical review or appeal process, with the regulators'
    Ombudsmen Offices often not utilized in this regard as a
    result. S. 2649 seeks to update this process with greater
    transparency and due process. Do you have any thoughts on this
    issue and what the FDIC is doing to improve the examination
    process and opportunity for meaningful review?

    A.1. I recognize that the FDIC's appeals process for bank
    examinations can be improved, and we are actively working on
    this issue. The FDIC recently hosted a series of listening
    sessions to solicit feedback on the supervisory appeals and
    dispute resolution process, where we received a number of
    valuable suggestions.
        With respect to the examination process, the FDIC has taken
    numerous steps to modernize its supervision and examination
    programs, including by leveraging technology to reduce the
    amount of time examination teams spend onsite at supervised
    institutions. This reduces the compliance burden for
    institutions--especially community banks--without sacrificing
    the quality of our supervision. As a result, our examination
    turnaround time (i.e., the time from when field work begins to
    when the examination report is sent to the bank) has
    significantly improved. During the 12 months ended November 30,
    2019, nearly 88 percent of safety and soundness examinations
    were conducted within our 75-day goal and 97 percent of
    consumer compliance and CRA examinations were conducted within
    our 120-day goal. Similarly, examination report processing time
    (i.e., the time from when field work is complete to when the
    report is sent to the bank) has improved markedly, with nearly
    93 percent of safety and soundness reports and more than 98
    percent of consumer compliance and CRA reports processed within
    our 45-day goal.\1\
    ---------------------------------------------------------------------------
        \1\ See FDIC Transparency & Accountability--Bank Examinations,
    available at https://www.fdic.gov/transparency/examination.html.

    Q.2. I applaud the OCC and the FDIC for issuing proposed rules
    last month that would provide certainty that an interest rate
    that is valid when the loan is made by a bank remains valid
    when the loan is transferred or sold. Since the Second Circuit
    issued its decision in Madden v. Midland Funding, I have had
    serious concerns that the decision discourages use of loan
    assignments and securitization to manage liquidity and
    concentration risk and may decrease consumers' access to
    credit.
        Some have criticized your action, claiming that it would
    permit nonbanks to evade a State's interest rate cap. I believe
    this criticism is without merit.

       LHave you not been crystal clear that a nonbank may
            not partner with a bank ``with the sole goal of evading
            a lower interest rate established under the law of the
            entity's licensing State(s)''?

       LIs it not true that your agencies can use
            supervision and enforcement to ensure that banks do not
            enter into ``rent-a-bank'' partnerships with nonbanks
            with the sole goal of evading a State's interest rate
            cap?

    A.2. The FDIC's notice of proposed rulemaking\2\ published on
    December 6, 2019, affirms that the FDIC views unfavorably
    entities that partner with a State bank with the sole goal of
    evading a lower interest rate established under the law of the
    entity's licensing State(s). Although I am unable to address
    any confidential supervisory information or provide
    institution-specific information, I would note that the FDIC
    issued a public enforcement action\3\ in October 2018 against
    Republic Bank & Trust Company for failing to clearly and
    conspicuously disclose required information related to the
    bank's Elastic line of credit product offered pursuant to a
    contract with Elevate@Work, L.L.C. The FDIC will continue to
    examine supervised institutions for compliance with all
    applicable laws and regulations.
    ---------------------------------------------------------------------------
        \2\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
    6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
    06/pdf/2019-25689.pdf.
        \3\ https://orders.fdic.gov/sfc/servlet.shepherd/document/download/
    069t00000037a32AA
    A?operationContext=S1.
    ---------------------------------------------------------------------------
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JELENA
                               McWILLIAMS

    Q.1. Earlier this year, Comptroller Otting said that the Office
    of the Comptroller of the Currency (OCC) was taking the lead on
    writing a rule to rein in risky incentive-based compensation
    practices at large financial institutions that reward senior
    bank executives for irresponsible risk-taking. Additionally, at
    a House Financial Services Committee hearing in May, Otting
    said that the OCC shared its proposal with the Securities and
    Exchange Commission (SEC).
        Chair McWilliams and Vice Chair Quarles, has Comptroller
    Otting shared the OCC's proposal with either of your agencies?

       LIf yes, what does the proposal contain?

       LIf yes, are all six regulators on board with the
            proposal?

       LIf yes, when can we expect to see a notice of
            proposed rulemaking posted?

    Q.2. Have all six regulators (FDIC, Fed, NCUA, SEC, OCC, and
    FHFA) sat down together to discuss this rulemaking?

       LIf yes, when did these discussions take place?

       LIf yes, have all six regulators decided to move
            forward with a proposed rule?

    Q.3. If the OCC decides to move forward on executive
    compensation rule without all six regulators, are you concerned
    the OCC will create two different standards, encouraging banks
    to shop for the regulator with the weakest requirements?

    A.1.-A.3. In June 2010--one month prior to the enactment of the
    Dodd-Frank Act--the FDIC, Federal Reserve Board (FRB), Office
    of the Comptroller of the Currency (OCC), and Office of Thrift
    Supervision (OTS) issued guidance to help ensure that incentive
    compensation policies at banking organizations do not encourage
    imprudent risk-taking and are consistent with the safety and
    soundness of the organization.\1\ Section 956 of the Dodd-Frank
    Act subsequently directed the FDIC, FRB, OCC, NCUA, SEC, and
    FHFA (``six agencies'') to jointly prescribe, within nine
    months of the enactment of the law, regulations or guidelines
    that prohibit incentive-based pay arrangements that the six
    agencies determine encourage inappropriate risks. Section 956
    mandates that the six agencies ensure that the standards are
    ``comparable'' to the standards established under section 39 of
    the Federal Deposit Insurance Act (FDI Act) and specifically
    take into consideration the compensation standards described in
    section 39(c). Under section 39(c), the Federal banking
    agencies are required to prohibit compensation arrangements
    that provide excessive compensation or could lead to material
    financial loss to an insured depository institution (IDI).
    Section 39(c) was promulgated by Congress in 1991 and has been
    in effect for IDIs since then.
    ---------------------------------------------------------------------------
        \1\  See Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on
    Incentive Compensation (June 21, 2010), available at https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg
    20100621a.htm.
    ---------------------------------------------------------------------------
        While the banking agencies' 2010 guidance remains fully
    intact, the six agencies continue to engage in discussions
    regarding how best to implement the statute. In the meantime,
    the FDIC continues to review compensation policies and
    practices of supervised institutions in accordance with the FDI
    Act and the 2010 guidance to ensure that institutions have
    appropriate risk management frameworks in place, including
    appropriate oversight and governance by the Board of Directors
    and sound operational controls.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JELENA
                               McWILLIAMS

    BB&T-SunTrust Merger
        The FDIC's Statement of Policy for merger approvals
    pursuant to the Bank Merger Act lists various standards that
    the FDIC will apply when evaluating a merger transaction.\1\
    While the FDIC released the Order and Basis for Corporation
    Approval along with the press release that the merger had been
    approved, the document is only 19 pages long and does not
    provide sufficient details warranted by a transaction that
    created the sixth largest commercial bank in the United States
    and the largest bank regulated by the FDIC.\2\
    ---------------------------------------------------------------------------
        \1\ Federal Deposit Insurance Corporation, ``FDIC Law, Regulations,
    Related Acts,'' https://www.fdic.gov/regulations/laws/rules/5000-
    1200.html#fdic5000fdicso2.
        \2\ Federal Deposit Insurance Corporation, ``Order and Basis for
    Corporation Approval,'' https://www.fdic.gov/news/news/press/2019/
    pr19111a.pdf.
    ---------------------------------------------------------------------------
    Competitive Factors
    Q.1.a. The FDIC evaluated how the transaction would affect
    competition in 81 geographic markets.\3\ These geographic
    markets are the areas used to measure the concentration of the
    relevant banking products.
    ---------------------------------------------------------------------------
        \3\ Id.
    ---------------------------------------------------------------------------
        How were these geographic markets defined? Are these the
    same geographic market definitions that the FDIC has used in
    evaluating previous merger applications?

    Q.1.b. Were the definitions of any predefined markets altered
    from the time the merger application was filed to the time of
    the merger approval?

    Q.2. According to the Statement of Policy, the FDIC considers
    the extent of existing competition ``in the relevant product
    market(s) within the relevant geographic market(s).'' However,
    in the Approval Order, the FDIC only discussed the
    concentration levels of deposits, rather than the full
    complement of relevant product markets.

    Q.2.a. What product markets did the FDIC use for its
    concentration analysis?

    Q.2.b. For each product market, please describe the source of
    the data used for the analysis. If proxies or estimates were
    used, please specify.

    Q.3. According to the Approval Order, in 14 of the geographic
    markets that the FDIC considered, the Herfindahl-Hirschman
    Index (HHI) levels for deposits would exceed one or both of the
    1800/200 thresholds, meaning that the expected change in market
    concentration is significant.

    Q.3.a. For the six markets where credit unions or thrifts
    mitigated the competitive concerns, please identify which
    credit unions and thrifts were included in the analysis, the
    dollar amount of their deposits, and any weights used for these
    institutions.

       LUnlike banks and thrifts, credit unions are not
            required to report deposits on a branch-level. Please
            indicate how the FDIC obtained the deposit levels for
            credit union branches. If estimates were used, please
            describe the methodology.

    Q.3.b. For the eight markets with divestitures, do any of these
    markets still approach either of the HHI thresholds even after
    considering the divestitures? If so, please indicate the
    geographic market and the HHI-levels before and after the
    merger.

    A.1.a.-A.3.b. Section 18(c)(5)(A) of the Bank Merger Act (BMA)
    prohibits the FDIC from approving a merger transaction that
    would result in, or would be in furtherance of, any combination
    or conspiracy to monopolize or to attempt to monopolize the
    business of banking in any part of the United States.\4\
    Similarly, section 18(c)(5)(B) of the BMA prohibits the FDIC
    from approving a merger transaction if the effect of the
    proposed merger transaction in any section of the country may
    be to substantially lessen competition, or tend to create a
    monopoly, or would in any other manner be in restraint of
    trade, unless the FDIC finds that the anticompetitive effects
    of proposed transaction are clearly outweighed in the public
    interest by the probable effect of the transaction in meeting
    the convenience and needs of the community to be served.\5\
    ---------------------------------------------------------------------------
        \4\ 12 U.S.C.  1828(c)(5)(A).
        \5\ 12 U.S.C.  1828(c)(5)(B).
    ---------------------------------------------------------------------------
        Although the BMA requires the FDIC to make an independent
    determination on the competitive effects of a proposed merger
    transaction, section 18(c)(4) of the BMA directs the Attorney
    General of the United States to furnish to the appropriate
    Federal banking agency a report on the competitive factors
    involved in a merger transaction subject to the BMA upon the
    request of the FDIC.\6\ The FDIC Statement of Policy on Merger
    Transactions states, as required by law, that the FDIC will
    request a report on the competitive factors involved in a
    proposed merger transaction from the Attorney General. This
    report must ordinarily be furnished within 30 days, and the
    applicant upon request will be given an opportunity to submit
    comments to the FDIC on the contents of the competitive factors
    report. Similarly, it is the practice of the Federal Reserve
    Board (FRB) to request such a report from the Attorney General
    in connection with bank holding company transactions subject to
    section 3 of the Bank Holding Company Act. Accordingly, the
    FDIC, FRB, and U.S. Department of Justice (DOJ) coordinated
    their review of the competitive effects of the proposal.\7\
    ---------------------------------------------------------------------------
        \6\ 12 U.S.C.  1828(c)(4). See also FDIC, ``FDIC Statement of
    Policy on Bank Merger Transactions,'' available at https://
    www.fdic.gov/regulations/laws/rules/5000-1200.html.
        \7\ See Federal Reserve and Department of Justice, ``How do the
    Federal Reserve and the U.S. Department of Justice, Antitrust Division,
    analyze the competitive effects of mergers and acquisitions under the
    Bank Holding Company Act, the Bank Merger Act and the Home Owners' Loan
    Act?'' available at https://www.federalreserve.gov/bankinforeg/
    competitive-effects-mergers-acquisitions-faqs.htm; and Department of
    Justice, ``Bank Merger Competitive Review--Introduction and Overview
    (1995),'' available at https://www.justice.gov/sites/default/files/atr/
    legacy/2007/08/14/6472.pdf.
    ---------------------------------------------------------------------------
    Geographic Markets
    It is the longstanding practice of the Federal banking agencies
    and DOJ to first assess the competitive effects of a proposed
    bank merger transaction by calculating concentration levels
    under the Herfindahl-Hirschman Index (HHI), a commonly accepted
    measure of market concentration.\8\ Generally, the Federal
    banking agencies and DOJ view a transaction that does not
    result in a post-merger HHI result of more than 1800 points and
    an increase of more than 200 points within a geographic market
    as not raising competitive concerns. Transactions that exceed
    both thresholds typically warrant further review.
    ---------------------------------------------------------------------------
        \8\ The HHI is calculated by summing the squares of the market
    shares of each participant in a relevant geographic market.
    ---------------------------------------------------------------------------
        In evaluating the competitive effects of the proposal, FDIC
    staff, in coordination with FRB and DOJ staff, considered how
    the transaction would affect competition in the 81 geographic
    markets where both BB&T and SunTrust operate. These banking
    markets are subject to periodic updates, and the FDIC's
    competitive analysis of the transaction was based on the most
    recent market definitions. Although the FDIC is not bound to
    use these predefined markets, it is consistent with the long-
    standing practices of the FDIC and other Federal banking
    agencies and DOJ to do so, and the FDIC considers FRB-defined
    banking markets to be presumptively reasonable for the purposes
    of its competitive review of merger transactions.
    Product Markets
        With regard to calculating market share in the relevant
    product market, the FDIC (consistent with the other Federal
    banking agencies and DOJ), uses deposit market share based on
    FDIC-generated summary of deposit (SOD) data. This focus on
    deposits recognizes that deposits represent a proxy for the
    full ``cluster'' of banking products and services provided to
    households and small businesses.\9\ For this reason, deposit
    market share guides the competitive review of bank merger
    transactions. The FDIC's competitive review was also informed
    by additional information, including business lending
    information, as contemplated in the ``FDIC Statement of Policy
    on Bank Merger Transactions,''\10\ as well as FRB and DOJ FAQs
    addressing the competitive review of merger transactions.\11\
    ---------------------------------------------------------------------------
        \9\ See FDIC, ``FDIC Statement of Policy on Bank Merger
    Transactions,'' available at https://www.fdic.gov/regulations/laws/
    rules/5000-1200.html. ``In many cases, total deposits will adequately
    serve as a proxy for overall share of the banking business in the
    relevant geographic market(s); however, the FDIC may also consider
    other analytical proxies.'' See also United States v. Philadelphia
    National Bank, 374 U.S. 321, 356 (1963) (holding that the relevant
    product market in a bank merger is the ``cluster'' of products and
    services provided by commercial banks).
        \10\ Id.
        \11\ See FRB and DOJ, ``How do the Federal Reserve and the U.S.
    Department of Justice, Antitrust Division, analyze the competitive
    effects of mergers and acquisitions under the Bank Holding Company Act,
    the Bank Merger Act and the Home Owners' Loan Act?'' available at
    https://www.federalreserve.gov/bankinforeg/competitive-effects-mergers-
    acquisitions-faqs.htm.
    ---------------------------------------------------------------------------
    Outcome
        As noted above, a transaction that does not result in a
    post-merger HHI of more than 1800 points and an increase of
    more than 200 points within a geographic market does not
    generally raise competitive concerns. Using the FRB-defined
    markets as the relevant geographic markets, and SOD data as a
    proxy for the relevant product market, the FDIC found that the
    HHI levels in 67 of the 81 markets fell below one or both of
    these thresholds, and that the HHI levels in the 14 remaining
    markets approached or exceeded both thresholds.
        In 6 of these 14 markets, the FDIC found that the presence
    of competitively viable credit unions mitigated the competitive
    concerns associated with the increased concentration levels.
    After incorporating such institutions into the market
    concentration calculations in these six markets, the FDIC found
    the resulting HHIs to be at acceptable levels.\12\
    ---------------------------------------------------------------------------
        \12\ These markets include North Lake/Sumter, Florida; Atlanta,
    Georgia; Milledgeville, Georgia; Lexington, Virginia; Norfolk-
    Portsmouth, Virginia; and Richmond, Virginia. Although not exceeding
    the HHI thresholds, staff also scrutinized the following markets and
    found that no additional mitigation was needed to address increased
    concentration: Citrus County, Florida; Daytona Beach Area, Florida;
    Savannah, Georgia; Lynchburg, Virginia; Newport News-Hampton, Virginia;
    and Winchester, VA-WV.
    ---------------------------------------------------------------------------
        Consistent with the approach outlined in the FRB and DOJ
    FAQs, the determination of whether to include credit unions in
    market concentration calculations was based on whether such
    institutions have the capacity to exert competitive pressures
    on banks within the relevant market. The FDIC incorporated into
    its analysis those credit unions with fields of membership
    extending to all or almost all of a relevant market's
    population and that had branches easily accessible to the
    general public. Because credit unions do not report branch-
    level deposits, the FDIC approximated such deposits in each
    relevant market based on available data. To avoid potentially
    overstating the competitive power of the included credit
    unions, the FDIC reduced the deposits attributed to the credit
    unions by 50 percent.
        With respect to the eight remaining markets presenting
    heightened concentration levels, the primary mechanism to
    mitigate the competitive effects of the proposed merger was the
    divestiture of 30 SunTrust branches to a third-party acquirer.
    With the consummation of the divestiture and the inclusion of
    competitively viable credit unions, the concentration levels
    within the eight remaining markets result in an HHI level near
    or below 1800 points or an increase of fewer than 200
    points.\13\
    ---------------------------------------------------------------------------
        \13\ The HHI calculation in certain markets factored in additional
    adjustments as appropriate, such as the exclusion of certain centrally
    booked deposits.
    ---------------------------------------------------------------------------
        The applicants agreed to divest every SunTrust branch in
    the following six markets: Lumpkin County and Wayne County,
    Georgia; Winston-Salem, North Carolina; and Eastern Shore,
    Martinsville, and South Boston, Virginia. The ``clean sweep''
    of SunTrust branches from these markets effectively neutralizes
    any change to the respective markets' HHIs as a result of the
    merger.\14\ In the remaining two markets, Durham-Chapel Hill,
    North Carolina, and Roanoke Virginia, the applicants committed
    to partial divestiture of SunTrust branches. The FDIC found
    that the divestitures adequately mitigated the competitive
    effects of the proposed merger.\15\ The FRB and DOJ
    determinations were substantially similar.
    ---------------------------------------------------------------------------
        \14\ The HHIs in each of these six mergers exceeded 1800 HHI points
    on both a pre- and post-transaction basis, but the ``clean sweep'' of
    SunTrust branches in these markets result in a de minimis change to the
    total HHI.
        \15\ After accounting for divestiture and appropriate weightings
    for thrifts and credit unions, the change in HHI to the Roanoke market
    exceeded 200 points, but the resulting HHI in Roanoke, Virginia, was
    below the 1800 threshold. After accounting for divestiture, appropriate
    weightings for thrifts and credit unions, and adjustments for centrally
    booked deposits, the change in HHI in Durham-Chapel Hill, North
    Carolina, was less than 200 points to a level below 1800.
    ---------------------------------------------------------------------------
        As described above, the FDIC's competitive review of the
    transaction was consistent with its approach to other merger
    transactions, and was guided by the review framework outlined
    in the FDIC's Statement of Policy on Bank Merger Transactions,
    the FRB and DOJ FAQs on merger transactions, and the DOJ's bank
    merger guidelines. After thoroughly reviewing the competitive
    effects of the merger, considering deposit concentration
    levels, business lending data, market dynamics in each
    geographic market, and the branch divestitures, the FDIC
    determined the merger transaction would not result in a
    monopoly in any part of the United States, and would not
    substantially lessen competition, tend to create a monopoly, or
    otherwise be in restraint of trade in any section of the
    country. This finding was consistent with the conclusions
    reached by the FRB in its review of the proposal under the Bank
    Holding Company Act, and with the concurrence of DOJ in
    authorizing the transaction.
    Prudential Factors
    Q.4. Please describe the process by which the FDIC evaluated
    the financial soundness of the resulting institution.

    Q.5. Please describe the process by which the FDIC evaluated
    the management of the resulting institution.

    A.4.-A.5. The FDIC has established a comprehensive risk-focused
    supervisory process for insured depository institutions. For
    large banks directly supervised by the FDIC, a continuous
    examination program is employed, whereby dedicated staff
    conducts on-site supervisory examinations and ongoing
    institution monitoring to monitor risk, assign supervisory
    ratings, and take other required supervisory action.
        FDIC staff is also dedicated to large institutions for
    which the FDIC is not the primary Federal regulator, and these
    individuals work closely with the primary Federal regulator to
    identify and monitor risk. FDIC staff also conducts quarterly
    risk assessments of large institutions and assigns an
    independent rating that considers vulnerability to asset and
    funding stress, as well as potential loss severity. Given these
    well-established supervisory processes, FDIC staff had a sound
    understanding of both institutions' risk profiles and risk
    management activities prior to considering the merger
    application.
    Analysis of Statutory Factors, Generally
        In evaluating a merger transaction, section 18(c)(5) of the
    BMA directs the FDIC to consider the financial and managerial
    resources and future prospects of the existing and proposed
    institutions.
        As noted in the FDIC's Statement of Policy on Bank Merger
    Transactions, the FDIC will normally approve a proposed merger
    transaction where the resulting institution meets existing
    capital standards, continues with satisfactory management, and
    whose earnings prospects, both in terms of quantity and
    quality, are sufficient. In evaluating management, the FDIC
    will rely to a great extent on the supervisory histories of the
    institutions involved and of the executive officers and
    directors that are proposed for the resultant institution.
        The FDIC's analyses include an assessment of the overall
    condition of each institution involved in the proposed merger,
    as well as the combined financial resources. Available holding
    company support is also considered, as is the source of
    funding.
        The FDIC will also assess the managerial resources,
    including the active management of each institution as well as
    the combined institution. Analyses are conducted of each
    institution's corporate governance practices as well as a
    review of managements' past responsiveness to regulatory
    recommendations. Any significant management changes are
    addressed.
    Outcome
        In evaluating the statutory factors, staff analyzed
    historical, current, and projected financial data and business
    models, as well as management capabilities, public comments,
    and other relevant matters. Both BB&T and SunTrust were in
    satisfactory financial condition, based on supervisory
    information and financial reports. Both institutions
    demonstrated acceptable earnings and asset quality, strong
    capital, and sufficient liquidity. Over the past 20 years, BB&T
    has reported positive annual net income every year, while over
    the same period SunTrust reported positive net income for every
    year except 2009. Additionally, the institutions were viewed to
    have complementary business models and to pose moderate risk,
    given their community focus and largely traditional business
    lines, which Truist Bank--the bank formed by the merger of BB&T
    and SunTrust--is expected to continue.
        The management team has documented experience and expertise
    regarding large regional bank operations and has been
    responsive to regulatory concerns. Directors and officers have
    held similar positions within the respective institutions prior
    to the merger, and proposed management officials have been
    associated with these institutions for a substantial period of
    time.
    Convenience and Needs Factor
    Q.6.a. The FDIC is required by the BMA to note and consider
    each institution's performance under the CRA. As stated in the
    Approval Order, while BB&T has an outstanding record of meeting
    community credit needs, SunTrust has a satisfactory record.

        On the same day the merger was approved, the Federal
    Reserve issued a consent order against SunTrust as a result of
    misleading or inaccurate statements to business customers about
    the operation and billing of certain add-on products.
        Did the FDIC consider the compliance records of both
    entities with respect to consumer finance laws in their review
    of the merger? Did the FDIC consult with the CFPB or look at
    CFPB examination data to determine whether the banks had
    adequate records of compliance with consumer protection laws?

    Q.6.b. At what point in the merger review process did the FDIC
    become aware of the practices that led to the Federal Reserve
    consent order against SunTrust? How were they discovered?

    A.6.a.-A.6.b. In evaluating a merger transaction, section
    18(c)(5) of the BMA directs the FDIC to consider the
    convenience and needs of the community to be served. In
    addition, the CRA requires that, when evaluating a BMA
    application, the FDIC take into account the CRA records of the
    institutions involved in the transaction.
        The FDIC considered the CRA and compliance record of both
    institutions. As stated in the Order and Basis for Corporation
    Approval,\16\ the FDIC took ``into account Truist Bank's branch
    distribution, the CRA record of performance for BB&T and
    SunTrust, the commitments articulated in the applicants'
    Community Benefits Plan, public comments received on the
    Application, the consumer compliance records of both banks, and
    the products and services to be provided by Truist Bank.''
    ---------------------------------------------------------------------------
        \16\ See FDIC, ``Branch Banking and Trust Company, Winston-Salem,
    North Carolina, Application for Consent to Merge with SunTrust Bank,
    Atlanta, Georgia, and to Establish Associated Branches,'' available at
    https://www.fdic.gov/news/news/press/2019/pr19111a.pdf.
    ---------------------------------------------------------------------------
        Throughout the application review process, the FDIC was in
    contact with the Consumer Financial Protection Bureau (CFPB)
    regarding both institutions' compliance records and with the
    FRB
    regarding SunTrust's compliance record.
        The FDIC became aware of the issues set forth in the FRB's
    Consent Order early in the application review process. The
    agencies had ongoing discussions regarding the substance and
    status of the FRB's review and, as a condition of approval of
    the application, the applicants agreed that Truist Bank will
    take all necessary and appropriate action to fully and timely
    comply with the Consent Order issued by the FRB on November 19,
    2019, against SunTrust Bank, Atlanta, Georgia.
    Financial Stability Factor
    Q.7. The Approval Order states that ``Though Truist Bank would
    be among the largest insured depository institutions in the
    United States, the proposed merger would effectuate such an
    increase in size by combining into one large institution
    products, services, and interconnections that do not generally
    present financial stability risks.''

       LCountrywide was a $200 billion institution when it
            failed.\17\ Washington Mutual was $307 billion.\18\
            Together, they had the potential to do significant
            damage to the deposit insurance fund. Why does the FDIC
            believe that the failure of a $450 billion institution
            would not present risks to the financial system?
    ---------------------------------------------------------------------------
        \17\ New York Times, ``Bank of American to buy Countrywide,''
    Gretchen Morgenson and Eric Dash, January 11, 2008, https://
    www.nytimes.com/2008/01/11/business/worldbusiness/11iht-
    bofa.3.9157464.html.
        \18\ Reuters, ``WaMu is largest bank failure,'' Elinor Comlay and
    Jonathan Stempel, https://www.reuters.com/article/us-washingtonmutual-
    jpmorgannews1/wamu-is-largest-u-s-bank-failureidUSTRE48P05I20080926.

       LPlease describe the extent to which the FDIC
            considered the cost of failure of the merged
            institution in its review. How would Truist be wound
    ---------------------------------------------------------------------------
            down if it failed?

    Q.8. The Approval Order also listed five quantitative metrics
    considered when evaluating the financial stability factor,
    including interconnectedness and complexity. For each metric,
    please indicate if the FDIC has established numeric thresholds
    to evaluate whether or not it is triggered. If so, please
    identify the thresholds. If not, please describe how those
    factors were evaluated?

    A.7.-A.8. The Dodd-Frank Act amended the BMA to require the
    FDIC, in assessing a proposed merger transaction, to consider
    the risk to the stability of the United States banking or
    financial system.\19\ However, the Dodd-Frank Act did not
    prescribe any specific metrics or standards to be used in
    consideration of this statutory factor. Rather, the drafters of
    the law left it to the discretion of the Federal banking
    agencies to use appropriate and relevant metrics and standards
    based on the agencies' significant supervisory experience.
    ---------------------------------------------------------------------------
        \19\ Pub. L. No. 111-203,  604(f), 124 Stat. 1376, 1602 (2010).
    ---------------------------------------------------------------------------
        In evaluating the potential impact of the proposed
    transaction on the stability of the U.S. banking or financial
    system, the FDIC considered quantitative and qualitative
    metrics, each of which aims to assess whether Truist Bank's
    systemic footprint would be such that its failure or financial
    distress would compromise the overall stability of the U.S.
    banking or financial system. In developing the financial
    stability analysis used for evaluating the merger transaction,
    the FDIC took into consideration related initiatives on
    financial stability of the FDIC and the other Federal banking
    agencies to the extent appropriate.
        The quantitative metrics considered with respect to the
    transaction include: (1) the size of Truist Bank; (2) the
    availability of substitute providers for any critical products
    and services to be offered by Truist Bank; (3) the degree of
    interconnectedness of Truist Bank with the U.S. banking or
    financial system; (4) whether Truist Bank would contribute to
    the complexity of the U.S. banking or financial system; and (5)
    the extent of cross-border activities of Truist Bank. No
    ``bright line'' thresholds have been established. Rather, all
    factors are considered individually and in the aggregate with
    respect to the particular facts and circumstances of the
    proposed transaction, with no single factor being determinative
    or carrying greater weight than another. The following
    summarizes the FDIC's approach to evaluating each of these
    factors:

       LSize of the Resulting Institution: The distress or
            failure of an insured depository institution is more
            likely to negatively impact the banking or financial
            system if its activities comprise a relatively large
            share of system-wide activities. In the case of Truist
            Bank, the FDIC concluded that, although Truist Bank
            would be the sixth largest insured depository
            institution in the United States, its share of system-
            wide activities would be comparable to that of its
            regional bank peers, and would be significantly less
            than that of Global Systemically Important Banks (G-
            SIBs).

       LThe Availability of Substitute Providers for any
            Critical Products and Services: The purpose of
            considering the availability of substitute providers
            for any critical products and services to be supplied
            by the resulting institution is to assess the degree to
            which market participants rely on those products and
            services, to determine those products and services for
            which there are no ready substitutes, and to understand
            where an inability or unwillingness by the resulting
            institution to continue providing those products or
            services could be disruptive to the U.S. banking or
            financial systems.

       LInterconnectedness of the Resulting Institution
            with the Banking or Financial System: The purpose of
            considering interconnectedness is to assess the degree
            to which the resulting institution may be engaged in
            transactions with other financial system participants
            and the risk that these interconnections could affect
            the stability of the U.S. banking or financial systems.

       LResulting Institution Contribution to the
            Complexity of the Financial System: This factor focuses
            on the degree to which the complexity of an
            institution's product offerings, activities, practices,
            or structure could contribute to, or transmit, risk to
            the U.S. banking or financial systems.

       LCross-Border Activities: The purpose of considering
            cross-border activities is to assess the degree to
            which coordination of the resulting institution's
            supervision and resolution could be complicated by
            differing legal requirements, geopolitical events, or
            competing national interests, leading to increased
            potential for spillover effects.

    Additionally, a qualitative assessment of potential resolution-
    related complexities was considered, including: the resulting
    institution's organizational structure; challenges regarding
    operational continuity if a bridge bank should be necessary;
    saleability and separability in resolution; and potential
    resolution-related challenges associated with its holdings of
    uninsured deposits.
        In factoring in the cost of a potential failure of the
    resulting institution, the FDIC notes that it has several
    powers and tools to effectively resolve failed banks. The
    precise resolution strategy and tools chosen for any bank
    failure depend upon the circumstances present at the time of
    failure.
        Additionally, the passage of the Federal Deposit Insurance
    Corporation Improvement Act (FDICIA) in 1991 requires that the
    FDIC choose the method which is the least costly option to the
    Deposit Insurance Fund when resolving a failing financial
    institution.
        The Dodd-Frank Act amended the Federal Deposit Insurance
    Act by adding the systemic risk exception to authorize, subject
    to certain requirements, other approaches to resolution if the
    least cost requirements of FDICIA would have serious adverse
    effects on economic conditions or financial stability.
    Transparency
        While the FDIC Policy Statement does not contain an
    explicit transparency requirement, you have placed a
    significant emphasis on transparency during your year-and-a-
    half at the FDIC.

    Q.9. The depository data used for the anticompetitive analysis
    is nonconfidential information. Please provide the full
    anticompetitive analysis it undertook when reviewing the
    merger?

    Q.10. During a speech at the 2019 Bank Policy Institute
    conference, you stated that BB&T and SunTrust made it ``very
    difficult to decline their merger.''\20\ Please clarify why you
    found it ``very difficult'' to decline the merger.
    ---------------------------------------------------------------------------
        \20\ Tweet by Victoria Guida, November 20, 2019, https://
    twitter.com/vtg2/status/11972137144
    88811520.

    Q.11. On November 19, 2019 at 10:00 am, the FDIC held a Board
    meeting in which they considered a variety of matters in an
    open session. Later that day, it was revealed that the FDIC
    Board approved the merger in a closed session, despite the fact
    that this action was creating the largest FDIC-supervised
    institution and is the largest bank merger since the 2008
    ---------------------------------------------------------------------------
    financial crisis.

       LWhy was the merger considered under a closed
            session?

       LWas any confidential information discussed during
            the closed session?

       LWho was in attendance during the closed session?
            Please include Board members and non-Government
            officials, if applicable.

       LPlease provide a transcript of the closed meeting.

    Q.12. American Banker published an interview with the top
    executives of BB&T and SunTrust in which Truist's chairman and
    CEO, Kelly King stated, ``I was told by several senior
    regulators there was no legal reason to object to the
    deal.''\21\
    ---------------------------------------------------------------------------
        \21\ American Banker, ``Truist rising: With mega merger done,
    pressure to deliver,'' Paul Davis, December 9, 2019, https://
    www.americanbanker.com/news/truist-rising-with-mega-merger-done
    -pressure-on-to-deliver.

    ---------------------------------------------------------------------------
       LWere you one of those senior level regulators?

       LDid any FDIC staff have conversations with the
            executives, or their representatives of either
            institution before the merger application was filed?

         LIf so, please disclose the date, participants,
            and substance of the conversation.

         LDid the FDIC provide any comment regarding the
            likelihood of the approval of the deal?

    A.9.-A.12. The FDIC's competitive analyses utilized a variety
    of public data sources, including SOD data, but was also
    informed by additional data sources that represent institution-
    specific sensitive, confidential business and supervisory
    information that the FDIC does not disclose.
        It is customary for the FDIC Board to consider
    applications, including merger applications, in closed session.
    The consideration of such applications often includes the
    discussion of institution-specific sensitive, confidential
    business and supervisory information that the FDIC does not
    disclose.
        The FDIC's long-established standards regarding disclosure
    of information are embodied in Part 309 of the FDIC's Rules and
    Regulations, which provides that the FDIC will disclose final
    opinions, including concurring and dissenting opinions, as well
    as final
    orders and written agreements made in the adjudication of
    cases. The FDIC has publicly released the final order
    associated with the subject bank merger application.
        Part 309 also provides that certain records are exempt from
    disclosure, including records containing or related to:

       LTrade secrets and commercial or financial
            information obtained from a person that is privileged
            or confidential;

       LInteragency or intra-agency memoranda or letters
            that would not be available by law to a private party
            in litigation with the FDIC; and

       LExamination, operating, or condition reports
            prepared by, on behalf of, or for the use of the FDIC
            or any agency responsible for the regulation or
            supervision of financial institutions.

        With regard to cited statements regarding the lack of a
    basis for denying the application, the BMA directs the FDIC to
    consider specific statutory factors when evaluating a merger
    application. To the extent that the particular facts and
    circumstances of a particular application lead to a favorable
    finding on all of these specific statutory factors, there would
    be no basis on which to deny the application under the BMA.
    Because BB&T satisfied specific statutory requirements, the
    FDIC application was approved unanimously by the FDIC Board.
    Subsequently, the FRB unanimously approved the holding company
    application.
        Prior to the public announcement, BB&T management
    communicated with FDIC staff and management (as primary Federal
    regulator of the bank) on several occasions to provide notice
    that the proposed transaction would be announced in the near
    future. The contacts involved management and staff of the
    FDIC's Atlanta Regional Office, which is assigned primary
    supervisory responsibility for BB&T, and the FDIC's Washington
    Office. Specifically, from February 1, 2019, until the proposal
    was publicly announced on February 7, 2019, the following
    contacts took place:

       LOn February 1, 2019, BB&T Chairman and Chief
            Executive Officer (CEO) Kelly King informed Chairman
            Jelena McWilliams by telephone that BB&T would contact
            FDIC staff regarding a possible merger transaction.

       LOn February 2, 2019, BB&T Chief Risk Officer (CRO)
            Clarke Starnes emailed FDIC staff to request a meeting
            on February 4, 2019.

       LOn February 4, 2019, CRO Starnes met with the
            FDIC's Examiner-In-Charge (EiC) of BB&T and other
            agency representatives, and provided notification of
            the proposed merger.

       LOn February 4, 2019, Doreen Eberley, Director of
            the FDIC's Division of Risk Management Supervision,
            spoke with BB&T Chairman and CEO King.

       LOn February 6, 2019, CRO Starnes emailed the FDIC's
            EiC of BB&T regarding the proposed announcement date.
    Valid-When-Made-Doctrine
    Q.13. Under current law, is a payday lender able to issue a
    loan with a 160 percent APR and sell that loan to a bank to
    avoid certain State interest rate caps?

    Q.14. Under the proposed rule, would a payday lender be able to
    issue a loan with a 160 percent APR and sell that loan to a
    bank to avoid certain State interest rate caps?

    Q.15. The proposal states that the FDIC would unfavorably view
    the practice of a nonbank lender using banks for the purpose of
    avoiding State interest rate caps. Please describe what
    concrete protections the proposed rule contains to ensure that
    this practice does not occur.

        Would the FDIC pursue enforcement actions against banks
    that assist nonbank lenders in avoiding State interest rate
    caps?

    A.13.-A.15. On December 6, 2019, the FDIC published a notice of
    proposed rulemaking that would clarify the law governing the
    interest rates State banks may charge.\22\ The proposed rule
    would provide that whether interest on a loan is permissible
    under section 27 of the Federal Deposit Insurance Act would be
    determined at the time the loan is made, and interest on a loan
    permissible under section 27 would not be affected by
    subsequent events, such as a change in State law, a change in
    the relevant commercial paper rate, or the sale, assignment, or
    other transfer of the loan.
    ---------------------------------------------------------------------------
        \22\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
    6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
    06/pdf/2019-25689.pdf.
    ---------------------------------------------------------------------------
        The proposed rule affirms that the FDIC views unfavorably
    entities that partner with a State bank with the sole goal of
    evading a lower interest rate established under the law of the
    entity's licensing State(s). Although I am unable to address
    any confidential supervisory information or provide
    institution-specific information, I would note that the FDIC
    issued a public enforcement action \23\ in October 2018 against
    Republic Bank & Trust Company for failing to clearly and
    conspicuously disclose required information related to the
    bank's Elastic line of credit product offered pursuant to a
    contract with Elevate@Work, L.L.C. The FDIC will continue to
    examine supervised institutions for compliance with all
    applicable laws and regulations.
    ---------------------------------------------------------------------------
        \23\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
    (November 30, 2018), available at https://www.fdic.gov/news/news/press/
    2018/pr18089.html.

    Q.16. The proposed rule does not contain a single quantitative
    estimate to estimate the impact of the change on consumers. The
    rule explicitly claims that ``in jurisdictions affected by
    Madden, to the extent the proposed rule results in the
    preemption of State usury laws, some consumers may benefit from
    the improved availability of credit from State Banks. For these
    consumers, this additional credit may be offered at a higher
    ---------------------------------------------------------------------------
    interest rate than otherwise provided by relevant State law.''

       LIs the FDIC conducting a quantitative cost-benefit
            analysis to evaluate the costs of loans being offered
            at higher interest rates against the benefit of these
            loans being available?

       LHas the FDIC conducted any cost-benefit analysis to
            justify the proposed rule? If not, what is the
            justification for moving forward with the proposed rule
            if the FDIC ``is not aware of any broad effects on
            credit availability as a result of Madden,'' as stated
            in the proposal?

    A.16. The preamble explained that an important benefit of the
    proposed rule is to uphold longstanding principles regarding
    the ability of banks to sell loans, an ability that has
    significant safety-and-soundness implications, and included an
    extensive discussion of the FDIC's legal reasoning. Further,
    one way the FDIC fulfills its mission to maintain stability and
    public confidence in the Nation's financial system is by
    carrying out all of the tasks triggered by the closure of an
    FDIC-insured institution. This includes attempting to find a
    purchaser for the institution and the liquidation of the assets
    held by the failed banks.
        As it stands, the Madden decision could significantly
    impact the losses to the DIF in a failed bank resolution and
    disposition of assets. Following a bank closure, the FDIC as
    Conservator or Receiver (FDIC-R) is often left with large
    portfolios of loans. The FDIC-R has a statutory obligation to
    maximize the net present value return from the sale or
    disposition of such assets and minimize the amount of any loss,
    both in order to protect the Deposit Insurance Fund (DIF).\24\
    ---------------------------------------------------------------------------
        \24\ Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1821(d).
    ---------------------------------------------------------------------------
        The DIF would be significantly impacted in a large bank
    failure scenario if the FDIC-R was forced to sell loans at a
    large discount to account for impairment in the value of those
    loans as a result of legal uncertainty. This uncertainty would
    also increase legal and business risks to potential purchasers
    of bank loans, which in turn would likely reduce overall
    liquidity in loan markets, further limiting the ability of the
    FDIC-R to sell loans.
        The proposal also discusses concerns of market observers
    and ratings agencies regarding the liquidity and marketability
    of certain types of bank loans, and noted published research on
    potential effects on credit availability in the Second
    District.\25\ The comment period closed on February 4, 2020,
    and the FDIC has received numerous comments expressing concerns
    about the potential effects on financial markets and concerns
    regarding availability of credit for high-risk consumers.
    ---------------------------------------------------------------------------
        \25\ See Michael Marvin, ``Interest Exportation and Preemption:
    Madden's Impact on National Banks, the Secondary Credit Market, and P2P
    Lending,'' Columbia Law Review, Vol. 116 (January 15, 2016), available
    at https://ssrn.com/abstract=2753899 (focusing on the potentially
    deleterious effects of Madden on credit availability and the pricing of
    instruments tied to debt originated by a national bank in the secondary
    credit market); see also Colleen Honigsberg, Robert J. Jackson Jr., and
    Richard Squire, ``How Does Legal Enforceability Affect Consumer
    Lending? Evidence from a Natural Experiment,'' The Journal of Law and
    Economics 60, number four (November 2017): 673-712, available at
    https://www.journals.uchicago.edu/doi/abs/10.1086/695808, (finding that
    the decision in Madden not only reduced credit availability for higher-
    risk borrowers in the Second Circuit's jurisdiction, but affected the
    pricing of certain notes in the secondary market); see also Piotr
    Danisewicz and Ilaf Elard, ``The Real Effects of Financial Technology:
    Marketplace Lending and Personal Bankruptcy,'' July 5, 2018, available
    at https://
    papers.ssrn.com/sol3/papers.cfm?abstract_id=3208908 (finding that
    Madden led to an increase in bankruptcy rates arising predominately
    from changes in marketplace lending).
    ---------------------------------------------------------------------------
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                           JELENA McWILLIAMS

    Q.1. This spring, the Office of Management and Budget issued a
    memorandum that for the first time required independent
    regulatory agencies such as yours to submit final rules to the
    Administration before publishing them.

       LDid the FDIC get approval from OMB for any of your
            final rules or guidance--Volcker rule, alternative
            data, real estate appraisals, community bank leverage
            ratio, etc.? If so, which rules were submitted?

       LDid OMB make any changes to your rule? If so, what
            changes did OMB request?

    A.1. The FDIC will continue to meet its statutory mission as an
    independent regulatory agency while abiding by all applicable
    laws, including the requirements set forth by Congress under
    the Congressional Review Act. As required under the
    Congressional Review Act, the FDIC has historically submitted
    and continues to submit final rules published in the Federal
    Register to the Office of Management and Budget (OMB). The FDIC
    has been evaluating whether other documents meet the definition
    of a rule under the Congressional Review Act, in which case
    such documents will be submitted to OMB and to Congress, as
    required under the Congressional Review Act. For example, the
    FDIC recently submitted to OMB and to Congress an advisory
    regarding the prudent management of agricultural lending during
    economic cycles.\1\ The FDIC continues to review whether
    additional principles should be adopted to improve transparency
    and accountability to Congress with respect to the rulemaking
    process.
    ---------------------------------------------------------------------------
        \1\ See FDIC FIL-5-2020, Advisory: Prudent Management of
    Agricultural Lending During Economic Cycles (January 28, 2020),
    available at https://www.fdic.gov/news/news/financial/2020/
    fil20005.html.

    Q.2. Without the Community Reinvestment Act, the homeownership
    rate in our country, and especially for Latinos and African
    Americans, would be much lower. UnidosUS published a report,
    Latino Homeownership 2007-2017: A Decade of Decline for
    Latinos, which found that that the CRA helped facilitate
    between 15% to as much as 35% of home loans to Latinos. How
    would proposed changes to CRA close the racial and ethnic
    ---------------------------------------------------------------------------
    homeownership gap?

    A.2. On December 12, 2019, the FDIC and the Office of the
    Comptroller of the Currency (OCC) approved a notice of proposed
    rulemaking\2\ that would modernize the regulations implementing
    the CRA, which have not been substantively updated for nearly
    25 years. The proposed rule is intended to increase bank
    activity in low- or moderate-income (LMI) communities where
    there is significant need for credit, encourage more
    responsible lending, and promote improvements to critical
    infrastructure. The proposal, like the existing rules,
    continues to evaluate banks on the 18 mortgage loans made to
    LMI individuals. The proposal sets forth numerous questions on
    ways in which the rule can be improved.
    ---------------------------------------------------------------------------
        \2\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
    (Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
    2020-01-09/pdf/2019-27940.pdf.
    ---------------------------------------------------------------------------
        The proposal would (1) clarify and expand what qualifies
    for CRA credit, (2) expand where CRA activity counts; (3)
    provide an objective method to measure CRA activity; and (4)
    revise data collection, recordkeeping, and reporting
    requirements.
        With respect to the first set of changes, the proposal
    would establish clear criteria for the type of activities that
    qualify for CRA credit, require the agencies to publish
    periodically an illustrative list of examples of qualifying
    activities, and establish a process for banks to seek agency
    confirmation that an activity is a qualifying activity. These
    changes would address current impediments to engaging in CRA
    activities and provide banks with greater certainty and
    predictability regarding whether certain activities qualify for
    CRA credit. Specifically, by providing banks with greater
    confidence that activities qualify for CRA credit before they
    invest time and resources in those activities, the proposed
    rule would incentivize banks to more readily engage in
    innovative projects that have a significant impact on the
    community. Moreover, by allowing stakeholders to confirm that
    activities qualify, the proposal would eliminate the
    uncertainty in the current regulations that potentially limited
    the scope and type of banks' CRA activities that will benefit
    banks' communities, particularly LMI individuals and areas.
        In addition to providing transparency, the proposed
    qualifying activities criteria would expand the types of
    activities that qualify for CRA credit to recognize that some
    banks are currently serving community needs in a manner that is
    consistent with the statutory purpose of CRA but are not
    receiving CRA credit for those activities. This expansion would
    ensure that banks help meet the needs of their entire
    communities, particularly LMI neighborhoods and other areas and
    populations of need. The expanded qualifying activities
    criteria would focus on economically disadvantaged individuals
    and areas in banks' communities. For example, the proposed
    qualifying activities criteria would expand the activities that
    qualify in areas that have traditionally lacked sufficient
    access to financial services, such as (1) distressed areas; (2)
    underserved areas, including areas where there is a great need
    for banking activities but few banks that engage in activities
    (known as banking deserts); and (3) Indian country. Moreover,
    to maintain a focus on LMI individuals, the proposal would, for
    example, no longer permit a mortgage loan to a high-income
    individual living in a low-income census tract to qualify for
    CRA credit.
        As with any comprehensive set of reforms, the agencies rely
    on stakeholder feedback. The agencies will continue to engage
    with regulated institutions, community and consumer groups,
    members of Congress, and other stakeholders through the
    rulemaking process, including with respect to the issue of
    homeownership rates.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER FROM JELENA
                               McWILLIAMS

    Q.1. The FDIC is the largest regulator of community banks.
    These institutions would not be in business if they are not
    serving their community. What steps are you considering in the
    CRA modernization process to ensure that the burden of
    regulatory change for community banks will not be
    disproportionate to the benefits of updated regulations?

    A.1. On December 12, 2019, the FDIC and the Office of the
    Comptroller of the Currency (OCC) approved a notice of proposed
    rulemaking \1\ that would modernize the regulations
    implementing the CRA, which have not been substantively updated
    for nearly 25 years. The proposed rule is intended to increase
    bank activity in low- or moderate-income (LMI) communities
    where there is significant need for credit, encourage more
    responsible lending, and promote improvements to critical
    infrastructure. The proposal would ensure that small banks are
    not overly burdened by the need to overhaul their existing
    systems or collect and report extensive data to comply with the
    new framework. Specifically, the proposal would allow small
    banks (i.e., those with $500 million or less in total assets)
    to choose to be evaluated under the current rules or to opt in
    to the new performance standards.
    ---------------------------------------------------------------------------
        \1\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
    (Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
    2020-01-09/pdf/2019-27940.pdf.
    ---------------------------------------------------------------------------
        Moreover, the proposal would add a criterion for activities
    that help finance or support another bank's community
    development (CD) loans, CD investments, or CD services.
    Including this criterion and expanding the definition of CD
    loan and investments to include certain commitments to lend and
    invest would address the fact that community banks understand
    community needs best but often are unable to provide the
    necessary funding or service alone. In these cases, large banks
    may finance the project, benefiting from community banks'
    efforts to identify areas of need. This criterion would address
    stakeholders' recommendations that the CRA regulatory framework
    do more to encourage inter-bank collaboration and allow
    community banks to remain involved in projects that they
    identified and enabled.

    Q.2. I appreciate that the FDIC and OCC have publicly
    encouraged banks to expand their small-dollar lending. I
    understand--and appreciate--that the Fed, FDIC and OCC are
    working together on a regulatory action that would remove
    barriers that discourage banks from entering or deepening their
    presence in the market for small dollar credit.

       LWhat is your timeframe for issuing a regulatory
            action on small dollar lending?

       LIn conjunction with that effort, does the FDIC plan
            to rescind the FDIC's 2013 guidance that imposed
            prescriptive underwriting expectations on small dollar
            loans?

    A.2. According to the FDIC's unbanked and underbanked study,
    over 20 million households in America are underbanked and over
    8 million are unbanked.\2\ While some banks offer small-dollar
    lending to help those in need, many banks have chosen not to
    offer such products, in part, due to regulatory uncertainty.\3\
    As a result, many families rely on nonbank providers to cover
    these emergency expenses, or their needs go unmet.
    ---------------------------------------------------------------------------
        \2\ See 2017 FDIC National Survey of Unbanked and Underbanked
    Households, available at https://www.fdic.gov/householdsurvey/2017/
    2017report.pdf. A household is classified as unbanked if no one in the
    household has a checking or savings account. A household is classified
    as underbanked if it has a checking or savings account and used one of
    the following products or services from an alternative financial
    services provider in the past 12 months: money orders, check cashing,
    international remittances, payday loans, refund anticipation services,
    rent-to-own services, pawn shop loans, or auto title loans.
        \3\ The FDIC, FRB, and OCC have taken separate approaches to small-
    dollar lending at the institutions they regulate. See FDIC Issues Final
    Guidance Regarding Deposit Advance Products (Nov. 21, 2013), available
    at https://www.fdic.gov/news/news/press/2013/pr13105.html; FDIC FIL-50-
    2007, Affordable Small-Dollar Loan Guidelines (June 19, 2007),
    available at: https://www.fdic.gov/news/news/financial/2007/
    fil07050.pdf; OCC Bulletin 2018-14, Core Lending Principles for Short-
    Term, Small-Dollar, Installment Lending (May 23, 2018), available at:
    https://www.occ.gov/news-issuances/bulletins/2018/bulletin-2018-
    14.html; Federal Reserve Statement on Deposit Advance Products (April
    25, 2013), available at: https://www.
    federalreserve.gov/supervisionreg/caletters/caltr1307.htm.
    ---------------------------------------------------------------------------
        To solicit feedback on these products and consumer needs,
    the FDIC issued a request for information\4\ in November 2018
    to learn more about small-dollar credit needs and concerns. We
    have reviewed more than 60 comments and are reviewing our
    existing policies, including the 2013 guidance on deposit
    advance products. As you note, we are working closely with the
    OCC and Federal Reserve Board (FRB) to coordinate policies and
    plan to take action in the near future. While the interagency
    process for joint rulemakings and guidance documents takes
    longer to complete than if one agency acted alone, the FDIC's
    engagement with the OCC and FRB is based on an understanding
    that the three agencies are committed to act as expeditiously
    as the process would allow.
    ---------------------------------------------------------------------------
        \4\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
    58566 (Nov. 20, 2018), available at https://www.govinfo.gov/content/
    pkg/FR-2018-11-20/pdf/2018-25257.pdf.

    Q.3. This Committee is considering legislation that would aim
    at providing some regulatory certainty to banks working with
    cannabis-related companies in the 47 States that have taken
    various steps towards legalization. Would legislation such as
    the SAFE Banking Act be a constructive step toward providing a
    framework for financial institutions to serve companies that
    ---------------------------------------------------------------------------
    comply with State cannabis laws?

    A.3. As part of my commitment to travel to every State to meet
    with bankers, their customers, and State regulators, I have
    repeatedly heard concerns regarding the uncertainty in
    providing banking services to cannabis-related businesses as
    well as other businesses that provide services to those
    cannabis-related businesses. The
    Financial Crimes Enforcement Network (FinCEN) issued guidance
    in 2014 to address the Bank Secrecy Act obligations when
    serving these customers.
        While financial institutions say they understand FinCEN's
    guidance, the guidance addresses BSA obligations and does not
    address uncertainty related to law enforcement. I defer to
    Congress on how best to address this uncertainty.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RODNEY E.
                                  HOOD

    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from May 15, 2019 to present.

    A.1.:

    May 15, 2019--Wednesday
         LSenate Hearing--Committee on Banking, Housing,
            and Urban Affairs ``Oversight of Financial Regulators''

    May 16, 2019--Thursday

         LCommittee on Financial Services Hearing
            ``Oversight of Prudential Regulators: Ensuring the
            Safe, Sound, and Accountable Conduct of Megabanks and
            Other Depository Institutions''

    May 20, 2019--Monday

         LOtoe-Missouria FCU Charter Ceremony, Red Rock, OK

    May 22, 2019--Wednesday

         LMeeting with Andrew Moss, OCC, Outreach and
            External Relations Program Manager--MDI

         LAndrew Young Presents: The Color of Money--OCC

    May 29, 2019--Wednesday

         LPhone call with--Andrew Moss, Outreach and
            External Relations Program Manager, OCC

    May 30, 2019--Thursday

         LLunch Meeting with CFPB Director Kraninger

         LFSOC Principles Meeting--Treasury

    May 31, 2019--Friday

         LRemarks before the Hope Global Forum--Atlanta, GA

    June 3, 2019--Monday

         LFederal Reserve Bank of Atlanta Meeting (Dr.
            Raphael Bostic)--Atlanta, GA

         LFederal Home Loan Bank of Atlanta Meeting--
            Atlanta, GA

    June 4, 2019--Tuesday

         LMeet--Cities for Financial Empowerment Fund--CFE
            Fund, NYC

    June 5, 2019--Wednesday

         LHSBC Financial Innovation Center Meeting with
            Jeremy Balkin--HSBC Midtown Office

         LAdam Connaker--Rockefeller Foundation Center for
            Innovation

    June 6, 2019--Thursday

         LInclusiv Meeting with Cathie Mahon--NYC

         LMeeting with National Urban League President Marc
            Morial--NUL Headquarters

    June 7, 2019--Friday

         LGeopolitics of Cyber Technology Breakfast
            Briefing--Deutsche Bank Innovation Lab

    June 10, 2019--Monday

         LFFIEC Briefing with Secretary Judy Dupree, Kaelin
            Browne, and Rosanna Piccirilli

         LCredit Union National Association (CUNA)
            Meeting--CUNA Office DC

    June 11, 2019--Tuesday

         LFintech Meeting with Jeff Bandman, Bandman
            Advisors

         LCato Institute Call with Moderator

         LMedia Training Beverly Hallberg, District Media
            Group

    June 12, 2019--Wednesday

         LCATO Summit on Financial Regulation Fire Side
            Chat--Cato Institute

         LMeet with Jovita Carranza Treasurer--Treasury

    June 13, 2019--Thursday

         LCriminal re-entry event--White House

         LMeeting with NWCUA's Troy Stang--City Center--DC

    June 17, 2019--Monday

         LInteragency Principals +1 BSA Meeting / Follow-Up
            Law Enforcement Briefing--Treasury

         LVirginia ARP (VA ARP) Meeting

    June 18, 2019--Tuesday

         LMeeting with National Disability Institute--
            Michael Morris and Mark Richert (Director of Public
            Policy)

         LFarm Credit Administration Meeting with Board
            Member and Acting CEO Jeff Hall and his EA Kevin Kramp

    June 19, 2019--Wednesday

         LExchequer Club Meeting Luncheon--Mayflower Hotel

    June 20, 2019--Thursday

         LMaryland/DC Credit Union Association Meet and
            Greet

         LCooperative Credit Union Association Meet and
            Greet

         LMeeting with State Employees CU CEO, Mike Lord

    June 21, 2019--Friday

         LNEC Meeting

    June 25, 2019--Tuesday

         LCybersecurity Threat Monitoring, Tools &
            Resources--Workshop--Interagency MDI & CDFI Bank
            Conference--FDIC

         LInteragency MDI & CDFI Bank Conference
            Reception--FDIC

    June 27, 2019--Thursday

         LFFIEC Principles Meeting--Consumer Financial
            Protection Bureau

         LCeremonial Swearing In by Vice President Pence-
            Eisenhower Executive Office Building

    July 9, 2019--Tuesday

         LCNBC's Capital Exchange: The Economy 2020--AJAX
            DC

         LMeeting with former Comptroller Tom Curry,
            currently at Nutter

         LMeeting with Stephanie Ortoleva--Founding
            President and Executive Director, Women Enabled
            International

    July 10, 2019--Wednesday

         LMeeting with Larry Blanchard

         LMeeting with National Association of Credit Union
            Service Organizations (NACUSO)

         LMeeting with Navy FCU President/CEO Mary McDuffie

    July 11, 2019--Thursday

         LJa'Ron Smith--Director of Urban Affairs and
            Revitalization at Executive Office of the President--
            White House

         LPALs Group Meeting with Lauren Saunders, Michael
            Calhoun, Chris Peterson, Rob Randhava

    July 12, 2019--Friday

         LFFIEC Conference Call--FFIEC Appraisal
            Subcommittee

    July 15, 2019--Monday

         LLunch Meeting with HUD Secretary Carson--U.S.
            Department of Housing and Urban Development

         LCooperative Credit Union Alliance

    July 17, 2019--Wednesday

         LMeeting with Boyce Adams, Banktel Systems

         LMeeting with Senator Crapo

    July 18, 2019--Thursday

         LGrand Opening of Hope Inside Destinations Credit
            Union--Baltimore, MD

    July 19, 2019--Friday

         LMedia Training with Beverly Hallberg

    July 22, 2019--Monday

         LSmall Business Matters Summit

    July 23, 2019--Tuesday

         LInteragency Principals +1 BSA Meeting--OCC

    July 24, 2019--Wednesday

         LPEW Meeting--Chairman to call in

         LCarolinas Credit Union League Meet & Greet--
            Columbia, SC

         LDinner with League members after Meet & Greet in
            SC

    July 25, 2019--Thursday

         LCarolinas Credit Union League--North Carolina
            Meet & Greet--Raleigh, NC

    July 26, 2019--Friday

         LNational Urban League Conference--IN

    July 27, 2019--Saturday

         L2019 National Urban League Small Business Matters
            Summit ``How to Become Bankable'' Workshop--IN

         LNational Urban League Small Business Matters
            Entrepreneurship Summit--National Urban League
            (Panel)--IN

    July 29, 2019--Monday

         LLunch with the Indiana League--IN

    July 31, 2019--Wednesday

         LMeeting with Mark Zelden--The Center for Faith
            and Opportunity Initiatives, Department of Labor

         LMeeting with Andrew Giuliani, White House Office
            of Public Liaison

    August 1, 2019--Thursday

         LCall with Anthony Hernandez (Defense Credit Union
            Council)

         LVictoria Guida--Politico

    August 2, 2019--Friday

         LDavid Baumann--CU Times

         LJohn Reosti--CU Journal

         LRay Birch--CU Today

    August 6, 2019--Tuesday

         LMeeting with Jerry Buckley--Buckley LLP

    August 7, 2019--Wednesday

         LMeet and Greet--UNC Center for Community
            Capital--North Campus

    August 8, 2019--Thursday

         LAfrican American Credit Union Coalition (AACUC)
            Roundtable with NCUA Chairman Hood--AACUC--Charlotte,
            NC

    August 9, 2019--Friday

         LChairman--Speaker at African American Credit
            Union Coalition Conference--Charlotte, NC

         LCUNA Podcast On-site at African American Credit
            Union Coalition--Charlotte, NC

         LAfrican American Credit Union Coalition--
            Receptions (2) and Awards Dinner--Charlotte, NC

    August 12, 2019--Monday

         LMeeting with Provident CU--Redwood City, CA

         LMeeting at Provident CU w/ CA League--Redwood
            City, CA

         LMeeting with Robinhood Financial LLC--Menlo Park,
            CA

         LDinner with Peter Shiner--Menlo Park, CA

    August 13, 2019--Tuesday

         LMeeting with SF Fed Reserve--Gerry Tsai (Fintech
            Team)--Federal Reserve Bank of SF

         LVISA Meeting--Innovation Lab--San Francisco, CA

         LBrief call with Treasurer Jovita Carranza

         LFHLB of San Francisco Meeting and Dinner--San
            Francisco, CA

    August 14, 2019--Wednesday

         LNational Association of State Credit Union
            Supervisors (NASCUS) Speech--San Francisco, CA

         LBrief Meeting with Katie Averill (Iowa Regulator)

    August 15, 2019--Thursday

         LAsian Real Estate Association of America Advisory
            Council Meeting--Chairman Speaks--Sonoma, CA

         LAsian Real Estate Association of America Board
            Retreat--Chairman--Sonoma, CA

         LCall with Bimal Patel Assistant Secretary for
            Financial Institutions at U.S. Department of the
            Treasury

    August 16, 2019--Friday

         LCall Chris Pilkerton, Acting Administrator, SBA

         LMeeting with Self-Help Credit Union--Napa, CA

         LSelf-Help--Lunch with Steve Zuckerman and
            leadership team

    August 20, 2019--Tuesday

         LChairman Speaking--Defense Credit Union Council
            Annual Conference--Chicago, IL

         LDefense Credit Union Council 20th Annual Hall of
            Honor Awards Dinner--Chicago, IL

    August 21, 2019--Wednesday

         LMeet with South Side Community FCU--Chicago, IL

    August 28, 2019--Wednesday

         LWSJ Interview Prep with Beverly Hallberg

         LPhone interview with Lalita Clozel, Wall Street
            Journal

    August 29, 2019--Thursday

         LTaped TV Interview with The Armstrong Williams
            Show

         LWhite House Digital Meeting--White House

    August 30, 2019--Friday

         LCall with Patrick La Pine, Southeastern Credit
            Unions

         LDinner with Bogdon Chmielewski, Polish Credit
            Union CEO and Zbigniew Rogalski, Maspeth Branch
            Manager--NYC

    August 31, 2019--Saturday

         LMeeting and Brief Tour of Exhibit with Krzysztof
            Matyszczyk, Chairman of the Board; Bogdon Chmielewski,
            Polish Credit Union CEO and Maciej Golubiewski, Consul
            General of Poland in NYC--NYC

         LOpening of ``Fighting and Suffering. Polish
            Citizens during World War II'' Exhibit (Chairman giving
            remarks)--NYC

         LLunch with Representatives of the Polish and
            Slavic FCU Board of Directors, Supervisory Committee
            and Executive Management--NYC

         LCall to Daniel Schline, North Carolina/South
            Carolina League President, re: Tropical Storm Dorian

    September 3, 2019--Tuesday

         LInteragency Principals Law Enforcement Briefing
            by FinCEN--FinCEN

    September 4, 2019--Wednesday

         LFSOC Meeting--Treasury Department

    September 5, 2019--Thursday

         LLunch Meeting with Undersecretary Mandelker--
            Treasury

         LPhone call with Clark Akers, Hall Capital

         LMeeting with Emory Cox, National Economic Council

    September 9, 2019--Monday

         LChairman speaking to Truliant Federal Credit
            Union--DC

         LMeeting with and remarks 11 Presidents of Federal
            Home Loan Banking System--DC

    September 10, 2019--Tuesday

         LChairman Speaking to National Association of
            federally Insured Credit Unions Congressional Caucus--
            DC

         LMeeting with Mick Mulvaney, Acting Chief of Staff
            to President Trump--DC

         LIn-person interview with Melissa Angell, CU
            Journal (immediately following NAFCU speaking)

         LMeeting with John Fenton, CEO of Affinity FCU (+
            4)--DC

         LInteragency Conference Call re: Model Risk
            Management

         LMeeting with Kinecta Federal Credit Union Board's
            Supervisory Committee--DC

    September 11, 2019--Wednesday

         LLunch with Bimal Patel, Assistant Secretary of
            Treasury for Financial Institutions--Treasury
            Department

         LDinner with State Liaison Committee of the
            FFIEC--DC

    September 12, 2019--Thursday

         LFFIEC Principals Meeting--CFPB

         LLunch with CFPB Director Kathy Kraninger--FDIC

         LMeeting with New Mexico Credit Union Hike the
            Hill Group

    September 13, 2019--Friday

         LLunch with Rebekah Goshorn Jurata, Special
            Assistant to the President for Financial Policy--White
            House

         LPhone interview with Caroline Hudson, Charlotte
            Business Journal

    September 16, 2019--Monday

         LCoffee with former Acting Comptroller Julie
            Williams, Promontory Financial Group--DC

    September 17, 2019--Tuesday

         LMeeting with Credit Union Association of the
            Dakotas Hike the Hill Group

    September 18, 2019--Wednesday

         LBSA Principals Meeting--OCC

    September 19, 2019--Thursday

         LMeeting with Kentucky Credit Union League and
            Cooperative Credit Union Association (Delaware,
            Massachusetts, New Hampshire, Rhode Island)

         LMeeting with Cornerstone Credit Union League
            (Texas, Arkansas, Oklahoma)

         LMeeting with Northwest Credit Union Association

         LReception: NeighborWorks Celebrates 40 Years of
            Community Partnerships, Investments & Impact--DC

    September 20, 2019--Friday

         LAustralia State Arrival Ceremony--White House

    September 23, 2019--Monday

         LChairman Speaking at American Credit Union
            Mortgage Assoc. (ACUMA) Annual Meeting--Gaylord
            National Harbor, MD

         LMeeting with James Schenck, President/CEO, Alicia
            Nealon, VP of Compliance and Derrick Harris, SVP of
            Branch Operations, PenFed

         LMeeting with Loretta Harrington, World Institute
            of Disability

         LMeeting with New York Credit Union Association
            Hike the Hill Group

    September 24, 2019--Tuesday

         LMeeting with SchoolsFirst Federal Credit Union
            Hike the Hill Group

         LMeeting with Montana Credit Union League

         LMeeting with Congressman Ted Budd

         LEvening of Conversation with Scott Pelley, CBS
            News, 60 Minutes and Lonnie Bunch, Secretary, National
            Museum of African American History and Culture--DC

    September 25, 2019--Wednesday

         LMeeting with the West Virginia Credit Union
            League & Ohio Credit Union League Hike the Hill Groups

    September 26, 2019--Thursday

         LAmerica's Credit Union Museum Open House
            (Chairman making brief remarks)--Manchester, NH

    September 27, 2019--Friday

         LPhone call with Grovetta Gardineer, Senior Deputy
            Comptroller for Bank Supervision Policy, OCC

         LLunch with Mark Calabria, Director, FHFA--FHFA
            Headquarters

    October 1, 2019--Tuesday

         LMeeting with Mick Mulvaney, Acting Chief of Staff
            to President Trump--White House

         LLunch with Howard Adler, Deputy Assistant
            Secretary, FSOC, Treasury--DC

    October 3, 2019--Thursday

         LChairman Speaking--National Council of
            Firefighter Credit Unions Inc. (NCOFCU) 2019 Annual
            Firefighters Credit Union Conference--Clearwater Beach,
            FL

         LDinner with Alabama Credit Union CEOs--
            Birmingham, AL

    October 4, 2019--Friday

         LMeeting with Bill Connor and America's First
            Federal Credit Union--Birmingham, AL

         LLunch with former NCUA Chairman Dennis Dollar,
            Dollar Associates--Birmingham, AL

         LMeeting with Alabama Credit Union League--
            Birmingham, AL

    October 8, 2019--Tuesday

         LChairman Hood Speaking to State Employees' Credit
            Union 2019 Annual Meeting--Greensboro, NC

    October 11, 2019--Friday

         LPhone Call--Under Secretary Sigal Mandelker,
            Treasury Department

    October 15, 2019--Tuesday

         LRadio Interview with David Webb, Webb Media

         LLunch with Kristan Nevins, Cabinet Secretary for
            President Trump--White House

         LMeeting with James Williams, CFO, Department of
            Labor

    October 16, 2019--Wednesday

         LMeeting with Michigan Credit Union League Hike
            the Hill Group

         LMeeting with Heartland Credit Union Association
            (Kansas and Missouri)

         LLunch with Nick Owens, Magnolia Strategy Partners

         LMeeting with John Ryan and Mike Stevens,
            Conference of State Bank Supervisors

    October 28, 2019--Monday

         LBite of Reality Financial Education Program--
            Monterey, CA

         LMeeting with Diana Dykstra, CEO, California/
            Nevada Credit Union Leagues--Monterey, CA

         LChairman Hood Speaking to REACH 2019 Conference--
            Monterey, CA

         LREACH Welcome Reception--Monterey, CA

    October 29, 2019--Tuesday

         LLunch with California/Nevada League Credit Union
            CEOs--Monterey, CA

    October 30, 2019--Wednesday

         LMeeting with David Kimball, CEO; Usama Ashraf,
            CFO; David Staley, VP Capital Markets; Prosper Fintech
            Team along with Peter Shiner of B.R. & Co.--San
            Francisco, CA

         LDinner with Peter Shiner of B.R. & Co.--San
            Francisco, CA

    October 31, 2019--Thursday

         LMeeting with Google Product Team; Venkat Rapaka,
            Felix Lin and Noah Richmond--Google, Sunnyvale, CA

         LMeeting with Google Legal and Compliance Teams;
            Paul Twarog, Laura Fragomeni and Noah Richmond--Google,
            Sunnyvale, CA

         LSmall Lunch Roundtable Discussion with Chairman
            Hood; Junior staff members from the product, legal and
            compliance--Google, Sunnyvale, CA

         LTour of Google X--Google, Mountain View, CA

    November 1, 2019--Friday

         LMeeting with Jacob Whitish, Vice Consul, Trade
            and Investment Officer, U.K.'s Department for
            International Trade--San Francisco, CA

    November 5, 2019--Tuesday

         LMeeting with Tim Moyer, FBI, re: money laundering
            and terror finance

         LMeeting with Tony Ferris, GRC Revolutionist

         LMeeting with Senate Majority Leader Mitch
            McConnell

    November 6, 2019--Wednesday

         LChairman Speaking to The America Saves Summit:
            Attacking the Savings Crisis hosted by the Consumer
            Federation of America--DC

    November 7, 2019--Thursday

         LReception Honoring Sigal Mandelker, U/S for the
            Office of Terrorism and Financial Intelligence,
            Treasury Department--Treasury Department

         LPhone call with Secretary Ben Carson

         LFSOC Meeting--Treasury Department

    November 8, 2019--Friday

         LChairman touring Samsung Innovation Center

         LReid Temple Small Business Symposium (Chairman
            giving opening remarks and then participating in
            panel)--Reid Temple Church, MD

    November 12, 2019--Tuesday

         LVideoconference with CUNA Small Credit Union
            Committee

         LPhone call with Congressman Trey Hollingsworth

         LMeeting with Jay Clayton, Chairman, SEC

    November 13, 2019--Wednesday

         LChairman Speaking to CT NASCUS Executive Forum--
            Hartford, CT

         LMeeting/Tour with Dean Marchessault, President,
            CEP, American Eale Financial Credit Union with Jorge
            Perez, Commissioner of Financial Institutions (CT)--
            Hartford, CT

    November 14, 2019--Thursday

         LMeeting with Calvin Harris, COO, National Urban
            League--NYC

    November 15, 2019--Friday

         LMeeting with Matt Homer, Executive Deputy
            Superintendent, Research & Innovation Division at New
            York State Department of Financial Services--NYC

         LFIRREA Principals Conference call

    November 18, 2019--Monday

         LLunch with Debbie Matz, Former Chairman, NCUA--
            Alexandria, VA

         LPhone call with Jelena McWilliams, Chairman of
            the Federal Deposit Insurance Corporation

    November 19, 2019--Tuesday

         LMeeting with Michelle Bowman, Governor, Federal
            Reserve Board

         LMeeting with Emily Hollis, ALM First and Kevin
            Kirksey, Principal, Strategic Solution Group

         LPhone call with Mike Morial, President and CEO,
            National Urban League

         LDinner with Leo Tilman, Tilman and Company

    November 21, 2019--Thursday

         LMeeting with NAFCU's Board of Directors

         LMeeting with Paul Compton, General Counsel, HUD

         LPhone interview with Ben Eisen, Wall Street
            Journal

    November 25, 2019--Monday

         LRemarks at Allegacy FCU High School Branch
            Opening--Carver High School, Winston Salem, NC

         LPhone call with former SEC Commissioner Mike
            Piwowar and Dianna Dunne, Milken Institute

    November 26, 2019--Tuesday

         LVisit to Charlotte Business Journal

    November 27, 2019--Wednesday

         LChairman Speaking to Charlotte Executive Club
            November Meeting--Charlotte, NC

    December 3, 2019--Tuesday

         LMeeting with Sen. Joe Manchin

         LMeeting with Sen. Jon Tester

    December 4, 2019--Wednesday

         LHouse Financial Services Committee Hearing--
            Oversight of Prudential Regulators: Ensuring the
            Safety, Soundness, Diversity, and Accountability of
            Depository Institutions

         LFSOC Meeting--Open Meeting--U.S. Department of
            the Treasury

         LFSOC Reception hosted by Chairman Clayton and
            Chairman McWilliams

    December 5, 2019--Thursday

         LBanking Committee Hearing--Oversight of Financial
            Regulators

    December 6, 2019--Friday

         LFollow-up phone call with Tony Ferris, Rochdale
            Group

    December 9, 2019--Monday

         LChairman Speaking to FHLB Atlanta Credit Union
            Conference (Keynote speaker)--Naples, FL

    December 10, 2019--Tuesday

         LRecording The CU Insight Experience Podcast

         LMeeting with Doug Webster, Department of Labor

         LExchequer Club Holiday Reception

         LInstitute of International Finance Holiday
            Reception

    December 11, 2019--Wednesday

         LPhone call with Dan Newberry, Sr. VP of Lending,
            TTCU Federal Credit Union

         LMeeting with Justin Bis--White House, Office of
            Presidential Personnel

    December 12, 2019--Thursday

         LMeeting with Congressman Blaine Luetkemeyer

         LFHLB Holiday Event

    December 13, 2019--Friday

         LPhone call with Richard Hunt, Consumer Bankers
            Association

         LFFIEC Principles Meeting

         LWhite House Christmas Reception

    Q.2. On October 23, 2019, I sent you a letter raising concerns
    that your recent actions put the NCUA's statutorily required
    political independence at risk, to which I have not received a
    response. On December 3, 2019, I received a hand delivered
    letter from you that summarized your accomplishments from the
    year, but was not responsive to my October letter. Please
    include for the record the responses to the five questions I
    asked in my October 23, 2019, letter.

    A.2. The December 3, 2019, letter's purpose was to highlight
    accomplishments since my tenure at the NCUA. The letter also
    offered my availability to set up a time to discuss the
    questions outlined in your October 23, 2019, letter.

    Q.3. The NCUA delayed for the second time an October 2015 rule
    to improve the resilience of the credit union system by
    strengthening capital requirements. In the wake of the 2008
    financial crisis, credit union failures required billions of
    dollars in emergency liquidity assistance and Government
    guarantees. Many of these failures resulted from inadequate
    levels of capital relative to the risk associated with the
    credit unions' assets and operations.\1\ The NCUA Board, by a
    2-1 vote, has extended until January 1, 2022, the effective
    date of the risk-based capital rule--a rule that had an initial
    effective date of January 1, 2019, and that the NCUA has
    already expanded and delayed once before. The NCUA determined
    that a 2-year delay would pose incremental risk to the Share
    Insurance Fund. Please provide the analysis used to determine
    the incremental risk to the Share Insurance Fund. What is the
    difference in the amount of loss-absorbing capital at credit
    unions under the current PCA framework compared to what it
    would be under the risk-based capital framework?
    ---------------------------------------------------------------------------
        \1\ 80 Fed. Reg. 66625, 66630 (Oct. 29, 2015).

    A.3. The enhancement of the risk-based capital standards would
    represent just one element of the NCUA's examination and
    supervision program. The strength of the current economy and
    the strong capital position of the vast majority of federally
    insured credit unions allowed the agency to conclude that the
    incremental risk posed by a 2-year extension of the effective
    date is manageable. The delay will enable the agency to ensure
    the rule is implemented in a well-integrated way.
        As part of the extensive analysis of the capital in the
    credit union system that agency staff performed prior to the
    Board's approving the 2-year extension to the risk-based
    capital rule, the NCUA identified credit unions that would have
    a capital shortfall under the rule and determined the
    incremental risk to the National Credit Union Share Insurance
    Fund was $43 million as of December 31, 2018. This estimate
    represents the gap between maintaining a well-capitalized
    classification under the current Prompt Corrective Action
    structure and a well-capitalized position under the future
    risk-based capital structure. The potential failure of these
    institutions during the 2-year period is mitigated by current
    economic conditions and other tools available under the
    agency's examination and supervision program.
        In December 2017, the Congressional Budget Office issued a
    report that included the gross cost to the Share Insurance Fund
    related to implementation of the risk-based capital rule would
    be $1.2 billion over a 10-year period. Straight-lining this
    over a 10-year period results in an incremental cost of $120
    million a year. Using this incremental loss factor for 2 years
    would total $240 million. Stated another way, the CBO concluded
    that the incremental cost represents about two basis points
    related to the Share Insurance Fund's equity ratio, which
    currently stands at 1.37 percent.
        The NCUA's risk-based capital requirements will only apply
    to federally insured credit unions with assets greater than
    $500 million. Based on September 30, 2019, Call Report data,
    these credit unions hold $136,825,595,187 in total capital. The
    current minimum capital requirement for these credit unions
    totals $85,209,522,143. By comparison, the estimated minimum
    capital required for the same federally insured credit unions
    under the risk-based capital rule would be $85,816,494,855.

    Q.4. The NCUA also approved a 2018 proposal to weaken
    protections for payday alternative loans (PALs). In your
    remarks at your ceremonial swearing-in, you described how the
    credit union system allowed loans to be provided to members
    ``based on the consideration of their character, as well as the
    ability to repay.''\2\ Under the final PALs II rule, however,
    certain loans could have triple digit APR and there is no
    underwriting requirement. Please explain whether credit unions
    are required to provide loans to members based on their ability
    to repay under PALs II and how the NCUA plans to examine for
    safety and soundness and consumer protection if credit unions
    are not subject to ability-to-repay underwriting requirements.
    ---------------------------------------------------------------------------
        \2\ Chairman Rodney E. Hood Ceremonial Swearing-In Remarks with the
    Vice President, June 2019, https://www.ncua.gov/newsroom/speech/2019/
    chairman-rodney-e-hood-ceremonial-swear
    ing-remarks-vice-president.

    A.4. The NCUA adopted two Payday Alternative Loan rules
    designed to encourage credit unions to offer credit services to
    underbanked segments of society. The consumer protections for
    PALs II loans are, in fact, stronger than those for PALs I
    loans. The PALs II rule provides the same consumer protections
    that exist for PALs I loans, with the added protection to
    prohibit fees for overdrafts and insufficient funds.
        Credit unions cannot charge an interest rate higher than 28
    percent on an annualized basis for any PALs loan product. The
    only fee credit unions can charge in connection with making any
    PALs loan is an application fee in the amount of the actual
    cost to process an application, not to exceed $20. By
    definition, under Regulation Z, an application fee is not a
    finance charge included in the calculation of APR.[1]

    [1] A Federal credit union can also charge late fees for
    payments a member fails to pay on time. Like application fees,
    late charges are not a finance charge or included in the APR.

        While the PALs I and PALs II loan requirements do not
    prescribe a full underwriting regimen, both rules require
    credit unions that make PALs loans to implement ``appropriate
    written underwriting guidelines to minimize risk, such as,
    requiring a borrower to verify employment by providing at least
    two recent pay stubs.'' The PALs II rule contains guidance on
    creating successful PALs programs that recommends adopting
    procedures and features designed to help each member repay
    these loans and restore a strong financial footing. First and
    foremost, the credit union should consider how the PALs loan
    will benefit a member's financial well-being. The rule also
    suggests including a savings component, financial education,
    and reporting repayment performance to consumer reporting
    agencies.
        PALs II is a reflection of our experience overseeing the
    original PALs program and of working with consumer focused
    leaders such as Pew Charitable Trusts to craft financial
    solutions that make a difference to millions of Americans with
    low-incomes. PALs is a program of prudent lending that directly
    helps households who have to date been relegated to the high
    interest rate, subprime payday lending industry. The NCUA is
    committed to building on our experience in this area and
    adjusting this program in a way that helps credit unions
    maximize sustainable and affordable service to their members.
        NCUA staff will review small-dollar lending, including PALs
    programs, during all safety and soundness examinations
    performed in 2020. The reviews will include ensuring compliance
    with all PALs requirements and determining whether a credit
    union's program meets the annual percentage rate cap.

    Q.5. On December 12, 2019, the Administration approved its 2020
    budget despite bipartisan concerns from both Board Member
    Harper and Board Member McWatters that the agency needs
    additional resources allocated to consumer protection and
    consumer compliance staff to proactively prepare for risk.
    Please explain why the NCUA did not include these allocations
    in its 2020 budget. How does the NCUA, an agency charged with
    ensuring that credit unions serve their members, expect to
    prioritize consumer protection without the appropriate level of
    resources?

    A.5. NCUA, like all other Federal banking agencies, employs a
    risk-focused approach when reviewing for compliance with
    consumer financial protection laws and regulations. This allows
    our staff to focus their attention to areas of highest concern.
    NCUA examiners use a variety of resources to properly scope
    their reviews of consumer compliance, including the results of
    any fair lending exams and consumer compliance data. In
    addition, field staff annually conduct targeted reviews of
    significant consumer protection laws and regulations during all
    safety and soundness examinations. At the conclusion of an
    examination, field staff assign a final risk rating of high,
    medium, or low to assess a credit union's overall compliance
    risk. The risk rating typically reflects the level of
    compliance risk in either a component rating on Management, in
    a credit union's overall CAMEL rating, or both. While this
    compliance risk rating is not a numerical rating of 1-5
    typically assigned by other Federal banking regulators, NCUA
    employs the same principles and compliance risk indicators as
    the other regulators do when assigning its compliance risk
    rating.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR ROUNDS FROM RODNEY E.
                                  HOOD

    Q.1. As members of the Financial Stability Oversight Council
    (FSOC), I would like to express my gratitude for FSOC's
    finalization of its revised interpretive guidance on nonbank
    financial company designations. As the lead sponsor of the
    Financial Stability Oversight Council Improvement Act of 2019,
    I am well aware of the need to reform the process for
    designating financial institutions as systemically important
    financial institutions (SIFIs). Although no revised guidance or
    regulation can take the place of reforming the ill-conceived
    designation process that came about as a result of Dodd-Frank,
    I am nonetheless grateful that FSOC has taken a step to this
    end.
        The Financial Stability Oversight Council Improvement Act
    of 2019 shares many goals with the guidance. Can you expand on
    why you chose to prioritize an activities-based approach?

    A.1. In December, FSOC members unanimously approved new
    interpretive guidance on how the Council would designate a
    nonbank financial company as ``systemically important.'' The
    activities-based approach ensures that the Council is looking
    at the widest range of potentially problematic financial
    activities that could threaten market stability, thus enhancing
    FSOC's overall vigilance and effectiveness.
        This new process will also enhance the Council's engagement
    with the primary financial regulators, who are most
    knowledgeable about the activities and overall risk profiles of
    the entities they regulate. It also requires a quantifiable
    cost-benefit analysis be conducted.
        The new guidance puts a premium on FSOC's transparency by
    laying out the exact process the Council would follow to
    designate a nonbank company for enhanced supervision. As such,
    it will
    provide the market with much-needed clarity on the Council's
    deliberations and decisionmaking.

    Q.2. As one of the original sponsors of the Improving
    Laundering Laws and Increasing Comprehensive Information
    Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH)
    Act, I am well aware of the pitfalls associated with our
    current anti-money laundering systems as well as the challenges
    that financial services institutions have in complying with
    current anti-money laundering rules and regulations.
        Financial institutions trying to understand and comply with
    our existing anti-money laundering rules frequently rely on the
    Federal Financial Institutions Examination Council's (FFIEC)
    Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Examination
    Manual. This manual was last updated in November 2014, before
    substantial changes like the finalization of the Customer Due
    Diligence Rule.

    Q.2.a. When will the manual be updated to reflect changes made
    after November 2014?

    A.2.a. The NCUA and the other FFIEC member agencies have been
    working jointly to update the manual. The agencies are close to
    releasing a partial update to the manual, with plans to finish
    a full update by the end of 2020.

    Q.2.b. In future updates, how will the manual promote
    consistency among each of the regulatory agencies that are
    members of the FFIEC?

    A.2.b. Just as we do with the current manual, the NCUA will
    conduct examinations consistent with the updated manual and
    train staff accordingly. The updated manual will ensure the
    exam approach is fully risk-based, as outlined in the July 2019
    Joint Statement on the Risk-Focused Approach to BSA/AML
    Supervision.

    Q.3. I understand the National Credit Union Administration
    (NCUA) is preparing to release a rule that would allow for-
    profit investors to invest in credit unions through
    subordinated debt. How does allowing for-profit investment
    comport with credit unions' tax-exempt status?

    A.3. Congress authorized secondary capital for low-income
    credit unions, the outstanding amounts of which are in the form
    of subordinated debt, to any nonnatural person investor, both
    for-profit and not-for-profit. On January 23, 2020, the NCUA
    Board unanimously approved a proposed rule that would expand
    the eligible investor base to accredited investors and remains
    consistent with the existing statutory authority. These debt
    instruments are nonvoting and extend no control to the
    investor, and therefore do not change the cooperative, not-for-
    profit structure of credit unions.

    Q.4. The NCUA has diverged from the other members of the FFIEC
    recently in regulatory issues such as real estate appraisals
    and capital standards. I'm concerned that differing standards
    among peer institutions could lead to systemic risk.

    Q.4.a. How do you justify these differences?

    A.4.a. The Federal Credit Union Act requires the NCUA Board to
    prescribe, by regulation, a system of Prompt Corrective Action
    that is:

      (1) L``consistent with''  216 of the Act; and

      (2) L``comparable'' to the system of PCA prescribed in the
            Federal Deposit Insurance Act.\1\
    ---------------------------------------------------------------------------
        \1\ Although the Act does not define the term ``comparable,''
    Senate Report 105-103 (May 1998) that accompanied the Credit Union
    Membership Access Act defines it as ``parallel in substance (though not
    necessarily identical in detail) and equivalent in rigor.''

        The Act also requires the NCUA Board to take into account
    the cooperative character of credit unions when designing the
    PCA system. Congress specifically listed the traits of the
    cooperative character as the fact that credit unions are not-
    for-profit cooperatives that do not issue capital stock, must
    rely on retained earnings to build net worth, and have boards
    of directors that consists primarily of volunteers. These
    traits accurately identify the important differences between
    credit unions and other U.S. depository institutions. Other
    than these traits, credit unions face the same financial and
    operational risks as other federally insured depository
    institutions.
        The Credit Union Membership Access Act of 1998 added to the
    Federal Credit Union Act a requirement for the NCUA to
    implement a risk-based net worth (risk-based capital)
    requirement for ``complex'' credit unions. While the other
    banking agencies' capital regulations apply to all banks
    regardless of size or complexity, the Federal Credit Union Act
    directs the NCUA to apply the risk-based requirement only to
    those credit unions the NCUA Board defines as complex.
        Because of the requirement for the NCUA's PCA system to be
    comparable, and the fact that credit unions are exposed to
    credit risk like all depository financial institutions, the
    NCUA's general approach was to defer to the capital treatment
    used by the other Federal banking agencies and the Basel
    Committee on Banking Supervision.
        However, the NCUA tailored the risk weights in the rule for
    certain assets that are unique to credit unions or where a
    demonstrable and compelling case exists, based on contemporary
    and sustained performance differences, to differentiate for
    certain asset classes, such as consumer loans, between banks
    and credit unions or where a provision of the Act requires
    doing so. In the instances where the risk weights are higher
    for credit unions, primarily concentrations of real estate and
    commercial loans, they relate to sources of higher losses to
    the Share Insurance Fund.
        Thus, the rule fundamentally maintains equal treatment for
    equal risks in all federally insured depository institutions.
    This provides equivalent protection to the taxpayer across
    federally insured financial institutions and minimizes any
    competitive distortions that could result from significantly
    different capital requirements for particular asset classes.
        In regards to appraisal standards, the NCUA Board approved
    an increase in the threshold below which appraisals would not
    be required for commercial real estate transactions from
    $250,000 to $1 million. This change became effective on October
    22, 2019. The NCUA last increased the commercial real estate
    appraisal threshold in 2002. We note that, in 1994, other
    members of the Federal Financial Institutions Examination
    Council established a threshold of $1 million for certain real
    estate-secured business loans (qualifying business loans or
    QBLs). In 2019, the other members of the FFIEC raised the
    threshold for non-QBLs from $250,000 to $500,000.
        Unlike the other banking agencies, the NCUA has never made
    the distinction between QBLs and non-QBLs. All commercial real
    estate loans, regardless if they are QBLs or non-QBLs, are
    subject to the same commercial loan requirements, including the
    $1 million appraisal threshold. Qualifying business loans are
    business loans that are not dependent on the sale of, or rental
    income derived from, real estate as the primary source of
    repayment. In contrast, non-QBLs are dependent on the sale or
    rental income derived from real estate as the primary source of
    repayment. Based on our supervisory experience, we believe the
    risks associated with QBLs and non-QBLs are different, but one
    is not necessarily higher risk than the other. Commercial real
    estate loans make up only 4 percent of credit union assets (as
    of 12/31/2018 Call Report data), and approximately a quarter of
    these commercial real estate loans would meet the definition of
    a QBL. For these reasons, we do not believe they warrant the
    added complexity of differing thresholds in our appraisal
    regulation.
        We do not believe that increasing the threshold for
    commercial real estate transactions represents a threat to the
    safety and soundness of credit unions due to several mitigating
    factors. Under the Federal Credit Union Act, most credit unions
    are subject to a statutory ceiling (1.75x net worth) for member
    business loans (commercial real estate loans are a type of
    MBL). Therefore, increasing the threshold to $1 million does
    not pose the same safety and soundness risk to credit unions as
    it would for banks, which do not have the same commercial
    lending restrictions.
        Transactions below the threshold are not exempt from
    valuation requirements altogether, as they must obtain a
    written estimate of market value unless specifically exempted.
    A valuation conducted consistent with safe and sound practices
    provides a reasonable basis to assess a property's market
    value. Although the commercial real estate appraisal threshold
    has increased, credit unions have always had--and will continue
    to have--the option to require an appraisal even when not
    required by regulation.
        We believe that cashflow and the resiliency of the borrower
    are the primary determinants of the success of a loan and not
    the appraisal. In 2017, we enhanced our commercial lending
    regulation with principles-based requirements that instill
    appropriate discipline for commercial lending at credit unions.
    For these reasons, we do not believe that raising the
    commercial real estate appraisal threshold will pose a
    significant risk to the safety and soundness of the credit
    union system.

    Q.4.b. How do the NCUA and FFIEC work together?

    A.4.b. The NCUA is an active participant of the FFIEC, and I
    currently serve as the Council's Vice Chairman. The agency is
    represented on various task forces, sub-committees, and working
    groups. Through these efforts, the NCUA works closely with the
    other FFIEC members to develop and promote uniform principles
    and standards related to the examination and supervision
    program. Additionally, the agencies develop, provide, and
    receive training through the FFIEC. While each agency must
    tailor practices, regulations, and supervisory processes to the
    unique needs and statutory requirements of its industry
    segment, the FFIEC plays a key role in promoting general
    consistency among member agencies. Members of the FFIEC also
    participate in joint rulemaking and statement initiatives.

    Q.4.c. What is the importance of the FFIEC to promoting the
    safety and soundness of our financial system?

    A.4.c. The FFIEC facilitates consistency in supervisory
    policies, information sharing on risks, the establishment of
    consistent examination procedures, and the pooling of resources
    to ensure consistent training on technical topics and
    examination procedures. The networking also allows the agencies
    to exchange information and ideas on patterns, practices, and
    examination outcomes to better evaluate the effectiveness of
    programs individually and collectively. To that end, the FFIEC
    is central to promoting safety and soundness for the financial
    system.

    Q.5.a. I've noticed an uptick in the number of credit unions
    buying banks. Given the regulatory challenges that would be
    involved with a bank trying to buy a credit union, this pattern
    of transactions seems like a one way street. In your
    forthcoming rulemaking regarding banks buying credit unions:
        How do you intend to help level the playing field?

    A.5.a. Credit unions do not buy banks. Credit unions cannot
    acquire bank charters. In some instances, credit unions
    purchase the assets and/or deposits of banks that choose to
    sell said assets and deposits. The vast majority of credit
    unions and community banks do not engage in such merger
    activity. When such occasions do arise, they are arms-length,
    market-based transactions that make economic sense to the
    institutions involved. All transactions must be pre-approved by
    the NCUA, the FDIC, and, in the case of a State-charted
    institution, the State regulator. Further, these transactions
    are explicitly authorized by the Federal Credit Union Act.
        The playing field between banks and credit unions has
    always been different by design. The structure of credit unions
    is fundamentally different from that of banks, and in light of
    the numerous statutory and regulatory restrictions imposed on
    credit unions by Congress and the NCUA, it is not surprising
    that most banks do not choose to switch their charters in favor
    of credit union charters.
        The Federal Credit Union Act severely limits credit union
    growth in multiple ways, including by limiting their customer
    base (otherwise known as ``field of membership''); imposing a
    cap on the amount of member business loans credit unions may
    make; preventing credit unions from issuing common stock and
    other equity; imposing an interest rate ceiling and fee caps on
    credit union lending; and imposing a variety of restrictions on
    the types of investments credit unions may make.
        It has been suggested by some that these transactions are a
    reflection of credit unions taking undue advantage of their
    tax-exempt status. Credit unions are tax-exempt institutions
    because they are not-for-profit, member-owned cooperatives and,
    as noted above, are subject to substantial growth, investment,
    and other restrictions that do not apply to banks.
        The NCUA's recent proposed rule, which was adopted
    unanimously by the NCUA Board on January 23, 2020, is designed
    to clarify the agency's supervisory process for the parties
    engaging in these transactions. The Federal Credit Union Act
    specifically authorizes these transactions but also requires
    the NCUA's prior approval before they may be consummated. When
    a Federal credit union purchases the assets or deposits of a
    bank, NCUA requires a two-step process to establish the
    membership status of the former bank's customers. First, the
    Federal credit union must confirm that the bank customers are
    within the Federal credit union's field of membership. Second,
    the former bank's customers must become full members of the
    Federal credit union. For State-chartered credit unions, the
    State regulatory agency determines membership eligibility and
    credit union membership. Since the Federal Credit Union Act
    requires the NCUA to consider improving or denying proposed
    transactions, restating these factors in the proposed rule
    increases stakeholder awareness of them.
        The number of credit union purchases of bank assets and
    certain liabilities is small relative to any standard. Since
    2012 credit unions have purchased the assets or liabilities of
    roughly 30 banks. This is comparable to the 36 federally
    insured credit unions that were converted to, or merged into,
    banks between 1995 and 2013. We should recognize that these
    transactions are occurring at a time when options for financial
    services are dwindling in far too many of our local
    communities, especially in rural areas. These transactions may
    be particularly beneficial for underserved and rural
    communities, which have seen a severe contraction in access to
    financial services over the last decade as financial
    institutions close branches.
        When communities lose access to financial services
    providers, it's like cutting off the oxygen to the local
    economy. Small businesses suffer; jobs are lost; and consumers,
    especially low-income households, are more likely to turn to
    less carefully regulated predatory lenders. If a credit union
    merging with a local bank allows for continued access to
    financial services when those services might otherwise have
    been lost, then that's an outcome we should encourage.

    Q.5.b. What transparency promotion measures do you intend to
    include?

    A.5.b. At its January 23 meeting, the NCUA Board approved a
    proposed rule to address transactions between federally insured
    credit unions and other types of institutions. The proposed
    rule does not provide new authorities for federally insured
    credit unions. Rather, it clarifies the NCUA's requirements and
    processes for considering transactions authorized in section
    205 of the Federal Credit Union Act.
        The proposed rule reflects the Act's mandate that the NCUA
    consider factors related to member service, as well as safety
    and soundness, in evaluating these transactions. The rule is
    intended to clarify what the NCUA requires to fulfill its
    statutory mandate. The proposed rule includes the following
    provisions:

       LAn express list of factors the NCUA will weigh in
            determining whether to approve such transactions. These
            considerations are required by statute, but the
            proposed regulation would reiterate the statutory
            requirements to increase stakeholder awareness.

       LExpress provisions to ensure compliance with credit
            union membership requirements. These requirements apply
            regardless, but the NCUA wants to ensure that
            stakeholders have appropriate notice of its
            expectations.

       LAn express list of the minimum required components
            of an application package, particularly addressing due
            diligence and safety and soundness.

       LA provision requiring a vote of a credit union's
            board of directors and a detailed certification
            requirement from each member of a credit union's board
            of directors who voted in favor of such a transaction.
            This vote and certification requirement are designed to
            ensure a credit union's board of directors is fully
            informed about any such potential transaction and its
            implications.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM RODNEY E.
                                  HOOD

    Q.1. During your confirmation hearing earlier this year, both
    you and now-Board Member Harper were asked about possible
    improvements to the National Credit Union Administration's
    Central Liquidity Facility that would make it better able to
    quickly and efficiently serve liquidity needs of the credit
    union system.
        Can you provide an update on this issue, particularly in
    terms of any specific regulatory improvements to the CLF's
    operations and functionality being considered under your
    direction as Chairman?

    A.1. Consistent with the spirit of President Trump's regulatory
    reform agenda and Executive Order 13777, the NCUA reviewed its
    regulations in 2017 and published a regulatory reform agenda
    that includes Part 725, the Central Liquidity Facility
    regulation. The original agenda remains in place; that is, to
    update the regulation where appropriate, allow for the use of
    nonmember correspondent institutions to provide certain
    operational services to the CLF, and to reduce the minimum
    collateral requirements of member credit unions for certain
    loans/collateral.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM RODNEY E.
                                  HOOD

    Q.1. Montana, and many areas of the country, face challenges of
    housing availability, affordability, and aging housing stock.
    As you know, this is a significant issue for rural as well as
    urban areas and is one of the largest barriers to success
    nationally. In Montana, lack of workforce housing is one of the
    greatest inhibitors of economic development.

    Q.1.a. What can be done to increase workforce housing and
    encourage more affordable housing to be built?

    A.1.a. Reducing burdensome regulation can play a critical role
    in ensuring a growing supply of affordable housing. I have
    always been a proponent of ensuring that regulations are
    effective, but not excessive. In my first months as NCUA's
    Chairman, I have worked hard to find areas in which we could
    roll back burdensome rules without jeopardizing safety and
    soundness. My firm belief is that a similar, concerted vision
    from local, State, and other Federal authorities could help
    make a dent in the problem.

    Q.1.b. What do you see as the largest barrier to affordable
    housing, particularly in rural areas?

    A.1.b. I agree with HUD leadership and other industry observers
    who recognize that supply constraints are a critical part of
    the problem. Barriers to construction, including burdensome
    regulations, have played an outsized role in limiting the
    number of new homes under construction in the United States.
    Indeed, despite recent increases, the pace of new home
    construction, both single-family and multi-family, is well
    below what would be expected, given population growth and
    historical norms.

    Q.1.c. How has the [Fed/FDIC/NCUA] worked to support housing?
    Where is there room for additional efforts?

    A.1.c. Credit unions provide affordable mortgage financing to
    many Americans. Credit unions provide attractively priced
    mortgages to their members and do so responsibly. Through both
    strong economic times and more challenging ones, the industry
    has provided mortgage loans with a strong track record of
    performance.
        While credit unions have played a positive role in
    improving affordability, NCUA and the industry at large cannot
    rest. By adhering to my key guiding principle--that regulation
    should be effective, but not excessive--I hope to ensure that
    NCUA does everything possible to support affordable housing. In
    my first year as NCUA's chairman, NCUA has already taken steps
    that should mitigate the problem. For instance, the NCUA board
    voted to propose to raise the appraisal threshold for
    residential loans, thereby decreasing the costs of loan
    origination for thousands of borrowers.

    Q.2. I appreciated the responses to my questions during the
    hearing, and the focus on supporting our farmers and ranchers
    and their families through the current challenges facing the
    agriculture sector while continuing to prioritize the safety
    and soundness of our community financial institutions.
        Is there anything that you would like to add on this topic?

    A.2. I appreciate the opportunity to expound on this important
    topic. I am passionate about addressing the needs of rural and
    other potentially underserved communities. This is an area that
    hits home to me. I am a proud, native North Carolinian, where
    more than one-third of the population lives in rural areas, and
    I have strong family ties to the countryside. Credit unions,
    with their historical grounding as a comprehensive, member-
    owned system of affordable financial services for underserved
    communities, plays an important role in fostering economic
    development in our rural and agricultural areas across the
    country. This mission is particularly urgent at this time, as
    many financial institutions have pulled out of rural America in
    the past few decades.
        Since I had the privilege of becoming Chairman of the NCUA
    last spring, the agency has taken important steps that I
    believe can play a positive role in supporting our rural
    communities. First, the NCUA Board finalized a rule raising the
    appraisal threshold for commercial real estate loans. This will
    reduce the regulatory burden for rural entrepreneurs and spur
    more lending in their communities. In making this rule change,
    the NCUA conducted extensive comparative analysis and due
    diligence and also instituted a number of safeguards attached
    to such loans. I have every confidence this rule change will
    uphold the safety and soundness of the credit union industry
    and present no undue risk to the Share Insurance Fund.
        The NCUA was also the first Federal financial regulator to
    issue guidance on how federally insured credit unions could
    provide financial services to the now-legal hemp industry. A
    thriving hemp industry should be a significant boost for rural
    America, and NCUA will continue to work with credit unions
    serving these communities to make sure they are aware of the
    full regulatory landscape in providing capital and financial
    services to this burgeoning agricultural industry.
        Through these measures, the NCUA will continue to balance
    its foundational aspirations of cooperative credit and ``people
    helping people'' with its statutory obligation to protect the
    Share Insurance Fund and the safety and soundness of the
    overall credit union industry.

    Q.3. Thank you all for your updated guidance on providing
    financial services to the hemp industry. As you know, this is
    an issue that has been very important to me. Montana leads the
    country in hemp production, and this guidance will help our
    producers and the financial institutions that are now able to
    serve them.

    Q.3.a. What will your agencies be doing to educate your
    examiners and the institutions that you oversee to adapt to
    working with hemp-related businesses?

    A.3.a. The NCUA issued a Regulatory Alert in August 2019 on
    credit unions serving hemp-related businesses. In addition, the
    agency conducted a webinar in December 2019 with State
    regulators on this topic and a webinar with NCUA staff in
    January 2020. The agency is in the process of putting together
    a frequently asked questions document that will be available on
    the NCUA's website. Agency staff will continue to work with the
    banking agencies, the USDA, and FinCEN to jointly develop and
    provide additional guidance and information.

    Q.3.b. Are there areas that you anticipate will require
    additional guidance?

    A.3.b. We will continue to ensure that credit unions are aware
    of all the laws and regulations concerning hemp regulations.
                                    ------

    RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM RODNEY E.
                                  HOOD

    Q.1. Despite changes in the market, many taxi medallion loans
    continue to perform. This is especially true where credit
    unions have worked with owners to adjust the terms of their
    loans to ensure they are affordable. I have heard concerns that
    NCUA examiners are applying taxi medallion loan valuation
    methodologies
    inconsistently, forcing credit unions to lower the value of
    taxi medallion loans immediately regardless of cashflows and
    whether they are performing.
        Does NCUA plan to codify valuation criteria as guidance to
    reduce the uncertainty that currently exists among credit
    unions regarding the NCUA's current approach to loan
    valuations?

    A.1. NCUA's role does not include codifying market valuation
    criteria. As you know, there is no one-size-fits-all approach
    to valuing taxi medallions or taxi medallion loans, and efforts
    to valuate are complicated by the fluctuating value of the
    medallions.
        Generally Accepted Accounting Principles (GAAP) establish
    the approach for valuing loans and other assets. NCUA examiners
    focus on ensuring the reasonableness of a credit union's
    valuation method and adherence to GAAP. At times, credit unions
    may obtain independent third-party valuations of their taxi-
    medallion loans that, in some cases, rely on cashflow analysis.
        To ensure consistency in its approach to supervising credit
    unions with taxi-medallion loan portfolios, the agency issued
    public-facing guidance in 2014 to provide examination staff
    with procedures to review taxi-medallion loan portfolios. This
    guidance is still in effect and outlines the various factors
    that can influence the value of a taxi medallion and the
    factors examiners should consider when reviewing taxi medallion
    loans.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM RODNEY E.
                                  HOOD

    Q.1.a. In the past three years, the open balance of auto loans
    held by credit unions has grown from $305.1 billion to $358.6
    billion, and credit unions have the second-highest market share
    of used auto financing.\1\ Auto loan delinquencies are now at
    their highest rate in the past two decades, with more than 7
    million Americans at least 90 days late on an auto loan.
    ---------------------------------------------------------------------------
        \1\ Experian, ``State of the Automotive Finance Market Q3 2019,''
    Melinda Zabritski, Fall 2019, https://www.experian.com/content/dam/
    marketing/na/automotive/quarterly-webinars/credit-trends/2019-q3-
    experian-automotive-safm.pdf.
    ---------------------------------------------------------------------------
        How are you monitoring the rising balance of auto loans
    held by credit unions, and what is your assessment of this
    growth?

    A.1.a. Credit union exposure to auto lending has not
    significantly increased related to asset growth, and loan
    performance remains strong. Call Report data from 2017 to third
    quarter 2019 show the compound annual growth rate for auto loan
    balances was 7.0 percent. The growth rate for total assets for
    the same period was 7.1 percent.
        On a quarterly basis, the NCUA analyzes auto-lending data
    using the information credit unions are required to submit as
    part of the 5300 Call Report process. NCUA also conducts
    various other risk-management functions pertaining to auto
    lending.

    Q.1.b. Auto loans issued by credit unions have the lowest 30-
    and 60-day delinquency rates relative to other types of
    lenders, and these rates have remained relatively steady for
    the past few years. What is keeping credit union default rates
    lower than other types of lenders, and do you anticipate any
    future rises in defaults on auto loans held by credit unions?
    If so, how are you ensuring credit unions are prepared for
    those rising defaults?

    A.1.b. Credit unions have a long history of making auto loans
    in a safe and sound manner. Credit union delinquency rates are
    lower than those of other auto lenders. The agency attributes
    this to the fact that credit unions generally make higher-
    quality loans.
        While credit unions have the second highest market share
    among all used car loans, we note that average credit scores in
    credit union portfolios are higher than the overall lending-
    industry average. Auto loans that meet the criteria for prime
    and superprime categories have significantly lower expected
    defaults than those in the subprime and deep subprime
    categories. According to Experian, for all auto lending, more
    than 60 percent of loans are prime and superprime. For credit
    unions, approximately 80 percent of loans are prime and
    superprime.
        Based on the high quality and strong history of
    underwriting, we currently do not anticipate rising delinquency
    or loan loss rates in their auto loan portfolios. Credit unions
    have the capital and risk management capabilities to address
    any rise in defaults.

    Q.2. Please describe what the NCUA views as the greatest risks
    to the Share Insurance Fund. For each area of risk identified,
    describe what the NCUA is doing to monitor and address those
    risks.

    A.2. The NCUA uses an Enterprise Risk Management program to
    evaluate various factors arising from its operations and
    activities, both internal to the agency and external in the
    industry, that can affect the agency's performance relative to
    its mission, vision, and performance outcomes. Agency priority
    risks include both internal considerations, such as the
    agency's control framework, information security posture, and
    external factors, such as credit union diversification risk.
    All of these risks can materially impact the agency's ability
    to achieve its mission.
        The NCUA has conducted several risk response assessments
    for priority areas, including: credit union business
    diversification, credit union cybersecurity, agency controls,
    and information security. These assessments help inform the
    agency's activities, operations, and planning and budget
    processes.
        Collaboration across programs and functions is a
    fundamental part of ensuring the agency stays within its risk
    appetite boundaries, and the NCUA will identify, assess,
    prioritize, respond to and monitor risks to an acceptable
    level. The 2020-2021 budget incorporates several specific
    programmatic changes that resulted from the NCUA's enterprise
    risk management reviews, such as hiring new personnel focused
    on cybersecurity, acquiring data loss prevention and other
    network security tools, and strengthening analytical focus on
    emerging financial risks within the credit union system.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                             RODNEY E. HOOD

    Q.1. Did you or your staff consult with the Office of
    Government Ethics before you chose to appear in the White House
    video and/or golfing photos supporting the President? If so,
    what did they say about the video of you praising the President
    and the photos of you golfing with the President at his golf
    resort?

    Q.2. Did you or your staff consult with the U.S. Office of
    Special Counsel before you chose to appear in the White House
    video and/or golfing photos supporting the President? If so,
    what did they say about the video and the photos of you golfing
    with the President at his golf resort?

    Q.3. Where was the video supporting the President shot?

    Q.4. Who wrote the script for the video?

    Q.5. Who decided to post the video on the White House Twitter
    feed?

    Q.6. Who paid for the trip to the President's golf resort?

    Q.7. How often do you golf with the President at his resorts?

    Q.8. Did you consult with the other NCUA board members before
    making the video and posting it on NCUA's Twitter account or
    other online sites?

    Q.9. Do you plan to record videos supporting the President in
    the future?

    A.1.-A.9. I am committed to ensuring that NCUA follows all
    applicable laws, including all ethics laws. As a general
    practice, I consult with the appropriate officials at the
    agency when there are ethics-related questions. If you have
    additional concerns, I am happy to have staff brief you further
    on this issue.

    Q.10. This spring, the Office of Management and Budget issued a
    memorandum that for the first time required independent
    regulatory agencies such as yours to submit final rules to the
    Administration before publishing them.

    Q.10.a. Did NCUA run its payday alternative loan final rule,
    real estate exemption, your secondary-chance hiring policy rule
    or other rule by OMB before publishing them? If so, which ones?

    A.10.b. Did OMB staff ask you to make any changes to any of the
    rules? If so, what changes did they request?

    A.10.a.-A.10.b. The following is a list of all the final rules
    issued by the NCUA from the beginning of my tenure as Chairman
    to date. Aside from the rule finalizing an internal office name
    change at 12 CFR part 790, the agency submitted all these to
    the Office of Management and Budget. OMB did not ask for any
    changes.

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    Q.11. There remains a persistent gap in home ownership among
    Americans with different ethnicities. According to the U.S.
    Census Bureau, in the third quarter of 2019, 73 percent of
    White households owned their home, compared to less than 43
    percent of Black households and 48 percent of Latino
    households. What, if anything, is the NCUA doing to encourage
    sustainable and affordable home ownership among credit unions'
    members?

    A.11. Credit unions currently play a critical role in
    facilitating affordable home ownership. In the first three
    quarters of 2019, the annualized pace of real estate lending
    for federally insured credit unions exceeded $190 billion. In
    many cases, mortgage rates for credit union loans are
    significantly below rates charged by other financial
    institutions. In terms of sustainability, I would stress that
    credit union mortgages traditionally have had significantly low
    default rates relative to other loans. Although NCUA always
    will remain vigilant in ensuring that underwriting standards
    are safe and sound, the strong historical loan performance
    indicates that mortgage sustainability has been a critical
    industry value.
        I have been a strong proponent of ensuring that regulation
    is effective, but not excessive. That principle has played a
    critical role--and will continue to do so--in facilitating
    affordable home ownership among credit union members. Last
    year, for instance, NCUA proposed to increase the appraisal
    threshold for residential mortgages originated by credit
    unions. That effort will decrease loan origination costs for a
    significant number of borrowers in the years ahead.

    Q.12. Nevada, and many other States across the Nation, are
    facing an affordable housing shortage, with only 17 units
    available per every 100 extremely low-income families. Rents
    are rising at twice the rate of inflation nationally. More than
    one in three rental households pay more than a third of their
    income on rent. Nearly half of African American rental
    households are rent burdened. Is NCUA proposing any initiatives
    to encourage investments in affordable rental housing?

    A.12. Rental housing is of critical importance to Americans and
    we understand that costs have been rising sharply. While credit
    unions operate under certain constraints that, to an extent,
    hinder their ability to invest in large-scale rental housing,
    NCUA will do its utmost to remove any inappropriate regulatory
    roadblocks. Although our mission entails ensuring the safety
    and soundness of the credit union system, we do not need to be
    adversarial with our regulated entities. Consistent with our
    mandate, we will strive to ensure that they have the tools
    necessary to develop financing options that help to address
    this problem while remaining within the bounds of safety and
    soundness.
        NCUA is aware that some affordable housing organizations
    are assessing how to harness investment in affordable rental
    housing through the new Opportunity Zones program that Congress
    enacted in 2017. That program has the potential to unlock
    significant investment in housing, community development, and
    new business growth. NCUA is currently looking at how we may
    encourage credit unions to engage with that program and promote
    their local knowledge and expertise to outside investors.

    Q.13. The Task Force on Climate-related Financial Disclosures
    publishes an annual report on climate-related business risks.
    Can you name three business risks that you are concerned about
    and what you plan to do to address them?

    A.13. The NCUA uses an Enterprise Risk Management program to
    evaluate various factors arising from its operations and
    activities, both internal to the agency and external in the
    industry, that can affect the agency's performance relative to
    its mission, vision, and performance outcomes. Agency priority
    risks include both internal considerations, such as the
    agency's control framework, information security posture, and
    external factors, such as credit union diversification risk.
    All of these risks can materially impact the agency's ability
    to achieve its mission.
        The NCUA has conducted several risk response assessments
    for priority areas, including: credit union business
    diversification, credit union cybersecurity, agency controls,
    and information security. These assessments help inform the
    agency's activities, operations, and planning and budget
    processes.
        Collaboration across programs and functions is a
    fundamental part of ensuring the agency stays within its risk
    appetite boundaries, and the NCUA will identify, assess,
    prioritize, respond to, and monitor risks to an acceptable
    level. The 2020-2021 budget incorporates several specific
    programmatic changes that resulted from the NCUA's enterprise
    risk management reviews, such as hiring new personnel focused
    on cybersecurity, acquiring data loss prevention and other
    network security tools, and strengthening analytical focus on
    emerging financial risks within the credit union system.
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     RESPONSE TO WRITTEN QUESTION OF SENATOR CRAMER FROM RODNEY E.
                                  HOOD

    Q.1. This Committee is considering legislation that would aim
    at providing some regulatory certainty to banks working with
    cannabis-related companies in the 47 States that have taken
    various steps towards legalization. Would legislation such as
    the SAFE Banking Act be a constructive step toward providing a
    framework for financial institutions to serve companies that
    comply with State cannabis laws?

    A.1. All credit unions must comply with the Bank Secrecy Act
    and anti-money laundering regulations, along with FinCEN
    requirements. The decision to open, close, or decline a
    particular account is made by credit union management.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR JONES FROM RODNEY E.
                                  HOOD

    Q.1. Starting a credit union, or any depositary institution,
    has a high barrier to entry. Entrepreneurs must tackle several
    hurdles including obtaining substantial funds before even
    applying for a charter. This leads to less competition for
    consumers and disincentives financial institutions to find
    innovative ways to serve
    consumers. What steps are you taking to encourage more new
    credit unions, especially among women and people of color?

    A.1. The agency is always looking for new incentives for credit
    unions and ways to encourage the creation of new MDI credit
    unions. For example, one of my priorities is to enhance and
    modernize the Federal credit union chartering process with the
    goal of encouraging the creation of MDIs and promoting greater
    financial inclusion.
        The NCUA is undertaking a modernization initiative in order
    to encourage new credit union formation. This all-inclusive
    review consists of analyzing current regulations to ensure they
    support startups that thrive in today's financial services
    industry as well as associated application procedures to ensure
    transparency and ease of use. The modernization initiative will
    culminate in a more streamlined and efficient chartering
    process.
        As a first step to the modernization process, NCUA launched
    a proof-of-concept chartering tool this past year. This online
    tool takes the prospective credit union organizer through a
    series of questions that help define the proposed credit union.
    As the organizer moves through the proof-of-concept, the credit
    union's name, potential products and services offered, and
    proposed field of membership are defined. The proof-of-concept
    is also an educational tool, informing organizers about
    Minority Depository Institutions and their ability to self-
    identify as an MDI if their proposed credit union will
    represent and support a minority community. This is a
    preparatory step for the organizers to determine whether or not
    they would like to move forward with a new charter application.
        In conjunction with the proof-of-concept, the NCUA is
    developing template documents in order to take the guesswork
    out of what is required to charter a new credit union. Business
    model templates, financial projection spreadsheets, and a
    capital estimator tool assist the organizers as they complete
    the new charter application. Online training is also available,
    with topics covering board governance, internal controls, and
    loan underwriting.
        The largest impediment faced by organizing groups is the
    accumulation of required capital. Consumers want easy access to
    cash and credit services, which can be costly to implement,
    especially for newly formed institutions. Depending on the
    types of products and services the new credit union intends to
    offer members, startup capital can be $1 million or more. NCUA
    is researching other sources of capital available to charter
    credit unions.
        NCUA has designated staff whose main responsibility is
    working with organizing groups to charter new credit unions.
    The agency provides one-on-one support to organizing groups as
    they work through the chartering process. Once the credit union
    is chartered, NCUA examiners play an integral role in assisting
    the newly chartered credit union during its first years of
    operations.
        Specific to MDIs, the NCUA has an MDI Preservation Program
    to assist these institutions. This MDI program provides needed
    support to federally insured credit unions that serve
    communities and individuals who may lack access to mainstream
    financial products and services. In many cases, our examiners
    in the field and CURE Office staff provide ongoing assistance
    to MDIs by working directly with them, sharing their knowledge
    of the credit union
    system and best practices, coordinating mentor relationships
    between large and small credit unions, and generally acting as
    a knowledgeable point of contact and resource. MDIs can qualify
    for funding initiatives, such as MDI Mentoring Grants, where
    mentor credit unions match up with MDI mentee credit unions for
    technical assistance and other support needs. The NCUA makes
    training available to credit unions through an online training
    portal as well as webinars covering information of importance
    for credit union volunteers, management, and staff.

                  Additional Material Supplied for the Record

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