[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
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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
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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\
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\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.
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------
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.
---------------------------------------------------------------------------
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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.
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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.
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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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