[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 /
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            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

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                            C O N T E N T S

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                       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.
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    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.
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    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.
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    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.
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    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.
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    \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.
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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\
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    \7\ See FDIC Transparency & Accountability, available at https://
www.fdic.gov/transparency.
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    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\
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    \8\ See FDIC Summary of Deposits, available at https://
www7.fdic.gov/SOD.
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    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\
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    \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\
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    \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
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    \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.
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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.
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    \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\
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    \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.
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    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.
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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.
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    \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.
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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.
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    \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.
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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.
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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.
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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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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    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.
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    \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.
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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.
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    \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.
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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.
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    \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.
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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\
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    \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.
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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.
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    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.
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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.


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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\
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    \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 
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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.





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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 
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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\
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    \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 
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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.
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    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.
                                ------                                


 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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