[Senate Hearing 116-493]
[From the U.S. Government Publishing Office]
S. Hrg. 116-493
THE QUARTERLY CARES ACT REPORT TO
CONGRESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING TESTIMONY FROM THE SECRETARY OF THE TREASURY AND THE CHAIRMAN
OF THE FEDERAL RESERVE, AS REQUIRED UNDER TITLE IV OF THE CARES ACT
__________
MAY 19, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-759 PDF WASHINGTON : 2022
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
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
Tanya Otsuka, Democratic Counsel
Corey Frayer, Democratic Professional Staff Member
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
(ii)
C O N T E N T S
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TUESDAY, MAY 19, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 50
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 51
WITNESSES
Steven T. Mnuchin, Secretary, Department of the Treasury......... 5
Prepared statement........................................... 52
Responses to written questions of:
Senator Brown............................................ 57
Senator Toomey........................................... 63
Senator Rounds........................................... 65
Senator Perdue........................................... 65
Senator Tillis........................................... 67
Senator Kennedy.......................................... 67
Senator McSally.......................................... 68
Senator Moran............................................ 68
Senator Cramer........................................... 70
Senator Reed............................................. 71
Senator Menendez......................................... 72
Senator Tester........................................... 77
Senator Warren........................................... 78
Senator Schatz........................................... 87
Senator Van Hollen....................................... 88
Senator Cortez Masto..................................... 89
Senator Jones............................................ 100
Senator Smith............................................ 105
Senator Sinema........................................... 112
Jerome H. Powell, Chairman, Board of Governors of the Federal
Reserve System................................................. 7
Prepared statement........................................... 53
Responses to written questions of:
Senator Brown............................................ 115
Senator Toomey........................................... 123
Senator Rounds........................................... 125
Senator Perdue........................................... 127
Senator Tillis........................................... 129
Senator Kennedy.......................................... 130
Senator McSally.......................................... 130
Senator Cramer........................................... 133
Senator Reed............................................. 134
Senator Menendez......................................... 135
Senator Tester........................................... 140
Senator Warren........................................... 142
Senator Schatz........................................... 153
Senator Van Hollen....................................... 155
Senator Cortez Masto..................................... 159
Senator Jones............................................ 169
(iii)
Page
Senator Smith............................................ 171
Senator Sinema........................................... 175
Additional Material Supplied for the Record
Letter submitted by CUNA......................................... 183
Letter submitted by NAM.......................................... 186
(iv)
THE QUARTERLY CARES ACT REPORT TO CONGRESS
----------
TUESDAY, MAY 19, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met by videoconference at 9:59 a.m., Hon.
Mike Crapo, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
We are all becoming more familiar with remote hearings, but
let me offer a few videoconferencing reminders.
Once you start speaking, there will be a slight delay
before you are displayed on the screen.
To minimize background noise, please click the ``mute''
button until it is your turn to speak or ask questions.
If there is a technology issue, we will move on to the next
Senator until it is resolved.
Because we have a hard stop at 12:15, all Senators and
witnesses need to be especially mindful of the 5-minute clock,
and this time I will do my very best to tap the gavel at about
30 seconds before the 5 minutes is up. And I ask everyone to
please honor our timeframes today.
You should all have one box on your screen labeled
``clock'' that will show how much time is remaining.
To simplify the speaking order, Senator Brown and I have
again agreed to go by seniority.
With that, today we welcome to this virtual hearing the
Honorable Steven T. Mnuchin, Secretary of Department of
Treasury; and the Honorable Jerome H. Powell, Chairman of the
Board of Governors of the Federal Reserve System.
We will receive testimony from the Secretary of the
Treasury and the Chairman of the Federal Reserve, as required
under Title IV of the CARES Act.
Congress has appropriated nearly $3 trillion to protect,
strengthen, and support Americans, to fight the pandemic, and
also to stabilize the infrastructure of our economic system.
A large portion of this funding is authorized under Title
IV of the CARES Act, which provides significant resources for
loans, loan guarantees, and other investments from Treasury and
the Federal Reserve's 13(3) emergency lending facilities and
programs in support of eligible businesses, States,
municipalities, and tribes.
Title IV of the CARES Act provided $454 billion as an
infusion into the Exchange Stabilization Fund to support the
Federal Reserve's emergency lending facilities that facilitate
liquidity in the marketplace and support eligible businesses,
States, local governments, and tribes.
This unique lending authority, known as ``13(3)
authority,'' is authorized under Section 13 of the Federal
Reserve Act and plays a critical role in stabilizing markets.
Both prior to and after the enactment of the CARES Act, the
Federal Reserve announced the establishment of or its intent to
establish several emergency lending facilities to support
financial markets and businesses, including some that are
supported and funded by the CARES Act.
Last week, other members of this Committee and I had a
robust discussion with Vice Chairman Quarles on these
facilities and stressed the importance of getting facilities
like the Main Street Lending Programs and the Municipal
Liquidity Facility up and running quickly to provide a lifeline
to struggling businesses, States, and local governments.
Again, I stress the importance of setting these facilities
up quickly and allowing broad access.
There was also a discussion about whether it is acceptable
for the Treasury to take any losses on investments put into the
special purpose vehicles that the Fed will lend to for various
programs.
The 13(3) facilities are a critical component of a strong
economic recovery, which reinforces the need to have them
quickly operational, broadly available. and as flexible as
possible.
Title IV also contains robust oversight provisions,
especially the one that brought us here today, Section 4026.
It is critical that each Federal agency follow all
reporting and oversight requirements in the CARES Act.
Other steps are already being taken to ensure appropriate
oversight.
Last week, this Committee voted the Special Inspector
General for Pandemic Recovery favorably out of Committee, and
yesterday the Congressional Oversight Committee published its
initial report on oversight of Title IV.
The CARES Act is the biggest rescue package in the history
of Congress, and we need to make sure the dollars and program
quickly find their mark.
During this hearing I look forward to hearing more on an
update of the status of the Treasury loan programs, 13(3)
emergency facilities, and the Paycheck Protection Program;
steps the Fed and Treasury have taken, and will continue to
take, to provide transparency into the loans and loan
guarantees under the CARES Act; and how the unused funds from
Title IV will be prioritized and leveraged to provide
additional liquidity to the economy.
While not part of Title IV of the CARES Act, SBA and
Treasury have worked around the clock to ramp up the Paycheck
Protection Program that has approved over 4.3 million loans to
small businesses that amount to about $513 billion.
According to the SBA, the overall loan size for the PPP is
$118,000, and during the second round of PPP funding, the
average loan size has been around $70,000.
On April 28, Treasury and SBA announced that the SBA would
review all PPP loans in excess of $2 million to make sure that
the borrowers' self-certification for the loans was
appropriate.
Last week, SBA and Treasury provided a safe harbor for
loans under $2 million.
Finally, on May 8, 2020, Commerce Committee Chairman Wicker
and I sent a letter to Secretary Mnuchin on the Payroll Support
Program requesting a detailed report on the status of the
program, and on May 12, Treasury announced the new transparency
measures with regard to the PSP.
I encourage you to continue your work with the applicants
and update the information as additional funds are disbursed.
I commend each of you and your staff for the hard work and
extraordinary actions you have taken to stabilize the economy
and provide support to Americans during this trying time.
Thank you for joining us today to share your agencies'
activities and plans in response to COVID-19.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
I would like to thank Chairman Crapo for following the best
advice of health experts and holding a virtual hearing to
prevent the spread of coronavirus.
I welcome Secretary Mnuchin and Chairman Powell to the
Senate Banking and Housing Committee. Thank you for joining us.
I am still outraged by Leader McConnell's reckless decision
to keep the Senate in session, putting Capitol Hill workers--
including Capitol police officers, custodial staff, floor
staff, and cafeteria workers--putting all workers at risk.
Leader McConnell has forced workers to go against public
health authorities' advice for 3 weeks now; he still has no
plan to get additional help to families and communities. The
House passed a bill that incorporates many of our plans. The
American people are rising to the challenge. Their leaders are
failing them. Leader McConnell says he sees no urgency. Those
are his words: ``no urgency.''
Before we begin, I would like to pause for a moment to
recognize all the workers who have lost their lives on the job
during this pandemic.
[Pause.]
Senator Brown. The coronavirus has been the great revealer.
It has brought out the best in our communities. We remember the
spirit of solidarity that created our social safety net during
the New Deal and inspired World War II victory gardens and
powered the civil rights movement. Today that spirit of
solidarity reveals itself in hand-sewn masks and fire escape
applause for hospital workers and videoconference play dates,
as millions of individual Americans pull together to do their
part to flatten the curve.
But this pandemic also lays bare how corporations that now
claim their workers are ``essential'' have for too long treated
them as more of a cost to be minimized.
Since the bailouts of the financial crisis, many of us have
been concerned about how our country rewards Wall Street and
too often ignores the people who make our country work.
Whenever we have asked why wages for these essential
workers are stagnant, we are told we cannot afford it.
Companies would have to raise prices if they paid people more.
Never mind that CEOs were getting huge raises and Wall Street
investors huge payouts. Never mind that low prices do not do
you a lot of good if your wages stay low right along with them.
Our economy has been paying the price for that--with a
shrinking middle class, with rising inequality, with lower
economic growth.
Now it is pretty clear: When millions of American workers
are laid off or have their hours cut or were making low wages
to begin with and are now worried about their future, our
economy grinds to a halt.
In fact, the only thing keeping our society running in the
middle of this crisis is American workers--those who stock our
shelves and deliver our packages and fill our prescriptions and
prepare food and care for loved ones.
A grocery store worker in Ohio told me recently, ``I do not
feel safe at work and they do not pay me much. I do not feel
essential. I feel expendable.''
We are asking people to show up to work and risk their
health and risk their families' safety--perhaps finally
realizing the words of Dr. King ringing true, that ``One day
our society will come to respect the sanitation worker . . .
for the person who picks up our garbage, in the final analysis,
is as significant as the physician, for if he does not do his
job, diseases are rampant. All labor has dignity.''
Yes, all labor has dignity.
You might think that at a time when we are demanding more
from essential workers than ever before, that people who punch
a clock or swipe a badge, people who take care of our families
and our elderly--mostly women, often black and brown workers--
you might think they would all be getting a huge raise.
Our economy is supposed to reward people whose talents are
in high demand. That is what we are taught. That is what CEOs
tell us, right?
But that is not happening. Workers are getting left behind
again.
As essential workers go home to their families--think about
this--after a long, stressful day, they are wondering how they
are going to pay the rent, they are wondering how they are
going to afford another week of groceries. And they wonder
whether they are going to infect their families after going to
work.
Those are the ones that are working. How about the 35
million Americans who have been laid off from their jobs
because of this crisis?
When we passed the CARES Act, we tried to address this. We
tried to make sure that the trillions of dollars in spending
would not just go to Wall Street like it usually does. We
wanted to make sure the Fed and the Treasury got this money
directly into workers' pockets.
We did not want to see it go to gas and oil companies,
whose activities frankly pose an existential threat to
essential workers and our whole economy.
Chairman Powell, I appreciate your recent comments about
how Congress needs to do more to put money directly in workers'
pockets. I agree, of course, with that.
If Congress does not act now to put money in the hands of
the people who actually power our economy--in workers, their
families, and Main Street businesses in struggling
communities--we risk making the economic crisis worse.
Leader McConnell needs to let the Senate take up the House
bill immediately. Debate it, negotiate it, argue with us, fight
over it, but do something.
Congress has an important responsibility also to make sure
the $500 billion we have already approved for the Fed and
Treasury is actually getting to workers. And from what we know
so far, it does not appear that this Administration or the
Federal Reserve are making workers their priority.
Today I look forward to hearing from both of you, Mr.
Secretary and Chairman Powell, not about what you are doing for
big banks or big corporations--we already know that--and how
you expect that money to trickle down, but how you are making
sure the money and the authority Congress gave you actually
help the people who make this country work.
I want to hear how it is going to be different this time.
I want you to explain what you will do to transform our
economy so that it works for everyone--not just the wealthy and
the powerful.
I want to hear about your plans to make our economy work
for essential workers now and in the future and how to safely
get those who have lost their jobs back to work.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
We will now move to the testimony. Secretary Mnuchin and
Chairman Powell, your full written statements will be made a
part of the record. We will now go to your oral testimony, and
we will start with you, Secretary Mnuchin.
STATEMENT OF STEVEN T. MNUCHIN, SECRETARY, DEPARTMENT OF THE
TREASURY
Secretary Mnuchin. Thank you. Chairman Crapo, Ranking
Member Brown, and members of the Committee, thank you for this
opportunity to highlight how the Department of Treasury and the
Federal Reserve are working together to provide liquidity to
the financial system. Our programs support the flow of much-
needed credit to American workers, families, businesses,
States, and municipalities.
I am testifying today on camera at the request of the
Committee. I look forward to testifying in person going forward
in a safe way with proper social distancing according to
medical guidelines.
I want to begin by acknowledging the unprecedented
challenges the American people are experiencing due to the
COVID-19 pandemic. This disease is impacting families and
communities across the Nation. Through no fault of their own,
the American people are also enduring economic challenges. I am
inspired by our Nation's medical professionals and first
responders on the front lines taking care of our fellow
citizens. Thanks to their efforts and unwavering commitment to
their communities, I am confident that our Nation will emerge
from the pandemic stronger than ever before.
President Trump and the entire Administration are committed
to providing necessary relief to help people get through this
time. The Treasury Department is working hard to implement the
CARES Act. We appreciate Congress working with us to enact this
statute, which is the single largest economic relief effort in
the history of our country. We also appreciate the feedback we
have received from Members of Congress on both sides of the
aisle as we implement a number of the critical programs
established by the CARES Act.
We have worked closely with the Small Business
Administration on the Paycheck Protection Program to ensure
processing of over 4 million loans for over $500 billion to
keep tens of millions of hardworking Americans on the payroll.
We are proud that nearly 400 Community Development Financial
Institutions and Minority Depository Institutions and many
small banks and nonbanks are participating in this program.
We have issued more than 140 million Economic Impact
Payments for over $240 billion to provide direct relief to
millions of Americans. The typical family of four received
approximately $3,400.
We have distributed about $150 billion to State, local, and
tribal governments through the Coronavirus Relief Fund for
essential services. We have also approved nearly $25 billion in
payroll support to the airline industry to protect this
critical sector of our economy.
Turning to the central focus of the hearing today, the
CARES Act also provided authority for $454 billion in support
for the Federal Reserve lending facilities to provide liquidity
to the system.
Since March 17th, I have approved the following facilities:
the Commercial Paper Funding Facility, the Primary Dealer
Credit Facility, the Money Market Mutual Fund Liquidity
Facility, the Term Asset-Backed Securities Loan Facility, the
Primary Market Corporate Credit Facility, the Secondary Market
Corporate Credit Facility, the Main Street Business Lending
Program, the Municipal Liquidity Facility, and the PPP Lending
Facility.
We have committed approximately $200 billion in credit
support under the CARES Act. We have the remaining money to
create or expand these programs as needed, and we continue to
monitor a variety of economic sectors closely and are prepared
to support these programs with the Federal Reserve as we need
to move forward.
We are sympathetic to hardworking Americans and businesses
enduring tremendous challenges due to COVID-19. We have had to
take unprecedented steps to shut down significant parts of the
economy in the interest of public health. As a result, in the
second quarter of this year, we are continuing to see large
unemployment and other negative indicators. It is important to
realize that the large numbers represent real people. This is
why it is so important to begin bringing people back to work in
a safe way.
As we listen to medical experts, we are optimistic about
the progress being made on vaccines, antiviral therapies, and
testing. Working closely with the Governors, we are beginning
to open the economy in a way that minimizes risks to workers
and customers. We expect economic conditions to improve in the
third and fourth quarter and into next year.
I want to conclude by thanking the hardworking people at
the Treasury, the Federal Reserve, and throughout the
Administration. Under the leadership of President Trump, I am
proud to have worked with all of you, on a bipartisan basis, to
get relief into the hands of hardworking Americans and
businesses as quickly as possible. While these are
unprecedented and difficult times, these programs are making a
major positive impact on people's lives. Together we will
destroy the COVID-19 virus, and our country will emerge from
this pandemic stronger than ever.
Thank you for the opportunity to discuss these efforts
today, and I look forward to your questions.
Chairman Crapo. Thank you, Secretary Mnuchin.
Chairman Powell.
STATEMENT OF JEROME H. POWELL, CHAIRMAN, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Powell. Chairman Crapo, Ranking Member Brown, and other
Members of the Committee, thank you for the opportunity to
testify today at the first quarterly hearing on the CARES Act.
This is a worldwide public health crisis, and health care
workers have been the first responders, showing courage and
determination and earning our lasting gratitude. So have the
legions of other essential workers who put themselves at risk
every day on our behalf.
As a Nation, we have temporarily withdrawn from many kinds
of economic and social activities to help slow the spread of
the virus. Some sectors of the economy have been effectively
closed since mid-March. People have put their lives and
livelihoods on hold, making enormous sacrifices to protect not
just their own health and that of their loved ones, but also
their neighbors and the broader community. While we are all
affected, the burden has fallen most heavily on those least
able to bear it.
The sacrifices we are all making represent an investment in
our individual and collective health. As policymakers, we
should continue to do what we can to help cushion the blow.
The scope and speed of this downturn are without modern
precedent, significantly worse than any recession since World
War II. We are seeing a severe decline in economic activity and
employment, and already the job gains from the last decade have
been reversed. Well more than 20 million people have lost their
jobs, and recent Fed research shows what others have also
found: that people earning less are the ones being hardest hit.
This reversal of economic fortune has caused a level of pain
that is hard to capture in words, as lives are upended amid
great uncertainty about the future.
The Federal Reserve is committed to using our full range of
tools to support the economy in this challenging time. Our
actions so far fall into four categories:
First, outright purchases of Treasuries and agency
mortgage-backed securities to restore functionality in these
critical markets;
Second, liquidity and funding measures, including discount
window measures, expanded swap lines with foreign central
banks, and several Treasury-backed facilities to support smooth
money market function;
Third, with additional Treasury-backing facilities to more
directly support the flow of credit to households, businesses,
and State and local governments;
Fourth, temporary regulatory adjustments to encourage and
allow banks to expand their balance sheets to support household
and business customers.
So far, we have created 11 facilities under Section 13(3)
of the Federal Reserve Act to support liquidity, funding, and
the flow of credit. All of these facilities have been
undertaken with the approval of the Treasury Secretary, and
many of them are supported by funding from the CARES Act. I
discuss these facilities in greater length in my written
statement which I provided to the Committee.
At the Fed, we are committed to transparency, particularly
in deploying our emergency powers. Public faith in our
operations depends on that transparency.
Thank you, and I will be happy to answer your questions.
Chairman Crapo. Thank you, Chairman Powell. I will begin
with you.
Mr. Chairman, as you know, with regard to the Municipal
Liquidity Facility, the thresholds for cities and counties are
established, but they are established at such a level that many
of the small cities and counties across the United States
cannot apply for individual loans. You have indicated that it
would be contemplated that the States be able to apply for
loans for these smaller cities and counties, and there is a lot
of concern out there about this. I would like to ask you to
clarify that it is intended that these dollars do reach these
small cities and counties, and tell us the process by which
that can be accomplished.
Mr. Powell. Thank you, Mr. Chairman. As you have seen, we
have been gradually expanding the scope of potential borrowers
in this world. There are 50,000 entities capable of borrowing,
so we need to draw some lines to be able to handle this.
But in the first instance, we have said that we will always
be willing to lend to a State with the purpose of downstreaming
to counties, cities, and other subdivisions of governmental
authority within that State. So that is one thing.
We also lowered the size of the city, and I would tell you
we are continuing to look at ways to accommodate further
borrowers, including perhaps in the case of States with
relatively low populations where the only borrower with access
may be the State Government itself. We are looking at ways to
make sure that in those States we address the needs of
potentially another borrower or two, and that is something we
will be working on going forward.
Chairman Crapo. Well, thank you very much.
Secretary Mnuchin, to you, with regard to the 13(3)
facilities, the CARES Act appropriates, if I recall correctly,
$500 billion to be utilized through the Exchange Stabilization
Fund to help facilitate the implementation of these Section
13(3) facilities by the Federal Reserve. Most of that has not
yet played out. Am I correct?
Secretary Mnuchin. So of the $500 billion, approximately
$50 billion was in direct lending programs from the Treasury
and $450 billion was available for the 13(3) facilities. I have
allocated about half of that, and let me be clear. I am
prepared to allocate the rest of that. The only reason I have
not allocated it fully is we are just starting to get these
facilities up and running. We want to have a better idea as to
which one of the facilities needs more capital as well as the
potential for adding additional facilities. So I expect to
allocate all the capital as needed, as was given to us.
Chairman Crapo. And so that the listening public can be
clear about this, the way these facilities work is once the
money is allocated as you have just indicated to a particular
facility and the Fed implements that facility, then that money
can actually be leveraged into much greater amounts of
liquidity for whatever market or situation that is addressed.
Is that correct?
Secretary Mnuchin. That is correct, depending upon the
credit risk; it depends on the leverage. We have allocated the
existing capital up to about $2.3 trillion in existing
facilities. And, Mr. Chairman, let me just make a comment
because I know there has been a lot of questions as to whether
the Treasury is willing to take risk with that. I would say the
answer is absolutely yes. The way these facilities work is in
the facilities that do not have any credit risk, such as the
PPP, I approve those without capital allocated. By definition
any facility that the Fed believes puts them at risk, I do put
up capital. So by definition, that capital is at risk. And we
are fully prepared to take losses in certain scenarios on that
capital.
Chairman Crapo. Well, thank you. And I have just about 50
seconds left, and I want to stay with the time. But there have
been some allegations that just big companies are being
benefited by these facilities. Could you quickly address that,
Secretary Mnuchin?
Secretary Mnuchin. Well, let me just comment. The
announcement of the Corporate Bond Facility, without putting up
$1 of taxpayer money, unlocked the entire primary and second
market for corporate bonds. So companies such as Boeing that I
had expected would need to borrow from us on a direct basis
were able to borrow $25 billion in the primary markets. So I
would say in the best-case scenario, the markets open up and we
do not need to use these facilities.
In the case of the Main Street Facility and the Municipal
Facility, which we expect both to be up and running by the end
of the month, we expect these to have a big impact on both
those markets.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. The workers who have kept our country
running during this public health emergency, the essential
workers that we all pay lip service at least to, are often the
lowest-paid workers in our economy. They are usually women.
They are disproportionately black and brown workers. Too often
they do not have a union. They are low-wage workers who do the
laundry at hospitals, who prepare our food. They put their
lives on the line to keep our country running. They are still
worried about paying the bills, staying afloat, and staying
healthy.
Mr. Secretary, do you think that is fair?
Secretary Mnuchin. Mister Senator, I apologize. Due to the
technical issues, I did not hear the beginning of your
question. I heard, ``Do you think that is fair?'' But I did not
hear the question.
Senator Brown. The people who we call the ``essential
workers'' and we call out and thank, those essential workers
are often the lowest-paid workers. They do the laundry; they
are the custodians, the security people. They prepare our food.
They put their lives on the line for very low wages. They are
still worried about paying the bills. Is that fair?
Secretary Mnuchin. Well, Mr. Senator, I just want to thank
all the essential workers, whether it be the health care people
or----
Senator Brown. Well, the thanking is great, but these are
people--is it fair that our economy pays the essential workers
so little in such work conditions?
Secretary Mnuchin. Mr. Senator, some of those people are
paid less than others. Again, I----
Senator Brown. Well, my question is: Is that fair?
Secretary Mnuchin. Again, Mr. Senator, I do not know what
specific workers you are referring to----
Senator Brown. Well, I can lay them all out. I will try the
Chairman of the Federal Reserve. Mr. Chairman, is it fair that
those workers who are exposing themselves to this virus that
are making low wages--we call them ``essential'' by all of our
definitions. Is that fair?
Mr. Powell. You know, those are workers who are basically
in the service sector. That is what is unusual about this, that
it is all about the service sector, and particularly those
parts of the service sector where there are lots and lots of
in-person contact, and those tend to be lower-paid workers, and
they are definitely the most affected. And I would just say
that, you know, all of our efforts are to do what we can to
help those people and create conditions so that they will have
the best possible chance to get back to work.
Senator Brown. Well, some of the best things you both could
do is to support pandemic pay for these workers and support
another recovery act that included more dollars for these low-
paid workers, who we continue to celebrate as essential.
Mr. Secretary, we passed the CARES Act to help millions of
workers who make our country work. You have set up CARES Act
programs to lend trillions of dollars to companies. Am I right
that you are not requiring companies to use the money they
borrow to keep their workers on the payroll?
Secretary Mnuchin. Mr. Senator, I am following what was the
exact letter and spirit of the law that we negotiated with you
and others on a bipartisan basis. In some of these facilities,
there are specific requirements, and I assure you that the
Chair and I are absolutely enforcing those requirements as
required in both the literal and spirit of the negotiations.
Senator Brown. Well, that was nice-sounding words, but the
Administration is willing to send people to work without regard
for their safety, but the Administration is unwilling to make
sure that these trillions of dollars in taxpayer money will
help these workers directly.
Secretary Mnuchin, let me go somewhere else. Public health
experts have told us it is not safe to reopen the economy until
we have worker protections in place that will control the
spread of COVID, things like testing, contact tracing,
protective equipment, efforts that the President has clearly
failed to lead to help our country.
Secretary Mnuchin, you said there is considerable risk of
not reopening, that keeping some businesses closed could cause
permanent economic damage. How many workers will die if we send
people back to work without the protections they need, Mr.
Secretary?
Secretary Mnuchin. Senator, we do not intend to send
anybody back to work without the protections, and I would say I
was prepared to come there today. I thought it was safe to
testify. As a matter of fact, I already was at the Senate this
morning wearing a mask. And I assure you both myself and
everybody on the task force, the Vice President and others, are
following the best medical advice, and I could not be more
proud of the medical advice that we are getting and the way the
economy is opening up in a safe way.
Senator Brown. So how many workers should give their lives
to increase our GDP by half a percent? That you are pushing
people back into the workplace, there has been no national
program to provide worker safety. The President says reopen
slaughterhouses, nothing about slowing the line down, nothing
about getting protective equipment. How many workers should
give their lives to increase the GDP or the Dow Jones by a
thousand points?
Secretary Mnuchin. No workers should give their lives to do
that, Mr. Senator, and I think your characterization is unfair.
We have provided enormous amounts of equipment. We have worked
with the Governors. We have done a terrific job of getting----
Senator Brown. Mr. Secretary, I am not going to let you
make a political speech about what a great job--we hear that
from the President in his news conferences--when, in fact, this
country--the President has still not led an effort to scale up
testing. He has played State after State, State against State.
He has played hospital against hospital to get protective
equipment. Everybody in the country, your comments
notwithstanding, knows that.
Chair Powell, you said last week the additional fiscal
support could be costly but worth it if it helps avoid long-
term economic damage and leaves us with a stronger economy. So
Congress needs to think about more than just the national debt
right now. It is less costly to act today to help people than
to pay for our failure to act in the future. Is that right, Mr.
Chairman?
Chairman Crapo. And if you would answer quickly, Mr.
Chairman.
Mr. Powell. Sure. Well, that is what I said. I said it
could be. This is really a question for Congress to weigh. I
wanted to call out the risk there, which was the risk of
longer-term damage to the economy. And that is what I was
doing, and I said we may need to do more and Congress may as
well.
Senator Brown. Thank you. And, Mr. Chairman, one brief
comment. The Administration thinks we should put more workers
at risk to juice the stock market. They have not come up with a
basic plan for how to protect workers when they go back to
work. When President Trump and Leader McConnell want to give
away trillions and tax breaks to billionaires, the price tag
did not matter a couple years ago when that happened. But we
need to spend money now to keep workers safe in spite of the
comments of some in the Administration and some in Senate
leadership.
Thank you, Mr. Chairman.
Chairman Crapo. Well, thank you. I think that I would
disagree with that characterization as well, but let us move on
to Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Thanks for joining
us this way.
I just want to follow up on this discussion about
additional spending and remind everybody, while we authorized
something on the scale of $3 trillion, to round things off, of
direct spending and lending and then authorized the Fed to
complement that with another roughly $3 trillion, that could
be--$6 trillion, that is like 30 percent of our entire annual
economic output. And, in fact, actually more than half of it
has not yet been spent or lent, so I think you can make a
pretty strong case that before we rush out and do another
spending bill, we actually let some of this stuff go to work
and understand the consequences of what we have already done.
I appreciate the Chairman observing that his comment--while
I think it was often mischaracterized as calling on Congress to
pass a new bill, in fact, it was much more nuanced than that,
and it acknowledged, among other things, the potential cost of
new spending. The comment that you made at the Peterson
Institute, Mr. Chairman, do you still stand by that comment?
Mr. Powell. I do, I do. Would you like me to expand on
that, Senator?
Senator Toomey. You know, I think we have covered it, so I
appreciate that. Let me move on to follow up on something the
Secretary said about reopening.
I think it is worth remembering why we shut down our
economy in the first place. It was a very specific reason, and
that was to prevent the virus from spreading so rapidly that so
many people would get sick so quickly that we would overwhelm
our hospitals. Well, it has been clear for weeks now that we
are not going to overwhelm our hospitals, certainly not in
Pennsylvania, and I know not in most of the country. And so I
think it is essential that we begin the process of carefully,
thoughtfully, and safely reopening the economy.
Secretary Mnuchin, the longer that we continue a shutdown,
when weeks turn into months, doesn't that necessarily increase
the risk that some businesses will fail, some jobs will not be
there to go back to if a lockdown and a shutdown continues
indefinitely?
Secretary Mnuchin. That is absolutely the case, Mr.
Senator. There is the risk of permanent damage. And as I have
said before, we are conscious of the health issues, and we want
to do this in a balanced and safe way.
Senator Toomey. Thank you. I guess for either of you on
this one, I want to talk a little bit about the Main Street
programs.
First, give us your best estimate of when we can expect
borrowers to actually be able to access funds from these
programs?
Mr. Powell. I will go ahead. So on Main Street and,
frankly, on all of the other facilities, we expect all of them
to be stood up and ready to go by the end of this month. I do
not say that it will not be a day or two into June, but that is
our expectation, and the funds should be flowing directly after
that.
Senator Toomey. And very briefly, would it be possible to
characterize the remaining hurdles you have got to get over in
order to start actually being operational?
Mr. Powell. Sure. So all of them are complex and
challenging, but Main Street is in a class by itself, really.
It is not the bond market. These are small and medium-size
companies. They live in a world of bank lending. That is a
world of negotiated documents, and we are trying to enter that
world and make loans to qualifying buyers. So we set up, you
know, big operations at the Federal Reserve Bank of Boston and
hired service providers, and we are doing all of that to be
ready to face off against it. It is very diverse, small,
medium, and large companies, very different industries, very
different credit needs, some of them asset-based, some of them
cash-flow-based. So it is a really complex undertaking, and
people are working literally around the clock, and have been
for weeks, to get it ready by the end of this month.
Senator Toomey. Thank you for that.
I also observe that one of the terms, one of the conditions
of these facilities is that the banks who are acting as
lenders--and, by the way, I am hoping that nonbanks can
participate as well. Business development companies and others
I think would be effective conduits for these funds. But the
lender is going to be required to keep some of the risk on
their own books, and I am wondering what kind of reaction you
have gotten from lenders and potential borrowers. What kind of
participation are you anticipating? Do you think there will be
strong demand for these facilities given the way they have been
structured?
Mr. Powell. There are three facilities. We have had a lot
of outreach--to borrowers, lenders, everybody--going back over
the last couple of months. And the three facilities will
probably attract different levels of demand. We are getting a
good deal of interest and inquiry on them, and I think we will
find out fairly quickly.
You should know that we will continue to be prepared to
adapt, as we have shown, if the uptake is not what we would
hope, and we will be prepared to go after that and try to find
ways to address the needs of this area of the economy.
Senator Toomey. All right. Thank you very much.
Thanks, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Chairman Powell, thank you for your great
leadership. I think you recognize that State and local
governments are absolutely critical to our response to COVID
but also to our economy. It has been estimated, for example,
that there are 20 million jobs in State and local government,
that State and local governments contribute 8.5 percent of
national GDP, and we all know they are facing dire economic
circumstances, projected 10 percent budget losses this year, 25
percent next year.
How likely will it be for us to have robust recovery if our
States do not receive additional and flexible fiscal relief,
not a loan from the Fed which increases their leverage, but
fiscal grants to the States? How robust can our recovery be if
this key sector is out of play?
Mr. Powell. Senator, I do not want to get too into
individual fiscal proposals. Those are really for you. I have
tried to stay at a fairly high level on this. I will just echo,
though, that I think something like 13 percent of the workforce
is in State and local government. A lot of the critical
services that people rely on day to day are, you know, provided
at the State and local level. With balanced budget provisions
in State Constitutions, that means that when revenue goes down
sharply, it can mean job cuts and service cuts. So those are
all important things to consider in going forward.
Senator Reed. Well, thank you.
Secretary Mnuchin, I just want to make a comment, because I
made this comment to you repeatedly. That is, I do believe that
within the Coronavirus Relief Fund that we passed, you do have
the flexibility to provide support for the States when it comes
to lost revenue. This lost revenue was not anticipated in their
budgets. Far from that. And, second, it is directly related to
the COVID virus. If you go to most States, it is directly
related.
So I would urge you to relook, as you have done with PPP,
and you have tailored that several times, look back again and
reconsider the ability to use flexibility in this Coronavirus
Relief Fund. So that is just a comment, Mr. Secretary. Let me
return back to Chairman Powell.
Chairman Powell, we know that unemployment is going to be
something that will be with us for a while. It is about 15
percent now. I have seen estimates as high as 20 or 25 percent
next year. And yet our unemployment insurance programs are
keyed to a date. They will end at a certain time.
Do you think it is important for us to have the confidence
and give confidence to people that they can still receive funds
like this, even if the date is surpassed, the economy is still
in disarray, States are still looking at 10 percent
unemployment rates? Don't they need that certainty so we would
have to build in some type of test--not a date, but a test for
unemployment compensation?
Mr. Powell. Senator, again, that is a question about a
specific fiscal policy, and that really falls to you. You know,
we try not to get into too many specifics. I will say, though,
that the risk that I called out last week and that I have been
concerned about, and others have, is that long periods of
unemployment can really affect people's ability to go back to
work because they lose their networks, they lose their skills,
they lost contact with the job market. So I think anything that
keeps people intact hopefully in their job, but in the
meantime, keep them out of insolvency and things like that,
should the expansion start later or take longer to get going,
those are appropriate things for you to look into.
Senator Reed. Just a final point, Chairman Powell. I think
we are missing the boat once again. This is sort of like deja
vu. I was here in 2008, 2009, and 2010, and we leaped in to
help the mortgage market with both feet, but we did not help
people avoid foreclosure. It seems to me that that is what we
will do again unless we have a fiscal program that provides
resources to keep people in their homes. When they cannot pay
their rent, when they miss their mortgage payments, that will
put pressure on the mortgage communities, and you and the Fed
and the Treasury will rush to help. Wall Street will get the
help. Main Street will be left behind. There will be, as there
was in 2008, 2009, and 2010, thousands and thousands of people
without homes. And any economic recovery is going to be slowed
by people in those conditions.
So I would just ask whether you consider this fiscal
response to the core problem--people cannot pay their rent,
they cannot pay their mortgage--is probably the best response
rather than filling in later.
Mr. Powell. I think you are right. Waves of foreclosures
can undermine household finances, obviously, and as a result,
bad household finances are troubled. But, of course, in this
case there has been some significant forbearance on that, and I
think, you know, that is, again, something to continue to
consider.
Senator Reed. Thank you very much, Mr. Chairman. I thank
Chairman Powell and Chairman Crapo. Thank you.
Chairman Crapo. Thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman. To the panel, thank
you all for being with us this morning.
This is a really important time in our country. There is no
doubt that the global pandemic has shocked the world and,
frankly, shuttered a lot of businesses. And because of the
Paycheck Protection Program, I think the two tranches of the
Paycheck Protection Program have saved, from my understanding,
somewhere near 50 million jobs--the first tranche, about 30
million jobs; the second tranche, about 20 million jobs. And we
still have about $100 billion left that we can deploy into our
communities.
With that said, thinking about the backdrop of $100 billion
left in the Triple P, Mr. Secretary, I think you know that I
feel really passionate about helping the underserved
communities, whether that is Horry County in South Carolina or
West Virginia and some of the rural parts of West Virginia.
Very often, small and minority businesses are the lifeblood in
those small rural communities, and, frankly, we have the
Minority Business Development Agency that has done a really
good job of helping to deploy some of the resources from the
Triple P into those underserved communities.
My question is: How can we use the MBDA or some other
mechanism to get more of those resources in our rural
communities or, frankly, in our inner-city communities where
perhaps the Paycheck Protection Program has been more
intimidating for smaller businesses, like barbershops and
beauty salons, some of the rural gas stations that may not have
the banking relationship that was necessary at the beginning of
the program, or their 1099, which means that basically they had
to wait a week before they were able to get in the cycle? How
can we help those organizations and agencies like the MBDA
actually provide the marketing so that more people understand
the benefits and understand the program of the Triple P? Mr.
Secretary?
Secretary Mnuchin. Well, Senator Scott, first of all, thank
you, because we appreciate the work you have done with us on
this issue already, and we will continue to work with you and
others.
One of the things we are very pleased about the additional
money is that the average loan size has come down considerably.
I think we all had certain concerns about in the first tranche
how larger companies were prioritized. I believe that has now
been corrected.
I also could not be more pleased how we have been able to
get sole proprietors and others into the program. And as I have
said, fortunately right now we still have a significant amount
of money left, but we are very much willing to consider the
bipartisan request of reserving money for CDFIs at the end to
make sure that the underserved communities are properly served
in this program. Thank you.
Senator Scott. Thank you. Mr. Secretary, once again let me
just say to you, since I can see you on the screen, you have
done a fabulous job under intense pressure, and without any
questions, America recognizes the valuable service that you
have provided to our country, and I am personally thankful for
your accessibility. Under pressure, you have still been very
receptive and responsive, and that is to say a lot under the
current conditions. So thank you very much on that.
Chair Powell, I heard you talk about forbearance very
quickly there, and this is an issue that continues to grow in
importance and really in urgency, whether it is a small
business, whether it is the residential market or the
commercial market.
The one concern I have that continues to grow would be
commercial mortgage-backed securities. There are a number of
shopping centers in South Carolina and, frankly, throughout the
country where, having spoken to some of the folks who own those
shopping centers, like 20 to 22 percent of the folks are able
to pay their rent, which means that we are looking at a domino
effect in the mortgage market, whether it is commercial and,
frankly, residential, the same concern. I am not sure what the
answers are. Certainly it is either forbearance or, frankly,
bankruptcy for many firms.
What should we expect, what should we anticipate from the
Fed and from the Treasury as it relates to creating more
liquidity in that market? And I do not know that there is a
silver bullet. I do not see a panacea. But what would you both
suggest that I should tell my constituents on this really
important issue? Thank you.
Mr. Powell. It is an important market. As you know, we have
supported the CMBS market with our open market purchases, and
that did help that market to keep functioning. In addition,
legacy CMBS are eligible for our Term Asset Loan Facility,
which is an asset-backed security. It is an important market.
We continue to monitor it. You know, the 13(3) facility is a
lending facility, and that is the tool we have. Not every
problem can be successfully addressed with such a facility, but
where it can be, we are willing to take a hard look.
Senator Scott. OK. Thank you.
Mr. Secretary, anything to add to that, sir?
Chairman Crapo. Quickly, please.
Secretary Mnuchin. Again, I would just add both working
with the FHFA as well as Ginnie Mae on the agency side and then
working with the Fed on the securitization side, unfortunately,
securitizations have certain limitations, but we continue to do
this. Thank you.
Senator Scott. Thank you, Mr. Chairman. I may be over my
time. I cannot see the clock, so I assume that I have 5 more
minutes left.
[Laughter.]
Chairman Crapo. I have been trying to tap. I am not sure if
everybody is hearing the taps, but I will do something loud.
Senator Scott. Thank you, sir.
Chairman Crapo. All right. Thank you.
Senator Menendez.
Senator Menendez. State and local governments are facing
unprecedented budget challenges. We are looking at enormous
wave of budget shortfalls about to crest, which will lead to a
devil's cocktail of devastating layoffs, dangerous cuts to
public safety and essential services, and massive local tax
increases. Any one of those ingredients alone threatens to make
this economic crisis even worse, and the combination of all
three is almost unthinkable.
The Bureau of Labor Statistics just reported that State and
local governments laid off nearly 1 million workers in the
month of April. That is almost 1 million firefighters, police
officers, teachers, emergency health personnel that should be
on the front lines of the public health crisis but are
sidelined instead.
So, Chairman Powell, let me just start by asking, do you
agree that our economy will get worse if State and local
governments are forced to lay off even more firefighters,
police officers, teachers, and emergency health personnel?
Mr. Powell. Well, let me say what we are doing, Senator.
You know, we have a Municipal Liquidity Facility that is there
to address the short-term liquidity needs that these entities
have because of their loss of revenue due to the effects of the
pandemic, and that is really the tool that we have to----
Senator Menendez. Well, I appreciate that, but that is not
my question. My question is: If States, counties,
municipalities continue on the path to lay off--you know, we
have a million laid off--even more, just from an economic
situation, doesn't that make the economic recovery even worse?
Mr. Powell. Essentially yes, Senator, and we have the
evidence of the global financial crisis and the years afterward
where State and local government layoffs and lack of hiring did
weigh on economic growth during that period.
Senator Menendez. Well, one of the tools that we have to
alleviate this problem is by using the money Congress provided
in the CARES Act to bring down borrowing costs for our State
and local governments so they can set the stage for a strong
recovery. I was glad to see the Federal Reserve support local
governments through the Municipal Lending Facility, but,
frankly, I do not think it is enough.
In a letter that I and Senators Tillis, Brown, and
Murkowski sent to you and Secretary Mnuchin last week, we
called on the Fed to establish another facility, one that would
purchase medium- and long-term municipal bonds, both directly
from issuers as well as on the secondary market and thereby
ensure our State and local governments can continue to finance
key public services and invest in infrastructure and other
areas to jump-start our economy and get Americans back to work.
Will you commit to work on that proposal that the Senators
sent to you?
Mr. Powell. Yes, we will take a look at that, Senator. I
will say, though, that generally with 13(3), what we are trying
to do is address liquidity needs, and those are really longer-
term funding needs. But notwithstanding that, we are taking a
look.
Senator Menendez. I appreciate that. In a speech last week,
Mr. Chairman, you said, ``Additional fiscal support could be
costly, but worth it if it helps avoid long-term economic
damage and leaves us with a stronger recovery. The tradeoff is,
of course, for our elected representatives.'' You know, I
agree. The hit to our States, cities, and counties is
tremendous, and it is not just specific to my State of New
Jersey. Projections released by Moody's reveals that every
State in the Nation is already or will soon face historic
budget shortfalls. Just to pick a few examples, they found that
Ohio and Arizona are each facing a fiscal shock totaling about
20 percent of their entire State budget. And for some States,
the numbers are even worse, like West Virginia, which is facing
a 40-percent fiscal shock. Like you said, the Fed cannot be
expected to solve all of our problems.
Yesterday I introduced the SMART Act, which is a bipartisan
bill--three Republicans, three Democrats--to provide $500
billion in direct support to our State and local governments.
It is the first bipartisan bill of its kind in the Senate, and
I think when we have colleagues from Mississippi, Louisiana,
and Maine on the Republican side, it is not a partisan issue.
Would that be the type of solution that can get us back in
terms of the States into fiscal recovery?
Mr. Powell. Senator, we try to stick to our knitting over
here, and you know that we have done what we can with the
Municipal Liquidity Facility. But those questions are really
for elected representatives.
Senator Menendez. Well, let me just close on this. A lot of
minority-owned businesses are not getting access to the
Paycheck Protection Program as we in Congress intended. I know
the Secretary has been receptive, I hope you will be receptive
as well to allowing community development financial
institutions and minority development institutions get greater
access to these programs and to the lending facilities set up
in the CARES Act so these funds can reach businesses in low-
income and underserved areas of our country. It is just still
not happening, and I urge--the Secretary, I believe, has been
rather receptive about this. I would urge you, Mr. Chairman, to
be receptive as well.
Chairman Crapo. Thank you.
We will next move to Senator Sasse, who will be with us by
telephone. And, Senator Sasse, I will tap at about 30 seconds
left of your 5 minutes. You can proceed.
Senator Sasse. Thank you, Chairman. And, gentlemen, thank
you both for being here. Sorry, but I am in the hallway outside
of a Judiciary Committee hearing, so I do not have the Zoom
camera here, but I am grateful for both of your time and
responsiveness on this.
I want to start by asking about some of the recent cyber
attacks. We have obviously seen an increase in schemes directed
at financial institutions that have been active in trying to
help with corona response, and I am just curious as to if you
have any update for us on the cybersecurity attacks we see in
this space.
Secretary Mnuchin. Well, I would just comment on that that
we have a Department within Treasury that is actively working
on all these issues and coordinates and makes sure that our
infrastructure--I will just give a pitch for our Secret Service
bill, moving the Secret Service back to the Treasury because
the issues I think they can help with is on these cyber-related
issues. But I can assure you we have all the resources working
on this jointly and take it very seriously.
Senator Sasse. [Inaudible] ----institutions that do not
have the scale to have huge cyber defenses on their own, and
when we see foreign actors doing stuff like this, it is
obviously critical that we view this as a whole-of-society
problem, not just these institutions alone. So thank you for
your pledge to keep looking at that.
Chairman Powell, the Fed has done a series of announcements
over the last 2 months about the 13(3) funding facilities. And
in the announcement of April 9th, the Fed announced that the
Term Asset-backed Securities Loan Facility would be expanded to
include commercial mortgage-backed securities as well as static
collateralized loan obligations. The Wall Street Journal
described that expansion as ``the Fed will in effect be buying
the worst shopping malls in the country and some of the most
indebted companies.''
Could you give us your perspective on the Wall Street
Journal's characterization of this expansion? And are they
right about the risk levels with some of the commercial
properties? Obviously, as America goes through this experience
of corona time, lots and lots of people are not just doing
telecommuting and distancing for the present, but we see in
Silicon Valley lots of companies planning to migrate their
long-term strategy, and I would assume that is a bellwether of
what we are going to see for commercial property across
America. The taxpayers should not be on the hook for flooding
into that space. Can you help us understand how you would
respond to the Wall Street Journal's argument?
Mr. Powell. Sure. First, in TALF we are supporting asset-
backed securities markets broadly, which that is consumers,
that is car loans, that is credit card loans, things like that,
in addition to the CMBS you mentioned. Now, we are only buying
the Triple A-rated piece, and we are only buying it with a
good-sized hair cut. So the credit risk is actually very, very
low on this to us, and the same thing is true of the CLOs.
Senator Sasse. That is helpful, the Triple A point. Thanks,
Chairman.
Secretary Mnuchin, I want to go back to some China IP
issues that you and I have discussed before. Obviously, the
Chinese Government has been stealing American intellectual
property for decades to fuel its economic rise, and while we
have indicted companies and individuals for cyber espionage and
for some of the theft of this intellectual property, we rarely
see any sanctions for these crimes. For instance, we have
indicted Huawei and its subsidiaries and its CFO for a long
list of crimes, from the theft of trade secrets to sanctions of
Asians' money laundering, but we have not placed any sanctions
on Huawei itself.
How do you and the Treasury Department assess the costs and
benefits of utilizing sanctions against some of the Chinese
Communist Party's economic champions like Huawei that obviously
are not really private sector companies? They built the
business die, sort of the ostensible private sector side of the
organization by stealing IP, but the back end of Huawei is
obviously hooked in not just to the Communist Party but to
military intelligence. So why do we continue to treat these
``companies'' as if they are really private sector? Where do
you come down on the cost-benefit analysis on utilizing
sanctions?
Secretary Mnuchin. Well, I think as a matter of policy, you
know--and I have said this before--I do not comment on future
sanctions actions, nor do I comment on specific sanctions on
specific companies, although I will tell you that the issues
related to Huawei we do discuss on an interagency basis and do
coordinate. I would also just comment that I have worked very
closely with Ambassador Lighthizer obviously on the China
agreements, and forced technology transfer is a major issue
that we have been combating.
Senator Sasse. Fair, Secretary, but we have heard U.S.
Government officials of both Administrations for two decades
talk about, you know, agreements that are eventually going to
have teeth, and they almost never do. Ambassador Lighthizer has
been a bit of a pit bull on this piece of it, but discussing it
in the interagency process is not really the same as us pushing
to help Huawei and their state-based backers understand that IP
theft has real consequences, not just press releases. So I am
glad that it is a topic for interagency discussion, but I would
just say--and I know that the Chairman's gavel there implies
that I am at time, but I would just say in the intelligence
community, oversight community in the legislature, this is an
increasingly bipartisan issue that Republicans and Democrats
believe that it is important for us to be holding these faux
private sector companies in China to more account, and the
Chinese Government needs to know that we mean it, not just say
eventually, you know, somebody is going to come up the stairs
if you guys keep stealing IP and they continue to do it. So for
what it is worth, I think the Article I perspective here on an
increasingly bipartisan basis is serious.
Thanks, Chairman.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman and Ranking Member
Brown. I want to thank both Secretary Mnuchin and Chairman
Powell for being on the call today. We have all seen what has
transpired over the last couple months as far as Inspectors
General go.
My question is quite simple: Can I get both of your
commitments, individually of course, that if an IG submits a
request to you, you would provide any information to them and
do so in a timely manner?
Secretary Mnuchin. Yes.
Mr. Powell. Yes.
Senator Tester. Good. Secretary Mnuchin, can you tell me
from your perspective how active has the Congressional
Oversight Commission been?
Secretary Mnuchin. I have seen the recent report. I cannot
comment on what meetings they have had or what they have done
on that.
Senator Tester. OK. And you guys, I would assume, comply
with any requests that they may make, correct?
Secretary Mnuchin. I see no reason why we would not.
Senator Tester. OK. Well, I value that and I appreciate
that from both of you. I think the President has a bit of a
different opinion, and I say that by what he has said, not by
what I think about the values of Inspectors General.
Secretary Mnuchin, do you think it is right to be able to
remove public servants that their job is independence and
holding the Government accountable?
Secretary Mnuchin. I think that--if you are referring to
the removal of the IG, again, which I only know from what I
have heard the President say, but, yes, that is within his
authority.
Senator Tester. Even if they are doing their job?
Secretary Mnuchin. Again, that is an appointed position. He
has the right to withdraw, just as he has nominated a new
Special Inspector General to work with the CARES Act, which we
look forward to the Senate confirming so we can work with that
person.
Senator Tester. I have a totally different perspective on
that, and I will tell you why. I know he has the authority to
remove anybody, including yourself, and I would say that if you
are doing your job, in the case the Inspector General has been
doing it on an independent basis, I think it is just--I think
it is a clear misunderstanding of the three branches of
Government.
So I talked to you a little bit about reporting to the IGs,
and I will tell you, I learned something today I did not know
before, that nearly half--this is by Senator Toomey--of the
dollars that we have allocated, the $3 trillion, has neither
been spent nor lent. So can you guys--we need more transparency
in these programs, and I think you would agree with that. When
can we see full information about who is getting the dollars?
Secretary Mnuchin. Well, let me just comment. When we
negotiated this bipartisan deal, we agreed to unprecedented
transparency. So we agreed to release things that are not
required by 13(3), so I do not know why you have not seen that.
Everything is posted on our website or the Fed's website. We
take great pride in the transparency that we have provided and
we have agreed to as part of the CARES Act.
Senator Tester. Secretary, you are saying that the
information about who is getting the dollars and who is getting
the money is already posted on your website?
Secretary Mnuchin. Again, what I have said is every single
commitment we have made is listed on the website, every single
term sheet, and, yes, it----
Senator Tester. So every dollar that has gone out is listed
on your website is what you said. That is what I heard.
Secretary Mnuchin. Again, within the CARES Act facilities
with the Fed, when we do individual transactions through them,
they are listed.
Senator Tester. Chairman Powell--I look forward to seeing
that list, by the way, Secretary Mnuchin, and I am going to go
online and I am going to search it, because I am going to tell
you that as much transparency as you have said is with this
program, as the Senator from Montana, as a member of the
Banking Committee, I am not seeing any of it, quite frankly. I
am seeing general numbers. I am not seeing any of it. We will
deal with that at a later date.
Chairman Powell, I have a question for you. There has been
$3 trillion that has been put out. Can you give me an idea how
many dollars, because of the leveraging that the Fed used, has
actually been infused in the economy?
Mr. Powell. Well, Senator, our facilities, the big
facilities to which the equity has been committed, are really
just coming online, so it is all ahead of us. You know, we have
taken some time to set these facilities up, so the amount that
has gone out so far is, in the context of the U.S. economy,
fairly modest. We have committed, though, to disclose all of
the borrowers and the amounts in a timely way.
Senator Tester. I appreciate that. There is $200 billion
that I believe Secretary Mnuchin said would be leveraged to
$2.3 trillion. Do you agree with that?
Mr. Powell. Yes, potentially. We cannot be precise about
these numbers, but we can leverage their equity at about that
rate.
Senator Tester. What is $100 billion among friends? Thank
you very, very much. I appreciate you both being here. I look
forward to being able to find the information Secretary Mnuchin
said was online. Take care. God bless.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. Secretary Mnuchin,
Chairman Powell, thank you both for being here.
I want to speak about the Primary and Secondary Corporate
Credit Facilities. As of today, those facilities are available
to companies that have ratings from public rating agencies like
S&P and Moody's. As you know, that can be a very expensive
process. Some companies do not want to go through the cost or
the rigmarole of getting those ratings but are highly
creditworthy. These companies often tend to be privately owned,
sometimes family owned. They can have very large employee
bases. We have some in Arkansas. In aggregate, they are
employing thousands of workers. I think probably all the
Senators on this Committee, maybe all 50 States, have companies
that are in this category. Oftentimes they sell loans directly
to insurance companies like life insurers that are rated by the
National Association of Insurance Commissioners. Those ratings
are high quality. They are the functional equivalent of a
public rating agency like an S&P or Moody's.
Secretary Mnuchin, what is the possibility of opening up
those facilities to companies that are selling those kind of
loans with those kind of creditworthiness ratings from the
NAIC?
Secretary Mnuchin. Senator Cotton, I have appreciated the
opportunity that you brought this to our attention, and as I
have suggested, I am working with the Fed very closely to see
if we can accommodate using those NAIC ratings, and if indeed
there is some private ratings that can be done on a level that
is not costly to the companies. But we are committed to make
sure that these companies can use the facilities as well.
Senator Cotton. Chairman Powell, can I get your perspective
on that question?
Mr. Powell. Yes. If I understood your description of the
companies, they sound more like Main Street companies than
primary or secondary credit market. Those are for investment
grade issuers who issue public bonds. If I misunderstood, I am
sorry. But----
Senator Cotton. On the Main Street Facility, Mr. Chairman,
I think the limitation that some companies might face is that
they exceed the employee cap, which I understand to be 10,000.
It would be similar to the Main Street Lending Facility.
Mr. Powell. Well, I would just echo what Secretary Mnuchin
said. We are working on this problem.
Senator Cotton. Thank you for that. And, Mr. Secretary, any
thoughts on when that decision might be made so these companies
can get the certainty on whether they will have access to that
facility or another facility or perhaps a brand-new facility?
Secretary Mnuchin. I understand the importance of this, and
I will commit to try to get back to you within the next week.
And we want to make sure that if there are companies that slip
through these two facilities, the Chair and I will work
together to make sure that we deal with those issues so that
they have funding.
Senator Cotton. OK. Thank you both for that, and thank you
for your work on this question over the last couple weeks.
Secretary Mnuchin, I now want to turn to a question about
the Paycheck Protection Program. It is a very specific
question, but I got it coming in my office this morning from
one of our small community lenders in Arkansas. I suspect many
other lenders have the same question. I suspect that banks
across all of our States have this question. The note we
received said, ``We are required to file a PPP version of SBA
Form 1502 by Friday for all the loans we funded, yet the
guidance and format of the reporting requirements have not been
issued. We are reaching a critical point in time. As you know,
banks have to extract this information from our core, and that
can be both time-consuming and tedious. We ask for a little
more detail. That detail is as follows: Banks will have to
extract these data points from our primary core software
system. This will require programming to mine these data
points, then merging into the required formats. Then we have to
inspect for accuracy. This will require several days to
accomplish. It is not as a simple as pushing a button and the
data is populated.''
Mr. Secretary, given that this is Tuesday, the deadline for
this is Friday, what is the prospect of getting more detailed
guidance from the SBA as soon as possible or perhaps pushing
that deadline back a little bit for all of these lending
institutions to comply with what you need?
Secretary Mnuchin. Mr. Senator, I believe we have already
pushed that date back, but I will check on that and confirm it.
And if there is a specific institution that has a problem,
please let me know the name, and we will figure out how to
accommodate that. We want to make sure that we get the
information, but where there are small and medium-size banks
that have issues, we will obviously try to figure out how to
accommodate them.
Senator Cotton. Thank you very much, and I thank you again
for Treasury and SBA's willingness to work with all of us over
these last 2 months to iron out all of these wrinkles as the
CARES Act is applied in so many different situations. Thank
you, gentlemen.
I yield back my time, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Can you hear me?
Chairman Crapo. Yes.
Senator Warner. OK, great. Thank you. And thank you,
gentlemen.
I want to start, Chairman Powell, from the comments I think
you have made, and I want to reinforce them. I think we all
realize and understand that losing a job at any point in your
lifetime is an enormous challenge. Losing a job in the midst of
a recession or depression could be devastating. I point to the
survey that the Fed put out last week that literally said 40
percent of our fellow Americans who make less than $40,000, 40
percent of those folks had their jobs disappear between
February and March. We all know as well that 36 million
Americans were unemployed. We are Depression levels of
unemployment. And I think statistics have always shown that
particularly losing a job during a recession could actually
incur long-time income losses, up to 19 percent over the coming
decade, some of the statistics that I have seen.
So I would again like you to take a moment to say--you
know, we have to measure overdoing versus underdoing, but with
this type of devastation, with this type of pain
disproportionately hitting low- and moderate-income Americans,
can you speak to us of the results and the long-term scars this
would present if we do not take aggressive action?
Mr. Powell. Thank you. I would be glad to. So there is
clear evidence that we are going to have a situation where
people are unemployed for long periods of time. That can
permanently weigh on both their careers and their ability to go
back to work and also weigh on the economy for years, equally
so with small and medium-size businesses, which are the jobs
machine of our great economy. If we allow unnecessary,
avoidable insolvencies because of effectively a natural
disaster, that, too, will destroy the work of many families and
generations, but it will weigh on the economy. So those are
things to keep in mind.
As I said earlier, this is the biggest response by Congress
ever and the fastest and the biggest from us, and still this is
the biggest shock wave seen in living memory, and the question
looms in the air: Is it enough? We will have to----
Senator Warner. I would argue that historically, whether it
is our country or other Nations, Governments tend to undershoot
during these periods, and we now have 36 million Americans
without work, and 40 percent of the folks under $40,000 a year
losing their work, that this scar could be deep and wide.
One of the reasons--I am going to turn to you, Secretary
Mnuchin, and we have discussed this. I think a number of our
colleagues on both sides of the aisle understand this. You
know, we did some aggressive things for folks in the airline
industry. We did some aggressive things for folks under 500.
But that middle market that the Main Street Facility is
supposed to address, I am gravely concerned that we need to
both get that out and we need to be very aggressive with it. I
did a letter to you all, to you, Secretary, yesterday,
outlining some of the ideas that I hope you would be willing to
lean into. But I want to--and you made mention earlier that you
were willing to have some of that $75 billion at risk in this
facility. But I would like you to speak to that a little bit
more, specifically in terms of, as you build out the baseline
of this facility, how much risk and how much of that capital
did you expect to potentially lose, and I would love to have
then the Fed Chairman very quickly echo whether he is willing
to relook at some of the penalty fees that are, to my
understanding, Fed regulations but not legislatively mandated.
Secretary Mnuchin, you first, please.
Secretary Mnuchin. Thank you. Well, Senator Warner, first
of all, I want to personally thank you for the time that you
spent with us during the legislative process in helping to
craft these different pieces and your availability since then
to work with us, so we appreciate your thoughts and will
continue to work with you.
As it relates to risking capital, as I have said, almost by
definition, anytime that the Fed thinks they need capital,
there is a risk to us. We obviously model our various different
scenarios. We have obviously continued to adapt the Main Street
Program to let more and more companies into it, and although we
refer to it as one program, it effectively has three
subprograms. So we run different scenario analysis. There are
scenarios within Main Street where we could lose all of our
capital, and we are prepared to do that. There are scenarios
where the world gets better and we could actually make a small
amount of money. But, again, as I have said, no different than
Secretary Paulson during the TARP period. They did not think
they were going to make money. Our intention is that we expect
to take some losses on these facilities. That is our base-case
scenario.
Senator Warner. Mr. Chairman, do you want to address it in
terms of the penalty rate?
Mr. Powell. I would be glad to. So what we are doing here
with these programs is we are making loans in times of severe
stress, where markets are not working, not providing credit on
reasonable terms, the original purpose of central banks. So
what rate should we charge? And what we do is we charge a rate
that is a little bit higher than the normal rate, but in most
cases much below what the market is currently providing. That
encourages prompt repayment. It helps those who cannot get
credit, but not those who want credit from us to save a few
basis points. And if markets are functioning reasonably well,
we do not want to replace them. We want to be a backstop to
those markets.
Senator Warner. I think, Mr. Chairman, my time is up, but I
would just urge you, these are extraordinary times, and I hope
you will lean into this as much as possible.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Gentlemen, first of all, thanks. I appreciate the work that
you have done and your organizations have done in making this
whole thing work as well as it has in a very short period of
time.
I would ask, first of all, to Secretary Mnuchin, in
discussing with our local lenders, they have got a number of
questions coming in with regard to PPP, and specifically two
different sections: Number one was the rule in which we asked
that these loans be literally divvied out and accepted within
10 days of the time of approval; and, second of all, how that
relates to a June 30th date for the execution or completion of
the use of those loans. And, Mr. Secretary, I do not find where
there is actually a June 30th end date where that has happened
in order to facilitate forgiveness of that loan.
Can you talk a little bit about your option or the
flexibility you have with regard to the PPP and the forgiveness
of loans and that June 30th date that so many people have
concerns about?
Secretary Mnuchin. Well, let me just comment, I think the
concern that people have, it is even bigger, that we would like
to get a bipartisan technical fix. As you said, there is the 10
days to disburse it. We have then given banks another 10 days
if people have not sent back the documents. And then there is
the 8-week period. So companies are really having issues with
not necessarily being able to use it during that 8 weeks. They
do not want more money, but want flexibility that they can use
it in longer than an 8-week period. And as it relates to the
June 30th issue, we are happy to follow up with your staff and
talk about where that fits into the bill.
Senator Rounds. Thank you.
Chairman Powell, I noted with interest a letter from Vice
Chair Quarles recommending that Congress give regulators
discretion to loosen certain capital requirements prescribed by
Section 171 of Dodd-Frank. Do you share the Vice Chair's
thinking? And what additional measures do you think Congress
and the Federal Reserve should consider?
Mr. Powell. I do share that. So the idea is temporarily
during this period, unusual, unique period in our history, the
banks have been strong. They have been making loans. They have
been taking in deposits. And because of the growth in their
balance sheet, they are constrained by some of these
regulations because they are taking on board very low risk
assets. So we have tried to provide relief so they can continue
to do what they are doing. So I do support that, and we have
done a number of things, and, you know, we will let you know as
we see the need for other adjustments.
Senator Rounds. Thank you, Mr. Chairman.
Secretary Mnuchin, one thought with regard to--in the
middle of this COVID-19 pandemic, we still have a discussion
about and on a regular basis get questions from taxpayers here
about the amount of money that we have borrowed and what we are
going to do about it. You are going to play a key role in how
we lay out that repayment plan. Can you talk a little bit about
the tools available to you specifically with regard to long or
ultra-long Treasury bonds? I know it has been a hot topic, and
I know that most recently you launched a 20-year bond. Can you
talk about the maturities, how you plan on laying that out, the
strategy that you are using to best accommodate our needs for
the immediate liquidity, but also recognizing that you have got
some tools available? And with these ultra-low interest rates
that we are at right now, it may very well work to our benefit
to feather this out over an extended period of time?
Secretary Mnuchin. Well, thank you. I am glad you asked
that question because I think it is very important. First, I
would just answer prior to this we spent a lot of time looking
at 50- and 100-year bonds and determined that there just was
not enough demand to make it worth it given borrowing sizes. We
did get advice on a 20-year, so we have added the 20-year. That
gives us the ability to both extend the duration as well as to
raise a significant amount of funds. So it is my intention, as
you have described, to borrow a lot of money in a short term to
have the funding, but then to expand our financing in 10-, 20-,
and 30-year bonds. What I would like to do is lock in a
significant amount at very low interest rates so that the money
we are borrowing can be paid back and dealt with over a long
period of time.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Today's hearing takes place in the worst economic crisis of
our lifetimes. Unemployment is now at Great Depression levels.
Nearly 40 percent of people making less than $40,000 lost their
jobs in March alone. Businesses are shuttered and they may
never reopen.
Congress passed the CARES Act and put nearly half a
trillion dollars worth of taxpayer money in corporate bailout
money in your hands. This is not the PPP or the Small Business
Fund, but half a trillion dollars for midsize and giant
corporations. So I want to talk a little bit about where that
money is going.
The law gives Treasury and Federal Reserve the authority to
write detailed rules determining which companies get taxpayer
relief and how they can spend that money. And over the past few
weeks, the Fed has been putting out these rules in the form of
what you call ``term sheets.''
So, Secretary Mnuchin, you have said that the jobs numbers
will improve. In fact, on Fox News, you said, ``We will have a
better third quarter, we will have a better fourth quarter, and
next year is going to be a great year.''
Now, to make that happen, people are going to need jobs. So
does this mean that you will require companies that receive the
bailout money from taxpayers to keep their workers on payroll?
Secretary Mnuchin. So let me just comment. I have said
publicly and I will say again I think the job numbers will get
worse before they get better. So I just want to be very clear
that I think that June will be a very difficult quarter.
As it relates to the CARES Act, I take great pride in the
bipartisan support on these bills, and these specifics were
negotiated on a bipartisan basis very clearly in each one of
these programs, and it is our intent in the 13(3) facilities to
fulfill both the spirit and the details of the law. So
different facilities have different requirements.
Senator Warren. So, I am sorry, Secretary Mnuchin, that is
not quite right. What the law specifically does is gives you
the specific authority to determine the terms on which these
loans are made and who is going to be able to get them for
these midsize and giant corporations. And so I have a very
simple question for you. You say the economy is going to
recover. It is going to take jobs in order for that to happen.
So what I want to know is: Are you going to require companies
that receive money from this half a trillion dollar slush fund
to have to keep people on payroll? It is a simple question. Yes
or no, are you going to require that?
Secretary Mnuchin. First, let me say that our number one
objective is keeping people employed.
Senator Warren. Good. So are you going to require that----
Secretary Mnuchin. I want to be very clear.
Senator Warren. ----of people who are getting taxpayer
money? That is my question.
Secretary Mnuchin. Again, we negotiated very significant
restrictions on employee compensation, on dividends, on
buybacks, and in the Main Street Facility we have put in a
provision that we expect people to use their best efforts to
support jobs. But----
Senator Warren. But--I am sorry. I have very limited time
here, Mr. Secretary. Let me understand what you are saying. In
all the facilities that are not the Main Street Facility, you
are not putting in any requirement for payroll, and the Main
Street Facility is something about commercial reasonable effort
to be able to maintain jobs. In other words, if somebody fires,
if a corporation fires a bunch of people, then gets Federal
taxpayer money, you are fine with that; or if they take a bunch
of Federal taxpayer money, and, well, it did not work out
commercially for us, then they can fire people.
So I take it your answer to my question whether or not you
are going to require as part of the terms of the loan that
people be kept on payroll is no? Isn't that right, Secretary
Mnuchin?
Secretary Mnuchin. That was discussed with people on both
sides of the aisle, and the determination was made----
Senator Warren. I am talking about term sheets.
Secretary Mnuchin. ----at the time----
Senator Warren. I am sorry, Secretary Mnuchin. I am talking
about your term sheets that you are putting out, and you are
telling me you are not going to require the payroll--let me ask
you one more question. Taxpayers are on the hook here for
nearly half a trillion dollars. You are not going to require
that they keep a single person on payroll. There are some
rules, though, in the term sheets, as you identified earlier,
like prohibiting companies from getting bailout money, from
double-dipping in other CARES programs. And by law, companies
that get this money are going to have to sign agreements
certifying that they are in compliance.
So, Secretary Mnuchin, here is what I want to know. Will
you create a certification process that ensures that executives
are held personally liable and are subject to criminal
penalties if they provide false information or misuse bailout
funds?
Chairman Crapo. And if you could be brief, Mr. Secretary.
Secretary Mnuchin. We will review that, and, again, I would
just comment on programs like the airline programs had very
specific requirements to keep jobs, which was the intent of
Congress.
Senator Warren. That is right, and the rest was left up to
you, and what you are saying is that you will not do it. You
know, we are in a situation where 35 million Americans have
filed for unemployment. You are in charge of over half a
trillion dollars. You are boosting your Wall Street buddies,
and you are leaving Americans behind. I think that----
Secretary Mnuchin. Senator Warren, I think that is a very
unfair characterization, and these issues were discussed with
both Republicans and Democrats at the time. You were not
necessarily part of those discussions, but these were
completely discussed.
Senator Warren. You were given the authority to determine
the terms. You have said it yourself. You are putting out term
sheets, and those term sheets do not require that a single
corporation----
Chairman Crapo. Senator----
Senator Warren. ----getting billions of dollars in taxpayer
money retain one job.
Chairman Crapo. Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman. Thank you both for
being here today. I look forward to these quarterly updates.
Chairman Powell, when you took this responsibility, the Fed
had about a $5 trillion balance sheet. You worked it down to
about 3.8. It was about 4 when the COVID-19 crisis hit. With
the money supply increasing from $3.8 to $5 trillion recently,
with the debt being at $23 trillion, and with about two-thirds
of what we have done so far in the $3 trillion relief package
it looks like goes to debt, and with the potential for more
movement by the Fed that would take the balance sheet now from
$4 trillion just in March, the five moves you made takes it up
to potentially $13.5 trillion. It is around probably $7
trillion today, and it could go north of 14 if, in fact, the
Main Street Program is fully levered up. Help us understand, I
mean, how do you put this genie back in the bottle? Help us
understand how you are thinking about this demand on capital,
demand for capital and what it might do to interest rates in
the short term and the long-term implications of what we have
just done. This is not a criticism at all. It is just I would
love to get your thoughts of how we should be thinking about
that balance sheet given that China, Japan, EU, all the other
big central banks are doing fairly similar moves, just not as
dramatically as we have done.
Mr. Powell. So when we expand our balance sheet, when we
bought securities, as you know, Senator, so we bought a lot of
Treasury and MBS securities to get those markets working. As
these facilities grow, we will also expand our balance sheet,
and those also--you know, that expands the money supply. I
would expect that over time--and that time will probably not be
very soon, but over time the assets that we have on our balance
sheet from this era will come to maturity. They will roll off,
and the balance sheet will again very gradually return. This
will be some years down the road, I would think.
Senator Perdue. If I could interrupt, I watched how hard it
was to get us from this 4.1 to 3.8 in the latter stages of that
and the consternation it had both politically and economically.
So you are confident that over time we will be able to manage
that size balance sheet?
Mr. Powell. So what really matters is the size of the
balance sheet relative to the size of the economy, and that
came down quite significantly from the end of 2014 until 2017
just by holding the balance sheet constant. So it can be done
in a way that is sort of passive and gradual, and it was for
about 3 years. We came down from, what, 25 percent of GDP to 16
or 17 percent of GDP. So it can be done over time.
In the meantime, I would say it does not have implications
for inflation. It does not have particularly problematic
implications. I am not saying there are no limits to this, but
it is not something that raises financial stability or
inflation concerns today.
Senator Perdue. Thank you.
Secretary Mnuchin, I just want to thank you and echo what
Tim Scott said earlier, and that is about your availability
through this crisis. I know you are recently married, and I do
not know where your wife is these days, sheltering in place. I
am sure you have not seen much of her. Thank you for all your
sacrifice in making this thing happen.
I want to correct the record. We have been told in this
meeting that there is no data out there, but I want to
highlight some numbers for us here. First of all, the Dodd-
Frank bill killed about 4,000 community banks in about 6 years.
There was a bipartisan bill done in January of 2018 that
modified the most onerous parts of that and saved our community
banks, and they are the rock stars in this process, in the PPP
program, anyway. I have a question, Secretary. Eight hundred
banks were approved under the SBA system prior to this; almost
5,000 banks made 4.3 million loans and so far put out $520
billion to companies under 500 employees. And, by the way, 99.8
percent of that $520 billion went to companies with fewer than
500 employees, so it did want we wanted to do. And 93 percent
of those loans are $350,000 or less.
My problem is this, Secretary: I think we have on two
levels, one in the bill itself and one that is happening now in
what we have done here, is that we have disincented people to
come back to work. Even now my State is beginning to open up,
and, by the way, safely. We have two constituent groups out
there, the military and essential workers, to look at how they
have managed their protocols and so forth while they manage
through this crisis. It gives me great confident that we can
open the economy up. The unemployment premium is keeping people
from coming back to work. There are employers in my State who
really want people to come back to work, but they are saying,
``No. Why would I do that? I am going to enjoy this premium
right now, and then call me back in a couple of months.''
The second thing is a lot of small employers actually
encouraged a few weeks ago their employees to go on
unemployment even though they were getting money and they were
hoping that they would--when the revenues started when they
opened up, they would begin to then bring the people back and
then use the loan to pay salaries. How would you help us think
about how to deal with that? The Labor Department at one point
said they were going to put some rules out about this premium.
And the second thing is the enforcement behind if an employer
wants an employee to come back to work, the employee should no
longer be qualified for unemployment insurance. Would you
address that?
Chairman Crapo. And if you could be brief, please.
Secretary Mnuchin. Thank you. And let me just say, you
know, we are aware of the technical problem here, and we want
to have a technical fix on the unemployment insurance. But,
specifically, let me just comment on the PPP. If you offer back
a worker and they do not take that job, they will be required
to notify the local unemployment insurance agency because that
person will no longer be eligible for unemployment.
Chairman Crapo. Thank you.
Senator Schatz.
Senator Schatz. Thank you to all of the testifiers and
panelists.
Chairman Powell, I want you to take us through two very
simple scenarios. The first is if Congress takes no additional
action in the next couple of months, and the other is if
Congress steps into the breach and passes another fiscal policy
bill.
I know you are loath to weigh in on specific policy
recommendations, but I want you to talk in terms of the overall
economy about the impact on quarters 3 and 4 should we decide
to say that the bills that we have passed are enough.
Mr. Powell. I think it really depends on the path of the
economy, honestly. As I said, my concern has been the risk and
possibility of longer-run damage to the economy through
unnecessary insolvencies on the part of households and
businesses and long-term unemployment, and that if we find
ourselves in that place, we may have to do more, and it could
also be something that Congress would want to do. I think--go
ahead.
Senator Schatz. So according to census data, about half of
small businesses are going to run out of cash within a month.
States are slowly reopening the economies, but consumer
behavior is not going to rebound to normal within a month. Do
you think that there is going to be a strong enough rebound in
economic activity in the next 1 to 3 months for that alone,
from what we have already done alone, to prevent thousands of
small businesses from going under? Or do you think there is a
need for additional fiscal policy?
Mr. Powell. I think we are going to see here fairly quickly
how the reopening goes, and it is very hard to know. We have
not done this thing before. No one has done this sort of thing
before. So I think you are going to be getting a lot of
information fairly quickly here in terms of what may be needed.
I make my comments on fiscal policy at a general level. I am
reluctant to talk about timing and specific provisions. It is
really not the Fed's role. We do try to stick to our knitting.
Senator Schatz. So why don't you go ahead? I will give you
an open-ended question. Please provide the panel with some
comments about the importance of fiscal policy over the next 6
to 9 months.
Mr. Powell. So it is a combination of a couple things.
First, just, as I mentioned, the risk of lasting damage to the
productive capacity of the economy through the labor force
because of longer-term unemployment and through unnecessary,
avoidable insolvencies on the part of small and medium-size
businesses. Those two things create a real risk.
The other thing I will point to is what we do is we address
liquidity problems, not solvency problems. We have lending
powers, not spending powers. So over time--and this is not a
certainty; this is a possibility. Over time, solvency problems
emerge from liquidity problems. Liquidity problems can develop
into solvency problems with the passage of time. That all
depends on the path of the economy, how well the reopening
goes, and, you know, which path we find ourselves on.
So I think what Congress has done to date has been
remarkably timely and forceful. I think you could say the same
about what we have done. I do think we need to take a step back
and ask, over time, is it enough? And we need to be prepared to
act further, and I would say we are if the need is there.
Senator Schatz. It seems to me that the distinction between
a solvency problem and a liquidity problem applies to big
institutions, big corporations, even Governments. But when you
are talking about a small business or a family, there is not
much of a difference between having a cash-flow problem and
simply being flat broke. And it seems to me that that
distinction, which you are able to make and rightly do as the
head of the Federal Reserve, is a rather abstract one for the
companies that are eight persons and the families that are sort
of at economic death's door. They do not distinguish between a
solvency problem and a liquidity problem. They have run out of
money.
Secretary Mnuchin, Section 4114 of the CARES Act states
that carriers receiving payroll grants shall ``refrain from
conducting involuntary furloughs or reducing pay rates and
benefits until September 30, 2020.'' But on April 21st, United
Airlines received $4.9 billion, and on May 1st, United
announced that it would reduce 28,000 workers from full-time to
part-time within 2 weeks. Was that announcement a violation of
the terms of the Payroll Support Program?
Chairman Crapo. And, again, please be brief.
Secretary Mnuchin. We believe right now that they are in
compliance with the program.
Senator Schatz. Right now. Were they violating this when
they first announced it?
Secretary Mnuchin. Again, I do not want to go through
specific situations with specific companies. I will say right
now we believe they are in compliance with the agreement.
Senator Schatz. Thank you.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. And, Chairman
Powell and Secretary Mnuchin, thank you for your, I think,
heroic work. Your teams have done a great job under immense
pressure, and I appreciate it.
One thing I want to go back to that was mentioned by some
of my colleagues about the CMBS, I like the fact that the
Administration expanded TALF to cover legacy CMBS. I think that
is a good step. I personally believe that commercial real
estate is under severe stress and is likely to get worse before
we start seeing a turn and a more positive growth, more
positive indicators from the economy.
One thing that I am concerned with, Secretary Mnuchin, is
right now it looks like we have only got about 15 percent from
the American Hotel and Lodging Association, about 15 percent of
forbearances of any kind from the CMBS servicers or service
providers. That seems like a low number to me. One, I would be
curious if you think that that is low given the circumstances
right now, and then what more we may need to do congressionally
to get the servicers and the borrowers to the table.
Secretary Mnuchin. It does seem a bit low to me as well. We
do have a structural problem of loans that are in
securitizations and how they have to be dealt with with the
special servicers. So, obviously, as it relates to the banks,
the banks have much more flexibility, but this is a technical
issue, and we may need to come back to Congress to work with
you on a technical fix.
Senator Tillis. Well, thank you. I would like to hear about
that. I think that we need to do it because I am gravely
concerned with the retail shopping, the hotel/lodging industry,
and those are industries that are largely going to lag behind
some of the business startups that we are seeing in some
States. So I would be interested in your feedback.
I was also kind of curious about the TALF Program and
potentially other areas where we should expand. I am thinking
about new issues, CMBS, RMBSs, installment loans. Have you
thought about that? And have you also thought about less than
Triple A?
Secretary Mnuchin. We have thought about----
Senator Tillis. And that would be----
Secretary Mnuchin. We have thought about all of those, and
I would just say, you know, I want to thank the people at the
Fed and the Treasury who have worked around the clock to get
these facilities up and running. We have prioritized these. But
I assure you as the Fed Chair and I have said, we will look at
all of our options to make sure we support jobs across the
spectrum.
Senator Tillis. I would particularly be interested--you do
not have to expand on it here, but on new issues, I am very
interested in that, to see what you are gaining, what you think
is within the realm of possibilities.
Chairman Powell, do you have anything to add to that?
Mr. Powell. No; just our commitment, as the Secretary
suggested, to keep our minds open and looking at evolving those
facilities as we learn more.
Senator Tillis. Secretary Mnuchin, I have one question for
you and then a final question for the both of you. I am
thinking about more about the tax burden right now on middle-
class households. Do you think any of our future work here
should include a treatment for maybe a reduction in the tax
burden on middle-class households and whether or not that would
be helpful?
Secretary Mnuchin. I think that is something that should be
seriously considered.
Senator Tillis. Now, the final one that I have--Chairman, I
am going to keep to the time. I have a growing sense that we
have a bit of a donut hole, those that are not quite right for
the Paycheck Protection Program because of their size but not
quite big enough or the nature of their business to be eligible
for the upcoming Main Street Lending Facility. So have you all
looked at--and, Secretary Mnuchin, I appreciate what you said
about the 8-week covered period. I think there are lot of
mechanics in there and what can be included as a forgivable
portion of the proceeds. All of that we need to look at; we
need to know fairly quickly. We know the covered period is
going to take congressional action. But when we massage the
PPP, that may fix the problem for some of these people I
describe as being in the donut hole. But are you seeing that
now, I mean, we do not have the full information on the Main
Street Lending Act, but I get a sense that there are going to
be some people caught in between. What are your thoughts about
more we need to do there? That final question is for both you
and Chairman Powell.
Secretary Mnuchin. I would say our objective is to make
sure that there are people that do not fall out in between. So
between the PPP, the EIDL loans, and the Main Street Program,
it is our objective to try to cover as many of those companies
as possible.
Mr. Powell. In fact, that is one of the reasons why we went
to a smaller minimum loan level on the Main Street Lending
Program in the last turn of the term sheet.
Senator Tillis. Thank you, Chairman Powell and Secretary
Mnuchin. I also look forward to seeing the Main Street Lending
Act mobilized in the coming couple weeks. Thank you.
Thank you, Mr. Chair.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman.
Secretary Mnuchin, Chairman Powell recently acknowledged
the need for additional fiscal relief and just in this hearing
acknowledged in response to Senator Menendez that State and
local layoffs of police and firefighters, first responders, and
teachers will make a bad economic situation even worse. Do you
agree with that assessment?
Secretary Mnuchin. Well, I have recently provided guidance
on the $150 billion we sent to the States that they can use
that money for police, fire, and first responders without
restrictions. So I hope there would be no layoffs as a result
of that relief. That was our objective.
Senator Van Hollen. Right. But in addition to them--so that
just moves the burden onto other public service providers,
including teachers, health care workers, public health workers.
Wouldn't you agree that layoffs of those workers or any workers
just takes a bad situation and makes it worse?
Secretary Mnuchin. I think it does, but I think the
question that Congress and the Senate need to address is who
should pay for that, which taxing authority, whether it is the
State or the Federal Government. And I look forward to working
with the Senate on a bipartisan basis to----
Senator Van Hollen. Well, Secretary Mnuchin, you said which
taxing authority. As you know, States have balanced budget
requirements. The Federal Government does not. It just borrowed
$3 trillion. It seems to me we need to take action here to
prevent a bad situation from getting even worse.
Let me ask you about the PPP program. A bipartisan group of
Senators has written and spoken to you about some of the
unilateral and unnecessary conditions the Treasury regulations
imposed on PPP. In fact, the Small Business Administration IG
recently said that the 25 percent limit on forgiveness for
fixed costs did ``not align with the language in the statute.''
Senator Rounds just raised another issue, which is not a
design flaw in the statute, in my view, regarding the June 30th
deadline for qualifying for full forgiveness. The House in the
HEROES Act reformed both of these provisions. Do you agree with
the changes that the House made in the HEROES Act with respect
to PPP?
Secretary Mnuchin. I am not familiar with their specific
language, but I am happy to look at it. But I do want to
comment on the 75-percent issue, and SBA wrote back to the IG
to disagree with that. And I have spoken to both Cardin and
Rubio on this. The program was designed for 8 weeks plus
overhead----
Senator Van Hollen. Mr. Secretary, I know what your
position is. I just wanted to highlight the position of the
Inspector General of the SBA, and in my view, you cannot find
that 25-percent limitation anywhere in the statute. I challenge
anyone to take a look and find it there.
I would ask you to take a look at the Rebuilding Main
Street Initiative that a number of us had put forward. I do
think it can get bipartisan support, and I look forward to your
responses there.
Let me turn to Chairman Powell and just say that I believe
that overall the Fed has acted quickly and for the most party
necessarily and appropriately. But I have serious concerns
about the actions you have taken with respect to the Secondary
Market Facility with respect to junk bonds.
In response to Senator Sasse, you emphasized that, at least
with the TALF Program, you were essentially helping those with
Triple A ratings. But when you look at the Secondary Market
Facility, you have purchased junk bonds, and we have this
strange situation where the same day we had unprecedented
damage in terms of unemployment numbers, the stock market was,
in fact, going up. And you pointed out that, you know, most of
the people being hurt are those earning less than $40,000 a
year. In fact, 40 percent of them have lost jobs. And it is not
clear to me why putting money into junk bonds is helping folks
on Main Street. In fact, it puts the public in a first loss
position behind even the most subordinated bond holder and uses
public funds to take on years and even decades of future cash-
flows with the price risk.
Can you respond to that concern?
Mr. Powell. Thanks. I would be glad to. So the only high-
yield bonds that we can buy are those of companies that were
investment grade on March 22 but have been downgraded, so-
called fallen angels. These are in many cases some very large
U.S. companies with many, many thousands of employees, and we
made them eligible for the Primary Market Corporate Credit
Facility, and we do not want to have, you know, a cliff there
where the investment grade markets are working well but the
non-investment-grade markets are not. So we made a very
limited, narrow set of actions to support market function in
those markets, including buying ETFs, exchange-traded funds.
That is a portfolio effect, and that has had an effect to
improve market function. We may have to be lending money to
those companies, but even better, they can borrow themselves
now, and a lot of that has been happening, and that is a really
good thing.
So that is kind of why we did it, and it is a fairly narrow
intervention. We are not buying junk bonds generally across the
board at all.
Senator Van Hollen. Mr. Chairman, if I could just follow up
briefly. I think a lot of those bonds were already in trouble
before the intervention, and their troubled was not directly
related to the pandemic. And if you could get back to me and
just show me where the Fed has the authority to purchase this
kind of below investment-grade instruments, I would appreciate
it.
Thank you.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. Chairman Powell, do you believe that
States and cities are going to experience revenue shortfalls as
a result of the economic lockdown to try to contain the spread
of the coronavirus?
Mr. Powell. Yes, Senator, I do think that is what we are
seeing.
Senator Kennedy. Do you think they are going to be
substantial?
Mr. Powell. Yes, I do.
Senator Kennedy. Is your Municipal Liquidity Facility set
up?
Mr. Powell. Well, we are probably 10 days away, 2 weeks
away from it actually being operational. Not quite yet is the
answer.
Senator Kennedy. And as I understand it, you basically will
buy short-term paper like revenue anticipation notes from the
States, which will allow those States to issue that short-term
paper at a lower interest rate? Am I correct?
Mr. Powell. Well, they will be able to issue it at all in
many cases, so, yes, we are supporting market function there.
By the way, that should support market function across the
municipal markets in longer-term maturities, too.
Senator Kennedy. Do you know how many States are prohibited
by their Constitution from borrowing money to pay for operating
expenses?
Mr. Powell. I think 49 States have a balanced budget
requirement.
Senator Kennedy. Yes, sir, but a lot of States have--in
their State Constitutions they are prohibited from borrowing
money to operate Government. They can borrow money to build
things, but not to operate Government. Are you aware of that?
Mr. Powell. Well, I thought most States could borrow during
the course of a year for maturities of less than a year to
smooth out the inflow of cash, revenue anticipation notes, tax
anticipation notes.
Senator Kennedy. Right. Have you had a lot of inquiries
about the Municipal Liquidity Facility?
Mr. Powell. Yes, Senator, we sure have.
Senator Kennedy. OK. Secretary Mnuchin, do you agree with
what the Chairman said?
Secretary Mnuchin. Yes.
Senator Kennedy. OK. Let me offer you an observation, Mr.
Secretary. I am not expecting you to comment on it. It looks to
me like the game plan is to have Senator McConnell, Senator
Schumer, Leader McCarthy, Speaker Pelosi, and you go off and
negotiate a deal on the next package, if there is one. And you
will bring that deal back to the Republicans and Democrats in
both Houses. And if the past is any indication, the Republicans
and Democrats in both Houses who do not get to participate in
the negotiations will moan and groan and complain and then boo,
and follow their leaders into the chute like cattle.
I am not sure that is going to work this time. I think that
whatever deal you all come up with is going to receive serious
pushback from both Republicans and Democrats in both Houses for
a variety of reasons. I could, of course, be wrong, but I doubt
it.
Why would we not agree to allow the States to use the $150
billion that we have already appropriated to them to address
shortfalls in their revenue base as a result of the
coronavirus?
Secretary Mnuchin. Well, Senator Kennedy, I just want to
comment on the first thing. I have no intention of doing what
you have just described, nor do I----
Senator Kennedy. Well, I do not want to debate----
Secretary Mnuchin. ----think that happened in the past.
Senator Kennedy. ----that, Mr. Secretary. It has been done
in the past. It was done the last time. I am not being
critical----
Secretary Mnuchin. Senator, there were at least 20 or 30
Senators, both Republicans and Democrats, that participated in
the detailed analysis of the last bill.
Senator Kennedy. Well, I understand, but there are a lot
more Members in the House than the Senate. And I am not being
critical. I am just telling you. That is the way it works
around here, and we all know it.
Why would you not be supportive--we have already spent $150
billion in the CARES Act. The States have it. We know they are
going to have shortfalls. We may not be able to pass another
bill. I think it is less than 50 percent chance of passing
another bill. Why would we not allow States, without
appropriating any new money, to use that money to address
revenue shortfalls that you and the Chairman of the Fed both
agree are going to exist and be substantial? And why would we
not do that today?
Secretary Mnuchin. Well, Senator Kennedy, I appreciate your
bill, and I know I had the opportunity to meet with you and
other Senators with the President. And if there is bipartisan
support for that, I am sure that the President and I would look
forward to that.
Senator Kennedy. What would it take for you to agree to
support it? How do I demonstrate bipartisan support?
Secretary Mnuchin. Again, I think I have a call scheduled
with you later today, so I am happy to talk to your more about
it. But, again, I think the President and I have said if there
is bipartisan support for this and the money has already been
allocated, that is something that I assume we would very
seriously go along with. But, again, there has to be broad
bipartisan support.
Senator Kennedy. Right. How about if there were 60 votes in
the Senate? Would you consider that bipartisan support?
Chairman Crapo. And would you please be brief?
Secretary Mnuchin. Again, I would just say I appreciate----
Senator Kennedy. How much time do I have?
Chairman Crapo. You are a minute and 15 seconds over.
Senator Kennedy. I am sorry. I cannot see my clock.
Chairman Crapo. We are going to have to figure that out.
Several have had that problem.
Senator Kennedy. Would you have him answer that one for me,
Mr. Secretary, Mr. Chairman?
Secretary Mnuchin. Again, I leave the details of that up to
you and the Senators there. I appreciate the unanimous support
we had previously, but I will leave that to you.
Senator Kennedy. I am sorry I went over, Mr. Chairman.
Chairman Crapo. No problem.
Senator Cortez Masto, can you see your clock? Go ahead.
Senator Cortez Masto. Thank you for joining us. Let me
start with Chairman Powell.
Chairman Powell, it was an interesting conversation you
were having with Senator Schatz on liquidity problems versus
the solvency problems. I do know that you have highlighted that
some of the sectors--airlines and hospitality--are in rough
financial shape. Because I come from Nevada and it is a
hospitality-generated State where we get most of our revenue,
can you speak to the challenges that hospitality and tourism
sectors face right now?
Mr. Powell. Sure. So I think sectors of the economy like
that where the business model is to gather people in one place
and entertain them, feed them, fly them around, whatever you
are going to do, those are sectors where it will take some time
for, I think, the public to return. That will happen, but it
will take some time for the public to regain confidence and
adapt to the new world and start traveling, taking vacations,
going to restaurants, things like that.
Senator Cortez Masto. And I am glad you brought that up
because that is one thing that we have not talked about, was
this notion that when we looked over our businesses--and I
think we all and I personally, that is what we want. We have
got to find this balance about opening our businesses in
general. But they are only going to be as successful as the
customer confidence that is there to patronize those
businesses. And that is not just true for the hospitality
industry. That is true for all businesses.
I do know that the service and retail has been hardest hit,
that business, and my understanding from some of the data that
I have seen is over 2 percent of those businesses have closed
permanently already. And so how are we to address this consumer
confidence issue? Because I know that is something that you
have thought about and talked about publicly, I have seen. What
should we be doing?
Mr. Powell. You know, one thing I will say is it affects
different sectors of the economy differently. The ones we
talked about are the ones where it is most important. Other
sectors of the economy may be able to recover much more
quickly, and we certainly hope so. But, you know, the number
one thing, of course, is people believing that it is safe to go
back to work, to go out, and that is about having a sensible,
thoughtful reopening of the country, something we all want and
something that we are in the early stages of now. That is what
it will take for people to regain confidence, I think, and
resume their activities--again, at a different pace depending
on the nature of the business, the nature of the activity.
Senator Cortez Masto. Right. And the health care piece of
it, right? That they will feel safe going back out if they feel
safe at--or they are going to be healthy and safe when they go
into an establishment. Isn't that true?
Mr. Powell. Yeah, it is the combination of getting the
virus under control, development of therapeutics, development
of a vaccine, all of those things, and also just, I think, you
know, seeing what your eyes are telling you. You can feel it
already, that people are doing things that they would not have
done 2 months ago, a little bit at a time, and I just think
that process will take time.
Senator Cortez Masto. Yeah, and until that happens, many
people are relying on local governments and State governments
as their social safety net, right? They are telling them--
looking to local government and State Government to tell them
how they can stay safe, they are opening businesses, where the
health care facilities are, how they can get testing that is
needed and contact tracing. Isn't it true that is where they
rely on their local governments first off?
Mr. Powell. Yes, and I think that is where the decisions
will be made, is at State and local government. Also
businesses, individual businesses. We talked to a lot of
businesses and nonprofits and leaders in all those areas, and
what I feel like is certainly for the larger ones, there is a
very thoughtful process going on about this. But, ultimately,
people will make their own minds up. You know, you can change
the formal social distancing measures, but ultimately people
are going to decide what they should and should not do with
themselves and with their families. And I think that will boil
down to having pretty good confidence that it is safe to go
out.
Senator Cortez Masto. Yeah, and I agree with you. I also
know at least in my State that many are waiting and relying on
their State and local governments to weigh in and help them
make those determinations and set those guidelines and make
sure their communities are safe. That is why funding for our
State and local governments is so important, and I cannot
stress that enough, not only in the next fiscal package that
needs to come into State and local governments, but you also
touched on the Municipal Lending Facility. I would like to see
more of that available to smaller populated States and local
governments. Nevada has 3 million population. There has to be a
way to also give them the opportunity to get the liquidity or
the funds that they need to ensure that they are providing that
safety net, that social safety net to consumers in general.
I know my time is up. Secretary Mnuchin, I have questions
for you as well. I will submit those for the record. Thank you
both for joining us today.
Chairman Crapo. Thank you.
Before I move to Senator McSally, I will announce to those
remaining that a vote started about 10 minutes ago, and we
still have a number left to go, so I ask you to please pay
attention to the clock. Sorry that it just turns out this way
at the end of these hearings.
Senator McSally.
Senator McSally. Thank you, Mr. Chairman. And, Chairman
Powell, Secretary Mnuchin, good to see you virtually.
I want to talk about China. As we know, they unleashed this
virus on America and the world with their classic Communist
coverup, deception, continued propaganda campaign, costing now
over 90,000 American lives, 35 million Americans losing their
jobs so far. We do not know who Patient Zero is. They destroyed
samples. They silenced doctors. They kicked out journalists,
impacted travel, international travel to seed this, and their
reckless behavior continues to be at the root of all this.
As you know, this is why we are here today. We are talking
about the economy, which was very strong, now really
struggling. People all over Arizona are really struggling
because of the calamity that has come from this virus.
I do not think anybody, I should say--actually, let me just
ask. I do not think either of you think there is any reason
that we should be rewarding China or Chinese State-owned
enterprises, or individuals or entities that want China to
prosper as we implement these massive initiatives to support
the American economy. Is it fair to say neither of you want
that to happen?
Secretary Mnuchin. That is correct.
Senator McSally. Chairman Powell.
Mr. Powell. Senator McSally, that is really not a question
for me. We are working on the economic response to this.
Senator McSally. I know. But none of us as Americans want
to see, you know, China or Chinese-owned enterprises
prospering. So I want to talk about a company called
``BlackRock.'' On March 24th, the Federal Reserve Bank of New
York retained BlackRock as the financial agent to
operationalize and transact with primary dealers in the Primary
Market Corporate Credit Facility and the Secondary Market
Corporate Credit Facility. As you know, these facilities serve
as markets for companies to sell bonds and obtain loans during
this situation, this downturn.
Typically, there is a competition, a competitive bidding
process, but BlackRock was selected for this one. As you
probably know, BlackRock is one of the leading investment banks
in Chinese funds, including helping Chinese companies list and
go public on American stock exchanges. Chinese companies listed
on American exchanges prohibit the Public Company Accounting
Oversight Board, or the PCAOB, from reviewing their audit
reports.
On BlackRock's website they have a page titled ``Five Myths
and Realities about Investing in China.'' According to
BlackRock, one of the biggest myths about China is that Chinese
State-owned enterprises do not control their economy. BlackRock
even tries to back that up with data. I will not go into all of
it, but it is ridiculous. BlackRock's ode to China does not
mention anything about human rights abuses, military responses
to the Hong Kong democracy protests, or even that the country
is ruled by a Communist Party. Ironic that one of the world's
largest investment banks and allegedly a staple of free markets
neglects to mention the fact that Communists actually run
China, and all while refusing to invest in a number of
legitimate and legal industries here in America, but that is a
separate issue.
So my question is: How and why did BlackRock get selected
as a financial agent for these facilities? How much money do
they stand to make as the agent? And what, if anything, will
prevent BlackRock from taking their profits that they earn to
invest in their interests in China and Chinese State-owned
enterprises?
Mr. Powell. So I guess I will take that. We hired BlackRock
for their expertise in these markets. They are actually an
asset manager. They are a very large asset manager which is
active in the markets that we are concerned with, with the
Primary Market and Secondary Market Credit Facilities. It was
done very quickly due to the urgency and the need for their
expertise. We will rebid the contract as we in practice do
going forward, and so that is where that is.
The fees are a matter of public record, and we will be
happy to supply those to you.
Senator McSally. So what, if anything, can we do to prevent
any of their profits from this to actually benefiting China and
Chinese State-owned companies, which they are severely invested
in?
Mr. Powell. I would just say this: All large asset managers
buy Chinese securities. These are global asset managers. It is
in no way--I am not here to defend or criticize them for that.
It is not really relevant to the work we want them to do. What
we are trying to do is create conditions in which U.S. workers
can keep their jobs or return to them, and that is what our
sole focus is. We are not trying to reach out for other public
policy objectives or deviate from that. We have really a laser
focus on that, and we concluded that this company was the right
one to be our fiscal agent in this place. Their views on
anything else are really not important. What is important is
that we do everything we can to support employment in the
United States.
Senator McSally. Well, let me just say it is important to
all of us--and thank you for your leadership on this--to
support our economy, to support jobs, to get our economy back
on track. But it is also important that we wake up as Americans
and that we hold China accountable and that they do not--they
are not allowed to profit because of these investments
taxpayers have made. So I am going to follow up with you on
these issues. I really think BlackRock and others need to also
wake up and do their patriotic duty, see what is going on here.
China, Communist China, should not be profiting off of
unleashing this calamity on the world, and that should be
something that should unite all Americans, even if they work at
BlackRock.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman.
Quickly, I will follow up. I agree that we need to hold all
people accountable. China, the WHO, folks in this
Administration--everybody needs to be held accountable if they
had deficiencies in what was going on in this pandemic.
Secretary Mnuchin, let me say I saw recently that the
Treasury is going to begin issuing debit cards for Americans
for their direct payments. You will recall that Senator Cotton
and I sent a letter shortly after the passage of the CARES Act
encouraging that. So I appreciate your willingness to do that.
I think it is going to quickly get money to millions of
Americans that have not received those direct payments as of
yet.
I wanted to also ask you about the Payroll Protection
Program. As we have talked about a little bit early on, in the
first round of funding, there were some problems with the
banks, and there were underserved communities that are not
getting their funds. And I think we have tried to correct that
and are doing much better. But the SBA Inspector General issued
a report in the wake of that that recommended that the agency
start collecting demographic information on who got those
loans.
Can you commit to work with the SBA Administrator to make
collecting demographic information mandatory for these PPP
loans so that there is that much-needed transparency?
Secretary Mnuchin. Well, I can tell you in the forms that
the lenders are required, there is demographic information. We
have been advised to make that optional and not mandatory, but
we very much hope that people provide that. And let me just say
we are very much committed to make sure that we serve the
underserved communities with the money we have left.
Senator Jones. Great. Thank you.
Chairman Powell, you know, I also saw your speech and read
your--saw the ``60 Minutes'' piece, and it kind of reminds me,
in listening to some of the comments about this, of what Judge
Taylor in ``To Kill a Mocking Bird'' said, that, you know,
people are going to hear what they want to hear and they are
going to see what they want to see. What I saw is a call to
action from that. And one of the things that was talked about,
that 40 percent of Americans that have lost their jobs and how
it is affecting our minority communities, not only in their
health and the disparities, what is being shone, a spotlight,
is the disparities on so many things.
You mentioned how this pandemic can exacerbate the existing
gap of wealth and assets and ownership between minorities and
even just poor people in general. We started this pandemic with
about 40 million poor people. It is going to get much bigger
than that, and it is going to be across racial lines.
What can we do to try to narrow that gap, to make sure that
the wealth gap does not get even greater as we open back up
this economy?
Mr. Powell. Well, the job losses that have been happening
have been happening in the service economy, particularly in
those parts where you are dealing directly with people, and
that is a lot of less-well-paying jobs and that sort of thing.
So if you look at the industries that have been really hard hit
with job losses, it is those industries. It is restaurants, it
is hotels, it is travel, things like that, and retail.
I recommend, by the way, that report, ``Survey of Household
Economics and Decisionmaking,'' which we release annually. We
just released it, and that is where those statistics come from.
There is a lot in there. And it is stunning how quickly
households get into financial trouble, how little many lower-
income households have in the way of financial resources. These
are longer-term problems to deal with. I think for now, you
know, this very much calls on us to do what we can to support
the economy. And as I mentioned earlier, we have 20-some
million people out of work. We want to do everything we can to
create a world where they can go back to their jobs or find new
jobs. And I think that is something all of us as policymakers
should be strongly focused on.
Senator Jones. Well, thank you for that. And it seems to be
connected to your comments of also making sure that we keep
people in their livelihoods, to keep the unemployment numbers
down. You know, I think from our standpoint we have been
focused on both saving lives and saving livelihoods. And while
we do not want to give folks incentives to stay on
unemployment, we certainly do want to give incentives to
businesses to open carefully.
I would encourage you, if you have not, to look at the
Paycheck Security Program that Senator Warner and others and I
are going to be filing this week so that we can give these
opportunities, because I am assuming that the more
opportunities we can give employers to keep people on their
payroll with benefits, that would aid in opening up the economy
safely and trying to keep us from getting into that long-term
recession. Would that be fair?
Mr. Powell. I will be happy to take a look at your
legislation, your proposed legislation.
Senator Jones. Well, thank you, Mr. Chairman. I appreciate
the opportunity. Thank you for coming, Mr. Secretary and Mr.
Chairman.
Chairman Crapo. Thank you.
Senator Moran.
Senator Moran. Mr. Chairman, thank you. Had I had more
time, I would extol the virtues of both the Secretary and the
Chairman in their efforts, their team, their public service
during this crisis. In the absence of that time, I hope you
understand the sentiments that that sentence expresses.
I want to focus, I guess, Secretary Mnuchin. We have talked
about PPP, and we have seen the consequences, the positive
consequences that have come from the program. There are large
businesses, Main Street, in which the facilities are being
developed to assist, but I am worried about other businesses. I
would use an example. Not that I am lobbying for any company,
but an example that comes to my mind in Kansas is Yellow
Roadway Trucking Company. It employs almost 30,000 people. It
is not investment grade. It has leverage, and it is a company
that, in the absence of assistance, the jeopardy of its
employees is significant. I think there are a lot of companies
out there like that. I think there are a number of other
companies in Kansas like that. And I want to make certain that
we are doing the things that are necessary to prepare to be of
assistance to them.
I think Senator Toomey and Senator Warner earlier indicated
that very few of us expected Treasury not to have to take
losses, that there needs to be some risk taking here. And I
want some kind of assurance that under the B4 program, the B4
facilities, that these kind of companies that are hugely
important to the economy can receive some assistance with the
facilities at Treasury and the Fed.
Secretary Mnuchin, is there some level of comfort I can
have?
Secretary Mnuchin. You have my assurance that we will go
back and look at that specific company and see what we can do
and get back to you.
Senator Moran. I hope it is more than that, because it is
not just that company. There are a number of companies across
the country, not just in Kansas, that this is----
Secretary Mnuchin. We will look at companies like that, and
as I said before, we want to make sure that there are
facilities that companies do not fall through the cracks. So
between all the different facilities, we are trying to do as
much as we can within our powers.
Senator Moran. Let me suggest to you that timing is of the
essence, just as it was in PPP. The circumstances companies
face today and lay off and furloughing employees are present
and around the corner. So I encourage the precipitous but
thoughtful action in addressing these circumstances.
Let me see if I can get two other questions in. One, do we
have a timeframe, Mr. Secretary, for further guidance regarding
PPP loan forgiveness?
Secretary Mnuchin. There is some guidance that just came
out on loan forgiveness that we believe deals with most of the
major issues.
Senator Moran. And then a second question, Secretary
Mnuchin. Does Treasury and SBA plan to issue guidance that
would allow 501(c)(3) organizations to utilize the alternative
size standards for PPP eligibility?
Secretary Mnuchin. We are reviewing that specific request,
so we have had that request, and we are reviewing it.
Senator Moran. Is that something a decision is close to
being imminent?
Secretary Mnuchin. We are going to decide one way or
another whether we can do that, so yes.
Senator Moran. OK. Thank you very much. Thank you, Mr.
Secretary. Thank you, Mr. Chairman.
Secretary Mnuchin. Thank you.
Chairman Crapo. Thank you. And you get a gold star, Senator
Moran, for yielding back a minute or two.
[Laughter.]
Chairman Crapo. Our final Senator for questions is Senator
Smith.
Senator Smith. Thank you, Mr. Chair, and thank you, Ranking
Member Brown. And thanks to both of you for being here today.
Chair Powell, you have talked about how we will not be able
to solve the economic crisis without solving the public health
crisis, which I agree with. And, Secretary Mnuchin, you have
said that we need to reopen the economy, and I quote, ``in a
thoughtful way,'' which I also agree with. So it seems to me
that a really important part of being thoughtful is to make
sure that Americans have accurate information about what is
going on. So I have no doubt that you will be surprised to hear
that a lot of us were taken aback when, I do not know, a couple
of days or so ago, we heard President Trump's son, Eric Trump,
acting as a surrogate for his father, say this, he said: ``They
think''--meaning they, the Democrats--``that they are taking
away Donald Trump's greatest tool, which is to be able to go
into an arena and fill it with 50,000 people every single time,
right? So that they will, and you watch, they will milk it
every single day between now and November 3. And guess what?
After November 3, coronavirus will magically all of a sudden go
away and disappear and everybody will be able to reopen.''
So this is the kind of misinformation that concerns me
greatly. Secretary Mnuchin, are you aware of any evidence that
what Eric Trump said, that his assessment is accurate?
Secretary Mnuchin. I did not see Eric's comments, nor do I
think in this setting it is appropriate for me to comment on it
one way or another.
Senator Smith. Well, I do not think it is accurate, and I
think it is exactly the kind of misinformation that is so
damaging to and undermining of both our economic approaches and
our policy approaches here.
But let me ask you, Chairman Powell, even before the COVID-
19 crisis, many Minnesotans were struggling to find an
affordable place to live. And last year, I spoke with hundreds
and hundreds of Minnesotans and family community leaders about
this challenge, housing developers as well, and they all told
us that at every part of the housing continuum, from housing
for homeless people and supportive housing, all the way up to
workforce housing, that this is a significant problem and a
significant affordability challenge. And so now we have this
coronavirus challenge.
So I along with many of my colleagues on this Committee
have been pushing for support for housing, $11.5 billion for
homeless assistance, $100 billion for rental assistance, and
$75 billion to stabilize homeowners.
Chair Powell, could you talk a little bit about the
importance of the housing sector in our economy right now and
what challenges you see ahead for us as we are living through
this crisis? And I appreciate what you said. The most important
policy objective should be to keep people in their homes and
keep them paying the bills.
Mr. Powell. These are longer-running problems which are, of
course, under particular pressure right now. But as an example,
a lot of the jobs are in big urban areas more and more. That is
where the job creation is. And yet the cost of living in those
places is higher and higher, very high, and often people who
are in the service industries providing their services have to
commute very long times to be able to afford to live in a
place. So, you know, it is an issue that has been with us for a
while. It is not one really that the Fed can affect much other
than by affording, you know, fair lending laws and things like
that. But we cannot really directly affect those, but they are
important to our economy.
Senator Smith. I realize that you do not want to comment
specifically on the specific policy issues that we have
confronting us here in Congress, but in general, do you see a
risk to the housing market as the economy continues to take a
downturn in the months ahead?
Mr. Powell. Well, I think there are multiple risks. One is
just to the extent forbearance does not do the job, you may
have people losing their homes. Given that this is a natural
disaster in a way, that is something that would be great to
avoid. You also see the housing industry coming--I will not say
to a halt, but under great pressure, activity being slowed,
that is a lot of jobs right there. So I think, you know, really
it comes down to sensibly, thoughtfully opening up the economy
in a way that builds confidence and keeps people safe. I think
that is really important that we do that well, and if we do,
you know, these other things will take care of themselves over
time.
Senator Smith. This is an issue that I think we should
continue to work on and talk about, the challenges that people
will have if they do lose their home. The ripple effect of
people not being able to pay their rent or their mortgage and
then the impact that that has all the way up through the
housing continuum I think is a grave concern. And if you do not
have a safe place to live, then nothing else in your life
works. I believe that this is something that is really
important for us to address in the next package.
Thank you very much, Mr. Chair.
Chairman Crapo. Thank you, Senator Smith.
And we have also been joined now by Senator Sinema, so she
will be the last questioner. She will be with us on audio only,
and thank you, Senator Sinema. If you finish in your 5 minutes,
I may make it to the vote.
Senator Sinema. Well, thank you, Mr. Chairman, and thank
you to our witnesses for being here today.
Every day Arizonans from every corner of my State are
worried about their health and their future, and that is why my
office has doubled our State team to better serve Arizonans
during this difficult time. Our goal is to offer top-notch
constituent services connecting Arizonans with resources and
going the extra mile to ensure they get the assistance they
need.
I am glad that we are having an oversight hearing today
because robust congressional oversight is critical to ensuring
we know where the CARES Act money is going and how it is going
to be spent. It is also vital to ensuring that Arizonans are
not stuck in Government bureaucracy. I am focused on cutting
through that red tape to help Arizonans.
My first question is for Secretary Mnuchin. Let us start
with the Economic Injury Disaster Loans. I sent you and
Administrator Carranza a letter on April 17th outlining my
concerns with how the Administration has run this program. I
have not received a response. The CARES Act promises small
businesses a $10,000 loan advance within 3 days of their
application. I know Arizonans who went through this process.
None of them got their loan advance within 3 days, and no one
received the full $10,000.
Why aren't they getting that full amount? And why aren't
they getting it on time?
Secretary Mnuchin. Well, first of all, let me just
apologize that you have not received a response. I will look
into that after this and get back to you.
As it relates to the EIDL Program, again, that is within
the SBA, but let me just comment that the SBA had significant
systems issues getting the EIDL Program up and running. I
thought the grants were doing much better than the loans, so I
will follow up and look at that.
On the loans they are rebuilding the entire system. I
think, as you know, we have over 5 million loans to process.
But we will follow up with you.
Senator Sinema. As you know, the SBA internally changed the
policy of EIDL to only issue a $1,000 loan advances per
employee up to $10,000. The original plan was $10,000 per
company. Who authorized the change? And why was it made?
Secretary Mnuchin. I believe the SBA Administrator made
that change, and I believe her thought on that was that there
was limited money and tried to spread it out amongst as many
companies as possible.
Senator Sinema. And she did not think to herself let us go
back and ask Congress to authorize more funding to pay for that
which they appropriated and called for in the legislation?
Secretary Mnuchin. Well, there was additional money in the
second phase, and we appreciate that Congress reacted to that.
Senator Sinema. OK, but, Secretary, my question is that the
SBA made this internal change without getting authorization
from Congress, and if they are saying they did it because they
did not have enough money, we then gave more money, and they
still have not used it to give that money to people as promised
as the $10,000 in the original legislation.
Secretary Mnuchin. As I said, I am more than happy to
follow up with you. I am not involved in some of the direct
specifics of that, so let me follow up with your office.
Senator Sinema. I appreciate that, Secretary.
The last thing I will say about the EIDL loans, my office
is right now working on over 300 outstanding EIDL cases. Some
of them are dating all the way back to early and mid-March. Can
your team commit to working with mine to get these cases moved
through quickly?
Secretary Mnuchin. I commit we will work with the SBA to
follow up. That is not acceptable, so we will follow up with
the SBA with you.
Senator Sinema. I appreciate that. I have some questions
about the Paycheck Protection Program as well. Small business
owners in Arizona are asking for guidance on how the loan
forgiveness works, and the lack of guidance has made it
difficult for small businesses to plan. We received some
guidance last Friday, and there is more still to come.
Could you tell me why it is taking so long to get guidance
for small businesses on the loan forgiveness aspect of PPP?
Secretary Mnuchin. Well, I would just comment I think you
know this was a very complicated program that we set up in a
short period of time. I thought that the guidance we put out
dealt with all the issues. But if there are specific issues
that you are hearing from, we will follow up with you and
provide that clarity.
Senator Sinema. I appreciate that. We would like to follow
up specifically.
As you know, the application to get your PPP loan was only
one-page long, but the forgiveness application is 11 pages long
and, according to my staff, requires a minimum of 3 hours to
complete. This is a real problem for mom-and-pop shops in
Arizona.
What efforts can we offer to assist small businesses in
filling out the complex form?
Secretary Mnuchin. Well, I can assure you I spent a lot of
time on the complexity of that. We tried to get it as short as
we could under the requirements of the law. I hope it does not
take 3 hours for small business. But, again, we tried to make
it as short as possible.
Senator Sinema. I appreciate that.
Mr. Chairman, I see that my time has expired. I would like
you to make it to the vote. I have many more questions. I will
submit some of them in writing.
Senator Sinema. Thank you so much, Mr. Chairman.
Chairman Crapo. Thank you, Kyrsten. I really appreciate
that.
I understand Senator Brown wants to make a 60-second
statement. You can do so.
Senator Brown. I will do 60 seconds. Thank you, Mr.
Chairman. Another successful hearing. Thank you, Chair Powell
and Secretary Mnuchin.
I wear on my lapel, as I have said before, a pin depicting
a canary in a bird cage instead of the official Senate pin. You
all know the story. The mine workers took the canary down in
the mines to warn of poisonous gas. They did not have a union
strong enough to protect them in those days or a Government
that cared enough. That is why we had the New Deal with worker
protections and public health.
Now, a century later, it is starting to feel like we are
back in the mines. Millions of American workers do not have a
union to protect them. After decades of corporate attacks and
based on the responses we have heard today and what we have
heard especially from the President over the past few months,
it seems that once again workers do not have a Government that
cares enough to protect them. Look at how the Administration
treats essential workers, women, especially African American
and Latino workers, putting their lives on the line. Look at
who they are willing to spend money on. This Administration
tells us everything we need to know. That is why Congress needs
to stand up for workers. That is why workers need unions, so we
can fight back for economic security and safety protections and
the dignity they deserve and for American values.
So, Mr. Chairman, thank you for allowing me a last minute
or so.
Chairman Crapo. Well, thank you. And I also want to thank
you, Senator Brown, for your cooperation and working with us to
have this hearing and help it to work out. I appreciate the
cooperative way in which we have been able to work on these
hearings.
I do disagree with the notion that our Secretary and our
Chairman here are not working very hard to make sure that the
support we have voted on gets out to those very people, those
who have these lower-paying jobs, those who are in the service
industry, the small businesses, the medium-size businesses, and
those places that will be needed to stand up our economy as we
have the opportunity to do so. So we may have a different point
of view on that, but I do appreciate your support in helping me
get this hearing set up and working.
And to our witnesses, Secretary Mnuchin, Chairman Powell, I
again appreciate your cooperation and work with me as we have
put together this hearing. We are plowing new ground here in
the Senate, as is happening across this Nation while we deal
with COVID-19, and your cooperation in working to get us
through this hearing and get your report to us is deeply
appreciated.
With that, I will say that for Senators who wish to submit
questions for the record, those questions are due on Tuesday,
May 26th, and I ask you, our witnesses, to respond to those
questions as quickly as possible.
Again, thank you each for participating today, and this
hearing is adjourned.
Secretary Mnuchin. Thank you very much to both of you.
[Whereupon, at 12:32 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
We are all becoming more familiar with remote hearings, but let me
offer a few videoconferencing reminders.
Once you start speaking, there will be a slight delay before you
are displayed on screen.
To minimize background noise, please click the mute button until it
is your turn to speak or ask questions.
If there is a technology issue, we will move to the next senator
until it is resolved.
Because we have a hard stop at 12:15, all senators and witnesses
need to be especially mindful of the five minute clock.
You should all have one box on your screens labeled ``clock'' that
will show how much time is remaining.
At 30 seconds remaining, I will gently tap the gavel to remind
senators their time has almost expired.
To simplify the speaking order process, Senator Brown and I have
again agreed to go by seniority.
With that, today we welcome to this virtual hearing the honorable
Steven T. Mnuchin, Secretary, Department of the Treasury; and The
Honorable Jerome H. Powell, Chairman, Board of Governors of the Federal
Reserve System.
We will receive testimony from the Secretary of the Treasury and
Chairman of the Federal Reserve, as required under Title IV of the
CARES Act.
Congress has appropriated nearly $3 trillion to protect, strengthen
and support Americans, to fight the pandemic, and also to stabilize the
infrastructure of our economic system.
A large portion of this funding is authorized under Title IV of the
CARES Act, which provides significant resources for loans, loan
guarantees, and other investments from Treasury and the Federal
Reserve's 13(3) emergency lending facilities and programs in support of
eligible businesses, States, municipalities, and Tribes.
Title IV of the CARES Act provided a $454 billion infusion into the
Exchange Stabilization Fund to support the Federal Reserve's emergency
lending facilities that facilitate liquidity in the marketplace and
support eligible businesses, States, local governments, and Tribes.
This unique lending authority, known as 13(3) authority, is
authorized under section 13 of the Federal Reserve Act, and plays a
critical role in stabilizing markets.
Both prior to and after the enactment of the CARES Act, the Federal
Reserve announced the establishment of or its intent to establish
several emergency lending facilities to support financial markets and
businesses, including some that are funded by the CARES Act.
Last week, other members of this Committee and I had a robust
discussion with Vice Chairman Quarles on these facilities and stressed
the importance of getting facilities like the Main Street Lending
Programs and the Municipal Liquidity Facility up and running quickly to
provide a lifeline to struggling businesses, States and local
governments.
Again, I stress the importance of setting these facilities up
quickly and allowing broad access.
There was also a discussion about whether it is acceptable for the
Treasury to take any losses on investments put into the special purpose
vehicles that the Fed will lend to for various programs.
The 13(3) facilities are a critical component of a strong economic
recovery, which reinforces the need to have them quickly operational,
broadly available and as flexible as possible.
Title IV also contains robust oversight provisions--specifically
the one that brought us here today, Section 4026.
It is critical that each agency follow all reporting and oversight
requirements in the CARES Act.
Other steps are already being taken to ensure appropriate
oversight.
Last week, this Committee voted the Special Inspector General for
Pandemic Recovery favorably out of committee, and yesterday, the
Congressional Oversight Committee published its initial report on
oversight of Title IV.
The CARES Act is the biggest rescue package in the history of
Congress and we need to make sure the dollars and program quickly find
their mark.
During this hearing, I look forward to hearing more about the
status of Treasury loan programs, 13(3) emergency facilities, and the
Paycheck Protection Program; steps the Fed and Treasury have taken, and
will continue to take, to provide transparency into the loans and loan
guarantees under the CARES Act; and how the unused funds from Title IV
will be prioritized and leveraged to provide additional liquidity to
the economy.
While not part of Title IV of the CARES Act, SBA and Treasury have
worked around the clock to ramp up the Paycheck Protection Program that
has approved over 4.3 million loans to small businesses that amounts to
about $513 billion.
According to SBA, the overall loan size for the PPP is $118,000,
and during the second round of PPP funding, the average loan size has
been around $70,000.
On April 28, Treasury and SBA announced that the SBA would review
all PPP loans in excess of $2 million to make sure borrowers' self-
certification for the loans was appropriate.
Last week, SBA and Treasury provided a safe harbor for loans under
$2 million.
Finally, on May 8, 2020, Commerce Committee Chairman Wicker and I
sent a letter to Secretary Mnuchin on the Payroll Support Program (PSP)
requesting a detailed report on the status of the program and on May
12, Treasury announced new transparency measures with regards to the
PSP.
I encourage you to continue to work with the applicants and update
the information as additional funds are disbursed.
I commend each of you and your staff for the hard work and
extraordinary actions you have taken to stabilize the economy and
provide support to Americans during this trying time.
Thank you for joining us today to share your agency's activities
and plans in response to COVID-19.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
I'd again like to thank Chairman Crapo for following the best
advice of health experts, and holding a virtual hearing to prevent the
spread of coronavirus.
I am still outraged by Leader Mitch McConnell's reckless decision
to keep the Senate in session, putting Capitol Hill workers--including
Capitol police officers, custodial staff, floor staff, and cafeteria
workers--putting all workers at risk.
Leader McConnell has forced workers to go against public health
authorities' advice for three weeks now, and he still has no plan to
get additional help to families and communities. The House passed a
bill that incorporates many of our plans. The American people are
rising to this challenge--and their leaders are failing them. Leader
McConnell says he sees no urgency--his words, no urgency.
Before we begin, I'd like to pause here for a moment to recognize
all the workers who have lost their lives on the job during this
pandemic.
The coronavirus has been the great revealer. It's brought out the
best in our communities--we remember the spirit of solidarity that
created our social safety net during the New Deal, and inspired World
War II victory gardens, and powered the Civil Rights movement. And
today that spirit of solidarity is now revealing itself in hand-sewn
masks, and fire escape applause for hospital workers, and video
conference play-dates, as millions of individual Americans pull
together to do their part to flatten the curve.
But this pandemic is also laying bare how corporations that now
claim their workers are ``essential,'' have for too long treated them
as more of a cost to be minimized.
Since the bailouts of the financial crisis, many of us have been
concerned about how our country rewards Wall Street, but ignores the
people who make our country work.
Whenever we've asked why wages for these essential workers are
stagnant, we're told we can't afford it--companies would have to raise
prices if they paid people more. Never mind that CEOs were getting huge
raises and Wall Street investors huge payouts. Never mind that low
prices don't do you a lot of good if your wages stay low right along
with them.
Our economy has been paying the price for that--with a shrinking
middle class, rising inequality, and lower economic growth.
Now it's pretty clear: when millions of workers are laid off, or
have their hours cut, or were making low wages to begin with and are
now worried about their future, our economy grinds to a halt.
In fact, the only thing keeping our society running in the middle
of this crisis is American workers--those who stock our shelves and
deliver our packages and fill our prescriptions and care for our loved
ones.
A grocery store worker in Ohio told me recently, ``I don't feel
safe at work and they don't pay me much. I don't feel essential--I feel
expendable.''
We are asking people to show up to work and risk their health, and
their families' safety--perhaps finally realizing that the words of Dr.
King ring true--that ``One day our society will come to respect the
sanitation worker.for the person who picks up our garbage, in the final
analysis, is as significant as the physician, for if he doesn't do his
job, diseases are rampant. All labor has dignity.''
ALL labor has dignity.
You might think that at a time when we're demanding more from our
essential workers than ever before, that people who punch a clock or
swipe a badge, people who take care of our families and our elderly--
mostly women, often black and brown workers--you might think they'd all
be getting a huge raise.
Our economy is supposed to reward people whose talents are in high
demand. That's what we're all taught and that's what the CEOs tell us,
right?
But that's not happening. Workers are getting left behind, again.
As essential workers go home to their families after a long,
stressful day, they're wondering how they're going to pay the rent, or
how they're going to afford another week of groceries. Aand they wonder
whether they're going to infect their families.
And those are the ones that are working--how about the 35 million
Americans who have been laid off from their jobs because of this public
health crisis?
When we passed the CARES Act, we tried to address this. We tried to
make sure that the trillions of dollars in spending wouldn't just go to
Wall Street like it always does. We wanted to make sure that the
Federal Reserve and the Treasury got this money into workers' pockets.
We certainly didn't want to see it go to oil and gas companies,
whose activities pose an existential threat to essential workers and
our whole economy.
Chairman Powell--I appreciate your recent comments about how
Congress needs to do more to put money directly in workers' pockets--I
agree.
If Congress does not act now to put money in the hands of the
people who actually power our economy--in workers, their families, and
Main Street businesses in struggling communities--we risk making the
economic crisis worse.
Leader McConnell needs to let the Senate take up the House bill
immediately.
Congress also has an important responsibility to make sure the $500
billion we've already approved for the Fed and Treasury is actually
getting to workers. And from what we know so far, it does not appear
that this Administration or the Federal Reserve are making workers
their priority.
Today I look forward to hearing from both of you, Mr. Secretary and
Chair Powell, not about what you're doing for big banks or big
corporations and how you expect that money to trickle down, but how
you're making sure the money and authority Congress gave you actually
help the people who make this country work.
I want to hear how it's going to be different this time.
I want you to explain what you will do to transform our economy so
that it works for everyone--not just the wealthy and powerful.
I want to hear about your plans to make our economy work for
essential workers, and how to safely get those who have lost their jobs
back to work.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF STEVEN T. MNUCHIN
Secretary, Department of the Treasury
May 19, 2020
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity to highlight how the Department of the
Treasury and the Federal Reserve are working together to provide
liquidity to the financial system. Our programs support the flow of
much-needed credit to American workers, families, businesses, States,
and municipalities.
I want to begin by acknowledging the unprecedented challenges the
American people are experiencing due to the COVID-19 pandemic. This
disease is impacting families and communities across the Nation.
Through no fault of their own, the American people are also enduring
economic challenges. I am inspired by our Nation's medical
professionals and first responders on the front lines taking care of
their fellow citizens. Thanks to their efforts and their unwavering
commitment to their communities, I am confident that our Nation will
emerge from the pandemic stronger than ever before.
President Trump and the entire Administration are committed to
providing necessary relief to help people get through this time. The
Treasury Department is working hard to implement the CARES Act. We
appreciate Congress working with us to enact this statute, which is the
single largest economic relief effort in the history of our country. We
also appreciate the feedback we have received from Members of Congress
on both sides of the aisle as we implement a number of critical
programs established by the CARES Act.
CARES Act Programs
We have worked closely with the Small Business Administration on
the Paycheck Protection Program (PPP) to ensure the processing of more
than 4.2 million loans for over $530 billion to keep tens of millions
of hardworking Americans on the payroll. We are proud that nearly 400
Community Development Financial Institutions and Minority Depository
Institutions, and many more small and nonbank lenders, are
participating in this program.
We have issued more than 140 million Economic Impact Payments for
over $240 billion to provide direct relief to millions of Americans.
The typical family of four received $3,400.
We have distributed almost $150 billion to States, local, and
tribal governments through the Coronavirus Relief Fund for essential
services. We have also approved nearly $25 billion in payroll support
to the airline industry to protect this critical sector of our economy.
Exchange Stabilization Fund
Turning to a central focus of this hearing, the CARES Act also
provided authority for $454 billion in support for Federal Reserve
lending facilities to provide liquidity to the financial system.
Since March 17, I have approved the following facilities:
The Commercial Paper Funding Facility
Primary Dealer Credit Facility
Money Market Mutual Fund Liquidity Facility
Term Asset-Backed Securities Loan Facility
Primary Market Corporate Credit Facility
Secondary Market Corporate Credit Facility
Main Street Business Lending Program
Municipal Liquidity Facility, and the
PPP Lending Facility.
We have committed up to $195 billion in credit support under the
CARES Act. We have the remaining $259 billion to create or expand
programs as needed, as we continue to monitor a variety of economic
sectors closely.
Economic Environment
We are sympathetic to hardworking Americans and businesses enduring
tremendous challenges due to the COVID-19 pandemic. We have had to take
unprecedented steps to shut down significant parts of the economy in
the interest of public health. As a result, in the second quarter of
this year, we are continuing to see large unemployment and other
negative indicators. It is important to realize that the large numbers
represent real people. This is why it is so important to begin bringing
people back to work in a safe way.
As we listen to medical experts, we are optimistic about the
progress being made on vaccines, antiviral therapies, and testing.
Working closely with governors, we are beginning to open the economy in
a way that minimizes risks to workers and customers. We expect economic
conditions to improve in the third and fourth quarters.
Conclusion
Under the leadership of President Trump, I am proud to have worked
with all of you, on a bipartisan basis, to get relief into the hands of
hardworking Americans and businesses as quickly as possible. While
these are unprecedented and difficult times, these programs are making
a positive impact on people. Together we will destroy the COVID-19
virus, and our country will emerge from the pandemic stronger than
ever.
Thank you for the opportunity to discuss our efforts today, and I
look forward to your questions.
______
PREPARED STATEMENT OF JEROME H. POWELL
Chairman, Board of Governors of the Federal Reserve System
May 19, 2020
Chairman Crapo, Ranking Member Brown, and other Members of the
Committee, thank you for the opportunity to discuss the extraordinary
steps the Federal Reserve has taken to address the challenges we are
facing.
I would like to begin by acknowledging the tragic loss and
tremendous hardship that people are experiencing both here in the
United States and around the world. The coronavirus outbreak is, first
and foremost, a public health crisis, with the most important responses
coming from those on the front lines in hospitals, emergency services,
and care facilities. On behalf of the Federal Reserve, let me express
our sincere gratitude to those individuals who put themselves at risk
day after day in service to others and to our Nation.
The forceful measures that we, as a country, are taking to control
the spread of the virus have substantially limited many kinds of
economic activity. Many businesses remain closed, people have been
advised to stay home, and basic social interactions have been greatly
curtailed. People have put their lives and livelihoods on hold at
significant economic and personal cost. All of us are affected, but the
burdens are falling most heavily on those least able to carry them.
It is worth remembering that the measures taken to contain the
virus represent an investment in our individual and collective health.
As a society, we should do everything we can to provide relief to those
who are suffering for the public good.
Available economic data for the current quarter show a sharp drop
in output and an equally sharp rise in unemployment. By these measures
and many others, the scope and speed of this downturn are without
modern precedent and are significantly worse than any recession since
World War II. Since the pandemic arrived in force just two months ago,
more than 20 million people have lost their jobs, reversing nearly 10
years of job gains. This precipitous drop in economic activity has
caused a level of pain that is hard to capture in words, as lives are
upended amid great uncertainty about the future. In addition to the
economic disruptions, the virus has created tremendous strains in some
essential financial markets and impaired the flow of credit in the
economy.
The Federal Reserve's response to this extraordinary period has
been guided by our mandate to promote maximum employment and stable
prices for the American people, along with our responsibilities to
promote stability of the financial system. We are committed to using
our full range of tools to support the economy in this challenging time
even as we recognize that these actions are only a part of a broader
public-sector response. Congress's passage of the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) was critical in enabling
the Federal Reserve and the Treasury Department to establish many of
the lending programs that I discuss below.
In discussing the actions we have taken, I will begin with monetary
policy. In March, we lowered our policy interest rate to near zero, and
we expect to maintain interest rates at this level until we are
confident that the economy has weathered recent events and is on track
to achieve our maximum-employment and price-stability goals.
In addition to monetary policy, we took forceful measures in four
areas: open market operations to restore market functioning; actions to
improve liquidity conditions in short-term funding markets; programs in
coordination with the Treasury Department to facilitate more directly
the flow of credit to households, businesses, and State and local
governments; and measures to allow and encourage banks to use their
substantial capital and liquidity levels built up over the past decade
to support the economy during this difficult time.
Let me now turn to our open market operations and the circumstances
that necessitated them. As tensions and uncertainty rose in mid-March,
investors moved rapidly toward cash and shorter-term Government
securities, and the markets for Treasury securities and agency
mortgage-backed securities, or MBS, started to experience strains.
These markets are critical to the overall functioning of the financial
system and to the transmission of monetary policy to the broader
economy. In response, the Federal Open Market Committee undertook
purchases of Treasury securities and agency MBS in the amounts needed
to support smooth market functioning. With these purchases, market
conditions improved substantially, and thus we have slowed our pace of
purchases. While the primary purpose of these open market operations is
to preserve smooth market functioning and effective policy
transmission, the purchases will also foster more accommodative
financial conditions.
As a more adverse outlook for the economy associated with COVID-19
took hold, investors exhibited greater risk aversion and pulled away
from longer-term and riskier assets as well as from some money market
mutual funds. To help stabilize short-term funding markets, we
lengthened the term and lowered the rate on discount window loans to
depository institutions. The Board also established, with the approval
of the Treasury Department, the Primary Dealer Credit Facility (PDCF)
under our emergency lending authority in section 13(3) of the Federal
Reserve Act. Under the PDCF, the Federal Reserve provides loans against
good collateral to primary dealers that are critical intermediaries in
short-term funding markets. Similar to the large-scale purchases of
Treasury securities and agency MBS I mentioned earlier, this facility
helps restore normal market functioning.
In addition, under section 13(3) and together with the Treasury
Department, we set up the Commercial Paper Funding Facility, or CPFF,
and the Money Market Mutual Fund Liquidity Facility, or MMLF. Both of
these facilities have equity provided by the Treasury Department to
protect the Federal Reserve from losses. Indicators of market
functioning in commercial paper and other short-term funding markets
improved substantially and rapid outflows from prime and tax-exempt
money market funds stopped after the announcement and implementation of
these facilities.
In mid-March, offshore U.S. dollar funding markets also came under
stress. In response, the Federal Reserve and several other central
banks announced the expansion and enhancement of dollar liquidity swap
lines. In addition, the Federal Reserve introduced a new temporary
repurchase agreement facility for foreign monetary authorities. These
actions helped stabilize global U.S. dollar funding markets, and they
continue to support the smooth functioning of U.S. Treasury and other
financial markets as well as U.S. economic conditions.
As it became clear the pandemic would significantly disrupt
economies across the world, markets for longer-term debt also faced
strains. The cost of borrowing rose sharply for those issuing corporate
bonds, municipal debt, and asset-backed securities (ABS) backed by
consumer and small business loans. Effectively, creditworthy
households, businesses, and State and local governments were unable to
borrow at reasonable prices, which would have further reduced economic
activity. In addition, small and medium-sized businesses that
traditionally rely on bank lending faced large increases in their
funding needs as they struggled with possible closure or substantially
curtailed revenues.
To support the longer-term, market-based financing that is critical
to economic activity, the Federal Reserve took a number of bold steps.
These steps were designed to ensure that credit would flow to borrowers
and thus support economic activity. With credit protection provided by
the Treasury Department, on March 23 the Board announced that it would
support consumer and small business lending by establishing the Term
Asset-Backed Securities Loan Facility (TALF). The TALF will lend
against ABS backed by newly issued auto loans, credit card loans, and
other consumer and small business loans. In turn, these loans will
support consumers seeking to obtain these important types of credit.
The Federal Reserve also took action with the Treasury Department
under section 13(3) to support the credit needs of large employers
through the Primary Market Corporate Credit Facility and the Secondary
Market Corporate Credit Facility. These facilities primarily purchase
bonds issued by U.S. companies that were investment grade on March 22,
2020. By purchasing these bonds, the Federal Reserve is able to lower
the borrowing costs for investment-grade companies and thus facilitate
economic activity.
The Federal Reserve is also preparing to launch the Main Street
Lending Program, which is designed to provide loans to small and
medium-sized businesses that were in good financial standing before the
pandemic. Importantly, with these and other facilities that the Federal
Reserve has not employed before, public input has been crucial in their
development. For example, in response to comments received, we lowered
the minimum loan size and raised the maximum loan size across the three
lending facilities within the program; in addition, we expanded the
size of firms allowed to borrow under the program to companies with up
to 15,000 employees. These changes should help the program meet the
needs of a wider range of employers that may need bridge financing to
support their operations and the economic recovery. We will continue to
adjust facilities as we learn more.
To bolster the effectiveness of the Small Business Administration's
Paycheck Protection Program (PPP), the Federal Reserve is supplying
liquidity to lenders backed by their PPP loans to small businesses. And
to help State and local governments better manage cash flow pressures
in order to continue to serve households and businesses in their
communities, the Federal Reserve, together with the Treasury
Department, established the Municipal Liquidity Facility under section
13(3) authority to purchase short-term debt directly from U.S. States,
counties, cities, and certain multistate entities. The two corporate
credit facilities, the Main Street Lending Program, and the Municipal
Liquidity Facility all have equity provided by the Treasury Department
to protect the Federal Reserve from losses. The passage of the CARES
Act by Congress was critical in enabling the Federal Reserve and the
Treasury Department to establish these real economy emergency lending
programs that have the capacity to make more than $2.6 trillion in
loans.
The tools that the Federal Reserve is using under its 13(3)
authority are for times of emergency, such as the ones we have been
living through. When economic and financial conditions improve, we will
put these tools back in the toolbox.
The final area where we took steps was in bank regulation. The
Board made several adjustments, many temporary, to encourage banks to
use their positions of strength to support households and businesses.
Unlike the 2008 financial crisis, banks entered this period with
substantial capital and liquidity buffers and improved risk-management
and operational resiliency. As a result, they have been well positioned
to cushion the financial shocks we are seeing. In contrast to the 2008
crisis when banks pulled back from lending and amplified the economic
shock, in this instance they have greatly expanded loans to customers.
Federal Reserve Board Vice Chair for Supervision Randal Quarles spoke
to you about these topics last week.
The Federal Reserve has been entrusted with an important mission,
and we have taken unprecedented steps in very rapid fashion over the
past few months. In doing so, we embrace our responsibility to the
American people to be as transparent as possible. We are deeply
committed to transparency, and recognize that the need for transparency
is heightened when we are called upon to use our emergency powers. This
is particularly the case when Congress appropriates taxpayer funds to
back lending programs that the Fed administers. In connection with the
CARES Act facilities--including the two corporate credit facilities,
the Main Street Lending Program, the Municipal Liquidity Facility, and
the TALF--we will be disclosing, on a monthly basis, names and details
of participants in each facility; amounts borrowed and interest rate
charged; and overall costs, revenues, and fees for each facility.
Thank you, I'd be happy to take your questions.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM STEVEN T. MNUCHIN
Q.1. The Administration has identified a range of needs among
companies in the U.S. defense industrial base for urgent
financial assistance. Section 4003(b)(3) of the CARES Act made
available $17 billion specifically to address the needs of
businesses critical to maintaining national security. Some of
businesses identified by the Administration may also be
eligible to receive forgivable loans under the Paycheck
Protection Program. In the CARES Act, Congress also
appropriated funding for activities under the Defense
Production Act to bolster the domestic production of urgently
needed medical supplies and equipment.
What steps are you taking, in coordination with Defense
Secretary Esper, to ensure that defense industrial base
companies in need of financial assistance receive aid first out
of the national security or PPP funding Congress provided,
rather than out of the DPA funding Congress provided primarily
to bolster additional production of medical supplies and
equipment?
A.1. Under section 4003(b)(3) of the Coronavirus Aid, Relief,
and Economic Security (CARES) Act, ``businesses critical to
maintaining national security'' may be eligible for a loan from
Treasury, subject to certain conditions and restrictions set
forth in the statute. Treasury consulted with the Department of
Defense, as well as the Office of the Director of National
Intelligence, regarding the implementation of this statutory
eligibility requirement. Based on input received in that
consultation, Treasury issued guidance that a business is
eligible for a loan if (1) it is performing under a ``DX''-
priority rated contract or order under the Defense Priorities
and Allocations System regulations (15 CFR part 700); (2) it is
operating under a valid top-secret facility security clearance
under the National Industrial Security Program regulations (32
CFR part 2004); or (3) based on a recommendation and
certification by the Secretary of Defense or the Director of
National Intelligence that the applicant business is critical
to maintaining national security, the Secretary of the Treasury
determines that the applicant business is eligible. Treasury
has been working diligently to review the applications
submitted by all companies that meet these criteria.
With respect to the Paycheck Protection Program (PPP),
Treasury and the Small Business Administration (SBA) have
worked closely with Congress, lenders, and other stakeholders
to ensure that as many workers and small businesses as possible
can readily participate in the opportunities afforded by this
program. Treasury has posted to its website a series of
documents, including interim final rules that implement the
PPP, a set of frequently asked questions, fact sheets, and
other documents to address specific lender and borrower
questions about eligibility and the application process, among
other topics.
Q.2. How many nondepository CDFIs that were not SBA-approved
7(a) lenders prior to the CARES Act have been approved to
participate in PPP? Of these, how many have participated in
PPP? For each nondepository CDFI lender that was not a 7(a)
lender prior to the CARES Act that has been approved to
participate in PPP, please provide the amount of business loans
or other commercial financial receivables the CDFI originated,
maintained, and serviced during a consecutive 12 month period
in the past 36 months.
A.2. Treasury and SBA have undertaken extensive and ongoing
efforts to encourage lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than
two years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, Community
Development Financial Institutions (CDFIs), Minority Depository
Institutions (MDIs), the Department of Agriculture, and other
stakeholders to ensure that as many workers and small
businesses as possible can readily participate in the
opportunities afforded by this program, with particular focus
on underserved borrowers, including minorities, women, and
rural entrepreneurs. Treasury and SBA extensively recruited
lending institutions that typically operate in underserved
communities to participate as PPP lenders. An important focus
of our efforts to serve underserved communities has been to
harness the role of CDFIs and MDIs. Hundreds of CDFIs were
contacted and advised of their eligibility to participate in
the PPP. As of August 8, 2020, when the PPP closed to new loan
applications, 432 CDFIs and MDIs had participated and provided
221,000 loans totaling more than $16.4 billion (308 CDFIs
provided over 114,000 loans totaling more than $7.5 billion).
Q.3. Are Treasury or the Federal Reserve requiring the
companies, including the banks' customers which use loan
programs to report payroll information that will allow Congress
to assess whether funds are being used to keep workers employed
and paid? If not, how do you intend to assess whether funds are
being used to keep workers employed and paid?
A.3. Main Street Lending Program borrowers undertake to make
commercially reasonable efforts to retain employees during the
term of the Main Street loans. Specifically, borrowers should
undertake good-faith efforts to maintain payroll and retain
employees, in light of their capacities, the economic
environment, available resources, and need for labor. Main
Street does not require specific recordkeeping or reporting
regarding employment.
Q.4. Highly leveraged energy sector companies were already
facing downgrades prior to the coronavirus outbreak, yet you
recently made revisions to lending programs that will allow
many of these companies to receive bailouts. Why is it
appropriate to provide funds to prop up businesses that were
failing regardless of the impacts of the coronavirus outbreak?
In your role as Chair of the Financial Stability Oversight
Council, did you consider the ramifications of further
subsidizing an industry that contributes to climate change
given the likelihood that the effects of climate change will
lead to more volatile and less stable financial markets? If so,
please provide your analysis. The Administration opposes the
spending package recently passed by the House. Why does it make
sense to spend billions propping up failing companies that put
our economy at risk but not to spend money on workers that need
to feed their families and pay rent?
A.4. In April, at the direction of the President, Secretary
Mnuchin and Energy Secretary Brouillette began working together
to consider ways in which to support the oil and gas sector and
the many thousands of hardworking Americans it employs.
Although the U.S. energy industry is of critical and strategic
importance to the U.S. economy, and U.S. energy independence is
a key policy priority of the Administration, Secretary Mnuchin
was clear in stating that any such support must not be a
``bailout'' and-unless specifically directed otherwise by
Congress-should be available under terms that are consistent
with the CARES Act and broadly applicable to all businesses and
industries across the U.S. economy.
The changes made to the Main Street Lending Program (Main
Street) were made in response to over 3,500 comments received
from the public representing a diversity of stakeholders. On
April 30, 2020, in response to concerns from the public
regarding the breadth of availability of Main Street loans for
small and medium-sized businesses, the Federal Reserve amended
the program's initial terms to expand the available loan
options as well as the pool of businesses eligible to borrow.
The changes to the Main Street were designed to allow an even
wider range of American companies and industries to access the
program in order to help support their workers and operations,
without favoring any particular sectors.
Q.5. Over the past several decades, the number of small banks
in the United States has decreased, while larger banks continue
to increase in number and size. Recent laws and regulations
have made it easier for big banks to buy smaller banks and out
compete the remaining banks in the local community. This makes
the disparity between small banks and large banks much more
pronounced, and also has the effect of reducing the number of
communities that have access to a bank. We have seen this
disparity play out in Treasury and SBA's rollout of the PPP
program. How is the Treasury Department addressing the
distribution of PPP loans based on the location and size of
participating lenders? What is Treasury doing to ensure that
small lenders in rural and low- and moderate-income are able to
issue PPP loans in their communities on an equal footing with
larger banks?
A.5. Treasury and SBA have posted information about the size of
lenders in the PPP program and the number and volume of loans
they have made. As of August 8, 2020, when the program closed
to new loan applications, lenders with more than $50 billion in
assets were responsible for 36 percent of PPP lending amount,
lenders with between $10 billion and $50 billion in assets were
responsible for 19 percent of PPP lending amount, and lenders
with less than $10 billion in assets were responsible for 45
percent of PPP amount. No single lender has comprised more than
4.4 percent.
Treasury and SBA have undertaken extensive and ongoing
efforts to encourage lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than
two years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, CDFIs, MDIs, the
Department of Agriculture, and other stakeholders to ensure
that as many workers and small businesses as possible can
readily participate in the opportunities afforded by this
program, with particular focus on underserved borrowers,
including minorities, women, and rural entrepreneurs. Treasury
and SBA extensively recruited lending institutions that
typically operate in underserved communities to participate as
PPP lenders. An important focus of our efforts to serve
underserved communities has been to harness the role of CDFIs
and MDIs. Hundreds of CDFIs were contacted and advised of their
eligibility to participate in the PPP. As of August 8, 2020,
when the PPP closed to new loan applications, 432 CDFIs and
MDIs had participated and provided 221,000 loans totaling more
than $16.4 billion. The program has resulted in $106 billion
provided to businesses in Historically Underutilized Business
Zones (HUBZones), accounting for more than 20 percent of all
PPP funding. Data also show that the loans have been broadly
distributed and made across diverse areas of the economy, with
27 percent of the funds going to low- and moderate-income
communities, which is in proportion to their percentage of the
population.
Q.6. Please provide the following data related to the Paycheck
Protection Program:
The name of each lender participating in PPP and the number
and dollar amount of loans it made under the PPP, including a
breakout of loans by borrower State, borrower ZIP code,
industry, loan size, and, as available, borrower demographic
information.
The total amount of lender compensation fees paid to each
PPP lender.
The total amount each lender paid in broker fees.
A.6. Treasury and SBA are committed to implementing the CARES
Act with transparency and accountability. Information regarding
approved PPP loans and program participation is provided on our
websites, including data to help inform your and the public's
understanding of borrower participation, such as the number and
dollar amount of loans, number of loans by amount, distribution
by lender size and type, list of top lenders, average loan
size, and loan distribution across industries and States.
Additionally, SBA has made additional data regarding PPP
loans publicly available in a manner that balances the
interests of transparency with protections for small
businesses, sole proprietors, and independent contractors. SBA
disclosed the business names, addresses, NAICS codes, zip
codes, business types, demographic data, jobs supported, and
loan amount ranges as follows: $150,000-350,000; $350,000-1
million; $1-2 million; $2-5 million; and $5-10 million. These
categories account for nearly 75 percent of the loan dollars
approved. For loans below $150,000, SBA disclosed the specific
loan amounts along with NAICS codes, zip codes, business types,
demographic data, and jobs supported, but no personally
identifiable borrower information.
This approach to public disclosure will allow Americans to
see how their tax dollars are being spent while ensuring that
America's entrepreneurs and job creators are able to compete
fairly as our economy safely reopens. Unlike other SBA loans,
PPP loan amounts are calculated based on payroll data, which
employers typically treat as commercially sensitive or
proprietary. In general, a borrower's specific PPP loan amount
will reveal the borrower's nonpublic payroll information-
including the personal income of independent contractors and
sole proprietors that received PPP loans.
In addition to these public disclosures, SBA worked with
congressional committees and the Government Accountability
Office to provide full access to all PPP loan-level
information-including, but not limited to, all borrower names
and loan amounts-in a manner that afforded appropriate
confidential treatment for nonpublic personally identifiable
and commercially sensitive business information.
We respectfully refer you to SBA for additional information
on the fees paid to lenders.
Q.7. The CARES Act authorized the United States Postal Service
to borrow up to $10 billion from the Treasury to cover
operating expenses at terms mutually agreed upon by the
Treasury and the USPS. Please provide an update on the
negotiations with the USPS on the status of the loan's
disbursement. Will you commit to providing the loan to USPS
without imposing any unrelated conditions requiring changes to
USPS postal management or operations?
A.7. On July 28, 2020, Treasury and the USPS agreed on terms
regarding the additional $10 billion in lending authority
included in the CARES Act. As mandated in the CARES Act, the
USPS may only use such borrowed funds for operating expenses.
No conditions requiring changes to USPS postal management or
operations were included. Additionally, this term sheet has
been provided to the House Oversight Committee and publicly
released.
Q.8. As you know the CARES Act provided both loans and payroll
support funding to air carriers. Both the loans and payroll
support funding required air carriers to meet certain
conditions. Is there any air carrier that you believe is not in
compliance with the terms and conditions of the CARES Act?
A.8. The Department of the Treasury expects all participants in
the Payroll Support Program (PSP) to comply with the
requirements of the CARES Act, which are also incorporated into
the terms of each carrier's Payroll Support Program Agreement.
Treasury has posted program guidance on its website, including
a form of Payroll Support Program Agreement setting forth
statutory requirements and other terms under which payroll
support is provided. \1\ As with each of the CARES Act programs
Treasury is implementing, we will continue to work to ensure
that the PSP is efficient and effective. To that end,
Treasury's agreement with each recipient of payroll support or
a Treasury loan requires the company to comply with the
requirements under the CARES Act and to provide reporting to
enable Treasury to monitor compliance. When Treasury identifies
a participant in these programs that is not complying with its
obligations under the CARES Act, we will take appropriate
action.
---------------------------------------------------------------------------
\1\ See https://home.treasury.gov/policy-issues/cares/preserving-
jobs-for-american-industry.
Q.9. I have heard of instances where pilots and flight
attendants have been downgraded in hours or position and
status, and therefore pay, as a result of a change in the air
craft. These instances include scenarios where flight
attendants or pilots, for example, are moved off of
international flights or, in the case of pilots, moved from
captain to first officer because they were assigned to a
narrow-body aircraft instead of a wide-body international
aircraft. Are reductions in pay due to a downgrade in aircraft
---------------------------------------------------------------------------
violations of the CARES Act?
A.9. Treasury incorporated the requirements of the CARES Act
into a PSP agreement that must be executed by each PSP
recipient and Treasury. Each PSP agreement reflects the
requirements in section 4114(a) of the CARES Act, which
prohibits recipients from ``conducting involuntary furloughs or
reducing pay rates and benefits until September 30, 2020.''
Treasury has also imposed reporting requirements to enable it
to monitor PSP recipients' compliance with the PSP agreements,
and each recipient is required to provide quarterly
certifications that it is in compliance with the terms and
conditions of the agreement. The agreement also makes clear
that PSP funds must be used exclusively to continue paying
employee salaries, wages, and benefits-the funds may not be
used for any other purpose.
Q.10. The President recently stated he supports ``looking
into'' banks committed to no longer investing in oil and gas
drilling in the Arctic. Has the President discussed this with
you or someone at your agency? Have you or anyone at your
agency started any investigation, or initiated any proceeding
to ``look into'' banks which have committed to not investing in
Arctic oil and gas development?
A.10. Treasury has not initiated any investigation or
proceeding with respect to this issue.
Q.11. Have you limited funds appropriated by Congress through
the CARES Act, or any other law, to banks that have committed
to stop financing Arctic oil and gas development?
A.11. No, Treasury has administered the programs Congress
provided for under the CARES Act in a manner consistent with
the text of the statute.
Q.12. Have you been directed by anyone, up to and including the
President, to use the authorities and resources at your
disposal to tip the scales in any way regarding banks or other
investors with commitments to not finance new development in
the Arctic?
A.12. Treasury has not taken any action with respect to a bank
or other investor with respect to this issue.
Q.13. To what extent has Treasury studied the degree to which
State and local revenue needs have been met by the Coronavirus
Relief Fund in the CARES Act? How great is the unmet need among
State and local governments and how does the Administration
intend to help meet it? Please provide any Treasury analyses on
State and local revenue.
A.13. Treasury endeavored to establish maximum flexibility in
developing guidance for the Coronavirus Relief Fund; however,
the CARES Act does not allow the use of CRF funds to supplement
lost revenue.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM STEVEN T. MNUCHIN
Q.1. Many in Congress have expressed concern about the impact
of job loss and unemployment upon low-income workers, and the
Federal Reserve's Report of the Well Being of US Households in
2019 found that 39 percent of Americans with a household income
of less than $40,000 had seen at least one job loss in March.
However, the report also stated that most workers expected
their job losses to be temporary, with nine in 10 people who
were furloughed or who had lost a job saying that their
employer indicated that they would return to their job at some
point.
As you stated in the hearing, ``where people are unemployed
for long periods of time, that can permanently weigh on both
their careers and their ability to go back to work, and also
weigh on the economy for years.'' While unemployment benefits
are an important source of needed liquidity for displaced
workers and can smooth consumption, having workers continue to
be unemployed for longer than necessary may be harming our
ability to quickly recover and restore long-term income
stability. A recent University of Chicago working paper found
that 68 percent of unemployed workers who are eligible for UI
will under the CARES Act receive benefits which exceed lost
earnings, and that the median wage replacement rate under the
CARES Act is 134 percent of prior wages.
How would you expect long-term (beyond July 31st, 2020)
wage replacement rates above 100 percent to impact efficient
labor reallocation and an eventual economic recovery?
Would you expect a targeted proportional system of
unemployment benefits that caps wage replacement rates at 100
percent to sufficiently smooth consumption for displaced
workers?
A.1. Economists believe that in most cases, increased benefit
generosity leads to reduced likelihood of unemployed workers
looking for and finding new work. There is not much evidence
that enhanced UI benefits deterred job search early in the
recession, as labor demand problems clearly dominated labor
supply problems. However, since the spring, the economy has
created over 10.6 million jobs in as little as four months, and
there is now no question that labor demand has come roaring
back. Thus, if unemployment insurance benefits were continued
at very high replacement rates, we would expect this to
meaningfully slow down job creation as some workers preferred
to stay home receiving benefits in excess of their earned wages
from work.
A further problem with replacement rates at 100 percent or
above is that since FICA taxes are not withheld from UI
benefits, and in many States UI benefits are not taxed as
income, pretax replacement rates of 100 percent can wind up
being meaningfully higher than 100 percent in after-tax terms.
A targeted proportional system of benefits that, when
factoring in benefits from the underlying unemployment
insurance (UI) program (including CARES Act programs) and any
Federal supplement to the weekly benefit amount, caps
replacement rates at 100 percent or lower would be preferred to
a fixed benefit amount. This approach would not have as large
negative labor supply effects as having two-thirds of workers
receive benefits in excess of their previous wages. Capping
wages at a level somewhat below 100 percent would be even more
effective at achieving the dual goals of helping households pay
for essentials and getting America back to work.
Note that UI is a State and Federal partnership, and State
laws individually set wage replacement rates, which typically
are targeted at a 50 percent wage replacement up to a specified
weekly benefit amount. A 100 percent wage replacement structure
would create downward pressure on the labor market supply by
acting as a disincentive to return to work and increase
employer costs by making it harder for employers to hire more
workers. Especially now, with State economies reopened and
robust job growth, any potential restructuring of the
fundamental premises of the UI system must align with the
States, the U.S. Department of Labor, and must balance both the
tax and benefit implications of the changes.
Q.2. On May 15th, 2020, the Small Business Administration and
Treasury Department released the Paycheck Protection Program
loan forgiveness application. The 11-page application is quite
extensive and lengthy as it reflects the various forgiveness
requirements implemented over the past several weeks. Many
small businesses, some of whom received very small loans, may
have to hire or rely on an outside source to complete the
application accurately.
Secretary Mnuchin, will SBA and Treasury consider releasing
a revised and shortened version for borrowers with smaller
loans?
A.2. SBA published an EZ version of the forgiveness application
that requires fewer calculations and less documentation for
eligible borrowers. In addition, Treasury has posted to its
website a series of documents, including interim final rules
that implement the PPP, a set of frequently asked questions,
fact sheets, program reports, and other documents to address
specific lender and borrower questions about eligibility and
the application and forgiveness process, among other topics.
This includes guidance to reflect the PPP Flexibility Act's
amendments to the PPP to, among other things, extend the
covered period for loan forgiveness to 24 weeks after the date
of loan disbursement and to lower the percentage of a
borrower's PPP loan proceeds that must be used for payroll
costs. This also includes a set of frequently asked questions
on loan forgiveness.
Treasury and the SBA will continue to provide additional
guidance, as appropriate, to help small businesses and other
eligible borrowers get the assistance they need.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM STEVEN T. MNUCHIN
Q.1. The CARES Act created a tax credit known as the Employee
Retention Credit to encourage businesses to keep employees on
their payroll. I understand that with this new credit, along
with a similar tax credit created by previous COVID relief
legislation, employers are able to request an advance payment
of the credit using the IRS Form 7200. Unfortunately, I've
heard that it may take up to four weeks to receive these
advance payments.
A number of legislative proposals would significantly
expand the Employee Retention Credit but I am concerned that
this would further delay advance payments. Is the current
system underpinning the Form 7200 process capable of expansion?
In lieu of the Form 7200, is the Treasury considering other
systems that would be capable of handling an increased volume,
and if so, how long would those systems take to implement?
A.1. Eligible employers that pay qualified wages for purposes
of the Employee Retention Credit are able to retain an amount
of all Federal employment taxes equal to the amount of the
qualified wages paid, rather than depositing them with the IRS.
The Federal employment taxes that are available for retention
by these employers generally include Federal income taxes
withheld from employees, the employees' share of Social
Security and Medicare taxes, and the employer's share of Social
Security and Medicare taxes with respect to all employees.
If the Federal employment taxes yet to be deposited are not
sufficient to cover the employer's cost of qualified wages, the
employer is able to file a request for an advance payment from
the IRS using Form 7200, Advance Payment of Employer Credits
Due to COVID-19. While the IRS has established a manual system
for processing the Form 7200, which does place constraints on
the volume that can be handled, the process for employers to
retain amounts of employment taxes, rather than deposit them,
is not subject to those same constraints.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM STEVEN T. MNUCHIN
Q.1. Bans on Merger and Acquisitions--Secretary Mnuchin, as you
know some in Congress are urging passage of legislation that
would prohibit merger and acquisition activity. Merger and
acquisitions are an important part of economic activity, and in
a crisis like the one we are facing, it may provide a life line
for some business who may not have means of staying
operational. Ensuring these businesses have the ability to
partner with others also preserves jobs and important services
in all of our States. Further, there are already sufficient
government tools to protecting against inappropriate merger
activity. Even, President Obama's CEA Advisor, Jason Furman,
agreed recently by saying that a merger prohibition was
``particularly misguided when some mergers can save jobs in the
midst of an economic crisis''.
Secretary Mnuchin, would you agree that a prohibition on
mergers would be misguided, and would you agree there are
already appropriate tools to manage these mergers to ensure
workers and markets are protected?
A.1. A blanket prohibition on all merger and acquisition
activity in the economy would be inappropriate. For further
information, I respectfully refer you to the Justice
Department.
Q.2. U.S. Listing of Chinese Companies--Secretary Mnuchin,
recently US-listed Chinese companies have been in the headlines
for accounting scandals that have wiped away hundreds of
millions in shareholder equity. Many members of Congress have
voiced their view that Chinese companies are inherently risky
to U.S investors because they are not subjected to PCOAB
oversight. While I share concerns that these companies are not
subjected to PCAOB oversight, I disagree that the solution to
the problem is to force the delisting of all Chinese companies
on U.S. exchanges. Afterall, delisting Chinese firms off U.S.
stock exchanges not only would remove the soft power we have
over these companies, but we wouldn't protect U.S. investors
since asset managers, mutual funds, and retail investors will
continue to purchase them wherever they are listed regardless
if they are listed on a U.S. exchange or not.
I am interested in your view on this situation, do you
believe delisting all Chinese companies is the best solution to
tackling this problem?
A.2. Under the Sarbanes-Oxley Act of 2002, the Public Company
Accounting Oversight Board (the PCAOB) is charged with ensuring
the integrity of the work of audit firms. A cornerstone of this
is allowing the PCAOB to examine the work papers of an auditing
firm related to its audit of a U.S.-listed company. However,
China unfortunately prohibits the PCAOB from accessing audit
work papers for Chinese companies listed in the U.S. This is a
problem that must be addressed for two reasons. First, if the
PCAOB cannot examine the work of auditing firms as required by
Sarbanes-Oxley, U.S. investors are exposed to a greater risk of
fraud. Second, high-quality financial reporting and auditing
are the bedrock of our financial system and have made U.S.
capital markets the most robust in the world. It is imperative
that we maintain the highest standards.
On June 4, President Trump issued a memorandum tasking the
President's Working Group on Financial Markets (the PWG) with
examining risks to investors in U.S. financial markets from
China's failure to allow the PCAOB to do its job. In response,
the PWG issued a report unanimously recommending five actions
that U.S. government agencies can take to protect investors in
U.S. financial markets relating to this audit issue. These
recommendations considered the impact on investors and the
continued fair and orderly operation of U.S. financial markets.
The first recommendation touches on your question most
directly. The PWG recommends that the Securities and Exchange
Commission enhances listing standards to require, as a
condition to initial and continued exchange listing in the
United States, PCAOB access to work papers for the audit of a
listed company. For companies from noncooperating jurisdictions
(so-called ``NCJs'') that are unable to satisfy that standard
as a result of governmental restrictions, this standard may be
satisfied by providing a co-audit from an audit firm where the
PCAOB has sufficient access to audit work papers. For example,
if a current auditor is a Chinese subsidiary of an
international accounting firm, the U.S. entity of the
international accounting firm could agree to undertake a co-
audit and provide access of its work papers to the PCAOB. To
reduce market disruption, the recommended new listing standards
could provide for a transition period until January 1, 2022 for
currently listed companies to come into compliance. However,
there would be no transition period for new listings. I would
like to emphasize that we are simply leveling the playing
field, holding Chinese firms listed in the U.S. to the same
standards as everyone else.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM STEVEN T. MNUCHIN
Q.1. As I mentioned in the hearing, I am concerned that
companies in need of financial assistance do not meet the
eligibility criteria for the existing Federal Reserve (Fed) and
Treasury programs. The Fed's programs are largely limited to
investment grade (IG) companies with certain leverage criteria
that gets harder to satisfy the longer the pandemic goes. These
programs have excluded otherwise well run companies that are
not IG, or somehow don't fit the specific criteria--companies
that are sometimes even deemed essential by the Cybersecurity
and Infrastructure Security Agency within the Department of
Homeland Security.
What is the Federal Reserve and Treasury doing to help
well-managed non-IG companies that have weathered the initial
storm without any government assistance, but may need access to
liquidity in the next couple of months?
A.1. The Main Street Lending Program provides bridge financing
to small- and medium-sized businesses with up to 15,000
employees or $5 billion in revenue. Main Street does not have a
rating requirement, and most borrowers are not Investment
Grade.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM STEVEN T. MNUCHIN
Q.1. Section 1102 of the CARES Act, requires eligible borrowers
to make good faith certifications for both loan eligibility and
loan forgiveness and seeks to hold lenders ``harmless.'' An
interim final rule notes, ``The lender does not need to conduct
any verification if the borrower submits documentation
supporting its request for loan forgiveness and attests that it
has accurately verified the payments for eligible costs . . .
The Administrator will hold harmless any lender that relies on
such borrower documents and attestation from a borrower.''
While it is understandable that normal processes and
verifications are set aside during these unprecedented times,
we must also utilize tools and technologies that are available
to assess for potential fraud.
Do you agree that the government should be looking at ways
to deter fraud in these programs and can you please explain and
detail how Treasury is working to deploy fraud management tools
and technologies to deter bad actors and help with loan
approvals and forgiveness decisions? Can you also detail what
lookback procedures are in place to protect taxpayer dollars?
A.1. On July 23, 2020, SBA issued a procedural notice to
lenders that included procedures for forgiveness loan reviews.
I respectfully refer you to the SBA for more information.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MCSALLY
FROM STEVEN T. MNUCHIN
Q.1. Short-term funding provisions are essential for nonprofits
right now, especially those with more than 500 employees that
are not eligible for the Paycheck Protection Program.
Nonprofits provide critical services to the most vulnerable.
Nonprofits often lack the ability to raise funds the way for-
profit enterprises can, and taking on additional debt can
severely affect the services nonprofit organizations provide.
What actions is Federal Reserve and Treasury considering for
nonprofits employers with between 500 and 10,000 employees?
A.1. On September 4, the Federal Reserve Bank of Boston
announced that two new Main Street Lending Program loan
facilities for nonprofit organizations were fully operational.
These new facilities are designed to help credit flow to small-
and medium-sized nonprofit organizations that were in sound
financial condition prior to the pandemic and have solid post-
pandemic prospects.
Q.2. As an investor in the Federal Reserve facilities (through
the Exchange Stabilization Fund) and as the Chairman of the
Financial Stability Oversight Council (FSOC), you have a broad
perspective to consider this issue and act to provide liquidity
assistance. Can you provide the indicators you are using to
guide your decision making as it relates to the necessity for a
mortgage servicer liquidity facility?
A.2. Treasury is actively monitoring the mortgage market and
the associated impact of COVID-19. We have focused considerable
resources on delivering authorized support to households and
businesses struggling as a consequence of the necessary public
health response. On March 26, 2020, Secretary Mnuchin announced
the creation of a Financial Stability Oversight Council Task
Force on Nonbank Mortgage Liquidity, which first convened on
March 30 to discuss conditions and activities in the mortgage
servicing markets and remains in regular discussions. Treasury
will continue to work to promote stable markets, including for
residential mortgage lending.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM STEVEN T. MNUCHIN
Q.1. You mentioned during the hearing that between the PPP, the
EIDL loans and the Main Street programs, it is your objective
to help as many companies as possible and to ensure that
companies do not ``fall through the cracks'' of these programs.
As you know there are many companies that are doing all that
they can to support their local economy, to keep their doors
open, workers employed, including those that are helping to
serve first responders but unfortunately due to the employee
threshold, investment grade requirement and/or asset threshold,
these great companies are falling through the cracks and as a
result do not benefit from these programs.
What are you doing to ensure that these companies are
getting the help that they need to stay in business and when
should we expect to see some additional changes to the programs
so that these companies no longer have to decide whether or not
to close their doors for good?
A.1. With respect to the PPP, Treasury has posted to its
website a series of documents, including interim final rules
that implement the PPP, a set of frequently asked questions,
fact sheets, program reports, and other documents to address
specific lender and borrower questions about eligibility and
the application and forgiveness process, among other topics.
This includes guidance to reflect the PPP Flexibility Act's
amendments to the PPP, including by:
Extending the covered period for loan forgiveness
from eight weeks after the date of loan disbursement to
24 weeks after the date of loan disbursement, providing
substantially greater flexibility for borrowers to
qualify for loan forgiveness. Borrowers who have
already received PPP loans retain the option to use an
eight-week covered period.
Lowering the requirements that 75 percent of a
borrower's loan proceeds must be used for payroll costs
and that 75 percent of the loan forgiveness amount must
have been spent on payroll costs to 60 percent for each
of these requirements. If a borrower uses less than 60
percent of the loan amount for payroll costs during the
forgiveness covered period, the borrower will continue
to be eligible for partial loan forgiveness, subject to
at least 60 percent of the loan forgiveness amount
having been used for payroll costs.
Increasing to five years the maturity of PPP loans
that are approved by SBA (based on the date SBA assigns
a loan number) on or after June 5, 2020.
In addition, the SBA published an EZ version of the
forgiveness application that requires fewer calculations and
less documentation for eligible borrowers. Treasury and the SBA
will continue to provide additional guidance, as appropriate,
to help small businesses and other eligible borrowers get the
assistance they need.
The Main Street Lending Program provides bridge financing
to small and medium-sized businesses and nonprofit
organizations. Businesses and nonprofit organizations with less
than 15,000 employees or less than $5 billion in 2019 revenue
have access to 5 year loans under five Main Street loan
facilities, with loan sizes ranging from $250,000 to as high as
$300,000,000. The Federal Reserve and the Treasury are
continuously evaluating feedback from borrowers, lenders, and
other stakeholders to determine how to adapt the Main Street
facilities so as to make them accessible to an even broader
spectrum of American businesses and nonprofit organizations.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER
FROM STEVEN T. MNUCHIN
Q.1. On April 28, 2020, Eighteen of my colleagues and I sent
you a letter in opposition to the increasing tactic of the
Nation's large financial institutions discrimination or
debanking of legal and complaint industries such as the
firearms, oil and gas, and coal industry based on politics or
social popularity, not financial standing. Our letter focused
specifically on what efforts were being made at the SBA and
other regulatory agencies to ensure equal access to Federal
recovery and stimulus funds. Have you seen this letter? Do you
have any thoughts?
But this question leads up to a more important question
which I have been wanting to ask--Mr. Secretary, do you believe
a financial institution which accesses or utilizes the
taxpayer's Federal Reserve's Open Window, Federal Deposit of
Insurance (FDIC) or Automated Clearing House (ACH) should be
allowed to discriminate against a legal and complaint business
based on social or political policy?
A.1. The Secretary shares your interest in making stimulus
programs available to as many of America's job creators and
their employees as feasible, and expects that participating
lenders will not discriminate against particular companies or
industries that are otherwise eligible under program rules.
Q.2. Recent reports have been published saying the Treasury
Department is considering extending the safe harbor by one-year
for wind and solar tax credits. Yesterday, I sent you a
bipartisan letter asking in light of these reports will you
consider a similar one-year extension for companies wanting to
use the 45Q tax credit? I noted in my letter, these are the
same companies that have been waiting for the final rules on
45Q two years after the deadline has passed.
A.2. We recently extended deadlines for the production tax
credit and investment tax credit that were due to expire in
2020 or 2021. Although the section 45Q credit is similar to the
production tax credit and investment tax credit in terms of the
beginning of the construction framework and safe harbors, the
potential deadlines are still several years away. That said, we
will continue to monitor the situation because we understand
how important certainty is in the planning and development of
these projects. We also encourage stakeholders to submit
comments on the recently issued proposed regulations and
include recommendations for changes or flexibility in the rules
that could be helpful during unforeseen circumstances.
Q.3. You recently announced that Treasury and the SBA will
audit any PPP loans in excess of $2 million to verify whether
the business ``really'' needed the loan. Many small businesses,
including those in the manufacturing industry, have payroll
costs that necessitated a loan of $2 million or more to keep
their workers paid during the crisis. How are Treasury and the
SBA going to ensure that these companies' loans are not
retroactively put at risk?
A.3. Borrowers with loans of $2 million or more may have an
adequate basis for making the required good-faith
certification, based on their individual circumstances in light
of the language of the certification and SBA guidance. On June
1, the SBA issued an interim final rule describing its loan
review procedures and related lender and borrower
responsibilities. Treasury and SBA have also posted guidance on
frequently asked questions on loan forgiveness, as well as on
procedures for lenders' submissions of PPP loan forgiveness
decisions to SBA and SBA loan forgiveness reviews. Treasury and
SBA will continue to provide additional guidance, as
appropriate, to help small businesses and other eligible
borrowers get the assistance they need.
Q.4. The CARES Act makes clear that PPP loan forgiveness should
be tax free--yet recent IRS guidance would deny the
deductibility of business expenses paid with PPP funds, which
is contrary to congressional intent. This guidance makes it
harder for small businesses to keep workers on payroll during
this crisis. Will you commit to reversing this guidance,
pursuant to congressional intent in the CARES Act, and allow
small manufacturers to receive the full benefit of the PPP?
Also on the PPP issue, are you considering allowing companies
to renew their loans instead of reapplying? Will you allow
companies extra time to use unspent funds?
A.4. Neither the initial receipt of the borrowed cash under a
PPP loan nor the forgiveness of a PPP loan result in taxable
income. The IRS has issued guidance \1\ that section 265 of the
Internal Revenue Code denies a double benefit if:
---------------------------------------------------------------------------
\1\ https://www.irs.gov/pub/irs-drop/n-20-32.pdf.
1. a PPP loan borrower uses the cash from the loan to pay
business expenses that would otherwise be tax
deductible (payroll, rent, mortgage interest,
---------------------------------------------------------------------------
utilities, etc.); and
2. the PPP loan is forgiven.
That is, section 265 applies to deny a deduction for the
otherwise deductible expenses up to the amount of the loan
forgiveness. In addition, the IRS guidance identifies long-
established authorities that deny deductions for otherwise
deductible payments for which the taxpayer receives
reimbursement. Otherwise deductible expenses that give rise to
PPP loan forgiveness are reimbursed by the forgiveness of the
PPP loan and therefore would not be deductible for this reason
as well.
Treasury and the SBA will continue to provide additional
guidance, as appropriate, to help small businesses and other
eligible borrowers get the assistance they need.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM STEVEN T. MNUCHIN
Q.1. As you may know, CNBC has reported that the
``Congressional Budget Office projects GDP dropping 38 percent
in the second quarter as 26 million Americans remain
unemployed.''
In light of these projections, are the Federal Reserve and
the Department of the Treasury considering either expanding the
forthcoming Main Street Lending Program or creating a different
program to facilitate lending to U.S. businesses with more than
15,000 employees so that they may also get assistance with
keeping workers on the job?
A.1. The purpose of the Main Street Lending Program is to
provide bridge financing for small- and medium-sized businesses
and nonprofit organizations to help them through the COVID-19
crisis. Other Federal Reserve facilities focus on the financing
needs of large businesses and State and local governments.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM STEVEN T. MNUCHIN
Q.1. The Small Business Administration (SBA) Inspector General
found that the SBA and Treasury failed to direct lenders to
prioritize underserved communities, including minority- and
female-owned businesses, as mandated by Congress when the
agencies implemented the Paycheck Protection Program (PPP)
under the CARES Act. Compounding SBA and Treasury's failure to
release guidance prioritizing underserved borrowers, Treasury
took almost a month after passage of the CARES Act to release
guidance for non-SBA approved CDFIs to participate in the PPP
program. As you know, CDFIs offer financial services to
underserved communities.
Why was the CDFI guidance delayed for almost a month?
A.1. In light of the urgency to launch the program, SBA and
Treasury determined that the most effective way to ensure PPP
loans could reach underserved communities was to make sure that
we had a substantial number of lenders participating that were
positioned to reach borrowers who had had less well-established
banking relationships. These efforts included issuing an
Interim Final Rule before the program launched detailing who is
eligible to make PPP loans (including hundreds of CDFIs, among
other types of lenders).
Q.2. How is Treasury working with CDFIs to ensure they are
prepared to offer PPP loans to underserved small businesses,
including women and minority-owned small businesses?
A.2. Treasury and SBA have undertaken extensive and ongoing
efforts to encourage lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than
two years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, CDFIs, MDIs, the
Department of Agriculture, and other stakeholders to ensure
that as many workers and small businesses as possible can
readily participate in the opportunities afforded by this
program, with particular focus on underserved borrowers,
including minorities, women, and rural entrepreneurs. Treasury
and SBA extensively recruited lending institutions that
typically operate in underserved communities to participate as
PPP lenders. An important focus of our efforts to serve
underserved communities has been to harness the role of CDFIs
and MDIs. Hundreds of CDFIs were contacted and advised of their
eligibility to participate in the PPP. As of August 8, 2020,
when the PPP closed to new loan applications, 432 CDFIs and
MDIs had participated and provided 221,000 loans totaling more
than $16.4 billion. The program has resulted in $106 billion
provided to businesses in HUBZones, accounting for more than 20
percent of all PPP funding. Data also show that the loans have
been broadly distributed and made across diverse areas of the
economy, with 27 percent of the funds going to low- and
moderate-income communities, which is in proportion to their
percentage of the population.
Q.3. It is my understanding that while Treasury has attempted
to identify and reach all citizens eligible for a direct
payment under the CARES Act, significant challenges remain to
ensuring that unbanked Americans get their payment in a fast,
safe and efficient manner.
What specific actions has Treasury taken to identify and
deliver payments to underbanked and unbanked citizens?
A.3. The IRS launched the Non-Filers tool and a substantial
communications effort that together have helped millions of
individuals, including the unbanked and underbanked, who are
not otherwise required to file a tax return, to provide the
information the IRS needed to issue an Economic Impact Payment.
The Treasury Department, Fiscal Service, and the IRS also
collaborated with other Federal agencies, including the
Consumer Financial Protection Bureau, the Social Security
Administration, and the Federal Deposit Insurance Corporation
(FDIC) to provide information on the Non-Filers tool. With
regard to the FDIC, information included instructions on how to
find, open, and provide new bank account information to the IRS
for the purpose of receiving an Economic Impact Payment. The
Treasury Department and the IRS initially prioritized mailing
checks to people with low AGI, starting with individuals with
an AGI of less than $10,000, then mailed checks to individuals
with progressively higher AGI amounts.
In addition, 2.1 million payments were automatically
delivered electronically to Direct Express cardholders, who are
mostly unbanked and use the Direct Express card program to
electronically receive their monthly benefit payments. The
Treasury Department has issued approximately four million
Economic Impact Payments on Economic Impact Payment debit cards
(EIP Cards), through the Treasury Department's safe,
convenient, and secure U.S. Debit Card program. The U.S. Debit
Card program provides debit card services to Federal agencies
for electronic delivery of certain payments. To facilitate the
use of these EIP Cards, the IRS has provided general
information and FAQs at https://www.EIPcard.com and on IRS.gov.
To inform payees on how to receive their Economic Impact
Payment on an existing general purpose reloadable debit card
(GPR Card), the IRS included information in FAQs regarding how
an account and routing number of a GPR Card can be provided to
the IRS through the Get My Payment portal or the Non-Filers
tool.
Q.4. How many Americans are still owed a payment under the
CARES Act?
A.4. As of September 18, 2020, Treasury and the IRS have issued
more than 163 million Economic Impact Payments totaling more
than $273 billion to individuals for whom the IRS has the
necessary information. Treasury and the IRS have worked
extensively to identify and reach out to eligible individuals
who have not received an Economic Impact Payment.
Q.5. Is Treasury developing additional efforts to reach these
people?
A.5. The IRS has engaged other Federal agencies to assist in
outreach efforts to Federal program beneficiaries who may not
have a filing obligation to use the Non-Filer portal \1\ on the
IRS website to claim an Economic Impact Payment. In addition,
on September 8, the IRS announced that they will be sending
letters to roughly 9 million Americans who typically do not
file Federal income tax returns and may be eligible for, but
have yet to claim, an Economic Impact Payment.
---------------------------------------------------------------------------
\1\ See https://www.irs.gov/coronavirus/non-filers-enter-payment-
info-here.
Q.6. Has the Administration considered using digital payments
as potential means of disbursing these funds? If so, please
describe any hurdles to implementation that have been
identified. If not, please explain why this solution has not
---------------------------------------------------------------------------
been considered.
A.6. As of September 18, 2020, Treasury and the IRS have issued
more than 163 million Economic Impact Payments totaling more
than $273 billion to individuals for whom the IRS has the
necessary information. The IRS and Fiscal Service accelerated
the rate of delivery of Economic Impact Payments to many
eligible Americans by successfully shifting such delivery away
from paper checks and to:
1. Direct deposit through information obtained through the
Get My Payment portal and Non-Filers tool on IRS.gov
(where the taxpayer can input their bank account
information).
2. Debit cards (which are funded electronically).
3. Bank accounts based on information provided by the Bureau
of the Fiscal Service, Social Security Administration,
and the Department of Veterans Affairs.
Treasury and the IRS found that these methods of
disbursement provided payment in a safe, secure, convenient,
and timely fashion.
Q.7. If there is a second round of direct payments, will the
Administration consider digital disbursement technologies to
ensure the vulnerable are not delayed in receiving their
payments, nor be forced to pay unfair fees to access their
money?
A.7. If there is a second round of direct payments, Treasury
and the IRS would make those payments in a safe, secure,
convenient, and timely fashion. The use of digital
disbursements technologies can be further evaluated,
specifically with respect to how the Federal Government would
balance fraud protection requirements against ease of access to
funds for consumers. In addition, if the payment mechanism
requires the Federal Government to sponsor an account for the
recipient, reasonable fees may be required for optional
services to ensure that taxpayers do not unfairly bear the
costs of digital account ownership by individual citizens.
Q.8. As you know, State and local governments are under
tremendous financial strain. Many of us in Congress believe
that direct assistance from the Federal Government and support
in the form of lending facilities under Section 4003 of the
CARES Act are critical to preventing additional layoffs of
public workers, dangerous cuts to public safety and essential
services, and large local tax increases. It is also important
that we consider how the private sector can assist State and
local governments to better manage their cash and serve as a
source of financing for infrastructure and other public
services.
Has the Treasury identified any impediments to greater
investment by the private sector in the municipal bond market?
A.8. One impediment concerns disclosures. Greater investment in
the municipal market by the private sector can be achieved if
bond issuers commit to the disclosure of important financial
and operational information in a format that is timely,
complete, and comparable. As you know, the disclosure
requirements and practices in the municipal bond market are not
as stringent as in corporate funding markets. Another
impediment is scale. Municipal infrastructure projects and
associated processes are characterized by factors that may make
it difficult for private investors to meaningfully scale local
investments into broader business practices. For example,
idiosyncratic and often small proposed projects, combined with
bespoke State and local government processes (e.g.,
procurement, permitting, contracting), may contribute toward a
challenging environment for scalable private investment
practices. Finally, there is often a mismatch between a
municipal project need and the expertise and availability of
private market operators willing to assume the risks in a
public-private partnership.
Q.9. Is the Treasury currently seeking any legislative changes
to enable the private sector to provide additional capital to
State and local governments? If so, please share those
proposals.
A.9. Treasury is not currently seeking any legislative changes
related to this topic.
Q.10. We are now 3 months into the COVID-19 pandemic and are
economy is under massive strain. More than 100,000 small
businesses have closed their doors forever. Additionally, three
out of four businesses have experienced declines in revenue.
Our businesses are in a free fall and the Main Street lending
facility could be a life line for businesses, if implemented
properly.
With the roll-out of the Paycheck Protection Program (PPP),
we saw how lending institutions and the Small Business
Administration's systems were overwhelmed by the loan demand.
How are you preparing banks for the volume of Main Street loan
applications they will receive? What are you doing to prepare
your own systems for the massive loan volume?
A.10. The Federal Reserve and the Department of Commerce, in
conjunction with SBA, have conducted webinars to explain the
Main Street Lending Program to eligible lenders. All five Main
Street facilities are operational and have the capacity to
process the loan volume.
Q.11. Are you allowing banks to limit loan applications to
existing customers? And, if so, will they be allowed to
prioritize their biggest customers?
A.11. The Federal Reserve is encouraging banks to accept
applications for Main Street loans from new customers. More
than 550 banks have registered for the Main Street Lending
Program. Approximately, 180 banks in all 50 States and U.S.
territories have agreed to be listed on the Federal Reserve
Bank of Boston website as accepting new customers for Main
Street loans. Many other banks accept Main Street loan
applications from new customers but have asked not to be listed
on the website.
Q.12. I have heard concerns that the earnings metrics the
Federal Reserve and Treasury intend to use for the Main Street
lending facilities are ill-suited for important sectors of our
economy that employ hundreds of thousands of Americans.
As you develop final guidance for these facilities, are you
examining whether the Federal Reserve and Treasury could use
additional metrics for different industries to ensure that as
many sectors of our economy as possible can utilize the
program?
A.12. The Federal Reserve and the Treasury are continuously
evaluating feedback from borrowers, lenders, and other
stakeholders to determine how to adapt the Main Street
facilities so as to make them accessible to an even broader
spectrum of American businesses and nonprofit organizations.
Q.13. Borrowers from commercial mortgage-backed securities
(CMBS), like hotels, shopping centers, and housing complexes,
attest that they are under significant financial hardship. In
many cases, their tenants are not able to pay rent and their
mortgage servicers are not offering flexibility. Several
affected entities are concerned about their ability to meet
their financial obligations over a protracted period of time.
Does the Treasury or Federal Reserve have plans to address
these concerns in the CMBS market, and if so, how?
A.13. Treasury and the Federal Reserve continue to monitor the
market impact of the COVID-19 pandemic on commercial real
estate borrowers, including those whose loans are in CMBS.
Treasury continues to work with the Federal Reserve to assess
the efficacy of existing facilities established under the
Federal Reserve's 13(3) emergency lending authority, and will
evaluate appropriate changes necessary to promote the flow of
credit and support a robust economic recovery.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM STEVEN T. MNUCHIN
Q.1. Tribes have experienced a number of issues so far with the
Coronavirus Relief Fund including questions about the formula,
data breaches, and lack of clarity on guidance.
How will you ensure Tribes have the guidance they need to
respond to community needs using Tribal Coronavirus Relief
funds in the coming months?
A.1. Treasury has worked closely with tribes throughout the
application process. Prior to and during the first round of
funding, Treasury and BIA held two joint tribal consultations
and provided a written comments period from March 31, 2020,
through April 13, 2020. Treasury also held discussions with
Native American associations and tribal financial experts to
consider a process that would be familiar to tribes, and
provide verifiable and objective information.
Treasury has provided extensive guidance in response to
requests from tribes for clarification as to the permissible
uses of CRF funds.
Q.2. What measures has Treasury put in place to prevent another
Tribal Coronavirus Relief data breach from occurring again?
A.2. Treasury will endeavor to continue to only provide data
with those essential to implementing Title V of the CARES Act
within their official duties.
Q.3. Recent data on the availability of credit suggests that it
has not been this difficult to obtain a mortgage since 2014,
and constraints on the availability of credit are particularly
acute for borrowers of non-QM loans and jumbo loans. Because
these mortgages are frequently packaged and sold as residential
mortgage-backed securities (RMBS) to private investors, the
recent illiquidity in secondary market private RMBS exacerbates
the lack of funding for such mortgages.
Non-agency RMBS is the largest asset class by volume within
all ABS, comprising approximately 30 percent of the market, but
is one of the few asset classes which is not currently eligible
under the Term Asset-backed Lending Facility (TALF) program.
Are there plans to allow AAA RMBS securities as eligible
collateral under TALF?
As many States move forward with reopening, Montana being
one of them, what assistance and guidance are you providing
PHAs in regards to reopening?
Would jumbo AAA RMBS and non-QM RMBS be eligible? Would
other sub asset classes--such as reperforming loans for
borrowers coming off a credit event--be eligible as well?
What support can Treasury lend to the Fed under TALF to
support the housing market so that financing is available for
self-employed or nontraditional borrowers who rely on non-QM
mortgages, or to borrowers who live in high-cost areas who rely
on jumbo financing?
What metrics will you use in making these determinations?
A.3. Treasury and the Federal Reserve are actively monitoring
the mortgage market and the associated impact of COVID-19. We
have focused considerable resources on delivering authorized
support to households and businesses struggling as a
consequence of the necessary public health response. Treasury
will continue to monitor the market, including the residential
mortgage lending market. Treasury continues to work with the
Federal Reserve to assess the efficacy of existing facilities
established under the Federal Reserve's 13(3) emergency lending
authority, and will evaluate appropriate changes necessary to
promote the flow of credit and support a robust economic
recovery. No decision has been taken to expand the eligible
collateral for TALF at this time.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM STEVEN T. MNUCHIN
Q.1. Airline Assistance--The CARES Act provided $50 billion in
taxpayer funds to assist passenger airlines. The CARES Act
specifies that, as a condition of receiving financial
assistance, carriers must ``refrain from conducting involuntary
furloughs or reducing pay rates and benefits until September
30, 2020.'' A small number of carriers, including Delta Air
Lines, have received financial assistance and subsequently cut
the hours of full-time workers. Why has Treasury taken no
action against companies that accepted payroll assistance and
then cut worker hours, thereby reducing take home pay for
workers?
A.1. Treasury incorporated the requirements of the CARES Act
into a PSP agreement that must be executed by each PSP
recipient and Treasury. Each PSP agreement reflects the
requirements in section 4114(a) of the CARES Act, which
prohibits recipients from ``conducting involuntary furloughs or
reducing pay rates and benefits until September 30, 2020.''
Treasury has also imposed reporting requirements to enable it
to monitor PSP recipients' compliance with the PSP agreements,
and each recipient is required to provide quarterly
certifications that it is in compliance with the terms and
conditions of the agreement. The agreement also makes clear
that PSP funds must be used exclusively to continue paying
employee salaries, wages, and benefits-the funds may not be
used for any other purpose.
Q.2. Treasury has issued guidance in a series of Q&A documents
that clarify the Department's view of how carriers and
contractors can comply with many terms of the payroll
assistance program, including the rules on stock buybacks,
dividends, and executive compensation. That guidance states
that the assistance is ``intended to preserve aviation jobs and
compensate air carrier industry workers by providing
continuation of payment of employee wages, salaries, and
benefits.'' However, even after public reports have emerged
that some carriers have begun cutting hours of workers,
Treasury has not issued guidance on whether cutting employee
hours or mandating unpaid time off for employees violates the
CARES Act. Does the Treasury Department plan to issue guidance
regarding whether cutting employee hours violates Section 4114
of the CARES Act for airlines receiving financial assistance
under the payroll relief provisions? If yes, when will you
release this guidance? If no, why not?
A.2. Treasury incorporated the requirements of the CARES Act
into a PSP agreement that must be executed by each PSP
recipient and Treasury. Each PSP agreement reflects the
requirements in section 4114(a) of the CARES Act, which
prohibits recipients from ``conducting involuntary furloughs or
reducing pay rates and benefits until September 30, 2020.''
Treasury has also imposed reporting requirements to enable it
to monitor PSP recipients' compliance with the PSP agreements,
and each recipient is required to provide quarterly
certifications that it is in compliance with the terms and
conditions of the agreement. The agreement also makes clear
that PSP funds must be used exclusively to continue paying
employee salaries, wages, and benefits--the funds may not be
used for any other purpose.
Q.3. Have you, or any person in the Treasury Department,
consulted with any representatives of Delta Air Lines regarding
compliance with Section 4114 of the CARES Act, and did Treasury
Department provide Delta Air Lines with any guidance regarding
complying with CARES Act provisions? If so, when did this take
place, who was involved, and what guidance was provided?
A.3. Treasury has not provided guidance to Delta Air Lines
regarding compliance with the CARES Act's prohibition on
involuntary furloughs or reducing pay rates and benefits, other
than Treasury's publicly issued guidance and the requirements
set forth in the PSP agreement.
Q.4. Did any airline receiving financial assistance for payroll
relief under the CARES Act seek guidance from the Treasury
Department regarding whether reducing employee hours, or
implementing unpaid mandatory time off, complies with Section
4114 of the CARES Act? Did anyone at Treasury provide that
guidance? If so, when did this take place, who was involved,
and what guidance was provided?
A.4. The guidance Treasury has provide regarding compliance
with section 4114 of the CARES Act is set forth in the terms of
the PSP agreement and in the guidance documents that Treasury
has publicly issued.
Q.5. CARES Act Oversight--Will you commit to provide the
Congressional Oversight Commission with any documents or
materials it requests in a timely manner?
A.5. We have dedicated teams of people working around the clock
responding to near-daily requests from Congress and six
oversight bodies, including the Congressional Oversight
Commission, related to either the CARES Act or the COVID-19
pandemic more generally. Treasury is and will continue working
with the Congressional Oversight Commission to timely
accommodate the Commission's interests, including by providing
documents and materials in a manner consistent with the
Executive Branch's constitutional tradition of accommodation
among our branches.
Q.6. Will you commit to provide the Special Inspector General
for Pandemic Relief with any documents or materials he requests
in a timely manner?
A.6. We have dedicated teams of people working around the clock
responding to near-daily requests from Congress and six
oversight bodies, including the Special Inspector General for
Pandemic Relief (SIGPR), related to either the CARES Act or the
COVID-19 pandemic more generally. Treasury is and will continue
working with the SIGPR to ensure that office has access to the
information necessary to fulfill its obligations under the law.
Q.7. Will you commit to provide the Pandemic Response
Accountability Committee with any documents or materials it
requests in a timely manner?
A.7. We have dedicated teams of people working around the clock
responding to near-daily requests from Congress and six
oversight bodies, including the Pandemic Response
Accountability Committee (PRAC), related to either the CARES
Act or the COVID-19 pandemic more generally. Treasury has
worked diligently to accommodate oversight needs from all of
our oversight bodies, including the PRAC, and will continue to
provide information to accommodate their various interests
related to the CARES Act.
Q.8. Will you commit to submit to the Senate Banking Committee
majority and minority a weekly list of any instances in which
you have denied the Special Inspector General for Pandemic
Relief or the Pandemic Relief Accountability Committee
information in the course of their oversight?
A.8. We have dedicated teams of people working around the clock
responding to near-daily requests from Congress and six
oversight bodies, including the Special Inspector General for
Pandemic Relief and PRAC, related to either the CARES Act or
the COVID-19 pandemic more generally. Treasury has worked
diligently to accommodate oversight needs from all of our
oversight bodies. Treasury will work with the Senate Banking
Committee to timely accommodate requests by the Committee in a
manner consistent with the Executive Branch's constitutional
tradition of accommodation among our branches.
Q.9. Will you commit to requiring companies that participate in
lending facilities backstopped with CARES Act money to disclose
detailed information regarding how they use this financial
assistance?
Will you commit to requiring companies to disclose
compensation and workforce data, including the mean, median,
and minimum wages of all non-executive employees; the number of
workers before and after the receipt of assistance; and the
salaries of executives, including bonuses and capital
distributions?
Will you commit to making this information public?
A.9. Treasury is committed to transparency when implementing
the CARES Act provisions. Among other voluntary measures,
Treasury and SBA agreed with the bipartisan leaders of the U.S.
Senate Small Business Committee to make public additional data
regarding PPP, ensuring that the interests of both transparency
and protections for small businesses are served. Treasury has
also implemented transparency measures for the Payroll Support
Program, including making available online a list of
participants, with amounts of assistance provided and, where
applicable, financial instruments provided to the Federal
Government as appropriate compensation for the provision of
financial assistance. Further, the Federal Reserve Board is
reporting substantial amounts of information on a monthly basis
for the liquidity and lending facilities using CARES Act
funding, including the:
Names and details of participants in each facility;
Amounts borrowed and interest rate charged; and
Overall costs, revenues, and fees for each
facility.
Treasury will continue to work to ensure they fulfill their
statutory reporting requirements, and will continue
administering the programs Congress provided for under the
CARES Act in a manner consistent with the text of the statute,
which was the result of earnest bipartisan negotiations that
resulted in overwhelmingly bipartisan support in both the House
and the Senate.
Q.10 Conflicts of Interest--Please describe how are you working
with the Treasury Department ethics officials to address and
manage or to prohibit conflicts of interest that may arise in
connection with the Administration and execution of the
authorities provided under the CARES Act?
A.10. The Department has a robust ethics program, which I fully
support. Department ethics officials acted swiftly to educate
employees on potential conflicts of interests that could arise
from changes to or expansion of their official duties due to
implementation of the CARES Act. This included the provision of
general and targeted advice on the criminal conflict of
interest statute, 18 U.S.C. 208, the impartiality and misuse
of position provisions of the Standards of Ethical Conduct for
Employees of the Executive Branch, 5 CFR part 2635, subparts E
and G, and the Ethics Pledge, EO 13770.
Q.11. How is the Treasury Department prohibiting or addressing
conflicts arising in the selection or hiring of contractors or
advisors?
A.11. Department ethics officials have been involved in the
provision of ethics advice to prospective and new employees and
detailees with CARES Act implementation responsibilities, with
the aim of detecting facially problematic ethics issues prior
to appointment or assignment, so that critical CARES Act work
could be readily accomplished. Employees involved in the
selection or hiring of contractors have also received guidance
on the criminal conflict of interest statute, 18 U.S.C. 208,
and the impartiality provisions of the Standards of Ethical
Conduct for Employees of the Executive Branch, 5 CFR part 2635,
subpart E.
Q.12. How is the Treasury Department prohibiting or addressing
conflicts arising in the management, administration, or
distribution of funds, grants, loans, loan guarantees, or other
investments authorized under Section 4003 of the CARES Act?
A.12. All Treasury employees who work on CARES Act
implementation duties, including under Section 4003, are
expected to comply with the criminal conflicts of interest
statute, the Standards of Ethical Conduct, the Ethics Pledge
(as applicable), and other ethics laws and regulations.
Department ethics officials have educated employees on the
need to remain vigilant for potential conflicts arising from
new or expanded duties and have provided individual ethics
advice to employees. Treasury ethics officials remain as a
resource to employees on all ethics matters.
Q.13. Please describe any post-employment restrictions or
guidelines beyond 18 U.S.C. 207 the Treasury Department is
implementing to safeguard against conflicts and to ensure
Treasury Department employees and officials are administering
the CARES Act without regard to future employment
opportunities.
A.13. The Department has not issued restrictions or guidance
beyond 18 U.S.C. 207 and the Ethics Pledge with respect to
post Federal employment activities. Employees seeking or
negotiating for non-Federal employment, or who otherwise have
an arrangement concerning prospective employment, must abide by
the recusal and other requirements in the conflicts statute, 18
U.S.C. 208, the Standards of Ethical Conduct, 5 CFR part 2635,
subparts D and F, and the STOCK Act.
Q.14. After your term as Secretary, will you commit not to work
for--or accept compensation from--any company with which you
made a loans, loan guarantee, and other investment authorized
under Section 4003 of the CARES Act?
A.14. After my term as Secretary, I will abide by the
restrictions in 18 U.S.C. 207 and the Ethics Pledge.
Q.15. Will you commit to not make any loans, loan guarantee,
and other investment authorized under Section 4003 of the CARES
Act to any company with which you have a personal financial
interest?
A.15. During my term as Secretary, I will abide by all
applicable ethics laws and regulations, the terms of my Ethics
Agreement, and the conflicts of interest provisions of the
CARES Act. I will seek guidance from Treasury ethics officials
should any potential conflict of interest arise.
Q.16. Lobbying--Will you commit to monthly, public disclosures
of all lobbying related to CARES Act spending or lending?
A.16. Treasury has been following and will continue to follow
applicable law regarding contact with the public related to the
CARES Act.
Q.17. Please provide a list of all lobbying contacts between
any political appointee at the Treasury Department and any
company seeking funds or loans made available under the CARES
Act, including:
Date of contact,
Names of Treasury Department officials receiving the
contact,
Name of entity making the contact, and
Any electronic or physicals documents or communications
related to such lobbying contacts.
A.17. Treasury has been following and will continue to follow
applicable law regarding contact with the public related to the
CARES Act.
Q.18. Will you commit to restrict any future CARES Act-related
lobbying activity to public, written submissions and prohibit
closed door meetings and phone calls between Treasury
Department officials and companies seeking relief (beyond
general policy clarification)?
A.18. Treasury has been following and will continue to follow
applicable law regarding contact with the public related to the
CARES Act.
Q.19. Whistleblowers and Other Issues--Will you commit to take
no retaliatory action against any whistleblowers at the
Treasury Department (including any contractors or employees of
contractors) who attempt to report waste, fraud, corruption, or
abuse or be victims of misconduct?
A.19. The Department is aware of its responsibilities under the
Whistleblower Protection Act and other relevant laws and takes
its compliance obligations seriously.
Q.20. How will you ensure that taxpayer money received by
companies won't be shifted into tax havens, eroding our tax
base and further deepening our debt?
A.20. Treasury is administering the programs Congress provided
for under the CARES Act in a manner consistent with the text of
the statute, which was the result of earnest bipartisan
negotiations that resulted in overwhelmingly bipartisan support
in both the House and the Senate.
Q.21. Student Loans--The Department of Education has been
subject to scrutiny by members of congress and litigation
brought by individual borrowers due to its repeated illegal
garnishment of student loan borrowers' wages in violation of
the CARES Act. \1\ The Treasury Department, as the
administrator of the Debt Collection Improvement Act and the
Treasury Offset Program, as well as the recipient of all funds
collected through Administrative Wage Garnishment (AWG), has
played a key role in this scandal. Please answer the following
questions regarding the status of borrowers and their debts as
of March 13, 2020, broken down by account assigned to each
private collection agency:
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\1\ https://www.booker.senate.gov/news/press/sen-booker-rep-
pressley-lead-colleagues-in-rebuking-administration-for-unlawful-wage-
garnishment
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How many borrowers were under an AWG order when the stop
collections order went into effect? Please provide demographic
breakdowns by the State, county, age, race, and gender of
borrowers.
How many borrowers were making payments under AWG when the
stop collections order went into effect? Please provide
demographic breakdowns by State, county, age, race and gender
of borrowers.
What was the total debt volume of these borrowers under an
AWG order when the stop collections order went into effect?
What was the average dollar amount garnished from
borrowers' wages (please provide this amount per month and per
pay period, if available) under the AWG orders then in effect?
A.21. The Department of Education manages all aspects of AWG to
collect its student loans. Fiscal Service does not conduct AWG
to collect the Department of Education's student loan debts and
has no information on which student loan borrowers are subject
to wage garnishment.
Q.22. Please provide a week-by-week analysis of the following
question about the total amount of money collected through an
AWG order after the stop collections order went into effect,
beginning March 13, 2020 through the date these responses are
provided [broken up by accounts assigned to each private
collection agency]:
What is the total amount of payments that have been
received by the Department of Treasury under an AWG order since
the stop collections order began?
What is the total number of borrowers that the Department
of Treasury has received garnished wages from since the stop
collections order began?
A.22. Fiscal Service does not conduct AWG to collect student
loan debts and has no information regarding payments received
as a result of the Department of Education garnishing wages.
Q.23. According to the Department of Education's FAQs published
on April 1, 2020, borrowers who have had their wages improperly
garnished after March 13, 2020 will see a refund of those
monies. Please provide a week-by-week analysis of the following
questions about refunds returned to borrowers by the Department
of Treasury as a result of improper garnishments after the stop
collection order, beginning March 13, 2020 through the date
these responses are provided [broken up by private collection
agencies]:
How many borrowers were issued refunds?
What was the total dollar amount of refunds issued to
borrowers?
What is the average time it took for each refund to be
issued after the Department of Education received payments made
by employers?
How many borrowers have claimed their refunds either
through a deposited check or direct deposit into a bank
account?
What is the number of borrowers and the total dollar amount
of unclaimed refunds issued to borrowers?
A.23. Federal agencies determine if any funds in their
possession need to be refunded. Fiscal Service's role in the
process is limited to disbursing any such funds pursuant to the
certification that the Federal agency provides when it requests
disbursement. In that capacity, Fiscal Service has limited
information regarding the underlying purpose for the payment
and has no means of determining whether a certified payment is
for the purpose of refunding monies. Only the Department of
Education can provide information regarding any refunds it has
made.
Q.24. Please provide any guidance the Department of Treasury
has provided to the Department of Education and/or employers
regarding the suspension of AWG?
A.24. Fiscal Service conducts AWG and other debt collection
actions on behalf of several Federal agencies through its
Cross-Servicing Program. The Department of Education does not
refer debts to the Cross-Servicing Program, and Fiscal Service
has provided no guidance to it regarding suspension of AWG.
With regard to other Federal agencies, Fiscal Service has
advised that it will suspend all collection tools, to include
AWG, if a Federal agency makes its own independent
determination that it has the authority to suspend the laws and
regulations governing collection of its debts, including the
relevant portions of the Federal Claims Collection Standards
(31 CFR Parts 900-904).
Q.25. Climate Change--Earlier this year, the Canadian
government announced a program to provide financing for
businesses in response to the ongoing novel coronavirus 2019
disease (COVID-19) pandemic. As one of the conditions for
receiving funds, Canada is requiring that companies receiving
assistance under this program ``commit to publish annual
climate-related disclosure reports consistent with the
Financial Stability Board's Task Force on Climate-related
Financial Disclosures, including how their future operations
will support environmental sustainability and national climate
goals.'' \2\
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\2\ Justin Trudeau, Prime Minister of Canada, ``Prime Minister
announces additional support for businesses to help save Canadian
jobs'', press release, May 11, 2020, https://pm.gc.ca/en/news/news-
releases/2020/05/11/prime-minister-announces-additional-support-
businesses-help-save.
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Despite the significant economic impacts of the climate
crisis, \3\ ``U.S. regulators have been slow to respond to the
threats that a warming planet can pose to financial assets.''
\4\ Would you support requiring major corporations to disclose
climate-related risks so investors and the public can
accurately assess climate-related threats as a condition for
receiving Federal bailout funds?
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\3\ New York Times, ``Climate Change's Giant Impact on the
Economy: 4 Key Issues,'' Neil Irwin, January 17, 2019, https://
www.nytimes.com/2019/01/17/upshot/how-to-think-about-the-costs-of-
climate-change.html; Brookings Institution, ``Ten facts about the
economics of climate change and climate policy,'' Ryan Nunn, Jimmy
O'Donnell, Jay Shambaugh, Lawrence Goulder, Charles Kolstad, and
Xianling Long, October 23, 2019, https://www.brookings.edu/research/
ten-facts-about-the-economics-of-climate-change-and-climate-policy/.
\4\ Reuters, ``U.S. regulator homes in on climate risks to U.S.
markets,'' Ann Saphir, December 11, 2019, https://www.reuters.com/
article/us-climate-change-market-risks/u-s-regulator-homes-in-on-
climate-risks-to-u-s-markets-idUSKBN1YF2D5.
A.25. Treasury is administering the programs Congress provided
for under the CARES Act in a manner consistent with the text of
the statute, which was the result of earnest bipartisan
negotiations that resulted in overwhelmingly bipartisan support
in both the House and the Senate. With respect to the CARES Act
programs that Treasury administers, Treasury is committed to
ensuring that participating businesses comply with all of their
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statutory reporting requirements.
Q.26. Recent studies estimate that climate change may cause
``permanent damage that would far eclipse the scale of the
2007-2008 financial crisis.'' \5\ A 2018 report by 13 Federal
agencies also found that without significant climate action, as
much as ten percent of the American economy may be wiped out by
2100. \6\ Additionally, a separate report argued climate change
may lead to tens of trillions of dollars in global damages and
will ``universally hurt worker health and productivity.'' \7\
Meanwhile, the Trump administration has exacerbated the climate
crisis by weakening safeguards on air pollution, emissions,
fossil fuel extraction, and more. \8\ According to government
data, these changes may cause thousands of more premature
deaths across the country. \9\
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\5\ Center for American Progress, ``Climate Change Threatens the
Stability of the Financial System,'' Gregg Gelzinis and Graham Steele,
November 21, 2019, https://www.americanprogress.org/issues/economy/
reports/2019/11/21/477190/climate-change-threatens-stability-financial-
system/.
\6\ New York Times, ``U.S. Climate Report Warns of Damaged
Environment and Shrinking Economy,'' Coral Davenport and Kendra Pierre-
Louis, November 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html; U.S. Global Change Research Program, ``Fourth
National Climate Assessment,'' November 23, 2018, https://
nca2018.globalchange.gov/.
\7\ Moody's Analytics, ``The Economic Implications of Climate
Change,'' Chris Lafakis, Laura Ratz, Emily Fazio, and Maria Cosma, June
2019, https://www.moodysanalytics.com/-/media/article/2019/economic-
implications-of-climate-change.pdf.
\8\ New York Times, ``The Trump Administration Is Reversing Nearly
100 Environmental Rules. Here's the Full List.,'' Nadja Popovich, Livia
Albeck-Ripka, and Kendra Pierre-Louis, May 6, 2020, https://
www.nytimes.com/interactive/2020/climate/trump-environment-
rollbacks.html.
\9\ New York Times, ``Cost of New E.P.A. Coal Rules: Up to 1,400
More Deaths a Year,'' Lisa Friedman, August 21, 2018, https://
www.nytimes.com/2018/08/21/climate/epa-coal-pollution-deaths.html.
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News reports show that you have ``cast doubt about climate
policies that [you believe] could inhibit growth and under
[your] watch the Treasury Department has rejected policies. to
fight climate change'' and that during your tenure, ``the Trump
administration has systematically disengaged the Treasury
Department from all aspects of addressing climate change.''
\10\ Additionally, while you have been Treasury Secretary, the
Administration ``eliminated the agency's Office of Environment
and Energy, reassigning its staff elsewhere within the Treasury
Department.'' \11\
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\10\ New York Times, ``Finance Ministers Grapple Over Economic
Threat of Climate Change,'' Alan Rappeport and Lisa Friedman, February
23, 2020, https://www.nytimes.com/2020/02/23/us/politics/g20-climate-
change.html.
\11\ Id.
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Please describe how the Treasury Department is
incorporating climate-related economic risks in financial
regulations. Please describe how the Trump administration's
rollbacks of environmental regulations are affecting economic
and financial stability.
Please describe the rationale for eliminating the Office of
Environment and Energy. Please describe how the Treasury
Department is meeting the functions of the Office of
Environment and Energy after its elimination.
A.26. Treasury is not a financial regulator and therefore is
unable to incorporate climate-related economic risks in
financial regulations.
Q.27. In the third quarter of 2019, oil and gas companies were
responsible for 91 percent of defaulted U.S. corporate debt.
\12\ Thirty-seven oil companies received over $1.9 billion in
tax benefits by using a provision in the Coronavirus Aid,
Relief, and Economic Security (CARES) Act. For example,
Marathon received a $411 million benefit, and Occidental
expects to receive $195 million because of a carryback
provision. \13\
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\12\ New York Times, ``Coronavirus May Kill Our Fracking Fever
Dream,'' opinion, Bethany McLean, April 10, 2020, https://
www.nytimes.com/2020/04/10/opinion/sunday/coronavirus-texas-fracking-
layoffs.html.
\13\ Bloomberg, ``1A`Stealth Bailout' Shovels Millions of Dollars
to Oil Companies'', Jennifer Dlouhy, May 15, 2020, https://
www.bloomberg.com/news/articles/2020-05-15/-stealth-bailout-shovels-
millions-of-dollars-to-oil-companies?sref=L459Uwzi.
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How will the Department of the Treasury ensure the long-
term stability of the U.S. energy and financial systems?
A.27. In April, at the direction of the President, Secretary
Mnuchin and Energy Secretary Brouillette began working together
to consider ways in which to support the oil and gas sector and
the many thousands of hardworking Americans it employs.
Although the U.S. energy industry is of critical and strategic
importance to the U.S. economy, and U.S. energy independence is
a key policy priority of the Administration, Secretary Mnuchin
was clear in stating that any such support must not be a
``bailout'' and-unless specifically directed otherwise by
Congress-should be available under terms that are consistent
with the CARES Act and broadly applicable to all businesses and
industries across the U.S. economy.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM STEVEN T. MNUCHIN
Q.1. I have heard reports that small businesses in Hawaii are
cancelling their PPP loans because the rules that the SBA and
Treasury imposed have undermined the usefulness of these loans.
By requiring that 75 percent of PPP funds go to payroll, small
businesses in high cost cities like Honolulu can't cover their
rent with the remaining 25 percent of the funds. Without the
ability to pay their rent, they can't stay in business. This 75
percent requirement is an arbitrary one-size-fits-all standard
that works against the purpose of the program of helping small
businesses stay in business.
Will you consider removing that new requirement of the
program?
A.1. Treasury has posted to its website a series of documents,
including interim final rules that implement the PPP, a set of
frequently asked questions, fact sheets, program reports, and
other documents to address specific lender and borrower
questions about eligibility and the application and forgiveness
process, among other topics. This includes guidance to reflect
the PPP Flexibility Act's amendments to the PPP, including by
lowering the requirements that 75 percent of a borrower's loan
proceeds must be used for payroll costs and that 75 percent of
the loan forgiveness amount must have been spent on payroll
costs to 60 percent for each of these requirements. If a
borrower uses less than 60 percent of the loan amount for
payroll costs during the forgiveness covered period, the
borrower will continue to be eligible for partial loan
forgiveness, subject to at least 60 percent of the loan
forgiveness amount having been used for payroll costs. Treasury
and the SBA will continue to provide additional guidance, as
appropriate, to help small businesses and other eligible
borrowers get the assistance they need.
Q.2. According to a Census survey, a third of small businesses
think it will take longer than 6 months for their businesses to
recover. And Fed Chair Powell has said it could take a year for
the economy to gain momentum again. While the CARES Act
envisioned that any outstanding PPP loans could be repaid over
a ten-year period, Treasury and the SBA set the term at two
years.
Do you think 2 years may be too short given the likelihood
that some industries may take longer to recover? (For example,
travel, tourism, live events, etc. may take much longer to
recover)
Would you consider lengthening the repayment period,
particularly for businesses in particularly hard-hit
industries?
A.2. Treasury has posted to its website a series of documents,
including interim final rules that implement the PPP, a set of
frequently asked questions, fact sheets, program reports, and
other documents to address specific lender and borrower
questions about eligibility and the application and forgiveness
process, among other topics. This includes guidance to reflect
the PPP Flexibility Act's amendments to the PPP, including by
increasing to five years the maturity of PPP loans that are
approved by SBA (based on the date SBA assigns a loan number)
on or after June 5, 2020.
Q.3. Treasury and the SBA also imposed a requirement that
businesses expend their PPP loan as soon as it is disbursed,
rather than allowing businesses to choose their 8-week period,
as long as it ended before June 30th. As a result, small
businesses that had already laid off their workers scrambled to
rehire people as soon as their loan was disbursed. If they had
trouble finding people to rehire, they are now stuck with an
unforgivable loan. If they were able to rehire people, they
will have to lay off these workers again because economic
activity will not sustain full payrolls by the time the 8-week
period is up.
Will you consider loosening this requirement to provide
small businesses with more flexibility to use their PPP loans
in the way that helps them the most?
A.3. Treasury has posted to its website a series of documents,
including interim final rules that implement the PPP, a set of
frequently asked questions, fact sheets, program reports, and
other documents to address specific lender and borrower
questions about eligibility and the application and forgiveness
process, among other topics. This includes guidance to reflect
the PPP Flexibility Act's amendments to the PPP, including by
extending the covered period for loan forgiveness from eight
weeks after the date of loan disbursement to 24 weeks after the
date of loan disbursement, providing substantially greater
flexibility for borrowers to qualify for loan forgiveness.
Borrowers who have already received PPP loans retain the option
to use an 8-week covered period.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR VAN HOLLEN FROM STEVEN T. MNUCHIN
Q.1. Secretary Mnuchin, on May 1, I sent a letter to you and
Administrator Carranza to issue guidance on forgiveness and
also issue a step-by-step guide for borrowers. Without a
clearly defined timeline and process for repayment of the loan,
small business owners and nonprofit organizations do not have
the information necessary to make informed financial decisions
for their businesses or organizations. I have heard from small
businesses owners and nonprofit organizations in Maryland who
have decided to forgo desperately needed assistance because
they do not have this important information.
You recently issued an 11-page application that PPP
borrowers have to fill out to apply for loan forgiveness. I am
concerned however, that the length of this application is too
long, especially for borrowers who took out small loans? I am
also concerned that you have yet to issue formal guidance on
forgiveness. Are you planning on streamlining this application?
When do you plan to issue formal guidance?
A.1. SBA published an EZ version of the forgiveness application
that requires fewer calculations and less documentation for
eligible borrowers. In addition, Treasury has posted to its
website a series of documents, including interim final rules
that implement the PPP, a set of frequently asked questions,
fact sheets, program reports, and other documents to address
specific lender and borrower questions about eligibility and
the application and forgiveness process, among other topics.
This includes guidance to reflect the PPP Flexibility Act's
amendments to the PPP to, among other things, extend the
covered period for loan forgiveness to 24 weeks after the date
of loan disbursement and to lower the percentage of a
borrower's PPP loan proceeds that must be used for payroll
costs. This also includes a set of frequently asked questions
on loan forgiveness. Treasury and the SBA will continue to
provide additional guidance, as appropriate, to help small
businesses and other eligible borrowers get the assistance they
need.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM STEVEN T. MNUCHIN
Q.1. According to Treasury Guidance and FAQ so far, the use of
disbursements will not be subject to other reporting that is
normally requires such as The Federal Funding Accountability
and Transparency Act (FFATA) reporting. However, States have
not seen specific guidance for documentation or reporting for
auditing and management. States have been informed that the
Treasury's Inspector General is involved in determining this
exemption.
When can States expect to see this type of guidance?
A.1. On July 2, 2020, the Treasury Office of the Inspector
General (OIG) released guidance pertaining to the CRF Reporting
and Record Retention Requirements, which was supplemented on
August 29, 2020, with Frequently Asked Questions. We understand
that the Office of Management and Budget expects to have the
final addendum to the 2020 Compliance Supplement published in
the Federal Register by October 31, 2020, which will include
the compliance requirements that auditors need to test and
report on for the CRF.
The Treasury guidance is clear that revenue replacement is
not an eligible use of funds for State and local governments.
However, the guidance included a section that said payments may
be used for economic support in the absence of a stay-at-home
order if deemed necessary by the State. Included was an example
of a grant program to assist small businesses that close in
order to promote social distancing or small businesses that
have reduced customer demand as a result of the COVID-19 public
health emergency.
Q.2. To what extent the grant would be essentially replacing
lost revenue for private businesses?
A.2. Revenue replacement of governments is not permitted given
the statutory requirement that expenditures covered with
payments from the Fund have not been accounted for in the most
recently adopted budget. This requirement does not relate to
small business subrecipients of payments from the Fund.
Q.3. Can you clarify whether assisting small businesses like
this would qualify as an eligible expense?
A.3. Assistance may be provided to small businesses as long as
that assistance complies with Treasury's guidance and is used
for permissible expenditures detailed in the CRF guidance.
Q.4. I led the Nevada Delegation in writing a letter requesting
the Treasury Department and the Federal Reserve to prioritize
loans to businesses uniquely impacted by COVID-19. In Nevada,
our economy relies on our hospitality, gaming, and tourism
employers, and we want to ensure industries bearing the brunt
of the crisis be aided in order to stabilize the marketplace
and preserve American jobs. At the encouragement of the Nevada
delegation and other congressional partners, the SBA reversed
its previously issued guidance to allow for businesses with
gaming revenue to apply for PPP.
Can you commit that otherwise eligible gaming business,
continue to be eligible for the Main Street lending program,
like the SBA PPP program now allows?
A.4. The Main Street Lending Program has used the borrower
eligibility criteria as modified and clarified by SBA
regulations for purposes of the PPP issued on or before April
24, 2020, which include businesses with legal gaming revenue.
Additionally, the Secretary has exercised his authority under
section 4003(c)(3)(A)(iii) of the CARES Act to grant a waiver
from the dividend prohibition in section 4003(c)(3)(A)(ii)(II)
of the CARES Act to permit a tribal business, the ownership
interests of which are wholly or majority owned by one or more
tribal governments, to pay dividends or make equivalent capital
distributions to its tribal government owners. This waiver may
help facilitate Main Street borrowing by tribal gaming
businesses.
Q.5. Chairman Jerome Powell spoke about the difference in
interventions to handle liquidity problems versus those due to
insolvency. For firms where a loan program does not address a
pending insolvency threat, are there warrants or equity stakes
that the government can take in a business to keep it solvent
while ensuring the taxpayers get repaid? If so, how would those
warrants be structured?
A.5. The Main Street Lending Program offers loans to small and
medium-sized businesses and nonprofit organizations that were
in sound financial condition before the COVID-19 pandemic and
have solid post-pandemic prospects to help them maintain
operations until the economy recovers. The program offers a
range of secured and unsecured senior loan options for
borrowers that meet minimum criteria and bank underwriting
standards. Eligible borrowers must certify that they do not
expect to enter into bankruptcy within the 90 days of taking a
Main Street loan. If Main Street borrowers require a
restructuring or workout, the Main Street Special Purpose
Vehicle may agree to reductions in interest (including
capitalized interest), extended amortization schedules and
maturities, and higher priority ``priming'' loans. Main Street
loans are full-recourse loans and are not forgivable. Under
section 4003(d)(3) of the CARES Act, the principal amount of a
Main Street loan cannot be reduced through loan forgiveness. In
addition, under Federal Reserve regulations, the Federal
Reserve cannot provide financing based upon equity stakes.
Q.6. If funds were provided as grants to businesses, what do
you recommend firms provide in return? Would retaining
employment, staying current with taxes and rent and any debt
obligations to appropriate conditions for a grant or equity
stake?
A.6. Funds provided under CARES Act section 4003 take the form
of loans, loan guarantees, and other investments, and may not
be forgiven (section 4003(d)(3)). However, loans, loan
guarantees, and other investments under sub-sections
4003(b)(1), (2), and (3) require that the U.S. government
receive a warrant, equity instrument, or senior debt instrument
for the benefit of taxpayers (section 4003(d)(1)). Businesses
receiving such funds are subject to restrictions on stock
buybacks and payment of dividends and other capital
distributions, may not reduce employment levels by more than 10
percent from the levels on March 24, 2020, and must be U.S.
businesses with significant operations in and a majority of
their employees based in the United States (section
4003(c)(2)). Note that funds provided under CARES Act section
4003(b)(4), including the Main Street Lending Program, are made
available through programs or facilities established by the
Federal Reserve, which does not make grants or take equity
stakes.
Q.7. Does the Treasury Department plan to provide one-time or
ongoing assistance to companies through its programs?
A.7. The Federal Reserve's Main Street Lending Program offers
medium-term loans to small and medium-sized businesses and
nonprofit organizations that were in sound financial condition
before the COVID-19 pandemic to help maintain their operations
until the economy recovers. Borrowers may borrow multiple loans
in any one of the facilities that cumulatively amount to the
aggregate limit of the facility. Main Street will accept loan
participations through the end of the year.
Q.8. What are you doing to build on the experience with other
industry-specific initiatives to help bus carriers? Are bus
companies able to access capital from CARES programs?
A.8. The Main Street Lending Program offers loans to all types
of small and medium-sized businesses that meet the eligibility
criteria, including the motor coach industry, to help maintain
their operations until the economy recovers. This includes
motor coach businesses that were in sound financial condition
before the COVID-19 pandemic and have solid post-pandemic
prospects. Following the submission of over 3,500 public
comments representing a diversity of stakeholders, the Federal
Reserve amended the program's initial terms to expand the
available loan options as well as the pool of businesses
eligible to borrow. The changes to the Main Street Lending
Program were designed to allow an even wider range of American
companies and industries to access the program in order to help
support their workers and operations.
Q.9. Congress expects the Federal Reserve to release names and
other information about participants in the facilities it set
up in response to the CARES Act. I appreciate the steps that
the Federal Reserve has already taken to increase transparency,
such as disclosing borrowers, amount borrowed and what rate of
interest, and the overall costs, revenues, and fees from
various facilities on a monthly basis.
How will you guard against any favoritism or unfairness in
access or terms?
A.9. The Main Street Lending Program purchases loan
participations of eligible borrowers that meet the minimum
criteria and the underwriting criteria of the eligible lenders
that have underwritten the loan. All borrowers and lenders are
required to certify their compliance with the conflict of
interest provisions in section 4019 of the CARES Act, and
lenders are also subject to various statutory and regulatory
requirements aimed at preventing favoritism and unfairness.
Q.10. Does the Treasury plan to release disclosures for other
programs not directly authorized under the CARES Act?
A.10. Treasury will continue to work to ensure they fulfill
their statutory reporting requirements, and will continue
administering the programs Congress provided for under the
CARES Act in a manner consistent with the text of the statute,
which was the result of earnest bipartisan negotiations that
resulted in overwhelmingly bipartisan support in both the House
and the Senate.
Q.11. The CARES Act prohibited companies that receive support
through the Federal Reserve programs that make direct loans
from paying dividends or buying back their own stock until 12
months after the loan is repaid. The CARES Act also imposes
limits on executive compensation for companies that receive
direct loans.
What is your oversight plan to ensure that no dividends are
paid or stocks are purchased and that executive compensation is
capped as Congress intended?
A.11. Under the Main Street Lending Program, Eligible Borrowers
must undertake to comply with the restrictions on dividends,
stock repurchases and compensation. A material breach of these
undertakings would trigger acceleration of the Main Street
loan.
Q.12. The CARES Act permitted the Treasury Department to waive
restrictions on dividends, stock buybacks and executive
compensation. If you waive those prohibitions and limitations
for specific companies, how--and how quickly--will you let
Congress know?
A.12. For the Main Street Lending Program, the Secretary
exercised his authority under section 4003(c)(3)(A)(iii) of the
CARES Act to grant a waiver from the dividend prohibition in
section 4003(c)(3)(A)(ii)(II) to permit a tribal business, the
ownership interests of which are wholly or majority held by one
or more tribal governments, to pay dividends or make equivalent
capital distributions to its tribal government owners. The term
``tribal government'' as used in this Frequently Asked Question
(FAQ) refers to a federally or State recognized Indian tribe
and does not include Alaska Native corporations. The Secretary
immediately notified the committees specified in section
4003(c)(3)(A)(iii), and any future waivers will be notified in
the same manner.
Q.13. The CARES Act restricts Fed financing to ``businesses
that are created or organized in the United States or under the
laws of the United States and that have significant operations
in and a majority of its employees based in the United
States.''
Will you ensure that any company that receives financing is
a U.S.-based company?
A.13. All recipients of funds under section 4003 of the CARES
Act must certify that they are created or organized in the
United States or under the laws of the United States, and have
significant operations in and a majority of their employees
based in the United States. The proceeds of a Main Street loan
may not be used for the benefit of the borrower's foreign
parents, affiliates or subsidiaries, if any.
Q.14. Will you prohibit aid to companies that may have
undergone a tax inversion before, changed its incorporation to
the U.S. recently, or is a U.S. subsidiary of a foreign
company?
A.14. Under the Main Street Lending Program, a borrower may be
a subsidiary of a foreign company, provided that the borrower
itself is created or organized in the United States or under
the laws of the United States, and on a consolidated basis has
significant operations in and a majority of its employees based
in the United States. However, a Main Street borrower that is a
subsidiary of a foreign company must use the proceeds of a Main
Street loan only for the benefit of the borrower, its
consolidated U.S. subsidiaries, and its other affiliates that
are U.S. businesses. The proceeds of a Main Street loan may not
be used for the benefit of any borrower's foreign parents,
affiliates, or subsidiaries.
Q.15. Will Treasury require disclosure of beneficial owners in
order to prevent shell structures?
A.15. Main Street Lending Program lenders require
identification of beneficial owners under existing anti-money
laundering and know your customer rules. In addition, in order
to certify their compliance with the conflict of interest
provisions of CARES Act section 4019, borrowers are required to
determine the beneficial owner of any 5 percent or greater
equity interest in the borrower.
Q.16. I am disappointed by Treasury's handling of tribal
financial data. These are some of the hardest hit communities,
with the most limited capacity to respond to economic
emergencies. Instead of acting expeditiously to get CARES Act
funding out the door, Treasury missed the statutory deadline to
distribute that money, and leaked sensitive financial
information in the process. I'd like to understand why this
happened, and what plans Treasury has to ensure it doesn't
happen again.
Who did Treasury share the Tribal data with?
A.16. When determining the methodology for distribution of CRF
funds to tribal governments, Treasury shared data with those
essential to carrying out the disbursement of CRF funds within
their official duties.
Q.17. For what purposes did the department share that data with
them?
A.17. Treasury shared data only with those essential to
carrying out the disbursement of CRF funds within their
official duties.
Q.18. What kinds of safeguards does Treasury normally have for
handling sensitive or potentially proprietary data?
A.18. As always, Treasury endeavors to protect sensitive or
potentially proprietary data.
Q.19. Why did Treasury ask for these specific data points,
since it appears that they are even going to use the answers
for their CRF formula?
A.19. Treasury requested many data points from tribes with the
intention of determining how to distribute CRF funds.
Q.20. It's imperative that Treasury provide tribes across the
country with the supports they need to take full advantage of
the CARES Act resources. These are some of the hardest hit
communities, with the most limited capacity to respond to
economic emergencies.
Has the Department heard from any Tribes with concerns
about needing guidance on allowable uses? How is the Department
helping with those requests? Are there any ideas from Tribes
that the Department has advised would likely be disallowed?
A.20. Treasury has worked closely with tribes throughout the
application process. Prior to and during the first round of
funding, Treasury and BIA held two joint tribal consultations
and provided a written comment period from March 31, 2020,
through April 13, 2020. Treasury also held discussions with
Native American associations and tribal financial experts to
consider a process that would be familiar to tribes, and
provide verifiable and objective information.
Q.21. Some Tribes have flagged concerns about the requirement
that all funds be spent by the end of the year, especially in
view of the potential for future waves of coronavirus.
Has Treasury heard any similar concerns? Would you be
willing to work with us to expand the flexibility of tribes to
spend those dollars outside of this calendar year if need be?
A.21. The CARES Act stipulates that CRF funds must be used for
unbudgeted expenditures between March 1, 2020 and December 30,
2020 related to COVID-19. A change in statute is required to
extend the date.
Q.22. I'm extremely concerned that the course of action
Treasury and SBA have adopted in the implementation of the
CARES Act has resulted in the near systematic exclusion of
Tribes. The decision to apply the gaming revenue prohibition to
the PPP--which resulted in a majority of Tribal business
concerns being unable to access the entire first tranche of PPP
funding. Then, a decision made for the second PPP tranche that
limited which financial institutions could participate.
Congress clearly intended for PPP to work more with minority
serving financial institutions--including Native CDFIs. Because
Indian Country has significant issues with underbanking, Tribes
and Native businesses often don't have preexisting
relationships with mainstream financial institutions. So, this
agreement was especially important for Indian Country. But, the
decision was made by the Administration to set a PPP asset
limit of $50m--which disqualified MOST Native CDFIs and
effectively shut Native businesses out of the program again.
The asset threshold was later lowered to $10m, but that still
excluded the majority of Native CDFIs. The end result, though,
is there's two rounds of PPP where Tribes have had limited to
no access because of Administrative decisions.
How will you make sure that these sorts of administrative
barriers don't prevent Tribes from accessing COVID-19 economic
recovery resources moving forward?
A.22. Any U.S. federally insured depository institution is an
eligible lender under the Main Street Lending Program, and
gaming businesses have always been eligible for Main Street
loans. In addition, following extensive outreach to tribes,
lenders to tribal businesses, and other stakeholders, the
Secretary granted a waiver allowing Main Street borrowers that
are wholly or partly owned by tribal governments to pay
dividends or other capital distributions to their tribal
government owners, and the Federal Reserve has made clear that
tribal economic enterprises that do not have legal existence
apart from the tribes themselves may nevertheless be eligible
under Main Street. Both of these steps were intended to
facilitate tribal access to the program.
Q.23. Will you commit to making sure the Administration
administers COVID-19 programs in a way that ensures the maximum
possible Tribal inclusion?
A.23. With respect to PPP borrowers, the Secretary shares your
interest in making the PPP available to as many of America's
job creators and their employees as feasible. Treasury has
posted to its website a series of documents, including interim
final rules that implement the PPP, a set of frequently asked
questions, fact sheets, and other documents to address specific
lender and borrower questions about eligibility and the
application process, among other topics. This includes a SBA
interim final rule posted on April 24, 2020, providing that a
business that is otherwise eligible for a PPP loan is not
rendered ineligible due to its receipt of legal gaming
revenues.
With respect to PPP lenders, to further ensure that the PPP
reached all communities in need of relief during the COVID-19
pandemic, SBA, in consultation with Treasury, set aside $10
billion of Round 2 funding to be lent exclusively by CDFIs, in
addition to the statutory set-asides in the PPP and Health Care
Enhancement Act of $30 billion for community financial
institutions and small banks and credit unions and an
additional $30 billion for banks and credit unions with assets
between $10 billion and $50 billion. SBA and Treasury also
considered applications for participation as PPP lenders from
CDFIs and minority-, women-, veteran-, and military-owned
lenders based on factors including those described on SBA Form
3507, including in cases where the lender does not meet all of
the requirements listed on that form. \1\
---------------------------------------------------------------------------
\1\ https://www.sba.gov/funding-programs/loans/coronavirus-relief-
options/paycheck-protection-program.
---------------------------------------------------------------------------
As described in the previous question above, the Secretary
and the Federal Reserve have already taken steps to facilitate
tribal access to the Main Street Lending Program, and welcome
suggestions from stakeholders on how to make the program even
more inclusive.
Q.24. One concern I have is that our minority-owned businesses,
because they often lack some of the traditional lending
relationships, have not been able to access PPP to the extent
that is needed.
Will we be getting PPP data on demographics? Or at least be
able to see how many loans were made in majority-minority
neighborhoods?
A.24. Treasury and SBA have undertaken extensive and ongoing
efforts to encourage lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than 2
years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, CDFIs, MDIs, the
Department of Agriculture, and other stakeholders to ensure
that as many workers and small businesses as possible can
readily participate in the opportunities afforded by this
program, with particular focus on underserved borrowers,
including minorities, women, and rural entrepreneurs. Treasury
and SBA extensively recruited lending institutions that
typically operate in underserved communities to participate as
PPP lenders. An important focus of our efforts to serve
underserved communities has been to harness the role of CDFIs
and MDIs. Hundreds of CDFIs were contacted and advised of their
eligibility to participate in the PPP. As of August 8, 2020,
when the PPP closed to new loan applications, 432 CDFIs and
MDIs had participated and provided 221,000 loans totaling more
than $16.4 billion. The program has resulted in $106 billion
provided to businesses in HUBZones, accounting for more than 20
percent of all PPP funding. Data also show that the loans have
been broadly distributed and made across diverse areas of the
economy, with 27 percent of the funds going to low- and
moderate-income communities, which is in proportion to their
percentage of the population.
Treasury and SBA are committed to implementing the CARES
Act with transparency and accountability. Information regarding
approved PPP loans and program participation is provided on our
websites, including data to help inform your and the public's
understanding of borrower participation, such as the number and
dollar amount of loans, number of loans by amount, distribution
by lender size and type, list of top lenders, average loan
size, and loan distribution across industries and States.
Additionally, SBA has made additional data regarding PPP
loans publicly available in a manner that balances the
interests of transparency with protections for small
businesses, sole proprietors, and independent contractors. SBA
disclosed the business names, addresses, NAICS codes, zip
codes, business types, demographic data, jobs supported, and
loan amount ranges as follows: $150,000-350,000; $350,000-1
million; $1-2 million; $2-5 million; and $5-10 million. These
categories account for nearly 75 percent of the loan dollars
approved. For loans below $150,000, SBA disclosed the specific
loan amounts along with NAICS codes, zip codes, business types,
demographic data, and jobs supported, but no personally
identifiable borrower information.
This approach to public disclosure will allow Americans to
see how their tax dollars are being spent while ensuring that
America's entrepreneurs and job creators are able to compete
fairly as our economy safely reopens. Unlike other SBA loans,
PPP loan amounts are calculated based on payroll data, which
employers typically treat as commercially sensitive or
proprietary. In general, a borrower's specific PPP loan amount
will reveal the borrower's nonpublic payroll information-
including the personal income of independent contractors and
sole proprietors that received PPP loans.
In addition to these public disclosures, SBA worked with
congressional committees and the Government Accountability
Office to provide full access to all PPP loan-level
information--including, but not limited to, all borrower names
and loan amounts--in a manner that afforded appropriate
confidential treatment for nonpublic personally identifiable
and commercially sensitive business information.
Finally, Treasury and SBA are working to gather additional
information on program participants. The PPP Loan Forgiveness
Application Form 3508 and Form 3508EZ both request voluntary
disclosure of veteran status, gender, race, and ethnicity from
loan recipients. I respectfully refer you to SBA for additional
information.
Q.25. On Friday, the Treasury and SBA released an 11-page loan
forgiveness application for the PPP Program with instructions
for how to complete it. This document provides clarity on a
number of issues such as when the 8-week forgiveness period
begins. Oversight of these grants to businesses is essential.
However, we still do not have detailed guidance on how the
program will be administered.
What are the steps for lenders and the SBA to process these
applications?
What system(s) are going to be used to transmit this
information to SBA?
What role will lenders have in the forgiveness process?
Can you provide a timeline of development of the guidance?
Can you provide an update on when clear and full
forgiveness guidance will be issued for small businesses and
lenders?
What can we expect to see in the guidance when it is
released?
What will happen in an instance where the statute is
revised after a borrower has already submitted an application
for forgiveness? How will those applicants be handled?
A.25. Treasury has posted to its website a series of documents,
including interim final rules that implement the PPP, a set of
frequently asked questions, fact sheets, program reports, and
other documents to address specific lender and borrower
questions about eligibility and the application and forgiveness
process, among other topics. This includes guidance to reflect
the PPP Flexibility Act's amendments to the PPP to, among other
things, extend the covered period for loan forgiveness to 24
weeks after the date of loan disbursement and to lower the
percentage of a borrower's PPP loan proceeds that must be used
for payroll costs. This also includes a set of frequently asked
questions on loan forgiveness, as well as a procedural notice
on procedures for lender submission of PPP loan forgiveness
decisions to SBA and SBA loan forgiveness reviews. \2\ In
addition, SBA published an EZ version of the forgiveness
application that requires fewer calculations and less
documentation for eligible borrowers. Treasury and the SBA will
continue to provide additional guidance, as appropriate, to
help small businesses and other eligible borrowers get the
assistance they need.
---------------------------------------------------------------------------
\2\ This includes detail on the financial services technology
provider that SBA has partnered with to make available a secure SaaS
platform to accept loan forgiveness decisions, supporting
documentation, and requests for forgiveness payments.
Q.26. A recent Census report found that three out of four small
businesses have sought financial assistance through the
Paycheck Protection Program.
As you have worked on this program over the last few
months, what have been the major concerns from the small
businesses who are not applying to the program?
What other steps should Congress be looking at to support
businesses for whom PPP was not the best option?
A.26. The Secretary shares your interest in making the PPP
available to as many of America's job creators and their
employees as feasible. Treasury looks forward to working with
you and your staff as you consider additional enhancements to
the program.
Q.27. In the summary reports issued for the separate rounds of
PPP funding, there is a breakdown on the number of
participating lenders based on their asset size (less than
$10B, between $10B and $50B, and over $50B). On the Summary for
the Second Round of funding, there were 148 lenders over $50B
in assets that participated--yet according to the Fed (as of
the end of last year), there were only 38 insured institutions
with consolidated assets over $50B.
What clarity can you provide on the disparity between these
two numbers?
A.27. As of August 8, 2020, when the program closed to new loan
applications, over 5.2 million loans had been approved for more
than $525 billion to borrowers across America. This includes
1.7 million loans for more than $190 billion that had been
approved by 34 lenders with assets over $50 billion.
Q.28. As evidenced by recent DOJ actions, the Paycheck
Protection Program (PPP) has faced increasing challenges
associated with fraud. The increasing rates of fraud have
hindered the program's ability to meet its underlying
objectives to assist small businesses looking to keep employees
on their payroll and prevent rising levels of unemployment. The
program, unwittingly, has created a new avenue for criminals to
perpetrate their frauds against U.S. consumers and small
businesses by attempting to disguise emails, websites and other
communications as coming from legitimate actors or government
entities, when in reality they are coming from nefarious
actors. Frequently, the first step in a fraudster's arsenal to
perpetrate a fraud scheme, such as the schemes that are
impacting the PPP, is to utilize a malicious VPN or other
online anonymizing tools such as bots to mask their true
identity and location. Without sophisticated tools to detect
the use of such devices, VPNs and such tools will continue to
enable fraudsters to perpetrate their crimes without leaving a
trace.
As the Treasury and the Federal Reserve work to bolster
these programs and prevent the increased rates of fraud they're
currently facing, what role will advanced, multisource
geolocation data play in fostering a more effective ID
verification and authentication process, to ensure that the PPP
and similar programs are able to fulfill their intended
objectives, and that these coveted funds reach the hands of the
individuals that need them most?
A.28. I respectfully refer you to the SBA for information on
this issue.
Q.29. The Federal Reserve has used its Section 13(3) authority
to lend to businesses and local governments and other powers to
allocate $2.3 trillion of credit through nine programs, backed
by $215 billion of Treasury funds.
Do you agree with the Congressional Budget Office estimates
that the Fed's programs will not increase the Federal deficit,
because loans that default are likely to be offset by other
loans repaid with interest that result in a net gain for the
government?
A.29. The CBO prepares its estimates under its own statutory
mandate and in a manner that is separate and independent from
the administration of the 13(3) facilities. At this time
Treasury has not evaluated CBO's estimates.
Q.30. We are aware of problems facing borrowers of the
commercial mortgage-backed securities, who are impacted by the
shutdowns of public spaces.
Has Treasury examined problems facing commercial mortgage-
backed securities?
Has Treasury considered using funds to support borrowers of
CMBS?
A.30. Treasury and the Federal Reserve continue to monitor the
market impact of the COVID-19 pandemic on commercial real
estate borrowers, including those whose loans are in commercial
mortgage-backed securities (CMBS). Treasury continues to work
with the Federal Reserve to assess the efficacy of existing
facilities established under the Federal Reserve's 13(3)
emergency lending authority, and will evaluate appropriate
changes necessary to promote the flow of credit and support a
robust economic recovery.
Q.31. Prior to this crisis, the travel industry was coming off
a decade of growth and many travel businesses were in strong
financial shape. Now, due to the travel restrictions, business
closures and quarantines in place across the U.S., travel
businesses have virtually no customers or revenue. The impacts
have been catastrophic
The response by Congress and the Administration has focused
largely on small businesses, which are absolutely vital to the
economy. While 83 percent of travel businesses are small
businesses, more than 50 percent of travel industry workers are
employed by mid- to large-sized businesses with more than 500
employees.
A.31. The Main Street Lending Program offers loans to small and
medium-sized businesses, including in the travel industry, that
were in sound financial condition before the COVID-19 pandemic
and have solid post-pandemic prospects to help maintain their
operations until the economy recovers. The program offers a
range of secured and unsecured senior loan options for
borrowers that meet eligibility criteria and bank underwriting
standards.
Q.32. What type of financial assistance is the Treasury
planning establish for our Nation's nonprofits, like
destination marketing organizations, many of which are
ineligible for programs like PPP under the CARES Act?
A.32. On September 4, the Federal Reserve Bank of Boston
announced that two new Main Street Lending Program loan
facilities for nonprofit organizations are fully operational.
These new facilities are designed to help credit flow to small-
and medium-sized nonprofit organizations that were in sound
financial condition prior to the pandemic and have solid post-
pandemic prospects.
Q.33. The Las Vegas Convention and Visitors Authority is a
quasigovernmental entity that is critical for driving
visitation to Las Vegas. The Authority's funding, which is tied
to local occupancy taxes, has plummeted--jeopardizing its
important mission and forcing it to lay off workers.
Unfortunately, quasigovernmental entities are unable to obtain
financial relief.
What kinds of relief are available for quasigovernmental
entities?
Is there are a way to ensure the Coronavirus Relief Fund
has more flexibility so quasigovernmental entities, like the
Las Vegas Convention and Visitors Authority, can receive
assistance?
A.33. Treasury is willing to discuss this issue with you as the
Department considers further guidance on the use of CRF funds
for quasigovernmental entities.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM STEVEN T. MNUCHIN
Q.1. Economic Impact Payments--As you know, the Internal
Revenue Service (IRS) has been issuing $1,200 Economic Impact
Payments to eligible Americans since April, to help them cope
with the financial effects of the pandemic. However, as of May
15, 2020, the IRS anticipated that 150 million payments still
needed to be sent out. There have been projections that it
could take up to 20 weeks--or 5 months--for all of the paper
checks to be sent.
A.1. As of September 18, 2020, Treasury and the IRS have issued
more than 163 million Economic Impact Payments totaling more
than $273 billion to individuals for whom the IRS has the
necessary information. The IRS and Fiscal Service accelerated
the rate of delivery of Economic Impact Payments to many
eligible Americans by successfully shifting such delivery away
from paper checks and to:
1. Direct deposit through information obtained through the
Get My Payment portal and Non-Filers tool on IRS.gov
(where the taxpayer can input their bank account
information).
2. Debit cards (which are funded electronically).
3. Bank accounts based on information provided by the Bureau
of the Fiscal Service, Social Security Administration,
and the Department of Veterans Affairs.
Q.2. 8.4 million households lack a bank account and 20 million
currently do not have home access to broadband. As a result,
the majority of recipients of paper checks are those that need
it most. What are you doing to ensure Economic Impact Payments
are getting to the most financially vulnerable individuals and
families in the shortest time frame possible?
A.2. The Treasury Department and the IRS initially prioritized
mailing checks to people with lower adjusted gross income
(AGI), starting with individuals with an AGI of less than
$10,000, then mailed checks to individuals with progressively
higher AGI amounts. The Treasury Department and the IRS
continue to conduct a sweeping public awareness campaign to
share information and details about Economic Impact Payments. A
significant goal of these outreach efforts is to reach those
Americans without adequate broadband access to ensure every
individual who is eligible for an Economic Impact Payment
receives their payment.
Q.3. Paycheck Protection Program (PPP) --PPP General: Are the
Treasury and SBA keep track of applicant's approval history for
PPP loans to see if they were denied a loan with different
lenders? If so, please provide that information.
A.3. I respectfully refer you to the SBA for more information.
Q.4. Racial Disparity--What is the Treasury Department and SBA
doing to ensure underserved small businesses in the communities
hardest hit by COVID-19 are recipients of Federal funds? Please
be as specific as possible.
A.4. Treasury and SBA have undertaken extensive and ongoing
efforts to encourage PPP lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than
two years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, CDFIs, MDIs, the
Department of Agriculture, and other stakeholders to ensure
that as many workers and small businesses as possible can
readily participate in the opportunities afforded by this
program, with particular focus on underserved borrowers,
including minorities, women, and rural entrepreneurs. Treasury
and SBA extensively recruited lending institutions that
typically operate in underserved communities to participate as
PPP lenders. An important focus of our efforts to serve
underserved communities has been to harness the role of CDFIs
and MDIs. Hundreds of CDFIs were contacted and advised of their
eligibility to participate in the PPP. As of August 8, 2020,
when the PPP closed to new loan applications, 432 CDFIs and
MDIs had participated and provided 221,000 loans totaling more
than $16.4 billion. The program has resulted in $106 billion
provided to businesses in HUBZones, accounting for more than 20
percent of all PPP funding. Data also show that the loans have
been broadly distributed and made across diverse areas of the
economy, with 27 percent of the funds going to low- and
moderate-income communities, which is in proportion to their
percentage of the population.
Q.5. CDFIs and MDIs--Are the Treasury Department and Federal
Reserve working with CDFIs, including nondepository CDFIs, and
minority depository institutions to help them navigate the PPP
and the PPP Lending Facility so that they can have more success
there? If so, please provide specific steps being taken.
A.5. As noted above, since enactment of the CARES Act, Treasury
and SBA have worked tirelessly and closely with Congress, with
borrowers, and with lenders of all sizes-including regional and
community banks, CDFIs, and MDIs-to ensure the broadest
possible segment of small businesses can access the PPP and to
encourage PPP lending to underserved and rural borrowers.
Treasury and SBA extensively recruited lending institutions
that typically operate in underserved communities to
participate as PPP lenders. An important focus of our efforts
to serve underserved communities has been to harness the role
of CDFIs and MDIs. For example, hundreds of CDFIs were
contacted and advised of their eligibility to participate in
the PPP. Treasury and SBA staff hosted tele-townhall forums
with trade associations representing CDFI lenders to
specifically engage with these lenders and understand how to
better serve their customers in underserved communities.
Guidance was also issued to all lenders, including CDFIs,
asking them to redouble their efforts to assist eligible
borrowers in underserved and disadvantaged communities to
expand economic opportunity. Treasury and SBA worked with the
Federal Reserve to establish the Payroll Protection Program
Liquidity Facility to enable PPP lenders, including both bank
and nonbank lenders as well as CDFIs and MDIs, to pledge PPP
loans to the Federal Reserve as collateral for Federal Reserve
borrowings to enhance lender liquidity and enable PPP lenders
to expand lending capacity. The availability of this liquidity
has greatly benefited nonbank and smaller PPP lenders that lend
to underserved communities and that lend to the smallest
businesses. And, SBA, in consultation with Treasury, set aside
$10 billion of Round 2 funding to be lent exclusively by CDFIs
to further ensure that the PPP reached all communities in need
of relief during the COVID-19 pandemic. Treasury and SBA
participated in a roundtable discussion focusing on MDIs'
experiences as lenders in the PPP, including their work to
serve small businesses in low- and moderate-income communities.
As of August 8, 2020, when the PPP closed to new loan
applications, 308 CDFIs had participated from across the
country, providing over 114,000 loans for more than $7.5
billion.
Q.6. Loan Forgiveness--The first PPP loan disbursements were
more than a month ago, yet Treasury only issued guidance late
Friday on how companies will qualify and apply for loan
forgiveness. Manufacturers and other small businesses still
need clarity so they can ensure they are taking the right steps
to receive full loan forgiveness--as Congress intended. Can you
commit to publicly releasing this week additional plain
language guidance on loan forgiveness procedures for lenders
and small businesses out there?
A.6. Treasury has posted to its website a series of documents,
including interim final rules that implement the PPP, a set of
frequently asked questions, fact sheets, program reports, and
other documents to address specific lender and borrower
questions about eligibility and the application and forgiveness
process, among other topics. This includes guidance to reflect
the PPP Flexibility Act's amendments to the PPP to, among other
things, extend the covered period for loan forgiveness to 24
weeks after the date of loan disbursement and to lower the
percentage of a borrower's PPP loan proceeds that must be used
for payroll costs. This also includes a set of frequently asked
questions on loan forgiveness. In addition, SBA published an EZ
version of the forgiveness application that requires fewer
calculations and less documentation for eligible borrowers.
Treasury and the SBA will continue to provide additional
guidance, as appropriate, to help small businesses and other
eligible borrowers get the assistance they need.
Q.7. Safe Harbor--The SBA and Treasury Department recently
released guidance that small businesses receiving loans for
less than $2 million will automatically be certified as in
``good faith.'' I applaud this decision as it will give small
business owners assurance that the SBA will not audit them
during this stressful time. Is there a process in place to
certify ``good faith'' loans that are above $2 million? What is
the status of the money returned from large corporations during
the first round? Would you be open to designating those funds
to go to lending by CDFIs and MDIs so that underserved
communities benefit from the larger companies returning the
funds?
A.7. On June 1, the SBA issued an interim final rule describing
its loan review procedures and related lender and borrower
responsibilities. Treasury and SBA have also posted guidance on
frequently asked questions on loan forgiveness, as well as on
procedures for lenders' submissions of PPP loan forgiveness
decisions to SBA and SBA loan forgiveness reviews. Treasury and
SBA will continue to provide additional guidance, as
appropriate, to help small businesses and other eligible
borrowers get the assistance they need. Treasury looks forward
to working with you and your staff as you consider additional
enhancements to the program. Treasury respectfully refers you
to SBA for information regarding returned funds.
Q.8. Factoring--I would like to understand why a large number
of small businesses, called factors, with fewer than 500
employees have been denied access to PPP loans.
Factors are being denied on the basis that they are
considered ``lenders'' under U.S. Code 13 CFR 120.110. Factors
purchase existing accounts receivable. They do not lend money.
Further, a recent Federal court decision in Michigan trust
concluded the exclusion violated the CARES Act.
Can you please look into this and address the situation or
explain why factors should not be permitted to participate?
A.8. The Secretary shares your interest in making the PPP
available and accessible to as many of America's job creators
and their employees as feasible. Treasury has posted to its
website a series of documents, including interim final rules
that implement the PPP, a set of frequently asked questions,
fact sheets, program reports, and other documents to address
specific lender and borrower questions about eligibility and
the application and forgiveness process, among other topics.
\1\ Treasury and the SBA will continue to provide additional
guidance, as appropriate, to help small businesses and other
eligible borrowers get the assistance they need.
---------------------------------------------------------------------------
\1\ See https://home.treasury.gov/policy-issues/top-priorities/
cares-act/assistance-for-small-businesses.
Q.9. State and Local Governments--The Treasury Department
issued guidance that States were not allowed to used their
distribution from the Coronavirus Relief Fund to replace lost
revenue. Just as stay-at-home ordinances affects businesses'
revenue, it affects government revenue. Local governments
across Alabama may be forced to lay off police, firefighters
and sanitation workers due decreased revenues that they were
not expecting when approving their budgets.
Would you support in a Covid-4 package allowing States and
local governments to use a portion of the Coronavirus Relief
Fund to cover predetermined expenses like keeping police and
firefighter on the streets and allowing sanitation workers to
pick up our garbage? If not, why, given the negative impact the
repercussions of these layoffs would have on families across
Alabama and other States?
A.9. While Treasury does not allow for CRF dollars to be used
in order to supplement lost revenues, it does allow for CRF
funds to be put towards payroll expenses for public safety,
public health, health care, human services, and similar
employees whose services are substantially dedicated to
mitigating or responding to the COVID-19 public health
emergency.
Q.10. Commercial Mortgage-Backed Securities (CMBS)--Borrowers
of commercial mortgage-backed securities, whose properties have
been shut down by government public safety precautions, are
under undue significant financial hardship because they stuck
between tenants that are not paying and mortgage servicers who
are not offering flexibility. These are owners of hotels,
shopping centers and certain housing entities. They are
extremely worried about their ability to meet their financial
obligations over a protracted time period with no rents coming
in. There is not a clear regulatory framework for CMBS but the
concerns remain. What efforts has the Treasury Department taken
to support those borrowers?
A.10. The Treasury and the Federal Reserve continue to monitor
the market impact of the COVID-19 pandemic on commercial real
estate borrowers, including those whose loans are in CMBS.
Treasury continues to work with the Federal Reserve to assess
the efficacy of existing facilities established under the
Federal Reserve's 13(3) emergency lending authority, and will
evaluate appropriate changes necessary to promote the flow of
credit and support a robust economic recovery.
Q.11. Mortgage Servicers--As you know, the CARES Act limited
assistance to only localities with a population that exceeds
500,000. In Alabama, only Jefferson County met the population
threshold and the funding allocation is limited to ``necessary
expenditures incurred due to the public health emergency,''
At the same time, more that 8 percent of households
nationwide have entered mortgage forbearance. This means that
mortgage servicing companies are now responsible for making the
property taxes, hazard insurance, and homeowners association
dues, and other assessments for 4.7 million mortgages each
month.
These are not an insignificant portion of a borrower's
monthly payment, accounting for 25 percent to 30 percent
depending on the State, and the property type. They are also
vital to the financial stability of my State. Without
additional Federal assistance to local governments in Alabama,
I am very concerned about any delays that may occur in
advancing property taxes payments.
Have you thought about the risks to cities and counties of
a liquidity crunch because of any delay or shortfall in State
and local tax payments due from escrow accounts in the coming
months? Have you considered standing up a liquidity facility
now to help mortgage servicers make these property tax and
insurance advances on behalf of home owners?
A.11. Treasury is actively monitoring the mortgage market and
the associated impact of COVID-19. We have focused considerable
resources on delivering support to households and businesses
struggling as a consequence of the necessary public health
response. Treasury will continue to work to promote stable
markets, including for residential mortgage lending.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH
FROM STEVEN T. MNUCHIN
Q.1. COVID-19 is having a massive impact on Tribes, first
because disparities in health and a shortage of safe, stable
housing mean the virus is more devastating in Tribal
communities. And second, because Tribes made the decision to
voluntarily close their enterprises to protect public health,
they have seen a massive loss of government revenue and also
big peaks in unemployment.
Even today, Tribal governments are still fighting to get
the full $8 billion that Congress intended for them, even as
Treasury has indicated that it plans to allocate some of this
money to Alaska Native corporations, which are for profit
corporations, not Tribal governments.
It's been over 50 days since the CARES Act passed, and
still only 60 percent of the $8 billion has been distributed.
It took Treasury over a month to get a single dollar out the
door. How do you square these delays with the Federal
Government's unique trust and treaty responsibilities to Tribal
nations?
A.1. Treasury has completed making payments to tribal
governments, other than amounts that have not been paid to
Alaska Native corporations pending litigation on that issue.
Q.2. Do you agree that Tribal governments, like their State and
local counterparts, have a unique need for relief funds so they
can provide essential government services to their members?
A.2. Title V of the CARES Act sought to provide relief to
State, territorial, local, and tribal governments by covering
the cost of unbudgeted for expenditures related to the COVID-19
public health emergency.
Treasury guidance clarifies specific expenditures for which
CRF fund recipients can use these funds in accordance with that
statute; in many cases those expenditures relate to essential
government services.
Q.3. We still don't know what exact formula Treasury used to
distribute the first $4.8 billion dollars, and how you plan to
distribute the rest. What formula did you use?
A.3. Please see Tribal Allocation Methodology on Treasury's
website here: https://onect.treasuryecm.gov/--layouts/15/
UniversalCT/pages/CTHome.aspx?Id=2020-SE-5528 and here https://
home.treasury.gov/system/files/136/Tribal-Allocation-
Methodology-for-Second-Distribution.pdf.
Q.4. Will you make public future distribution formulas you are
using to distribute these Tribal Relief Funds? For past and
future allocations? When?
A.4. As with previous methodologies used for the payments of
CRF funds to tribal governments, Treasury intends to include
the methodology for future payments to tribal governments if
such payments may be required in the future.
Q.5. In Minnesota and across the country, people experiencing
homelessness are especially vulnerable to COVID-19. People
living in shelters, or encampments, or in their cars don't have
the most basic thing we all need, a safe place to call home.
Many of them are youth, or moms with children. They don't have
a permanent address, and many of them have not filed a tax
return, so how do they get the direct recovery assistance that
they need so desperately.
Has Treasury done outreach to homeless service providers or
local Continuums of Care and asked them to help identify people
experiencing homelessness and work with them to claim their
payment?
A.5. The Treasury Department and the IRS have conducted
outreach with homeless service providers as well as other
organizations that work closely with the homeless and other
underserved groups. The IRS has made tens of thousands of
contacts with a variety of nonprofits, social service agencies,
State and local organizations, and many others with millions of
members to share information related to Economic Impact
Payments. This includes food banks, faith-based organizations,
and SNAP organizations.
For example, as of June 12, 2020, the IRS has reached out
to more than 4,500 homeless shelters with information on how to
obtain an Economic Impact Payment. The IRS has shared
information with the Department of Housing and Urban
Development, including the Continuum of Care Program, \1\ to
provide information to individuals experiencing homelessness to
assist them in submitting information needed to obtain an
Economic Impact Payment. The IRS will also continue to reach
out to other national organizations dedicated to assisting
these individuals and others who are eligible to receive an
Economic Impact Payment.
---------------------------------------------------------------------------
\1\ See https://www.hud.gov/hudprograms/continuumofcare.
Q.6. The CARES Act required you to conduct a public awareness
campaign on the availability of these payments for non-tax
filers. In late April, the IRS published some promotional
materials encouraging these individuals to sign up at IRS.gov
to receive their payments.
Is this the extent of your public awareness campaign? How
would you expect these individuals to access the Internet when
places like libraries and cafes have been closed by stay-at-
home orders?
A.6. Treasury and the IRS have continued to actively carry out
the public awareness campaign. This is one of the biggest
communications and outreach efforts the IRS has undertaken,
with more than 100 products being created and more taking place
each week in advance of the October 15 deadline to use the Non-
Filers tool. In addition to sharing extensive material with the
news media, social media, and websites, this national public
awareness campaign has included partnering with a wide spectrum
of community and professional groups across the country-with
special emphasis being given to working with organizations that
interact with those who may not normally file a tax return,
including organizations and social service groups that assist
underserved communities. Thousands of these contacts have taken
place, and the IRS has created special tools and products, like
partner kits, to help share information about Economic Impact
Payments to those with-and without-Internet access. As more
areas have reopened, this effort has continued to reach an
increasing number of people.
Q.7. Please describe the full range of steps actions the
Department of Treasury has taken to provide recovery rebate
payments to individuals experiencing homelessness.
A.7. In addition to the outreach efforts described in a
previous question, the IRS has taken special steps to reach
potential organizations nationwide that might assist
individuals experiencing homelessness and share IRS-related
Economic Impact Payment resources with them. The IRS has asked
these organizations to act as a ``trusted partner'' to receive
payments on behalf of their homeless clients. More than 300
organizations agreed when asked by the IRS if they would act as
a ``trusted partner'' allowing homeless persons to use their
physical address to receive an Economic Impact Payment. In
addition, organizations across the country continue to work in
local communities with the homeless and other under-served
communities to share Economic Impact Payment information,
including information on how homeless individuals can provide a
mailing address for a payment. These efforts range from (i)
volunteer efforts at IRS-supported Volunteer Income Tax
Assistance and Tax Counseling for the Elderly sites, as well as
low-income taxpayer clinics; to (ii) sharing information with
social service groups, nonprofits, faith-based institutions,
and an array of Federal, State, and local agencies such as the
Consumer Financial Protection Bureau. Thousands of
organizations have been reached and these efforts continue.
Q.8. Some advocates and members of the homeless community have
suggested that the IRS send checks using the Postal Service's
General Delivery service, which can deliver mail to people
without a permanent address. The IRS has not indicated whether
they would consider this.
What is your view on this proposal? Will you work with the
Postal Service and take advantage of this vitally important
service that many people experiencing homelessness are already
familiar with?
A.8. The Treasury Department and the IRS are considering the
potential effectiveness of partnering with the Postal Service
to leverage its General Delivery service to reach those
Americans experiencing homelessness. Our successful partnership
with the Department of Veterans Affairs has helped ensure that
Veterans and their beneficiaries who receive Federal benefits
receive their Economic Impact Payments automatically and
without additional paperwork. Since the enactment of the CARES
Act, we have continued to explore ways to improve our ability
to deliver this much-needed relief to the American people.
Q.9. Accessing loans under the Paycheck Protection Program has
been a challenge for many business owners, especially for
business owners of color and native businesses, who are less
likely to have a lending relationship with a bank that will
accept their PPP application.
Is it acceptable for the largest banks in the country to be
only processing PPP applications for existing customers, for
most of the time that they were accepting PPP applications?
Should the largest banks in the country, like JPMorgan
Chase, Wells Fargo, Bank of America, and Citi, be allowed to
prioritize PPP loans for some customers over others? Or should
they be processed on a first come, first served basis?
What steps have you taken to ensure all eligible businesses
are able to access PPP loans?
A.9. The Secretary shares your interest in making the PPP
available and accessible to as many of America's job creators
and their employees as feasible. 45 percent of the approved PPP
lending amount was lent by lenders with less than $10 billion
in assets. With an average loan size of approximately $100,000,
the program is serving the smallest of businesses.
Treasury and SBA have undertaken extensive and ongoing
efforts to encourage lending to underserved and rural
borrowers. These efforts have included recruiting lenders that
operate in underserved communities to participate in PPP and
facilitating their approval of PPP loans, as well as educating
underserved borrowers about the opportunities that exist for
them through PPP. Guidance was issued to all lenders asking
them to redouble their efforts to assist eligible borrowers in
underserved and disadvantaged communities. This was done to
ensure that individuals, businesses, and other entities in
underserved and rural markets, including veterans and members
of the military community, small business concerns owned and
controlled by socially and economically disadvantaged
individuals, women, and businesses in operation for less than
two years, all benefited from PPP.
Treasury and SBA have worked closely with Congress,
regional and community banks, fintech lenders, CDFIs, MDIs, the
Department of Agriculture, and other stakeholders to ensure
that as many workers and small businesses as possible can
readily participate in the opportunities afforded by this
program, with particular focus on underserved borrowers,
including minorities, women, and rural entrepreneurs. Treasury
and SBA extensively recruited lending institutions that
typically operate in underserved communities to participate as
PPP lenders. An important focus of our efforts to serve
underserved communities has been to harness the role of CDFIs
and MDIs. Hundreds of CDFIs were contacted and advised of their
eligibility to participate in the PPP. As of August 8, 2020,
when the PPP closed to new loan applications, 432 CDFIs and
MDIs had participated and provided 221,000 loans totaling more
than $16.4 billion. The program has resulted in $106 billion
provided to businesses in HUBZones, accounting for more than 20
percent of all PPP funding. Data also show that the loans have
been broadly distributed and made across diverse areas of the
economy, with 27 percent of the funds going to low- and
moderate-income communities, which is in proportion to their
percentage of the population.
Q.10. In addition, I sent you a letter on May 7 raising several
question about the PPP program, which I repeat below.
What steps are you taking to ensure PPP borrowers are made
fully aware of the requirements of the program, including
requirements to qualify for loan forgiveness?
What, if any, documents are provided to borrowers to
understand the rules of the loan and forgiveness? Are borrowers
required to acknowledge that they understand the program rules
before obtaining a loan?
Is there any requirement for lenders to consider whether
PPP is the best program for borrowers, in comparison to other
economic support options that may be available, before
processing a loan application? Are fees paid to lenders
structured in a way that they incentivize good lending
practices and proper treatment of customers?
What steps are you taking to prepare for the millions of
requests for loan forgiveness that will arise in coming weeks?
What processes have been established to help borrowers
understand how to obtain forgiveness, and when will you publish
final rules on loan forgiveness?
Do you believe lenders be prepared to handle the large
volume of requests that will soon arrive? Are lenders
appropriately incentivized to handle the requests in an
appropriate and timely manner?
A.10. More than 5 million PPP loans were approved by nearly
5,500 lenders, helping to support an estimated 51 million jobs
and more than 80 percent of small business payroll. As of
August 8, 2020, this included over 102,000 PPP loans to
borrowers in Minnesota for more than $11.2 billion. With an
average loan size of approximately $100,000, the program is
serving the smallest of businesses. PPP loans have also been
broadly distributed, with about 27 percent of the funds going
to low and moderate income communities, which is in proportion
to their percentage of the population.
Treasury has posted information to its website to address
specific lender and borrower questions about eligibility and
the application and forgiveness process, among other topics.
This includes guidance to reflect the PPP Flexibility Act's
amendments to the PPP to, among other things, extend the
covered period for loan forgiveness to 24 weeks after the date
of loan disbursement and to lower the percentage of a
borrower's PPP loan proceeds that must be used for payroll
costs. This also includes an SBA Procedural Notice on
procedures for lender submission of PPP loan forgiveness
decisions to SBA and SBA forgiveness loan reviews. Treasury and
SBA will continue to provide additional guidance, as
appropriate, to help small businesses and other eligible
borrowers get the assistance they need.
Q.11. On April 23, I wrote to you to urging that a number of
business types that were previously denied PPP loans be made
eligible for the program. Thank you for heeding my request and
making rural electric cooperatives, agricultural cooperatives,
rural hospitals and Tribal businesses eligible for the program.
The two remaining business types I noted in my letter are small
banks and credit unions, who cannot use PPP loans for their own
operations.
Do you plan to make credit unions and community banks
entities eligible for PPP? Why or why not?
A.11. Treasury and SBA will continue to provide additional
guidance, as appropriate, to help small businesses and other
eligible borrowers get the assistance they need.
Q.12. The CARES Act directed Treasury and the Federal Reserve
to set up a lending program for midsize businesses. You said
you intended to comply with both the letter and the spirit of
the CARES Act.
One provision of the CARES Act says that the Treasury
Secretary ``shall endeavor'' to establish a lending program for
midsize businesses and that any borrower applying for a loan
under the midsize business lending program must certify that
``the recipient will not outsource or offshore jobs for the
term of the loan and 2 years after[wards].''
Yet, when the Fed unveiled the term sheets for the Main
Street Lending Facility, there doesn't seem to be any mention
of a certification for not moving jobs offshore.
Do you think firms getting taxpayer-funded bailout should
be required to keep their jobs in the United States?
Why wasn't this a requirement in your agreement with the
Fed to require firms to agree not to move jobs or production
overseas?
What about other Treasury-Fed lending programs, besides the
midsize business lending program? Don't you think that any firm
receiving a Federal grant or loan should be required to agree
that they won't move jobs offshore?
In what ways did you ``endeavor'' to implement the program
as described in the CARES Act, in keeping with both the spirit
and letter of the law?
Why isn't the offshoring provision required in the Main
Street Lending Program? What steps did you take in an effort to
implement that provision?
Besides the offshoring provision, please describe the steps
you took to comply with both the letter and spirit of Section
4003(c)(3)(D)(i)(I) through (X) of the CARES Act, including why
you ultimately chose to implement each requirement or not.
A.12. The Main Street Lending Program was designed to support
credit provision to U.S. businesses that were in good financial
condition before the COVID-19 crisis to help maintain their
operations and employment until the economy recovers. Main
Street is not a grant program, and the terms of loans under the
program are not intended to be better than market.
Under section 4003(c)(3)(C) of the CARES Act, a borrower
must be ``businesses that are created or organized in the
United States or under the laws of the United States and that
have significant operations in and a majority of its employees
based in the United States.'' An eligible borrower may be,
however, a subsidiary of a foreign company, provided that the
borrower itself is created or organized in the United States or
under the laws of the United States, and the borrower on a
consolidated basis has significant operations in and a majority
of its employees based in the United States. Any borrower that
is a subsidiary of a foreign company must use the proceeds of a
Main Street loan only for the benefit of the borrower, its
consolidated U.S. subsidiaries, and other affiliates of the
borrower that are U.S. businesses. The proceeds of a Main
Street loan may not be used for the benefit of such borrower's
foreign parents, affiliates, or subsidiaries. Main Street
borrowers are also fully subject to the CARES Act's
restrictions on officer and employee compensation, dividend
payments, and stock buybacks.
With respect to Section 4003(c)(3)(D)(i)(I) through (X) of
the CARES Act, we believe that Main Street has fulfilled
Congress's intent to balance support to small- and medium-sized
businesses with guarding taxpayer funds. The program provides
medium-term loans to companies that were in sound financial
condition before the crisis, and have solid post-pandemic
prospects, to bridge the economic disruption caused by the
coronavirus. While economic conditions have improved
considerably since work began on designing Main Street, we have
continued to make changes to the program to address public
comments. We recognize that there remains, nonetheless, a
degree of uncertainty over the short to medium-term impact of
the virus on economic activity, and potential changes that
companies may need to make to be successful in the short and
long-term. In the interim, restricting borrowers' flexibility
to adjust to these challenging times may limit their
sustainability, resulting in increased losses of both jobs and
taxpayer funds. We underscore that recent business surveys have
indicated that there is limited unmet demand for credit.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM STEVEN T. MNUCHIN
Q.1. In Arizona and across the country, COVID-19 harmed many
small business that provide renewable energy and stalled
projects that were near completion but faced pandemic-related
supply chain and employment disruptions. Under existing rules,
if projects are not completed on time they risk losing
eligibility for tax benefits. I was pleased to hear the
Treasury Department was considering extending the continuity
safe harbor for both the production tax credits (PTC) and
energy investment tax credits (ITC) from four to five years for
projects that began construction in 2016 or 2017. I'm asking
Treasury to consider extending continuity safe harbor
protections for all eligible projects from 2016 to the present,
as all have faced COVID-19 related delays and challenges. It is
my hope that the forthcoming guidance will capture projects
that meet either one of the two safe harbor tests, the five
percent investment test, or the begin construction test. Will
the Treasury Department guidance extend ITC safe harbor for all
eligible projects that began between 2016 and the present, that
meet either of the two safe harbor tests?
A.1. Notice 2020-41 \1\7 was issued on May 27, 2020, providing
relief for taxpayers developing PTC and ITC eligible renewable
energy projects by extending the four-year ``continuity safe
harbor'' for certain projects that began construction in 2016
or 2017. The Notice also provides a ``3.5 month safe harbor''
for services or property paid for by the taxpayer on or after
September 16, 2019 and received by October 15, 2020. This
guidance provides taxpayers with flexibility to satisfy the
beginning of construction requirements despite current delays
and disruptions. We will continue to monitor the impact of
COVID-19 on this industry and will consider additional relief
as needed.
---------------------------------------------------------------------------
\1\ See https://www.irs.gov/pub/irs-drop/n-20-41.pdf.
Q.2. On May 5, the Treasury Department finally released $4.8
billion of the $8 billion in the Coronavirus Relief Fund
allocated by the CARES Act for Tribal communities. This
announcement came over a month after Congress passed the CARES
Act with a statutory deadline for these funds to be distributed
to Tribes before 30 legislative days. Unfortunately, three
weeks have gone by and the full amount has still not been
distributed. This is unacceptable. Tribes in Arizona need all
available resources to fight the coronavirus pandemic now. When
will the Treasury Department disburse the total amount of CARES
Act funding to Tribal communities? Do you have any information
on the specifics of the formula that will distribute these
---------------------------------------------------------------------------
funds?
A.2. Treasury has completed making payments to tribal
governments, other than amounts that have not been paid to
Alaska Native corporations pending litigation on that issue.
The distribution methodology can be found on Treasury's website
at https://home.treasury.gov/system/files/136/Coronavirus-
Relief-Fund-Tribal-Allocation-Methodology.pdf and https://
home.treasury.gov/system/files/136/Tribal-Allocation-
Methodology-for-Second-Distribution.pdf.
Q.3. Thousands of hotels have been shuttered due to the COVID-
19 pandemic, with revenues down 80 percent. According to an
American Hotel and Lodging Association survey, only 15 percent
of commercial mortgage-backed security (CMBS) borrowers have
received any kind of forbearance or debt relief from their
servicers. Mass foreclosures in the CMBS market would be
catastrophic to Arizona communities that rely on tourism. What
proposal is the Administration considering to prevent
unprecedented mass foreclosures in the hotel CMBS market?
A.3. Treasury and the Federal Reserve continue to monitor the
market impact of the COVID-19 pandemic on commercial real
estate borrowers, including those whose loans are in CMBS.
Treasury continues to work with the Federal Reserve to assess
the efficacy of existing facilities established under the
Federal Reserve's 13(3) emergency lending authority, and will
evaluate appropriate changes necessary to promote the flow of
credit and support a robust economic recovery.
Q.4. As we continue to combat this pandemic, business owners
are worried about their survival right now and in the coming
weeks and months as our country slowly reopens. Do you believe
that businesses will need an ongoing source of financial
assistance to provide confidence to reopen and rehire as
opposed to one-time debt options?
A.4. Treasury has taken action to provide fast and direct
economic assistance to American workers and their families,
small businesses, and those hit hardest by the COVID-19 global
pandemic. Treasury is monitoring economic conditions closely,
and we look forward to continued discussions with you and your
staff to address critical issues.
Q.5. Per its April 30 guidance, the Federal Reserve ruled that
the Term Asset-Backed Securities Loan Facility (TALF) will not
consider collateral without a credit rating from the highest
investment-grade rating category from a major nationally
recognized statistical rating organizations (NRSROs) as
eligible collateral. Right now, the consumers and small
business owners turning to personal loans are those most in
need of support and access to credit at this difficult time. Is
the Fed considering approving investment-grade personal loans
as eligible collateral under TALF to ensure that these American
consumers and small business owners are not left out?
A.5. Treasury continues to work with the Federal Reserve to
assess the efficacy of existing facilities established under
the Federal Reserve's 13(3) emergency lending authority, and
will evaluate appropriate changes necessary to promote the flow
of credit and support a robust economic recovery. No such
decision has been taken to expand TALF at this time.
Q.6. Per its April 30 guidance, the Federal Reserve ruled that
TALF will only consider collateral with a credit rating in the
highest long-term or short-term investment-grade rating
category from at least two NRSROs. Self-employed borrowers
generally experience greater income volatility and rely on
unconventional forms of documentation to access credit. As
such, the self-employed often struggle to access credit
affordably. However, like other small businesses, self-employed
business owners are important contributors to Arizona's
economy. Are there plans to allow AAA residential mortgage-
backed securities as eligible collateral under TALF?
A.6. Treasury continues to work with the Federal Reserve to
assess the efficacy of existing facilities established under
the Federal Reserve's 13(3) emergency lending authority, and
will evaluate appropriate changes necessary to promote the flow
of credit and support a robust economic recovery. No such
decision has been taken to expand TALF at this time.
Q.7. Given record high unemployment levels in Arizona, mortgage
forbearance and delay of evictions are a very temporary
solution. Servicers of home loans backed by Fannie Mae, Freddie
Mac, and Ginnie Mae are not only required to make mortgage
payments on behalf of the borrowers, but also payments on
property taxes, homeowners and mortgage insurance, and
homeowner association dues. As more and more homeowners enter
forbearance, both independent mortgage servicers and community
banks will need liquidity support. How do your organizations
plan to deal with mass forbearance and provide liquidity to
struggling servicers? Service transferring is already a chaotic
process for borrowers. Can a program be created to avoid
borrowers having their service transferred during such a
critical time?
A.7. Treasury is actively monitoring the mortgage market and
the associated impact of COVID-19. We have focused considerable
resources on delivering authorized support to households and
businesses struggling as a consequence of the necessary public
health response. On March 26, 2020, Secretary Mnuchin announced
the creation of a Financial Stability Oversight Council Task
Force on Nonbank Mortgage Liquidity, which first convened on
March 30 to discuss conditions and activities in the mortgage
servicing markets and remains in regular discussions. Treasury
will continue to work to promote stable markets, including for
residential mortgage lending.
Q.8. Requiring servicers to advance property taxes, hazard
insurance, homeowners association dues, and other assessments
is no small task. Servicers typically advance these amounts
when borrowers face financial shortfalls or after a natural
disaster without any problem, however, the national scale of
this pandemic is unpresented and our municipal and county
budgets are already strained. Both Fannie Mae and Ginnie Mae
have taken steps to moderate the servicer advancing burdens for
principle and interest. Have your organizations contemplated
the risks to cities and counties if liquidity is not restored?
Have you considered standing up a liquidity facility to help
servicers make these tax and insurance advances, particularly
in cities and counties that are not able to access the
Municipal Liquidity Facility?
A.8. Treasury is actively monitoring the mortgage market and
the associated impact of COVID-19. We have focused considerable
resources on delivering authorized support to households and
businesses struggling as a consequence of the necessary public
health response. On March 26, 2020, Secretary Mnuchin announced
the creation of a Financial Stability Oversight Council Task
Force on Nonbank Mortgage Liquidity, which first convened on
March 30 to discuss conditions and activities in the mortgage
servicing markets and remains in regular discussions. Treasury
will continue to work to promote stable markets, including for
residential mortgage lending.
Q.9. Nonprofits serve on the front lines of the coronavirus
pandemic helping feed Arizona families, providing Arizonans
safe shelter, and connecting Arizonans to critical health
services. To continue their important work and meet growing
need they may need access to the 13(3) facilities. What can you
do to ensure that nonprofits with up to 10,000 employees
receive additional financial assistance?
A.9. On September 4, the Federal Reserve Bank of Boston
announced that two new Main Street Lending Program facilities
were fully operational. This program is designed to help credit
flow to small- and medium-sized nonprofit organizations that
were in sound financial condition prior to the pandemic and
have solid post-pandemic prospects. Nonprofit organizations
with 15,000 employees or fewer, or 2019 annual revenues of $5
billion or less, are eligible.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JEROME H. POWELL
Q.1. Are Treasury or the Federal Reserve requiring the
companies, including the banks' customers which use loan
programs to report payroll information that will allow Congress
to assess whether funds are being used to keep workers employed
and paid? If not, how do you intend to assess whether funds are
being used to keep workers employed and paid?
A.1. The emergency lending facilities are intended to promote
the flow of credit to households, business, and communities.
Our efforts have been targeted at achieving our dual mandate,
including the creation of an environment where the unemployed
have the best possible chance to return to their old jobs or
find new ones as the economy recovers. Our facilities were
designed in compliance with both the Coronavirus Aid, Relief,
and Economic Security Act (CARES Act) and section 13(3) of the
Federal Reserve Act, which do not mandate that funds are used
to keep workers employed and paid. For our Main Street Lending
Program (Main Street), we do expect borrowers to make
commercially reasonable efforts to maintain their payrolls.
This means that businesses that participate in the program are
expected to make good-faith efforts to maintain payroll and
retain employees in light of their capacities, the economic
environment, their available resources, and their business need
for labor. Borrowers' commercially reasonable efforts to
maintain payrolls may take different forms across the broad
range of businesses eligible for Main Street. The Federal
Reserve and the Department of the Treasury (Treasury
Department) will monitor Main Street's impact on small and
medium-sized businesses and the resulting effects of that and
the other 13(3) facilities on the economic recovery and
employment broadly rather than on a borrower-by-borrower basis.
Recognizing that the manner for best supporting their
operations and payroll will likely vary considerably across
borrowers, Main Street borrowers are not required to disclose
the intended use of funds. They do, however, face restrictions
on their use. Main Street borrowers are generally restricted
from repaying existing debt ahead of schedule until the Main
Street loans are repaid. Main Street borrowers are also subject
to the CARES Act restrictions on compensation, stock
repurchases, and capital distribution restrictions that apply
to direct loan programs. Further, Main Street borrowers may not
use the proceeds of a Main Street loan for the benefit of its
foreign parents, affiliates, or subsidiaries.
Overall, providing credit to businesses, large and small,
should help to ensure that their workers remain employed and
paid through this very difficult period. The Federal Reserve
will continue to consider adjustments to Main Street's terms
and conditions, as appropriate.
Q.2. Highly leveraged energy sector companies were already
facing downgrades prior to the coronavirus outbreak, yet you
recently made revisions to lending programs that will allow
many of these companies to receive bailouts. Why is it
appropriate to provide funds to prop up businesses that were
failing regardless of the impacts of the coronavirus outbreak?
Pursuant to the Federal Reserve's role on the Financial
Stability Oversight Council, did you consider the ramifications
of further subsidizing an industry that contributes to climate
change given the likelihood that the effects of climate change
will lead to more volatile and less stable financial markets?
If so, please provide your analysis.
A.2. As noted above, the emergency lending facilities were
established to support the flow of credit to households,
businesses and communities. We hope the assistance will help
them to be in a position to make the recovery as strong as
possible. Pursuant to section 13(3) of the Federal Reserve Act,
the Federal Reserve is prohibited from lending to entities that
are insolvent. To meet that requirement, we have structured the
facilities to provide access to businesses across the economy
that were in sound financial condition prior to COVID-19.
The Federal Reserve is monitoring the conditions in the
financial system and economy to take actions needed to support
the economy, maintain the flow of credit to households and
businesses, and promote our maximum employment and price
stability goals. Accordingly, and as needed, the Federal
Reserve Board (Board) and the Secretary of the Treasury
(Secretary) may make adjustments to the terms and conditions of
the programs, including pricing and eligibility requirements.
For example, following the initial announcement of Main Street,
the Board received a number of comments requesting adjustments
to the maximum loan size, leverage levels, and ability to use
the proceeds to refinance debt from a wide variety of potential
lenders and borrowers. In response to these comments, the scope
and eligibility of the Main Street facilities were expanded.
The Federal Reserve remains committed to understanding the
risk climate change poses to the real economy and financial
system. As I have mentioned in previous letters to you and
other Members of Congress, staff across the Federal Reserve
System are conducting research to understand the ways in which
climate-related risks may transmit to the real economy and
financial system. This work includes assessing how the
financial sector's exposure to energy companies could affect
the financial system and real economy. Staff research also
supports the Board's participation in several forums with other
U.S. and international regulators where the evaluation of the
effects of climate change on the financial system are
particularly relevant.
Q.3. The Administration opposes the spending package recently
passed by the House. Based on your comments that fiscal
stimulus is needed, does it make more sense to spend billions
propping up failing companies that put our economy at risk than
it does to spend more money on families that need to pay rent?
A.3. The CARES Act and other fiscal policy actions are
providing direct help to families, businesses, and communities.
This support can make a critical difference to helping both
families and businesses in a time of need, as well as limiting
long-lasting damage to our economy. Ultimately, however, it is
the responsibility of the Congress and the Administration to
decide on the appropriate size and composition of any
additional fiscal stimulus.
Q.4. The Federal Open Market Committee minutes from April 28-
29, 2020 note that the activities of some nonbank financial
institutions present vulnerabilities to the financial system
that could worsen in the event of a protracted economic
downturn and that these institutions and activities should be
monitored closely. What is the Federal Reserve, on its own and
as a member of the Financial Stability Oversight Council, doing
to monitor these institutions and their activities? What
particular types of nonbank financial institutions or
activities are particularly vulnerable and how does the Federal
Reserve plan to address those vulnerabilities? Has the Federal
Reserve taken these vulnerabilities into account when creating
its 13(3) facilities? Will the Federal Reserve propose to
designate any of these nonbank financial institutions
systemically important?
A.4. Nonbank financial institutions (NBFI) include a diverse
group of entities such as insurance companies, finance
companies, government-sponsored enterprises, hedge funds,
security brokers and dealers, issuers of asset-backed
securities, mutual funds, and money market funds. These NBFIs
have diverse business models and practices, many of which
differ greatly from those of banks. Even so, these institutions
and activities can pose similar vulnerabilities to those of
banks, including high leverage, excessive maturity
transformation, and complexity, all of which can lead to
financial stability risks, as manifested in the wake of COVID-
19. The Federal Reserve has been closely monitoring these
institutions and their activities on a continuous basis, both
on its own and as a member of the Financial Stability Oversight
Council (FSOC), as reflected in various publications including
the Federal Reserve's Financial Stability Reports (FSR) and the
FSOC Annual Reports.
The FSOC conducts regular assessments of systemic risks
posed by the activities of nonbank financial institutions under
its activities-based approach to designation. These assessments
occur through discussions at the Systemic Risk Committee and
publications from the FSOC and its members, such as the FSOC
Annual Report, the Federal Reserve's FSR, and the Office of
Financial Research's Financial Stability Risk Assessment.
Designations of institutions as systemically important are a
matter for the entire FSOC to address, and any questions about
designations and the work of the FSOC are most appropriately
directed to the Secretary, who serves as the Chair of the FSOC.
The Federal Reserve's May 2020 FSR highlights several
vulnerabilities for NBFIs, including dealer balance sheet
constraints, potential runs in money market funds, fire sale
risks arising from liquidity transformation by asset managers
and insurers, liquidity strains associated with deleveraging by
leveraged investors such as hedge funds, and funding stress
faced by mortgage servicers. \1\ The FSR describes these risks
in more detail, as well as actions that the Federal Reserve
took in March of this year to help alleviate these pressures.
Staff continue to monitor these vulnerabilities and work with
relevant regulators through the FSOC to consider potential
solutions.
---------------------------------------------------------------------------
\1\ www.federalreserve.gov/publications/2020-may-financial-
stability-report-purpose.htm.
---------------------------------------------------------------------------
Amid the tensions and uncertainties of mid-March and as a
more adverse outlook for the economy took hold, investors
exhibited greater risk aversion and pulled away from longer-
term and riskier assets as well as from some money market
mutual funds. The Federal Reserve, together with the Treasury
Department, established several emergency lending facilities
under the emergency lending authority in section 13(3) of the
Federal Reserve Act to ensure the smooth functioning of various
markets and to mitigate the financial stability risks arising
from vulnerabilities in the financial system. For example, to
stabilize the short-term funding markets, the Federal Reserve
established the Primary Dealer Credit Facility, the Commercial
Paper Funding Facility, and the Money Market Mutual Fund
Liquidity Facility. To support the longer-term financing of
businesses, States, and localities, the Federal Reserve
launched the Term Asset-Backed Securities Loan Facility, the
Primary Market Corporate Credit Facility, the Secondary Market
Corporate Credit Facility and the Municipal Liquidity Facility
(MLF). We also launched Main Street and the Paycheck Protection
Program Liquidity Facility to boost credit flows to small and
medium-sized businesses.
Q.5. Millions of Americans are unable to make their credit card
and auto loan payments because of the economic effects of the
coronavirus pandemic. \2\ What are the concentrations of
consumer debt in each sector of the financial system? How is
the Federal Reserve analyzing the levels of consumer debt at
banks and nonbanks, including the likelihood of charge-offs and
losses occurring simultaneously and the effect on financial
stability?
---------------------------------------------------------------------------
\2\ https://www.wsj.com/articles/millions-of-americans-skip-
credit-card-and-car-payments-11589985381
A.5. Banking organizations entered this crisis in strong
financial condition. Within the banking industry, consumer
lending is dominated by a few large banking organizations,
including a handful of auto and credit card companies. Credit
card lending is concentrated at a small number of the large
banking organizations, while nonbanks account for about one-
half of mortgage origination and servicing and two-thirds of
auto lending.
We expect substantial deterioration in consumer credit
quality given the high unemployment caused by COVID-19.
However, the extent of deterioration is difficult to estimate
due to the uncertain paths of the virus and the economic
recovery. Moreover, recent actions by the Government and
private lenders have mitigated some of the negative effects of
the crisis on consumer credit. For example, the stimulus
payments and unemployment insurance expansions included in the
CARES Act have assisted individuals and households in covering
short-term expenditures. The CARES Act also provides mortgage
payment forbearance for up to 12 months for borrowers in
federally backed loans that are experiencing COVID-19-related
hardship. In addition, the Board, along with the other Federal
financial institution regulatory agencies, issued guidance to
encourage financial institutions to work constructively with
borrowers affected by COVID-19 and provide additional
information regarding loan modifications in light of the CARES
Act. \3\ This guidance notes that when working with borrowers,
lenders and servicers should adhere to consumer protection
requirements, including fair lending laws, to provide the
opportunity for all borrowers to benefit from these
arrangements. Most lenders, bank and nonbank alike, report
working with their borrowers and are offering various
forbearance programs that provide additional short-term relief.
---------------------------------------------------------------------------
\3\ ee press release at https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20200407a.htm.
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The Federal Reserve dedicates substantial resources to
provide oversight of consumer lending in supervised
institutions. We closely supervise institutions with larger
consumer loan exposures through processes such as the
Comprehensive Capital Analysis and Review and the Horizontal
Capital Review, and through the work of dedicated supervisory
teams. Current supervisory activities include monitoring for
the potential effects of the expiration of the forbearance and
consumer assistance programs on consumer credit. Forbearance
programs are not standardized across firms or for product
types, clouding analysis of the timing and severity of losses.
However, the programs are likely to extend the timing of COVID-
19-related losses into 2021.
The Federal Reserve also monitors closely credit
performance changes at nonbank lenders, such as credit unions
and finance companies, to achieve a more comprehensive picture
of the stress households may have in meeting their debt
obligations. In addition, the Federal Reserve pays close
attention to developments in the asset-backed securities market
as this market provides important liquidity for lending to
households.
Q.6. You previously said ``we have the evidence from the global
financial crisis and the years afterwards that State and local
governments' layoffs and lack of hiring did weigh on economic
growth.'' Can you describe in greater detail the extent to
which State and local governments' layoffs and lack of hiring
slowed the economic recovery after the Great Recession? Do you
expect a similar impact to occur in the economic downturn
related to COVID-19? Do you have similar concerns about the
economic impacts of cuts to services at the State and local
levels?
A.6. State and local governments confronted significant fiscal
strain following the Great Recession. As a result, their
employment fell for several years. More broadly, the overall
purchases of these governments fell for four years following
the recession-with outlays for infrastructure falling
particularly sharply-and rose only anemically for several years
thereafter. It is well documented that these outcomes weighed
on broader economic growth. \4\
---------------------------------------------------------------------------
\4\ See, for example, the analysis in Cashin, Lenney, Lutz, and
Peterman, ``Fiscal Policy and Aggregate Demand in the U.S. Before,
During and Following the Great Recession'', Finance and Economics
Discussion Series 2017-061. Washington: Board of Governors of the
Federal Reserve System.
---------------------------------------------------------------------------
State and local governments are currently confronting acute
budget pressure as the sharp decline in economic activity
caused by COVID-19 has pushed down their tax collections. The
Federal Reserve has established the MLF in order to help these
governments better manage the cash flow pressures they are
confronting, and Congress and the Administration have provided
direct support to the States and localities through the CARES
Act and other actions. The extent to which State and local
governments will impose a drag on economic activity going
forward will depend importantly on the path of the broader
economic recovery--and the corresponding extent to which these
governments' tax bases recover-and the extent to which these
governments receive additional support from the Federal
Government. That said, it is the responsibility of the Congress
and the Administration to decide on the appropriate size and
composition of any additional fiscal stimulus.
Q.7. If banks are meant to do meaningful underwriting as part
of the Main Street Lending Programs (MSLP), and the Federal
Reserve and the Treasury have designed the MSLP to minimize
losses, why is the risk of loss on the loans shared on a pari
passu basis between the participating bank and the MSLP SPV?
A.7. Under Main Street, lenders are required to retain five
percent of each loan participated to the Main Street special
purpose vehicle (SPV) and to share losses with the Main Street
SPV on a pari passu basis. The Federal Reserve and Treasury
Department believe that this level of risk sharing will
incentivize prudent underwriting and risk management standards
and, therefore, limit downside risk to taxpayers. At the same
time, pari passu risk-sharing creates balance sheet capacity
for eligible lenders and facilitates a ``true sale'' of the
participation interest to the Main Street SPV.
Q.8. Why did the Federal Reserve and Treasury select the
participation rates of 95 percent and 85 percent for the Main
Street Lending Programs?
A.8. On June 8, the Board amended the terms of the Main Street
facilities to enable more small and medium-sized businesses to
receive Main Street loans. Part of this expansion included
raising the Main Street SPV's participation rate to 95 percent
for loans across all of the Main Street facilities.
The Board and Treasury Department considered several
factors in sizing the rate of participation in Main Street
eligible loans and upsized tranches. The agencies created Main
Street facilities that purchase sizable (but less-than-100
percent) participations in loans in order to maintain a level
of risk sharing that creates balance sheet capacity for
eligible lenders, while at the same time providing eligible
lenders a strong incentive to apply prudent underwriting and
risk management standards. A 95 percent participation provides
an appropriate balance of these considerations.
Q.9. The Federal Reserve FAQs for the Primary Market Corporate
Credit Facility and Secondary Market Corporate Credit Facility,
and for the Term Asset-Backed Securities Loan Facility,
initially indicated the Federal Reserve would accept ratings
only from the three largest credit rating agencies.
On May 26, 2020, updated FAQs expanded the universe of
acceptable credit rating agencies beyond just the three largest
firms, but two ratings are still required, with one from one of
the three largest firms. In addition, the updated FAQs omit
certain Securities and Exchange Commission registered NRSROs.
Please explain the process by which the Federal Reserve
determined the NRSRO ratings it will accept and the two rating
requirement, including that one of the two required ratings be
from of the three largest firms. Also, does the Federal Reserve
intend to announce additional updates or whether it will expand
the universe of acceptable NRSROs?
Furthermore, given that thousands of companies are sole-
rated by a credit rating agency that is not one of the three
largest, and under the FAQ, the Federal Reserve will not accept
a second rating from one of the three largest firms assigned
after March 22, 2020, will those companies be ineligible for
every Federal Reserve lending facility?
Finally, why did the Federal Reserve initially limit major
credit rating agencies to the three largest NRSROs despite the
long-standing policy goals, in particular since the 2008
financial crisis, to avoid reliance solely on ratings and
reinforcing the market concentration of those firms?
A.9. The emergency lending facilities were established to
support the flow of credit to households, businesses, and
communities. In addition, under the law, the loans the Federal
Reserve extends must be satisfactorily secured and sufficiently
protect taxpayers from loss.
The Federal Reserve's initial priority was to announce the
establishment of these facilities as quickly as possible, and
therefore the facilities first used credit ratings from only
the three largest nationally recognized statistical rating
organizations (NRSROs), given that the most widespread credit
ratings used are from these three NRSROs.
To promote the flow of credit in a manner consistent with
the law, the Federal Reserve undertook an analysis to determine
whether to expand the list of eligible NRSROs. As part of this
analysis, the Federal Reserve considered the design and focus
of each facility, and the role that each NRSRO plays in the
relevant market. Specifically, the Federal Reserve sought to
balance the benefits of using ratings from the NRSROs most
relied on by investors with the need to ensure broad access to
our programs. That analysis led the Federal Reserve to include
three additional NRSROs in its facilities. The Federal Reserve
hopes this change expands access to its facilities, while
continuing to protect against taxpayer losses. The Federal
Reserve will continue to monitor its facilities to ensure they
are working as intended.
Q.10. The President recently stated he supports ``looking
into'' banks committed to no longer investing in oil and gas
drilling in the Arctic. Has the President discussed this with
you or someone at your agency? Have you or anyone at your
agency started any investigation, or initiated any proceeding
to ``look into'' banks which have committed to not investing in
Arctic oil and gas development?
A.10. It is not the practice of the Federal Reserve to confirm,
or deny, whether we have commenced an examination or civil
investigation involving a particular supervised financial
institution.
The Federal Reserve recognizes the importance of ensuring
public access to financial services for all legal businesses in
an environment that promotes trust and confidence. The Federal
Reserve's supervisory responsibilities over the banking system
generally are discharged with the objective of ensuring the
safety and soundness of the financial system. In exercising
these responsibilities, the Federal Reserve does not regulate
decisions by a banking organization with respect to the types
of financial services the organization chooses to furnish or
not to furnish, so long as the organization's activities are
conducted prudently and in compliance with applicable law.
Q.11. Have you limited funds appropriated by Congress through
the CARES Act, or any other law, to banks that have committed
to stop financing Arctic oil and gas development?
A.11. The determination of how funds are appropriated under the
CARES Act with regard to section 13(3) facilities is made by
the Secretary. As required by section 13(3) of the Federal
Reserve Act, all of our emergency lending facilities are broad
based. In addition, they each have neutrally defined
eligibility requirements. Neither the eligibility criteria, nor
any other term or condition of any of our facilities in any way
relates to bank actions with respect to Arctic oil and gas
development.
Q.12. Have you been directed by anyone, up to and including the
President, to use the authorities and resources at your
disposal to tip the scales in any way regarding banks or other
investors with commitments to not finance new development in
the Arctic?
A.12. As noted, the section 13(3) facilities established by the
Federal Reserve with the support of the Secretary have
neutrally defined eligibility requirements intended to help the
real economy and in particular, households and businesses,
respond to the financial hardships resulting from the impact of
COVID-19 and efforts to contain it. I have not been directed by
any person to take any action relating to commitments to not
financing new development in the Arctic.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM JEROME H. POWELL
Q.1. Many in Congress have expressed concern about the impact
of job loss and unemployment upon low-income workers, and the
Federal Reserve's Report of the Well Being of US Households in
2019 found that 39 percent of Americans with a household income
of less than $40,000 had seen at least one job loss in March.
However, the report also stated that most workers expected
their job losses to be temporary, with nine in 10 people who
were furloughed or who had lost a job saying that their
employer indicated that they would return to their job at some
point.
As you stated in the hearing, ``where people are unemployed
for long periods of time, that can permanently weigh on both
their careers and their ability to go back to work, and also
weigh on the economy for years.'' While unemployment benefits
are an important source of needed liquidity for displaced
workers and can smooth consumption, having workers continue to
be unemployed for longer than necessary may be harming our
ability to quickly recover and restore long-term income
stability. A recent University of Chicago working paper found
that 68 percent of unemployed workers who are eligible for UI
will under the CARES Act receive benefits which exceed lost
earnings, and that the median wage replacement rate under the
CARES Act is 134 percent of prior wages.
How would you expect long-term (beyond July 31st, 2020)
wage replacement rates above 100 percent to impact efficient
labor reallocation and an eventual economic recovery?
Would you expect a targeted proportional system of
unemployment benefits that caps wage replacement rates at 100
percent to sufficiently smooth consumption for displaced
workers?
A.1. In the current economic environment, it is difficult to
assess the effects of high replacement rates on efficient labor
reallocation. Much depends on what the efficient level of
reallocation is at present, and that is extremely difficult to
ascertain. For example, to the extent that layoffs are
temporary and workers remain attached to their prior employers,
reallocation will not be efficient. The July employment report
showed that over 70 percent of those who have lost their jobs
are on temporary layoff, which is a very high number by
historical standards. Whether temporary layoffs will remain
elevated (and for how long) is hard to judge.
The level of efficient reallocation may also be low
currently because employment relocation-a necessary part of
many reallocations-is difficult for public health reasons. In
addition, to the extent that a wage replacement rate is only
temporarily high, it may not reduce efficient reallocation by
much because in a depressed and uncertain labor market, many
unemployed individuals will not want to pass up an opportunity
of steady, gainful employment that may not come again soon.
A targeted proportional system of unemployment benefits
that caps wage replacement rates at 100 percent may not
sufficiently smooth consumption for some families. For example,
some families may have lost income that is not covered by
unemployment insurance. In addition, families that are also
incurring unusually large health-related or other emergency
expenditures may struggle to maintain their typical
consumption.
Q.2. I strongly support the Federal Reserve's efforts to
provide liquidity to midsize companies through the Main Street
facility. It is important for the Federal Reserve to think
carefully about how that facility will be governed. In
particular, commercial lenders typically gain certain rights
when a loan becomes troubled. While it is reasonable for the
Federal Reserve to have similar rights with respect to the loan
participations it acquires through the Main Street facility, it
must avoid having politics injected into lending decisions.
To that end, what steps is the Federal Reserve taking to
ensure that any decisions it makes as a lender under the Main
Street facility will be free from political influence?
A.2. Under the Main Street Lending Program (Main Street), the
Federal Reserve Board authorized the Federal Reserve Bank of
Boston to establish a special purpose vehicle (SPV) to purchase
participations in eligible loans originated by eligible
lenders. Lending decisions will be made by eligible lenders,
which will apply their own underwriting standards when
evaluating the creditworthiness of a borrower, in addition to
the minimum requirements set out in facility term sheets. The
Main Street Loan Participation Agreement \1\ sets out terms
governing the Main Street SPV's voting rights with respect to
its participation in Main Street loans, both during the life of
the loans and in work-out scenarios. In general, the Loan
Participation Agreement contains commercially standard terms,
adjusted as appropriate for the unique features of Main Street.
\2\ While the SPV has the right to vote on specific core
matters relating to the administration of the loan, eligible
lenders will retain non-core rights and are expected to service
each Main Street loan in accordance with the standard of care
set out in the Loan Participation Agreement (i.e. to exercise
the same duty of care in approaching such proceedings as it
would exercise if it retained a beneficial interest in the
entire loan). Consistent with Section 13(3) of the Federal
Reserve Act and the Federal Reserve's obligations under the
Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
the Main Street SPV will make commercially reasonable decisions
to protect taxpayers from losses on Main Street loans and will
not be influenced by non-economic factors when exercising its
voting rights under the Loan Participation Agreement, including
with respect to a borrower that is the subject of a work-out or
restructuring. \3\ Further information on the Main Street
facilities and the criteria for eligible lenders can be found
at www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.
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\1\ The Main Street Loan Participation agreement and other legal
forms and agreements can be found at https://www.bostonfed.org/
supervision-and-regulation/supervision/special-facilities/main-street-
lending-program/information-for-lenders/docs.aspx.
\2\ Among other deviations from market-standard terms, the
Participation Agreement gives the Main Street SPV additional rights
that can be used to prevent any reduction in the principal amount of
the portion of any Main Street loan that is participated to the Main
Street SPV, as prohibited under section 4003(d)(3) of the CARES Act.
\3\ See Frequently Asked Questions J.4-J.6 available at https://
www.bostonfed.org/mslp-faqs.
Q.3. Please respond to the following regarding flows of prime
money market fund (PMMF) liquidity in March 2020:
What were the gross redemptions from publicly offered PMMFs
from March 11 to March 18, 2020? For comparison, what were the
gross redemptions from PMMFs from January 13 to January 17,
2020; and also from October 11 to October 18, 2019?
Separately, for each of the above three time frames, please
provide the gross purchases into PMMFs.
Separately, for each of the above three time frames, please
break the answer down between gross redemptions or purchases,
as the case may be, of PMMFs with stable NAVs open only to
natural person investors and PMMFs with fluctuating NAVs open
to both natural persons and non-natural persons.
A.3. In mid-March 2020, amid very large outflows from prime
money market funds (MMFs), institutional funds (which are open
to investors other than ``natural persons'') experienced the
largest net outflows. \4\ From March 11 to March 18, 2020, when
prime MMFs saw outflows totaling $85 billion, institutional
prime MMFs had $67 billion in outflows. Retail prime MMFs,
which are open only to natural persons and thus represent a
different segment of the market, had $19 billion in outflows in
this time frame.
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\4\ Net flows are gross purchases less gross redemptions. Net
flows provide the best overall representation of the pressure arising
from investor flows on money market funds to buy assets (when net flows
are positive) or sell assets (when net flows are negative). We do not
separately analyze data on gross purchases and gross redemptions for
money market funds. The Securities and Exchange Commission collects
data on gross purchases and gross redemptions for money market funds.
---------------------------------------------------------------------------
From January 13 to January 17, 2020, prime MMFs had net
inflows of $1.6 billion: approximately $0.2 billion into
institutional funds and $1.3 billion into retail funds. From
October 11 to October 18, 2019, prime MMFs had net inflows of
$10 billion: approximately $6 billion into institutional funds
and $4 billion into retail funds.
Institutional prime MMFs have consistently experienced
heavier outflows than retail prime MMFs in episodes of stress,
including in mid-March 2020, and also during the 2008 run on
MMFs. Heavier outflows from institutional MMFs may occur
because their shareholders have more resources to monitor funds
carefully and may face strong incentives to avoid losses or
liquidity constraints on their shares.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM JEROME H. POWELL
Q.1. Vice Chair Quarles mentioned in a recent hearing before
this committee that the Federal Reserve has closely studied the
impact of the COVID-19 pandemic on the banking system and that
such analysis will inform each bank's Stress Capital Buffer.
While I appreciate the Board's efforts on this front, many
of the macroeconomic effects of COVID-19 weren't fully
reflected in the financial services sector until after the
Board's initial COVID-19 analysis had been completed.
For the sake of transparency and so that financial
institutions can benefit from the fullness of understanding of
how the Board views the impact of the COVID-19 pandemic on bank
capital, will the Board release its pandemic analysis in a
timely fashion?
A.1. On June 25, the Federal Reserve Board (Board) released the
results of its stress tests for 2020 and additional sensitivity
analyses that the Board conducted to assess the resiliency of
large banking organizations under three hypothetical recession
scenarios that could result from COVID-19. In the three
scenarios, the unemployment rate peaked at between 15.6 percent
and 19.5 percent, which is significantly higher than any of the
Board's pre-COVID-19 stress test scenarios.
The Board also released the results of its full stress
test, which was designed before COVID-19. The Board will use
the results of that test to set the new stress capital buffer
(SCB) requirement for large banking organizations, which will
take effect, as planned, in the fourth quarter.
In addition to releasing the results of the test, the Board
has determined that the changes in financial markets and the
macro-economic outlook could have a material effect on each
firm's risk profile and financial condition. The Board is
therefore requiring large banking organizations to update and
resubmit their capital plans later this year to reflect current
stresses, which will help firms re-assess their capital needs
and maintain strong capital planning practices during this
period of uncertainty. The Board will conduct additional
analysis each quarter to determine if adjustments to this
response are appropriate.
Q.2. Dodd-Frank requires that banks' annual stress test include
four scenarios but the Stress Capital Buffer is based on the
results for just one of those scenarios--the Supervisory
Severely Adverse scenario. How does the Board believe financial
institutions should use the other three scenarios when the
Supervisory Severely Adverse scenario sets the binding
requirement in the Stress Capital Buffer?
A.2. Large banking organizations are subject to four scenarios
in the Board's stress testing and capital planning program: the
supervisory severely adverse scenario, the supervisory baseline
scenario, the Bank Holding Company (BHC) baseline scenario and
the BHC stress scenario. The SCB requirement is calculated
based on the results of the supervisory severely adverse
scenario in the Board's annual stress test, but a large banking
organization's capital planning process should be informed by
all the information included in the results of the four
scenarios. A firm's risk identification and capital planning
process also includes designing its own scenario. Further, the
Board's supervisory assessment of capital planning is evaluated
in part from the results of the stress tests, including those
from all applicable scenarios.
Q.3. I understand that the Stress Capital Buffer has integrated
the Board's regulatory capital rule with the Comprehensive
Capital Analysis and Review (CCAR) framework. As a result, CCAR
now serves as a way for banks to calculate the Stress Capital
Buffer required to cover potential losses. Following this
integration, the Board has taken a step forward to remove the
quantitative objection to capital distributions since the
Stress Capital Buffer now determines capital distributions.
What will the Board's objectives be for CCAR in the future
following these changes? And what metrics will the Board use
when it evaluates capital distributions in the future?
A.3. Under the SCB rule issued in March 2020, the results of
the Federal Reserve's supervisory stress tests and firms'
planned dividends are used to calculate a firm-specific SCB
requirement, which informs the size of the buffer requirements
to which each large firm is subject. A firm is subject to
automatic distribution limitations if its capital ratios fall
below the minimum plus buffer requirements.
The Comprehensive Capital Analysis and Review will continue
to be an integral part of the Board's supervisory program for
large banking organizations, by assessing both the capital
plans and the capital planning practices that these firms use
to assess their capital needs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM JEROME H. POWELL
Q.1. Federal Reserve Balance Sheet--Chair Powell, this is not a
criticism of the Federal Reserve's actions, rather more a
question aimed at the path forward. Over the past 3 months, the
Federal Reserve's balance sheet has expanded from $4.1 trillion
to nearly $7 trillion today. In fact, if the Fed maximizes the
lending powers granted under the CARES Act, the balance sheet
can easily expand to nearly $14 trillion.
Given the fiscal deficit that we have incurred and will
continue to incur for the foreseeable future, have we monetized
the national debt?
A.1. The Federal Reserve's chosen level of asset holdings is
never intended or designed to fund the government. As always,
the Federal Reserve's actions are guided by its mandate to
promote maximum employment and stable prices for the American
people, along with the responsibility to promote the stability
of the financial system. Moreover, from the perspective of a
consolidated government balance sheet, because the Federal
Reserve funds its balance sheet with interest-paying reserves,
the Federal Reserve's asset purchases represent a shortening of
the maturity structure of government debt and not a
monetization of the debt.
In recent months, the Federal Reserve's asset purchases
have been directed toward supporting the flow of credit to
households, businesses, and State and local governments. In
particular, as the public health crisis intensified in mid-
March 2020, the functioning of the Treasury market and the
market for agency mortgage-backed securities deteriorated
sharply. These markets are critical to the overall functioning
of the financial system and to the transmission of monetary
policy to the broader economy. If left unchecked, these strains
could have severely aggravated what was already a very large
shock to the financial system.
By most metrics, liquidity in these markets greatly
improved in short order. Accordingly-starting in early April
2020-the Federal Reserve began to significantly slow the size
of its purchases. Going forward, the Federal Reserve's holdings
of securities will be determined by the needs to support market
functioning and the flow of credit, consistent with the Federal
Reserve's congressionally-mandated mission.
Q.2. Does the expanded Fed balance sheet and our out of control
debt situation undermine your ability to tackle future
inflationary pressures?
A.2. In the near term, the ongoing public health crisis will
weigh heavily on economic activity, employment, and inflation.
In fact, recent inflation readings have been soft and the
Federal Open Market Committee's (FOMC) June economic
projections show participants anticipated that the 12-month PCE
inflation measure would likely run well below the FOMC's 2
percent objective for some time. As a result, the FOMC expects
to maintain the current, low Federal funds rate target range
until it is confident that the economy has weathered recent
events and is on track to achieve maximum employment and price
stability.
Of course, going forward, the FOMC will closely watch the
incoming data on inflation and inflation expectations. At each
future meeting, the FOMC will evaluate all data on the U.S.
economy and choose the appropriate stance of policy to continue
to move the economy toward its mandated objectives. As the FOMC
noted in its recent statement, it is committed to using its
full range of tools to support the U.S. economy in this
challenging time, thereby promoting its maximum-employment and
price-stability goals.
Q.3. The Great Deleveraging--In a post-Covid environment, the
world will be flushed with debt, both private and public. Back
in January, the Institute of International Finance projected
global debt to be at $253 trillion or 322 percent of GDP. I
cannot imagine how much we will be facing in January 2021.
We have failed to learn the lessons of the past crisis and
while household debt has dropped, we have failed to control the
excesses in government spending and cheap money propagated
asset bubbles.
Deleveraging will be painful and exceptionally so for the
lower bounds of our economy. In your view, what are indicators
that you are looking for before you would recommend fiscal
tightening and what are recommendations that you would like to
see beyond monetary policy that would assist in removing our
dependency from this glut of debt?
A.3. The details of fiscal policy decisions are for elected
representatives, who hold the powers of taxation and spending.
While it is important for fiscal policymakers to take actions
over time that put the Federal budget and debt on a sustainable
path in the longer run, the time to make that a top priority is
when the economy is strong, and unemployment is low.
Q.4. The Fed and Congress has flooded the market with cheap
credit to prevent the wide scale collapse of the economy, I am
bothered by colleagues who are seeking to widen the scale of
the intervention or attempting to pick winners and losers. How
do we avoid the path of Japan or Europe where their
interventions in the past recessions have created zombie
companies or zombie industrial sectors?
A.4. Our 13(3) facilities are intended to function as backstops
to the private markets, with pricing designed to encourage
borrowers to use private financing if it is available. The
tools that the Federal Reserve is using under its 13(3)
authority are for times of emergency such as now, and we will
put these tools back in the toolbox when economic and financial
conditions improve. Our 13(3) facilities are designed to have
broad, neutrally defined eligibility requirements and to lend
to borrowers that were in sound condition prior to the onset of
COVID-19.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JEROME H. POWELL
Q.1. As I mentioned in the hearing, I am concerned that
companies in need of financial assistance do not meet the
eligibility criteria for the existing Federal Reserve (Fed) and
Treasury programs. The Fed's programs are largely limited to
investment grade (IG) companies with certain leverage criteria
that gets harder to satisfy the longer the pandemic goes. These
programs have excluded otherwise well run companies that are
not IG, or somehow don't fit the specific criteria--companies
that are sometimes even deemed essential by the Cybersecurity
and Infrastructure Security Agency within the Department of
Homeland Security.
What is the Federal Reserve and Treasury doing to help
well-managed non IG companies that have weathered the initial
storm without any government assistance, but may need access to
liquidity in the next couple of months?
A.1. Section 13(3) of the Federal Reserve Act and the Federal
Reserve Board's (Board) Regulation A require that a lending
Reserve Bank be secured to its satisfaction and that the
collateral be assigned a lendable value. The eligibility
criteria for creditworthiness, including the requirement that
eligible companies in the corporate credit facilities be
investment grade, help satisfy this requirement and
appropriately protect taxpayers from the risk of loss
associated with the loan. The facilities broadly seek to
support creditworthy companies that rely on capital markets to
fund their operations during unusual and exigent circumstances.
While our corporate credit facilities are designed primarily to
support markets that serve investment grade companies, we
wanted to prevent a gulf opening up between those markets and
the other markets that serve high-yield issuers. Therefore, the
corporate credit facilities are open to so-called ``fallen
angels''--companies that would have been investment grade but
for the COVID-19 shock. The Secondary Market Corporate Credit
Facility (SMCCF) is also purchasing a limited quantity of high-
yield exchange traded funds (ETFs). Support to the market for
issuers that access the facility also supports the credit
markets more broadly, including for those that do not access
the facility or are not eligible to access the facility. In
addition, noninvestment grade companies may be eligible to
borrow under the Main Street Lending Program if the lending
bank's internal risk rating of the company is equivalent to a
supervisory rating of ``pass.'' The Federal Reserve is
monitoring conditions closely and may reevaluate the terms and
conditions of facilities as needed.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY
FROM JEROME H. POWELL
Q.1. With respect to qualifying eligibility to participate in
the Primary Market Corporate Credit Facility (PMCCF) to those
companies that have a rating from the largest nationally
recognized statistical rating organization (NRSROs)
What is the basis for treating smaller NRSROs differently
from the largest NRSROs, particularly in light of the fact that
their regulator, the SEC, does not differentiate among them?
By limiting eligibility in the PMCCF to only those
companies that have investment grade ratings from one of the
three largest NRSROs, aren't you effectively limiting access to
these important sources of funding to only the Nation's largest
companies?
Is that consistent with the goals and objectives of the
CARES Act and the other Fed/Treasury programs that are
addressed to the crisis?
A.1. The emergency lending facilities, including the Primary
Market Corporate Credit Facility (PMCCF), were established to
support the flow of credit to households, businesses, and
communities. In addition, under the law, the loans the Federal
Reserve extends must be satisfactorily secured and sufficiently
protect taxpayers from loss.
Our initial priority was to announce the establishment of
these facilities as quickly as possible, and therefore the
facilities, including the PMCCF, first used credit ratings from
the three largest nationally recognized statistical rating
organizations (NRSRO), given that the most widespread credit
ratings used are from these three NRSROs.
Consistent with our objectives to promote the flow of
credit in a manner consistent with the law, the Federal Reserve
undertook an analysis to determine whether to expand the list
of eligible NRSROs. As part of this analysis, we considered the
design and focus of each facility, and the role that each NRSRO
plays in the relevant market. Specifically, we sought to
balance the benefits of using ratings from the NRSROs most
relied on by investors with the need to ensure broad access to
our programs. That analysis led the Federal Reserve to include
three additional NRSROs in its facilities. Our hope is that
this change expands access to its facilities, while continuing
to protect against taxpayer losses. We will continue to monitor
the facilities to ensure they are working as intended.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MCSALLY
FROM JEROME H. POWELL
Q.1. Consumer spending is 70 percent of GDP, and much of that
is supported by consumer credit. Data shows that the demand for
online personal loans remains high, but the liquidity has been
badly disrupted. As a result interest rates are increasing on
personal loans. Do you have a timetable for the Federal Reserve
adding at least the highest rating grade for personal loans to
the TALF program?
A.1. As you note, an individual or family's ability to purchase
goods and services depends crucially on their ability to access
credit at affordable terms. Indeed, that is a key motivation
for the Term Asset-Backed Securities Loan Facility (TALF)
program. TALF-eligible loan collateral includes several types
of asset-backed securities (ABS) that provide key support for
consumer spending, including auto, credit card, and student
loan ABS. In determining the types of collateral that are
eligible for TALF loans, the Federal Reserve Board (Board)
considers whether accepting an asset class will provide
material support to the economy, such as by facilitating
consumer spending. The Board also considers whether inclusion
of the asset class is appropriate under the restrictions of
section 13(3) of the Federal Reserve Act. For example, the
Board and Reserve Banks must take steps to ensure the
protection of the taxpayer, including by assigning a ``lendable
value to all collateral.''
Personal loan ABS may not be good candidates for the TALF
given these restrictions. Unlike auto, credit card, and student
loan ABS, personal loan ABS is a fairly new asset class, and
comprehensive information is not available about the
performance of personal loan ABS in stressed economic periods.
Likewise, only a small share of personal loan ABS is routinely
rated triple-A by the rating agencies.
The Board will continue to evaluate the feasibility of
adding other asset classes to or expanding the scope of
existing asset classes eligible for the TALF.
Q.2. It has come to our attention that borrowers of commercial
mortgage-backed securities, whose properties have been shut
down by government public safety precautions, are under undue
significant financial hardship because they are stuck between
tenants that are not paying and mortgage servicers who are not
offering flexibility. These are owners of hotels, shopping
centers and certain housing entities. They are extremely
worried about their ability to meet their financial obligations
over a protracted time period with no rents coming in. There is
not a clear regulatory framework for CMBS but the concerns
remain.
What are you doing to help commercial real estate and other
industries that were excluded from the Federal Reserve's
facilities programs?
Would you consider a plan to utilize the remaining funding
allocated to the Treasury Department under Title IV of the
CARES Act to support those borrowers?
Do you think it would be appropriate to change the leverage
constraints so the facilities are more effective in providing
assistance to commercial real estate?
What measures are you planning to take to ensure lenders
that utilize the TALF program provide appropriate relief to
borrowers to ensure that permanent jobs loss does not incur as
a result of imminent foreclosures due to the lack of
forbearance being granted in the CMBS market?
A.2. The Federal Reserve is closely monitoring the situation in
the commercial mortgage-backed securities (CMBS) market and the
commercial real estate market more broadly and recognizes the
current challenges in the market. The actions taken by the
Federal Reserve to support the broader economy have alleviated
some of the strains in the commercial real estate market. The
Federal Reserve's purchases of Agency CMBS, as part of open-
market operations, and the inclusion of legacy, non-agency
CMBS, as TALF-eligible collateral, have improved spreads and
liquidity in the CMBS market. The Main Street Lending Program
(Main Street) and the Paycheck Protection Program Liquidity
Facility have helped provide small and medium-sized businesses
financing to maintain operations, including paying rent to
their landlords. The Corporate Credit Facilities are also
providing support to some segments of the commercial real
estate industry. The Federal Government and the Federal Reserve
continue to be willing to adjust the parameters of these
programs to allow for more flexible use of these programs by
borrowers and financial institutions.
Even with these actions, as you note, certain commercial
real estate borrowers continue to experience significant
distress. For example, since late February 2020, the lodging
and retail sectors have experienced precipitous declines in
demand as a result of COVID-19. In June, looking only at
mortgages funded by CMBS, borrowers accounting for about 24
percent of mortgages in the lodging sector and 18 percent of
mortgages in the retail sector were more than 30 days
delinquent. Other sectors--for example, the multi-family
sector--have experienced less-severe increases in
delinquencies. However, the Federal Reserve's main tool-
lending-may not be an effective solution for commercial
properties that have suffered large revenue losses and already
have large debt burdens. Loans extended under emergency lending
facilities under Section 13(3) of the Federal Reserve Act--
including those facilities that utilize funding allocated to
the Department of the Treasury under Title IV of the
Coronavirus Aid, Relief, and Economic Security Act (CARES
Act)--are generally not subordinate to other debt, and the
Federal Reserve must take steps to ensure that the taxpayer
will be repaid. In addition, many commercial property owners
are barred by their loan agreements from taking on more debt.
Regarding TALF, the program is designed to support the flow
of credit to households and businesses by providing liquidity
to the ABS market. TALF accepts as collateral triple-A non-
agency CMBS issued before March 23. TALF has been effective in
achieving its objectives, as evidenced by the significant
narrowing of CMBS spreads since its announcement. However, the
program is not an appropriate vehicle to address forbearance in
the non-agency CMBS market. In a typical CMBS structure,
decisions about loan modifications are made by the special
servicer appointed by the holders of the junior bonds, not by
the triple-A bondholder. The TALF borrower, therefore, has
little influence over the modification decisions made by the
CMBS trust. When a securitization already exists and is trading
in the marketplace, changing the rules of its pooling and
servicing agreement is extremely difficult. Further, imposing
additional restrictions on which CMBS are eligible collateral
for TALF loans could run counter to the program's goals of
increasing market liquidity.
We are committed to using our tools to help employers get
through the current difficult period. We will continue to
monitor economic conditions, including those in commercial real
estate, as well as the efficacy of existing facilities. We will
consider changes in our approach as warranted by developments.
Q.3. Short-term funding provisions are essential for nonprofits
right now, especially those with more than 500 employees that
are not eligible for the Paycheck Protection Program.
Nonprofits provide critical services to the most vulnerable.
Nonprofits often lack the ability to raise funds the way for-
profit enterprises can, and taking on additional debt can
severely affect the services nonprofit organizations provide.
What actions is Federal Reserve and Treasury considering for
nonprofits employers with between 500 and 10,000 employees?
A.3. Nonprofit organizations are a critical part of our
economy, employing millions of people, providing essential
services to communities, and supporting innovation and the
development of a highly skilled workforce. We announced on June
15 that we would be seeking public feedback on a proposal to
expand Main Street to provide access to credit for nonprofit
organizations described in sections 501(c)(3) and 501(c)(19) of
the Internal Revenue Code that meet minimum eligibility
criteria. \1\ The Board received comments from a wide range of
stakeholders, and in response, on July 17, we announced revised
term sheets that expanded the range of nonprofit organizations
eligible to obtain Main Street loans. Under the updated terms,
the Federal Reserve will offer loans to small and medium-sized
nonprofits that were in sound financial condition before COVID-
19. Nonprofit organizations will need to meet various
eligibility criteria to qualify, including financial
eligibility criteria based on operating performance, liquidity,
and ability to repay debt. For additional information on the
proposed nonprofit facilities, please see the facility term
sheets. \2\
---------------------------------------------------------------------------
\1\ www.federalreserve.gov/newsevents/pressreleases/
monetary20200615b.htm
\2\ For the Nonprofit Organization Expanded Loan Facility term
sheet, see https://www.federalreserve.gov/newsevents/pressreleases/
files/monetary20200717a1.pdf. For the Nonprofit Organization New Loan
Facility term sheet, see https://www.federalreserve.gov/newsevents/
pressreleases/files/monetary20200717a2.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER
FROM JEROME H. POWELL
Q.1. There are over 6,200 nonprofits that employ more than 500
workers (according to GuideStar), but they are not eligible for
the forgivable loans established in the CARES Act. Nonprofit
organizations with more than 500 employees employ over 25
percent of the nonprofit workforce or over 3 million Americans.
Congress included nonprofits in the Main Street Lending
Program, but the Federal Reserve has stated that nonprofits are
not currently eligible.
As a result, there have not been any relief loan options
provided to charities with more than 500 employees. I have
heard from many social service groups who have seen an increase
in demand as well as increased costs associated with keeping
staff and clients safe. I have in hand a letter from several
voluntary health charities, such as Alzheimer's Association,
American Heart Association, American Lung Association, and
American Cancer Society, who are working overtime to support
patients and families most at risk of contracting COVID-19 or
developing dangerous complications and not able to access any
of the forgivable loans.
A.1. Nonprofit organizations are a critical part of our
economy, employing millions of people, providing essential
services to communities, and supporting innovation and the
development of a highly skilled workforce. We announced on June
15 that we would be seeking public feedback on a proposal to
expand the Main Street Lending Program (Main Street) to provide
access to credit for nonprofit organizations described in
sections 501(c)(3) and 501(c)(19) of the Internal Revenue Code
that meet minimum eligibility criteria. \1\ The Federal Reserve
Board received comments from a wide range of stakeholders, and
in response, on July 17 we announced revised term sheets that
expanded the range of nonprofit organizations eligible to
obtain Main Street loans. Under the updated terms the Federal
Reserve will offer loans to small and medium-sized nonprofits
that were in sound financial condition before COVID-19.
Nonprofit organizations will need to meet various eligibility
criteria to qualify, including financial eligibility criteria
based on operating performance, liquidity, and ability to repay
debt. For additional information on the proposed nonprofit
facilities, please see the facility term sheets. \2\
---------------------------------------------------------------------------
\1\ www.federalreserve.gov/newsevents/pressreleases/
monetary20200615b.htm
\2\ For the Nonprofit Organization Expanded Loan Facility term
sheet, see https://www.federalreserve.gov/newsevents/pressreleases/
files/monetary20200717a1.pdf. For the Nonprofit Organization New Loan
Facility term sheet, see https://www.federalreserve.gov/newsevents/
pressreleases/files/monetary20200717a2.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JEROME H. POWELL
Q.1. As you may know, CNBC has reported that the
``Congressional Budget Office projects GDP dropping 38 percent
in the second quarter as 26 million Americans remain
unemployed.''
In light of these projections, are the Federal Reserve and
the Department of the Treasury considering either expanding the
forthcoming Main Street Lending Program or creating a different
program to facilitate lending to U.S. businesses with more than
15,000 employees so that they may also get assistance with
keeping workers on the job?
A.1. The employee size and revenue eligibility metrics under
the Main Street Lending Program (Main Street) were adopted to
enable the program to support small and medium-sized businesses
that are unable to receive sufficient assistance through other
programs, such as the Small Business Administration's Paycheck
Protection Program, or that may not have reached the scale
needed to issue the kinds of capital market instruments that
would be purchased under the Federal Reserve's Primary Market
Corporate Credit Facility (PMCCF). Larger companies may wish to
consider whether the PMCCF, which extends credit to Coronavirus
Aid, Relief, and Economic Security Act (CARES Act)-eligible
businesses without imposing restrictions related to revenues or
number of employees, meets their needs. Like Main Street,
borrowers under the PMCCF must meet facility-specific
eligibility criteria. As of June 29, the PMCCF is operational
and available for use.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JEROME H. POWELL
Q.1. The Municipal Liquidity Facility only offers loans that
must be paid back in three years. All of the private market
business lending facilities offer four year lending, even
though the businesses borrowing from those facilities could
pose a greater credit risk to taxpayers than States and
localities.
What is the rationale for offering States and localities a
shorter loan term than private corporations?
Does the Federal Reserve expect that absent additional
assistance from the Federal government, the fiscal pressures on
States and localities will still be there 3 years from now?
A.1. The purpose of the Municipal Liquidity Facility (MLF) is
to restore market functioning by increasing the availability of
funding to eligible issuers through purchases of their short-
term notes, so that municipalities can better manage cash flow
pressures in order to continue to serve their communities. The
36-month maturity limit reflects the purpose of the MLF to
provide near-term financing to eligible issuers facing severe
liquidity constraints resulting from the increase in State and
local government expenditures related to COVID-19 and the
decrease and delay of certain tax revenue, while allowing
eligible issuers access to funding over more than one budget
cycle. By addressing the cash management needs of eligible
issuers, the MLF also was intended to encourage private
investors to reengage in the municipal securities market,
including across longer maturities. With the MLF and other
facilities in place as a backstop to the private market, many
parts of the municipal bond market have significantly recovered
from the unprecedented strains experienced earlier this year.
Municipal bond yields have declined considerably, issuance has
been robust in recent months-particularly for issuers rated AA
or higher who make up about 80 percent of the municipal
securities market--and market conditions have improved. \1\
---------------------------------------------------------------------------
\1\ See Board of Governors of the Federal Reserve System (2020),
Financial Stability Report (Washington: Board of Governors, May),
https://www.federalreserve.gov/publications/2020-may-financial-
stability-report-purpose.htm.
---------------------------------------------------------------------------
We will continue to closely monitor conditions in the
primary and secondary markets for municipal securities and will
evaluate whether additional measures are needed to support the
flow of credit and liquidity to State and local governments.
Q.2. Similarly, the rates the Federal Reserve is offering to
investment-grade municipalities isn't far below the rates the
Federal Reserve is offering to private companies in the Main
Street lending programs, even though municipal bonds
historically have had much lower rates of default.
Please explain the Federal Reserve's rationale for pricing
the municipal lending facility at the rates specified in the
latest term sheet.
Do you believe that the pricing could discourage States and
municipalities from using the facility and potentially
stigmatize those that choose to do so--making it harder for
those who borrow from the facility to go back to the private
market in the future?
A.2. Under Section 13(3) of the Federal Reserve Act and the
Federal Reserve Board's (Board) Regulation A, the interest rate
on the eligible notes must be set at a rate that is a premium
to the market rate in normal circumstances, affords liquidity
in unusual and exigent circumstances, encourages repayment of
the eligible notes, and discourages use of the facility as the
unusual and exigent circumstances that motivated the program
recede and economic conditions normalize. Under the Municipal
Liquidity Facility (MLF), the pricing methodology is based on
the overnight indexed swap (OIS) rate for a comparable maturity
plus a fixed spread that corresponds with the ratings of the
eligible notes and their relevant tax status. On August 11, the
Federal Reserve Board announced revised pricing for the MLF.
The revised pricing reduces the interest rate spread on tax-
exempt notes for each credit rating category by 50 basis points
and reduces the amount by which the interest rate for taxable
notes is adjusted relative to tax-exempt notes.
The fixed spread over OIS that applies for each credit
rating category under the MLF was chosen because it meets the
legal requirements. Our pricing methodology adjusts the
interest rate based on credit rating, maturity, and tax status
because these factors affect the pricing of similar municipal
debt in markets during normal times. In addition, the interest
rate on the facility is set at a level that is supportive of
borrowers facing more severe challenges. The Federal Reserve
will monitor conditions to assess the efficacy of the facility
and any unintended consequences.
Q.3. Please describe in detail the metrics the Federal Reserve
will use to judge the efficacy of the Municipal Liquidity
Facility.
A.3. On June 2, the State of Illinois became the first
Municipal Liquidity Facility (MLF) borrower when it issued $1.2
billion, 12-month general obligation notes to the facility at a
rate of 3.82 percent. This is more than 100 basis points lower
in yield than comparable short-term notes that the State issued
in the primary market in May.
However, the efficacy of the facility is not measured by
take-up. The Federal Reserve established the MLF to help
support State and local governments' ability to serve
households and businesses in their communities. That ability
depends crucially on access to municipal securities markets.
With that in mind, to measure the effectiveness of the MLF, the
Federal Reserve is closely monitoring conditions in the primary
and secondary markets for municipal securities. In particular,
we are monitoring liquidity conditions, market access, market
pricing, and volatility. Since the period of heightened market
volatility in mid-March and the announcement of the MLF,
conditions in municipal bond markets have generally improved.
For example, spreads on general obligation bonds, which rose
significantly in mid-March, have steadily decreased, reflecting
greater investor demand for these securities. Moreover, after
depressed primary issuance activity in March and April,
issuance activity has been robust in May and June.
Conditions in the secondary market have also improved, with
transaction costs and bid wanted amounts returning to more
normal levels.
Q.4. We are now three months into the COVID-19 pandemic and are
economy is under massive strain. More than 100,000 small
businesses have closed their doors forever. Additionally, three
out of four businesses have experienced declines in revenue.
Our businesses are in a free fall and the Main Street lending
facility could be a life line for businesses, if implemented
properly.
With the roll-out of the Paycheck Protection Program (PPP),
we saw how lending institutions and the Small Business
Administration's systems were overwhelmed by the loan demand.
How are you preparing banks for the volume of Main Street loan
applications they will receive? What are you doing to prepare
your own systems for the massive loan volume?
A.4. The Federal Reserve took significant steps to prepare for
the full roll-out of the Main Street Lending Program (Main
Street):
Main Street Portal. The Main Street special purpose
vehicle (SPV), which is managed by the Federal Reserve
Bank of Boston (FRBB), has contracted with a vendor to
serve as credit administrator. The FRBB, working with
this credit administrator, has created a portal to
register eligible lenders and facilitate intake of loan
participations from preregistered lenders for purchase.
The system has substantial on-demand computing capacity
and the credit administrator constantly monitors system
usage. The vendor has also trained call center and
support staff and is prepared to increase available
resources as needed. In addition to facilitating loan
intake, the online portal will also facilitate credit
monitoring of the portfolio during the life of the
loans.
Legal Documents. In the course of our outreach
efforts, lenders stressed the importance of providing
clarity in program legal documents regarding program
terms, conditions, and associated liability. We have
worked hard to provide potential Main Street borrowers
and lenders with clarity and certainty regarding these
requirements. The FRBB has posted all of the key legal
documents online, including a form loan participation
agreement, lender registration documents, lender and
borrower certification and covenant documents, and a
set of instructions for lender-required documentation.
The FRBB has also established a Main Street website for
centralized access to information for lenders and
borrowers.
Outreach. To provide potential lenders with
information on Main Street and to address their
questions in real time, the Federal Reserve has posted
more than 10 webinars explaining aspects of the program
with question and answer sessions. The Board and FRBB
also have established online mailboxes where members of
the public can submit questions. These mailboxes are
actively monitored, and questions submitted are
addressed on a bilateral basis or through guidance on
the program, including in the form of FAQs. To access
additional information, lenders and borrowers are
encouraged to access the Main Street website. \2\
---------------------------------------------------------------------------
\2\ www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.
Main Street is, of course, a credit program and not a grant
program. Participation is a function of eligibility
requirements and the extent to which the program terms and
conditions are attractive to both borrowers and lenders. We
will monitor the use of the program closely and make
adjustments if needed in the future, including to address any
---------------------------------------------------------------------------
operational issues.
Q.5. Are you allowing banks to limit loan applications to
existing customers? And, if so, will they be allowed to
prioritize their biggest customers?
A.5. Main Street includes three for-profit facilities, as well
as two recently announced nonprofit facilities, each with
unique features, designed to meet the needs of different types
of borrowers, including banks' existing customers and new
customers. The Main Street Expanded Loan Facility (MSELF) and
Nonprofit Organization Expanded Loan Facility (NOELF) require
that an eligible borrower have an existing term loan or
revolving credit facility with an eligible lender. However,
under the Main Street New Loan Facility (MSNLF), Main Street
Priority Loan Facility (MSPLF), and Nonprofit Organization New
Loan Facility, lenders may extend loans to new or existing
customers. The Federal Reserve has specifically designed the
terms and conditions of the MSNLF, MSPLF, and NONLF to allow
for lending to new customers. With respect to the MSNLF and
MSPLF, the Federal Reserve has issued FAQs providing guidance
for how to apply the facilities' underwriting criteria with
respect to new customers. We expect similar guidance will be
available for the NONLF when that facility becomes operational.
Q.6. I have heard concerns that the earnings metrics the
Federal Reserve and Treasury intend to use for the Main Street
lending facilities are ill-suited for important sectors of our
economy that employ hundreds of thousands of Americans.
As you develop final guidance for these facilities, are you
examining whether the Federal Reserve and Treasury could use
additional metrics for different industries to ensure that as
many sectors of our economy as possible can utilize the
program?
A.6. Main Street is designed to augment the supply of loans
made to businesses with established cash flows prior to COVID-
19 that need assistance to maintain operations and payroll
through these current unusual and exigent circumstances. By
focusing on bridge financing to businesses with interrupted
operations and cash flows, Main Street both directly addresses
the near-term needs of borrowers and supports the provision of
credit by lenders who may find it especially challenging to
assess near-term cash flows owing to the uncertain outlook for
COVID-19 and economy. This is a large portion of the business
community and business lending. Within this type of lending,
adjusted earnings before interest, taxes, depreciation, and
amortization (EBITDA) is a key underwriting metric used by
lenders in evaluating the credit risk of small and medium-sized
businesses. As a result, it is one of the factors that
determines the maximum loan size that borrowers are eligible to
receive within Main Street.
The Federal Reserve also recognizes that nonprofit
organizations' liquidity positions and ability to repay are not
generally evaluated by lenders based on EBITDA. Understanding
this and the critical role nonprofit organizations play in the
economy, the Federal Reserve announced on June 15 that it would
be seeking public feedback on a proposal to expand Main Street
to provide access to credit for nonprofit organizations. The
Board received comments from a wide range of stakeholders, and
in response, on July 17 we announced revised term sheets that
expanded the range of nonprofit organizations that would be
eligible to obtain Main Street loans. Under the updated terms,
the Federal Reserve will offer loans to small and medium-sized
nonprofits that were in sound financial condition before COVID-
19. Nonprofit organizations will need to meet various
eligibility criteria to qualify, including financial
eligibility criteria based on operating performance, liquidity,
and ability to repay debt.33 Additional details on the proposed
nonprofit facilities can be found at www.federalreserve.gov/
monetarypolicy/mainstreetlending.htm.
The Federal Reserve further recognizes that, for some
borrowers, collateral values or other factors are more
indicative of the ability to obtain credit than cash flows.
Staff continue to monitor lending conditions broadly and, while
credit conditions have tightened overall, credit appears to be
available generally against good collateral when such
collateral is available. If these conditions were to change
significantly, the Federal Reserve would carefully evaluate
whether its authorities could further support the availability
of credit. We remain alert to the possibility that changes to
market conditions may warrant changes to the terms and
conditions of the Federal Reserve's emergency lending programs.
Q.7. Borrowers from commercial mortgage-backed securities
(CMBS), like hotels, shopping centers, and housing complexes,
attest that they are under significant financial hardship. In
many cases, their tenants are not able to pay rent and their
mortgage servicers are not offering flexibility. Several
affected entities are concerned about their ability to meet
their financial obligations over a protracted period of time.
Does the Treasury or Federal Reserve have plans to address
these concerns in the CMBS market, and if so, how?
A.7. The Board has been closely monitoring the situation in the
commercial mortgage-backed securities (CMBS) market and
recognizes the concerns that you have outlined in your
question. Several of the Federal Reserve's initiatives to
support the broader economy have proven beneficial to the CMBS
market, such as the purchases of Agency CMBS as part of open-
market operations and the inclusion of legacy CMBS as TALF-
eligible collateral. Spreads and liquidity in the CMBS market
have improved significantly since the Federal Reserve started
these programs. Main Street and the Paycheck Protection Program
Liquidity Facility may also support CMBS borrowers by providing
small and medium-sized businesses financing to maintain their
operations-including paying rent-until conditions normalize.
Other Federal Reserve programs, such as the corporate credit
facilities, are also providing support to some segments of the
commercial real estate industry.
Even with these actions, as you note, certain CMBS
borrowers continue to experience significant distress. Since
late February 2020, the lodging and retail sectors have
experienced precipitous declines in demand as a result of
COVID-19. In June, looking only at mortgages funded by CMBS,
borrowers accounting for about 24 percent of mortgages in the
lodging sector and 18 percent of mortgages in the retail sector
were more than 30 days delinquent. Other sectors-for example,
the multi-family sector-have experienced less-severe increases
in delinquencies.
We are committed to using our policy tools to help
employers get through the current difficult period. However,
loans made through a Federal Reserve facility may not be an
effective solution for hotel and retail commercial properties
that have suffered large revenue losses and already have large
amounts of debt. Loans extended under the Federal Reserve's
13(3) authority are generally not subordinate to other debt,
and the Federal Reserve must take steps to ensure that the
taxpayer will be repaid. In addition, many CMBS borrowers may
be barred by their loan agreements from taking on more debt.
We will continue to monitor economic conditions, including
those faced by CMBS and other commercial real estate borrowers,
as well as the efficacy of existing facilities. We will
consider changes in our approach as warranted by future
developments.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM JEROME H. POWELL
Q.1. Recent data on the availability of credit suggests that it
has not been this difficult to obtain a mortgage since 2014,
and constraints on the availability of credit are particularly
acute for borrowers of non-QM loans and jumbo loans. Because
these mortgages are frequently packaged and sold as residential
mortgage-backed securities (RMBS) to private investors, the
recent illiquidity in secondary market private RMBS exacerbates
the lack of funding for such mortgages.
Non-agency RMBS is the largest asset class by volume within
all ABS, comprising approximately 30 percent of the market, but
is one of the few asset classes which is not currently eligible
under the Term Asset-backed Lending Facility (TALF) program.
Are there plans to allow AAA RMBS securities as eligible
collateral under TALF?
A.1. In determining whether a certain type of asset-backed
securities (ABS) should be eligible collateral for Term Asset-
Backed Lending Facility (TALF) loans, the Federal Reserve
Board's (Board) considers whether accepting an asset class will
provide material support to the economy and whether inclusion
of the asset class is appropriate under the restrictions of
section 13(3) of the Federal Reserve Act. In particular, under
section 13(3), the Board and Reserve Banks must take steps to
ensure the protection of the taxpayer, including by assigning a
``lendable value to all collateral.'' To satisfy this
restriction, we prioritize categories of ABS where a large
share of issuance is routinely rated triple-A by the rating
agencies and where comprehensive information is available about
credit performance in different economic environments,
including stressed conditions.
As you noted, one of the largest ABS categories not
currently eligible as TALF collateral is residential mortgage-
backed securities (RMBS), and a large share of RMBS issuance is
typically rated triple-A by the rating agencies. However, some
RMBS have performed poorly in times of stress, and RMBS
collateralized by mortgages with low or nonstandard
documentation have a particular history of underperformance.
The types of ABS currently accepted as TALF collateral
generally have a long history of performing well in stressed
economic conditions, and the Board relies on that history of
strong performance to ensure that TALF loans are made in a
manner consistent with section 13(3).
The Board recognizes that the current exclusion of all RMBS
from TALF affects credit availability in some sectors of the
mortgage market and continues to consider whether adding
certain types of RMBS to the list of TALF-eligible collateral
is consistent with the 13(3) requirements and the policy aims
of the TALF. In this analysis, we are assessing separately how
jumbo, non-QM, and re-performing RMBS measure against the
considerations articulated above. This analysis is being
conducted in consultation with our colleagues at the U.S.
Department of the Treasury, which has provided a $10 billion
equity investment in the TALF special purpose vehicle using
funds appropriated to the Exchange Stabilization Fund under
section 4027 of the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act).
Q.2. As many States move forward with reopening, Montana being
one of them, what assistance and guidance are you providing
PHAs in regards to reopening?
A.2. While direct oversight and support for public housing
authorities (PHAs) are not under the purview of the Board, we
are sympathetic to the challenges that PHAs face during these
difficult times. The Federal Reserve System's Community
Development Offices have worked to collect information about
the economic impact of actions undertaken to respond to the
public health crisis through outreach, data collection and
analysis to help inform the work of agencies and community
organizations working to support low- and moderate-income (LMI)
populations. Through conversations with relevant stakeholders
and a review of the results of the April and June 2020 rounds
of the Federal Reserve System's survey of LMI communities on
the effects of COVID-19, we know that many organizations
providing affordable housing services are incurring significant
unanticipated expenses. \1\ Among these unexpected expenses are
increased cleaning and sanitization costs to protect the health
of their residents, increased carrying costs for new properties
or those under renovation for which construction has been
halted, and the provision of personal protective equipment for
their staff members.
---------------------------------------------------------------------------
\1\ https://www.frbatlanta.org/community-development/publications/
national-COVID-19-survey
---------------------------------------------------------------------------
The simultaneous decline in rental revenues as residents
lose their employment has exacerbated this increase in
expenses. Based on the Census Bureau's Household Pulse Survey
and other sources, we know that employment and housing
disruption are most significant for the very lowincome
households that it is the mission of PHAs to serve. Therefore,
we are closely monitoring conditions in affordable rental
markets to identify any stresses that may either reverberate
through the financial system or negatively impact renters,
especially low-income renters.
Q.3. Would jumbo AAA RMBS and non-QM RMBS be eligible? Would
other sub asset classes--such as reperforming loans for
borrowers coming off a credit event--be eligible as well?
A.3. Please see response to Question 1.
Q.4. What support can Treasury lend to the Fed under TALF to
support the housing market so that financing is available for
self-employed or nontraditional borrowers who rely on non-QM
mortgages, or to borrowers who live in high-cost areas who rely
on jumbo financing?
A.4. Please see response to Question 1.
Q.5. What metrics will you use in making these determinations?
A.5. Please see response to Question 1.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JEROME H. POWELL
Q.1. On December 13, 2019, I signed a letter to you regarding
climate-related financial and economic risks. \1\ In this
letter, my colleagues and I stated, ``The Fed's supervisory
framework and analytical tools need to account for the fact
that our financial system faces new risks from climate
change.'' \2\
---------------------------------------------------------------------------
\1\ Letter from Senators Schatz, Warren, Smith, Klobuchar,
Whitehouse, Baldwin, and Harris to Federal Reserve System Chair Jerome
Powell, December 13, 2019.
\2\ Id.
---------------------------------------------------------------------------
In your response, you stated, ``Congress has principally
entrusted other agencies with the task of addressing climate
change. However, as your letter notes, there are ways in which
climate-related risks could have relevance for the Federal
Reserve Board (Board) as it fulfills its mission.'' \3\
Additionally, earlier this year, you stated, ``The public has
every right to expect and will expect that we will ensure that
the financial system is resilient and robust against the risks
of climate change.'' \4\
---------------------------------------------------------------------------
\3\ Letter from Federal Reserve System Chair Jerome Powell to
Senator Warren, February 10, 2020.
\4\ Reuters, ``Fed Has a Role in Combating Climate Change Risk,
Powell Says'', Ann Saphir, January 29, 2020, https://www.reuters.com/
article/us-usa-fed-climatechange/fed-has-a-role-in-combating-climate-
change-risk-powell-says-idUSKBN1ZT031.
---------------------------------------------------------------------------
Given the threats of climate change on the financial
system, \5\ please explain how you view the Federal Reserve
Board's role in combatting the climate crisis and its
associated economic risks.
---------------------------------------------------------------------------
\5\ Center for American Progress, ``Climate Change Threatens the
Stability of the Financial System'', Gregg Gelzinis and Graham Steele,
November 21, 2019, https://www.americanprogress.org/issues/economy/
reports/2019/11/21/477190/climate-change-threatens-stability-financial-
system/.
---------------------------------------------------------------------------
Has the Federal Reserve System hired or contracted climate
economists to work on evaluating climate change risks? Have you
or other senior Federal Reserve System officials been briefed
or advised by climate scientists or climate economists inside
or outside of government on these issues?
A.1. Economic research to understand the specific transmission
channels between climate-related risks and the financial system
is essential to understanding the impact of those risks on the
Federal Reserve's mission. This research remains at an early
stage, and the Federal Reserve is working to foster and develop
it. These efforts are active and ongoing, and they will help us
assess the ways climate-related risks may affect the economy,
financial stability, and the safety and soundness of financial
institutions. Moreover, as mentioned below, the Federal Reserve
Board (Board) staff participate in several forums with other
U.S. and international regulators where the evaluation of the
effects of climate change on the financial system are
particularly relevant.
Regarding the second part of your question, the Federal
Reserve does have a range of staff who conduct and publish
academic research on climate-related financial risks; I have
attached, as Appendix A, a list of publications by several of
those staff with my response.
Q.2. You also stated, ``The Board and Reserve Banks are
exploring new sources of climate-related data and computational
resources, research projects involving existing supervisory
data collections, and participation in conferences and
workshops to share our efforts with the public. These efforts,
which are in their early stages, span several areas within the
Board and the Reserve Banks.'' \6\
---------------------------------------------------------------------------
\6\ Letter from Federal Reserve System Chair Jerome Powell to
Senator Warren, February 10, 2020.
---------------------------------------------------------------------------
Please provide a detailed timeline for the Federal
Reserve's timeline for this research, publicizing their
findings, and operationalizing the findings in the Federal
Reserve's supervision.
A.2. Much of the research mentioned in Appendix A has been
published and presented in academic seminars and conferences.
The Federal Reserve has made a concerted effort in recent years
to make more information about supervision, regulation, and
financial stability work available to the public. This
engagement and transparency is especially important in an area
of research that is still emerging, such as the analysis of
climate-related financial risks, and we expect to make as much
of our own research on this topic public as possible.
Q.3. Earlier this year, when asked why the Federal Reserve
System has not joined ``dozens of other global central banks in
the Network for Greening the Financial System, an international
effort to better understand risks from rising temperatures,''
reports show that you indicated that ``it is just a matter of
time.'' \7\
---------------------------------------------------------------------------
\7\ Reuters, ``Fed Has a Role in Combating Climate Change Risk,
Powell Says'', Ann Saphir, January 29, 2020, https://www.reuters.com/
article/us-usa-fed-climatechange/fed-has-a-role-in-combating-climate-
change-risk-powell-says-idUSKBN1ZT031.
---------------------------------------------------------------------------
Will you commit to joining the multitude of foreign central
banks and financial regulators that are focusing on climate
risk at the Network for Greening the Financial System (NGFS)?
A.3. While the timeline of the Network for Greening the
Financial System's (NGFS) activities is in flux as a result of
COVID-19, the Federal Reserve remains engaged with the NGFS
secretariat and its members, continues to participate in its
meetings as a guest, and is following its work closely. We
continue to discuss with the NGFS what role the Federal Reserve
could potentially play in NGFS work, particularly as its
steering committee considers how to align its governance
structure with the best practices of other international
organizations. Any role would need to be consistent with the
mandate and scope of activities Congress has authorized for the
Federal Reserve.
Q.4. Do you think the United States has a competitive advantage
when it comes to leading global efforts on financial regulation
at international coordinating bodies when the Federal Reserve
is not a member of the NGFS?
A.4. As I described in a previous letter to you, the Federal
Reserve has considerable expertise in understanding the impact
of severe weather events, ranging from economic forecasting, to
financial stability monitoring, to prudential supervision, to
continuity of operations. I continue to believe that this
expertise, our active participation in the emerging research
dialogue on climate-related financial risks, and our commitment
to evidence-based policymaking position us well to contribute
to the assessment and measurement of climate-related financial
risks. Our peers in other jurisdictions are working to make
similar contributions, and we continue to benefit from their
efforts.
Q.5. I am an original cosponsor of the Climate Change Financial
Risk Act of 2019. \8\ This bill would create new climate risk
scenarios for financial institution stress tests. It would
require the Federal Reserve, along with an advisory group of
climate experts, to develop three stress test scenarios: one
assuming 1.5 degrees Celsius of warming above pre-industrial
levels, one assuming 2 degrees of warming, and one assuming
``business as usual'' warming. \9\ These tests will quantify
how expected physical and transition risks will affect economic
conditions, and will require financial institutions to define
how they will adapt their practices to limit climate impacts.
The Federal Reserve will have the power to reject plans and
prohibit institutions from proceeding with capital
distributions.
---------------------------------------------------------------------------
\8\ Climate Change Financial Risk Act of 2019, S. 2903, https://
www.congress.gov/bill/116th-congress/senate-bill/2903.
\9\ Office of Senator Schatz, ``Schatz Introduces New Legislation
To Ensure U.S. Financial System Is Prepared for Climate Change,''
November 20, 2019, https://www.schatz.senate.gov/press-releases/schatz-
introduces-new-legislation-to-ensure-us-financial-system-is-prepared-
for-climate-change.
---------------------------------------------------------------------------
Do you support the Federal Reserve conducting stress tests
to measure resilience to climate-related financial risks? If
not, what measures do you support to incorporate climate risk
scenarios in overseeing large financial institutions?
The Bank of England recently stated, ``Climate change
creates risks to both the safety and soundness of individual
firms and to the stability of the financial system.'' \10\
Accordingly, they have decided to stress test the United
Kingdom's largest banks and insurance companies against the
physical and transition risks associated with climate change.
\11\ Will the Federal Reserve follow suit and develop climate-
related stress tests?
---------------------------------------------------------------------------
\10\ Bank of England, ``Discussion Paper: The 2021 biennial
exploratory scenario on the financial risks from climate change,''
December 2019, https://www.bankofengland.co.uk/-/media/boe/files/paper/
2019/the-2021-biennial-exploratory-scenario-on-the-financial-risks-
from-climate-
change.pdf?la=en&hash=73D06B913C73472D0DF21F18DB71C2F454148C80.
\11\ Climate News Network, ``Bank of England Unveils Climate
Stress Test'', Kieran Cooke, January 1, 2020, https://
climatenewsnetwork.net/bank-of-england-unveils-climate-stress-test/.
A.5. Federal Reserve staff and other central banks are engaged
in research to better understand the translation of climate
risk to economic and financial risk, as would be required to
conduct a stress test. Further research in this new and rapidly
evolving field is a prerequisite to any regulatory or
supervisory steps, including any changes to stress testing
requirements. We are committed to making as much of this
research as public as possible to inform the common effort by
academics and Congress to more fully understand climate-related
---------------------------------------------------------------------------
financial risks.
Q.6. Following the Banking, Housing, and Urban Affairs
Committee hearing on December 5, 2019, I submitted questions
for the record for Federal Reserve System Vice Chair for
Supervision Randal Quarles. \12\
---------------------------------------------------------------------------
\12\ Questions for the Record from Senator Warren to Federal
Reserve System Vice Chair for Supervision Randal Quarles, December 12,
2019.
---------------------------------------------------------------------------
In response to my question regarding incorporation of
climate risks in assessing financial stability, Vice Chair
Quarles stated, ``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.'' \13\ Recent
reports, however, have described the ``likelihood that the Fed
won't account for long-term climate risks, like stranded fossil
fuel assets, as it directs the world's largest asset manager to
revive the U.S. economy.'' \14\
---------------------------------------------------------------------------
\13\ Letter from Federal Reserve System Vice Chair for Supervision
Randal Quarles to Senator Warren, May 11, 2020.
\14\ E&E News, ``Fed Faces Climate Test as It Tries To Rescue
Economy'', Avery Ellfeldt, April 16, 2020, https://www.eenews.net/
stories/1062883505.
---------------------------------------------------------------------------
Please provide specific information about the staff
research on climate-related risks and the financial system and
how the Federal Reserve System has incorporated staff research
in its supervision of financial institutions.
A.6. As noted in my response to question 1a, I have attached
Appendix A. This list of research undertaken by Federal Reserve
System staff on climate-related financial and economic risks
covers a wide range of sub-topics, including the effect of
climate-related risks on asset prices, consumer spending,
industrial production, savings behavior, credit availability,
and fiscal outcomes. It also reflects the emerging State of
this area of the economic literature, as well as the number of
questions that would still benefit from careful analysis. As I
noted in a previous letter to you, we expect to continue
participating actively in these efforts, and to work to
understand the transmission of climate-related risks to the
financial system. As we understand these transmission
mechanisms better, this research will assist us in our
supervisory work.
Q.7. Vice Chair Quarles also stated, ``Federal Reserve staff
and I remain in frequent contact with our supervisory
colleagues in other jurisdictions, following closely their own
climate-related projects.'' \15\
---------------------------------------------------------------------------
\15\ Letter from Federal Reserve System Vice Chair for Supervision
Randal Quarles to Senator Warren, May 11, 2020.
---------------------------------------------------------------------------
Please provide a list of supervisory institutions in other
jurisdictions with whom the Federal Reserve staff and you have
communicated regarding climate-related financial risks.
Please describe how these communications have informed the
Federal Reserve's efforts to incorporate climate-related risks
in its supervision of large financial institutions.
A.7. The Federal Reserve is an active member of international
standard-setting bodies, such as the Basel Committee for
Banking Supervision and the International Association of
Insurance Supervisors, as well as the Financial Stability
Board, which is chaired by Vice Chair Quarles. The membership
of these groups includes dozens of central banks, supervisors,
and finance ministries; each group has climate-related projects
underway to which we are actively contributing.
We also have attended meetings of the NGFS as a guest, and
Federal Reserve staff have held bilateral meetings with staff
from other central banks and supervisors on climate-related
issues. These include staff from De Nederlandsche Bank, the
European Central Bank, the Bank of Japan, Japan Financial
Services Agency, and the Bank of England.
These conversations have offered staff useful perspectives
on the nature of the work being undertaken at foreign
institutions, as well as the challenges that those institutions
have faced. Further, some staff have been able to engage on
existing and potential future research papers.
Q.8. In response to my question regarding how the Federal
Reserve has assessed if the financial system is resilient to
climate-related risks or taken any actions to increase
resilience to the climate crisis, Vice Chair Quarles's response
instead focused on near-term severe weather events, rather than
long-term climate impacts, and stated that the Federal Reserve
does not directly model ``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).'' \16\
---------------------------------------------------------------------------
\16\ Id.
---------------------------------------------------------------------------
Given the significant differences between climate and
weather, \17\ please describe how the Federal Reserve System is
differentiating between severe weather impacts and climate
change in its analysis of climate-related risks.
---------------------------------------------------------------------------
\17\ New York Times, ``How the Weather Gets Weaponized in Climate
Change Messaging'', Brad Plumer, March 1, 2019, https://
www.nytimes.com/2019/03/01/climate/weather-climate-change.html.
A.8. Changes in longer-term climate trends could affect the
frequency, severity, location, and impact of severe weather
events. As Appendix A reflects, Federal Reserve staff have
undertaken a range of research to examine the effect of severe
weather events and other natural disasters on economic and
financial outcomes. These kinds of analyses are an important
input into efforts to model the economic and financial effects
of long-run climate trends. Researchers in the field have begun
to work on this second distinct challenge, and our staff are
---------------------------------------------------------------------------
both following closely and contributing to that work.
Q.9. Earlier this year, the Canadian government announced a
program to provide financing for businesses in response to the
ongoing novel coronavirus 2019 disease (COVID-19) pandemic. As
one of the conditions for receiving funds, Canada is requiring
that companies receiving assistance under this program ``commit
to publish annual climate-related disclosure reports consistent
with the Financial Stability Board's Task Force on Climate-
related Financial Disclosures, including how their future
operations will support environmental sustainability and
national climate goals.'' \18\
---------------------------------------------------------------------------
\18\ Justin Trudeau, Prime Minister of Canada, ``Prime Minister
announces additional support for businesses to help save Canadian
jobs,'' press release, May 11, 2020, https://pm.gc.ca/en/news/news-
releases/2020/05/11/prime-minister-announces-additional-support-
businesses-help-save.
---------------------------------------------------------------------------
Despite the significant economic impacts of the climate
crisis, \19\ ``U.S. regulators have been slow to respond to the
threats that a warming planet can pose to financial assets.''
\20\
---------------------------------------------------------------------------
\19\ New York Times, ``Climate Change's Giant Impact on the
Economy: 4 Key Issues'', Neil Irwin, January 17, 2019, https://
www.nytimes.com/2019/01/17/upshot/how-to-think-about-the-costs-of-
climate-change.html; Brookings Institution, ``Ten facts about the
economics of climate change and climate policy,'' Ryan Nunn, Jimmy
O'Donnell, Jay Shambaugh, Lawrence Goulder, Charles Kolstad, and
Xianling Long, October 23, 2019, https://www.brookings.edu/research/
ten-facts-about-the-economics-of-climate-change-and-climate-policy/.
\20\ Reuters, ``U.S. Regulator Homes in on Climate Risks to U.S.
Markets'', Ann Saphir, December 11, 2019, https://www.reuters.com/
article/us-climate-change-market-risks/u-s-regulator-homes-in-on-
climate-risks-to-u-s-markets-idUSKBN1YF2D5.
---------------------------------------------------------------------------
Will you require companies that receive money from
taxpayers to keep workers on their payroll?
A.9. By promoting the flow of credit to households and
business, our facilities are intended to support the provision
of liquidity in the economy, which will help businesses
maintain their operations and employees through this
challenging period. Our facilities were designed in compliance
with both the Coronavirus Aid, Relief, and Economic Security
Act (CARES Act) and section 13(3) of the Federal Reserve Act.
For our Main Street Lending Program, we do expect borrowers to
make commercially reasonable efforts to maintain their
payrolls. Overall, providing credit to businesses, large and
small, should help to ensure that their workers can remain
employed and paid through this very difficult period. We will
continue to monitor our facilities to ensure they are working
as intended.
Q.10. Do you consider climate change a threat to the stability
of our financial system, especially in the wake of the
coronavirus crisis?
A.10. The Federal Reserve is committed to promoting a safe,
flexible, and stable financial system. This mandate requires us
to examine a wide range of risks to the financial system. As I
mentioned in my response to question 1a, economic research to
understand the specific transmission channels between climate-
related risks and the financial system is essential to
understanding the impact of those risks on the Federal
Reserve's mission. This research remains at an early stage, and
the Federal Reserve is working to foster and develop it. These
efforts are active and ongoing and will help us assess the ways
climate-related risks may affect the economy, financial
stability, and the safety and soundness of financial
institutions.
Q.11. In the third quarter of 2019, oil and gas companies were
responsible for 91 percent of defaulted U.S. corporate debt.
\21\ Thirty-seven oil companies received over $1.9 billion in
tax benefits by using a provision in the Coronavirus Aid,
Relief, and Economic Security (CARES) Act. For example,
Marathon received a $411 million benefit, and Occidental
expects to receive $195 million because of a carryback
provision. \22\
---------------------------------------------------------------------------
\21\ New York Times, ``Coronavirus May Kill Our Fracking Fever
Dream'', opinion, Bethany McLean, April 10, 2020, https://
www.nytimes.com/2020/04/10/opinion/sunday/coronavirus-texas-fracking-
layoffs.html.
\22\ Bloomberg, `` `Stealth Bailout' Shovels Millions of Dollars
to Oil Companies'', Jennifer Dlouhy, May 15, 2020, https://
www.bloomberg.com/news/articles/2020-05-15/-stealth-bailout-shovels-
millions-of-dollars-to-oil-companies?sref=L459Uwzi.
---------------------------------------------------------------------------
How will the Federal Reserve ensure the long-term stability
of the U.S. energy and financial systems?
A.11. In the wake of COVID-19, we are monitoring corporate
insolvencies carefully from both a supervisory and financial
stability perspective. As part of that monitoring, we are
paying careful attention to default risk in different sectors
and considering what the repercussions of that risk are for
financial stability more broadly. Additional information on the
Federal Reserve's approach to monitoring financial system
vulnerabilities, including those in the nonfinancial corporate
sector, can be found in our latest Financial Stability Report.
\23\ In terms of the U.S. energy sector, Federal law assigns
regulatory responsibility to other agencies.
---------------------------------------------------------------------------
\1\ 1 www.federalreserve.gov/publications/2020-may-financial-
stability-report-purpose.htm
---------------------------------------------------------------------------
APPENDIX A
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM JEROME H. POWELL
Q.1. According to Census data, about half of small businesses
will run out of cash within a month. States are beginning to
reopen their economies, but consumer behavior is not going to
return to normal within a month.
How many small businesses does the Fed estimate will have
to close permanently within the next month?
What economic indicators will the Fed monitor in the next
couple of weeks to gauge the economy's recovery?
A.1. COVID-19 poses a critical risk of insolvency to small and
medium-sized businesses. These firms are the heart of our
economy and widespread insolvencies could cause long-lasting
economic harm. In order to bolster the effectiveness of the
Paycheck Protection Program (PPP), the Federal Reserve launched
the Paycheck Protection Program Liquidity Facility, which
supplies liquidity to lenders backed by their PPP loans to
small businesses. In addition, the Federal Reserve's Main
Street Lending Program (Main Street) facilities are now
available to provide credit to small and medium-sized firms
that were in sound financial condition prior to COVID-19.
Going forward, the financial health of small businesses is
highly uncertain and will likely remain challenging. The number
of insolvencies will depend upon multiple factors, including
the pace of the broader economic recovery. The Federal Reserve
will be carefully monitoring this issue through the use of
information such as small business loan performance data and
the surveys produced by organizations such as the National
Federation of Independent Business.
Q.2. You have warned that there could be serious, long-term
economic harm from avoidable insolvencies-both at the household
and business level.
In order to avoid unnecessary insolvencies, how quickly
should Congress act? If we wait until we see bankruptcies
increase, isn't that too late to use fiscal policy to prevent
them?
A.2. As stated in my previous response, the current economic
downturn poses the threat of insolvency for many businesses and
households; such insolvencies could do significant longer-run
damage to the economy. Maintaining the flow of credit is
therefore essential for mitigating damage to the economy and
laying the groundwork for the recovery. To directly support the
flow of credit to households, to businesses of all sizes, and
to State and local governments, the Federal Reserve has
established several lending facilities. These facilities
benefit the economy by providing financing where it is not
otherwise available, helping employers to retain their workers
and households to meet their obligations. By backstopping
financial markets, these facilities aim to increase the
willingness of private-sector lenders to issue credit, thereby
easing financial strain for families and firms. Furthermore,
the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act) and other legislation provides additional, direct support
to households and businesses, which should help reduce the
prevalence of firm and household financial strain. Going
forward, though, household and business insolvency remains a
significant concern. That said, the size, composition, and
timing of any additional fiscal support for households and
firms is ultimately a decision for Congress and the
Administration.
Q.3. Data from before the COVID pandemic show that household
debt increased to a new high of $14 trillion in the first
quarter of 2020, which is $1.6 trillion higher than the
previous peak in 2008. Many Americans will take on more debt to
get through the pandemic, and many will fall behind in paying
their bills.
Do you think policies that would help reduce Americans'
debt burden would help speed our economic recovery?
A.3. Total household debt reached a record high of $14 trillion
in nominal terms in the first quarter of 2020. Real debt,
however, remained about $1.1 trillion below its previous peak
in 2008. In addition, real income grew over this period and
interest rates on household debt are much lower than in 2008.
As a result, the aggregate household debt service ratio-the
ratio of total required household debt payments to total
disposable income-remained at a subdued level.
The rapid rise in unemployment and the curtailment of
incomes for many people brought by COVID-19 has limited their
ability to keep up with their debt obligations. To help
borrowers weather this shock and manage their debt obligations,
several programs-such as mortgage and Federal student loan
forbearance programs-were implemented.
Government policies that help reduce households' debt
burdens would likely have positive economic effects, including
near-term growth and increased spending by those households. In
such a scenario, aggregate demand could go up in the near term
as borrowers see their debt payments reduced, and some
borrowers' credit scores could be boosted. This improvement of
consumers' balance sheets and creditworthiness could expand
their credit access, leading to more borrowing and increased
aggregate demand.
The extent to which such policies would promote overall
economic growth would depend on many competing factors that
lawmakers and the Administration will need to carefully
consider, including the costs of such policies in a time of low
interest rates against potential increases in employment and
economic growth.
Q.4. Do you think the damage to people's credit scores from
late payments as a result of COVID will weigh on Americans'
financial health or the economy?
A.4. Provisions under the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) relating to credit reporting allow
consumers affected by the pandemic to obtain relief while
minimizing the impact on their credit scores. The law requires
creditors to report as ``current'' any credit obligations on
which they have provided an accommodation to a COVID-19-
affected borrower who was current prior to the accommodation.
Indeed, partly due to these measures and lender-provided loan
forbearance, so far we have not seen a widespread increase in
delinquencies for household credit, nor a material
deterioration of credit scores. Maintaining household credit
performance and stable credit scores is important for ensuring
a smooth flow of credit to the household sector, which in turn
will play an important role in helping to facilitate a robust
economic recovery.
To support consumers in managing their finances during
COVID-19, the Federal Reserve Board has issued numerous
statements and rules to encourage banks to work with their
customers, support implementation of provisions of the CARES
Act under our supervision, increase banks' flexibility in
accommodating consumers' access to credit, and remind banks of
their obligation to comply with consumer laws and regulations,
including fair lending. The various actions are listed on the
COVID-19 page of our public website. \1\ As an overview,
several of the regulatory and supervisory statements to support
financial institutions and consumers in this crisis include:
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/COVID-19.htm
Forbearance and credit workouts: We have issued
guidance encouraging banks and mortgage servicers to
work with customers and borrowers to provide
forbearance. \2\
---------------------------------------------------------------------------
\2\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200403a.htm
CARES Act examination procedures: We have issued
public examination procedures to inform the industry of
how we intend to supervise State member banks for
compliance with the credit reporting and mortgage
forbearance provisions of the CARES Act. \3\
---------------------------------------------------------------------------
\3\ https://www.federalreserve.gov/supervisionreg/caletters/
caltr2011.htm
Small dollar loans: We have issued principles
describing how banks can extend responsible small
dollar loans to help borrowers cover temporary cash-
flow imbalances, unexpected expenses, or income
shortfalls. \4\
---------------------------------------------------------------------------
\4\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200520a.htm
Appraisals: We have temporarily deferred the
requirement for appraisals to facilitate mortgage
credit. \5\
---------------------------------------------------------------------------
\5\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200414a.htm
Access to savings: We have suspended limits on the
number of withdrawals from savings accounts to provide
consumers greater access to their funds. \6\
---------------------------------------------------------------------------
\6\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20200424a.htm
Community Reinvestment Act (CRA) consideration for
activities: We have issued a statement indicating that
CRA credit would be provided for activities that serve
the needs of lower-income consumers and communities,
\7\ with interagency guidance issued to clarify
activities that will be considered as responsive under
CRA. \8\
---------------------------------------------------------------------------
\7\ https://www.federalreserve.gov/supervisionreg/caletters/
caltr2004.htm
\8\ https://www.federalreserve.gov/supervisionreg/caletters/
caltr2010.htm
In addition, consistent with its supervisory authority, the
Federal Reserve will examine banks under its jurisdiction for
compliance with the CARES Act provisions that are intended to
mitigate any negative impact on credit scores due to loan
accommodations.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR VAN HOLLEN FROM JEROME H. POWELL
Q.1. On May 4, the Federal Reserve Bank of New York announced
that it plans to use the Term Asset-Backed Loan Facility (TALF)
to purchase Exchange Traded Funds (ETFs) that may own bonds
rated below investment grade. How did the Federal Reserve reach
this decision, and how does it measure the trade-offs of
purchasing such ETFs?
A.1.I understand from further discussions with your staff that
your question is referring to purchases made by the Secondary
Market Corporate Credit Facility (SMCCF). Market functioning in
the corporate credit market has been impaired based on metrics
such as prices, bid ask spreads, trading volumes, and price
volatility as well as limited primary market issuance from high
yield issuers. The Federal Reserve decided that by purchasing
Exchange Traded Funds (ETFs) that have exposure to high-yield
issuers, the SMCCF would be able to provide support to this
segment of the corporate bond market and limit discontinuities
between the different segments of the market. Such
discontinuities can lead to extreme outcomes where companies
downgraded a single notch-from low investment-grade to the
upper end of high-yield-find themselves facing sharply higher
funding costs and thus are under increased pressure to cut
costs, including by reducing their workforces.
The increased risk associated with acquiring securities
issued by high-yield companies is managed by investing through
instruments that allow for the creation of a diversified
portfolio and by the increased amount of the U.S. Department of
the Treasury's (Treasury) equity allocated to support these
purchases. The Federal Reserve and the Treasury also limit the
amount of risk to the SMCCF from purchases of high-yield ETFs
by ensuring that the large majority of ETF purchases target the
investment grade corporate bond market.
Q.2. What specific authority is the Federal Reserve for its
Secondary Market Facility? Is the Federal Reserve using its
13(3) authorities, if so please explain? Has the Federal
Reserve ever used this authority to buy junk debt? Please
explain the legal authority the Federal Reserve is relying on
to justify its use of the Secondary Market Facility to purchase
junk bond debt.
For assets not guaranteed as to interest and principal by
the U.S. government, what is the qualifying collateral, as
required by Section 13(3),that secures these assets in an
amount sufficient to protect taxpayers from losses?
A.2. The Federal Reserve, with the approval of the Secretary of
the Treasury (Secretary), established the SMCCF pursuant to
authority under section 13(3) of the Federal Reserve Act. In
unusual and exigent circumstances, the Federal Reserve Board
(Board), by the affirmative vote of not less than five members,
may authorize any Federal Reserve Bank, subject to such
conditions and during such periods as the Board may determine,
to extend credit to any participant in a program or facility
with broad-based eligibility. In particular, section 13(3)
allows the SMCCF to purchase certain types of debt instruments.
\1\ Section 4003 of the Coronavirus Aid, Relief, and Economic
Security Act (CARES Act) also contemplates that the Federal
Reserve may establish programs or facilities that purchase
obligations or other interests in secondary markets to provide
liquidity to the financial system. \2\ The Federal Reserve has
not previously used this authority to purchase high yield
corporate debt instruments.
---------------------------------------------------------------------------
\1\ The Federal Reserve Act allows the lending Reserve Bank ``to
discount for any participant in any program or facility with broad-
based eligibility, notes, drafts, and bills of exchange when such
notes, drafts, and bills of exchange are indorsed or otherwise secured
to the satisfaction of the Federal Reserve bank.'' 12 U.S.C. 343(3).
\2\ See, e.g., 12 U.S.C. 4003(b)(4)(B).
---------------------------------------------------------------------------
In the case of the SMCCF, the Federal Reserve Bank of New
York (FRBNY) has recourse to all of the assets owned by the
special purpose vehicle (SPV), including any earnings and fees
accumulated in the course of the operation of the SPV.
Moreover, the equity provided by the Treasury in connection
with the SMCCF further protects the FRBNY from loss. Market
participants use credit ratings to assess the likelihood that a
company's debt will be repaid. Likewise, the SMCCF uses credit
ratings to identify which debt instruments it may purchase and
how much Treasury equity will be allocated to protect against
losses from those instruments. The historical default rates of
companies rated below investment grade are higher than those of
companies rated above investment grade, but the SMCCF adjusts
for heightened credit risk by allocating more Treasury equity
to support purchases of companies rated below investment grade.
In particular, the SMCCF leverages the Treasury equity at 10 to
1 when acquiring corporate bonds of issuers that are investment
grade, but only at 7 to 1 when acquiring corporate bonds of
issuers that were previously rated investment grade but are now
rated one rating grade below investment grade. \3\
---------------------------------------------------------------------------
\3\ The SMCCF also purchases exchange-traded fund (ETF) shares,
and leverages the Treasury equity at between 10 to 1 and 3 to 1,
depending on the risk profile of the ETF.
---------------------------------------------------------------------------
The loans made by the Federal Reserve to support purchases
made in the corporate credit facilities are secured by the
equity provided to the facilities by the Treasury and by all of
the assets acquired by the facilities.
Q.3. Why has the Federal Reserve decided to pursue this avenue
to buy junk ETFs?
A.3. Please see the response to Question 1.
Q.4. The Treasury Department has agreed to make a $75 billion
equity investment in the corporate facilities. If there are
losses on these assets, who will bear the costs?
A.4. The Secretary, using funds appropriated in the CARES Act,
has agreed to make a $75 billion equity investment in the
corporate credit facilities. The Treasury's equity investment
is designed to protect the Federal Reserve from losses on the
facilities' purchases by providing first-loss credit
protection. The facilities leverage this equity prudently. For
example, the Primary Market Corporate Credit Facility (PMCCF)
requires $1 of Treasury equity for each $10 spent to purchase a
corporate bond or syndicated loan of an investment-grade
issuer. The PMCCF requires $1 of Treasury equity for each $7
spent to purchase a corporate bond or syndicated loan of an
issuer that was previously rated investment-grade but has
fallen to one rating grade below investment grade since the
facility was established. The Treasury's equity requirements
under the SMCCF are set up similarly to the PMCCF, as discussed
in the answer to Question 2. In all cases, the corporate credit
facilities have calibrated the Treasury leverage based on the
nature of the asset being purchased, which incorporates risk
sensitivity and protects against taxpayer loss.
Q.5. What assurance is there that the proceeds received by
investors in return for these secondary market purchases will
be used to support the same companies or any U.S. company for
that matter?
A.5. The corporate bond market experienced significant
dislocations with the onset of COVID-19. By facilitating market
functioning, the SMCCF is intended to reduce the risk that
secondary market prices for corporate bonds become subject to
fire sales or price dislocations. These price dislocations are
important because they affect the primary markets through which
American companies access capital. Potential buyers may
purchase bonds sold at distressed prices in the secondary
market rather than buying newly issued bonds directly from
companies, reducing the availability of new credit to fund
companies. In addition, there is a direct relationship between
the secondary market and the primary market, as most new
corporate bond prices are set based on secondary market
spreads. By providing support to the secondary market, the
SMCCF reduces the cost of new credit and increases the
availability of new credit to borrowers who might otherwise not
be able to access the market at reasonable rates.
The SMCCF only transacts with eligible sellers that are
created or organized in the United States or under the laws of
the United States. Likewise, the SMCCF has purchased U.S.-
listed ETFs whose investment objective is to provide broad
exposure to the market for U.S. corporate bonds and, through
its Broad Market Index purchase program, bonds of issuers that
are created or organized in the United States or under the laws
of the United States.
Q.6. The Federal Reserve has hired the firm BlackRock to serve
as an investment manager for this facility. How is the Federal
Reserve ensuring BlackRock is acting in the best interest of
the Federal Reserve and the public?
A.6. On May 11, Corporate Credit Facilities LLC (CCF), an SPV
created to facilitate the operations of SMCCF, entered into an
Investment Management Agreement (IMA) with BlackRock Financial
Management, Inc. (BlackRock) in connection with the SMCCF. The
FRBNY is the sole managing member of the CCF.
Pursuant to the IMA, BlackRock acts as a fiduciary to the
CCF in performing investment management services. In order to
best advance the CCF's objectives as a fiduciary, BlackRock is
required to follow FRBNY's specific and detailed investment
guidelines and to buy and sell corporate bonds, corporate
loans, and corporate bond ETFs on a best execution basis.
BlackRock is required to communicate with the CCF on a daily
basis regarding its planned purchase activity for the day and
respond to requests for updates from the CCF on market
functioning and asset purchases.
The IMA imposes stringent requirements on BlackRock to
protect confidential information and to mitigate conflicts of
interest. Confidential information gained by BlackRock or its
affiliates or their respective directors, officers, or
employees in the course of this engagement may not be leveraged
for matters unrelated to the CCF. BlackRock's compliance with
the rigorous information barrier and conflict of interest
mitigation provisions the Federal Reserve has imposed under the
IMA is subject to audit and review by FRBNY, the Board, and
other governmental authorities with oversight responsibilities
under applicable law.
These are select examples of provisions relating to the
Federal Reserve's efforts to ensure that Blackrock is acting in
the best interest of the public. The IMA, including the
investment guidelines, is available in full on the FRBNY
website. \4\
---------------------------------------------------------------------------
\4\ See www.newyorkfed.org/medialibrary/media/markets/SMCCF-
Investment-Management-Agreement.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM JEROME H. POWELL
Q.1. We know that people over 70, African Americans, Native
Americans, and Latinos are disproportionately more likely to be
facing health crises and death due to COVID-19.
What does the research show about the economic hardship for
African Americans, Native Americans, and Latinos in terms of
loss of income and employment as well as financial hardship due
to the COVID-19 pandemic?
We know that young adults, African American and Latino
income, wealth and homeownership rates continued to lag behind
whites following the financial crisis of 2008, has the Federal
Reserve undertaken any analysis regarding economic hardship for
African Americans, Latinos and young adults following this
pandemic? If so, what interventions would reduce financial
hardship for these households?
Are minorities overrepresented in the 40 percent of workers
with household incomes under $40,000 a year who are now
unemployed? If so, at what percentage?
A.1. The deterioration in labor market conditions induced by
the COVID-19 shock has been sudden, severe, and widespread.
Still, workers in some industries, occupations, demographic
groups, and locations have experienced more-significant
employment declines than others. Although disparities in labor
market outcomes often arise during recessions, factors unique
to this episode have also contributed to the recent divergence.
In particular, with respect to race and ethnicity, some
minority groups have experienced a disproportionate share of
the job losses induced by COVID-19. According to the Census
Bureau's Current Population Survey, the employment-to-
population ratio for African Americans fell by 8.6 percentage
points from February to June, while that for Hispanics fell 9.1
percentage points. Both declines were significantly larger than
the 6.5 percentage point decline for the overall population.
\1\
---------------------------------------------------------------------------
\1\ Sample-size limitations make it difficult to infer with
precision the magnitude of employment declines for Native Americans,
and the Bureau of Labor Statistics reporting of employment statistics
for that group is also more limited.
---------------------------------------------------------------------------
Furthermore, these racial and ethnic minorities tend to
have lower incomes and smaller amounts of financial assets than
the overall population, and are therefore less able to
financially weather an extended period of unemployment and the
large associated losses in labor earnings. \2\
---------------------------------------------------------------------------
\2\ Akee, et al. (2019) link the universe of U.S. income tax
filers for 2000-2014 to individual-level information on race and
ethnicity from multiple censuses and American Community Survey data,
and document that African Americans, Hispanics, and Native Americans
have persistently lower incomes than whites. (See Randall Akee, Maggie
R. Jones, and Sonya R. Porter, 2019, ``Race Matters: Income Shares,
Income Inequality, and Income Mobility for All U.S. Races,''
Demography, 56, 999-1021, https://doi.org/10.1007/s13524-019-00773-7.)
Dettling, et al. (2017) use data from the Survey of Consumer Finances
to show that in 2016 (the most-recent survey year) African Americans
and Hispanic families had considerably less wealth than white families,
while ``other'' families (a diverse group including those identifying
as Asian, American Indian, Alaska Native, Native Hawaiian, Pacific
Islander, other race, and all respondents reporting more than one
racial identification) had lower net worth than white families but
higher net worth than African Americans and Hispanic families. (See
Lisa J. Dettling, Joanne W. Hsu, Lindsay Jacobs, Kevin B. Moore, and
Jeffrey P. Thompson, 2017. ``Recent Trends in Wealth-Holding by Race
and Ethnicity: Evidence from the Survey of Consumer Finances,'' FEDS
Notes. Washington: Board of Governors of the Federal Reserve System,
September 27, 2017, https://doi.org/10.17016/2380-7172.2083.)
---------------------------------------------------------------------------
Consistent with these results, responses to the Federal
Reserve Board's (Board) latest Survey of Household Economics
and Decisionmaking (SHED) show that in late 2019 (before the
onset of COVID-19), a large share of adults were either unable
to pay their monthly bills or were one modest financial setback
away from failing to pay monthly bills in full-and that this
share was larger for African American and Hispanic families.
\3\
---------------------------------------------------------------------------
\3\ The SHED is an annual survey conducted by the Federal Reserve
Board that measures the economic well-being of U.S. households and
identifies potential risks to their finances. The 2019 SHED (which was
released in May 2020) showed that at the time of the survey (October
2019), 16 percent of adults were not able to pay all of their current
month's bills in full, and an additional 12 percent of adults said they
would be unable to pay all of their current month's bills if they had
an unexpected $400 expense that they had to pay. Both of these shares
were significantly larger for African Americans and Hispanic families
than for white families, at all levels of education. (See Board of
Governors of the Federal Reserve, ``Report on the Economic Well-Being
of U.S. Households in 2019,'' available at https://
www.federalreserve.gov/consumerscommunities/shed.htm.)
---------------------------------------------------------------------------
Regarding the second question, the June 2020 Monetary
Policy Report to Congress noted that a supplement to the SHED
conducted in April 2020 (after the onset of COVID-19) found
that among households with an annual income of $40,000 or less,
nearly 40 percent of individuals who were employed in February
experienced job loss in March or early April, compared with 20
percent of the overall population. Unfortunately, the SHED data
cannot be used to meaningfully break down the population with
annual income under $40,000 by race and ethnicity due to
sample-size limitations. However, other research has shown that
African Americans, Hispanics, and Native Americans tend to be
overrepresented in the lower parts of the income distribution
and underrepresented at the top. \4\
---------------------------------------------------------------------------
\4\ See Akee, et al. (2019), cited above.
Q.2. I led the Nevada Delegation in writing a letter requesting
the Treasury Department and the Federal Reserve to prioritize
loans to businesses uniquely impacted by COVID-19. In Nevada,
our economy relies on our hospitality, gaming, and tourism
employers, and we want to ensure industries bearing the brunt
of the crisis be aided in order to stabilize the marketplace
and preserve American jobs. At the encouragement of the Nevada
delegation and other congressional partners, the SBA reversed
its previously issued guidance to allow for businesses with
gaming revenue to apply for PPP.
Can you commit that otherwise eligible gaming business,
continue to be eligible for the Main Street lending program,
like the SBA PPP program now allows?
A.2. Yes. On April 24, the Small Business Administration (SBA)
issued an interim final rule modifying, for purposes of the
SBA's Paycheck Protection Program (PPP), its regulation deeming
legal gaming businesses to be ``Ineligible Businesses'' for
normal course SBA lending. Under the revised rule, ``[a]
business that is otherwise eligible for a PPP Loan is not
rendered ineligible because of its receipt of legal gaming
revenues.'' \5\
---------------------------------------------------------------------------
\5\ See 85 FR 23450, 23451 (published April 28, 2020).
---------------------------------------------------------------------------
The Main Street Lending Program (Main Street) incorporates
the SBA's definition of Ineligible Businesses, as modified by
the SBA for purposes of the PPP on or before April 24. \6\ As
such, a business that is otherwise an eligible borrower for
purposes of Main Street is not rendered ineligible solely due
to its receipt of legal gaming revenues. Main Street Frequently
Asked Question (FAQ) E.1 provides that the Main Street
``Ineligible Business'' definition incorporates the SBA's
interim final rule permitting legal gaming businesses to borrow
by citing and linking to the rulemaking.
---------------------------------------------------------------------------
\6\ See the Main Street FAQs at www.bostonfed.org/mslp-faqs.
---------------------------------------------------------------------------
Please note that, like any potential borrower in any
industry, a gaming business must satisfy the other Main Street
eligibility criteria and an eligible lender's underwriting
criteria in order to receive a Main Street loan.
Q.3. Vice Chair Quarles spoke before this Committee last week.
We urged him to move quickly to set up the Main Street Lending
Program. We need to make credit available to businesses who
have liquidity problems due to the pandemic.
What are the employee retention provisions in the Main
Street Lending Program?
Will the Fed require applicants to the Main Street Lending
Program to disclose the intended use of these funds and
disclose those to the public?
Will the Fed consider requiring the same or similar
employment protection policies that is has in its other
programs like the Primary Market Corporate Credit Facility?
A.3. Main Street was established under Section 13(3) of the
Federal Reserve Act (FRA), with approval of the Treasury
Secretary and an equity investment using funds appropriated by
the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act). Main Street is designed to provide support for lending to
small and medium-sized businesses in sound financial condition
before COVID-19 in order to assist such businesses in
maintaining operational capacity and payroll.
The CARES Act was the product of careful bipartisan
negotiations in Congress, and the legislation does not include
a requirement that businesses participating in lending programs
established by the Federal Reserve maintain payrolls. However,
as indicated in the Main Street term sheets, eligible borrowers
should make commercially reasonable efforts to retain employees
during the term of the loan. ``Commercially reasonable
efforts'' is a standard used in commercial contracts and is
familiar to businesses. This means that businesses that
participate in the program are expected to make good-faith
efforts to maintain payroll and retain employees in light of
their capacities, the economic environment, their available
resources, and their business need for labor.
Borrowers' commercially reasonable efforts to maintain
payrolls may take different forms across the broad range of
businesses eligible for Main Street. Because of the facts and
circumstances that may inform a borrower's judgment in respect
of this expectation, the Federal Reserve and the U.S.
Department of the Treasury (Treasury Department) will not
assess the commercial decisions of individual borrowers. The
Federal Reserve and Treasury Department will monitor Main
Street's impact on small and medium-sized businesses and the
resulting effects on the economic recovery and employment
broadly rather than on a borrower-by-borrower basis. The
Federal Reserve will continue to consider adjustments to Main
Street's terms and conditions, as appropriate.
Recognizing that the manner for best supporting their
operations and payroll will likely vary considerably across
borrowers, Main Street borrowers are not required to disclose
the intended use of funds. They do, however, face restrictions
on their use. Main Street borrowers are generally restricted
from repaying existing debt ahead of schedule until the Main
Street loans are repaid. Main Street borrowers are also subject
to the CARES Act restrictions on compensation, stock
repurchases, and capital distribution that apply to direct loan
programs. Further, Main Street borrowers may not use the
proceeds of a Main Street loan for the benefit of foreign
parents, affiliates, or subsidiaries.
The Federal Reserve is committed to transparency and will
disclose information associated with the Main Street
facilities, including the names of lenders and borrowers,
amounts borrowed and interest rates charged, and overall costs,
revenues and other fees, on a monthly basis.
Q.4. Congress expects the Federal Reserve to release borrower
names and other information about participants in the
facilities it set up in response to the CARES Act. I appreciate
the steps that the Federal Reserve has already taken to
increase transparency, such as disclosing borrowers, amount
borrowed and what rate of interest, and the overall costs,
revenues, and fees from various facilities on a monthly basis.
How will you guard against any favoritism or unfairness in
access or terms?
A.4. The Board is committed to guarding against favoritism or
unfairness in access or terms for its facilities. The
facilities are designed to provide broad-based eligibility with
transparent and neutrally objective eligibility criteria for
participation and creditworthiness. In all of our lending
programs, we expect lenders to consider loan applications from
borrowers and assess each potential borrower's financial
condition at the time of the loan application, regardless of
whether that potential borrower is an existing customer or a
new customer. We continue to monitor all of our programs to
ensure that their terms and conditions are being met.
Q.5. Does the Fed plan to release disclosures for other
programs not directly authorized under the CARES Act, such as
purchasing asset-backed securities?
A.5. The Federal Reserve is deeply committed to ensuring
transparency and accountability in the establishment and
operation of facilities established pursuant to section
4003(b)(4) of the CARES Act and section 13(3) of the FRA.
Section 13(3) of the FRA allows the Board, in unusual and
exigent circumstances, to authorize any Federal Reserve Bank to
extend credit to any participant in a program or facility with
broad-based eligibility. The Board has established 13
facilities pursuant to this authority; nine of the facilities
have received equity investments from the Treasury Department
with funds appropriated under the CARES Act: the Term Asset-
Backed Securities Loan Facility (TALF), Secondary Market
Corporate Credit Facility (SMCCF), Primary Market Corporate
Credit Facility (PMCCF), Main Street New Loan Facility (MSNLF),
Main Street Expanded Loan Facility (MSELF), Main Street
Priority Loan Facility (MSPLF), Nonprofit Organization Expanded
Loan Facility (NOELF), Nonprofit Organization New Loan Facility
(NONLF) and Municipal Liquidity Facility (MLF).
Both the FRA and the CARES Act require the Federal Reserve
to provide an initial report to the Committee on Banking,
Housing, and Urban Affairs of the Senate and the Committee on
Financial Services of the House of Representatives (the
Committees) within seven days after the Board authorizes any
loan or other financial assistance pursuant to those sections.
The seven-day reports generally do not include transaction
information as facilities are usually not operational by the
time the report is filed. The Board provided to the Committees
its initial reports for each facility within seven days after
authorization, and these reports also were posted on the
Board's public website.
After the initial report, the Federal Reserve is required
to provide updates to the Committees at least every 30 days
regarding the value of collateral; the amount of interest,
fees, and other revenue or items of value received in exchange
for the assistance; and the expected or final cost to the
taxpayers of such assistance. To enhance transparency, the 30-
day reports will contain enhanced amounts of information on a
monthly basis for the liquidity and lending facilities using
CARES Act funding, as well as for the Paycheck Protection
Program Liquidity Facility, including the names and details of
participants in each facility; amounts borrowed and interest
rates charged; and overall costs, revenues, and fees for each
facility. For the programs that are targeted at financial
market functioning, the Federal Reserve will provide a full
accounting of transactions in these facilities but on a delayed
schedule. Real-time disclosure would risk stigmatizing
participation in these facilities and undermining the Federal
Reserve's ability to assure that these systemically important
markets continue their critical function in times of severe
market stress. The delay in disclosure will be no longer than
it needs to be to ensure that participants do not hesitate to
participate.
The Federal Reserve has provided, and will continue to
provide, periodic updates concerning each operational facility
at least every 30 days.
Q.6. The CARES Act prohibited companies that receive support
through the Federal Reserve programs that make direct loans
from paying dividends or buying back their own stock until 12
months after the loan is repaid. The CARES Act also imposes
limits on executive compensation for companies that receive
direct loans.
What is your oversight plan to ensure that no dividends are
paid or stocks are purchased and that executive compensation is
capped as Congress intended?
A.6. Under the Main Street facilities, the Chief Executive
Officer and Chief Financial Officer (or officers performing
similar functions) of the eligible borrower must certify that
the borrower meets each of the borrower certifications and
covenants. These certifications and covenants include
compensation, stock repurchase, and capital distribution
restrictions. If borrowers fail to follow the certification and
covenants outlined in the term sheets of the Main Street
facilities, they will be required to the repay the proceeds
obtained through the facility immediately. Moreover, if the
Federal Reserve finds evidence of a knowing material
misrepresentation, we will refer the matter to law enforcement
authorities.
Q.7. The CARES Act restricts Fed financing to ``businesses that
are created or organized in the United States or under the laws
of the United States and that have significant operations in
and a majority of its employees based in the United States.''
Will you ensure that any company that receives financing
from the Federal Reserve is a U.S.-based company?
Will you prohibit aid to companies that may have undergone
a tax inversion before, changed its incorporation to the U.S.
recently, or is a U.S. subsidiary of a foreign company?
Will the Fed require disclosure of beneficial owners in
order to prevent shell structures?
As the Federal Reserve permits investments in Exchange
Traded Funds (ETFs), how will the Fed ensure that none of the
investments of ETFs include non-U.S. companies?
A.7. The Federal Reserve is committed to complying with the
restrictions set forth in the CARES Act, including the
provision that borrowers participating in Federal Reserve
facilities in which the Treasury Department has invested funds
appropriated under the CARES Act must be created or organized
in the United States or under the laws of the United States and
have significant operations in and a majority of its employees
based in the United States. U.S. subsidiaries of foreign
companies are eligible to participate in these facilities as
long as the subsidiary is created or organized in the United
States or under the laws of the United States and on a
consolidated basis has significant operations in and a majority
of its employees based in the United States. In addition, in
the PMCCF and Main Street, we also require that subsidiaries of
foreign companies use facility proceeds to support their U.S.
businesses and U.S. employees.
The SMCCF purchases U.S.-listed Exchange Traded Funds (ETF)
whose investment objective is to provide broad exposure to the
market for U.S. corporate bonds. The preponderance of ETF
holdings are of ETFs whose primary investment objective is
exposure to U.S. investment-grade corporate bonds, and the
remainder are in ETFs whose primary investment objective is
exposure to U.S. high-yield corporate bonds. In some limited
cases, the holdings of ETFs may include underlying bonds that
would otherwise be ineligible for purchase by the SMCCF.
Q.8. As you are aware, the Fed has hired the BlackRock
investment firm to buy high-yield exchange-traded funds, newly
issued corporate bonds, and existing investment grade corporate
bonds.
Will the Fed prohibit BlackRock from making trades based on
what they learned while providing the financing until after the
Fed announced all of its purchases publicly?
Will the Fed prohibit BlackRock executives, who are allowed
to view both confidential information and interact with the
rest of the firm outside the ``ethical wall'' while providing
financing, from making trades until after the Fed announced all
of its purchases publicly?
Will the Fed institute any disclosure or transparency
requirements to ensure the public is aware of financial firms
which help administer Federal relief, and what compensation
they may receive?
A.8. The investment management agreement with BlackRock for the
corporate credit facilities is public and can be found on the
Federal Reserve Bank of New York's public website. \7\ The
agreement provides clarity into the internal controls required
by BlackRock or any subsequent investment managers and provides
additional transparency on the Federal Reserve's relationship
with the investment manager.
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\7\ www.newyorkfed.org/medialibrary/media/markets/SMCCF--
Investment--Management--Agreement.pdf.
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Confidential information gained by BlackRock or its
affiliates or their respective directors, officers, or
employees in the course of this engagement may not be leveraged
for matters unrelated to the corporate credit facilities. This
restriction prohibits, without limitation, use of any
confidential information for the benefit of BlackRock, for the
benefit of any other BlackRock client, or to inform any
financial transaction, render any advice or recommendation, or
attempt to influence any market or transaction for the benefit
of any individual or entity other than the corporate credit
facilities. This obligation survives the termination or
expiration of the investment management agreement.
BlackRock employees providing investment management,
trading, and/or advisory services to the corporate credit
facilities or the Federal Reserve Bank of New York-for the
duration of when they have access to material nonpublic
information plus a two-week cooling off period-are prohibited
from providing investment management, trading, or advisory
services to anyone other than the corporate credit facilities
in any of the asset classes held by BlackRock and must also
refrain from purchasing for him/herself investments in any of
the asset classes held by BlackRock, unless authorized by the
Chief Compliance Officer of the Federal Reserve Bank of New
York. The two-week period is intended to ensure that material
nonpublic information loses its value in the market. To be
clear, even after the two-week cooling off period, material
nonpublic information may not be leveraged for matters
unrelated to the corporate credit facilities. Additional
information is available in Exhibit G of the investment
management agreement, which sets forth the Information Barrier
and Conflicts of Interest Mitigation procedures.
Compensation for the investment manager is also detailed
under Exhibit D of the investment management agreement, ``Fee
Schedule and Payment Procedures.'' For the other vendors with
whom the Federal Reserve has contracted to operationalize its
emergency facilities, information has been made available or
will be made available about their compensation details. \8\
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\8\ For the Commercial Paper Funding Facility agreements, see
www.newyorkfed.org/markets/commercial-paper-funding-facility. For the
MLF agreements, see www.newyorkfed.org/markets/municipal-liquidity-
facility. For the TALF agreements, see www.newyorkfed.org/markets/term-
asset-backed-securities-loan-facility.
Q.9. After a major price-fixing scandal, international banking
regulators sought to phase out LIBOR by the end of 2021. The
plan was to replace it with SOFR--the Secured Overnight
Financing Rate.
Why has the Federal Reserve picked LIBOR as the benchmark
for the Main Street Lending Program?
As the Fed buys debt from potentially hundreds of
companies, why will the Fed keep issuing loans tied to a
controversial reference rate?
Since the Fed's Main Street Lending facility provides loans
with a four-year maturity, is that going to make the transition
from LIBOR to SOFR in 2021 more difficult?
A.9. Under the initial Main Street term sheets released for
comment on April 8, the Federal Reserve and Treasury Department
proposed a SOFR-based interest rate. The agencies received
significant feedback during the comment period from potential
participants that quickly implementing new systems to issue
loans based on SOFR would require diverting resources from
challenges related to COVID-19. Although financial institutions
are transitioning to more robust reference rates, LIBOR remains
the most common base rate used in business lending, even though
firms cannot rely on LIBOR being published after the end of
2021. Consistent with the recommendations of the Alternative
Reference Rates Committee, Main Street lenders and borrowers
are advised to include fallback contract language to be used
should LIBOR become unavailable during the term of the loan.
Q.10. The Federal Reserve has used its Section 13(3) authority
to lend to businesses and local governments and other powers to
allocate $2.3 trillion of credit through nine programs, backed
by $215 billion of Treasury funds.
Do you agree with the Congressional Budget Office estimates
that the Fed's programs will not increase the Federal deficit,
because loans that default are likely to be offset by other
loans repaid with interest that result in a net gain for the
government?
In addition to loans, the Federal Reserve could take an
equity stake in companies receiving assistance, would returns
on those warrants help offset the size of the programs? If so,
by how much?
A.10. Consistent with section 13(3) of the FRA, and Regulation
A, the design of our facilities helps to ensure that taxpayers
are protected from loss. In particular, when designing our
facilities, we model our lending to prevent losses even in
severely adverse scenarios. Furthermore, we only make loans to
borrowers that we believe are solvent, in programs of broad
eligibility.
In addition, under Regulation A, interest rates on eligible
notes under each of our facilities are set at a rate that is a
premium to the market rate in normal circumstances. Overall,
the Federal Reserve believes that the facilities as designed
will protect taxpayers from losses. Although these actions do
not guarantee there will not be losses on some loans, they do
help prevent them. Moreover, consistent with section 13(3) of
the FRA, our emergency facilities provide emergency liquidity
for strained credit markets. These programs are not spending or
investment programs. Moreover, the Federal Reserve does not
receive warrants from companies that access our facilities.
The Federal Reserve will continue to monitor these
facilities to ensure they are working as intended, including
that they adequately protect taxpayers from losses.
Q.11. What are you doing to assess and prepare for the
possibility that a long-lasting economic downturn could
potentially threaten the solvency of US banks both large and
small?
A.11. The banking system is more resilient and better placed to
sustain financing to the real economy as a result of the
regulatory reforms enacted, and measures taken by the banking
industry, in the aftermath of the 2008 global financial crisis.
These reforms have helped the banking system to serve as a
source of strength and to support the flow of credit to
households and businesses during these challenging times. We
have encouraged banks to make prudent use of their existing
buffers of capital and liquidity.
In response to COVID-19, the Board has focused on
heightened monitoring of banking organizations and targeting
exam resources to high-risk institutions. We are also actively
working with the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and State counterparts
to ensure consistent responses and approaches to supervising
banking organizations of all sizes during the crisis. For
example, the agencies have jointly developed guidance and
statements related to COVID-19, including an Interagency
Examiner Guidance for Assessing Safety and Soundness
Considering the Effect of the COVID-19 Pandemic on
Institutions. The guidance and statements highlight potential
risks to banking organizations related to COVID-19 to help the
banking organizations prepare for these risks.
With respect to the largest banks, the Board recently
finalized a stress capital buffer framework that uses a
forward-looking analysis to help ensure that large banking
organizations have sufficient capital to survive a severe
recession while still being able to lend to households and
businesses. As part of our stress testing approach this year,
the Board conducted sensitivity analyses to assess the
resiliency of large banking organizations under three
hypothetical recessions, which could result from COVID-19. In
light of the results from these analyses, the Board took
several actions to help ensure large firms remain resilient
despite the economic uncertainty from COVID-19. In particular,
for the third quarter of this year, the Board is requiring
large banks to preserve capital by suspending share
repurchases, capping dividend payments, and allowing dividends
according to a formula based on recent income. The Board is
also requiring banks to update and resubmit their longer-term
capital plans. The Federal Reserve will closely monitor the
condition of the large banks and the broader financial system
in the coming months, including through additional COVID-19-
related analysis and will consider additional actions as
appropriate.
Q.12. What are you doing to build on the experience with other
industry-specific initiatives to help bus carriers? Have you
crafted programs so that these companies can get access to
capital?
A.12. Consistent with section 13(3) of the FRA, all of our
emergency lending facilities have broad, neutrally defined
eligibility requirements and pricing mechanisms and are
designed to minimize credit allocation while also minimizing
risks to the taxpayer. Like many other industries affected by
COVID-19, bus carriers may benefit from Federal Reserve
programs, such as Main Street, depending on their size and
other characteristics. The overall objective of Main Street is
to promote lending to businesses that were in sound financial
condition prior to COVID-19 and to meet the needs of a broad-
range of eligible businesses across every sector of the
economy. Like other program eligibility requirements, the Main
Street eligibility requirements were designed to be broad.
Specific eligibility requirements and terms under each of Main
Street's facilities can be found in the facility term sheets.
\9\ For more information on Main Street, please see
www.federalreserve.gov/monetarypolicy/mainstreetlending.htm.
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\9\ For the MSNLF, see www.federalreserve.gov/newsevents/
pressreleases/files/monetary20200608a1.pdf. For the MSPLF, see
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200608a2.pdf. For the MSELF, see www.federalreserve.gov/
newsevents/pressreleases/files/monetary20200608a3.pdf.
Q.13. Prior to this crisis, the travel industry was coming off
a decade of growth and many travel businesses were in strong
financial shape. Now, due to the travel restrictions, business
closures and quarantines in place across the U.S., travel
businesses have virtually no customers or revenue. The impacts
have been catastrophic.
The response by Congress and the Administration has focused
largely on small businesses, which are absolutely vital to the
economy. While 83 percent of travel businesses are small
businesses, more than 50 percent of travel industry workers are
employed by mid- to large-sized businesses with more than 500
employees.
What type of financial assistance are the Treasury and
Federal Reserve planning establish for our Nation's nonprofits,
like destination marketing organizations, many of which are
ineligible for programs like PPP under the CARES Act?
A.13. Nonprofit organizations are a critical part of our
economy, employing millions of people, providing essential
services to communities, and supporting innovation and the
development of a highly skilled workforce. We announced on June
15 that we would be seeking public feedback on a proposal to
expand Main Street to provide access to credit for nonprofit
organizations described in sections 501(c)(3) and 501(c)(19) of
the Internal Revenue Code that meet minimum eligibility
criteria. \10\ The Board received comments from a wide range of
stakeholders, and in response, on July 17 we announced revised
term sheets that expanded the range of nonprofit organizations
eligible to obtain Main Street loans. Under the updated terms,
the Federal Reserve will offer loans to small and medium-sized
nonprofits that were in sound financial condition before COVID-
19. Nonprofit organizations will need to meet various
eligibility criteria to qualify, including financial
eligibility criteria based on operating performance, liquidity,
and ability to repay debt. For additional information on the
nonprofit facilities, please see the facility term sheets. \11\
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\10\ https://www.federalreserve.gov/newsevents/pressreleases/
monetary20200615b.htm
\11\ For the Nonprofit Organization Expanded Loan Facility term
sheet, see https://www.federalreserve.gov/newsevents/pressreleases/
files/monetary20200717a1.pdf. For the Nonprofit Organization New Loan
Facility term sheet, see https://www.federalreserve.gov/newsevents/
pressreleases/files/monetary20200717a2.pdf.
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------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES
FROM JEROME H. POWELL
Q.1. Racial Disparity--What steps has the Federal Reserve taken
to ensure and track that its lending facilities will reach the
hardest hit communities, particularly communities of color?
Please be as specific as possible.
Can the Federal Reserve provide Congress the data on the
race of the ownership of the entities using the facilities?
A.1. We generally collect information on borrowers related to
the terms of the loan they are getting from us (such as their
credit rating) or the eligibility for the loan (such as
certifications related to the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act)). We publish detailed
information on borrowers and loan terms every month. In
addition, contracts with our facility vendors are public and
generally require them to make efforts to seek diverse
subcontractors.
We are committed to ensuring the Main Street Lending
Program (Main Street) is widely known throughout the business
community and among depository institutions, including among
minority and women-owned businesses and minority depository
institutions (MDIs). To that end, we have made an intentional
effort to reach minority and women-owned businesses as well as
MDIs as part of our Main Street outreach. For example, on June
24, the Federal Reserve held a webinar targeted at reaching
minority and women-owned businesses to walk through the program
and take questions from attendees. In advance of the webinar,
we reached out to a wide range of diverse businesses
associations and organizations with strong connections to
minority communities to help get the word out. In addition, on
July 1, the Federal Reserve and the National Bankers
Association, through our Partnership for Progress program, held
a briefing on the Main Street for MDIs.
The Paycheck Protection Program Liquidity Facility (PPPLF)
has a wide reach across the country and a variety of
communities and we have found that community banks have been
especially active participants. The Federal Reserve conducted
outreach, including a series of webinars about the PPPLF, to
ensure that eligible institutions have the necessary
information to access the program. Additionally, we partnered
with community development staff and conducted specific
outreach with the Opportunity Finance Network, the Community
Development Bankers' Association, and others to ensure that
Community Development Financial Institution (CDFI) loan funds
are able to access the PPPLF. There are currently nearly 80
participants in the PPPLF that are either MDIs or CDFIs or
both. We will continue to conduct outreach as needed to support
the broadest possible access to Paycheck Protection Program
(PPP) lenders.
Q.2. Are the Treasury Department and Federal Reserve working
with CDFIs, including nondepository CDFIs, and minority
depository institutions to help them navigate the PPP and the
PPP Lending Facility so that they can have more success there?
If so, please provide specific steps being taken.
A.2. The employee size and revenue eligibility metrics under
Main Street were adopted to enable the program to support small
and medium-sized businesses that are unable to receive
sufficient assistance through other programs, such as the SBA's
PPP, or that may not have reached the scale needed to issue the
kinds of capital market instruments that would be purchased
under the Federal Reserve's Primary Market Corporate Credit
Facility (PMCCF). Larger companies may wish to consider whether
the PMCCF, which extends credit to CARES Act-eligible
businesses without imposing restrictions related to revenues or
number of employees, meets their needs. Like Main Street,
borrowers under the PMCCF must meet facility-specific
eligibility criteria. As of June 29, the PMCCF is operational
and available for use.
Q.3. Main Street Lending Facility--While Main Street funding is
vital for small and medium manufacturers and should be
implemented now, larger manufacturers are also suffering from
liquidity crises and also need relief. When will the term
sheets and regulations be written and loans made available for
larger manufacturers with more than $5 billion in sales or
15,000 jobs? They were included in the CARES Act and also are
counting on the Fed and the Treasury.
A.3. The employee size and revenue eligibility metrics under
Main Street were adopted to enable the program to support small
and medium-sized businesses that are unable to receive
sufficient assistance through other programs, such as the SBA's
PPP, or that may not have reached the scale needed to issue the
kinds of capital market instruments that would be purchased
under the Federal Reserve's Primary Market Corporate Credit
Facility (PMCCF). Larger companies may wish to consider whether
the PMCCF, which extends credit to CARES Act-eligible
businesses without imposing restrictions related to revenues or
number of employees, meets their needs. Like Main Street,
borrowers under the PMCCF must meet facility-specific
eligibility criteria. As of June 29, the PMCCF is operational
and available for use.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH
FROM JEROME H. POWELL
Q.1. Accessing loans under the Paycheck Protection Program has
been a challenge for many business owners, especially for
business owners of color and native businesses, who are less
likely to have a lending relationship with a bank that will
accept their PPP application.
Is it acceptable for the largest banks in the country to be
only processing PPP applications for existing customers, for
most of the time that they were accepting PPP applications?
Should the largest banks in the country, like JPMorgan
Chase, Wells Fargo, Bank of America, and Citi, be allowed to
prioritize PPP loans for some customers over others? Or should
they be processed on a first come, first served basis?
A.1.The goal of the Small Business Administration's (SBA)
Paycheck Protection Program (PPP) was to provide funding to
small businesses to help them keep their workers on their
payrolls during COVID-19. In response, lenders mobilized to
operationalize lending though the PPP as quickly as possible.
These loans are supporting more than 51 million jobs and over
80 percent of all small business employees, and the SBA reports
that 98 percent of PPP loans were for $1 million or less. \1\
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\1\ U.S. Department of Treasury, Press Release, ``SBA and Treasury
Announce Release of Paycheck Protection Program Loan Data'', available
at https://home.freasurv.gov/news/press-releases/sm-052.
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Depending on the circumstances, financial institutions
choosing to work only with existing customers may raise fair
lending concerns, such as that of redlining. In addition,
prioritizing certain customers, such as high net worth
applicants, or applying additional eligibility requirements,
such as minimum loan amounts, may raise consumer protection
concerns regarding fair access and fair treatment. These
protections apply to loans made through the PPP, just as they
do to other types of small business lending. As in all lending
activities, State member banks under the supervision of the
Federal Reserve are expected to have effective consumer
compliance management systems in place to ensure that all of
their lending activities adhere to fair lending and other
applicable consumer protection laws. We recognize that
financial institutions moved swiftly to assist borrowers
affected by COVID-19 and that in some instances there may have
been legitimate reasons for limiting PPP loans to existing
customers, given, for example, the speed with which PPP loans
needed to be made and Bank Secrecy Act requirements. When
exercising supervisory and enforcement responsibilities, the
Federal Reserve will take into account the unique circumstances
impacting borrowers and institutions resulting from COVID-19.
Examiners will also take into account an institution's good-
faith efforts that demonstrate their efforts to serve borrowers
and comply with consumer protection laws while deploying
capital that was critical to support their communities.
Q.2. Do you believe banks are meeting the credit needs and
convenience of their communities when it comes to PPP loans, if
they're only lending to existing customers? Do you have fair
lending concerns about the practices of any institutions
related to PPP?
A.2.With every policy action that the Federal Reserve has
undertaken, meeting the convenience and needs of consumers and
communities and helping them weather the financial impacts of
COVID-19 has been foremost on our minds. Each of the facilities
were established to support the flow of credit to households,
businesses, and communities. Several of our lending facilities
were specifically aimed at providing liquidity to consumers and
small and midsize businesses, including the Term-Asset Loan
Facility, the Paycheck Protection Program Lending Facility
(PPPLF), and Main Street. In addition, the Board has urged
banks to work with their customers, and issued statements and
rules to support banks' efforts to exercise flexibility in
accommodating consumers' access to credit, while reminding
banks of the importance of complying with consumer laws and
regulations, including fair lending. \2\
---------------------------------------------------------------------------
\2\ The various actions in response to COVID-19 can be found at
https://www.federalreserve.gov/COVID-19.htm.
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With respect to whether the PPP is meeting the convenience
and needs of communities, small business lending undertaken by
banks under the SBA's PPP is an important part of the Federal
COVID-19 response to support consumers, households, businesses,
and communities. The PPP provides loans to small businesses so
that they can keep their workers on the payroll by extending
credit to eligible financial institutions that originate PPP
loans. To bolster the effectiveness of the PPP, the Board
launched the PPPLF to supply liquidity to participating
financial institutions through term financing backed by PPP
loans to small businesses. The PPPLF extends credit to eligible
financial institutions that originate PPP loans, taking the
loans as collateral at face value.
In terms of evaluations under the Community Reinvestment
Act (CRA) assessment of whether a bank is meeting the
convenience and needs of its communities, PPP loans that meet
the Community Reinvestment Act's (CRA) small business loan
definitions will be considered as retail loans under the
lending test. In addition, PPP loans greater than $1 million
will be considered as community development loans if they have
a primary purpose of community development, for example by
promoting economic development or helping to revitalize or
stabilize low- or moderate-income geographies or distressed or
underserved nonmetropolitan middle-income geographies. \3\
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\3\ For more information, see CA 20:10, ``Community Reinvestment
Act (CRA) Consideration for Activities in Response to the Coronavirus''
at https://www.federalreserve.gov/supervisionreg/caletters/
caltr2010.htm.
Q.3. Businesses can't wait a few months for PPP loans--they
need them now. How will you be enforcing the Community
Reinvestment Act when it comes to PPP, to make sure banks are
doing a meaningful job reaching all of the businesses in need
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in their communities?
A.3. The Board has worked with the Office of the Comptroller of
the Currency (OCC) and Federal Deposit Insurance Corporation
(FDIC) to release interagency frequently asked questions (FAQs)
that address the CRA treatment of PPP loans, among other
topics. \4\ This particular FAQ makes clear that the CRA
treatment of PPP loans will follow existing CRA rules,
including a focus on smaller loans to small businesses and
ensuring a primary purpose of community development as defined
under the CRA. The FAQ notes that PPP loans to businesses that
meet existing CRA small business standards would count for CRA
purposes. However, for PPP loans made to larger businesses,
some fact-specific determinations will be considered, such as
the location of the business. As indicated in the Federal
Reserve System's Small Business Credit Survey, there are unmet
credit needs for the smallest businesses, including many
minority-owned and womenowned businesses, and we encourage
banks to work to responsibly meet these credit needs for these
businesses as well. \5\
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\4\ See https://www.federalreserve.gov/supervisionreg/caletters/
caltr2010.htm.
\5\ See https://www.fedsmallbusiness.org/medialibrary/
FedSmallBusiness/files/2020/2020-sbcs-employer-firmsreport.pdf.
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The Board also has taken steps to broaden the eligible
lenders for the Federal Reserve's PPP Liquidity Facility
(PPPLF) to include nondepository Community Development
Financial Institutions (CDFIs) that are eligible PPP lenders.
\6\ This step will help provide these lenders with additional
liquidity needed to make PPP loans, resulting in additional
options for business in lower-income communities and for women-
and minority-owned firms given CDFIs' focus on these target
markets.
---------------------------------------------------------------------------
\6\ See https://www.federalreserve.gov/newsevents/pressreleases/
monetary20200430b.htm.
Q.4. The CARES Act directed Treasury and the Federal Reserve to
set up a lending program for midsize businesses.
One provision of the CARES Act says that the Treasury
Secretary ``shall endeavor'' to establish a lending program for
midsize businesses and that any borrower applying for a loan
under the midsize business lending program must certify that
``the recipient will not outsource or offshore jobs for the
term of the loan and 2 years after[wards].''
Yet, when the Fed unveiled the term sheets for the Main
Street Lending Facility, there doesn't seem to be any mention
of a certification for not moving jobs offshore.
Do you think firms getting taxpayer-funded bailout should
be required to keep their jobs in the United States?
Why wasn't this a requirement in your agreement with the
Fed to require firms to agree not to move jobs or production
overseas?
What about other Treasury-Fed lending programs, besides the
midsize business lending program? Don't you think that any firm
receiving a Federal grant or loan should be required to agree
that they won't move jobs offshore?
In what ways did you endeavor to implement the program as
described in the CARES Act, in keeping with both the spirit and
letter of the law?
Why isn't the offshoring provision required in the Main
Street Lending Program? What steps did you take in an effort to
implement that provision?
Besides the offshoring provision, please describe the steps
you took to comply with both the letter and spirit of Section
4003(c)(3)(D)(i)(I) through (X) of the CARES Act, including why
you ultimately chose to implement each requirement or not.
A.4. The Main Street Lending Program (Main Street) is designed
to facilitate support to small and medium-sized businesses as
effectively and efficiently as possible, while protecting
taxpayer funds. Main Street is designed to help enable such
businesses to maintain their operations during this difficult
time period.
In section 4003(c)(3)(D)(i) of the Coronavirus Aid, Relief,
and Economic Security Act (CARES Act), Congress set out a
possible design for a facility to provide assistance to
midsized businesses, which included restrictions on outsourcing
or offshoring jobs during the term of the loan and for 2 years
after the loan was repaid. Congress clarified in section
4003(c)(3)(D)(ii) of the CARES Act, however, that Main Street
could be designed at the Federal Reserve Board's (Board)
discretion under its authority in Section 13(3) of the Federal
Reserve Act without such restrictions. The Board used this
authority in designing Main Street in a manner that would
comply with all applicable laws and would best facilitate the
flow of credit to small- and medium-sized business borrowers.
While Main Street's terms do not include restrictions on
offshoring, Main Street borrowers are required to commit that
they will use the proceeds of the Main Street loan only for the
benefit of the borrower, its consolidated U.S. subsidiaries,
and other affiliates of the borrower that are U.S. businesses.
Borrowers may not use the proceeds of the loan for the benefit
of their foreign parents, affiliates, or subsidiaries.
In addition, Main Street requires certifications and
covenants that are similar to several of the other conditions
set out in section 4003(c)(3)(D)(i) of the CARES Act, including
the following restrictions which are imposed by section 13(3)
of the Federal Reserve Act, other sections of the CARES Act, or
the Main Street term sheets:
U.S. Business Requirement: Under section
4003(c)(3)(C) of the CARES Act, eligible borrowers must
be ``businesses that are created or organized in the
United States or under the laws of the United States
and that have significant operations in and a majority
of its employees based in the United States.'' This
requirement is substantially similar to the
requirements in sections 4003(c)(3)(D)(i)(IV) and (VI).
Direct Loans: Eligible borrowers must commit to
comply with the restrictions that apply to direct loan
programs under section 4003(c)(3)(A)(ii) of the CARES
Act, except that an S corporation or other tax pass-
through entity that is an eligible borrower may make
distributions to the extent reasonably required to
cover its owners' tax obligations in respect of the
entity's earnings. Certain of these requirements are
similar to the requirement in section
4003(c)(3)(D)(i)(VII) of the CARES Act.
Solvency: Borrowers must certify that they are
solvent and are not in bankruptcy, resolution, or
another type of insolvency proceeding at the time of
borrowing to effectuate compliance with section 13(3)
of the Federal Reserve Act. This requirement is
substantially similar to the requirement in section
4003(c)(3)(D)(i)(V) of the CARES Act. In addition,
under the Main Street term sheets, each borrower must
certify that that it has a reasonable basis to believe
that, as of the date of origination of the Main Street
loan and after giving effect to such loan, the borrower
has the ability to meet its financial obligations for
at least the next 90 days and does not expect to file
for bankruptcy during that time period.
Availability of Credit: To effectuate compliance
with Section 13(3) of the Federal Reserve Act and
Regulation A, each borrower must certify that it is
unable to secure ``adequate credit accommodations''
because the amount, price, or terms of credit available
from other sources are inadequate for the borrower's
needs during the current unusual and exigent
circumstances. This requirement is similar to section
4003(c)(3)(D)(i)(I) of the CARES Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM JEROME H. POWELL
Q.1. In its April 30 guidance, the Federal Reserve determined
that nonbank financial institutions would not be considered as
eligible lenders under the Main Street Lending Program.
However, the Federal Reserve is open to considering options to
expand the list of eligible lenders in the future. Since April
30, has the Federal Reserve made any further determinations
regarding eligible lenders? If so, will that broader list
include business development companies (BDCs) to ensure that
funds are able to reach Main Street businesses?
A.1. At this time, nonbank financial institutions that are
unaffiliated with depository institutions are not considered
eligible lenders for the purposes of the Main Street Lending
Program (Main Street). The Federal Reserve continues to
consider options to expand the list of eligible lenders in the
future. Currently, eligible lenders include: U.S. federally
insured depository institutions (including banks, savings
associations and credit unions), U.S bank holding companies,
U.S. savings and loan holding companies, U.S. branches or
agencies of foreign banks, U.S. intermediate holding companies
of foreign banking organizations, and U.S. subsidiaries of the
foregoing. Any changes to the list of eligible lenders will be
announced on the Main Street website. \1\
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\1\ www.federalreserve.gov/monetarypolicy/mainstreetlending.htm
Q.2. Since March, occupancy rates for hotels, fitness centers,
and entertainment venues have hit all-time lows. Business
owners are now looking towards the Main Street Lending Program
as their best lifeline for making it through the pandemic. I'm
concerned that some of the lending limits based on leverage
will prevent many businesses in these industries from
participating. Is the Federal Reserve looking at unique
business characteristics for different sectors when determining
lending limits based on leverage? Is it doing so with an eye
towards providing additional flexibility in future guidance,
such as increasing the maximum loan size and modifying the
borrower eligibility formulas to ensure businesses with high
---------------------------------------------------------------------------
debt costs, such as hotels, can utilize the program?
A.2. Main Street is designed to be broad-based and not to
target lending to any particular sector of the economy. We
adopted criteria based on adjusted earnings before interest,
taxes, depreciation, and amortization (EBITDA) because it is a
key underwriting metric used by lenders in evaluating the
credit risk of small and medium-sized businesses across
industries. Lenders and borrowers regularly agree to adjust a
borrower's EBITDA to accommodate differences in business models
across industries, as well as one-time events that may
positively or negatively impact a borrower's earnings. To
account for differences based on industry or business models, a
Main Street lender may adjust a borrower's EBITDA in the same
way it has previously adjusted EBITDA when lending to that
borrower or similarly situated borrowers, as applicable. When
applied prudently, these adjustments provide a lender with a
more accurate representation of a business's earnings capacity
over time. Allowing for leverage of four or six times adjusted
EBITDA is within the normal range of practice in lending to
business borrowers.
We will continue to monitor lending conditions broadly and
consider adjustments to Main Street terms and conditions, as
appropriate.
Q.3. Arizona is experiencing an all-time high in unemployment.
Thousands of Arizonans are still struggling to successfully
file for unemployment and receive benefits. I am concerned that
with expanded unemployment benefits expiring at the end of
July, the program will end before Arizonans see any relief.
Does the Federal Reserve expect coronavirus-related layoffs to
be reversed before the July deadline?
A.3. We expect that the recovery of the labor market will take
some time. Indeed, at the June meeting of the Federal Open
Market Committee (FOMC), participants' median expectation was
for the unemployment rate to remain above its longer-run level
at least through the end of 2022. \2\ While payroll employment
rebounded strongly in May, June, and July, only about 40
percent of the jobs lost in March and April have been recouped.
\3\ Looking ahead, many indicators (including high-frequency
indicators such as initial claims for unemployment insurance,
mobility data, and employment in small businesses) suggest that
the pace of improvement in the labor market has slowed. \4\
Furthermore, weekly COVID-19 case counts remain high, and some
States have ramped up restrictions again. These developments
might further restrain improvements in the labor market.
---------------------------------------------------------------------------
\2\ The FOMC's Summary of Economic Projections for the June 2020
FOMC meeting is available at https://www.federalreserve.gov/
monetarypolicy/fomcprojtabl20200610.htm.
\3\ After falling by 22.2 million over March and April, nonfarm
payroll employment increased by 9.3 million over May, June, and July.
\4\ For example, after declining at a rapid clip through early
June, initial claims for unemployment insurance have moved down more
slowly, on net, since then and stood at a still-elevated level of 1.1
million in the week ending August 15.
Q.4. In its guidance, the Federal Reserve has ruled that
eligible issuers for its emergency lending facilities must be
rated by major nationally recognized statistical rating
organizations (NRSROs). In some cases, such as the Primary
Market Corporate Credit Facility, eligible issuers must be
rated by the three largest NRSROs specifically. Restricting
eligibility to issuers with ratings from incumbent agencies
unnecessarily excludes Arizona companies and BDCs, especially
those with ratings from other tops NRSROs approved by the
Securities and Exchange Commission. I am also concerned that
the decision may undermine market confidence in rating agencies
overall. The Federal Reserve stated it would consider expanding
eligibility to other NRSROs. When will this consideration take
place? If the Federal Reserve is considering expansion, what
---------------------------------------------------------------------------
criteria will be used to make its determination?
A.4. The emergency lending facilities, including the Primary
Market Corporate Credit Facility, were established to support
the flow of credit to households, businesses, and communities.
In addition, under the law, the loans the Federal Reserve
extends must be satisfactorily secured and sufficiently protect
taxpayers from loss.
The Federal Reserve's initial priority was to announce the
establishment of these facilities as quickly as possible, and
therefore the facilities first used credit ratings from the
three largest nationally recognized statistical rating
organizations (NRSROs), given that the most widespread credit
ratings used are from these three NRSROs.
Consistent with our objectives to promote the flow of
credit in a manner consistent with the law, the Federal Reserve
undertook an analysis to determine whether to expand the list
of eligible NRSROs. As part of this analysis, the Federal
Reserve considered the design and focus of each facility, and
the role that each NRSRO plays in the relevant market.
Specifically, the Federal Reserve sought to balance the
benefits of using ratings from the NRSROs most relied on by
investors, with the need to ensure broad access to our
programs. That analysis led the Federal Reserve to include
three additional NRSROs in its facilities. The Federal Reserve
hopes this change expands access to its facilities, while
continuing to protect against taxpayer losses. The Federal
Reserve will continue to monitor its facilities to ensure they
are working as intended.
Q.5. In its April 30 guidance, the Federal Reserve set the
terms for its Municipal Liquidity Facility program to limit the
purchasing of short-term notes to cities with over 250,000
residents and counties with over 500,000. I've heard directly
from Arizona mayors and county leaders who do not meet these
requirement but are in dire financial straits. Has the Federal
Reserve made any further determinations regarding resident caps
since guidance was release? If not, what kind of relief can the
Federal Reserve provide to smaller counties and cities across
the country?
A.5. At this time, the Municipal Liquidity Facility (MLF) will
purchase up to $500 billion in shortterm notes directly from
U.S. States, including the District of Columbia, U.S. counties
with a population of at least 500,000 residents, and U.S.
cities with a population of at least 250,000 residents. To
provide relief to smaller counties and cities, eligible States,
cities, and counties may use the proceeds of eligible notes
sold to the special purpose vehicle under the MLF to purchase
the notes of, or otherwise assist, any of their political
subdivisions or other government entities. Under this facility,
political subdivisions and other government entities are
defined as any county, city, municipality, township, village,
school district, special district, utility, authority, agency
or other unit of government, as determined by the eligible
State, city, or county. In recognition that it can be difficult
in some cases, for various reasons, for States to borrow on
behalf of their cities and counties, we announced on June 3,
that every State can have at least two cities and counties that
are able to directly issue to the MLF. Additional information
on the eligibility requirements under the MLF can be found in
the facility term sheet. \5\
---------------------------------------------------------------------------
\5\ The MLF term sheet, effective June 3, 2020:
www.federalreserve.gov/newsevents/pressreleases/files/
monetary20200603a1.pdf.
---------------------------------------------------------------------------
The Federal Reserve will continue to closely monitor
conditions in the primary and secondary markets for municipal
securities and will evaluate whether additional measures are
needed to support the flow of credit and liquidity to State and
local governments.
Q.6. Under the CARES Act, the Paycheck Protection Program (PPP)
was intended to target relief for businesses in underserved and
rural markets, and for businesses owned by veterans, women, and
minorities. A month after passage of the CARES Act, the
Treasury allowed nondepository Community Development Financial
Institutions (CDFIs) to be eligible PPP lenders in order to
meet this end. As such, the Federal Reserve allowed CDFIs to
participate in its PPP Liquidity Facility (PPPLF). With the
exception of the PPPLF, CDFIs do not have access to any other
13(3) facility. On May 8, 2020, the Small Business
Administration (SBA) Inspector General released a flash report
on the implementation of the PPP, which found the SBA did not
follow Congressional intent in serving low-income and
disadvantaged areas. CDFIs will need more liquidity support
than the purchase of their PPP loans to assist the SBA and meet
demand. Is the Federal Reserve open to considering the
inclusion of CDFIs in its other facilities? Why was the
determination to exclude CDFIs from other 13(3) facilities
made?
A.6. Main Street considers eligible lenders to be U.S.
federally insured depository institutions (including banks,
savings associations, and credit unions), U.S. bank holding
companies, U.S. savings and loan holding companies, U.S.
branches or agencies of foreign banks, U.S. intermediate
holding companies of foreign banking organizations, or any U.S.
subsidiary of any of the foregoing. At this time, nonbank
financial institutions are not considered eligible lenders for
purposes of Main Street. However, the Federal Reserve
recognizes the role that Community Development Financial
Institutions play in provisioning credit for minority and low-
to-moderate income communities and is considering options to
expand the list of eligible lenders in the future.
Q.7. Per its April 30 guidance, the Federal Reserve ruled that
the Term Asset-Backed Securities Loan Facility (TALF) will not
consider collateral without a credit rating from the highest
investment-grade rating category from a major nationally
recognized statistical rating organizations (NRSROs) as
eligible collateral. Right now, the consumers and small
business owners turning to personal loans are those most in
need of support and access to credit at this difficult time. Is
the Fed considering approving investment-grade personal loans
as eligible collateral under TALF to ensure that these American
consumers and small business owners are not left out?
A.7. As you note, only asset-backed securities (ABS) with
triple-A ratings from at least two nationally recognized
statistical rating organizations are eligible collateral for
Term Asset-Backed Securities Loan Facility (TALF) loans. In
reaching this determination, the Federal Reserve Board (Board)
balanced two considerations. First, the Board generally accepts
as TALF collateral ABS asset classes that fund a material share
of economic activity, such as credit card, auto, and student
loan ABS, and ABS collateralized by small business loans with
Small Business Administration guarantees. The objective of
facilitating the flow of credit to consumers and businesses is
typically not at odds with the restriction that only triple-A
securities are TALF-eligible. In most major classes of ABS, a
large share of the underlying bonds are rated triple-A, so
enough triple-A TALF-eligible ABS exist for the program to
achieve its objective.
Second, under the restrictions of section 13(3) of the
Federal Reserve Act, the Board and Reserve Banks must take
steps to ensure the protection of the taxpayer, including by
assigning a ``lendable value to all collateral.'' Restricting
TALF-eligible collateral to bonds with triple-A ratings helps
ensure that the Board and the Reserve Banks are complying with
section 13(3).
In the case of personal loans, although these loans provide
access to credit to some consumers and small businesses, other
forms of credit are more economically significant for
consumers. In addition, the majority of personal-loan borrowers
obtain these loans from banks, not from the nonbank lenders
that are dependent on ABS for funding. As a result, personal
loans are still available currently to consumers. Finally,
personal loan ABS are difficult to reconcile with the section
13(3) restrictions. As you note, only a small share of these
ABS obtain triple-A ratings, and because they are a relatively
new asset class, comprehensive information is not available
about their performance in stressed economic periods.
The Board will continue to evaluate the feasibility and
efficacy of adding other asset classes to or expanding the
scope of existing asset classes eligible for the TALF.
Q.8. Per its April 30 guidance, the Federal Reserve ruled that
TALF will only consider collateral with a credit rating in the
highest long-term or short-term investment-grade rating
category from at least two NRSROs. Self-employed borrowers
generally experience greater income volatility and rely on
unconventional forms of documentation to access credit. As
such, the self-employed often struggle to access credit
affordably. However, like other small businesses, self-employed
business owners are important contributors to Arizona's
economy. Are there plans to allow AAA residential mortgage-
backed securities as eligible collateral under TALF?
A.8. In determining whether a certain type of ABS should be
eligible collateral for TALF loans, the Board considers whether
accepting an asset class will provide material support to the
economy and whether inclusion of the asset class is appropriate
under the restrictions of section 13(3) of the Federal Reserve
Act. In particular, under section 13(3), the Board and Reserve
Banks must take steps to ensure the protection of the taxpayer,
including by assigning a ``lendable value to all collateral.''
To satisfy this restriction, we prioritize categories of ABS
where a large share of issuance is routinely rated triple-A by
the rating agencies and where comprehensive information is
available about credit performance in different economic
environments, including stressed conditions.
Residential mortgage-backed securities (RMBS) is one of the
largest ABS categories not currently eligible as TALF
collateral, and a large share of RMBS issuance is typically
rated triple-A by the rating agencies. However, some RMBS have
performed poorly in times of stress, and RMBS collateralized by
mortgages with low or nonstandard documentation have a
particular history of underperformance. The types of ABS
currently accepted by the TALF generally have a long history of
performing well in stressed economic conditions. The Board
relies on that history of strong performance to ensure that the
TALF is consistent with section 13(3).
The Board recognizes that the exclusion of RMBS from TALF
has an effect on mortgage credit availability and continues to
consider whether some types of RMBS can be accepted by the TALF
in a manner consistent with section 13(3).
Q.9. Given record high unemployment levels in Arizona, mortgage
forbearance and delay of evictions are a very temporary
solution. Servicers of home loans backed by Fannie Mae, Freddie
Mac, and Ginnie Mae are not only required to make mortgage
payments on behalf of the borrowers, but also payments on
property taxes, homeowners and mortgage insurance, and
homeowner association dues. As more and more homeowners enter
forbearance, both independent mortgage servicers and community
banks will need liquidity support. How do your organizations
plan to deal with mass forbearance and provide liquidity to
struggling servicers? Service transferring is already a chaotic
process for borrowers. Can a program be created to avoid
borrowers having their service transferred during such a
critical time?
A.9. The Federal Housing Finance Agency (FHFA), Fannie Mae,
Freddie Mac, and Ginnie Mae have announced helpful measures
that will make it easier for mortgage servicers to carry out
the forbearance requirements of the Coronavirus Aid, Relief,
and Economic Security (CARES) Act. Moreover, the Federal
financial regulatory agencies and the State regulators have
taken a number of steps, including those listed below, to
clarify the responsibilities of mortgage servicers and to
address issues related to the transfer of residential
mortgages.
In April, the Board joined other Federal financial
institution regulators, the Consumer Financial
Protection Bureau (CFPB), and State regulators in
issuing a COVID-19 emergency joint policy statement,
\6\ which outlined various practices and policies to
provide mortgage servicers clarity and to assist them
in complying with the CARES Act provisions providing
forbearance to consumers impacted by COVID-19. The CFPB
issued related FAQs related to mortgage forbearance.
\7\
---------------------------------------------------------------------------
\6\ www.federalreserve.gov/newsevents/pressreleases/
bcreg20200407a.htm (April 7, 2020); revised from
www.federalreserve.gov/newsevents/pressreleases/bcreg20200322a.htm
(March 22, 2020). See also, www.federalreserve.gov/newsevents/
pressreleases/bcreg20200403a.htm (April 3, 2020).
\7\ https://files.consumerfinance.gov/f/documents/cfpb--mortgage-
servicing-rules-COVID-19--faqs.pdf (April 3, 2020).
In April, the CFPB outlined practices to provide
mortgage servicers clarity, facilitate compliance, and
prevent harm to consumers during the transfer of
residential mortgages. \8\
---------------------------------------------------------------------------
\8\ www.consumerfinance.gov/about-us/newsroom/cfpb-outlines-
mortgage-loan-transfer-process-prevent-consumerharm/.
In May, the CFPB and State regulators issued a
consumer guide to mortgage relief options. \9\
---------------------------------------------------------------------------
\9\ www.consumerfinance.gov/about-us/newsroom/cfpb-csbs-consumer-
guide-mortgage-relief-options/
In June, the CFPB and the State regulators issued
additional guidance to mortgage servicers to assist
them in complying with the CARES Act provisions
providing forbearance to consumers impacted by COVID-
19. \10\
---------------------------------------------------------------------------
\10\ www.consumerfinance.gov/about-us/newsroom/cfpb-and-state-
regulators-provide-guidance-assist-borrowersCOVID-19/
These regulators continue to be in close communication with
each other and with other agencies, and stakeholders that have
responsibilities for mortgage servicers. We continue to closely
---------------------------------------------------------------------------
monitor developments in this area.
Q.10. Requiring servicers to advance property taxes, hazard
insurance, homeowners association dues, and other assessments
is no small task. Servicers typically advance these amounts
when borrowers face financial shortfalls or after a natural
disaster without any problem, however, the national scale of
this pandemic is unpresented and our municipal and county
budgets are already strained. Both Fannie Mae and Ginnie Mae
have taken steps to moderate the servicer advancing burdens for
principle and interest. Have your organizations contemplated
the risks to cities and counties if liquidity is not restored?
Have you considered standing up a liquidity facility to help
servicers make these tax and insurance advances, particularly
in cities and counties that are not able to access the
Municipal Liquidity Facility?
A.10. Mortgage-backed securities (MBS) guarantors such as
Fannie Mae, Freddie Mac, and Ginnie Mae have a strong incentive
to ensure that servicers advance payments to cities, counties,
insurers, and other entities, since a foreclosure stemming from
a tax lien or homeowners' association dues lien would affect
the MBS guarantor's ability to recover its own losses in the
event of a borrower default. These guarantors are continuously
assessing whether the servicers have the resources to live up
to their responsibilities under the servicing agreements.
As you note, the steps that Fannie Mae, Freddie Mac, Ginnie
Mae, and the FHFA have taken have moderated the strains
associated with advances of principal and interest, and thereby
left servicers with more cash available to meet their other
obligations. Mortgage servicers that also originate mortgages
have been able to use the proceeds from the recent high levels
of mortgage refinancing activity to fund tax and insurance
advances.
All the entities with a regulatory stake in the solvency
and stability of mortgage servicers noted above continue to be
in close communication with each other. At the Federal Reserve,
we continue to monitor developments with mortgage servicers
closely. We remain prepared to use our full set of tools to
support the flow of credit to households and businesses.
Q.11. Nonprofits serve on the front lines of the coronavirus
pandemic helping feed Arizona families, providing Arizonans
safe shelter, and connecting Arizonans to critical health
services. To continue their important work and meet growing
need they may need access to the the 13(3) facilities. What can
you do to ensure that nonprofits with up to 10,000 employees
receive additional financial assistance?
A.11. Nonprofit organizations are a critical part of our
economy, employing millions of people, providing essential
services to communities, and supporting innovation and the
development of a highly skilled workforce. We announced on June
15 that we would be seeking public feedback on a proposal to
expand Main Street to provide access to credit for nonprofit
organizations described in sections 501(c)(3) and 501(c)(19) of
the Internal Revenue Code that meet minimum eligibility
criteria. \11\ The Board received comments from a wide range of
stakeholders, and in response, on July 17 we announced revised
term sheets that expanded the range of nonprofit organizations
eligible to obtain Main Street loans. Under the updated terms,
the Federal Reserve will offer loans to small and medium-sized
nonprofits that were in sound financial condition before COVID-
19. Nonprofit organizations will need to meet various
eligibility criteria to qualify, including financial
eligibility criteria based on operating performance, liquidity,
and ability to repay debt. For additional information on the
nonprofit facilities, please see the facility term sheets. \12\
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\11\ www.federalreserve.gov/newsevents/pressreleases/
monetary20200615b.htm
\12\ For the Nonprofit Organization Expanded Loan Facility term
sheet, see https://www.federalreserve.gov/newsevents/pressreleases/
files/monetary20200717a1.pdf. For the Nonprofit Organization New Loan
Facility term sheet, see https://www.federalreserve.gov/newsevents/
pressreleases/files/monetary20200717a2.pdf.
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