    [Senate Hearing 116-457]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 116-457

                       OVERSIGHT OF FINANCIAL REGULATORS

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

                                    HEARING

                                   before the

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 SECOND SESSION

                                       ON

        RECEIVING TESTIMONY FROM FEDERAL FINANCIAL REGULATORY AGENCIES
     REGARDING EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS WITH RESPECT TO
       REGULATORY AND SUPERVISORY ACTIVITIES FOR FINANCIAL INSTITUTIONS,
                  CREDIT UNIONS, AND OTHER REGULATED ENTITIES

                                   __________

                               NOVEMBER 10, 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

    54-195 PDF                WASHINGTON : 2026

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

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

                         Gregg Richard, Staff Director

                    Laura Swanson, Democratic Staff Director

                            Catherine Fuchs, Counsel

                    Brandon Beall, Professional Staff Member

               Corey Frayer, Democratic Professional Staff Member

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, NOVEMBER 10, 2020

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    36

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    37

                                   WITNESSES

    Randal K. Quarles, Vice Chairman for Supervision, Board of
      Governors of the Federal Reserve System........................     5
        Prepared statement...........................................    39
        Responses to written questions of:
            Senator Cortez Masto.....................................   105
    Brian P. Brooks, Acting Comptroller, Office of the Comptroller of
      the Currency...................................................     6
        Prepared statement...........................................    46
        Responses to written questions of:
            Senator Rounds...........................................   106
    Jelena McWilliams, Chairman, Federal Deposit Insurance
      Corporation....................................................     8
        Prepared statement...........................................    73
        Responses to written questions of:
            Senator Scott............................................   108
            Senator Toomey...........................................   109
            Senator Rounds...........................................   110
            Senator Kennedy..........................................   111
            Senator Tester...........................................   113
            Senator Warren...........................................   118
            Senator Cortez Masto.....................................   122
            Senator Sinema...........................................   129
    Rodney E. Hood, Chairman, National Credit Union Administration...    11
        Prepared statement...........................................    91
        Responses to written questions of:
            Senator Toomey...........................................   129
            Senator Rounds...........................................   131
            Senator Tester...........................................   134
            Senator Cortez Masto.....................................   142
            Senator Sinema...........................................   143

                  Additional Material Supplied for the Record

    Letter from the Credit Union National Association................   145
    Letter from the National Association of Federally-Insured Credit
      Unions.........................................................   152
    The Board of Governors of the Federal Reserve System's November
      2020 Supervision and Regulation Report.........................   155

                                     (iii)

                       OVERSIGHT OF FINANCIAL REGULATORS

                                  ----------

                           TUESDAY, NOVEMBER 10, 2020

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met, via Webex, at 2:32 p.m., Hon. Mike
    Crapo, Chairman of the Committee, presiding.

                OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

        Chairman Crapo. This hearing will come to order.
        Before we get going, a few videoconferencing reminders.
    Once you start speaking, there will be a slight delay before
    you are displayed on the screen, and do not worry about that.
        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, as usual, we will move to the next Senator
    until it is resolved. And, again, I remind all Senators and our
    witnesses that the 5-minute clock still applies, and you should
    all have one box on your screens labeled ``Clock'' that will
    show how much time is remaining. I will try to remember to
    gently tap the gavel to remind Senators of their time because
    we seem to always have one or two who do not have the clock in
    front of them.
        To simplify the speaking order process, Senator Brown and I
    have again agreed to go by seniority for this hearing.
        With that, today we welcome to this virtual hearing the
    Federal prudential regulators: Federal Reserve Vice Chairman of
    Supervision, Randy Quarles; Acting Comptroller of the Office of
    the Comptroller of the Currency, Brian Brooks; Chairman of the
    Federal Deposit Insurance Corporation, Jelena McWilliams; and
    Chairman of the National Credit Union Administration, Rodney
    Hood.
        We will receive testimony from each agency on efforts,
    activities, objectives, and plans since you last testified
    before the Committee, as well as an update on COVID-19-related
    actions.
        Since the passage of the Coronavirus Aid, Relief, and
    Economic Security Act, or CARES Act, your agencies have taken
    many meaningful steps to mitigate the economic impact of the
    pandemic and to provide conditions that will lead to a forceful
    recovery.
        On October 30, the Federal Reserve announced changes to its
    Main Street Lending Facility, including decreasing the minimum
    loan size for the new loan and priority loan facilities from
    $250,000 to $100,000, and allowing borrowers to deduct any PPP
    loan less than $2 million from their outstanding debt for the
    purposes of the leverage test.
        Your agencies should continue to carefully review the
    regulatory and supervisory frameworks, adjusting where
    necessary to bolster financial institutions' ability to support
    economic recovery--which, by the way, has shown positive signs
    of recovery over the last several months.
        On October 29, the United States GDP surged a record 33
    percent in the third quarter as the economy started to reopen.
        The unemployment rate fell to 6.9 percent in October. Just
    last spring CBO projected that we would still be at 9.5 percent
    by the end of 2021.
        And since April, around 12 million jobs have been gained,
    meaning we have recovered more than half of the jobs lost due
    to the Government-enforced shutdowns.
        Over the last few months, I have sent several letters to
    the regulators on a number of important issues.
        On July 31, I sent a letter to each of the agencies urging
    the use of existing discretion to extend relief provided under
    Title IV of the CARES Act, including extending the Community
    Bank Leverage Ratio to December 31, 2021; the Troubled Debt
    Restructurings, or TDRs, to January 1, 2022; and the Current
    Expected Credit Losses, or CECL, methodology to January 1,
    2023, while clarifying and minimizing unintended effects of
    mid-year adoption.
        On October 8, I sent the regulatory agencies a letter
    regarding the increase in regulatory burden for banks and
    credit unions simply due to their rapid implementation Paycheck
    Protection Program, or PPP.
        As a result of their critical role in PPP and the economic
    recovery, many banks and credit unions inadvertently
    experienced significant balance sheet growth, which is
    ultimately expected to decline as borrowers meet the PPP's
    forgiveness terms.
        The FDIC took an important step in issuing an interim final
    rule to alleviate the increased Part 363 audit and reporting
    requirements for insured depository institutions that have
    experienced growth from PPP and participation in the Federal
    Reserve 13(3) facilities, and other stimulus efforts.
        It is important that banks and credit unions are not
    inadvertently disincentivized from continuing to play a key
    role in the economic recovery or to participate in future
    efforts.
        I urge each of you to continue using your discretion to
    alleviate the regulatory burdens associated with a variety of
    asset-based regulatory thresholds on those banks and credit
    unions who are temporarily experiencing growth from
    participation in recovery-oriented programs.
        Turning to the OCC, on October 19, the Senate rejected a
    Congressional Review Act of the Community Reinvestment Act
    issued by the OCC.
        According to the OCC, the final rule improves Community
    Reinvestment Act regulations ``by clarifying what qualifies for
    CRA consideration, updating how banks define their assessment
    areas, evaluating bank CRA performance more objectively, and
    making the entire process more transparent and timelier. The
    final rule's framework will increase support to small business,
    small- and family-owned farms, Indian Country, and distressed
    areas, and it accommodates banks of all sizes and business
    models.''
        The CRA had not been materially modernized since 1995, and
    I commend the OCC for taking this important step.
        As we continue to weather this pandemic, I again stress to
    each of you and your agencies the importance of our financial
    institutions providing access to credit and financial services
    to creditworthy individuals and businesses in legal industries.
        It is vitally important that our country's financial
    institutions, especially the largest, not deny credit financing
    based on political preferences related to firearms, oil and
    gas, or others.
        Lending decisions should be based on creditworthiness and
    should not target specific industries, especially as we work to
    restore our economy to pre-pandemic strength.
        This will remain an incredibly important issue for me, and
    I will continue to fight for access to credit and financial
    services for all of our legal industries.
        I appreciate each one of you joining us today to share your
    agency's activities and plans, as well as the tireless work of
    you and your staff in response to COVID-19.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman.
        The American people sent a clear message in this election:
    they rejected an Administration where Wall Street and
    corporations run the economy. People want a Government that is
    actually on their side.
        For the past 4 years, the Trump administration and the
    Federal financial regulators before us today have put their
    thumbs on the scale for corporations and their wealthy friends,
    while leaving everyone else at the mercy of the supposed ``free
    market.''
        Americans watched a President ignore a pandemic, refuse to
    even try to put in place any kind of plan to bring the virus
    under control, and to reject all our efforts to support
    families and get our economy running smoothly.
        Whatever the Majority Leader may say, whatever damage he
    and some of my colleagues and the outgoing President are doing
    to our democracy with their lies and their fabricated attacks
    on our nonpartisan and hardworking poll workers and local
    election officials, the facts are clear: A decisive majority of
    the public--5 million more people voted for Joe Biden than
    Donald Trump--a decisive majority rejected what they have
    endured over the last 4 years and voted for new leadership that
    will restore faith in our Government.
        People are ready to turn the page. They are ready for real
    leadership that will give them their freedom and their lives
    back. They are ready to heal and rebuild.
        The work we do here on the Banking and Housing Committee
    can be a big part of that and can make a real, tangible
    difference in people's lives--if we, Committee Members of both
    parties, come together and choose to do so.
        We have the power on this Committee to tackle the issues
    that actually matter to people's lives--their paychecks,
    housing, transportation, and the communities they live in.
        We can put small businesses back on their feet. We can lift
    up Brown and Black communities that have been hit the hardest
    by this pandemic. We can keep people in their homes; we can
    make their homes more affordable; we can bring down people's
    energy bills. We can lead the world in the fight against
    climate change. We can seize every opportunity to create good-
    paying jobs. We can free people from the stress of debt
    collectors and the downward spiral of payday lenders. And we
    can reorient our economy from wealth to work.
        To do all of that, we have to take on Wall Street power.
        We know who ships jobs overseas. We know who jacks up drug
    prices. We know who spends trillions on stock buybacks instead
    of higher wages. We know who busts unions. It is not our
    neighbors who may have a different political sign in their yard
    or a different bumper sticker on their car. It is the largest
    corporations, it is their unaccountable CEOs--from Facebook to
    Wells Fargo--and their allies in Washington.
        Wall Street is all too happy to watch phony populists turn
    us against each other, as long as it means they get to keep
    exploiting workers and playing by a different set of rules.
        For 4 years, we have had a President trying to convince
    people to blame their fellow Americans who may not look like
    them or worship like them, instead of blaming a system that
    rewards executives' stock portfolios when they lay off workers
    or when they cut their pay.
        Divide to distract--that was the playbook. Divide to
    distract from all the ways he and his followers in Congress
    were funneling more wealth to the already wealthy and funneling
    more power to the already powerful.
        But it did not work this time.
        Last week, a record 80 million Americans rejected that
    division, the largest vote for any Presidential nominee in our
    Nation's history. Now we have to deliver results.
        We have to take on big oil and other corporate polluters
    that have spent billions of dollars trying to convince people
    that climate change is an unsolvable problem, instead of a
    tremendous opportunity.
        We have to end the corporate business model that treats
    workers, especially Black and Brown workers, as expendable, in
    a system that perpetuates systemic racism.
        We have to break up the biggest banks and give that power
    to everyone else who has been denied a voice in our economy.
        Our financial system should be a public good. It already is
    for big banks. We need to make it work for everyone else and
    create a better system centered around the dignity of work.
        When work has dignity, hard work pays off for everyone, no
    matter who you are, no matter where you live, no matter what
    kind of work you do.
        When work has dignity, everyone can afford housing and
    transportation, and they have power over their lives and their
    own money.
        When work has dignity, we have a strong, growing middle
    class, and everyone--everyone--can reach it. Making that vision
    possible is the job of the Banking and Housing Committee.
        We know we have great challenges. We are in a public health
    crisis, an economic crisis, and a climate crisis. Extraordinary
    times call for us to aim higher and think bigger--to rise to
    meet this moment, to restore people's faith in their
    Government.
        Mr. Chairman, I look forward to coming together with
    Senators on both sides of the aisle, and with the new
    Administration, to get to work.
        Thank you so much.
        Chairman Crapo. Thank you, Senator Brown.
        We will now proceed to the testimony of our witnesses, and
    I will have you speak in the order I introduced you.
        So, Vice Chairman Quarles, you may proceed.

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

        Mr. Quarles. Thank you, Chairman, thank you, Ranking Member
    Brown, thank you, Members of the Committee, for the opportunity
    to testify today on the Federal Reserve's supervisory
    activities.
        My last appearance, in May, followed a period of historic
    financial stress. The emergence of COVID-19 and the measures
    taken in response added a deep strain of uncertainty to
    financial markets. It prompted a sharp and global flight from
    riskier, more volatile asset classes, and a retreat to the
    safety of cash. That retreat demanded immediate, extraordinary,
    and concerted public intervention, to ensure stability, restore
    calm, and see the Nation through an unfolding crisis.
        The Federal Reserve's intervention spanned a wide range of
    intermediaries and markets, including the banking sector.
    Strengthened by a decade of improvements in capital, liquidity,
    and risk management, including the refinement and recalibration
    of the last 3 years, banking organizations became an important
    shelter from financial distress. Our goal was to ensure this
    shelter stood fast--that banks could respond to the emergency
    and address consumer, business, and community needs, without
    jeopardizing their own safety and soundness.
        The report accompanying my testimony lists these actions in
    detail, and we have extended several of them as the COVID event
    has continued. They include temporary adjustments to capital
    and reserve measures, compliance requirements, and offsite
    examination activities. Importantly, they clarify, beyond
    doubt, that safety and soundness are no impediment to working
    constructively with borrowers and other customers in times of
    strain.
        Together with monetary, financial stability, and fiscal
    actions, these measures helped calm the waters. The initial
    wave of market stress has passed, and the recovery has begun
    much sooner than expected. This speaks to the country's
    tenacity, ingenuity, and spirit in responding to even the
    greatest of shocks.
        The challenge we face now is distinct, formidable, and
    complex. The surprise of the COVID event is gone, replaced by a
    clearer view of its economic consequences. The burdens facing
    households and businesses are better understood, but they are
    no less significant, and they are not evenly borne. I am
    confident that we will work through them together, support
    those hardest hit, and ensure that our economic wounds do not
    become scars.
        The Federal Reserve remains committed to using our full
    range of tools to support the economy for as long as needed. A
    strong, resilient banking system is an essential element of
    such support. A durable recovery demands banks that lend
    actively, confront gains and losses honestly, withstand
    unexpected shocks, and help customers rebuild and adapt. Our
    task, as supervisors, is to ensure that the country's banks
    continue to meet that exacting standard.
        The Federal Reserve's earliest COVID-related guidance,
    encouraging banks to work with their borrowers, was an
    important step toward this goal. Since then, working with our
    colleagues in other financial regulatory agencies, we have
    taken several others. These range from principles to guide
    COVID-related credit accommodations to a clearer statement on
    Community Reinvestment Act consideration of COVID-related
    activities, to steps that make it easier for banks to
    participate in emergency lending programs. It also includes the
    use of flexibility in our stress-testing apparatus to better
    understand the effects of the COVID event.
        As our report shows, that strength is still intact.
    Liquidity and capital remain high and, indeed, have increased
    at our largest banks over the course of the COVID event. Firms
    have sharply increased their reserves, setting aside resources
    today against possible losses tomorrow. Banks are well
    positioned to serve as a bulwark against broader financial and
    economic stress.
        It is worth recognizing how things might have been
    different. This foundation would not exist, after a once-in-a-
    century shock, if not for a decade of work by officials and by
    the banks themselves to make banks stronger and more stable,
    and to make banking supervision fairer, more efficient, and
    more transparent. Those values are not contingent, fit only for
    an economic boom. They represent an ethic and a commitment--to
    addressing the most pressing supervisory and regulatory issues
    in the most effective ways--that are even more critical during
    a crisis.
        That ethic has steered the Federal Reserve through the last
    7 months. It will continue to guide us through the recovery.
        COVID-19 changed many aspects of the Federal Reserve's
    work. It also affirmed the values and priorities that remain
    the same--those that will continue to guide us in our support
    for the financial system, the economy, and the country, long
    after the COVID event has passed.
        Thank you for your time, and I look forward to answering
    your questions.
        Chairman Crapo. Thank you, Mr. Quarles.
        Next, Acting Comptroller Brian Brooks.

    STATEMENT OF BRIAN P. BROOKS, ACTING COMPTROLLER, OFFICE OF THE
                      COMPTROLLER OF THE CURRENCY

        Mr. Brooks. Thank you, Chairman Crapo, Ranking Member
    Brown, and Members of the Committee. I appreciate the
    opportunity to update you on the OCC's work ensuring that
    Federal banks operate in a safe, sound, and fair manner and
    remain sources of strength for their communities.
        Senator Crapo, I would like to congratulate you on your
    tenure chairing this Committee. I thank you for your leadership
    and personal thoughts as we worked together, and I look forward
    to working with your successor.
        Over the past 8 months, the OCC has supported the orderly
    function of our banking system through an extraordinary time.
    Fortunately, banks and savings associations entered this period
    with nearly historic high levels of capital and liquidity.
    Asset quality was strong, and the economy had enjoyed the
    longest expansion on record.
        Then, as part of the national response to COVID-19,
    economic activity was suspended. Regulators at this table
    collaborated to provide banks the flexibility necessary for
    them to use that strength to support their customers and
    sustain economic activity. My testimony today will provide
    detail on the actions this agency has taken on that front.
        Today we continue to monitor the effects of shutting down
    the economy. While banks remain sound, we see potential for
    troubled assets ahead in commercial and residential real
    estate, in small business and consumer lending, and in the
    travel and hospitality sectors in particular.
        Banks, particularly those with concentrations in those
    assets, must take a sober view of their risks and work with
    customers to the maximum extent possible consistent with safety
    and soundness.
        The recent OCC semiannual risk perspective highlights the
    credit, operational, and compliance risks in the system which
    will focus our supervisory efforts in the months ahead.
        Prudent risk management today can avoid the need for more
    extreme loss mitigation tomorrow. Having said that, we also do
    see reasons for cautious optimism about the future based on
    strong third quarter GDP growth, continued reduction in
    unemployment, strong consumer and small business sentiment, and
    better than expected news about the near-term availability of
    effective COVID-19 vaccines.
        While the economy and banks face uncertainty as to the
    length and depth of the pandemic's trough, I also want to
    highlight what gives me optimism for the future of banking.
        During the social unrest that followed the killing of
    George Floyd this summer, it became clear that the protesters
    were angry that too many Americans had been left out of our
    national wealth creation engine for far too long. The OCC,
    therefore, founded Project REACh to convene bankers, civil
    rights leaders, innovators, and business people to promote
    full, fair, and equal participation in our national economy.
        The project is working to eliminate obstacles to credit for
    the 45 million Americans with no usable credit score, to expand
    affordable housing for those who cannot afford high downpayment
    requirements, and to reinvigorate minority banks that serve
    often neglected communities.
        We have now kicked off regional REACh efforts, including
    one serving the greater Los Angeles area very recently, and we
    have hosted access to capital events in South Carolina and
    Colorado. I have been humbled by the momentum among the
    industry, community, and civil rights advocates and our staff
    here at the OCC.
    Indeed, Project REACh has become a movement to tear down
    barriers so that all may pursue their American dreams.
        Another reason for optimism comes from innovators
    themselves within banks and elsewhere who are excited about
    improving banking and financial services to consumers,
    businesses, and communities. We are seeing new products and
    better ways of delivering them and much more efficient ways of
    operating. Ultimately, this progress will benefit consumers and
    businesses, and they will have greater choice and more autonomy
    over their financial well-being.
        At the OCC, we believe that consumers, businesses, and the
    economy are best served when this innovation can occur within
    the banking system, and the system is allowed to evolve as
    consumer preferences evolved. We think this for several
    reasons.
        First, the banking system is among our most strictly
    regulated and closely supervised industries. Those who fear
    innovation may harm consumers should consider the possibility
    that innovation might be safer in a supervised environment than
    it is under the currently largely unsupervised environment. The
    same is true for those focused on prudential risk.
        Over the last decade, large market shares of lending and
    payments processing have migrated from the commercial banks
    into less regulated shadow banks. This trend reduces our
    collective ability to spot and manage issues early on. And, of
    course, we should not underestimate the risk of a status quo in
    which incumbents seek protection from competition and, thus,
    delay the delivery of innovative financial services that are
    already available in other parts of the world.
        The OCC has been a leader in this area since coining the
    phrase ``responsible innovation'' in 2015. We remain committed
    to encouraging responsible efforts to deliver more choice and
    more economic opportunities and safe, sound, and fair ways
    within the Federal banking system to benefit consumers and
    businesses across the country.
        Thank you again for the opportunity to testify today. I am
    proud to serve as the Acting Comptroller of the Currency and
    support the agency's important mission. I look forward to your
    questions.
        Chairman Crapo. Thank you.
        Next, FDIC Chair Jelena McWilliams.

       STATEMENT OF JELENA McWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Ms. McWilliams. Chairman Crapo, Ranking Member Brown,
    Members of the Committee, and staff, thank you for the
    opportunity to testify today. I hope that you and your families
    are staying healthy and safe.
        When I testified before this Committee 6 months ago, we
    were confronting great uncertainty and volatility due to the
    COVID-19 pandemic and related Government shutdowns. Many
    industries and segments of the economy were experiencing
    unprecedented declines in activity, and this shock was
    reverberating throughout the financial system.
        Although there remains considerable uncertainty about the
    path of the economy, we know from two quarters of industry-wide
    reporting that the banking system has served as a source of
    strength throughout this period. Banks of all sizes supported
    their customers and communities, including by originating
    nearly $500 billion in PPP loans and accommodating more than $2
    trillion in new deposits over two quarters.
        The banking system's ability to support the economy
    reflects the industry's strong capital and liquidity positions.
    In the second quarter of 2020, aggregate equity capital
    increased to more than $2.1 trillion, which translated to an
    average common equity Tier 1 capital ratio of 13.4 percent. On
    both an aggregate and percentage basis, these capital levels
    were slightly higher than the quarter immediately preceding the
    pandemic.
        To support the ability of banks to work constructively with
    their customers, the FDIC has taken meaningful actions to
    provide banks necessary flexibility while maintaining safety
    and soundness and consumer protection.
        Today I will provide an update on five areas in which we
    have made significant progress: responding to economic risks
    related to COVID-19; enhancing our resolution readiness;
    supporting communities in need; fostering technology solutions
    and encouraging innovation; and finalizing outstanding
    rulemakings.
        My written statement provides greater detail in each of
    these areas, but I would like to briefly touch on each of them,
    starting with our response to economic risks related to COVID-
    19.
        Beginning in early March, the FDIC and our fellow
    regulators undertook a series of actions that helped maintain
    stability in financial markets. In addition to providing
    flexibility for banks to work with their borrowers, we made
    many targeted temporary regulatory changes to facilitate
    lending and other financial intermediation.
        Over the past 6 months, we have taken additional regulatory
    and supervisory actions in support of these objectives and the
    economy. We continue to monitor conditions and receive feedback
    from supervised institutions, and we will consider additional
    guidance as appropriate.
        On to our resolution readiness, as the FDIC responded to
    the immediate impact of the pandemic, we also focused on
    enhancing our resolution readiness in several ways.
        Although we entered the pandemic with a historically low
    number of bank failures, we recognized that the absence of
    failures could not last forever, even before the pandemic.
    Accordingly, the FDIC improved our resolution-related
    capabilities by centralizing our supervision and resolution
    activities for the largest banks, establishing a new approach
    to bank closing activities to help protect the health of our
    employees should banks fail during the pandemic; coordinating
    with our international counterparts on cross-border resolution
    for global systemically important banks; carrying out targeted
    engagement and capabilities testing with select firms on an as-
    needed basis; regularly reviewing institution and financial
    industry data to inform FDIC resource management decisions and
    prepare for potential surge activities if necessary; and
    finalizing rules that will improve our resolution-related
    activities.
        We have been mindful of also supporting communities in need
    during this time in particular. As the pandemic continues to
    disrupt the daily lives of all Americans, we are particularly
    mindful that minority and low- and moderate-income communities
    have suffered disproportionately. As the Nation's deposit
    insurer and primary supervisor of community banks, including
    minority depository institutions, or MDIs, the FDIC plays an
    important role in helping these institutions meet the needs of
    their customers and communities.
        Shaped by my personal experiences and guided by a
    commitment to increasing financial inclusion in traditionally
    underserved communities, one of my priorities as FDIC Chairman
    has been expanding our engagement and collaboration in support
    of MDIs.
        One of the options we are exploring is a framework that
    would match MDIs and CDFIs with investors interested in the
    particular challenges and opportunities facing these
    institutions and their communities. We are in the process of
    creating a vehicle through which investors' funds would be
    channeled to make investments in or with MDIs and CDFIs. We are
    still developing the details but expect to release more
    information in the near future.
        As we consider additional ways to create a more inclusive
    banking system, we must recognize the tremendous benefits that
    financial innovation can deliver to consumers. New technologies
    have the potential to bring more people into the banking
    system, provide access to new products and services, and lower
    the cost of credit.
        Our recent biennial survey on household use of banking and
    financial services shows that individuals are increasingly
    moving to digital banking. As these trends continue, regulators
    should aim to foster the development of new technologies that
    improve the way banks operate and how they are able to serve
    their customers.
        To enable this evolution, we established an office of
    innovation--FDiTech--and began working on several initiatives.
    Notably, we recently sought feedback on a ground-breaking
    approach to facilitate technology partnerships between banks
    and fintechs. Our Request for Information proposed a public-
    private standard-setting partnership and voluntary
    certification program that would help reduce the cost and
    uncertainty associated with the introduction of new technology
    at an institution. Reducing these barriers to innovation is
    particularly important for community banks. We look forward to
    reviewing recommendations from interested parties as we review
    next steps.
        We also opened our first hack-a-thon to begin developing
    next-generation supervisory technologies that will streamline
    regulatory reporting, reduce regulatory costs, and improve the
    ability of regulators to quickly identify emerging risks at
    banks or across the financial system. Lessons learned in these
    events will not only increase the effectiveness of the FDIC,
    but they will also lay the foundation for streamlined tech
    integration in our Nation's banks.
        We continue to focus our efforts on modernizing and
    improving the efficiency and resiliency of the financial
    system. We finalized two rules regarding Federal interest rate
    authority in Section 19 of the FDI Act, both of which codify
    existing FDIC guidance and bring clarity to the market. In
    addition, we engaged with our fellow regulators to address the
    Volcker Rule's overly restrictive covered fund provisions,
    modified requirements regarding the collection of initial
    margin from affiliates, and established a long-term liquidity
    metric for the largest banks.
        Among upcoming actions, we intend to finalize two
    additional rules regarding broker deposits and industrial loan
    companies in the near future.
        Chairman Crapo. Madam, I am going to have to ask you to
    wrap up soon, if you would.
        Ms. McWilliams. Thank you for the opportunity to testify
    today, and I look forward to your questions, and I apologize
    for going over my time.
        Chairman Crapo. No problem. Thank you.
        Then, finally, Chairman Hood.

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

        Mr. Hood. Thank you. Good afternoon, Chairman Crapo,
    Ranking Member Brown, and Members of the Committee. Thank you
    for the opportunity to provide an update on the state of
    federally insured credit unions and the NCUA's efforts to
    assist them during the ongoing COVID-19 pandemic.
        Our Nation's credit union system was well capitalized at
    the start of the pandemic and remains so today, with high
    levels of net worth and ample liquidity. This strength has
    allowed credit unions to adapt to the operational challenges
    resulting from the pandemic.
        Total assets in federally insured credit unions rose 15
    percent over the year ending in the second quarter of 2020, to
    $1.75 trillion. Credit union shares and deposits rose by nearly
    17 percent, to $1.49 trillion. Since mid-March, the NCUA has
    worked diligently to provide credit unions with regulatory
    relief and much-needed flexibility so they can continue to
    safely serve their member-owners.
        We have also adjusted our examination program to protect
    our staff, and we all continue to work remotely and
    effectively. We have issued 11 interagency statements and 20
    guidance letters to the industry to date, helping credit unions
    to address emerging risk and implement the regulatory and
    statutory changes that have been made in response to the
    pandemic.
        The NCUA has provided over $3.7 million in technical
    assistance to small, low-income, and minority credit unions in
    the form of its 2020 Community Development Revolving Loan Fund
    allocation, which went directly to COVID-19 assistance.
        The credit union system's net worth increased 6.8 percent
    over the year, to $182.9 billion. The aggregate net worth ratio
    for the system stood at 10.46 percent, well above the 7 percent
    statutory requirement. The Share Insurance Fund is also strong,
    and the equity ratio remains well within the statutory range
    under the Federal Credit Union Act. Accordingly, we believe
    there is no need to assess a premium at this time.
        Credit unions have continued to provide needed credit and
    financial services, with lending rising to an all-time high of
    $1.5 trillion in all major categories. Credit unions
    collectively extended $8.4 billion in loans under the SBA's
    Paycheck Protection Program, with an average loan amount of
    $49,000. Like capital, liquidity is a pillar of strength and
    the bedrock upon which the safety and soundness of the credit
    union system rests.
        Congress' decision to increase the flexibility of, and
    borrowing authority for, the Central Liquidity Facility in the
    CARES Act has contributed greatly to bolstering the
    availability of liquidity in the system. Since the Act was
    signed into law, the NCUA has successfully encouraged natural-
    person and corporate credit unions to join the CLF. Today, the
    facility's borrowing capacity has exceeded $32 billion and
    provides access to nearly 80 percent of all credit unions. I am
    indeed grateful that Congress provided this much-needed
    authority in the CARES Act. However, I respectfully request
    that these changes be extended for the pandemic's duration so
    the credit union system and the NCUA can respond effectively
    should the need for emergency liquidity arise.
        One important lesson from 2020 is the need for greater
    financial inclusion. Lamentably, recent events have revealed
    many inequities in our society, not the least of which is that
    the pandemic has had a more deleterious impact on communities
    of color. Since becoming the 11th Chairman of the NCUA, I have
    made financial inclusion a priority within the agency and the
    credit union system as a whole. I recently reinforced that
    commitment with the launch of a new financial inclusion
    initiative called, ACCESS--Advancing Communities through
    Credit, Education, Stability & Support. This initiative will
    refresh and modernize regulations, policies, and programs that
    all support greater financial inclusion within the agency and
    the credit union system, and will address the specific needs of
    diverse communities. I look forward to working in partnership
    with the Members of this Committee toward this worthy endeavor.
        In closing, I would like to thank the Committee again for
    the opportunity to appear before you today and discuss how the
    NCUA is working to protect our Nation's credit union system and
    the 122.4 million members, how they are all working to help
    them during this challenging time. I look forward to answering
    your questions. Thank you all for the opportunity to be here,
    and thank you, Chairman Crapo, for the leadership that you
    provide. It has been an absolute pleasure working with you,
    sir.
        Thank you.
        Chairman Crapo. Thank you very much.
        I will go with the first questioning. My first question is
    going to be directed to the Federal Reserve, the FDIC, and the
    OCC. But I would like you all to keep your responses to about
    30 to 45 seconds because I want to get to a question for the
    NCUA as well.
        I wrote to the Fed, the FDIC, the OCC, and the NCUA, and
    the CFPB, actually, in October, asking each of you to use your
    discretion to minimize the regulatory impact on banks and
    credit unions resulting from participation in the PPP. And I
    know that some of you have taken important actions in that
    regard.
        I believe, however, that there is still a litany of rules
    that impose a burden on our institutions simply from passing
    asset-based regulatory thresholds based on their participation
    in PPP and other Government support.
        The question I have first to Vice Chairman Quarles,
    Chairman McWilliams, and Acting Comptroller Brooks is: What
    additional areas can you use your discretion in to provide
    relief to banks that are subject to significantly more
    burdensome regulations simply from participation in the PPP and
    that are eventually expected to revert in size eventually?
        Mr. Quarles. Well, I am happy to start with an answer to
    that question, Chairman. We do have some flexibility in our
    regulatory framework with respect to some of the measures that
    increase in stringency as banks increase in asset size to make
    temporary exceptions. We have done that, and we are continuing
    to look as to whether we should extend some of that relief.
        With respect to some of the measures, we are not currently
    seeing that they are actually going to pose a problem. I think
    it is principally an issue for the smaller banks that are being
    pushed up over levels than the larger banks that might be being
    pushed into the next category or other. We are not seeing that
    with the larger banks that that is actually happening yet. But
    smaller banks could be pushed into some materially more
    difficult areas, and I think we need to look at what we can do
    there.
        Mr. Brooks. Chairman Crapo, I am happy to go next. I would
    begin by echoing Chairman McWilliams' statement in our opening
    remarks that at the most recent FDIC Board meeting, the members
    of the FDIC Board of Directors, myself included, approved a new
    position that will exclude those kinds of assets from audit
    requirements that are subject to asset size thresholds. And I
    would also say that the bank regulators on an interagency basis
    are currently working on a set of rules that would relieve for
    a period of time certain asset thresholds being tripped that
    trigger heightened scrutiny and heightened compliance
    requirements at different levels.
        So just to orient Committee Members on this, there are a
    number of different regulatory requirements that kick in at
    $500 million for certain things, $600 million for certain other
    things, $1 billion for other things, et cetera. And I think the
    direction of that discussion is something that will cap out at
    $10 billion most likely based on current conversations. I think
    Vice Chairman Quarles has it exactly right that at larger
    levels, banks are fully capable of managing those risks, but it
    is small banks that have those difficulties. And I also think
    that there will be some time limitation on that, and there is
    discussion among the agencies as to what the appropriate
    temporary period of time is to provide that relief.
        I would just close by saying that one thing that is
    important is that, on the one hand, we must accommodate the
    dislocations created by the COVID-19 pandemic situation, but at
    the same time it is important that those things be wound down
    just as soon as the pandemic ends, because it is important as
    supervisors that we have real visibility into the balance sheet
    risks created by those assets over time.
        Chairman Crapo. Thank you.
        And, Chair McWilliams, we are down to about a minute, so
    you are going to get cheated on a little bit of time here, but
    please respond.
        Ms. McWilliams. It is OK. I cheated a little bit earlier,
    so I will yield the time to Chairman Hood. I will just say that
    small banks have done a disproportionate amount of lending to
    their proportion of the banking industry share, so about 31
    percent of PPP loans versus 15 percent of total assets. So it
    is only appropriate if you look at these thresholds, as
    Comptroller Brooks mentioned, and accommodate them because they
    are truly temporary.
        Chairman Crapo. Thank you.
        And, Chairman Hood, my specific question to you would be to
    see if you could focus on your comments that I heard and your
    evaluation of the PCA Framework and the net worth level issues
    in this context.
        Mr. Hood. Yes, sir, that really is important. One of the
    things that I wanted to note is that credit union shares are at
    an all-time high, as are loans. And in the current framework,
    there is now pressure on our credit unions to reduce their
    lending activities during this pandemic, and the last thing we
    need is for a third of Americans to not have access to credit
    during this time. So if we can provide any type of relief from
    prompt corrective action, it would certainly be greatly
    appreciated because what it does, it allows management to focus
    solely on meeting the needs of the member owners as opposed to
    any of the prompt corrective action frameworks that we have in
    place. I think if we can provide the relief on a temporary
    basis, safety and soundness will still be preserved. And, you
    are right, I did write about this in my April 29th response to
    you, so any relief that we can get would be greatly
    appreciated.
        Chairman Crapo. All right. Thank you very much.
        Senator Brown.
        Senator Brown. Thank you, Mr. Chair.
        To all four of you, you have all had an opportunity to
    serve your country at the highest levels. As this
    Administration winds down, I would like to thank you for your
    service, each of you.
        But looking back over each of your terms, I do not think
    you have left your agencies, much less American families,
    communities, and small businesses, I do not think you have left
    them better off than when you took office. Each of you could
    have done so much more to actually improve Americans' lives,
    especially during these difficult last months. Instead, you
    have finalized the Wall Street wish list.
        Vice Chairman Quarles, your job is one of the most crucial
    in our country when it comes to preventing another banking
    crisis. In 2006, you painted an optimistic picture of the
    economy, said you were offering ``some perspectives on risks in
    the financial sector that have garnered a great deal of media
    attention.'' That sounds to me like an economist's version of
    shouting, ``Fake news.''
        The 2008 crisis was very real. As far as I can tell, you
    learned nothing from it. Just like last time, you now insist
    that even though millions are struggling to stay in their jobs
    and stay in their houses, the economic future is bright because
    the stock market is up. Experts of all backgrounds have warned
    that the collapse in the real economy would inevitably cause
    enormous losses for banks. For almost a year, you have ignored
    the pleading from me and others, including former Fed Chairs,
    to stop bank dividends and protect the financial system.
        I applaud the Fed's recent recognition that it needs to
    address racial inequality, but another lessons from 2008 is
    that a financial crisis would disproportionately destroy the
    wealth and opportunity for peoples of color. If the Fed is
    going to take the racial wealth gap seriously, it must take
    financial stability seriously. You simply have not. Last week,
    80 million voters rejected that thinking.
        Chair McWilliams, the FDIC is supposed to ensure the
    viability of small banks, keeping your deposits safe so they
    can be put to work in our communities. Instead, you have gutted
    rules that were meant to keep mega banks from crashing the
    entire system, risking a repeat of the hundreds of community
    bank failures that happened in the last crisis. You approved a
    merger that created yet another too-big-to-fail bank that will
    likely muscle smaller community banks out of existence. You
    have attempted to force out experienced banking experts during
    an economic crisis. Most recently, you decided to distort data
    that proves millions of households do not have all the banking
    services they need. You did it by literally erasing those
    families from the FDIC report. Those underbanked households are
    many of the same people that would suffer if you got your way
    and gutted the Community Reinvestment Act.
        Your tenure has certainly made life easier for big bank
    executives. I will give you that. But it is going to hurt the
    communities your agency is supposed to serve. Last week, 80
    million voters rejected that thinking.
        Acting Comptroller Brooks, OneWest, the bank that you and
    Secretary Mnuchin and Joseph Otting worked at was known, as you
    know, as a ``foreclosure machine.'' It makes no sense that the
    outgoing President handed the wheels of the economy to so many
    people who had a hand in crashing it in 2008. Even though you
    are running the OCC without the approval of the Senate, you
    have made sweeping changes to regulations to benefit the same
    corporations you used to lobby for. It is exactly this kind of
    self-dealing that has eroded so many Americans' trust in their
    Government and the economy. And last week, 80 million American
    voters rejected that thinking.
        And, Chair Hood, you are the only one on the panel I voted
    for for confirmation. The credit unions you regulate are often
    the only ones providing credit in Black and Brown communities
    and small towns in rural America. You are in a unique position
    to help Americans left out of our financial system, but instead
    of standing up for them, it seems like you are more focused on
    currying favor with the outgoing President and the photo ops
    that used to come along with it.
        Last week, 80 million voters rejected that thinking. We now
    have an opportunity for the financial regulators to do what
    they should be doing to help. Elections have consequences. The
    Wall Street first attitude of the Trump administration is over.
    President-elect Biden--my colleagues on this Committee all know
    that he is the President-elect. Fear, I suppose, keeps them
    from saying it. President-elect Biden will have the opportunity
    to install watchdogs at these agencies who will put working
    families and their communities first and will give America
    confidence that their Government is on their side.
        Mr. Chairman, thank you.
        Chairman Crapo. Thank you.
        We will now turn to Senator Toomey.
        Senator Toomey. Thank you very much, Mr. Chairman.
        I would like to begin by congratulating each of our
    witnesses. I want to congratulate you on doing some outstanding
    work during an incredibly difficult time. Think about what we
    have been through as a country: the worst pandemic in 100
    years, and the first time in the history of the Republic that
    Governments, our State Governments mostly but also to some
    degree the Federal Government, intentionally closed our
    economy. Never even been contemplated before much less actually
    take place.
        So the economy was shut down. It was illegal to go to work,
    illegal to operate a business, and we all understand why. But
    what I find is absolutely extraordinary, as we look back on
    these last several months, is, despite that unprecedented
    catastrophic elimination almost of our economy for some period
    of time, yet almost no bank failures; and, in fact, the banking
    industry of America rose to the challenge, small banks and
    medium-sized banks, especially, providing credit to small
    businesses, medium-sized business consumers on a scale that
    most of us probably never imagined. The financial institutions
    weathered the storm because they were well regulated, well
    capitalized, read, able, and willing, and, in fact, they did
    respond to the need of their customers, the men and women who
    run the small businesses and employ so many millions of
    Americans. It is a remarkable success story.
        And it leads me to a point I want to stress, which is part
    of what made that possible was the CARES Act and the 13(3)
    lending facilities. I want to just stress--and this is
    especially for Vice Chairman Quarles because this is relevant
    for the Fed. I believe that those facilities were a remarkable
    success by any reasonable measure. They were intended to
    restart the private lending of America's economy, to provide a
    backstop so that private capital could flow and businesses
    could borrow and, therefore, stay alive, keep their workers in
    place to the extent possible, and we would have an economy when
    we got to the other side.
        Well, what has happened is as soon as those programs were
    authorized and set up, capital started flowing, actually like
    never before. The corporate market, corporate bond market,
    high-yield as well as high-quality credit, all-time record
    issuances. Bank lending off the charts. Liquidity was available
    and available very, very quickly. And that is a big part of the
    reason the economy has recovered as rapidly as it is. We all
    know it is not done yet. We have got work left to do. But how
    many economists anywhere in the world thought that we would
    have an unemployment rate below 7 percent at the end of
    October? People thought it was be 10 percent at the end of
    December, and it is not.
        So this series of programs did their job. The private
    sector is providing the capital that is needed. It is now time
    to terminate these programs, which is exactly what was
    contemplated by the legislation and, frankly, to take a victory
    lap that we have gotten our economy back on track. It is not
    done yet, but it is definitely heading very much in the right
    direction.
        A couple of quick questions. One, I just want to follow up
    on a question raised by the Chairman, and I guess this is--I
    will start with Vice Chairman Quarles. There was a discussion
    about some of the increased regulatory burden on banks,
    especially small- and medium-sized banks, for no reason other
    than the fact that they really stepped up and responded in this
    crisis by providing credit. That swelled their balance sheets,
    and that has triggered, for those especially who crossed the
    $10 billion threshold, a number of costly regulatory
    provisions, one of the most problematic of which is the
    Government-mandated price fixings of the interchange fees. So I
    would just urge you to consider ways in which you might ensure
    that we do not punish banks that really did exactly what their
    communities needed when they needed it.
        I would like to ask also about the transition away from
    LIBOR, and I am mostly concerned about orphan contracts, those
    contracts that have existed in some cases for years and extend
    into the future, and they assume a LIBOR index is available for
    ongoing payments. What are we going to do about these orphan
    contracts, these contracts that are currently existing and they
    do not end until after the date on which we expect LIBOR to no
    longer be operative?
        Mr. Quarles. So I think we need to consider a mechanism
    that would allow those so-called legacy contracts, the great
    bulk of them, to mature on their existing basis without having
    to be renegotiated and shifted to a new rate, without allowing
    the continuation of the writing of new contracts during the
    period that that legacy is running off.
        I think there are a variety of ways to do that. The banks
    have been discussing that. We have been discussing it with the
    banks. It is an international issue as well. We have been
    discussing it through the FSB and directly with the United
    Kingdom, which has a special responsibility for LIBOR. And I
    think that within the next month or two, we should have a plan
    to share that would address them.
        Senator Toomey. So, you know, obviously LIBOR is a
    reference based on the eurodollar deposit market. There is a
    eurodollar deposit market, and it continues. Would it make
    sense to simply have a different mechanism for establishing
    what the offered side of that market is?
        Mr. Quarles. We could think about that. That could be a so-
    called synthetic LIBOR, and synthetic reference rates are
    something that the Bank of England and the FCA in the United
    Kingdom have thought about. I think in the United States,
    because of our different sort of litigation framework, I would
    want to think of other ways to try to address that issue before
    we move in that direction.
        Senator Toomey. Thank you.
        Mr. Chairman, I do not see a clock. Am I out of time?
        Chairman Crapo. Yes. You are actually a little over.
        Senator Toomey. OK. I apologize and I will yield.
        Chairman Crapo. I will have to do better at my gaveling.
        Senator Reed.
        Senator Reed. Well, thank you very much, Mr. Chairman, and
    thank you to the panelists for your testimony.
        Vice Chairman Quarles, in a speech on September 23, 2020,
    you agreed with Chair Powell that it will take continuous
    support to stay in a robust recovery, which implies a second
    major COVID bill along the lines of the CARES Act. Is that
    still your position?
        Mr. Quarles. So I think I would say whether there is to be
    another round of CARES Act stimulus is ultimately, of course, a
    question for the Congress. As we look currently at the
    evolution of the economy, as Senator Toomey noted, the economy
    is recovering more robustly and more rapidly than we had
    expected in the spring, even than we expected a couple of
    months ago. Each time that we get new reports out, the numbers
    improve.
        I think probably the most accurate thing to say would be
    that additional support would accelerate a recovery that is
    underway, but I would not want to say at this point that you
    would say that it was necessary.
        Senator Reed. Well, that is essentially what I think
    Chairman Powell has said and you said just not too long ago.
    One of the major aspects of the CARES Act was to support the
    State and local Government, and it is, I think, critical to do
    that because I hear from not only my Governor but Governors
    across the Nation that they are running into really difficult
    choices in terms of cutting public services and raising taxes.
    And without additional support, they will have to do that,
    which I do not think will help stimulate the economy or aid a
    recovery.
        So what is your view of State and local assistance as we
    did in the CARES Act?
        Mr. Quarles. Well, I think you need to draw a distinction
    between the types of support that the Fed provides, which is
    backstop lending, which for many State and local Governments
    may not be the answer to their issues for them to acquire more
    debt. There are limits on the amount of indebtedness they can
    acquire for almost all of them. And our terms require that--you
    know, our policies require that they be made on certain terms
    from a decision that the Congress might make to extend
    additional fiscal support. And the latter would be something
    that, again, would be a decision that the Congress would make
    and would require quite different tools than the Federal
    Reserve has.
        Senator Reed. Right, it would complement what you are
    doing, and in addition to the additional resources,
    flexibility. Right now the States are prevented from using
    their resources to cover lost revenue, which for many States is
    the critical problem they have. And, in fact, the chief policy
    officer of the Chamber of Commerce pointed out that this has
    been a lead to really replacing the lost-time revenue with
    program tax increases, which is not usually considered to be
    stimulative. So do you think the flexibility is needed?
        Mr. Quarles. Again, with respect to the municipalities, I
    think that I can speak to what the Federal Reserve can do, and
    the decision to provide the broader range of support would be
    something for the Congress to debate and decide.
        Senator Reed. Mr. Chairman, do I have additional time? I
    have one more question for Chairman McWilliams.
        Chairman Crapo. You have 50 seconds.
        Senator Reed. Thank you very much.
        Chairman McWilliams, in 50 seconds, this might be more of a
    final point by me. We are facing a housing tsunami. The
    National Council of State Housing Agencies indicated that U.S.
    renters will owe up to $34 billion in past-due rent by January,
    increasing eviction filings, imposing punishing financial
    hardship on millions in just a few months. We could have in
    January--and that is not too far away--thousands, hundreds of
    thousands of people being evicted or foreclosed; and in the
    midst of a pandemic where sleeping five in a bedroom is not the
    best medical advice I think doctors would give, that could
    happen, probably, and indeed I think we have to do something.
    So I would hope that you and your colleagues in the housing
    community will be thinking hard about supporting efforts to
    provide financial relief to these renters. Eventually, it will
    hit the banks because, as they foreclose on the mom-and-pop
    landlords, they will have a lot of property on their hands
    which might not be very valuable. So I would hope you would do
    that.
        Respecting the Chairman and his graciousness, thank you
    very much, Mr. Chairman.
        Chairman Crapo. Thank you, Senator Reed.
        Senator Scott.
        Senator Scott. Thank you, Mr. Chairman, and thank you to
    the panel for being here with us this afternoon.
        I will start with Acting Comptroller Brooks and Chairman
    Hood. Since this Committee's last oversight hearing, your
    agencies have launched initiatives aimed at promoting broader
    financial inclusion: Project REACh at the OCC and the ACCESS
    initiative at NCUA. As someone who spent much of my time in
    Congress and now in the Senate working to identify and reduce
    barriers to economic mobility and opportunity and to expand
    access to credit and capital, especially for underserved
    communities, I was deeply encouraged by these initiatives. I
    would love to have an update both on REACh as well as ACCESS.
    Perhaps, Mr. Brooks?
        Mr. Brooks. Well, thank you, Senator Scott, and thank you
    for your continued engagement on these issues. I very much
    enjoyed our event together in South Carolina where we looked at
    the intersection between Project REACh, the CRA, and your
    opportunity zones bill. So I think this was a terrific
    dialogue.
        On Project REACh, I think most of you are aware that
    Project REACh has three major components at the national level.
    One is to convene bankers, civil rights groups, and tech
    executives around the idea of building a synthetic credit score
    for the 45 million Americans who do not have one. The reason
    that matters is that in America, the principal way that most
    families build wealth generationally is through home ownership,
    and, you know, it is hard to buy a house in this country
    without a mortgage, and you cannot get a mortgage without a
    credit score.
        So the 45 million so-called credit invisibles are hugely
    disproportionately Black and Hispanic, so this is a major civil
    rights issue for our time. And yet it turns out that giving
    those people credit for their rent payments, their utility
    payments, and their cash-flows and their bank accounts, which
    most of them have, is relatively easily doable. So I think that
    we are not very far away from an announcement of a version 1.0
    of a new kind of credit score, working closely with the Big
    Three credit bureaus and the companies I just mentioned, to
    allow those people the opportunity to be considered for home
    mortgages. That will be a game changer when that becomes
    available, and I think that will be available this year.
        The second piece has to do with the 20-percent downpayment
    requirement that most Americans face in buying houses, and,
    again, the percentage of people who inherit money to make a 20-
    percent downpayment is disproportionately favoring, you know,
    Whites and Asians and disproportionately disfavoring Blacks and
    Hispanics who more often than others did not inherit money
    generationally and, thus, have a very hard time meeting that
    threshold.
        Downpayment assistance programs have offered some support
    for that, but we think that a more radical examination of the
    system is required, and various participants in Project REACh
    have talked about different ways of closing the downpayment
    gap. One of those ways has to do with the possibility of equity
    financing as well as debt financing for home ownership, and
    there are a lot of people who are very enthusiastic about the
    ability of drawing new capital sources into the housing market
    for that. So these are all very good.
        One of the most important things we are working on here is
    reinvigorating the commitment of large banks to support
    minority depository institutions in their communities, so the
    other piece in Project REACh we expect to be announced very
    shortly is the Project REACh MDI Pledge, in which big banks
    will commit not only to supporting MDIs financially, but also
    through engaging in executive training programs and rotational
    programs and real business partnerships designed to make MDIs
    successful, not just to preserve their existence but to make
    them successful in their communities. And the reason that
    matters a lot is that MDIs are the trust builders in certain
    communities. They are the reason why many African Americans who
    do not feel comfortable, for example, interacting with big
    banks who they may have felt scammed them in the past do feel
    comfortable approaching MDIs in their own communities, and that
    is an important entry point into the banking system.
        Senator Scott. Thank you very much.
        Chair Hood?
        Mr. Hood. Thank you, Senator Scott. Since becoming the
    Chairman of NCUA, I have long advocated that financial
    inclusion is indeed the civil rights issue of our generation.
    To that end, I was very pleased to work with my agency
    colleagues to recently launch ACCESS, that is, Advancing
    Communities through Credit, Education, Stability, & Support.
    The first piece is credit. We are going to need to continue to
    have small-dollar loan products when we live in a society where
    40 percent of American households could not come up with $400
    in an emergency. That percentage grows to 60 percent in
    communities of color and, sadly, 90 percent in disabled
    communities. So we want to work to ensure that individuals will
    have access to low-dollar amounts, small-dollar loans. I am
    pleased that credit unions today have made 171,000 loans that
    are really helping provide small-dollar loans, but we want to
    do more, and we especially want to do more in minority
    communities.
        Another piece is education. How do we provide the
    educational coaching and help and financial well-being so folks
    cannot just get into the credit system, but how do they remain
    in it sustainably? So we are working with groups such as
    Operation HOPE and others who can really help propel
    individuals into the mainstream economy.
        The next piece is stability. Mr. Brooks just talked about
    minority depositories. We at NCUA supervise 509 MDIs. We want
    to do more than strengthen them. We want to make sure that they
    are empowered to succeed and touching communities of color who
    traditionally have been left on the margins of economic
    success. So we are continuing to provide mentoring
    relationships. We are providing technical assistance and
    grants. We want to even encourage them to work in opportunity
    zones that you champion. In addition to stability with MDIs, we
    also want to support our low-income designated credit unions
    and CDFIs as well because they are all on the front line when
    it comes to providing mainstream financial access.
        The last piece is support. Support looks for us in the
    chance of looking at employment opportunities. If people are
    going to have mainstream success, they are going to need to
    have jobs. So we have implemented the Second Chance Initiative
    where individuals who may have had nonviolent, noncriminal
    offenses can now work in our credit unions. And we are also
    looking at a pipeline for the future where we are providing
    opportunities for students of colors and others to enter in the
    financial services industry. So that, sir, is Operation ACCESS.
    Thank you.
        Senator Scott. Thank you. Mr. Chairman, I know that I am
    about a minute over my time. I will just close with these
    comments. I am going to submit some more questions for the
    record to Chairwoman McWilliams as well as Vice Chairman
    Quarles.
        Mr. Brooks, thank you for you approach in coming to
    Charleston and being willing to go across this country
    promoting ways to help the credit invisible as well as to lower
    the challenges or hurdles around downpayments. Your work has
    been, frankly, some of the most nonpartisan--not bipartisan but
    nonpartisan work I have been a part of. Thank you very much.
        Mr. Brooks. Thank you, Senator.
        Chairman Crapo. Thank you.
        Senator Menendez.
        Senator Menendez. Thank you, Chairman.
        Earlier this year, the House Select Subcommittee on the
    Coronavirus Crisis found that the Treasury Department privately
    encouraged lenders to prioritize existing customers when
    issuing Paycheck Protection Program loans, leaving many
    minority-owned small businesses without access to important
    Federal aid.
        So, Comptroller Brooks and Chair McWilliams, were you aware
    that Treasury privately encouraged banks to focus on their PPP
    lending to existing customers? A simple yes or no would do.
        Mr. Brooks. So, Senator Menendez, thank you for that
    question. I was not aware that there was such a thing, and I am
    not aware today. I do know that there were some issues around
    Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance
    which did lead some banks to make those judgments themselves
    because they had already vetted their existing customers. But I
    am not aware of what you suggest just now.
        Ms. McWilliams. Likewise, Senator Menendez, I was not
    aware, but I know that initially banks were--we were asking
    them to originate these loans quickly to get into the economy
    so that people can get paid and make their payments, and as a
    result of that, reaching out to existing customers alleviated
    some of the burdensome----
        Senator Menendez. You said you did not know. Neither of you
    knew. But the head of the American Banking Association told its
    board of directors, ``Treasury would like for banks to go to
    their existing customer base.'' And JPMorgan corroborate this
    account, explaining, ``From early on there was an understanding
    from Treasury that banks would be working with existing
    clients.''
        So you must have known that at least this was unofficial
    guidance. Did you push back in that regard?
        Mr. Brooks. So, Senator Menendez, maybe I can start with an
    answer to that. So early on in the PPP rollout, one of the
    things that we identified across our banks was not that they
    were favoring their existing customers; it was that they were
    having a hard time doing Know Your Customer, as I say, another
    compliance for new clients in the door in a rapid response
    framework. So one of the things we did at the OCC is we
    convened a set of listening sessions with banks who were having
    that difficulty and fintechs that had adopted various Know Your
    Customer and customer identity verification tools to allow them
    to quickly originate loans to people that were not already in
    their system.
        We know anecdotally that that listening session had some
    results, that there were some partnerships that resulted in
    that, and particularly in the mid-size and community bank group
    inside of the OCC, they were able to ramp up new customer
    support.
        Ms. McWilliams. And, Senator Menendez, from the FDIC,
    community banks were proactively reaching their customers, and
    to the extent that they had new inquiries from new customers,
    they had to go through the due diligence that, frankly, the
    agency is required----
        Senator Menendez. Did either you or the FDIC or the OCC
    encourage banks to extent PPP lending beyond their customer
    base?
        Mr. Brooks. So, Senator, speaking for the OCC, absolutely.
    That was the purpose of those listening sessions that I
    mentioned. They were attended by----
        Senator Menendez. Beyond listening, did you urge them to
    extend beyond their customer base?
        Mr. Brooks. Yes, the whole announced point of the listening
    session was to help them overcome the hurdles to get to new
    customers.
        Senator Menendez. Well, I would just simply say many
    minority-owned small businesses do not have existing banking
    relationships, and Treasury's decision to encourage banks to
    prioritize PPP loans to their existing customers and from my
    perspective both the FDIC and OCC inaction has had devastating
    consequences on our Nation's minority-owned small businesses.
    Limiting PPP loans to banking customers left minority small
    businesses out of $670 billion of Federal aid. Now 41 percent
    of Black-owned small businesses, 32 percent of Latino-owned
    small businesses are permanently closed because of the
    pandemic. This was avoidable. It is avoidable. And it is a
    shame that that is, in fact, what took place.
        Let me ask you, Comptroller Brooks, in May I asked former
    Comptroller Otting about your agency's work on the Community
    Reinvestment Act. At the time Mr. Otting stated that despite
    the pandemic and evidence that the PPP lending was failing to
    serve minority communities, the OCC should accelerate its work
    on
    implementing the CRA rule, a rule that most in the civil rights
    community oppose.
        Since then, the Federal Reserve issued its own Advanced
    Notice of Proposed Rulemaking that invites comments from
    stakeholders on how the CRA can be strengthened to meet its
    core purposes of reinvesting in low-income communities.
        When the Fed issued this ANPR, you stated, ``I have told
    the Fed that if they get good comments in response to their
    rulemaking, we are not beyond the prospect of finding ways of
    improving it even more.'' But can you clarify what exactly you
    meant by that? It seems to me that the Fed is likely going to
    receive comments from the civil rights community and other
    comments that track what they have stated in response to your
    rulemaking. The OCC disregarded a lot of that at the time. What
    would lead you to change your mind now?
        Mr. Brooks. Well, Senator Menendez, the first thing I would
    say is that the Fed's ANPR is so similar to the OCC's final
    rule in its substantive elements as to be almost
    indistinguishable in terms of their change in geographic
    assessment areas, their inclusion of Native American country,
    small family farms, and other things that were originated in
    the OCC's rule. We frankly took it as imitation being the
    sincerest form of flattery when it came to their ANPR.
        The main difference between the Fed's ANPR and the OCC's
    rule is that the Fed appears to continue to prefer subjective
    and discretionary performance assessments; whereas, our view is
    these things should be more objective and predictable over
    time. But what I really meant was I think both the Fed and the
    OCC recognized that the status quo is simply untenable. The
    status quo had been tied to bank branches as the only areas
    incentivized for lending and investment, and banks have pulled
    more than 10,000 branches out of minority communities over the
    last 25 years. So our basic view was we need to make the system
    better, and if there is a way of making it still better next
    year, we are happy to do that. But letting it sit for another 2
    years in the current status quo was, in our view, an
    unacceptable option.
        Senator Menendez. I think it is always telling that the
    entire civil rights community has a much different point of
    view, and if anyone is an advocate for these people, it is
    them.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman.
        First of all, to all of our panelists, thank you very much
    for participating today.
        Vice Chairman Quarles, as I said in the past, we should not
    be making it harder than necessary for banks to do their jobs
    considering that we are really relying on the banks to lift our
    economy out of the COVID slump. As we look ahead to the end of
    2020, however, I am worried that unnecessary regulatory burdens
    will only increase. The Fed's actions to temporarily exclude
    low- and no-risk assets from the supplemental leverage ratio
    made sense given the flight to cash that took place at the
    onset of the coronavirus pandemic. The G-SIB surcharge, on the
    other hand, is said to be calculated at the end of the year but
    has not been adjusted to take the same considerations into
    account. I am concerned that not providing a similar adjustment
    for the G-SIB surcharge could prevent institutions that have
    the broadest and deepest reach into our economy from doing
    their jobs when we need their help the most.
        Would you agree with me that it would make sense to extend
    the low-risk asset exclusion from the supplemental leverage
    ratio to the G-SIB surcharge since the G-SIB surcharge
    calculations are imminent?
        Mr. Quarles. So I think there is a logical analogy there. I
    think what we have seen with respect to the G-SIB surcharge
    calculations is that we are not hearing from the large firms
    that are affected by them, that the changes in their balance
    sheet over the period of the COVID event are leading them to
    possibly being pushed up into a higher bucket or leading them
    to contract activity in a way that we would not want at a time
    when we want the most support for the real economy so that that
    does not happen.
        In general, my view on the G-SIB surcharge is--you know, we
    calculated our G-SIB surcharge at the high level, and as we
    look at the final implementation of the Basel III framework,
    which I intend to accomplish over the course of the next year,
    we should then look at the overall package of measures that
    were put in place before these last measures that we will
    implement--that includes the G-SIB surcharge and many others--
    and ensure that they are all calibrated so that the level of
    capital in the system remains roughly the same as we put these
    new measures in. I think that is the right time to look at the
    calibration of the G-SIB surcharge.
        If we were hearing from a lot of firms that there was a
    real problem that was arising, as we were hearing with respect
    to the supplemental leverage ratio, that might be a different
    story. But at the moment we are not.
        Senator Rounds. It will be interesting to see what their
    thoughts are after today's hearing as to whether or not they
    want to make contact with you. Thank you for that.
        Chairman McWilliams, last month the FDIC released its
    latest annual survey of the household use of banking and
    financial services. I was very surprised to see that there was
    actually an increase in the percentage of American Indian
    households that are unbanked from 2015 to 2019 and that the
    percentage of Native American households that are unbanked is
    roughly 10 times as high as a household making the average
    income from a family in South Dakota.
        Given the critical importance that banking services will
    have on our economy recovery, particularly in vulnerable areas
    like Native American reservations, which not only are they
    people of color but literally you are talking about living on
    reservations as well, providing ample access to credit is going
    to be critical in the weeks and the months ahead.
        What more can we be doing to help reduce the number of
    unbanked and underbanked Native Americans in the near future
    but also long term?
        Ms. McWilliams. Thank you, Senator Rounds, for that
    question, and it is frankly one of those issues that have been
    very close to my heart in figuring out how can we get more
    people to become a part of the banking system, recognizing that
    the Native American community has been particularly impacted in
    this area.
        I think this is where, frankly, innovation and encouraging
    banks to work with fintechs in providing the path for them to
    do so in a responsible way with respect to consumer protection
    and safety and soundness is going to be pivotal to be able to
    ensure that those communities have access to credit, access to
    banking accounts. Also, trying to help the minority depository
    institutions, especially Native American MDIs that serve those
    areas in particular, and specifically to have access to
    capital, and I mentioned in my opening statement we are
    creating a somewhat unprecedented fund that will be managed by
    an outside party that others can invest in, and that fund would
    go to help MDIs, and my hope would be quite a bit of help would
    go to the Native American MDIs, minority depository
    institutions, to offer banking products.
        So we are heavily focused on this, and I am happy to sit
    down with you and brief you on some of the other efforts.
        Senator Rounds. Thank you. And, Mr. Chairman, I suspect
    that my time has expired.
        Chairman Crapo. It just did.
        Senator Rounds. All right. Very good. Thank you, Mr.
    Chairman. Thank you for your response.
        Chairman Crapo. Senator Tester.
        Senator Tester. Yes, thank you, Mr. Chairman and Ranking
    Member Brown, and I thank all the folks who are here testifying
    today. I appreciate it very much.
        I am going to start with you, Vice Chairman Quarles. I want
    to go back to a question that Jack Reed had asked you, and it
    revolves around the need for additional dollars in the economy,
    what Powell had said, what you had agreed with that statement
    awhile back. And I just want to give you an opportunity to
    clarify, and I want to preface this question by saying we have
    125,000 infections a day, which is an incredible number.
    Experts are saying it will be 200,000 a day by the end of this
    month. Hospitals are full. They are full all over the place. In
    fact, my wife had major surgery last week. Her recovery was in
    the pediatric unit, and I said, ``Why is my wife in the
    pediatric unit?'' And they said, ``Because the hospital is full
    of COVID patients.'' This was the only bed they had.
        So my question is that we have got schools, both K-12,
    university units, we have got municipalities, we have got
    working families, we have got small businesses. There are a
    number of folks out there that are still in a world of hurt. I
    had a doctor tell me 2 weeks ago, 3 weeks ago, that January,
    February, and March may be the toughest months this Nation has
    ever endured, which is a hell of a statement. So tell me what--
    if you really meant that, that there is not any need for any
    additional stimulus? Or what exactly did you say?
        Mr. Quarles. So I think that the--well, Senator Reed's
    question was, I think, particularly in the context of the
    municipal facilities and what could be done there. I do think
    that we are with each--I would not want to understate at all
    the degree to which many people in the country continue to
    struggle as a result of the COVID event. The question that I
    was trying to respond to was with
    regard to the type of support that would be appropriate for
    them and drawing the distinction between is this support----
        Senator Tester. So let me cut to this, Randal. My
    question--and it is different than Senator Reed's--is: Do you
    think that there needs to be another stimulus package generally
    speaking focused on the economy of this country, whether it is
    municipalities, whether it is schools, whether it is small
    business, whether it is unemployed families? Do you think there
    needs to be another package?
        Mr. Quarles. So, again, I think that as a central banker I
    should leave those decisions to the Congress. I do not think--
    --
        Senator Tester. Come on, come on, come on, come on. A month
    ago you gave us your two bits on this deal, and now you are
    not. I voted for you, OK? I thought you would be--I thought you
    would not have politics into this. It seems to me that since
    the election there is a different point of view now, and that
    drives me crazy.
        Mr. Quarles. No, it is a result of the fact that the
    economy is recovering faster than any of us expected.
        Senator Tester. OK. OK, I got it. So you guys do not--it is
    from the very get-go on this pandemic, the economy has followed
    this pandemic right down the line, and we do not have to shut
    down any businesses. I guarantee you when people--when the
    hospitals are full and people are dying in record numbers, that
    information gets out there, and people do not go out period. I
    have got two brothers that are older than I am that go out
    very, very seldom because of this pandemic.
        So my question is--and I guess your answer is no, we do not
    need any additional money infused in the economy, and if it is,
    that is fine.
        Mr. Quarles. Senator, my answer is that as a central banker
    I should not try to subsume the role of the Congress. I think
    the Fed facilities are limited in what it is that they can do.
        Senator Tester. Vice Chairman Powell, I want to try to be
    fair, but--I mean Vice Chairman Quarles--but when Powell said
    it, you said, ``I agree.'' Now you are saying, ``I do not want
    to make a statement on this.'' And you are a central banker,
    and, in fact, you do have major impacts on the economy, and
    decisions you make and what you advocate for, actually people
    like me actually listen to you. And you are saying, ``That is
    not my problem anymore. There will be a new Administration in 2
    or 3 months, so what the heck, what happens happens.'' Is that
    right?
        Mr. Quarles. No, that really is not what I am saying,
    Senator.
        Senator Tester. All right. But I certainly did not get an
    answer to the question of whether we need more money into the
    economy or not.
        Thank you, Mr. Chairman, and I have got to tell you I am
    very disappointed in that perspective considering it was
    totally different a few months ago.
        Chairman Crapo. Thank you.
        Senator Kennedy.
        Senator Kennedy. Thank you, Mr. Chairman. Can you hear me
    OK?
        Chairman Crapo. Yes.
        Senator Kennedy. OK. Let me know, Mike, when my time is
    getting close.
        Mr. Quarles, what percentage of small- and medium-sized
    American businesses in your judgment are losing money right
    now?
        Mr. Quarles. I do not know that percentage, Senator. I
    could find it out.
        Senator Kennedy. I am not trying to trick you. I am just
    trying to get your sense of the economy. Do you think it is
    more than half? Less than half? What is your hunch?
        Mr. Quarles. The number of businesses that are losing money
    right now I would----
        Senator Kennedy. Small- and medium-sized----
        Mr. Quarles.----say small businesses is probably less than
    half, but I would want to get an accurate answer for you. I do
    not know the answer to that statement.
        Senator Kennedy. Yes, I read--the Economist had a piece
    yesterday saying that as best they forecast, it is between a
    third and 40 percent. Now, these are small- and medium-sized
    businesses. But that is most businesses in America in terms of
    jobs.
        What is your sense of the economy in terms of whether we
    have recovered from the coronavirus yet, economically of
    course, and how long it is going to take us to get back to our
    pre-virus GDP?
        Mr. Quarles. No, we obviously have not recovered.
    Unemployment rates are still very elevated, and I may have
    over-obsessed on the question of whether it was half or not.
    There clearly is a lot of distress among small businesses.
    There is a great deal more recovery to be done in the country.
    The length of time that that would take I think is hard to
    tell. It is dependent on perceptions of the course of the
    virus. It is dependent----
        Senator Kennedy. Randy, what is your gut? I mean, are we
    going to--at this time next year will we have recovered to our
    pre-coronavirus GDP? Or do you think it is going to take
    longer? What is your gut?
        Mr. Quarles. No, my projection, for what it is worth, is
    that it would take longer than a year. I would expect us to be
    toward our pre-COVID levels 2022, maybe early 2023.
        Senator Kennedy. If we did more stimulus and it was
    targeted in the right way--let us suppose we did more PPP--
    would that help? Could we shorten the amount of time?
        Mr. Quarles. It would accelerate the speed of the economic
    recovery. I think that is unquestionable.
        Senator Kennedy. OK. Let me talk to you just for a few
    minutes about the Treasury market. It almost froze up, did it
    not?
        Mr. Quarles. For a period there in March, yes, there was
    severe distress. It almost froze up. That is fair to say.
        Senator Kennedy. I mean, people throughout the world were
    actually trying to dump Treasurys in exchange for dollars, were
    they not?
        Mr. Quarles. Yes. There was spilling in many different
    quarters and all around the world.
        Senator Kennedy. So when we had the meltdown in 2008-9,
    everybody was running to Treasurys as a safe haven. This time
    they did not even want Treasurys. They wanted dollars, cash. Am
    I right?
        Mr. Quarles. That is correct.
        Senator Kennedy. OK. If you want to unload Treasurys or buy
    them, you have got to go through a primary dealer, do you not?
    Is the proper term ``primary dealer'' or ``primary broker''?
        Mr. Quarles. Primary dealers are----
        Senator Kennedy. Primary dealer.
        Mr. Quarles. Yes, sort of the central dealers in the
    Treasury market. I mean, Treasury securities can be sold and
    cash can be obtained from Treasury securities in other ways,
    but they are critical.
        Senator Kennedy. OK. How many primary dealers do we have?
        Mr. Quarles. It is about 29.
        Senator Kennedy. OK. Why do we have to go through primary
    dealers? Why don't we set up a system--I mean, the primary
    dealers were part of the problem, which is why you guys had to
    step in.
        Chairman Crapo. And you have about 30 seconds, Senator
    Kennedy.
        Senator Kennedy. Thank you. Why don't we set up a system
    where we do not use primary dealers, where people can trade
    with each other? Mr. Quarles?
        Chairman Crapo. You know, we had a little bit of trouble
    with Mr. Quarles' audio at the beginning, and it looks like we
    may have just lost him again.
        Senator Kennedy. Can I have my time back?
        Chairman Crapo. You can have 30 seconds, Senator Kennedy.
        Senator Kennedy. That is all I need.
        Chairman Crapo. But not for Mr. Quarles right now, unless
    you want to speak to him, yes.
        Senator Kennedy. He is gone, right?
        Chairman Crapo. Yes. He may be able to hear us.
        Senator Kennedy. Well, that is pretty convenient.
        [Laughter.]
        Senator Kennedy. You hit the old ``disappear'' button. Well
    played there, Randy.
        Let me ask another one of the people, why do we use all
    these primary dealers. Why don't we just set up a system where
    people could trade with each other? Whomever.
        Chairman Crapo. Oh, he is back.
        Mr. Quarles. I am back. Did that fail again? No, I am back.
    And that was not strategic. I do want to answer the question. I
    think it is fair, Senator, for us to look at secondary market
    trading of Treasurys going forward. That is a lesson learned,
    and we have an interagency working group put together to look
    at alternatives, just as your question would suggest.
        Senator Kennedy. Thank you, Mr. Chairman.
        Chairman Crapo. Thank you, Senator Kennedy.
        Next is Senator Warren.
        Senator Warren. Thank you, Mr. Chairman. And thank you to
    our witnesses for being here.
        So all of you are in charge of making sure that regulating
    the banks and credit unions to make sure that when the economy
    is in serious trouble, our financial system is going to be able
    to weather the storm. So Americans' jobs and homes and
    livelihoods depend on your getting this right.
        One way the Federal Reserve monitors the soundness of the
    financial system is to conduct stress tests on the largest
    banks to see if they are going to be able to handle a severe
    down turn.
        Now, in the most recent analysis, which was 5 months ago,
    the Fed noted that firms' capital forecasts ``tend to be
    strongly dependent on the assumption that there will be
    additional rounds of economic stimulus.'' In other words, banks
    are in good shape if the Federal Government passes a strong
    stimulus bill to help the people in businesses that are
    struggling because of the pandemic.
        Vice Chairman Quarles, the Fed's analysis was released in
    June. Did the assumption that was built into the stress test
    occur? Has Congress passed any additional economic stimulus
    since June?
        Mr. Quarles. Senator, the answer to that is no, the
    Congress----
        Senator Warren. OK. So there has been no economic stimulus
    in the 5 months since you released that report saying how much
    the banks needed the economic stimulus.
        Now, 6 months ago, however, House Democrats passed a
    comprehensive relief bill, and for 6 months Mitch McConnell has
    refused to let the Senate vote on that bill. In the meantime,
    unemployment benefits ran out, evictions resumed, State budgets
    cratered, and Black and Brown workers paid the highest price.
        So I am worried because this creates a very dangerous
    cycle. When families and small businesses lose Federal help and
    they cannot pay their loans, then the banks and then our entire
    financial system are at risk. And sure enough, the banks are
    now reporting that they anticipate higher loan default rates.
        So, Vice Chairman Quarles, without stimulus, do the banks
    and the financial system run more risk? Hello? Have we lost the
    Vice Chair?
        Chairman Crapo. It sounds like we have lost the Vice Chair
    again. I am sorry, Senator Warren.
        Senator Warren. So this is something that only works for
    the Vice Chair, I mean the Fed here.
        Chairman Crapo. Actually, he is the only one we have had
    the problem with so far. It was there at the beginning of the
    hearing. We actually----
        Senator Warren. I am not suggesting this was strategic. I
    am just asking--Mr. Chairman, do you want to let somebody else
    go and have me finish my question when we get the Vice Chair
    back? What would you like to do?
        Chairman Crapo. Well, the next on my list is Senator
    Schatz. Do you have questions for some other than Mr. Quarles?
        Senator Schatz. All of my questions are for Mr. Quarles.
        Chairman Crapo. OK. Well, then, next after you is Senator
    Van Hollen. He may not be with us. He is signed in. Senator
    Cortez Masto--wait, Senator Van Hollen is here.
        Senator Van Hollen. I am here. The good news is I am here,
    Mr. Chairman. The bad news is I also have some questions for
    Mr. Quarles.
        Chairman Crapo. OK. We are doing our best to get it back up
    with Mr. Quarles. Senator Jones?
        Well, I do not know what to do, folks, because----
        Senator Cortez Masto. Actually, Mr. Chairman, I do have
    some questions for other----
        Chairman Crapo. Oh, yes. Senator Cortez Masto, you can help
    us out here, hopefully.
        Senator Cortez Masto. Thank you. Thank you, everyone. I so
    appreciate the opportunity.
        Let me start with Acting Comptroller Brooks with the true
    lender rule. Do you still intend to move forward with the true
    lender rule?
        Mr. Brooks. Thank you, Senator Cortez Masto. We do. As you
    know, we have just finalized that rule, and, you know, we
    believe that it is important for a wide variety of reasons, the
    most important of which perhaps is solving the age-old problem
    of rent a charter, where banks were disclaiming responsibility
    for loans they originated. One of the purposes of the true
    lender rule is to focus compliance obligations where it
    belongs, which is the bank that holds itself out as the lender.
        Senator Cortez Masto. So can I ask you then why are there--
    if I am not mistaken, there are 13 national consumer and civil
    rights groups and more than 100 groups submitted comment
    letters that your proposed rule would facilitate fraudulent
    predatory rent-a-bank schemes and otherwise undercutting the
    interest rates that States have set on some of these loans. How
    do you address that?
        Mr. Brooks. Well, there are a lot of adjectives and adverbs
    in that accusation to unpack, but I think there are two main
    things going on. There is the issue of interest rates, and then
    there is the issue of all of the other consumer protections out
    there.
        When it comes to interest rates, the Congress and the
    Supreme Court decided in the late 1970s and early 1980s that it
    was a good thing for the economy--and this was a broad
    bipartisan consensus at that time--to allow both national banks
    and State banks to export their home-State interest rates to
    other States. The reason for that was, if you think back to
    that era, there was rampant inflation, and in many States it
    was essentially illegal to get a loan because the market rate
    of money was higher than the legal rate of money. And so that
    was one of the ways that we got through the financial crisis of
    the late 1970s, was that kind of decision.
        All that is going on in our true lender rule is the idea
    that banks can originate these loans and they can sell those
    loans on the secondary market to nonbanks, as they always have,
    really, without questioning the legality of the banks' original
    interest rate exportation authority.
        The innovation of true lender is to make sure that somebody
    is responsible for the consumer protections associated with
    that loan, and in the last 25 years, nobody has been
    responsible. It has been an issue of sort of both sides
    pointing at each other.
        So in our rule, we facilitate banks doing what they have
    had the authority to do since 1978 in the Marquette case, and
    we have made clear that if they enter into these partnerships,
    they are responsible for the fair lending law compliance, the
    disclosure and truth-in-lending law compliance, the UDAP
    obligations, and every other thing that neither the banks nor
    their partners have taken accountability for in the past.
        So the point is to bring more credit to more people and to
    create accountability where there was none.
        Senator Cortez Masto. I appreciate that. I would ask,
    though, that you continue to watch this, because as a former
    Attorney General (AG)--and I already noticed now there are
    several AG lawsuits because you have rent-a-bank lenders like
    Elevate that has just been sued by the AG of the District of
    Columbia; you have LoanMart, which has been sued by California,
    and others utilizing this opportunity to circumvent the
    interest rate paths that have been set by 45 States, including
    the District of Columbia, which are in essence predatory loans
    with higher interest rates.
        So I would ask that you consider to take a look at that and
    follow that as this moves forward, because the biggest concern,
    particularly now during COVID-19, when so many people are
    struggling, they are going to look for these loans, and there
    are going to be predators out there, and it would be the worst
    thing to see that your new rule has opened the door for those
    types of predatory loans, so I would ask you to consider to
    take a look at that.
        Mr. Brooks. And, Senator, I would just say absolutely. The
    good news about the rule is it now gives us authority to police
    those from the bank side.
        Senator Cortez Masto. Right. Thank you.
        Let me jump back here and talk a little bit about Troubled
    debt restructuring, because I know in some parts of Nevada, and
    really across the country, borrowers have begun repaying their
    loans. But in Las Vegas and other places reliant on hospitality
    tourism, business owners still do not have the income to pay
    their loans in full every month.
        So let me ask, Chair Hood, do you think some credit unions
    and banks are at risk of failure due to the inability of some
    of their commercial real estate and mortgage borrowers to pay
    their loans on time and in full?
        Mr. Hood. Well, credit unions, Senator, have a long history
    of really helping their member-owners during times of
    adversity. In fact, the credit union system grew following the
    Great Depression, so based on the data we have to date, credit
    unions have entered into the COVID with very strong capital,
    well above our statutory requirement. Liquidity is strong. And,
    in fact, from what we are seeing in looking at call report
    data, they are doing relatively well in the sense that they are
    continuing to provide forbearances. In fact, Senator, credit
    unions have already provided 1.7 million loan forbearances for
    an aggregate amount of $55 billion, so almost 50 percent of our
    credit unions are all providing some type of forbearance.
        Based on the data we have, we do believe that we have the
    tools to really keep the credit union system safe and sound. If
    there is one ask I would have, it is working with you and your
    Committee to extend the Central Liquidity Facility in the CARES
    Act. As you know, liquidity is a major pillar of our industry.
    While we have solid liquidity now, I think in the future,
    because we do not know what the future portends, it would be
    nice to know that we do have that extension beyond December
    31st of this year, ma'am. But I do think the credit unions are
    positioned to continue what they have always done, and that is
    providing member service.
        Senator Cortez Masto. Thank you. Thank you all. I notice my
    time is up.
        Chairman Crapo. OK. Thank you. And I believe that we have
    been able--we have been trying to hook up with Vice Chair
    Quarles by phone. Do we have you by phone, Mr. Quarles?
        Mr. Quarles. Yes, if you can hear me. I am so sorry.
        Chairman Crapo. Yes, we can hear you. So, Elizabeth, we can
    go back to you now. We will not have his picture, but we have
    him and his voice. And I do not know where you were----
        Senator Warren. It is OK. I will try to pick up where we
    were.
        So what we were talking about is that the Fed conducted
    stress tests on the largest financial institutions, said that
    the financial institutions are healthy, but that the capital
    forecasts tend to be strongly dependent on the assumption that
    there will be additional rounds of economic stimulus.
        Then we established--that was 5 months ago--there have been
    no additional rounds of economic stimulus, and in the meantime,
    we have seen a lot of negative economic indicators, and that
    indeed the banks are now saying that they anticipate higher
    default rates.
        So the question I had been asking, Vice Chair Quarles, is:
    Without stimulus, do these big banks and ultimately the
    financial system run more risk?
        Mr. Quarles. So I should note that, as you noted in your
    original question, the banks' projections themselves assume
    stimulus, but our stress tests have not assumed any stimulus.
    We want to ensure that the stress tests that we----
        Senator Warren. Well, fair enough. Look, but that is not
    the question I am asking you, and also, the question about how
    much capital they have got obviously goes to the heart of your
    stress test. And you said right there in the stress test that
    the projections on capital depend on there being a stimulus.
    And, look, families need help. They have needed it all summer
    while Mitch McConnell has stubbornly crossed his arms and
    refused to let us vote. And now Senate Republicans are doing
    even more damage to our economy if they do not put a relief
    bill out that is big enough to get the job done and up for a
    vote.
        So, you know, this is a problem, obviously, at the Senate
    level, but the Fed itself is not powerless as well. You can act
    right now. You are allowing the big banks to continue to shovel
    billions of dollars out the door in dividends, money that could
    be used to help survive a historic downturn. You could stop
    this outflow of money right now.
        So at what point, Mr. Vice Chairman, will the Fed actually
    do its job and suspend all dividend payments?
        Mr. Quarles. Bank capital ratios have been rising over the
    last 6 months, Senator, and----
        Senator Warren. That is not the question I asked you,
    Governor Quarles. What I asked you was: What data are you going
    to need to see in order to actually take action here? We are
    watching a downturn in this economy. The stress tests
    specifically say they are based on the assumption there was
    going to be stimulus. Mitch McConnell has refused to let us get
    a stimulus. So I am asking about the billions of dollars that
    the banks are still pushing out the door in dividends because
    ultimately the American taxpayer is going to be on the hook if
    these banks are not able to meet their requirements going
    forward and need bailouts.
        Mr. Quarles. So we are running stress tests currently, and
    our stress tests do not assume any stimulus. We are running
    stress tests currently to determine the resilience of the
    banking sector. We ran them in the spring. We ran sensitivity
    analyses in the spring. We are now running additional stress
    tests, taking into account what happened in the spring and the
    condition of the banking industry and the economy as a result
    of that. We will have the results of those stress tests
    revealed publicly at a bank-by-bank level by the middle of
    December, and then we will use that information to inform our
    determination whether we would continue the suspension of the
    70 percent of capital distributions that we have already
    imposed on the banks and the limitation on the dividends that
    they may pay or adjust that in some way.
        Senator Warren. Let me just stop you there, because we have
    already had to do this for a long time. Your job is to protect
    the American people, not the bank investors. And I do not
    believe you are doing your job. Mitch McConnell has changed his
    tune. He said he wants to pass a relief bill before the end of
    the year, and I think that is great. But America needs a real
    relief bill, not a fig leaf. There are not enough fig leaves on
    the entire planet to cover up the Republican Party's monumental
    failure to take this coronavirus seriously.
        So Americans are now falling sick at the fastest rate since
    the pandemic began. It is time for you to stop letting these
    banks shove money out the door, stop making excuses and do your
    job.
        Thank you, Mr. Chairman.
        Chairman Crapo. Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman.
        Vice Chairman Quarles, about a week ago, New York's
    financial regulator said it would start integrating financial
    risks into the supervision of New York chartered banks. Among
    other things, the banks will conduct enterprise-wide risk
    assessments on how climate change will impact credit risk,
    market risk, and other core business risks.
        Are you following what is going on in New York? And do you
    agree with the New York regulator that banks should integrate
    climate financial risks into their risk management frameworks?
        Mr. Quarles. The supervision of the banks is a Board
    responsibility that is delegated to the reserve banks, so, yes,
    of course, I am following that, and, of course, I would agree
    with it. If I did not, it could not happen.
        Senator Schatz. I want to just follow up on a conversation
    we had in December on the Fed's joining the Network for
    Greening the Financial System, which now consists of 75 members
    and 13 observers. You told me--and this was good. You told me
    the Fed had been auditing the class before formally registering
    with the Network for Greening the Financial System. Chair
    Powell also said last week that the Fed was in the working
    groups of NGFS.
        Where are we on formally joining the Network for Greening
    the Financial System as a full member or observer?
        Mr. Quarles. So that is really up to the NGFS. We have
    requested membership. I expect that it will be granted.
        Senator Schatz. Do you know what the timeframe is?
        Mr. Quarles. I do not. I guess I would say--no, well, they
    have an annual meeting that is in the spring, which was the
    last time there was a lot of work around this. But I suspect we
    could probably join before the spring. That I do not really
    know, but I can get the answer for you.
        Senator Schatz. Yes, could you, please? And, also, to the
    extent that any of this has been reduced to writing in terms of
    a formal application to become a member or observer, could you
    provide that to the Committee, please?
        Mr. Quarles. Absolutely, we will get you information on
    that.
        Senator Schatz. Thanks very much.
        You also said in December that you were closely engaged
    with the Bank of England on how they are looking at climate
    change and regulation and supervision. Are you still engaged
    with the Bank of England? And can you just share with us what
    you learned or what you are working on?
        Mr. Quarles. Yes, I mean, we just had a tripartite meeting
    just last week with the Bank of England and the ECB on
    questions of regulation and supervision. Climate change is
    obviously something we discussed. We have been particularly
    monitoring how it is that they are thinking about their
    inclusion of climate change in their stress-testing process. It
    is a different process than ours, and they are at a very
    preliminary level still in the process of thinking about it.
    But we are definitely involved in the sense that we understand
    that is involved.
        Senator Schatz. And just as a point of clarification,
    because I and others have introduced legislation to this
    effect, my understanding is that the Fed has the full authority
    to move forward on this because risk is risk, and it might be
    helpful to clarify this through a change in statute. But you
    actually do not need a change in statute to do any of the
    things that you are doing right now as it relates to climate
    risk. Is that your assessment?
        Mr. Quarles. That is correct. I do not think that we need a
    change in statute. It may be--this supervision report that we
    published last week and that was submitted with my testimony
    does include a section on climate change and our supervisory
    activities with respect to climate change. That goes into more
    detail about how we are thinking about this and incorporating
    it into our supervisory activities.
        Senator Schatz. Thank you very much. I really appreciate
    your work here. And just to point out that we all have
    different views about climate change and about the solution set
    that should be undertaken, but risk is risk and the charge for
    the Fed and other financial regulators is to measure that risk,
    whether it--whether it has got an ideological argument behind
    it or not, risk is risk.
        I also want to thank the Fed for lowering the minimum loan
    size threshold from the Main Street Lending Program to
    encourage more small businesses to participate, but there
    appears to be very little uptake. What can we do to push money
    out to these small businesses who appear to not find this to be
    a particularly attractive program?
        Mr. Quarles. Well, you know, most of the Fed programs--and
    the Main Street Program is not different in that respect, the
    Fed facilities--really operate as backstops. They achieve their
    function when they restore confidence to the private financing
    markets, and I think you could say that that has happened with
    the Main Street Facility as well. So I do not actually view the
    limited take-up so far of the Main Street Facility as
    necessarily a sign of its failing. You could view that as a
    sign of its success if needs are being satisfied by the private
    sector. That is ultimately what we want as opposed to their
    being satisfied by the Fed. But I think that it is useful to
    have it out there as a backstop should the economy develop in a
    more adverse way and these financing needs not be being met by
    the private sector.
        Senator Schatz. Thank you. I appreciate it.
        Chairman Crapo. Thank you, Senator Schatz.
        It appears that Senator Van Hollen has had to leave the
    meeting. Senator Van Hollen, are you with us?
        [No response.]
        Chairman Crapo. OK. He may have had to leave the hearing.
        Senator Jones?
        [No response.]
        Chairman Crapo. That appears to be all of the Senators who
    are available. Senator Brown, do you want to make a final
    comment before we conclude the hearing?
        Senator Brown. I do not, Mr. Chairman. Thank you for
    asking, and thank you to you and the four witnesses.
        Chairman Crapo. All right. Thank you.
        Well, then, with that, that will conclude our questions for
    today's hearing. For Senators who wish to submit questions for
    the record, those questions are due to the Committee by
    Tuesday, November 17th.
        To each of the witnesses, we ask that you respond to those
    questions as promptly as you can, and thank you for joining us
    at the Committee today.
        This hearing is adjourned.
        [Whereupon, at 4:21 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today we welcome to this virtual hearing the Federal prudential
    regulators: Federal Reserve Vice Chairman of Supervision, Randy
    Quarles; Acting Comptroller of the Office of the Comptroller of the
    Currency, Brian Brooks; Chairman of the Federal Deposit Insurance
    Corporation, Jelena McWilliams; and Chairman of the National Credit
    Union Administration, Rodney Hood.
        We will receive testimony from each agency on efforts, activities,
    objectives, and plans since you last testified before the Committee, as
    well as an update on COVID-19 related actions.
        Since the passage of the Coronavirus Aid, Relief and Economic
    Security Act, or CARES Act, your agencies have taken many meaningful
    steps to help mitigate the economic impact of the pandemic, and to
    provide conditions that will lead to a forceful recovery.
        On October 30, the Federal Reserve announced changes to its Main
    Street Lending Facility, including decreasing the minimum loan size for
    the new loan and priority loan facilities from $250,000 to $100,000;
    and allowing borrowers to deduct any PPP loan less than $2 million from
    their outstanding debt for the purposes of the leverage test.
        Your agencies should continue to carefully review the regulatory
    and supervisory frameworks, adjusting where necessary to bolster
    financial institutions' ability to support economic recovery.
        Which, by the way, has shown positive signs of recovery over the
    last several months.
        On October 29, the United States GDP surged a record 33 percent in
    the third quarter as the economy started to reopen.
        The unemployment rate fell to 6.9 percent in October, when just
    last spring CBO projected that we'd still be at 9.5 percent by the end
    of 2021.
        Since April, around 12 million jobs have been gained, meaning we
    have recovered more than half of the jobs lost due to shutdowns.
        Over the last few months, I have sent several letters to the
    regulators on a number of important issues.
        On July 31, I sent a letter to each of the agencies urging the use
    of existing discretion to extend relief provided under Title IV of the
    CARES Act, including: the Community Bank Leverage Ratio to December 31,
    2021; Troubled Debt Restructurings (TDRs) to January 1, 2022; and the
    Current Expected Credit Losses (CECL) methodology to January 1, 2023,
    while clarifying and minimizing unintended effects of mid-year
    adoption.
        On October 8, I sent the regulatory agencies a letter regarding the
    increase in regulatory burden for banks and credit unions simply due to
    their rapid implementation Paycheck Protection Program (PPP).
        As a result of their critical role in PPP and the economic
    recovery, many banks and credit unions inadvertently experienced
    significant balance sheet growth, which is ultimately expected to
    decline as borrowers meet the PPP's forgiveness terms.
        The FDIC took an important step in issuing an interim final rule to
    alleviate the increased Part 363 audit and reporting requirements for
    insured depository institutions (IDIs) that have experienced growth
    from PPP and participation in the Federal Reserve 13(3) facilities (and
    other stimulus efforts).
        It is important that banks and credit unions are not inadvertently
    dis-incentivized from continuing to play a key role in the economic
    recovery or participate in future efforts.
        I urge each of you to continue using your discretion to alleviate
    the regulatory burdens associated with a variety of asset-based
    regulatory thresholds on those banks and credit unions temporarily
    experiencing growth from participation in recovery-oriented programs.
        Turning to the OCC, on October 19, the Senate rejected a
    congressional Review Act of the Community Reinvestment Act issued by
    the OCC.
        According to the OCC, the final rule improves Community
    Reinvestment Act regulations ``by clarifying what qualifies for CRA
    consideration, updating how banks define their assessment areas,
    evaluating bank CRA performance more objectively, and making the entire
    process more transparent and timelier. The final rule's framework will
    increase support to small business, small- and family-owned farms,
    Indian Country, and distressed areas, and it accommodates banks of all
    sizes and business models.''
        The CRA had not been materially modernized since 1995, and I
    commend the OCC for taking this momentous step.
        As we continue to weather this pandemic, I again stress to each of
    you and your agencies the importance of our financial institutions
    providing access to credit and financial services to creditworthy
    individuals and businesses in legal industries.
        It is vitally important that our country's financial institutions,
    especially the largest, not deny credit financing based on political
    preferences related to firearms, oil and gas, or others.
        Lending decisions should be based on creditworthiness, and should
    not target specific industries, especially as we work to restore our
    economy to pre-pandemic strength.
        This will remain an incredibly important issue for me, and I will
    continue to fight for access to credit and financial services for all
    of our legal industries.
        I appreciate each one of you joining us today to share your
    agency's activities and plans, as well as the tireless work of you and
    your staff in response to COVID-19.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        The American people sent a clear message in this election: they
    rejected an Administration where Wall Street and corporations run the
    economy--people want a Government that's on their side.
        For the past 4 years, the Trump administration and the Federal
    financial regulators before us today have put their thumbs on the scale
    for corporations and their wealthy friends, while leaving everyone else
    at the mercy of the supposed ``free market.''
        Americans watched a President ignore a pandemic, refuse to even try
    to put in place any kind of plan to bring the virus under control, and
    reject all our efforts to support families and get our economy running
    safely.
        And whatever the Majority Leader may say--whatever damage he and
    some of my colleagues and the outgoing President are doing to our
    democracy with their lies and their fabricated attacks on our
    nonpartisan poll workers and local election officials--the facts are
    clear: a decisive majority of the public--5 million more people voted
    for Joe Biden than Donald Trump--a decisive majority rejected what they
    have endured over the last 4 years, and voted for new leadership that
    will restore faith in our Government.
        People are ready to turn the page, they're ready for real
    leadership that will give them their freedom and their lives back, and
    they're ready to heal and to rebuild.
        The work we do here on the Banking and Housing Committee can be a
    big part of that, and can make a real, tangible difference in people's
    lives--if we, Committee Members of both parties, come together and
    choose to do so.
        We have the power on this Committee to tackle the issues that
    actually matter to people's lives--their paychecks, housing,
    transportation, and the communities they live in.
        We can get small businesses back on their feet. We can lift up the
    Black and Brown communities that have been hit the hardest by this
    pandemic. We can keep people in their homes, make those homes more
    affordable, and bring down people's energy bills. We can lead the world
    in the fight against climate change and seize every opportunity to
    create good-paying jobs. We can free people from the stress of debt
    collectors and the downward spiral of payday lenders.
        And we can reorient our economy from wealth to work.
        To do all of that, we have to take on Wall Street power.
        We know who has been shipping jobs overseas, jacking up drug
    prices, spending trillions on stock buybacks instead of higher wages,
    and busting unions: it's not our neighbors who may have a different
    political sign in their yard or bumper stick on their car--it's the
    largest corporations, their unaccountable CEOs--Facebook to Wells
    Fargo--and their allies in Washington.
        Wall Street is all too happy to watch phony populists turn us
    against each other, as long as it means they get to keep exploiting
    workers and playing by a different set of rules.
        For 4 years, we've had a President trying to convince people to
    blame their fellow Americans who may not look like them or worship like
    them, instead of blaming a system that rewards executives' stock
    portfolios when they lay off workers or cut their pay.
        Divide to distract--that was the playbook. Divide to distract from
    all the ways he and his followers in Congress were funneling more
    wealth to the already-wealthy and more power to the already-powerful.
        But it didn't work this time.
        Last week, a record nearly 80 million Americans rejected that
    division that, the largest vote for any Presidential nominee in our
    country's history. Now, we have to deliver results.
        We have to take on Big Oil and other corporate polluters that have
    spent billions of dollars trying to convince people climate change is
    an unsolvable problem, instead of a tremendous opportunity.
        We have to end the corporate business model that treats workers--
    especially Black and Brown workers--as expendable, and that perpetuates
    systemic racism.
        We have to break up the biggest banks, and give that power to
    everyone else who has been denied a voice in our economy.
        Our financial system should be a public good. It already is for big
    banks--we need to make it work for everyone else, and create a better
    system centered on the Dignity of Work.
        When work has dignity, hard work pays off for everyone, no matter
    who you are, where you live, or what kind of work you do.
        When work has dignity, everyone can afford housing and
    transportation, and they have power over their lives and their own
    money.
        When work has dignity, we have a strong, growing middle class, and
    everyone--everyone--can reach it.
        Making that vision possible is the job of the Banking and Housing
    Committee.
        We know we have great challenges--we're in a public health crisis,
    an economic crisis, and a climate crisis. And extraordinary times call
    for us to aim higher and think bigger--to rise to meet this moment, and
    restore people's faith in their Government.
        I look forward to coming together with Senators on both sides of
    the aisle, and with the new Administration, to get to work.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

    Q.1. Do you pledge to work with President-elect Biden's team to
    ensure an orderly transition to a new Administration?

    Q.2. Have you established office space within your agency for
    the President-elect's transition team?

    Q.3. Have you prepared briefing books for the President-elect's
    transition team that includes all relevant information they
    will need to know?

    A.1.-A.3. In response to your first three questions, the
    Federal Reserve is committed to an orderly transition and
    working with the new Administration. To that end, we
    facilitated meetings with the transition team as soon as the
    ascertainment was made by the General Services Administration.
    The transition team met with many representatives of the
    Federal Reserve at all levels of the agency. In addition, the
    transition team met with representatives of some of the Federal
    Reserve Banks. We provided them with briefings on information
    they requested.

    Q.4. Is troubled debt restructuring merely an accounting issue
    or are there real concerns about risks to financial
    institutions?

    Q.5. Will your agency update the interagency guidance regarding
    Troubled Debt Restructuring to allow these COVID-19 loan
    modifications to extend beyond 6 months? Would loans with terms
    beyond 6 months still fall within the TDR authority?

    A.4.-A.5. In response to questions 4 and 5, the 2020
    interagency guidance related to the COVID event loan
    modifications provides an interpretation of the troubled debt
    restructuring (TDR) rules that exist under current U.S.
    generally accepted accounting principles (GAAP), which is
    governed by the Financial Accounting Standards Board. Extending
    our current guidance beyond 6 months may be contrary to
    existing U.S. GAAP.
        Having said that, TDR relief provided by the Coronavirus
    Aid, Relief, and Economic Security Act (CARES Act) does not
    have a 6-month time limitation. Modifications longer than 6
    months need not be designated as TDRs if the criteria laid out
    in section 4013 of the CARES Act are met. The CARES Act
    originally allowed such treatment for qualifying modifications
    that occurred prior to December 31, 2020, and the recently
    passed Consolidated Appropriations Act, 2021, extended this
    expiration date to be the earlier of January 1, 2022; or 60
    days after the termination of the national emergency.
        Further, regardless of the TDR designation, the regulatory
    agencies have released and reiterated guidance that encourages
    financial institutions to work with their borrowers and
    highlights that management will not be criticized for doing so
    in a prudent manner.

    Q.6. Without additional relief from Congress, how bad are
    defaults, foreclosures, and evictions going to get and what
    will be the impact on financial institutions?

    A.6. As we saw in the financial crisis that attended the 2007-
    2008 recession, the consequences of widespread mortgage default
    and foreclosure can be severe. Foreclosures can trigger and
    exacerbate a housing downturn, which can then spill over to the
    rest of the economy. A large increase in foreclosures or
    distressed sales would likely put significant downward pressure
    onhouse prices, while a large fall in house prices would damage
    household balance sheets and would likely reduce residential
    investment and consumer spending, thereby potentially deepening
    a recession. In response to falling house prices and rising
    defaults, mortgage lenders often tighten credit, thus
    exacerbating price declines and intensifying recessionary
    dynamics. Moreover, losses on mortgage loans can put
    substantial strains on the balance sheets of banks and other
    financial institutions. In addition, households who have
    undergone eviction or foreclosure face substantial costs, both
    financial and nonfinancial. For example, suchhouseholds
    typically have persistently lower access to credit and are more
    likely to experience adverse health outcomes.
        A variety of Government policies have attempted to prevent
    a wave of mortgage defaults, foreclosures, and evictions. The
    CARES Act gave borrowers with Government-Sponsored Enterprise
    (GSE) and Government-backed loans access to mortgage
    forbearance, which helps to prevent default by allowing
    borrowers to defer mortgage payments for up to 12 months.
    Although this part of the CARES Act expired at the end of 2020,
    the GSEs and the Federal Housing Administration have continued
    their forbearance programs. Private lenders are also offering
    forbearance, although with terms that are reportedly not as
    generous as the Government programs. The continuation of
    forbearance should help to keep people in their homes and
    support house prices, especially while unemployment remains
    elevated.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM BRIAN P.
                                 BROOKS

    Q.1. I understand that a company known as Figure Technologies
    recently applied for a national bank charter but that they
    wouldn't be taking deposits. This comes about a year after a
    court decision from the Southern District of New York that
    argued that the Office of the Comptroller of the Currency
    doesn't have the legal authority to charter nondepository
    institutions.
        How do you balance the court's decision against the
    application from companies like Figure Technologies? Is there
    additional clarity that Congress could provide here to promote
    innovation while maintaining the safety and soundness of our
    banking system?

    A.1. The New York District Court's holding in Lacewell v. OCC,
    which the OCC has appealed to the United States Court of
    Appeals for the Second Circuit, addressed an institution that
    would not be taking deposits. That holding is not relevant to
    Figure Technologies' application for a national bank charter
    because Figure plans to accept deposits and operate as a full-
    service national bank. Figure will not be FDIC insured,
    however. Its business plan only entails accepting deposits from
    institutional clients in amounts over $250,000, the limit for
    FDIC insurance. Since all of Figure's deposits will be above
    the statutory limit for deposit insurance, the OCC will not
    require the company to seek deposit insurance. However, if its
    application is approved, Figure will be expected to maintain
    sufficient capital and liquidity levels, comply with
    appropriate rules and consumer protections, and will be subject
    to stringent OCC supervision as required for every national
    bank. The Figure application is similar to other charter
    applications from technology companies the OCC has recently
    approved, such as Varo Bank. Providing a path for these
    companies to operate within the banking system and to be
    supervised within that system ensures a level competitive
    playing field, protects consumers, promotes safety and
    soundness, and provides regulators a more comprehensive view of
    financial system activity.

    Q.2. I appreciate the work that all of you have been doing to
    help your respective constituents meet the needs of their
    customers during this difficult time. As I noted in my
    conversation with Vice Chair Quarles, I have a number of
    outstanding concerns about some of the unintended consequences
    that may occur as a result of the unique economic events we're
    experiencing combined with how consumer activity is changing
    the balance sheets of banks and credit unions.
        Chairman McWilliams said in her written testimony, ``The
    FDIC is also actively considering similar targeted adjustments
    to further mitigate unintended consequences resulting from
    pandemic-related Government programs.'' I know that the
    Paycheck Protection Program and Economic Impact Payments in
    particular have resulted in significant cash-flow changes that
    have made financial institutions look temporarily much larger
    than normal for the purposes of their capital treatment. Are
    there other Government programs that have had a similar impact?

    A.2. There are currently no Government programs that have had
    an impact on bank balance sheets on a scale that is similar to
    the Paycheck Protection Program (PPP) or Economic Injury
    Disaster Loan (EIDL) program. There are other Government
    programs that have the potential to increase the size of bank
    balance sheets; however, their use has been limited compared to
    the volume of loans provided under the PPP and EIDL. For
    example, outstanding balances under the Main Street Lending
    Program, Money Market Mutual Fund Liquidity Facility (MMMFLF),
    and Paycheck Protection Program Liquidity Facility (PPPLF) were
    approximately $69.0 billion in the aggregate as of November 13,
    2020. By comparison, PPP-approved dollars totaled approximately
    $525.0 billion as of the PPP's program closing on August 8,
    2020, and EIDL approved dollars totaled approximately $194.3
    billion as of November 23, 2020.

    Q.3. What specific adjustments are you considering as a result
    of these Government responses?

    A.3. The OCC has provided banks with the flexibility to
    participate in various Government programs and receive capital
    treatment relief. For example, on November 3, 2020, the OCC
    published OCC Bulletin 2020-96, ``Capital and Liquidity
    Treatment for Money Market Liquidity Facility and Paycheck
    Protection Program.'' This rule finalized various interim rules
    and stipulated that a banking organization may continue to
    exclude assets acquired as part of the MMMFLF and PPP covered
    loans pledged under the PPPLF from various capital ratio
    calculations. Further, all PPP loans receive a zero percent
    risk weighting (the lowest risk weight possible) for capital
    purposes. In addition, a banking organization subject to the
    liquidity coverage ratio rule excludes from its total net cash
    outflow those amounts associated with advances from the MMMFLF
    and PPPLF and those inflow amounts associated with collateral
    securing the advances.
        Additionally, the OCC, along with the FDIC and Board of
    Governors of the Federal Reserve System (Board), issued an
    interim final rule providing relief to community banks that
    have crossed an asset threshold due to participation in the PPP
    and other COVID-19 pandemic relief efforts. Community banks
    with total assets of $10 billion or less as of 2019, and that
    have crossed relevant asset thresholds, will have additional
    time to reduce their asset sizes as the programs unwind or to
    prepare for new requirements if the banks plan to remain above
    the asset thresholds in 2022.

                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JELENA
                               McWILLIAMS

    Q.1. The FDIC has long history of working with banks, including
    mission-driven institutions such as Optus Bank in my home State
    of South Carolina, to develop policies that support broader
    access to the financial system.
        Can you provide me with an update on the FDIC's development
    of guidance to private sector firms that is aimed at
    facilitating investments in and support of Minority Depository
    Institutions (MDIs) and Community Development Financial
    Institution (CDFI) banks?

    A.1. One of my priorities as FDIC Chairman has been expanding
    our engagement and collaboration in support of minority
    depository institutions (MDIs). An MDI is often the financial
    lifeblood of the community it serves, enabling individuals and
    minority-owned small businesses to securely build savings and
    obtain credit. On October 16, 2020, the FDIC published a
    resource guide titled ``Investing in the Future of Mission-
    Driven Banks: A Guide to Developing New Partnerships,'' which
    outlines the important role FDIC-insured MDIs and Community
    Development Financial Institutions (CDFIs) play in the
    financial system, describes the business needs of these banks,
    and outlines strategies for private companies and philanthropic
    organizations to consider in supporting MDIs and CDFIs: equity
    investments, grants, deposits, creation of an investment fund,
    technology support, and other partnership opportunities.\1\
    These strategies can help MDIs build capacity and scale. We
    also published an interactive mapping system showing the
    headquarters and branches of all FDIC-insured MDIs and CDFIs,
    with links to each bank's website.
    ---------------------------------------------------------------------------
        \1\ See FDIC Publishes Resource Guide to Promote Investment
    Partnerships With FDIC-Insured Minority Banks and Community Development
    Financial Institutions (Oct. 16, 2020), available at https://
    www.fdic.gov/news/pressreleases/2020/pr20111.html.
    ---------------------------------------------------------------------------
        In addition, the FDIC is facilitating the creation of a
    Mission-Driven Bank Fund that will provide opportunities for
    MDIs to propose investments in equity capital, loan
    participations, and other mechanisms to help build capacity and
    scale.\2\ With significant investment commitments by private
    companies, philanthropic organizations, and other financial
    institutions, we believe this fund will provide a sizable
    source of capital and other helpful tools that can help MDIs
    grow their operations and expand their impact in minority
    communities.
    ---------------------------------------------------------------------------
        \2\ See FDIC, The Mission-Driven Bank Fund, available at https://
    www.fdic.gov/regulations/resources/minority/mission-driven/
    infographic.pdf.

    Q.2. Can you provide an update on the FDIC's work related to
    ---------------------------------------------------------------------------
    the development of a Mission-Driven Bank Fund?

    A.2.  On November 18, 2020, the FDIC announced a competition to
    choose one or more experienced financial advisors to support
    the development of the new Mission-Driven Bank Fund, which will
    provide a vehicle for private sector and philanthropic
    investment in FDIC-insured MDIs and CDFIs.\3\ The selected
    financial advisor(s) will work with the FDIC to develop the
    framework, structure, and concept of operations for the Fund.
    The FDIC received a number of submissions on December 2, and a
    technical evaluation panel has evaluated the offerors'
    proposals. The FDIC signed an agreement with a financial
    advisor on January 11, 2021, and we anticipate the development
    of the fund structure will take approximately 60 days. Once the
    Fund is established, an independent investment committee and
    fund manager will be selected by investors.
    ---------------------------------------------------------------------------
        \3\ See FDIC Seeks Financial Advisor to Establish New ``Mission-
    Driven Bank Fund'' to Support FDIC-Insured Minority Banks and Community
    Development Financial Institutions (Nov. 18, 2020), available at
    https://www.fdic.gov/news/press-releases/2020/pr20125.html.
    ---------------------------------------------------------------------------
                                    ------

      RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM JELENA
                               McWILLIAMS

    Q.1. One way that banks support the mortgage market is through
    providing warehouse lines of credit to independent mortgage
    banks. Some argue that capital treatment of warehouse lending
    is misaligned with the risk of this business. They point out
    that banks must hold a full 100 percent risk-weighted capital
    against warehouse lines, even though if banks made the loans
    themselves, they would have a 50 percent risk weight. Is there
    merit to lowering the risk weighting to improve mortgage market
    liquidity and provide a more stable source of support for the
    mortgage market from banks?

    A.1. The bank capital framework is generally implemented on an
    interagency basis. The FDIC regularly reviews our capital
    rules, including the risk weights for different assets, both
    internally and with the other banking agencies. The banking
    agencies are currently engaged in a rulemaking effort to
    finalize the outstanding components of the Basel III framework,
    which involves reviewing the risk weights of various asset
    classes. As part of this process, and as part of our regular
    review of the impact of capital rules, the FDIC will continue
    to evaluate whether modifications to the framework are
    appropriate to support the strong functioning of the U.S.
    mortgage market.
                                    ------

      RESPONSE TO WRITTEN QUESTION OF SENATOR ROUNDS FROM JELENA
                               McWILLIAMS

    Q.1. I appreciate the work that all of you have been doing to
    help your respective constituents meet the needs of their
    customers during this difficult time. As I noted in my
    conversation with Vice Chair Quarles, I have a number of
    outstanding concerns about some of the unintended consequences
    that may occur as a result of the unique economic events we're
    experiencing combined with how consumer activity is changing
    the balance sheets of banks and credit unions.
        Chairman McWilliams said in her written testimony, ``The
    FDIC is also actively considering similar targeted adjustments
    to further mitigate unintended consequences resulting from
    pandemic-related Government programs.'' I know that the
    Paycheck Protection Program and Economic Impact Payments in
    particular have resulted in significant cash-flow changes that
    have made financial institutions look temporarily much larger
    than normal for the purposes of their capital treatment. Are
    there other Government programs that have had a similar impact?
        What specific adjustments are you considering as a result
    of these Government responses?

    A.1. Since the beginning of the COVID-19 pandemic, the FDIC has
    taken a number of actions to show flexibility in its regulatory
    approach in response to the unprecedented economic conditions
    and unique Government response,\1\ which resulted in record
    deposit inflows at FDIC-insured banks. Banks experienced two
    consecutive quarters of over $1 trillion in new deposits,
    increases that far exceed any deposit growth the FDIC has seen
    in the past. In October 2020, we issued an interim final rule
    to allow insured depository institutions (IDIs) that have
    experienced growth to determine whether they are subject to the
    requirements of Part 363 of the FDIC's regulations (i.e.,
    Annual Independent Audits and Reporting Requirements) for
    fiscal years ending in 2021 based on their consolidated assets
    as of December 31, 2019.\2\
    ---------------------------------------------------------------------------
        \1\ For a detailed description of these actions, see FDIC Chairman
    Jelena McWilliams, ``Oversight of Financial Regulators,'' testimony
    before S. Comm. on Banking, Hous., and Urban Affairs (May 12, 2020),
    available at https://www.fdic.gov/news/speeches/spmay1220.html and FDIC
    Chairman Jelena McWilliams, ``Oversight of Financial Regulators,''
    testimony before S. Comm. on Banking, Hous., and Urban Affairs (Nov.
    10, 2020), available at https://www.fdic.gov/news/speeches/
    spnov1020.html.
        \2\ See Applicability of Annual Independent Audits and Reporting
    Requirements for Fiscal Years Ending in 2021, 85 Fed. Reg. 67427 (Oct.
    23, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-10-
    23/pdf/2020-23630.pdf.
    ---------------------------------------------------------------------------
        Consistent with that action and the principle of targeted
    regulatory flexibility, the FDIC joined the Federal Reserve
    Board and the Office of the Comptroller of the Currency in
    issuing an interim final rule to similarly ``freeze'' an IDI's
    asset size for purposes of determining applicability of certain
    regulations for community banks.\3\ The rule, which applies to
    certain regulatory thresholds of $10 billion or less, provides
    that an IDI generally can calculate its asset size for
    applicable thresholds during calendar years 2020 and 2021 based
    on the lower of either total assets as of December 31, 2019, or
    total assets as of the normal measurement date. Through its
    application to thresholds under the community bank leverage
    ratio, management interlocks, Call Reports, and examination
    frequency rules, the rule provides community banks with
    temporary relief from incurring material costs to comply with
    new regulatory requirements during a time of economic
    disruption.
    ---------------------------------------------------------------------------
        \3\ See Temporary Asset Thresholds, 85 Fed. Reg. 77345 (Dec. 2,
    2020), available at https://www.govinfo.gov/content/pkg/FR-2020-12-02/
    pdf/2020-26138.pdf.
    ---------------------------------------------------------------------------

                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JELENA
                               McWILLIAMS

    Q.1. When the FDIC proposed regulations in 2007 related to
    industrial loan companies, the agency faced significant
    pushback from Congress on one issue: applications involving
    parent companies that engage in commercial activities.
    Ultimately, the FDIC made the prudent decision to exclude
    commercial parents in the 2007 proposal.
        The world has changed dramatically in the years that have
    passed. Where commentators were concerned about big physical
    retailers like Walmart in 2007, now an entirely new generation
    of internet companies dominate the American economy. Their
    enormous roles in our lives now raise concerns about the
    collection and mixing of consumer data in ways we could never
    have even imagined in 2007. For instance, Apple didn't even
    launch its first App Store until 2008.
        The FDIC's current rule would not exclude applications from
    commercial parent companies of industrial loan companies. The
    FDIC's notice of proposed rulemaking lacks any explanation,
    analysis, or discussion as to why the FDIC changed its 2007
    policy on commercial parents.
        Can you please explain the FDIC's thinking and, in
    particular, describe what analyses, studies, or other efforts
    the FDIC undertook or considered when deciding to change its
    position from 2007?

    A.1. The March 2020 notice of proposed rulemaking (NPR)
    explained that the FDIC's decision not to go forward with the
    2007 proposal was rooted in a number of factors that
    collectively resulted in reduced organizer interest in
    establishing new industrial banks. Notably, interest in
    organizing new institutions of all charter types, including
    industrial banks, diminished given the deteriorating economic
    and market conditions (identified as early as mid-2007)
    resulting in market disruptions, restricted liquidity, reduced
    availability of capital, and a low interest rate environment.
    These conditions, in conjunction with the oncoming financial
    crisis, impacted institutions across the banking industry and
    resulted in the FDIC not finalizing the 2007 NPR. Instead the
    FDIC recognized the necessity of closely monitoring the
    performance of industrial banks during that period of severe
    financial distress.\1\
    ---------------------------------------------------------------------------
        \1\ After 2013, the moratorium imposed by Congress in the Dodd-
    Frank Act expired by its terms and was not renewed.
    ---------------------------------------------------------------------------
        The March 2020 NPR provided a reasoned discussion of the
    decision to move forward with the proposed rule, and the final
    rule adopted in December 2020 \2\ took into consideration
    information drawn from the FDIC's supervisory experience in the
    ensuing years. Industrial banks today are owned by financial
    and nonfinancial commercial firms. Overall, the performance and
    condition of industrial banks during the most recent banking
    crisis was consistent with other FDIC-insured institutions
    based on assigned supervisory ratings, which consider each
    institution's unique business model, complexity, and risk
    profile. As discussed in the final rule, from the beginning of
    2009 through 2011, on average, industrial banks were assigned
    composite and component ratings similar to other charter types
    with regard to safety and soundness, consumer protection, and
    the CRA. Further, the portfolio of industrial banks reflected
    similar proportions of institutions that were composite rated
    3, 4, or 5 \3\ during the crisis, as well as a similar rate of
    failure as compared to the portfolio of traditional insured
    institutions.
    ---------------------------------------------------------------------------
        \2\ See FDIC Approves Rule to Ensure Safety and Soundness of
    Industrial Banks (Dec. 15, 2020), available at https://www.fdic.gov/
    news/press-releases/2020/pr20137.html.
        \3\ Each financial institution is assigned composite and component
    ratings for safety and soundness under the Uniform Financial
    Institutions Rating System (UFIRS). Under the UFIRS, composite ratings
    are based on an evaluation and rating of six essential components of an
    institution's financial condition and operations: adequacy of capital,
    the quality of assets, the capability of management, the quality and
    level of earnings, the adequacy of liquidity, and the sensitivity to
    market risk. Evaluations of the components take into consideration the
    institution's size and sophistication, the nature and complexity of its
    activities, and its risk profile.
    ---------------------------------------------------------------------------
        While some industrial banks have pursued nontraditional
    business models, industrial banks as a whole have experienced
    financial performance and condition results comparable to
    nonindustrial bank-insured institutions. Industrial banks tend
    to maintain higher levels of capital and generate higher
    earnings than their commercial bank peers. At year-ends 2009
    through 2011, industrial banks maintained a median tier 1
    leverage capital ratio between 13.1 percent and 15.4 percent,
    whereas other insured institutions maintained a median tier 1
    leverage capital ratio between 9.3 percent and 9.7 percent. As
    of June 30, 2020, the median tier 1 leverage capital ratio for
    industrial banks was 14.6 percent, compared to 10.3 percent for
    other insured institutions.\4\
    ---------------------------------------------------------------------------
        \4\ FDIC Call Report Data, June 30, 2020.
    ---------------------------------------------------------------------------
        Similarly, industrial banks reported a median return on
    average assets (ROAA) ratio of between 0.6 percent and 2.5
    percent at year-ends 2009 through 2011, versus a median ROAA
    ratio of between 0.4 percent and 0.7 percent for other insured
    institutions. The median ROAA ratio for industrial banks and
    other insured institutions as of June 30, 2020, were 1.1
    percent and 0.9 percent, respectively.\5\
    ---------------------------------------------------------------------------
        \5\ Id.
    ---------------------------------------------------------------------------
        Further, during the same time period, industrial banks have
    been assigned UFIRS examination ratings for the capital and
    earnings components that, on average, were very similar to
    those of other insured institutions. This generally indicates
    that industrial banks have implemented and maintained
    appropriate risk management practices that, given financial
    condition and performance, have adequately compensated for the
    risks inherent in the business models.
        Finally, industrial banks experienced failures during the
    crisis at about the same rate as other types of institutions,
    and there have not been any industrial bank failures since
    2010.\6\
    ---------------------------------------------------------------------------
        \6\ Security Savings Bank, Henderson, Nevada, failed in February
    2009, and Advanta Bank Corporation, Draper, Utah, failed in March 2010.
    ---------------------------------------------------------------------------
        The final rule includes a number of regulatory
    requirements, including heightened source of strength
    requirements, to address potential risks. Both the NPR and
    Supplementary Information portion of the final rule provide
    additional details on the justification and factual
    underpinnings of the rule.\7\
    ---------------------------------------------------------------------------
        \7\ See supra note 11.

    Q.2. Given the limited discussion in the Federal Register on
    this dramatic change in the FDIC's position on this issue, how
    can you expect the public to meaningfully provide comments on
    the potential impact of opening your proposal to commercial
    ---------------------------------------------------------------------------
    parent companies?

    A.2. The FDIC has an obligation to effectively and
    transparently execute the law authorizing the establishment of
    industrial banks. The final rule, which is consistent with the
    FDIC's historical practice regarding the establishment and
    supervision of industrial banks, provides transparency on this
    process while incorporating lessons learned from the FDIC's
    supervisory experience with industrial banks to promote
    enhanced supervision of the bank and parent company and to
    ensure that the parent company is a source of strength for the
    bank.
        The NPR discussed the history of industrial banks in the
    United States, both generally and in the context of
    controversies over the past two decades. The NPR reviewed
    potential risks inherent in approving and supervising
    industrial banks. These include concerns over the mixing of
    banking and commerce, as well as the potential risk to the
    Deposit Insurance Fund posed by the lack of Federal
    consolidated supervision of parent companies. The NPR also set
    out the justification for the proposed rule, including the need
    to codify and clarify supervisory expectations for industrial
    banks and the importance of imposing commitments on parent
    companies to ensure the parent company can serve as a source of
    strength for its subsidiary industrial bank.
        The NPR specifically discussed that commenters on the 2007
    rulemaking observed that the FDIC lacked authority to draw a
    distinction between financial and nonfinancial industrial bank
    owners absent a change in law.
        The NPR provided discussion of the factual, legal, and
    policy considerations for the proposed rule, such that
    interested parties were able to--and did--submit a variety of
    comments on a number of issues raised in and by the proposed
    rule.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JELENA
                               McWILLIAMS

    Q.1. Impact of Pandemic on Regulatory Asset Thresholds: During
    the pandemic, because of participation in the Paycheck
    Protection Program, EIDL, EIP, USDA emergency programs, and
    others--as Chairman Crapo and Senator Toomey highlighted during
    the hearing--a number of financial institutions have grown to
    new regulatory thresholds, and for many this will be temporary.
        I'm very proud of the work that community banks and credit
    unions in Montana have done to help their communities during
    this health and economic crisis, particularly the effort it has
    taken to make the Paycheck Protection Program work despite many
    challenges. I am concerned though that these community
    financial institutions will face unnecessary consequences from
    these important programs and may be unable to participate in
    future rounds of these stimulus programs.
        Thank you to you all for your focus on the disproportionate
    impact that these increased assets have on smaller
    institutions. This is a problem I'm hearing about directly from
    Montanans, and like you we've seen that these pandemic-related
    assets have a more significant impact the smaller a bank is.
    Especially for these smaller banks, the problems with increased
    pandemic-related assets are not limited to PPP.
        I know that this is something all of your agencies are
    looking into and some have taken action on. I appreciated
    hearing your answers to the Chairman's question, and I look
    forward to continuing to work with you all on this issue.
        What can your agencies do to ensure financial institutions
    are not punished for participating in these programs while also
    maintaining the safety and soundness of the system?
        Can you do this all on your own or are there areas that
    require action from Congress?

    A.1. Since the beginning of the COVID-19 pandemic, the FDIC has
    taken a number of actions to show flexibility in its regulatory
    approach in response to the unprecedented economic conditions
    and unique Government response,\1\ which resulted in record
    deposit inflows at FDIC-insured banks. Banks experienced two
    consecutive quarters of over $1 trillion in new deposits,
    increases that far exceed any deposit growth the FDIC has seen
    in the past. In October 2020, we issued an interim final rule
    to allow insured depository institutions (IDIs) that have
    experienced growth to determine whether they are subject to the
    requirements of Part 363 of the FDIC's regulations (i.e.,
    Annual Independent Audits and Reporting Requirements) for
    fiscal years ending in 2021 based on their consolidated assets
    as of December 31, 2019.\2\
    ---------------------------------------------------------------------------
        \1\ For a detailed description of these actions, see FDIC Chairman
    Jelena McWilliams, ``Oversight of Financial Regulators,'' testimony
    before S. Comm. on Banking, Hous., and Urban Affairs (May 12, 2020),
    available at https://www.fdic.gov/news/speeches/spmay1220.html and FDIC
    Chairman Jelena McWilliams, ``Oversight ofFinancial Regulators,''
    testimony before S. Comm. on Banking, Hous., and Urban Affairs (Nov.
    10, 2020), available at https://www.fdic.gov/news/speeches/
    spnov1020.html.
        \2\ See Applicability of Annual Independent Audits and Reporting
    Requirements for Fiscal Years Ending in 2021, 85 Fed. Reg. 67427 (Oct.
    23, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-10-
    23/pdf/2020-23630.pdf.
    ---------------------------------------------------------------------------
        Consistent with that action and the principle of targeted
    regulatory flexibility, the FDIC joined the Federal Reserve
    Board and the Office of the Comptroller of the Currency in
    issuing an interim final rule to similarly ``freeze'' an IDI's
    asset size for purposes of determining applicability of certain
    regulations for community banks.\3\ The rule, which applies to
    certain regulatory thresholds of $10 billion or less, provides
    that an IDI generally can calculate its asset size for
    applicable thresholds during calendar years 2020 and 2021 based
    on the lower of either total assets as of December 31, 2019, or
    total assets as of the normal measurement date. Through its
    application to thresholds under the community bank leverage
    ratio, management interlocks, Call Reports, and examination
    frequency rules, the rule provides community banks with
    temporary relief from incurring material costs to comply with
    new regulatory requirements during a time of economic
    disruption.
    ---------------------------------------------------------------------------
        \3\ See Temporary Asset Thresholds, 85 Fed. Reg. 77345 (Dec. 2,
    2020), available at https://www.govinfo.gov/content/pkg/FR-2020-12-02/
    pdf/2020-26138.pdf.

    Q.2. Impact of Pandemic on Safety and Soundness: This pandemic
    has had significant impacts on our economy and communities
    throughout the country.
        As you continue examinations, what impact are you seeing
    these factors have on the banks and credit unions you regulate?
    Is this impact different on smaller, community institutions?

    A.2. The FDIC closely monitors the health of the U.S. banking
    system and publicly reports on these conditions through our
    Quarterly Banking Profile. Consistent with improved economic
    activity in the third quarter of 2020, the banking industry
    reported better results relative to the first half of the
    year.\4\ Banks reported higher net income, largely because of
    lower provisions for credit losses and an increase in
    noninterest income, compared with the first two quarters of
    2020. Lower provisions reflect the improving economy and a
    general expectation from the banking industry of stabilization
    in the expected future credit performance of the loan
    portfolio. Deposit growth stabilized during the third quarter
    and is now near the average rate of growth between year-end
    2014 and year-end 2019. However, economic uncertainty and the
    low interest rate environment remain headwinds for the banking
    industry. In the third quarter, banks faced additional downward
    pressure on net interest margins, an increase in nonperforming
    loans, and a decline in loan volume. Notwithstanding these
    challenges, the number of institutions on the FDIC's ``Problem
    Bank List'' remained low, increasing to 56 from 52 the previous
    quarter.
    ---------------------------------------------------------------------------
        \4\ See FDIC-Insured Institutions Reported Improved Profitability
    in Third Quarter 2020 (Dec. 1, 2020), available at https://
    www.fdic.gov/news/press-releases/2020/pr20131.html.
    ---------------------------------------------------------------------------
        Community banks continued to outperform the industry
    overall with stronger improvements in annual net income and
    loan growth. Specifically, the 4,590 FDIC-insured community
    banks reported quarterly net income of $7.3 billion, a 10
    percent increase year-over-year. However, community banks
    continued to report an annual increase in provisions, further
    net interest margin compression, and a modest increase in
    nonperforming loans.
        The FDIC has conducted heightened monitoring of financial
    institutions whose activities or concentrations may present
    additional concerns due to the economic consequences of the
    pandemic. We have expanded our regular risk monitoring
    activities, particularly for institutions that have
    concentrated exposures to the industries that have been most
    impacted by the pandemic. Various divisions across the FDIC
    coordinate to bring together institution-specific and
    macroeconomic information, including assessments of aggregate
    banking industry vulnerabilities to credit and liquidity risk.
    The FDIC will continue to monitor conditions at insured
    depository institutions for any additional stress or
    deterioration in asset quality related to the pandemic.

    Q.3. Risks in Financial System: For the past 8 months much of
    everyone's focus has been on the health and economic crisis.
    But everything else hasn't stopped because of the coronavirus,
    even if at times it feels that way.
        Are there trends that you are seeing or problems you are
    concerned about that we aren't focused enough on during the
    pandemic?

    A.3. While responding to the economic risks related to COVID-19
    has been a top priority for the FDIC since the beginning of the
    pandemic, our key supervisory and other essential functions
    have remained operational. Using technology, we have maintained
    our supervisory activities during the pandemic, working offsite
    to protect our examiners and bank employees. When necessary, we
    have provided institutions flexibility regarding the initiation
    of an examination; however, such extensions have generally been
    for only brief periods of time.
        We continue to actively monitor the financial system,
    including potential risks that preceded the pandemic. Among
    other things, we continue to actively monitor cybersecurity
    risks in the banking industry, and our examinations seek to
    ensure that financial institutions are appropriately managing
    their exposure to such risks. In addition, we recognize that
    the role of banks within the financial system continues to
    evolve. For example, a substantial portion of mortgage
    servicing and origination has migrated outside the banking
    system, and policymakers must consider the risks and benefits
    of this migration with respect to both financial stability and
    credit availability.

    Q.4. Post-Pandemic Economy: As the pandemic continues our
    economy continues to suffer, and I am concerned that we will
    have another slow, uneven recovery like we saw after the most
    recent economic crisis. A concern I know many here share.
        What are your top priorities to make sure that that doesn't
    happen? What more should Congress be doing to address the long-
    term implications of this crisis?

    A.4. Although the future path of the economy remains somewhat
    uncertain, we have seen the economy begin to recover from the
    first two quarters of 2020, and we remain optimistic that as
    the vaccine distribution process will promote continued
    economic growth. Nonetheless, the FDIC remains focused on the
    resiliency of the banking sector and ensuring we are prepared
    for any possible outcomes. As we did in 2020, we will continue
    to provide needed flexibility for banks to work with their
    borrowers and modify loans when appropriate.\5\ In 2020, we
    confirmed with the staff of the
    Financial Accounting Standards Board (FASB) that short-term
    modifications (e.g., 6 months) made on a good faith basis in
    response to COVID-19 to borrowers who were current prior to any
    relief are not troubled debt restructurings (TDRs) under ASC
    Subtopic 310-40. Additionally, under Section 4013 of the
    Coronavirus Aid, Relief, and Economic Security Act (CARES Act),
    loan modifications related to COVID-19, executed on loans that
    were not more than 30 days past due as of December 31, 2019,
    and executed prior to December 31, 2020, do not need to be
    categorized as TDRs. The TDR treatment provided in Section 4013
    of the CARES Act was recently extended by Congress until
    January 1, 2022. As a result, any loan modifications eligible
    under Section 4013 of the CARES Act will not need to be
    considered TDRs for the duration of 2021. These actions have
    supported the ability of banks to work with their borrowers,
    and we will continue to take additional actions as appropriate.
    ---------------------------------------------------------------------------
        \5\ See FDIC, FIL-36-2020, Revised Interagency Statement on Loan
    Modifications by Financial Institutions Working With Customers Affected
    by the Coronavirus (Apr. 7, 2020), available at https://www.fdic.gov/
    news/financial-institution-letters/2020/fil20036.html; see also FDIC-
    FIL-22-2020, Interagency Statement on Loan Modifications by Financial
    Institutions Working with Customers Affected by the Coronavirus (Mar.
    22, 2020), available at https://www.fdic.gov/news/financial-
    institution-letters/2020/fil20022.html.

    Q.5. Rural Branches: I have been long concerned about
    consolidation among financial institutions. It's hard for small
    communities to survive without a post office and a bank or
    credit union branch.
        Has the coronavirus pandemic changed trends you have been
    seeing in recent years around the closure of branches? Or
    mergers and acquisitions?
        Is there more that should be done legislatively or through
    regulation to address branch closures?

    A.5. I deeply appreciate the challenge for rural communities
    posed by branch closures. The FDIC is the primary Federal
    regulator for most agricultural banks and thus understands
    these challenges firsthand. For example, between 1980 and 2010,
    more than half of all rural counties across the United States
    lost population, and the rural counties that experienced
    outflows lost 14.8 percent of their population on average.\6\
    Although community banks in depopulating areas have been
    resilient in meeting the challenges posed by these demographic
    trends, the eroding size of the local customer base makes it
    harder to raise deposits and attract loan customers.
    ---------------------------------------------------------------------------
        \6\ See FDIC, Long-Term Trends in Rural Depopulation and Their
    Implications for Community Banks, available at https://www.fdic.gov/
    bank/analytical/quarterly/2014-vol8-2/article2.pdf.
    ---------------------------------------------------------------------------
        The need for a strong community banking sector in rural
    areas is underscored by the uneven distribution of banking
    offices across the country. As of June 30, 2019, 620 counties--
    or 20 percent of the counties across the Nation--were served
    only by community banking offices, 127 counties had only one
    banking office, and 33 counties had no banking offices at
    all.\7\ We have taken a number of steps to increase the
    competitiveness of community banks, including by working to
    remove unnecessary barriers for institutions seeking to
    innovate. In addition, we continue to focus on agricultural
    lending and the ability for farm banks, which represent nearly
    one-quarter of all FDIC-insured institutions, to manage amid
    changing industry conditions.\8\ With respect to branch
    closures, insured depository institutions (IDIs) must provide
    notice of proposed closures to customers and the appropriate
    Federal banking agency, but such closures are not subject to
    application requirements or regulatory approval. Section 42 of
    the FDI Act requires IDIs to give written notice to customers
    and the appropriate Federal banking agency no later than 90
    days prior to the date of the proposed branch closure.\9\
    ---------------------------------------------------------------------------
        \7\ See FDIC Summary of Deposits, available at https://
    www7.fdic.gov/SOD.
        \8\ See FDIC 2019 Risk Review, available at https://www.fdic.gov/
    bank/analytical/risk-review/full.pdf.
        \9\ 12 U.S.C. Sec.  1831r-1(a)-(b). IDIs must also post a notice on
    the premises of a branch proposed to be closed for a period of at least
    30 days prior to the proposed closing. 12 U.S.C. Sec.  1831r-
    1(b)(2)(A).
    ---------------------------------------------------------------------------
        Section 42 imposes additional notice requirements on
    interstate banks that propose to close any branch in a low- or
    moderate-income area, and, under certain circumstances,
    authorizes the appropriate Federal banking agency to take
    action to convene a meeting of stakeholders in the affected
    area.\10\ However, section 42 clarifies that such action may
    not affect the authority of the bank to close the branch so
    long as the notice requirements of section 42 are
    satisfied.\11\ The FDIC is the primary Federal supervisor for
    more than 3,000 community banks and, as such, will ensure
    through our examination and supervisory processes that these
    institutions satisfy the notice requirements of section 42,
    consistent with the Interagency Policy Statement
    ConcerningBranch Closing Notices and Policies (Policy
    Statement).\12\
    ---------------------------------------------------------------------------
        \10\ 12 U.S.C. Sec.  1831r-1(d).
        \11\ 12 U.S.C. Sec.  1831r-1(d)(3).
        \12\ See Branch Closings, 64 Fed. Reg. 34845 (June 29, 1999),
    available at https://www.govinfo.gov/content/pkg/FR-1999-06-29/pdf/99-
    16471.pdf.
    ---------------------------------------------------------------------------
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JELENA
                               McWILLIAMS

    Q.1. Last month, the FDIC released the 2019 Survey of Household
    Use of Banking and Financial Services, which found that 5.4
    percent of U.S. households were unbanked. Describe how the FDIC
    plans to utilize these findings to address and bring greater
    attention to some of the most common reasons why individuals do
    not have accounts at insured depository institutions,
    including:

       LNot having enough money to meet minimum balance
            requirements

       LLack of trust in the banking system

       LHigh and unpredictable account fees

       LInconvenient hours or locations

    A.1. Building on the FDIC's longstanding goal of bringing more
    Americans into the banking system, we have made significant
    progress to support communities in need, especially low- and
    moderate-income communities. As we consider additional ways to
    create a more inclusive banking system, we recognize the
    tremendous benefits that financial innovation can deliver to
    consumers, including in the areas of payments and credit. New
    technologies have the potential to bring more people into the
    banking system, provide access to new products and services,
    and lower the cost of credit.
        One example is the use of alternative data in credit
    underwriting. Alternative data is information not typically
    found in the consumer's credit files of the nationwide consumer
    reporting agencies or customarily provided as part of
    applications for credit. Using alternative data can improve the
    speed and accuracy of credit decisions and help firms evaluate
    the creditworthiness of consumers who might not otherwise have
    access to credit in the mainstream credit system. Last year,
    the FDIC, jointly with the other Federal regulators, issued a
    statement encouraging the responsible use of alternative data
    in credit underwriting to facilitate greater access to
    credit.\1\ We continue to engage with our fellow regulators to
    consider other potential steps that would further encourage and
    facilitate the use of alternative data.
    ---------------------------------------------------------------------------
        \1\ See Federal Regulators issue joint statement on the use of
    alternative data in credit underwriting (Dec. 3, 2019), available at
    https://www.fdic.gov/news/news/press/2019/pr19117.html.
    ---------------------------------------------------------------------------
        Similarly, we issued principles encouraging financial
    institutions to offer responsible small-dollar loans to
    customers for both consumer and small business purposes.\2\ We
    recognize the important role that such loans can play in
    helping customers meet their ongoing needs for credit due to
    temporary cash-flow imbalances, unexpected expenses, or income
    shortfalls, including during periods of economic stress,
    national emergencies, or disasters.
    ---------------------------------------------------------------------------
        \2\ See Federal Agencies Share Principles for Offering Responsible
    Small-Dollar Loans (May 20, 2020), available at https://www.fdic.gov/
    news/press-releases/2020/pr20061.html.
    ---------------------------------------------------------------------------
        Small-dollar credit products and the use of alternative
    data in underwriting can create a powerful combination for low-
    and moderate-income consumers. Our new guidance documents can
    help encourage FDIC-supervised institutions to offer products
    to existing and potential customers, consistent with safe and
    sound banking principles and consumer protection laws.
        We are also working on numerous initiatives to facilitate
    partnerships between fintechs and banks. These partnerships are
    particularly important to financial inclusion, allowing banks
    to partner with fintechs that have already developed innovative
    products and underwriting methods that banks can quickly and
    safely adopt to support their customers.
        To help encourage these partnerships, the FDIC issued
    earlier this year a guide for fintechs and other third parties
    looking to work with banks.\3\ Using the guide, fintechs that
    may be new to bank partnerships can gain a better understanding
    of applicable risk management principles and the due diligence
    processes banks generally follow to meet them.
    ---------------------------------------------------------------------------
        \3\ See FDIC, Conducting Business with Banks: A Guide For Fintechs
    And Third Parties (February 2020), available at https://www.fdic.gov/
    fditech/guide.pdf.
    ---------------------------------------------------------------------------
        More recently, we asked stakeholders to comment on a
    groundbreaking approach to facilitate technology partnerships.
    Our request for information proposed a public/private standard-
    setting partnership and voluntary certification program that
    would help reduce the cost and uncertainty associated with the
    introduction of new technology at an institution.\4\
    ---------------------------------------------------------------------------
        \4\ See Request for Information on Standard Setting and Voluntary
    Certification for Models and Third-Party Providers of Technology and
    Other Services, 85 Fed. Reg. 44890 (July 24, 2020), available at
    https://www.govinfo.gov/content/pkg/FR-2020-07-24/pdf/2020-16058.pdf.
    ---------------------------------------------------------------------------
        Risk management is an important component of third-party
    partnerships with banks. But the onboarding and due diligence
    process can be costly and time consuming for both banks and
    their potential technology vendors. These challenges are often
    amplified at community banks with tight budgets and limited
    technology expertise. The costs are also high for technology
    firms. Each bank often has a somewhat different approach to due
    diligence, and the paperwork and review requirements for
    vendors are multiplied at each new institution.
        The voluntary certification program we have proposed would
    create a standard setting organization to establish standards
    for due diligence of vendors and for the technologies they
    develop. The FDIC would participate with industry and other
    stakeholders in the development of these standards. Third-party
    providers, including fintechs could then voluntarily submit
    their organization and technologies to an independent
    certifying organization to verify conformance to the applicable
    standards. In turn, banks could rely on this certification to
    onboard the vendor and integrate the technology into bank
    operations. Banks would continue to be responsible for
    exercising appropriate oversight over these vendors, and the
    products and services offered would still need to comply with
    all applicable laws, including consumer protection and
    antidiscrimination.
        Standardizing the due diligence process and removing
    regulatory and operational uncertainty surrounding technologies
    could fundamentally change the way banks partner with
    technology firms. We received numerous comments on the
    proposal, and are reviewing them as we consider next steps.

    Q.2. The FDIC supervises a large number of community banks.
    Please describe the impact of the following on the health of
    these institutions.

       LThe short-term impacts of COVID-19 and delayed
            fiscal support.

       LThe long-term implications of depressed net
            interest margins due to prolonged low interest rates
            for the foreseeable future.

    A.2. The FDIC closely monitors the health of the U.S. banking
    system and publicly reports on these conditions through our
    Quarterly Banking Profile. Consistent with improved economic
    activity in the third quarter of 2020, the banking industry
    reported better results relative to the first half of the
    year.\5\ Banks reported higher net income, largely because of
    lower provisions for credit losses and an increase in
    noninterest income, compared with the first two quarters of
    2020. Lower provisions reflect the improving economy and a
    general expectation from the banking industry of stabilization
    in the expected future credit performance of the loan
    portfolio. Deposit growth stabilized during the third quarter
    and is now near the average rate of growth between year-end
    2014 and year-end 2019. However, economic uncertainty and the
    low interest rate environment remain headwinds for the banking
    industry. In the third quarter, banks faced additional downward
    pressure on net interest margins, an increase in nonperforming
    loans, and a decline in loan volume. Notwithstanding these
    challenges, the number of institutions on the FDIC's ``Problem
    Bank List'' remained low, increasing to 56 from 52 the previous
    quarter.
    ---------------------------------------------------------------------------
        \5\ See FDIC-Insured Institutions Reported Improved Profitability
    in Third Quarter 2020 (Dec. 1, 2020), available at https://
    www.fdic.gov/news/press-releases/2020/pr20131.html.
    ---------------------------------------------------------------------------
        Community banks continued to outperform the industry
    overall with stronger improvements in annual net income and
    loan growth. Specifically, the 4,590 FDIC-insured community
    banks reported quarterly net income of $7.3 billion, a 10
    percent increase year-over-year. However, community banks
    continued to report an annual increase in provisions, further
    net interest margin compression, and a modest increase in
    nonperforming loans.

    Q.3. In its COVID sensitivity analyses, the Federal Reserve
    noted that ``Supervisors remain focused on certain firms that
    are particularly sensitive to the current economic outlook,
    whose outlooks are more optimistic than appropriate given
    current conditions, whose credit cost forecasts have not
    considered a range of possible outcomes, or whose planning has
    not been thoughtful.'' Have FDIC supervisors made any similar
    observations, either at the bank-level of the entities subject
    to the Fed's stress testing framework or for any of the banks
    under FDIC supervision? If so, what actions has the FDIC taken
    in response?

    A.3. The FDIC has conducted heightened monitoring of financial
    institutions whose activities or concentrations may present
    additional concerns due to the economic consequences of the
    pandemic. We have expanded our regular risk monitoring
    activities, particularly for institutions that have
    concentrated exposures to the industries that have been most
    impacted by the pandemic. Various divisions across the FDIC
    coordinate to bring together institution-specific and
    macroeconomic information, including assessments of aggregate
    banking industry vulnerabilities to credit and liquidity risk.
    The FDIC will continue to monitor conditions at insured
    depository institutions for any additional stress or
    deterioration in asset quality related to the pandemic.

    Q.4. Last month, the agencies issued a final rule for the Net
    Stable Funding Ratio, one of the key pillars of the post-crisis
    liquidity framework established by the Basel Committee. The
    final rule was substantially weaker than the proposal released
    in 2016 as a result of eliminating U.S. Treasuries and reverse
    repos from the Required Stable Funding (RSF). The cost-benefit
    analysis of that rule evaluated the costs of greater risk
    weights for these assets against the benefits of ``mitigating
    the risk of sharp price declines of level 1 liquid asset
    securities,'' and the fact that ``a small RSF requirement on
    level 1 liquid assets would ensure that covered companies fund
    a small portion of these securities from stable sources, which
    could ease the liquidity pressure caused by price declines and
    thus potentially reduce the need for liquidity support in times
    of stress.''

       LHow did the agencies consider the actions of the
            Federal Reserve to stabilize these markets earlier this
            year when conducting this analysis, given that no RSF
            requirement was in place?

       LDid your agency conduct any independent analysis of
            the impact of a small RSF requirement on the
            disincentivizing covered companies from acting as
            intermediaries of U.S. Treasury and repo markets during
            times of stress? If so, please provide that analysis.

       LDoes the analysis assume that the Federal Reserve
            will always be able to provide support to these markets
            in the event of a crisis?

       LHow did the agencies quantify the cost of Federal
            Reserve intervention?

    A.4. Strong capital liquidity requirements for the largest,
    most systemically important banks are a key pillar of the post-
    crisis regulatory framework, and our framework continues to
    apply the most rigorous capital and liquidity standards to the
    largest banks \6\ while also tailoring such standards for banks
    based on their size, risk profile, and systemic footprint. In
    2014, the FDIC, the Federal Reserve Board, and the Office of
    the Comptroller of the Currency finalized the Liquidity
    Coverage Ratio (LCR), the first quantitative liquidity standard
    for U.S. banks.\7\ The LCR requires the largest banks to
    maintain sufficient high-quality liquid assets (HQLA) to meet
    their total net cash outflows over a 30-day period.
    ---------------------------------------------------------------------------
        \6\ These standards include the total risk-based capital ratio,
    tier 1 risk-based capital ratio, common equity tier 1 risk-based
    capital ratio, tier 1 leverage ratio, and capital conservation buffer,
    in addition to supervisory stress testing.
        \7\ See Liquidity Coverage Ratio: Liquidity Risk Measurement
    Standards, 79 Fed. Reg. 61440 (Oct. 10, 2014), available at https://
    www.govinfo.gov/content/pkg/FR-2014-10-10/pdf/2014-22520.pdf.
    ---------------------------------------------------------------------------
        Larger banks are also subject to the countercyclical
    capital buffer, supplementary leverage ratio, enhanced
    supplementary leverage ratio, capital surcharge for
    systemically important banks, and total loss-absorbing capacity
    requirements, among other heightened standards.
        In October 2020, we issued a final rule to implement the
    Net Stable Funding Ratio (NSFR), which complements the LCR by
    establishing a long-term quantitative liquidity metric.\8\ The
    NSFR will require covered banks to maintain stable funding to
    support their assets, commitments, and derivatives exposures
    over a 1-year time horizon. In recognition of the low risk to a
    bank's funding profile posed by HQLA, the rule will not require
    stable funding to be held against unencumbered level 1 liquid
    assets and short-term secured lending transactions backed by
    level 1 liquid assets (e.g., U.S. Treasury securities). These
    assets serve as reliable sources of liquidity based on their
    high credit quality, and they serve a critically important role
    in supporting the smooth functioning of funding markets.
    ---------------------------------------------------------------------------
        \8\ See Agencies Issue Final Rule to Strengthen Resilience of Large
    Banks (Oct. 20, 2020), available at https://www.fdic.gov/news/press-
    releases/2020/pr20116.html.
    ---------------------------------------------------------------------------
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR CORTEZ MASTO FROM JELENA McWILLIAMS

    Q.1. Do you pledge to work with President-elect Biden's team to
    ensure an orderly transition to a new Administration?

    A.1. Yes. The FDIC has met all requirements of Government
    agencies under the Presidential Transition Act of 1963. I have
    met virtually with President-elect Biden's agency review team.
    Our senior career official responsible for transition planning
    has engaged with the agency review team shortly after the
    election. FDIC staff has provided timely responses to all
    requests from the agency review team, including all interviews
    and other questions.

    Q.2. Have you established office space within your agency for
    the President-elect's transition team?

    A.2. The FDIC offered the agency review team physical space at
    our offices, which they did not opt to use. Consistent with
    their requests, all meetings have been conducted virtually due
    to the COVID-19 pandemic.

    Q.3. Have you prepared briefing books for the President-elect's
    transition team that includes all relevant information they
    will need to know?

    A.3. Yes, we prepared and delivered an extensive briefing book
    for the agency review team covering all aspects of the FDIC's
    operations and activities. In addition, we have conducted 16
    separate meetings between the agency review team and FDIC
    senior officials, and we have provided timely responses to all
    other information requests.

    Q.4. Are community banks at risk of failure due to the
    inability of some of their commercial real estate or mortgage
    borrowers to pay their loan on time and in full?

    A.4. The FDIC closely monitors the health of the U.S. banking
    system and publicly reports on these conditions through our
    Quarterly Banking Profile. Consistent with improved economic
    activity in the third quarter of 2020, the banking industry
    reported better results relative to the first half of the
    year.\1\ Banks reported higher net income, largely because of
    lower provisions for credit losses and an increase in
    noninterest income, compared with the first two quarters of
    2020. Lower provisions reflect the improving economy and a
    general expectation from the banking industry of stabilization
    in the expected future credit performance of the loan
    portfolio. Deposit growth stabilized during the third quarter
    and is now near the average rate of growth between year-end
    2014 and year-end 2019. However, economic uncertainty and the
    low interest rate environment remain headwinds for the banking
    industry. In the third quarter, banks faced additional downward
    pressure on net interest margins, an increase in nonperforming
    loans, and a decline in loan volume. Notwithstanding these
    challenges, the number of institutions on the FDIC's ``Problem
    Bank List'' remained low, increasing to 56 from 52 the previous
    quarter.
    ---------------------------------------------------------------------------
        \1\ See FDIC-Insured Institutions Reported Improved Profitability
    in Third Quarter 2020 (Dec. 1, 2020), available at https://
    www.fdic.gov/news/press-releases/2020/pr20131.html.
    ---------------------------------------------------------------------------
        Community banks continued to outperform the industry
    overall with stronger improvements in annual net income and
    loan growth. Specifically, the 4,590 FDIC-insured community
    banks reported quarterly net income of $7.3 billion, a 10
    percent increase year-over-year. However, community banks
    continued to report an annual increase in provisions, further
    net interest margin compression, and a modest increase in
    nonperforming loans.
        The FDIC has conducted heightened monitoring of financial
    institutions whose activities or concentrations may present
    additional concerns due to the economic consequences of the
    pandemic. We have expanded our regular risk monitoring
    activities, particularly for institutions that have
    concentrated exposures to the industries that have been most
    impacted by the pandemic. Various divisions across the FDIC
    coordinate to bring together institution-specific and
    macroeconomic information, including assessments of aggregate
    banking industry vulnerabilities to credit and liquidity risk.
    The FDIC will continue to monitor conditions at insured
    depository institutions for any additional stress or
    deterioration in asset quality related to the pandemic.

    Q.5. Previously, you had stated that modifications were not
    considered TDRs. Is that still the case?

    A.5. Beginning in March 2020, the FDIC, jointly with the other
    Federal regulators, provided needed flexibility for banks to
    work with their borrowers and modify loans when appropriate.\2\
    We confirmed with the staff of the Financial Accounting
    Standards Board (FASB) that short-term modifications (e.g., 6
    months) made on a good faith basis in response to COVID-19 to
    borrowers who were current prior to any relief are not troubled
    debt restructurings (TDRs) under ASC Subtopic 310-40.
    Additionally, under Section 4013 of the Coronavirus Aid,
    Relief, and Economic Security Act (CARES Act), loan
    modifications related to COVID-19, executed on loans that were
    not more than 30 days past due as of December 31, 2019 and
    executed prior to December 31, 2020, do not need to be
    categorized as TDRs. The TDR treatment provided in Section 4013
    of the CARES Act was recently extended by Congress until
    January 1, 2022. As a result, any loan modifications eligible
    under Section 4013 of the CARES Act will not need to be
    considered TDRs for the duration of 2021.
    ---------------------------------------------------------------------------
        \2\ See FDIC, FIL-36-2020, Revised Interagency Statement on Loan
    Modifications by Financial Institutions Working with Customers Affected
    by the Coronavirus (Apr. 7, 2020), available at https://www.fdic.gov/
    news/financialinstitution-letters/2020/fil20036.html; see also FDIC-
    FIL-22-2020, Interagency Statement on Loan Modifications by Financial
    Institutions Working with Customers Affected by the Coronavirus (Mar.
    22, 2020), available at https://www.fdic.gov/news/financial-
    institution-letters/2020/fil20022.html.

    Q.6. Has the FDIC issued guidance to ensure that banks are
    working with their borrowers to defer payments? Specifically,
    how are lenders working with property owners and landlords to
    ---------------------------------------------------------------------------
    pay their bills even when tenants are unable to pay the rent?

    A.6. On March 13, 2020, the FDIC issued a statement encouraging
    institutions to assist consumers and communities affected by
    COVID-19.\3\ In that statement, we encouraged financial
    institutions to work with all borrowers, especially borrowers
    from industry sectors particularly vulnerable to economic
    volatility, including airlines; energy companies; travel,
    tourism, and shipping companies; small businesses; and
    independent contractors that are reliant on affected
    industries. The statement also provided that prudent efforts to
    modify the terms on existing loans for affected customers of
    FDIC-supervised banks will not be subject to examiner
    criticism. Later in March 2020, the FDIC, jointly with the
    other Federal regulators, provided needed flexibility for banks
    to work with their borrowers and modify loans when appropriate.
    The FDIC also issued responses to frequently asked questions
    (FAQs) from financial institutions, which encourage
    institutions to offer borrowers affected by COVID-19 payment
    accommodations, such as allowing borrowers to defer or skip
    payments or extending the payment due date.\4\ The FAQs also
    state that financial institutions can call their FDIC Regional
    Office, which can assist them by discussing key considerations
    and regulations on payment accommodations and disclosures.
    ---------------------------------------------------------------------------
        \3\ See FDIC, FIL-17-2020, Regulatory Relief: Working with
    Customers Affected by the Coronavirus (Mar. 13, 2020), available at
    https://www.fdic.gov/news/financial-institution-letters/2020/
    fil20017.html.
        \4\ See FDIC, Frequently Asked Questions for Financial Institutions
    Affected by the Coronavirus Disease 2019 (Referred to as COVID-19),
    available at https://www.fdic.gov/coronavirus/faq-fi.pdf.

    Q.7. Will your agency update the interagency guidance regarding
    Troubled Debt Restructuring to allow these COVID-19 loan
    modifications to extend beyond 6 months? Would loans with terms
    ---------------------------------------------------------------------------
    beyond 6 months still fall within the TDR authority?

    A.7. According to U.S. generally accepted accounting
    principles, a restructuring of a debt constitutes a TDR if the
    creditor, for economic or legal reasons related to the debtor's
    financial difficulties, grants a concession to the debtor that
    it would not otherwise consider. The TDR designation is an
    accounting categorization, as promulgated by FASB and codified
    in ASC Subtopic 310-40.
        As noted above, in March 2020, the FDIC and our fellow
    regulators confirmed with the staff of the FASB that short-term
    modifications (e.g., 6 months) made on a good faith basis in
    response to COVID-19 to borrowers who were current prior to any
    relief are not TDRs under ASC Subtopic 310-40. Additionally,
    under Section 4013 of the CARES Act, eligible loan
    modifications do not need to be categorized as TDRs. The TDR
    treatment provided in Section 4013 of the CARES Act was
    recently extended by Congress until January 1, 2022. As a
    result, any loan modifications eligible under Section 4013 of
    the CARES Act will not need to beconsidered TDRs for the
    duration of 2021.

    Q.8. The FDIC report on unbanked and underbanked excluded the
    underbanked data. Why did this biannual study decide not to
    include underbanked individuals?

    A.8. In October 2020, the FDIC released our latest biennial
    survey on household use of banking and financial services.\5\
    The survey was conducted in June 2019, collecting responses
    from almost 33,000 households on bank account ownership, the
    primary methods banked households use to access their bank
    accounts, bank branch visits, use of prepaid cards and nonbank
    financial transaction services, and use of bank and nonbank
    credit.
    ---------------------------------------------------------------------------
        \5\ See How America Banks: Household Use of Banking and Financial
    Services, 2019 FDIC Survey, available at https://www.fdic.gov/analysis/
    household-survey/2019report.pdf.
    ---------------------------------------------------------------------------
        The FDIC did not exclude underbanked households from the
    survey. In fact, the survey continues to collect detailed
    statistics on the use of nonbank financial services by American
    households. While we have eliminated the term ``underbanked''
    from the report due to the intrinsic subjectivity of the
    definition and the evolution of the financial services system,
    the report presents extensive and detailed information about
    households that use nonbank financial products and services, as
    in prior reports.
        The FDIC's past six reports utilized five different
    definitions of ``underbanked,'' which has made it impossible to
    compare results from one survey to another. The changing
    definitions of ``underbanked'' reflect the increasing
    difficulty of capturing this term and measuring its prevalence.
    Consumers often make choices not based on whether a service is
    offered by a bank or nonbank financial institution, but based
    on factors such as price or convenience.
        Since the survey was first published more than a decade
    ago, new financial products have proliferated, and it has
    become increasingly problematic to characterize individuals who
    have bank accounts as ``underbanked'' based solely on their use
    of financial products and services offered by nonbanks.
    Further, both banks and nonbanks may offer many of the same
    products and services. For example, the 2019 survey found that
    over 32 percent of banked households used nonbank peer-to-peer
    or person-to-person (``P2P'') services. Moreover, the majority
    of those banked households fell into the highest income and
    highest education levels surveyed. Characterizing such well-
    educated, higher-income households as ``underbanked'' solely
    because they used a P2P service offered by a nonbank seems not
    only inaccurate, but also inapposite to the underlying
    statutory purpose of the survey: gaining a better understanding
    of the efforts by banks to bring the unbanked into the
    conventional banking system.

    Q.9. Without additional relief from Congress, how bad are
    defaults, foreclosures, and evictions going to get and what
    will be the impact on financial institutions?

    A.9. Notwithstanding continued economic uncertainty related to
    the trajectory of COVID-19, the banking industry remains well
    capitalized with ample liquidity and has, to date, weathered
    the economic effects of the pandemic. The FDIC continues to
    monitor and report on conditions and take actions to support
    the ability of banks to work constructively with their
    customers.

    Q.10. The recent expose of Suspicious Activity Reports (SARs)
    filings sent shockwaves through the financial industry.
        The article reported multiple examples of major financial
    institutions failing to take proactive action regarding
    customers on whom they have filed SARs and/or against whom they
    have suspicions of illegal activity, how big of a concern is
    this for your agency?

    A.10. The purpose of a Suspicious Activity Report (SAR) filing
    is for financial institutions to describe and report to the
    Financial Crimes Enforcement Network (FinCEN) any suspected or
    potential illegal activity they observe. However, the filing of
    a SAR is not itself evidence of wrongdoing. Each insured
    financial institution \6\ is required to file SARs based on the
    relatively low-level evidentiary threshold of ``suspicion.'' As
    such, there are no Bank Secrecy Act (BSA) requirements for
    financial institutions to terminate a customer relationship
    after identifying potentially suspicious activities.
    ---------------------------------------------------------------------------
        \6\ The term ``financial institution'' in this response is a
    substitute for the term ``bank'' and ``State bank'' as defined in
    Section 3 of the Federal Deposit Insurance Act.
    ---------------------------------------------------------------------------
        After the filing of an initial SAR, financial institutions
    are requested pursuant to FinCEN's guidance to file additional
    SARs (commonly referred to as ``continuing activity SARs'')
    with FinCEN every 90 days if a customer's unusual or suspicious
    transactions continue. Ultimately, the decision to establish,
    maintain, or close an account is made by a financial
    institution in accordance with its own policies, procedures,
    and processes. Those decisions are made based on the
    information available to the financial institution, the
    institution's customer risk profile, and the institution's
    assessment of ongoing risks associated with its customer.
        The BSA provides financial institutions with flexibility in
    how they develop risk-based procedures and monitoring processes
    for the purpose of updating customer due diligence information
    and determining when to close accounts. As part of their BSA/
    AML compliance program requirement, FDIC-supervised financial
    institutions are required to have written policies, procedures,
    and processes that, among other things, address the
    identification and reporting of suspicious activity and the
    escalation process for decisions to maintain or terminate
    customer relationships based on relevant factors, including SAR
    filings. If the financial institution chooses to maintain an
    account, it is required to comply with all applicable BSA
    requirements, including requirements to conduct ongoing
    monitoring on the basis of risk, and, as appropriate, file
    SARs, including, as applicable, continuing activity SARs.
        An important consideration when evaluating financial
    institutions' actions regarding customers on whom they have
    filed SARs is that law enforcement may send ``keep open''
    letters to financial institutions requesting, but not
    requiring, they keep accounts open, so as not to impair ongoing
    investigations. Although there is no requirement that a
    financial institution keep accounts open, FinCEN has encouraged
    financial institutions to be mindful that complying with a
    ``keep open'' request may further law enforcement efforts to
    combat money laundering, terrorist financing, and other crimes.
    In the event a financial institution keeps the account open,
    the financial institution still must comply with its
    requirement to file SARs when appropriate.
        Under Section 8(s) of the Federal Deposit Insurance Act
    (FDIA), FDIC's examination of an institution is required to
    include a review of the institution's BSA/AML compliance
    program, and FDIC reports of examination are required to
    describe any problems with the compliance program. Furthermore,
    section 8(s)(3) of the FDIA requires the FDIC to issue a cease
    and desist order against an institution if it has defects in
    its BSA/AML compliance program in one or more program
    components that indicate that either the written BSA/AML
    compliance program or its implementation is not effective.
    Examples include, but are not limited to, deficiencies that are
    coupled with other aggravating factors, such as (i) highly
    suspicious activity creating a potential for significant money
    laundering, terrorist financing, or other illicit financial
    transactions, (ii) patterns of structuring to evade reporting
    requirements, and (iii) systemic failures to file SARs, or
    other required BSA reports.
        Historically, during any given time period, the
    overwhelming majority of FDIC-supervised financial institutions
    subject to examinations have BSA/AML compliance programs,
    including SAR monitoring and reporting processes that are
    considered acceptable by FDIC examiners.

    Q.11. One of the allegations in the investigation was that
    financial institutions did not list the relationship manager
    within their own institution. Is your agency aware of whether
    this problem is prevalent?

    A.11. The financial institution's relationship manager is not a
    required SAR data input field. On June 19, 2000, the Federal
    financial institutions supervisory agencies, together with
    FinCEN, issued a revised SAR form effective December 31,
    2000.\7\ As part of the modifications to the SAR form, two
    sections requiring ``witness'' and ``preparer information''
    were replaced with Part IV, ``Contact for Assistance.''
    Subsequent revisions to the SAR form associated with FinCEN's
    July 1, 2012,\8\ implementation of a new BSA E-Filing system,
    replaced the ``Contact for Assistance'' field with ``Filing
    Institution Contact Office'' and ``Filing Institution Contact
    Phone Number.'' These revisions further anonymized the specific
    financial institution personnel involved in the SAR filing for
    the safety of such individuals in case a SAR was made public.
    ---------------------------------------------------------------------------
        \7\ See Revised Suspicious Activity Report Form (SAR) (June 19,
    2020), available at https://www.fincen.gov/news/news-releases/revised-
    suspicious-activity-report-form-sar.
        \8\ See Filing FinCEN's new Currency Transaction Report and
    Suspicious Activity Report (Mar. 29, 2012), available at https://
    www.fincen.gov/resources/statutes-regulations/guidance/filing-fincens-
    new-currency-transaction-report-and.
    ---------------------------------------------------------------------------
        Current SARs cannot be submitted by financial institutions
    to FinCEN without the required financial institution ``Contact
    Office'' and ``Phone Number'' fields. Since every SAR has a
    financial institution contact office for law enforcement and
    regulatory personnel to contact in order to obtain additional
    information about the SAR filing, the FDIC does not believe
    failure to list a relationship manager is a prevalent problem.

    Q.12. It is important that SARs remain confidential. Are you
    working with FinCEN to ensure future leaks will not occur?

    A.12. The FDIC recognizes the importance of SAR
    confidentiality. The unauthorized disclosure of SARs is a crime
    that can impact the national security of the United States,
    compromise law enforcement investigations, and threaten the
    safety and security of the institutions and individuals who
    file such reports. It is critical that the existence of a SAR
    be kept confidential, as well as the information contained in
    the SAR. It is essential to the partnership between the
    financial industry and Government that sensitive and
    confidential financial and personal information reported to
    FinCEN be protected.
        Given the confidential nature of this information, we
    continually stress the importance of SAR confidentiality and
    security with the intuitions we supervise, with our staff, and
    with the other regulators, including FinCEN, to ensure
    protection of data.
        The FDIC is aware that FinCEN has referred this particular
    SAR disclosure matter to the U.S. Department of Justice and the
    U.S. Department of the Treasury's Office of Inspector General.
    The FDIC is not privy to the source or circumstances
    surrounding the leak. Once such information is available to the
    FDIC, we will be in a better position to work with FinCEN to
    implement any necessary additional, proactive measures to
    ensure SAR data confidentiality and security.

                                    ------

      RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM JELENA
                               McWILLIAMS

    Q.1. As you know, the commercial real estate (CRE) market is
    under extreme pressure due to this pandemic. Collapse of this
    market would be disastrous to Arizona communities. In April,
    the regulators released the ``Interagency Statement on Loan
    Modifications and Reporting for Financial Institutions Working
    with Customers Affected by the Coronavirus.'' This guidance
    allowed financial institutions to modify existing CRE loans
    impacted by the coronavirus. While this guidance was helpful
    and much-needed, it now requires updating. Are there plans to
    update this guidance to allow these COVID loan modifications to
    extend beyond 6 months?

    A.1. Beginning in March 2020, the FDIC and our fellow
    regulators provided needed flexibility for banks to work with
    their borrowers and modify loans when appropriate.\1\ We
    confirmed with the staff of the Financial Accounting Standards
    Board (FASB) that short-term modifications (e.g., 6 months)
    made on a good faith basis in response to COVID-19 to borrowers
    who were current prior to any relief are not troubled debt
    restructurings (TDRs) under ASC Subtopic 310-40. Additionally,
    under Section 4013 of the Coronavirus Aid, Relief, and Economic
    Security Act (CARES Act), loan modifications related to COVID-
    19, executed on loans that were not more than 30 days past due
    as of December 31, 2019, and executed prior to December 31,
    2020, do not need to be categorized as TDRs. The TDR treatment
    provided in Section 4013 of the CARES Act was recently extended
    by Congress until January 1, 2022. As a result, any loan
    modifications eligible under Section 4013 of the CARES Act will
    not need to be considered TDRs for the duration of 2021.
    ---------------------------------------------------------------------------
        \1\ See FDIC, FIL-36-2020, Revised Interagency Statement on Loan
    Modifications by Financial Institutions Working With Customers Affected
    by the Coronavirus (Apr. 7, 2020), available at https://www.fdic.gov/
    news/financial-institution-letters/2020/fil20036.html; see also FDIC-
    FIL-22-2020, Interagency Statement on Loan Modifications by Financial
    Institutions Working With Customers Affected by the Coronavirus (Mar.
    22, 2020), available at https://www.fdic.gov/news/financial-
    institution-letters/2020/fil20022.html.
    ---------------------------------------------------------------------------
                                    ------

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

    Q.1. What is the likelihood of NCUA charging a Share Insurance
    Fund premium either this year or next year?

    A.1. As required by the Federal Credit Union Act, the NCUA must
    maintain an equity ratio between 1.2 and 1.5 percent in the
    National Credit Union Share Insurance Fund (NCUSIF). There are
    several scenarios under which the NCUA would be required to
    assess an insurance premium based on the equity ratio. For
    example:

       LIf the equity ratio falls below 1.3 percent, the
            NCUA may assess an insurance premium to insured credit
            unions to restore the equity ratio up to, but not
            above, 1.3 percent.

       LIf it is projected that the equity ratio will fall
            below 1.2 percent within 6 months of determination, or
            if the equity ratio has actually fallen below 1.2
            percent, the NCUA must establish and implement a fund
            restoration plan within 90 days to restore and maintain
            the equity ratio at 1.2 percent.

       LIn the event that the equity ratio falls below 1
            percent, the NCUA would require insured credit unions
            to recapitalize the NCUSIF in addition to the insurance
            premiums assessed by the NCUA.

        The NCUA calculates the equity ratio bi-annually as of June
    30 and December 31 each year. The NCUSIF equity ratio is
    calculated as the sum of NCUSIF contributed capital and results
    of operations, less any unrealized gains, divided by the total
    insured shares. The equity ratio can decline either through a
    decrease in the retained earnings from the NCUSIF operating
    results or an increase in the total insured shares.
        As of the June 30, 2020, calculation, the NCUSIF equity
    ratio declined by 13 basis points in a 6-month period to 1.22
    percent. The decline in the equity ratio during this period was
    the result of unprecedented growth in insured shares during the
    first 6 months of 2020. Insured shares grew at a nonannualized
    rate of 12.95 percent. Historically, the average insured share
    growth rate has been 4.58 percent. The sum of contributed
    capital and retained earnings, less contingent liabilities,
    also increased during the 6 months, but at a much lower rate
    than the insured shares. Based on forecasted share insurance
    growth and fund equity values, the NCUA projected the December
    31, 2020, NCUSIF equity ratio at 1.32 percent.
        At this time, the NCUA does not project that the NCUSIF
    equity ratio will fall below 1.2 percent in the next 6 months.
    As always, economic uncertainties could impact the accuracy of
    this projection, including the length of time necessary for a
    full economic recovery and the impacts on the financial
    services industry. Likewise, continued strong growth in insured
    shares and low interest rate returns on the NCUSIF portfolio
    are also factors that depress the equity ratio. While economic
    stress related to COVID-19 has lowered net interest margins
    impacting earnings, asset quality and capital adequacy remain
    strong. The NCUA continues to evaluate how a variety of stress
    scenarios could impact the NCUSIF's performance in the event a
    fund restoration plan becomes necessary.

    Q.2. What is the status of NCUA's efforts to improve
    examinations, including by making them less burdensome,
    streamlining virtual examinations, and improving the agency's
    use of technology?

    A.2. In 2017, the NCUA Board approved the virtual examination
    project and associated resources to research methods to conduct
    offsite as many aspects of the examination and supervision
    processes as possible. Currently, the program is in the
    research and discovery phase. During this phase, the NCUA
    researching ways it can harness new and emerging data, assess
    advancements in analytical techniques, and utilize innovative
    technologies. Additionally, the NCUA is identifying ways to
    improve its supervisory approach and to move to a more virtual-
    based examination model in the next 5 to 10 years. By
    identifying and adopting alternative methods to remotely
    analyze much of the financial and operational condition of a
    credit union, with equivalent or improved effectiveness
    relative to current examinations, it may be possible to
    significantly reduce the frequency and scope of onsite
    examinations. However, this examination model will encompass
    more than just the element of working offsite. The NCUA seeks
    to modernize and reengineer the way the agency:

       LCollects data from credit unions;

       LPerforms analytics and evaluate risk through
            advanced analytics tools; and

       LConducts the examination by incorporating
            alternative examination techniques, tools, and
            automation.

        The virtual examination model should lead to greater use of
    standardized interaction protocols, advanced analytical
    capabilities, and subject matter experts, resulting in more
    consistent and accurate supervisory determinations, providing
    greater clarity and consistency with respect to how the agency
    conducts supervisory oversight, and reducing coordination
    challenges between agency and institution staff. Through this
    modernization effort, the NCUA intends to reduce the burden on
    credit unions, improve offsite supervision capabilities,
    provide more consistency and standardization for the
    examination and supervision process, and explore and evaluate
    technology utilization and the industry's interest in adopting
    the technology.
        The first step in this modernization initiative is the
    NCUA's Enterprise Solution Modernization program. This is a
    long-term effort to introduce emerging and secure technology in
    support of the agency's examination, data collection, and
    reporting efforts. The modernization's objectives include
    streamlining and aligning examination and data processes,
    technology, and infrastructure across business functions, as
    well as gaining process efficiencies with integrated, scalable
    platforms, and robust tools. The first project of this
    initiative, a new examination tool, was introduced to pilot
    participants in September 2019; due to the COVID-19 pandemic,
    however, the broader rollout was delayed until 2021.
        The new examination tool will make examinations less
    burdensome by providing the ability to securely request and
    submit documents and information for the examination in an
    organized manner that is easily accessible to members of an
    exam team. It also reduces burden by giving credit unions the
    opportunity to manage examination findings and view completed
    examination reports securely from one application. Integrated
    robust financial analytics, including loan and share analytics
    helps provides support for virtual examinations. This new
    examination tool leverages technology with a scalable
    infrastructure to facilitate and streamline a virtual
    examination program.

                                    ------

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

    Q.1. I appreciate the work that all of you have been doing to
    help your respective constituents meet the needs of their
    customers during this difficult time. As I noted in my
    conversation with Vice Chair Quarles, I have a number of
    outstanding concerns about some of the unintended consequences
    that may occur as a result of the unique economic events we're
    experiencing combined with how consumer activity is changing
    the balance sheets of banks and credit unions.
        Chairman McWilliams said in her written testimony, ``The
    FDIC is also actively considering similar targeted adjustments
    to further mitigate unintended consequences resulting from
    pandemic-related Government programs.'' I know that the
    Paycheck Protection Program and Economic Impact Payments in
    particular have resulted in significant cash-flow changes that
    have made financial institutions look temporarily much larger
    than normal for the purposes of their capital treatment. Are
    there other Government programs that have had a similar impact?
        What specific adjustments are you considering as a result
    of these Government responses?

    A.1. I am actively considering options that the agency can take
    to provide relief from rules that are tied to assets. Many of
    our credit unions have grown due to an unexpected high volume
    of deposits that has flowed into these credit unions.
        At the NCUA's November Board meeting, the Board approved a
    proposed rule change that would allow credit unions to
    capitalize interest when considering loan modifications for
    borrowers that have experienced financial distress. We believe
    this rule change would be particularly helpful for borrowers
    who have mortgages that have been in forbearance for an
    extended period of time.
        In April 2020, the Board unanimously approved an interim
    final rule that amended the NCUA's capital adequacy, member
    business loans, and commercial lending regulations following
    the creation of the Small Business Administration's Paycheck
    Protection Program (PPP).
        The interim rule amended the NCUA's capital adequacy
    regulation so that covered PPP loans receive a zero-percent
    risk weight in the agency's risk-based net worth requirements.
    In addition, if a PPP loan is pledged as collateral for a
    nonrecourse loan provided through the Federal Reserve System's
    PPP Lending Facility, the pledged loan can be excluded from a
    federally insured credit union's calculation of total assets
    for the purposes of calculating its net worth ratio.
        Also in April 2020, the NCUA Board approved an interim
    final rule that enhanced the Central Liquidity Facility (CLF)
    regulations and supplemented legislative changes made by the
    Coronavirus Aid, Relief, and Economic Security (CARES) Act.
    This interim final rule:

       LEliminated the 6-month waiting period for a new
            member to receive a loan;

       LMade temporary amendments to the waiting period for
            a federally insured credit union to terminate its
            membership;

       LEased collateral requirements on some assets; and

       LAllows, temporarily, for an agent member to borrow
            for its own liquidity needs.

    Besides announcing statutory and regulatory changes to the CLF,
    the NCUA also provided substantial guidance on the benefits of
    joining the CLF for both individual credit unions, and the
    credit union system as a whole.
        In addition, the Board unanimously approved in April 2020,
    a temporary final rule that offers credit unions temporary
    regulatory relief. This rule temporarily raised the maximum
    aggregate amount of loan participations that a federally
    insured credit union may purchase from a single originating
    lender without needing a waiver from their NCUA Regional
    Director.
        Under the rule, a Federal credit union no longer has to
    refinance a purchased obligation so that it matches the types
    of loans the credit union is allowed to make. The final rule
    also suspended the required timeframes for the occupancy or
    disposal of properties held by Federal credit unions that are
    not being used to conduct business or that have been abandoned.
        In May 2020, the Board also approved an interim final rule
    that made two temporary changes to the NCUA's prompt corrective
    action regulations that provide relief to credit unions that
    temporarily fall below well capitalized. This interim rule
    temporarily reduced the earnings retention requirement for
    credit unions classified as adequately capitalized. Those
    credit unions that cannot meet the earnings retention
    requirement will not have to submit a written application
    requesting approval to decrease their earnings retention
    amount. If a credit union poses an undue risk to the Share
    Insurance Fund or exhibits material safety and soundness
    concerns, the appropriate NCUA Regional Director may require
    the credit union to submit an earnings transfer waiver request.
        The NCUA provided more information on regulatory relief
    measures related to the agency's prompt corrective action
    regulations in a Letter to Credit Unions 20-CU-18, Prompt
    Corrective Action Regulatory Relief Measures in Response to the
    COVID-19 Pandemic (https://www.ncua.gov/regulation-supervision/
    letters-credit-unions-other-guidance/prompt-corrective-action-
    regulatory-relief-measures-response-covid-19-pandemic). This
    was issued in anticipation that some credit unions may
    experience a temporary reduction in earnings and capital due to
    their COVID-19 response efforts. The letter describes the
    administrative order approved pursuant to Sec.  702.201 that
    reduced the amount of earnings retention required for credit
    unions classified as adequately capitalized. Additionally, the
    letter describes credit unions' authority to submit a
    streamlined Net Worth Restoration Plan if their net worth ratio
    declined to undercapitalized predominantly due to temporary
    share growth as a result of the COVID-19 pandemic.
        Also in the April 2020, NCUA Board meeting, the Board
    approved a final rule that increased the threshold level where
    an appraisal is not required for residential real estate-
    related transactions, from $250,000 to $400,000. This rule was
    communicated to credit unions in Letter to Credit Unions 20-CU-
    10, Residential Appraisals Threshold Increase and Other COVID-
    19 Related Relief Measures (https://www.ncua.gov/regulation-
    supervision/letters-credit-unions-other-guidance/residential-
    appraisals-threshold-increase-and-other-covid-19-related-
    relief-measures). If the property involved in such a
    transaction falls below the threshold, federally insured credit
    unions will generally be required to obtain written estimates
    of the market value of the real estate, consistent with safe
    and sound practices. The final rule became effective upon
    publication in the Federal Register on April 30, 2020.
        Further, the Board approved an interim final rule in the
    same April 2020, Board meeting that allows a federally insured
    credit union to temporarily defer certain appraisals and
    evaluations for up to 120 days when alternatives are
    unavailable and when the appraisal or evaluation would delay
    the closing of the residential or commercial real estate loan
    transaction. This interim rule covers all real-estate related
    transactions except those for acquisition, development, and
    construction of real estate.
        The NCUA Examiner's Guide was amended to include a COVID-19
    chapter, which serves as a central source of guidance for
    examiners as they continue to work with credit unions during
    this pandemic. This chapter contains guidance specific to
    provisions of the CARES Act and relief measures approved by the
    NCUA Board that relate to the agency's examination program.
        Through the NCUA's offsite examination stance, agency
    examiners are working to assist credit unions with the
    individual and unique challenges imposed by the COVID-19
    pandemic. NCUA examiners consider the circumstances each credit
    union is facing when reviewing an institution's financial and
    operational conditions. The Examiner's Guide reiterates the
    NCUA's position that examiners will not criticize a credit
    union's prudent relief for members, provided it is conducted in
    a reasonable manner with proper controls and management
    oversight.
                                    ------

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

    Impact of Pandemic on Regulatory Asset Thresholds
    Q.1. During the pandemic, because of participation in the
    Paycheck Protection Program, EIDL, EIP, USDA emergency
    programs, and others--as Chairman Crapo and Senator Toomey
    highlighted during the hearing--a number of financial
    institutions have grown to new regulatory thresholds, and for
    many this will be temporary.
        I'm very proud of the work that community banks and credit
    unions in Montana have done to help their communities during
    this health and economic crisis, particularly the effort it has
    taken to make the Paycheck Protection Program work despite many
    challenges. I am concerned though that these community
    financial institutions will face unnecessary consequences from
    these important programs and may be unable to participate in
    future rounds of these stimulus programs.
        Thank you to you all for your focus on the disproportionate
    impact that these increased assets have on smaller
    institutions. This is a problem I'm hearing about directly from
    Montanans, and like you we've seen that these pandemic-related
    assets have a more significant impact the smaller a bank is.
    Especially for these smaller banks, the problems with increased
    pandemic-related assets are not limited to PPP.
        I know that this is something all of your agencies are
    looking into and some have taken action on. I appreciated
    hearing your answers to the Chairman's question, and I look
    forward to continuing to work with you all on this issue.
        What can your agencies do to ensure financial institutions
    are not punished for participating in these programs while also
    maintaining the safety and soundness of the system?

    A.1. I strongly support credit unions' efforts to assist their
    members through the use of various governmental programs
    intended for relief, especially during this pandemic. In
    response to the pandemic, and as a result of the CARES Act, the
    NCUA Board
    approved several measures to support credit unions by providing
    flexibility in regulatory asset thresholds.
        In April 2020, the NCUA Board approved an interim final
    rule that amended the NCUA's capital adequacy (NCUA regulation
    part 702, Capital Adequacy, https://www.ecfr.gov/current/title-
    12/chapter-VII/subchapter-A/part-702?toc=1), and member
    business loans and commercial lending (NCUA regulation part
    723, Member Business Loans; Commercial Lending, https://
    www.ecfr.gov/current/title-12/chapter-VII/subchapter-A/part-
    723) regulations following the creation of the SBA's Paycheck
    Protection Program.
        Under the interim final rule, the NCUA's capital adequacy
    regulation was amended to assign covered PPP loans a zero-
    percent risk weight in the agency's risk-based net worth
    requirements. In addition, for the purposes of calculating a
    federally insured credit union FICU's net worth PPP loan
    pledged as collateral for a nonrecourse loan provided through
    the Federal Reserve System's PPP Lending Facility can be
    excluded from the FICU's calculation of total assets.
        In May 2020, the NCUA Board approved an interim final rule
    that made two temporary changes to the NCUA's prompt corrective
    action (PCA) regulation (NCUA regulation part 702, Capital
    Adequacy) that provides relief to credit unions that
    temporarily fall below well capitalized.
        The first change temporarily reduced the earnings retention
    requirement to zero for credit unions classified as adequately
    capitalized. PCA establishes the earnings retention requirement
    applicable to FICUs that are not well capitalized. This annual
    earnings retention requirement is a net worth amount equal to
    not less than 0.4 percent of their total assets. The NCUA Board
    used its authority to reduce the earnings retention requirement
    to ease the regulatory burden while maintaining safety in the
    system. The terms of the earnings retention requirement were
    issued in a separate administrative order in June 2020.
        The second temporary change affects credit unions that
    experience a decline in their net worth ratio predominantly due
    to share growth. For these credit unions, the NCUA Board will
    temporarily permit the submission of a streamlined Net Worth
    Restoration Plan (NWRP). The streamlined NWRP must attest that:

      (1) LThe reduction in the credit union's net worth ratio to
            an undercapitalized (has a net worth ratio of 4 percent
            to 5.99 percent) classification was predominantly
            caused by share growth; and

      (2) LSuch share growth is a temporary condition caused by
            COVID-19.

        In these cases, the FICU may submit a simplified NWRP
    noting that the FICU fell into the undercapitalized category
    because of share growth. If a credit union poses an undue risk
    to the Share Insurance Fund or exhibits material safety and
    soundness concerns, a formal earnings transfer waiver request
    may be required.
        The NCUA is required by statute to assess Share Insurance
    Fund premiums based on a credit union's insured shares, not
    total assets. For this reason, there are several key regulatory
    measures that are not impacted by PPP loans, such as premiums
    or capitalization. Additionally, it is important to note that
    federally insured, State-chartered credit unions are not
    assessed an annual operating fee by the NCUA.

    Q.2. Can you do this all on your own or are there areas that
    require action from Congress?

    A.2. I have met with Members of Congress to discuss the
    importance of the CARES Act provisions and the need for
    extensions during the COVID-19 pandemic. I thank Congress for
    extending the CLF and TDR CARES Act provisions in the
    Consolidated Appropriations Act, 2021. These provisions,
    described below, are vital to ensuring recovery during the
    pandemic.
        In April 2020, the NCUA Board approved an interim final
    rule that amended its CLF regulation (NCUA regulation part 725,
    National Credit Union Administration Central Liquidity
    Facility, https://www.ecfr.gov/current/title-12/chapter-VII/
    subchapter-A/part-725). The interim final rule provides credit
    unions greater access to liquidity to help credit unions remain
    operational throughout the crisis, makes it easier and more
    attractive for credit unions to join the CLF, and it includes
    several amendments to conform to the CARES Act. This rulemaking
    is set to expire on December 31, 2021. The Board is unable to
    extend this regulatory relief beyond what is included in the
    CARES Act and lengthened in the Consolidated Appropriations
    Act, 2021.
        The statutory changes made by the CARES Act to the NCUA's
    CLF also provide credit unions with essential liquidity
    protection. As of December 4, 2020, the facility's borrowing
    authority stands at $32.8 billion--an increase of $22.3 billion
    since April--a direct result of the CARES Act. In total, 4,145
    credit unions (or 80 percent) of all federally insured credit
    unions now have access to the CLF. Section 4016 of the CARES
    Act increased the maximum legal borrowing authority from 12 to
    16 times the subscribed capital stock and provides CLF access
    to members of corporate credit unions.
        The TDR provision in the CARES Act (Section 4013) has given
    credit unions additional flexibility to offer better workouts
    for borrowers experiencing difficulties than they could
    normally offer. As of September 2020, call reports show the
    industry is increasing their allowance accounts in anticipation
    of future loan losses. These improved loan arrangements have
    proven to be critical for countless borrowers who have lost
    income due to the COVID-19 pandemic.
    Impact of Pandemic on Safety and Soundness
    Q.3. This pandemic has had significant impacts on our economy
    and communities throughout the country.
        As you continue examinations, what impact are you seeing
    these factors have on the banks and credit unions you regulate?

    A.3. The pandemic is affecting credit unions and their members
    to varying degrees. The credit union industry has a long
    history of
    assisting their members in times of need and the NCUA continues
    to encourage credit unions to work with affected members. Like
    other industries, credit unions adapted to changing working and
    economic environments; they have adapted well, as credit unions
    are generally open and serving their members during the
    pandemic.
        Similar to the Great Recession, there was a flight to
    safety resulting in the credit union industry experiencing high
    share growth in 2020. Americans who have kept their jobs have
    increased their savings rates dramatically, and those who lost
    their jobs have been helped by income support from the CARES
    Act and the Consolidated Appropriations Act, 2021. Credit
    unions and other financial institutions have been entrusted
    with those savings. Over the last year, as shown in the NCUA
    Call Report data from September 30, 2019, and September 30,
    2020, shares have grown nearly 26 percent and, as can be
    expected, assets grew by almost 20 percent. As a result, many
    credit unions saw a decline in their net worth ratio as asset
    growth outpaced net worth growth. The credit union industry saw
    a decline in net worth over the past year from 11.39 percent as
    of September 30, 2019, to 10.44 percent as of September 30,
    2020. The industry as a whole, however, remains well
    capitalized and strong.
        As credit unions continue to work with members, their
    strategic plans are changing. Credit unions are preparing for
    lower earnings resulting from low interest rates and higher
    provision for loan losses in response to credit issues. A
    significant share of auto and mortgage loans went into
    forbearance at the start of the crisis and many borrowers are
    still in this status. With elevated unemployment rates and the
    sharp impacts of the crisis on specific industries (for
    example, leisure and hospitality), the pandemic is affecting
    credit union members throughout the country and thus has
    increased credit risk.
        Going forward, the industry will face not just increased
    credit risk, but will also have to deal with the prospect of
    compressed margins. When interest rates decline, as they have
    since February, there is a tendency for net interest margins
    (NIMs) to shrink. Although a downward trend in credit union
    NIMs has been evident for several decades, with historically
    low interest rates and little likelihood that they will rise
    materially anytime soon, credit unions are likely to find
    shrinking NIMs are a significant challenge. Additionally, as
    with banks, credit unions are offering relief to their members
    in the form of loan forbearance, which reduces earnings as the
    inflow of loan payments decreases during forbearance.

    Q.4. Is this impact different on smaller, community
    institutions?

    A.4. In general, credit unions tend to be relatively small
    institutions. The vast majority have less than $1 billion in
    assets and all but a handful have less than $10 billion in
    assets. Accordingly, the NCUA is nuanced when describing
    effects for credit unions of different sizes; by an absolute
    standard, almost all of our regulated institutions are modest
    in size.
        In some ways, the impact of the pandemic on smaller credit
    unions (under $50 million in assets) can be more severe than
    larger institutions. For example, a smaller credit union may
    find it more difficult to serve remote members if they haven't
    invested in the latest technology. Smaller credit unions
    frequently serve a field of membership that is concentrated in
    one employer or industry. In relative terms, however, there are
    moderate increases in assets and shares among our smaller
    credit unions. Assets and shares have grown materially
    throughout the system, but larger credit unions have expanded
    their balance sheets the most.
        It is still too early to make a reliable determination
    about whether credit risk at smaller credit unions has
    increased or decreased. Also, many other factors will affect a
    credit union's credit risk profile through the course of this
    crisis. Given the uneven effects of the crisis, much will
    depend on a credit union's field of membership, geographic
    footprint, and loan portfolio.
        Large and small credit unions alike have seen their
    interest margins shrink. The latest data suggest that smaller
    credit unions may have seen slightly larger declines, but
    smaller credit unions tended to have higher interest margins
    prior to the crisis. It is difficult to predict whether the
    difference between interest margins at small and large credit
    unions will continue to shrink in the coming quarters. As of
    September 30, 2020, small credit unions remain strong and well
    capitalized (97 percent) with a net worth of approximately 16
    percent, a slight decline from approximately 17 percent as of
    September 30, 2019. The reason for the decline is similar to
    the rest of the credit union industry--asset growth outpaced
    net worth growth, but to a smaller degree. Small credit unions
    also saw the impact of a flight to safety as shares grew in
    small credit unions by approximately 8 percent.
    Risks in Financial System:
    Q.5. For the past 8 months, much of everyone's focus has been
    on the health and economic crisis. But everything else hasn't
    stopped because of the coronavirus, even if at times it feels
    that way.
        Are there trends that you are seeing or problems you are
    concerned about that we aren't focused enough on during the
    pandemic?

    A.5. The NCUA continues to focus on its top pandemic-related
    priorities:

      (1) Lthe health and safety of NCUA staff and contractors;

      (2) Lthe impact on credit union operations; and

      (3) Lthe impact on credit unions' financial condition.

        In March 2020, the agency successfully transitioned to an
    offsite stance, enabling us to reduce the risk to staff while
    still performing our mission and essential functions.
    Additionally, the NCUA provided credit unions with guidance on
    operating during the pandemic and implemented regulatory relief
    where feasible.
        Throughout the pandemic, in particular, increased telework
    and heavy leverage of information technology to support remote
    operations has increased cybersecurity risks, both in the
    broader financial services sector and in the credit union
    industry. Indeed, the NCUA has seen an increase in fraudulent
    activity, such as phishing, identity theft, and ransomware. In
    partnership with the Treasury Department, the FBI, and other
    agencies, the NCUA issued an August 2020 guidance letter that
    updated credit unions about the fraud risks associated with
    operations under COVID-19. The agency continues to monitor
    developments in these areas.
        While the anticipated adverse financial trends of COVID-19
    have not yet fully materialized, the NCUA is also monitoring
    credit unions' cash, liquidity, loan delinquencies, loan
    losses, and loan forbearance programs. The agency has analyzed
    a range of outcomes and their impact on credit unions' net
    worth and the impact on the Share Insurance Fund to anticipate
    and prepare for a range of potential outcomes.
    Post-Pandemic Economy
    Q.6. As the pandemic continues our economy continues to suffer,
    and I am concerned that we will have another slow, uneven
    recovery like we saw after the most recent economic crisis. A
    concern I know many here share.
        What are your top priorities to make sure that that doesn't
    happen?

    A.6. I have been working diligently on a number of fronts to
    mitigate the impact that this pandemic has had on credit unions
    and their members, particularly those from underserved and
    lower-income communities. A good example is the recent Letter
    to Credit Unions 21-FCU-03, Underserved Area Expansions,
    https://ncua.gov/regulation-supervision/letters-credit-unions-
    other-guidance/underserved-area-expansions-0. The credit union
    industry has a long history of assisting its member-owners in
    times of need, as we are experiencing right now. The NCUA
    supports credit unions' efforts to work with affected members.
    For example, a credit union may work with a borrower to extend
    the terms of repayment or otherwise restructure the borrower's
    debt obligations. Such efforts can ease pressures on troubled
    borrowers, improve their capacities to service debt, and
    strengthen a credit union's ability to collect on its loans.
        To reflect the agency's response to the economic conditions
    that emerged in response to the COVID-19 pandemic, as well as
    various statutory and regulatory changes that occurred since
    March 2020, the NCUA updated its 2020 supervisory priorities in
    July 2020 in Letter to Credit Unions 20-CU-22, Update to NCUA's
    2020 Supervisory Priorities, https://ncua.gov/regulation-
    supervision/letters-credit-unions-other-guidance/update-ncuas-
    2020-supervisory-priorities. The update to the NCUA's
    supervisory priorities focused supervisory attention on:

       LConsumer financial protection based on the
            potential for increased consumer compliance risk
            resulting from the COVID-19 pandemic's impact on
            consumers;

       LCompliance with the applicable provisions outlined
            in the CARES Act;

       LCredit risk management and allowance for loan and
            lease losses reviews in response to delays in the FASB
            requirement to comply with CECL;

       LLiquidity risk reviews in light of the COVID-19
            economic impact; and

       LInformation systems and assurance reviews using the
            newly deployed InTREx-CU tool. The InTREx-CU is a newly
            deployed security tool to aid examiners and credit
            unions in finding and mitigating potential information
            security risks and program deficiencies.

        The NCUA also provides grants and loans through the
    Community Development Revolving Loan Fund (CDRLF) program,
    which helps low-income-designated credit unions provide basic
    financial services to their members and stimulate economic
    activity in their communities. Early on in the pandemic, the
    NCUA committed the majority of its 2020 CDRLF allocation to
    COVID-19 assistance. The agency awarded $3.7 million in grants
    and no-interest loans to 162 low-income credit unions to help
    them better serve their members and communities during the
    pandemic. Forty-eight of the credit unions receiving this
    assistance were Minority Depository Institutions (MDIs). Some
    of the funding took the form of rental, mortgage, and utility
    payment assistance to members, such as entrepreneurs, small
    business owners, and hospitality/service industry employees.
        Looking forward, I believe that efforts to promote
    financial inclusion will be paramount in ensuring that our
    economic recovery is broad and evenly shared. At its core,
    financial inclusion means expanding access to safe and
    affordable financial services for unbanked and underserved
    people and communities, as well as broadening employment and
    business opportunities. In short, these Americans are most at
    risk of being left behind in an economic recovery. Throughout
    my tenure, I have encouraged the NCUA to identify new and
    innovative ways to bring more Americans into the financial
    mainstream. To this end, I am pleased to report that the agency
    launched a new initiative in October called ACCESS, or
    Advancing Communities through Credit, Education, Stability, &
    Support, https://ncua.gov/support-services/access. Comprised of
    representatives from across the agency, this initiative will
    refresh and modernize regulations, policies, and programs that
    support financial inclusion within the agency and, more
    broadly, throughout the credit union system. I often note that
    credit unions have a strong emphasis on service to their
    members--one that is captured in the industry's ``people
    helping people'' ethos--which is exactly the mindset needed in
    the coming recovery.

    Q.7. What more should Congress be doing to address the long-
    term implications of this crisis?

    A.7. I believe Congress should focus on providing programs that
    alleviate the impact of the pandemic, such as the PPP and
    mortgage loan forbearance. Additionally, Congress should focus
    on ways to shorten the duration of the pandemic and get the
    economy back to normal by developing programs and protocols
    designed to provide a safe public and work environment.
        I want to thank Congress for extending two important
    provisions of the CARES Act in the recent Consolidated
    Appropriations Act, 2021. First, the statutory changes made by
    Section 4016 of the CARES Act to the NCUA CLF provided credit
    unions with essential liquidity protection. As of December 4,
    2020, the facility's borrowing authority stands at $32.8
    billion--an increase of $22.3 billion since April--a direct
    result of the CARES Act. In total, 4,145 credit unions (or 80
    percent) of all federally insured credit unions now have access
    to the CLF. Section 4016 of the CARES Act increased the maximum
    legal borrowing authority from 12 to 16 times the subscribed
    capital stock and provides CLF access to members of corporate
    credit unions.
        Second, with the additional flexibility provided by the TDR
    language (Section 4013 of the CARES Act), 2,363 federally
    insured credit unions were able to make 1.7 million CARES Act
    forbearances totaling $55 billion. In addition, credit unions
    have extended non-CARES Act loan modifications to their member-
    owners who experienced financial difficulties. The NCUA
    continues to encourage credit unions to make loan modifications
    to help those impacted by the pandemic.
    Rural Branches
    Q.8. I have long been concerned about consolidation among
    financial institutions. It's hard for small communities to
    survive without a post office and a bank or credit union
    branch.
        Has the coronavirus pandemic changed trends you have been
    seeing in recent years around the closure of branches? Or
    mergers and acquisitions?

    A.8. Addressing the needs of rural and smaller, potentially
    underserved communities is a passion of mine. I am a proud,
    native North Carolinian, where over one-third of the population
    lives in rural areas, and I have strong family ties to rural
    America. As you note, the trend of consolidation among
    financial institutions is a long-running trend. The credit
    union industry has not been immune from that trend,
    particularly smaller credit unions. Consolidations and mergers
    can have a disproportionately negative impact on smaller
    communities, as witnessed by the trend of many financial
    institutions, particularly banks, pulling out of rural America
    in the past few decades.
        With their historical grounding as a comprehensive, member-
    owned system of affordable financial services for underserved
    groups, I believe that credit unions play an important role in
    maintaining a strong presence in smaller communities to support
    their economic development and access to capital. At the NCUA,
    I have worked to put the industry in a stronger position to do
    just that. In July, for instance, the NCUA Board unanimously
    approved a final rule (https://ncua.gov/files/agenda-items/
    AG20200730Item
    1b.pdf) that would help facilitate greater access to safe and
    affordable financial services by changing the agency's
    chartering and field-of-membership regulations for community
    charter approvals, expansions, or conversions. This rule will
    help maintain and expand financial access to more Americans in
    smaller and underserved communities.
        Early on in the pandemic, the NCUA committed the majority
    of its 2020 CDRLF allocation to COVID-19 assistance. The NCUA
    awarded $3.7 million in grants and no-interest loans to 162
    low-income credit unions in 40 States and the District of
    Columbia this year to help the industry better serve its
    members and communities, mostly rural and underserved. Forty-
    eight of the credit unions receiving this assistance were MDIs.
        As we are still amidst the pandemic, it is difficult to
    state definitively how the crisis may be impacting branch
    closures or mergers and acquisitions. I have received some
    early indications that credit union merger activity could
    increase, but the extent and durability of any such trend
    remains unknown. In recent years, I have seen an increasing
    trend in the number of branch closings in smaller credit
    unions--this trend continued in 2020. The rural area branch
    trends of all federally insured credit unions, however, are
    generally consistent with urban area branches, with growth in
    rural area branches outpacing growth in urban areas in recent
    months.
        The changes in branch count by credit union asset size,
    however, shows there is a higher number of branch closures in
    smaller credit unions than in larger credit unions. During
    2020, the trends also show an increase in the number of branch
    closures in credit unions with less than $100 million in assets
    and in credit unions with assets of $250 million-$500 million.
        While the number of credit unions closing branches has
    increased for some asset sizes during 2020, the number of
    credit union branches located in rural areas has actually
    improved over the last 18 months--increasing from 4,852 at the
    end of the first quarter of 2019 to 4,900 at the end of the
    third quarter of 2020.
        Compared to prior years, the trends in credit union
    consolidation--consisting of mergers, liquidations, and
    purchases and assumptions--slowed during 2020. While the
    pandemic has likely impacted credit unions already experiencing
    operating challenges, the pandemic has not dramatically
    increased the number of consolidations. In 2017, there were 202
    credit union mergers, compared to 2020 when there were an
    estimated 105 mergers.

    Q.9. Is there more that should be done legislatively or through
    regulation to address branch closures?

    A.9. The consolidations and branch closures do not appear to
    have had a negative impact on rural area credit union branches.
    The trends actually support some growth in credit union
    branches located in rural communities over the past 18 months.
    Currently, credit unions are required to notify the NCUA of
    closures in conjunction with a merger. Further, a merging
    credit union is required to obtain an affirmative vote from its
    membership prior to merger. Membership notification in this
    instance includes a list of continuing credit union branch
    service locations, so members are aware of any proposed changes
    in the branch structure prior to voting to merge. The
    continuing credit union is also required to identify
    alternative means of service to members when closing a branch
    in conjunction with a merger.
        The NCUA acts to minimize interruption in services to
    members in accordance with the Federal Credit Union Act;
    however, it does not have any further regulatory requirements
    pertaining to a credit union's decision to close a branch.
        As noted, there are a number of valid reasons for closing a
    branch, and many of them involve normal operating decisions and
    cost structure analysis.
                                    ------

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

    Q.1. Do you pledge to work with President-elect Biden's team to
    ensure an orderly transition to a new Administration?

    A.1. Yes. The NCUA has collaborated with the President-elect's
    transition team since November 2020 following ascertainment.

    Q.2. Have you established office space within your agency for
    the President-elect's transition team?

    A.2. Yes. The agency will provide office space within the
    agency for the transition team, if requested.

    Q.3. Have you prepared briefing books for the President-elect's
    transition team that includes all relevant information they
    will need to know?

    A.3. Yes. All relevant briefing information has been provided
    to the transition team.

    Q.4. Previously, you stated that the NCUA would consider TDR on
    a case-by-case basis. What has been the demand by credit unions
    for lower capital requirements due to delinquent loans?

    A.4. The NCUA will continue to work with the other banking
    regulators to issue TDR guidance as needed and in accordance
    with Generally Accepted Accounting Principles (GAAP). The NCUA
    has not received requests to lower capital requirements due to
    delinquent loans. As of September 30, 2020, the delinquency
    ratio for federally insured credit unions remains low at 0.55
    percent.

    Q.5. Will your agency update the interagency guidance regarding
    Troubled Debt Restructuring to allow these COVID-19 loan
    modifications to extend beyond 6 months? Would loans with terms
    beyond 6 months still fall within the TDR authority?

    A.5. The Interagency Statement on Loan Modifications and
    Reporting for Financial Institutions Working with Customers
    Affected by the Coronavirus (Revised) published on April 7,
    2020, (https://www.ncua.gov/files/press-releases-news/
    interagency-statement-tdr-policy-revised.pdf), is still
    relevant and can be applied to modifications during 2021. This
    guidance states that subsequent modifications should be viewed
    in totality in determining if the additional modification is a
    TDR. The agencies, in consultation with the FASB, have stated
    short-term modifications (less than 6 months) are generally not
    considered a TDR. In particular, the guidance explains the
    requirements for a modification to be considered as a TDR and
    what should be done in the cases of loan modifications that are
    not considered to be TDRs. Any change to current GAAP would
    require FASB to make that change.
                                    ------

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

    Q.1. As you know, the commercial real estate (CRE) market is
    under extreme pressure due to this pandemic. Collapse of this
    market would be disastrous to Arizona communities. In April,
    the regulators released the ``Interagency Statement on Loan
    Modifications and Reporting for Financial Institutions Working
    with Customers Affected by the Coronavirus.'' This guidance
    allowed financial institutions to modify existing CRE loans
    impacted by the coronavirus. While this guidance was helpful
    and much-needed, it now requires updating. Are there plans to
    update this guidance to allow these COVID loan modifications to
    extend beyond 6 months?

    A.1. The Interagency Statement on Loan Modifications and
    Reporting for Financial Institutions Working with Customers
    Affected by the Coronavirus (Revised), (https://www.ncua.gov/
    files/press-releases-news/interagency-statement-tdr-policy-
    revised.pdf), is still relevant and can be applied to
    modifications during 2021. Nothing in the guidance precludes a
    financial institution from modifying a loan term beyond 6
    months.

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