[Senate Hearing 117-337]
[From the U.S. Government Publishing Office]
S. Hrg. 117-337
NOMINATIONS OF LAEL BRAINARD AND SANDRA THOMPSON
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
NOMINATIONS OF:
LAEL BRAINARD, OF THE DISTRICT OF COLUMBIA, TO BE VICE CHAIRMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
__________
SANDRA THOMPSON, OF MARYLAND, TO BE DIRECTOR OF THE FEDERAL HOUSING
FINANCE AGENCY
__________
JANUARY 13, 2022
__________
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
48-297 PDF WASHINGTON : 2022
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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THURSDAY, JANUARY 13, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 45
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 46
NOMINEES
Lael Brainard, of the District of Columbia, to be Vice Chairman
of the Board of Governors of the Federal Reserve System........ 6
Prepared statement........................................... 48
Biographical sketch of nominee............................... 49
Responses to written questions of:
Chairman Brown........................................... 83
Senator Toomey........................................... 86
Senator Menendez......................................... 105
Senator Warnock.......................................... 106
Senator Rounds........................................... 111
Senator Tillis........................................... 112
Senator Daines........................................... 113
Sandra Thompson, of Maryland, to be Director of the Federal
Housing Finance Agency......................................... 7
Prepared statement........................................... 67
Biographical sketch of nominee............................... 68
Responses to written questions of:
Chairman Brown........................................... 114
Senator Toomey........................................... 116
Senator Menendez......................................... 134
Senator Sinema........................................... 135
Senator Warnock.......................................... 137
Senator Scott............................................ 139
Senator Tillis........................................... 142
Senator Hagerty.......................................... 145
Senator Daines........................................... 145
Additional Material Supplied for the Record
Letter submitted in support of nominee Lael Brainard............. 152
(iii)
NOMINATIONS OF LAEL BRAINARD AND SANDRA THOMPSON
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THURSDAY, JANUARY 13, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex and in room 106,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
Today's hearing again is a hybrid format. Our witnesses are
in person, as we see, but Members have the option to appear
both in person or virtually.
We consider the nominations of two highly qualified
nominees today, Dr. Lael Brainard to be Vice Chair of the Board
of Governors of the Federal Reserve System, and Acting Director
Sandra Thompson to be Director of the Federal Housing Finance
Agency.
It is amazing what a difference a year makes. We have today
safe and effective vaccines that are saving lives and getting
people back to work--207 million Americans are now fully
vaccinated.
Our economy has weathered the storm and rebounded. In 2021,
we added a record 6.4 million new jobs, more than any year
since 1939.
And it is not just the jobs numbers. It is the quality of
those jobs. Workers are demanding raises and they are finally
getting them. They are changing jobs at record rates because
people finally have some options.
The past year has illustrated how our economy works best,
when it works for everyone. Not just Wall Street. Not just the
top 1 percent. Everyone. Whether you punch a clock or swipe a
badge, whether you earn a salary or make tips. Whether you are
raising children or caring for an aging parent. No matter who
you are, where you live, or what kind of work you do.
Economic growth will not mean much if it does not reach all
workers--families in Steubenville and Scranton and communities
of all sizes, all over the country.
The President has nominated Dr. Brainard and Acting
Director Thompson to important roles in our Government and our
economy, to put those workers and their families at the center
of our Government and the center of our economy, to deliver
results that actually improve their lives.
Dr. Brainard is a leading economist who understands that a
strong economy is one where workers have power. She is
committed to a worker-centered monetary policy that boosts
employment and lifts wages, something that every member of the
Fed's rate-setting committee has reaffirmed. She has led the
way in modernizing and strengthening the Community Reinvestment
Act, something that Senator Warner has been particularly
interested in, a landmark civil rights law passed to begin to
undo the shameful legacy of redlining and lending
discrimination, and spur investment in all neighborhoods and
communities.
Through her leadership, the Fed listened to the people
whose lives and livelihoods are affected--civil rights leaders,
affordable housing advocates, local officials, and banks of all
sizes. She brought everyone to the table and she is working to
ensure banks meet the needs of all our communities. During this
pandemic, she has served as a steady hand, working shoulder to
shoulder with Chair Powell to stabilize our economy and steer
the country out of our abyss.
Dr. Brainard has a distinguished record of bipartisan
service in Government. She joined the Fed in 2014. From 2009 to
2013, she was Under Secretary for International Affairs at the
Department of Treasury. She worked in the first Bush
administration as a staff economist at the Council of Economic
Advisers and as deputy national economic adviser in the Clinton
administration. She was a professor at the Massachusetts
Institute of Technology.
As Vice Chair, she will be tasked with supporting efforts--
efforts that are already underway--to empower workers and
refocus our economy on Main Street, and make sure that all
Americans have good jobs with growing paychecks and an
affordable cost of living.
That also means supporting efforts to close the racial
wealth and income gaps that have barely shrunk in decades. As
the Fed has noted, quote, ``The average Black and Hispanic or
Latino households earn about half as much as the average White
household and own only about 15 to 20 percent as much net
wealth.'' As one of our colleagues once said, when we all do
better, we all do better.
With Governor Brainard as Vice Chair of the Fed, Americans
will have someone who understands that workers--not
corporations, not Wall Street--that workers create economic
growth. Her commitment to the success of all Americans, from
all walks of life and every region of the country, is clear in
all the work she has done throughout her distinguished career.
Acting Director Thompson has a similarly long and
distinguished career in public service. In her time as Acting
Director, she has taken meaningful steps to put renters,
homeowners, and families first.
Over the past 6 months, Acting Director Thompson has
directed the GSEs to strengthen their plans to preserve
affordable housing and support manufactured housing and housing
in rural areas; she has expanded opportunities for middle class
and low-income homeowners to save money on their mortgages
through refinancing; and she has increased the focus on fair
housing at the GSEs.
I can think of no other nominee as qualified to work to
make homes more available and affordable for families
throughout the country while strengthening the financial
standing of the GSEs.
More than two dozen consumer advocates, civil rights
organizations, and housing advocates have all written to this
Committee supporting her.
Before being designated as Acting Director in June 2021,
she served for 8 years as the Deputy Director for the Division
of Mission and Goals at FHFA. There she led an office
responsible for the mission activities of the GSEs and housing
and regulatory policy under directors of both parties to ensure
the safety and soundness of Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks.
Prior to joining FHFA, she spent 18 years at the FDIC,
where she worked for seven different chairpersons from each of
the political parties, and in senior-level positions, including
Director of the Division of Supervision and Consumer Protection
and the Director of the Division of Risk Management and
Supervision, helping to stabilize our Nation's banks.
Earlier in her career, she served at the Resolution Trust
Corporation, cleaning up and restoring faith in our financial
system after the savings and loan crisis. In a nutshell, you
can see how qualified she is.
She will be in a position at FHFA to tackle some of the
most pressing issues facing homeowners and renters to ensure
the stability of our housing finance system. Whether you are
looking to rent or to buy, housing had become too expensive and
too hard to find long before the pandemic began.
More than 50 years after passage of the Fair Housing Act,
people of color are far more likely to be denied a mortgage,
far less likely to own their own home, far more likely to pay
more in rent than they could afford. And in just the past week,
tragic fires in the Ranking Member's home State and in the
Bronx have reminded us of how far we need to go to ensure that
everyone has safe, affordable places to live.
FHFA has an important role to play in addressing these
challenges, and Acting Director Thompson has distinguished
herself as the person we need to lead this critical work.
These nominees, each of them understands the challenges our
economy faces. They understand the people who make our economy
work, like so many of this President's nominees. It is notable
that as we recover from a pandemic that laid bare just how hard
women especially work--at paid jobs in the labor market and at
unpaid jobs taking care of their families--we have two women
poised to take leading roles in our recovery.
I want to thank both nominees for their exceptional and
their lengthy years of commitment to public service.
Ranking Member Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman. Governor Brainard
and Ms. Thompson, welcome. You both have very extensive
experience in your respective fields, and I commend you both
for your commitment to public service.
Governor Brainard has been nominated to serve as Fed Vice
Chair. The Fed has been granted significant independence to
isolate it from political influence. However, Congress has
given the Fed very narrowly defined monetary and regulatory
missions.
First, the Fed has been tasked with conducting monetary
policy to promote stable prices and maximum employment. But the
Fed's recent actions have failed to maintain price stability.
Last year, Governor Brainard repeatedly insisted that
inflation was transitory. We have now had 9 consecutive months
where inflation has been more than two times the Fed's 2
percent target. That makes it pretty clear that inflation is
not transitory. Yesterday's CPI release of 7 percent, the
highest in 40 years, confirms that further.
Inflation is a tax that is eroding Americans' paychecks
every day. Even though wages are growing, inflation is growing
faster, and that is causing workers to fall further and further
behind.
I appreciate that the Fed has pivoted toward normalizing
monetary policy to tackle inflation, but the Fed also needs to
learn from its mistakes, and I think that begins with the Fed's
new monetary policy framework, of which Governor Brainard was
an author and an outspoken advocate. The framework really
subordinated the Fed's price stability mandate to try and
maximize employment by allowing inflation to run hot.
Under this approach, the Fed looked beyond employment as a
whole to consider whether employment was, quote, ``broad based
and inclusive,'' end quote. What this meant was the Fed would
sacrifice stable prices to see if it could achieve higher
employment gains in certain demographic groups.
As Governor Brainard explained last year, the Fed should
look at employment numbers on a, quote, ``disaggregated
basis,'' end quote, and use monetary policy to narrow
employment gaps between different, quote, ``racial and ethnic
groups,'' end quote. This framework risks keeping in place an
inflation tax on all Americans while the Fed decided which
subgroups of people should have faster job growth than others.
One of the problems is that monetary policy can never
equalize employment rates amongst different groups. In the end,
the Fed would run the risk of failing on both fronts of its
dual mandate because you need stable prices in order to achieve
a strong economy and maximum employment. Given this fact, the
Fed should reevaluate its new framework.
The Fed also has the mission of monitoring the safety and
soundness of certain major financial institutions. Under
Chairman Powell, the Fed enacted modest, sensible reforms that
reduced regulatory burdens and helped spur economic growth. But
Governor Brainard was the sole dissenter over 20 times on
regulatory matters, an unprecedented number at the Fed.
For example, she argued that the Fed's reforms of capital,
liquidity, and stress tests for smaller, less complex banks
would, quote, ``weaken the safeguards at the core of the
system,'' end quote. Yet though the economy nearly collapsed at
the start of the pandemic, the banking system emerged
exceptionally well-capitalized and served as a source of
strength for the economy, demonstrating the sensibility of
these reforms.
In addition to opposing these reforms, Governor Brainard
has urged the Fed to take an activist role on global warming,
which is beyond the Fed's expertise and mission. According to
the New York Times, she has, and I quote, ``endorsed the use of
supervisory guidance, the Fed's recommendations to banks, to
encourage financial institutions to curb their exposures,'' end
quote.
I am particularly concerned that she has advocated for the
Fed to shape environmental policy through so-called climate
scenario analysis. Not only does the Fed lack expertise in
environmental matters, but there is no reason to believe that
global warming poses a systemic risk to the financial system.
As I have noted before, we have not found a single bank
that has failed in the modern era due to a severe weather
event. There is a ``transition risk'' for banks associated with
global warming, but that is political and regulatory in nature.
It is the risk that unelected bureaucrats will attempt to
impair the value of energy-related assets by cutting off credit
to the energy sector.
This is not about whether climate change is a significant
threat to our society. It is about the fact that climate
policymaking requires tradeoffs between costs and benefits. And
these are inherently political decisions, which is why they
belong firmly in the domain of officials who are elected and
directly accountable to voters.
Now turning to Ms. Thompson, she has been nominated to
serve as the Director of the FHFA, where she has had a busy 6
months as Acting Director. In that time, she has proposed
reductions in capital requirements for Fannie Mae and Freddie
Mac, suspended restrictions on the GSEs' acquisitions of high-
risk loans, required the GSEs to develop plans to further what
Democrats call, quote, ``racial equity,'' end quote, but it
just really looks like affirmative action in the housing space,
and increased the GSEs' affordable housing goals.
Unfortunately, she has not prioritized ending the GSEs'
conservatorships.
I am concerned the Administration is seeking to use FHFA
and the GSEs to take on more risk for taxpayers and expand
affirmative action into housing. That makes Ms. Thompson's
nomination, notwithstanding her extensive experience, a
referendum on the Administration's radical housing policy.
This policy contemplates more mortgages for higher-risk
borrowers, repurposing the GSE as instrumentalities of social
policy, and a disappointing embrace of the failed GSE model. In
a break from decades of bipartisan housing finance reform
efforts, this Administration is using the power of the GSEs'
conservatorships to command and control a huge swath of the
American economy. And we are now asked to ratify this radical
housing policy, and to take ownership of the bailouts and
foreclosures that I am afraid are likely to follow. Especially
given where we might be in the housing cycle, we should be
reluctant to do so.
Mr. Chairman, I look forward to hearing from today's
nominees.
Chairman Brown. Thank you, Senator Toomey.
Would the witnesses please rise and raise your right hands.
Do you swear or affirm that the testimony you are about to
give is the truth, the whole truth, and nothing but the truth,
so help you God?
Ms. Brainard. I do.
Ms. Thompson. I do.
Chairman Brown. Do you agree to appear and testify before
any duly confirmed committee of the U.S. Senate?
Ms. Brainard. I do.
Ms. Thompson. I do.
Chairman Brown. Please be seated. Thank you.
Governor Brainard and Acting Director Thompson, welcome to
the Committee. If you would like to introduce family members or
friends in your testimony I invite you to do that, at the
beginning or whenever you want to.
Governor Brainard, please begin.
STATEMENT OF LAEL BRAINARD, OF THE DISTRICT OF COLUMBIA, TO BE
VICE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
Ms. Brainard. Chairman Brown, Ranking Member Toomey, and
other Members of the Committee, thank you for this opportunity
to appear before you. I am greatly honored to be nominated by
President Biden to serve as Vice Chair of the Board of
Governors of the Federal Reserve, and I am delighted to be here
alongside Acting Director Thompson. If confirmed to this
position, I look forward to continuing to work with Members of
this Committee.
We are seeing the strongest rebound in growth and decline
in unemployment of any recovery in the last five decades. Over
the past year, unemployment has fallen by 2.8 percentage
points, and growth is estimated to be around 5.5 percent,
according to a variety of private forecasts.
But inflation is too high, and working people around the
country are concerned about how far their paychecks will go.
Our monetary policy is focused on getting inflation back down
to 2 percent while sustaining a recovery that includes
everyone. This is our most important task.
When the pandemic struck in 2020, I worked closely
alongside Chair Powell, Secretary Mnuchin, and many others,
with the support of Congress, to calm financial market turmoil
and save American jobs and businesses. When markets stabilized,
I worked to responsibly wind down the emergency facilities that
were established, and today the economy is making welcome
progress, but the pandemic continues to pose challenges. Our
priority is to protect the gains we have made and support the
recovery.
Since 2014, as a member of the Federal Open Market
Committee, I have supported monetary policy that is responsive
to economic conditions as they evolve. Our approach helped
sustain the longest recovery on record with low inflation and
millions of jobs.
More broadly, I have worked to safeguard and grow our
economy during the Administrations of five Presidents from both
parties. I have worked on the U.S. policy response to every
major financial crisis over three decades. In some foreign
countries, I saw up close how high inflation hurts workers and
families, especially the most vulnerable.
I am committed to pursuing the Federal Reserve's
congressionally mandated goals of price stability and maximum
employment and to maintaining the strength and resilience of
our financial markets. I am committed to the independent and
nonpartisan status of the Federal Reserve.
If confirmed, I look forward to supporting Chair Powell in
carrying out the responsibilities assigned to the Federal
Reserve and in fostering transparent communication and
accountability to you and the American people, more broadly. I
will bring a considered and independent voice to our
deliberations, drawing on insights from working people,
businesses, financial institutions, and communities, large and
small, across the country.
Before closing, I want to thank my husband, Kurt, my
daughters, Caelan, Ciara, and Chloe, for their steadfast
support of my work. And I would like to commend the outstanding
efforts of the many individuals across the Federal Reserve
System who work so hard every day to serve the American public.
Senators, I thank you for your consideration and I look
forward to answering your questions. Thank you.
Chairman Brown. Thank you, Dr. Brainard.
Acting Director Thompson.
STATEMENT OF SANDRA THOMPSON, OF MARYLAND, TO BE DIRECTOR OF
THE FEDERAL HOUSING FINANCE AGENCY
Ms. Thompson. Chairman Brown, Ranking Member Toomey, and
Members of the Committee. I first want to thank President Biden
for nominating me to serve as the Director of the Federal
Housing Finance Agency (FHFA). It is the greatest honor of my
career to appear before you today.
Thank you to the Senators and the staff members with whom I
have met in advance of this hearing. If I am fortunate enough
to be confirmed, I look forward to working with all of you on
the important issues at FHFA.
I would like to introduce my sons, Jarrett and Aaron, who
are here with me today, and I would like to recognize and thank
my parents, Herman and Helen Lathan. While due to COVID
considerations they are not able to be here in person, the fact
that my parents are still alive to witness today's hearing is
very meaningful to me.
I was born and raised on the South Side of Chicago to my
extraordinary parents, who came to Chicago from Mississippi as
part of the Great Migration. My parents and family, along with
the Chicago Public School system, and my beloved Howard
University right here in Washington, taught me hard work,
dedication, determination, and perseverance. I would like to
specifically recognize the schools in Chicago that helped me
succeed: McDade Elementary School, Gillespie Junior High
School, and Lindblom Technical High School, all on the South
Side.
My nomination for Director of the FHFA is a great
privilege. I recognize that it is rare for a career public
servant to have the opportunity to lead a Federal agency, and,
as the first African-American woman nominated for this position
I appreciate the opportunity to demonstrate my expertise, good
judgment, and leadership in this position.
I am proud of the work we have done at FHFA in my 8 years
there. The agency plays a vital role in both promoting access
to mortgage credit nationwide and protecting the safety and
soundness of the housing finance system through our supervision
of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank
System.
Throughout my 40-year career, with experience in mortgage
markets and financial regulation at multiple agencies, I have
seen what it takes to lead a Federal agency and be effective in
that role. In my work at FDIC and FHFA, I have demonstrated
leadership, management ability, and an understanding of the
secondary mortgage markets and industry, a fair and balanced
perspective, and a strong belief in the importance of the
safety and soundness of America's financial institutions.
During my time in Federal financial institution regulation
I have witnessed and worked to end several financial crises.
These crises exposed some truths in housing finance. When I
served as the FDIC's head of supervision and consumer
protection throughout the 2008 financial crisis, I witnessed
firsthand the consequences of irresponsible lending when
hundreds of banks across the country were closed and a record
number of homes went into foreclosure. I saw how the borrowers
who received unsustainable loans and predatory loan products
were devastated in the downturn, and historically underserved
and disadvantaged communities were hit especially hard. Years
of progress in closing the home ownership and wealth gaps were
erased as a result. In fact, today the Black-White home
ownership gap is wider than it was in the 1960s, when lending
discrimination that was based on race was still legal.
As a financial regulator, I have long believed that safety
and soundness and access to credit are not mutually exclusive.
Broad, fair access, and the stability of financial institutions
work together as pillars of the Nation's housing finance
system. Indeed, sustainable access to credit requires
sustainable lending standards.
FHFA will continue to promote sustainable and equitable
access to credit in a safe and sound manner. We will
responsibly focus our efforts on the safety and soundness
mission Congress gave to the FHFA and on the mission that
Congress gave the housing GSEs under our supervision, providing
liquidity across the Nation and especially supporting
underserved markets like rural and tribal areas, manufactured
housing, and preserving affordable housing. If confirmed, it
would be an honor for me to serve as the FHFA Director, and I
will continue to be fair, balanced, and transparent.
Thank you for the opportunity to testify before you today,
and I am happy to answer any of your questions.
Chairman Brown. Thank you, Acting Director. I appreciate
both of you came in under your 5 minutes, and I ask you to
continue to be. Rarely do people do that, that are witnesses. I
ask you to continue to be brief.
I have two questions for each of you, so as briefly as you
can. Governor Brainard, I will start with you. Thank you for
your work during the pandemic. The Fed took extraordinary
action, as we know, to support the economy. Some of my
colleagues seem to have forgotten what a critical state our
economy was in when the pandemic first hit. Workers and small
businesses in this country certainly have not forgotten.
Why were those actions necessary, and did you support all
of them, Governor?
Ms. Brainard. Thanks for asking the question. So I worked
day in and day out, alongside Secretary Mnuchin at Treasury,
Chair Powell, Vice Chair Quarles, and other colleagues to stand
up the necessary facilities to calm financial markets. As you
no doubt recall, our financial markets were in turmoil as they
absorbed the news of the pandemic. A lot of workplaces had to
shut down because of the risk of infection before vaccines were
available, and millions of Americans overnight were placed on
layoff. And we really risked losing small businesses around the
country. We risked losing medium-sized businesses and the tens
of millions of Americans that those businesses employed.
And so I think due to the very important actions that
Congress took we worked closely with Treasury to make sure that
there was financing available for small banks and CDFIs and
MDIs to get loans to small businesses in communities around the
country. We worked to make sure that Main Street financing was
available. We made sure to ensure that financial market turmoil
was calmed, and we provided a lot of support to the economy.
And here we are, 2 years later, and we have regained all of
that massive loss of GDP. We have businesses that are thriving
around the country. People are back to work. So I was proud to
work on that alongside all of my colleagues. I did not disagree
with any of the actions that we took. In fact, I strongly
supported them and worked hard to make them work.
Chairman Brown. Thank you, Governor.
Acting Director, you know better than almost anyone how
critical it is that financial institutions have appropriate
capital to be transparent about their risk. What have you done
so far, and what more needs to be done to make sure GSEs have
the capital they need to continue providing access to housing
in good and bad times?
Ms. Thompson. Thank you for the question, Senator. I firmly
believe in the safety and soundness of the housing GSEs, Fannie
Mae and Freddie Mac specifically. They have just been allowed
to build capital and retain earnings, and we think that that is
very important.
One of the steps that we have taken is to encourage the use
of the credit risk transfer program which, as you well know,
Fannie Mae and Freddie Mac are the largest holders of mortgage
credit risk in the United States, I daresay the world. And one
of the things that we like to do is facilitate moving that
credit risk off the backs of the taxpayers and into the hands
of the private sector. And we believe that some of the changes
that we have made to the capital rule will help facilitate the
credit risk transfer program and move credit risk away from the
GSEs and the taxpayers and into the hands of private investors.
Chairman Brown. Thank you, Acting Director.
Dr. Brainard, second question for you. For the first time
in decades workers are starting to see a bit more power in our
economy--record job gains, record wage increases. We need to
continue that progress to catch up to all the costs that have
been rising for decades. You will work closely with Chair
Powell, if you are both confirmed, and oversee the Fed's
monetary policy.
How does the Fed's monetary policy framework allow us to
ensure we have stable prices and an economy where all workers
have a good job and reap the benefits of economic growth?
Ms. Brainard. So our monetary policy framework puts stable
prices and maximum employment on an equal footing, and I think
we are taking actions on the monetary policy front that I have
confidence will be brining inflation down while continuing to
allow the labor market to return to full strength over time. So
we are going to achieve that maximum sustainable employment
while we bring inflation down to 2 percent.
Chairman Brown. Thank you, Governor Brainard.
Last question, Acting Director Thompson. GSEs have reported
about 4 percent of their new mortgages over the past 2 years
went to Black borrowers and fewer than 11 percent went to
Latino borrowers. For refinanced loans the shares are even
lower. Compare that to FHA, which most recently reported that
17 percent of loans went to Black borrowers, and more than 25
percent to Latino borrowers.
What should GSEs do to make sure that they are serving
borrowers of color equally?
Ms. Thompson. Thank you for the question, Senator.
Certainly we believe that every American ought to have
sustainable and affordable housing and also places to live if
they are renters.
With regard to the Black ownership gap, one of the things
that we have done is we have asked the enterprises to come up
with some equitable housing plans, and they are supposed to
focus on and identify barriers that underserved communities,
particularly in communities of color, have as it relates to
getting a mortgage. They are supposed to identify barriers and
then come up with specific plans to execute the requirements
that they have developed.
We also have a focus, as you well know, on all underserved
communities, whether they are rural or tribal and other areas
around the country. But we think that these housing equity
plans will go a long way to help minority home ownerships in
underserved communities across the country have access to
mortgage credit.
Chairman Brown. Thank you, Acting Director. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. Governor Brainard,
thanks again for your continued willingness to continue in
public service. I know this is not always easy.
I was encouraged to hear you say that you are committed to
the independent and nonpartisan status of the Federal Reserve.
It is very important that Fed decisions on monetary and
regulatory policy are entirely free from political
interference.
So I think this is a simple yes or no question. Will you
commit to considering yourself independent from the White
House, regardless of which party occupies it?
Ms. Brainard. Yes.
Senator Toomey. Thank you. And will you commit to make your
decisions without regard to political or electoral
consequences?
Ms. Brainard. Yes.
Senator Toomey. Thank you. So I think you have acknowledged
the importance of the independence of the Fed, how crucial that
is for maintaining the trust and confidence of the American
people. In light of that, I wonder if you could tell me how you
view the coup by three men, including one who is serving on a
term that expired 3 years ago, that forced out Jelena
McWilliams, a well-respected regulator, from the once
independent FDIC.
Ms. Brainard. So I cannot speak to the FDIC. I can tell you
that I have enjoyed working with Jelena, continue to work with
her, Jelena McWilliams, Chair McWilliams, on issues such as
Community Reinvestment Act.
We have a very different institution and it is a very
collegial institution. It is nonpartisan. And I can tell you a
little bit about how I work in that institution, just to give
you a sense.
Senator Toomey. Well, I am very limited on time here so let
me just say, I know you commented on Jelena McWilliams, and I
appreciate that, and I do understand you to have had a good
working relationship with her. But I would suggest then and ask
you to reflect on what happened there, and I think it is
relevant.
The Fed, as you know, is also a multimember agency. It has
prided itself on operating free from political interference and
following norms of governance for many years. That used to
describe the FDIC, and unfortunately it does not anymore, and
there are people on the left and in this Administration who
want the Fed to become more political, to become advocates for
the causes and agenda that they support. And I have warned, and
I am concerned that the Fed's dalliance with those issues,
totally irrelevant to the dual mandate, will undermine the
Fed's credibility and threaten its independence, and I think
that is very important.
Let me move on to climate risk. As you know, the Fed has
consistently stated that there are two categories of climate-
related financial risk. The first is physical risks and the
second is transition risks. Now the actual data shows that
physical risk, that is actual severe weather events, do not
threaten financial stability. This week, Chairman Powell said
the possibility of financial stability disruptions from
physical risks, quote, ``doesn't seem likely in the near
term,'' end quote. Well that is obvious. There was a recent
report from the New York Fed that backs this up. According to
the report, weather disasters from the last quarter century had
insignificant or small effects on U.S. banks' performance.
So do you acknowledge that the likelihood of weather events
leading to systemic risk during your term as Fed Governor is
virtually zero, based on historical data?
Ms. Brainard. So to be honest, I think it is very important
for us just to understand potential implications of tail risks.
Tail risks are risks that have very, very low probability of
happening but have extreme damage. And, of course, I would not
have expected us to need to study pandemics 5 years ago either,
and yet a lot of our policymaking over the last 2 years has
been really under the cloud of a very complicated set of
economic conditions and financial risks associated with a
natural event.
So, you know, it is our job just to be very attentive to
potential risks to the financial system.
Senator Toomey. So here is my concern, and I am certainly
not alone in this. The actual evidence shows that there is no
real physical risk. The transition risk, though, is real, and
Chairman Powell explained the source of that. The source of
transition risk is really Government policy. And this is what
is concerning. There are lots of risks out there. There could
be a trade war with China. There could be geopolitical turmoil
coming from a Russian invasion of Ukraine. We could have the
Government engage in shutdowns again in response to a pandemic,
for instance.
Actually, I would argue each of those poses a greater risk
to the financial system than some sort of climate event, which
has never resulted in the failure of a major bank. But you have
not advocated doing stress tests around those other risks. The
only one I know of that you have advocated is stress tests for
the less likely risk, which is the climate-related risk. And
the concern that many of us have is that this whole construct,
unique to climate risk, even though it is really not a threat
certainly in the foreseeable future to the financial system, it
is all about a precursor for using the regulatory power of the
Fed to direct capital away from politically disfavored
industries.
So Sarah Bloom Raskin is, by some accounts, might be
President Biden's next nominee to be the Vice Chair for
Supervision. Now she has been explicit on this point, and she
has argued regarding the implementation of the CARES Act that
the Fed, and I quote, ``should not be directing money to
further entrench the carbon economy,'' end quote. So she is
explicitly advocated that the Fed allocate capital by denying
it to this disfavored sector.
And my question is, do you agree with Ms. Raskin that the
Fed should play that role?
Ms. Brainard. So let me just respond to your question,
Senator. Thanks for asking. I have not suggested that we should
do stress tests for climate. Stress tests are very specific.
They are related to the capital planning of large financial
institutions. We do actually include geoeconomics risks in
those stress tests, so we have included things like Brexit in
our stress tests. But I certainly have not stated that we
should do climate stress tests.
In terms of supervisory guidance, what we tend to do is ask
large institutions, in particular, ``Do you have a good risk
management framework for assessing all of your material
risks?'' We would not tell banks which sectors to lend to or
which sectors to not lend to, but we do want to make sure that
they are measuring, monitoring, and managing their material
risks, and many large financial institutions----
Senator Toomey. So then just to be clear then, you disagree
with Ms. Raskin on this point.
Ms. Brainard. So I honestly have not studied her positions,
and I would simply say I can speak to what we do in our
supervisory guidance. And, you know, it is pretty meat and
potatoes. It is very well known to the large institutions and
really not that different from what they are doing today.
The one thing I would also just want to clarify is I do not
think that is appropriate for small institutions. I think small
institutions do not have as big a footprint. I think, you know,
they will decide what their risks are. But I am really more
focused on the large institutions, who themselves come in to
tell us that they would like to have more consistent
expectations in this area across jurisdictions.
Senator Toomey. I have run out of time.
Chairman Brown. Thank you, Senator Toomey.
Senator Menendez, of New Jersey, is recognized.
Senator Menendez. Thank you. Governor Brainard, let me
first thank you for your leadership on reforming the Community
Reinvestment Act rule over the past several years. In the
middle of 2020, when the Trump administration was ramming a
flawed rule to the OCC, civil rights advocates, banks, and
other affected parties looked to you as a serious voice in the
room, and if confirmed, I have no doubt that you will continue
in that spirit. As we approach Dr. King's birthday
commemoration this coming week I think about this as one of the
essential elements of a move toward a more just society.
So let me first ask, during the past few years, as you were
engaging in that work, what did you hear from minority-led
organizations about the CRA changes needed to further
incentivize investments in minority communities who were
disproportionately impacted during the pandemic?
Ms. Brainard. Well thank you for your question, and yes, I
was very pleased that the Board unanimously put out an Advanced
Notice of Proposed Rulemaking that I think, you know, really
does provide a nice foundation for community groups and banks
to give us feedback on what would be some good modernization
measures.
So what we hear still from many communities around the
country is that they still do not have similar access to
credit. There are still barriers in terms of getting that
access. They really like having bank branches in their
neighborhoods, but particularly in rural areas that is not
always the case. And they want to be able to have more
interaction with financial institutions. They want minority
depository institutions and community development financial
institutions, which do tend to be very good at serving those
underserved communities, to be strengthened. And they just
really care deeply about the Community Reinvestment Act, as do
many banks.
Senator Menendez. So would you commit to making it a top
priority to work with the other regulators to issue a strong,
new rule in a timely fashion?
Ms. Brainard. I will certainly support that effort at the
Board and with the other regulators, yes.
Senator Menendez. OK. I appreciate that because minority
communities are hurting right now, and this needs to be a
priority. The pandemic has brought to light how severe the lack
of credit and investment dollars problems are for minority
small business owners, and I think it is past time for our
regulators to work together and issue updated and effective CRA
rule, so I look forward to your leadership.
Ms. Thompson, New Jersey is what I call a blue-chip State,
a State that spurs innovation and drives the Nation's economy.
According to U.S. News and World Report, New Jersey has the
second-best public school system in the country and the highest
per capita income in the country. In other words, we do a great
job of educating our kids and giving them the ability to reach
their potential. That is just not because New Jerseyans are
smarter than their fellow Americans, but it is because we
invest in our people.
So this is a State that is part of a region that generates
20 percent of GDP for the entire Nation, so we make money for
the Federal treasury. But as we met yesterday, and I
appreciated our visit, I explained how many New Jersey
homeowners are being hit with a one-two punch of rising flood
insurance rates, unfair cap on State and local tax deduction,
the oldest deduction in the Federal Internal Revenue Code, and
thanks to the Trump tax bill, which we are fighting to reverse
both of those bad policies.
But I want to make sure that as Director of the FHFA you
are sensitive to the concerns of homeowners, not just in New
Jersey but other high-cost States. Yes, we want to be fiscally
responsible to the entities, the GSAs that are under your
purview, but we cannot simply do it on the backs of those that
are actually generating revenue for the Federal treasury. Can
you comment on that?
Ms. Thompson. Sure, Senator, and thank you for the
question. Certainly we care very much about the high-cost
loans. As you know, last year we had a historic increase in
home prices, and that hit States that have high-cost areas
probably harder than most. One of the actions that we undertook
was to increase the fees for some of the higher-balance loans,
and that may unduly impact a number of counties across the
country. I think most of the country is not impacted, but there
are about 121 counties across the country that are.
Having said that, we do recognize that there is a
difference between buying a home in New Jersey versus buying a
home in Aiken, South Carolina. And we have excluded from this
fee first-time home buyers with area median incomes less than
100 percent, and we have also excluded our affordable products
so that there is no fee associated with first-time home buyers
who live in high-cost areas.
But we know that there is a huge affordability issue,
especially with first-time home buyers, and we did not want to
exacerbate that problem.
Senator Menendez. Thank you. Finally, Governor Brainard,
the Fed has a serious diversity problem, something I keep
pressing. I had it with Chairman Powell and I am compelled to
raise it with you as well. If you are confirmed, what steps are
you going to take to improve minority representation,
particularly Latino representation, which is among the worst of
the diversity that exists at the Federal Reserve?
Ms. Brainard. Well thank you for your question. So I think
the Federal Reserve was actually founded on a recognition of
the importance of bringing a diversity of perspectives to the
table. That is why we have 12 reserve banks all across the
country and we have branches in communities all across the
country. So we have regional diversity, we have always valued
sectoral diversity. It is very important to have different
kinds of backgrounds.
But we really have lagged on racial and ethnic diversity.
We are seeing some very important changes that we have worked
very hard on at the reserve banks in terms of the boards of
directors. If you look there at Latino representation it has
gone up threefold just in the last 4 years, and so now we have
about 25 percent of our Class C directors are Latino. We have
about a third that are Black, and we have now more than half
who are minorities of one sort or another. So we have made
progress there.
But in terms of actual leadership positions we have only
ever had one Black President. We have never had a Latino
President. And so, you know, that remains a very high priority.
Many of those boards have spent a great deal of time making
sure that we have more diverse pools of candidates and that our
procedures in hiring are as good as best practices everywhere.
And why? Because we know, as those who wrote the Federal
Reserve Act knew, is that having more diverse perspectives at
the table, diversity of every type, leads to less group think
and better outcomes.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Menendez.
Senator Rounds, of South Dakota, is recognized.
Senator Rounds. Thank you, Mr. Chairman. Let me begin by
saying thank you to both of you for your continued
participation in public service.
Ms. Thompson, in September, the FHFA, under your
leadership, proposed a capital framework which offers a
stronger incentive for the GSEs to create credit risk transfer,
or CRT, relative to the current capital regime. I think you
began and you visited a little bit about that with the Chairman
of the Committee here.
I would like to explore that a little bit more, because I
believe that this is a legitimate tool, and I am just curious,
can you share with me briefly your philosophy on the CRT and
how you might utilize it further, if confirmed?
Ms. Thompson. Sure. Thank you for the question, Senator. I
firmly believe that the credit risk transfer program is very
important for the enterprises. As I mentioned earlier, Fannie
and Freddie are the largest holders of mortgage credit risk in
the world, and right now Fannie and Freddie, they are able to
retain capital but they are not able to--they do not have
enough capital to withstand a severe event.
And so if something really, really bad happens, the event
will have to be paid for, once again, by the taxpayers, and it
is important for us to continue to encourage the credit risk
transfer program so that the taxpayers are not on the hook for
any extreme events and that private investors have to engage in
the credit risk decisions.
We just believe that it is critical for the enterprises,
especially while they are undercapitalized, to continue to
transfer credit risk away from the taxpayers and into the hands
of private investors.
Senator Rounds. Thank you.
Governor Brainard, first of all thank you for the meeting
the other evening in my office. I most certainly appreciated
our conversation. I think a number of the concerns that our
Ranking Member has shared with you, you have had an opportunity
to respond.
I am curious specifically on an item that you and I spoke
on very briefly but I would like to have a conversation here as
well, and I made a similar request like this to Chairman Powell
on Tuesday. I believe the adjustments to the supplementary
leverage ratio, or the SLR, are necessary in order to account
for the large influx of cash that has become challenging for
banks to manage. Would you be willing to work with my office to
look at ways to address the liquidity issues through the
calculation of the SLR?
Ms. Brainard. Yeah, well thank you, Senator, and I
certainly share that view that because of the need to respond
to the pandemic there are a lot more reserves in the system.
And I supported the removal of the reserves from the leverage
ratio for custodial banks, and I think it makes good sense to
look for ways, while keeping capital strong, to find a way to
adjust that supplemental leverage ratio because of the much
larger amount of reserves in the system.
Senator Rounds. Thank you.
Ms. Brainard. I do commit to working with you.
Senator Rounds. Thank you. Also, let's talk a little bit
about inflation. This is critical. We are at 7 percent right
now. The stated goal is 2 percent. We have 5 percentage
points--critical. I think in our discussion with Chairman
Powell he made it pretty clear that the Fed could manage the
demand side, and I think you would agree with that. Demand is
where you work at, not necessarily on the supply side. Fair
enough?
Ms. Brainard. Absolutely. I think over the medium term
inflation is a monetary phenomenon, and we have tools that
operate on the demand side.
Senator Rounds. OK. In order to move that back, and I know
that you have made it very clear that this is a critical
priority, how much of the inflationary trends that we see today
do you think you can actually manage with demand side policy
only?
Ms. Brainard. So I think, you know, we have a set of tools.
They are very effective and we will use them to bring inflation
back down. Sector to sector, there are microeconomic market
structure, other issues at work, supply disruptions at work.
That is not where our tools are effective. That lies elsewhere.
But we are committed to using the tools that we have to deal
with inflation, which is fundamentally a monetary phenomenon.
Senator Rounds. What I am trying to get at, and this is not
a gotcha question. My question really is, with inflation where
it is at we know it is both supply side and it is demand side.
But clearly there have been discussions, and clearly you have
research done as to how much of the inflationary trends that we
have are attributable to demand side policy. Can you share with
us what you believe the percentage, or at least the amount of
inflation would be attributable to demand side?
And the reason why I ask is because if you overreach or if
you do not do enough you are never going to get it down, but at
the same time with supply side--and we both recognize that you
cannot do much about supply side, and this is critical--the
price of gasoline is going up because we have got restrictions
on the availability of new gasoline being put into the system
and high demand for gas. But simply telling a consumer that the
price has gone up and so we are going to make it more
restrictive for you to buy it, they are still going to buy gas
because they have got to get to work.
So in this particular case, as we look at food prices going
up and we look at gasoline going up, the price of rents is
going to be going up, the price of housing is going up, how
much of that interest on inflation do you have the
responsibility, or should you be looking at in terms of the
demand side of the equation?
Chairman Brown. Governor, be as brief as you can in your
answer, please. Thanks.
Ms. Brainard. Well, I will certainly, just looking at
prices at the pump, prices at the grocery store, that is
clearly hurting Americans all over the country. That is about a
quarter of the very high inflation that we see. So I think you
are certainly right to focus in on those areas as particularly
difficult and very rooted in supply side constraints.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Tester, from Montana, is recognized from his
office.
Senator Tester. Well thank you, Chairman Brown, and I want
to thank Director Thompson and Governor Brainard for being here
today.
You know, Director Thompson, you said something in your
opening statement that is something we need to pay attention to
and that is the ownership gap today is wider than it was in the
1960s when discrimination was legal. This is a question for
you, but then if Governor Brainard wants to add to this I would
certainly like to hear her opinion too.
But what can you do about closing that ownership gap in the
position that you are going to be hopefully confirmed for?
Ms. Thompson. Thank you for the question, Senator. Access
to credit is really important especially in underserved
communities generally. And I mentioned earlier that we have
asked the enterprises to develop equitable housing plans that
focus on some of the inequities that have taken place. They are
supposed to identify barriers for underserved communities,
particularly Black and Brown communities, to engage in home
ownership. And we are looking over those plans now, and some of
them focus on education and making sure that opportunities are
available for people to understand what the home ownership
process is, how it works, what it does, and then if there are
other issues, like appraisals that come into play in terms of
bias that may or may not exist.
And we want to make sure that the enterprises are focused
on identifying barriers and focusing on coming up with plans to
address and identify those barriers, to really close the home
ownership gap. Because as you know, Senator, a home is the
greatest asset that most people own, and we believe that home
ownership will go a long way toward closing the racial equity
gap.
Senator Tester. Governor Brainard, would you like to
respond to that same question? What can you do in the position
that you are going in for to solve this ownership gap?
Ms. Brainard. Thanks for the question, Senator. So we are
well aware of that home ownership gap. We collect those
statistics, and it is has been very, very stubborn.
We do work with banks, trying to provide help and
incentives under the Community Reinvestment Act to increase the
supply of affordable housing, workplace housing. We know there
are shortages in all of the communities represented by Members
of this Committee. I have visited many of them.
And in particular we have community development financial
institutions who are very good at using LIHTC subsidies and
other subsidies together with bank financing, and that is
really where the Community Reinvestment Act comes in, to expand
the supply. We are looking also at naturally occurring
affordable housing. That is one of the questions we asked in
the CRA. Native CDFIs, for instance, are very good at working
on very particular issues affecting tribal nations. So getting
incentives for banks to partner with those institutions can
help on the margins.
Senator Tester. Thank you for that. I would also that--you
know this; I think you both know this--there is an incredible
supply problem out there across this country, which has caused
housing prices to go up. If you have any ideas, any
recommendations, about what Congress can do to help solve this
problem I would certainly love to hear them. I know the Build
Back Better proposal that may or not be going anywhere at this
moment in time had some housing initiatives in it, but I think
could have been positive if they were passed in the way that I
saw them, to solving some of the supply problems.
Governor Brainard, I want to continue with you for a
second. You and Chairman Powell have clearly worked pretty well
on a partnership during your time together at the Fed, and I
know this will continue. I gave Powell the opportunity to share
his view earlier this week and I want to give you the same.
I remember very clearly the pressure that President Trump
put on the Fed for his own political gain, not the well-being
of the economy, and I am grateful for you and your colleagues'
commitment to the independence that you maintained in the Fed
through that intensive pressure. So can you tell me briefly why
is this independence so very important?
Ms. Brainard. Well I think it is a long-established
tradition at the Federal Reserve, and, you know, it is
certainly important to be able to set monetary policy in a way
that is closely related to the goals that Congress set for us,
and we need to make judgments in the Committee free from
political pressures, and that is what we have been able to do
under the independence of the Fed, and it is important to keep
doing that. I will certainly continue to support Chair Powell
in that.
Senator Tester. Thank you both.
Chairman Brown. Thank you, Senator Tester.
Senator Kennedy, from Louisiana, is recognized.
Senator Kennedy. Thank you, Mr. Chairman. Governor,
Director, congratulations on your nominations.
Governor, I realize at the Federal Reserve that you have a
big staff that advises you on inflation. And based on their
track record my guess is they also advised people to buy condos
in Las Vegas in 2007. But you do not have to accept their
advice. So with respect to your predictions on inflation, how
did you get it so wrong?
Ms. Brainard. Well, Senator, thank you for----
Senator Kennedy. Could you move closer to the mic for me?
Ms. Brainard. Yes, of course. Thank you for your question,
Senator.
Senator Kennedy. You are welcome.
Ms. Brainard. So I think, you know, nobody got the pandemic
right. The pandemic is unprecedented.
Senator Kennedy. But I am asking you about inflation.
Ms. Brainard. Yeah. So I think as forecasters, private
forecasters, certainly the forecasters, the SEP, the whole
Committee, we thought that perhaps we would see a more rapid
resolution of the pandemic and the supply demand mismatches, in
particular cars----
Senator Kennedy. Excuse me for interrupting----
Ms. Brainard. ----energy----
Senator Kennedy. ----but I do not have much time. Are you
saying that inflation as caused by the pandemic?
Ms. Brainard. So we certainly have seen the perpetuation,
for instance, of the Delta variant leading to----
Senator Kennedy. Excuse me. But are you saying that
inflation is caused by the pandemic?
Ms. Brainard. I certainly think the supply demand
imbalances that have been the biggest contributors to the very
high inflation we have seen are directly attributable to supply
chain issues, distortions in demand.
Senator Kennedy. But here is what troubles me about that. I
will agree that inflation is spreading, but I do not see people
going around coughing inflation on each other. And I understand
supply chains matter, but so does the demand side, and so does
too much money chasing too few goods. And I do not think, and I
do not think any fair-minded person thinks that inflation is
solely the result of the pandemic.
Let me move on. Do you think that Federal regulatory
authorities should use their considerable power, not just the
Federal Reserve but Federal regulatory authorities, do you
think they should use their considerable power to discourage
private banks from lending money to oil and gas companies?
Ms. Brainard. No.
Senator Kennedy. Ma'am?
Ms. Brainard. No.
Senator Kennedy. OK. Do you think that those Federal
regulatory authorities should use their power to discourage
private banks from lending money to gun manufacturers and
dealers?
Ms. Brainard. It is not our job. We do not tell banks what
sectors to lend to. We just ask them to risk manage and we make
sure they have good processes----
Senator Kennedy. Well, I agree with you and I thank you for
that. Will you issue a statement to that effect, if you are
confirmed?
Ms. Brainard. Well I certainly have made that statement,
will continue to make that----
Senator Kennedy. Yes, ma'am, but would you issue a separate
statement saying, ``I want to make it clear, for what it is
worth, to all of my colleagues in Government, I do not think
that you should use your power to discourage private banks from
lending money to oil and gas companies and to gun
manufacturers''? Will you do that?
Ms. Brainard. Well I will not tell other regulators what to
do but I will be happy to talk about what we do at the Federal
Reserve, what our statutory authorities require us to do.
Senator Kennedy. OK. I am going to follow up with you on
that. OK?
Ms. Brainard. Senator.
Senator Kennedy. I take that as a yes, and I am looking
forward to that statement.
Director--gosh, this is America's debt. I am not going to
have time to ask you about it because I want to ask Director
Thompson a quick question. I mean, yes, Director Thompson.
Madam Director, are you familiar with President Biden's Risk
Rating 2.0 pricing scheme for the National Flood Insurance
Program?
Ms. Thompson. Sir, I am not familiar with the details of
that program.
Senator Kennedy. Well I need you to take a look at it. You
talked about affordability. President Biden is about to make
housing for at least 5 million Americans unaffordable, by
raising their flood insurance from $1,000 a year to $5,000 and
$6,000 a year, and you are going to have a problem.
Real quickly, Governor, do you think--we have got four big
banks. They have market share between 30 percent and 50
percent. In the greatest economy in all of human history they
are not really banks; they are countries. Do you think power,
economic power is too concentrated in those four banks?
Ms. Brainard. Well I certainly think that from a financial
stability point of view, when you have very, very large
institutions that are systemic, you need to have very, very big
capital buffers and liquidity buffers and risk management,
because it would be very, very difficult to resolve those banks
in a moment of financial stress.
Senator Kennedy. OK. Thank you, Mr. Chairman. You have been
very, very kind with your time.
Chairman Brown. Thank you, Senator Kennedy.
Senator Kennedy. My office will work with you on that
statement about oil and gas and gun manufacturers.
Ms. Brainard. Thank you, Senator.
Senator Kennedy. OK?
Chairman Brown. Senator Warner, from Virginia, is
recognized.
Senator Warner. Thank you, Mr. Chairman. I want to first of
all take a moment. I know normally in the Banking Committee we
do not introduce our witnesses, but I want to take a moment to
add to your comments about Dr. Brainard. I have known Lael and
her family for more than 20 years. I think she has done a great
job on the Federal Reserve. She has been the representative
from the Federal Reserve Bank of Richmond's Fifth Federal
Reserve District. She cares deeply, and as you indicated in
your opening statement about working families, she is ready to
roll up her sleeves to take on the challenges that our economy
faces.
And I think a prime example of that is what happened during
the last year of the Trump administration, when we got hit with
COVID, and candidly, if that Administration had responded
quicker we might not be in as deep a hole as we were. But she
worked the Fed. She and Chairman Powell worked very closely
with Secretary Mnuchin, and I think in many ways prevented what
would have been an economic catastrophe. So I very much look
forward to supporting her.
I would say, to my good friend from Louisiana, that when we
were passing unprecedented amounts of money to put that capital
into American families' pockets I did not hear anybody complain
about inflation. I think the first $3 trillion, $2.2 trillion
was 100 to nothing [inaudible]. I think the next couple
trillion was 96. I will give Senator Kennedy credit on that.
But the vast majority of us on both teams said that was the
right thing to do, and I think history will treat it as the
right thing to do. And I hope that that moves aggressively on
dealing what it can do on monetary policy.
But I would say, and I wish we had all been a little more
prescient about the challenge of inflation, and we know when
gas prices go up, but if we were looking at the indicators, and
if we were looking at the indicator, for example, that
President Trump always used as his best weathervane--when he
stuck his finger in the air and said, ``How is the economy
doing?''--he would look at the stock market. Well, inflation
hit the 7 percent number the other day. What did the market do?
It went up. So again, I am not saying that the market makers
are smarter than us Senators, but the markets weighed in on
this.
If we look back, as well, to like the early '80s or late
'70s, when we saw the kind of inflationary pressures, when
inflation, I think, hit 7 percent, 7, 8 percent, before it went
up even higher, interest rates were about 16 percent. They went
higher than that, but they were at 16 percent. Right now
interest rates, for 30-year mortgage are about 3 percent. So
the market, at least--and boy, oh boy, I bet Dr. Brainard and I
bet Jay Powell, wish they had never heard of the word
``transitory,'' because we are going to probably continue to
fry them on using that term.
But I would say that the market indicators--the market,
interest rates, and candidly, the fact that most of us, on both
sides, were all in on making the investments to deal with
COVID--I want inflation to go down, and I do think we will
start to see movement down. And incrementally, if you look at
the rise and you look at slow declines, but I do hope the Fed
will act.
I do want to raise one issue, and again I want to come back
and compliment my friend, the Senator from Louisiana, and my
friend, the Senator from North Carolina, because one of the
things that I think we did that was really bold, along with
help from all the folks on this side of the aisle, was we said
we need to get more capital out to disadvantaged communities
during COVID. I think, Director Thompson, I want to commend
her. I may not get to my question on her but I want to thank
her and the fact around I am not going to get the GSE reform
but I commend you for saying you are still open to that and the
fact that in-housing finance reform, I know how challenging
that area can be, as somebody who worked with my friend, Bob
Corker, or GSE reform and still has got the scars to prove it.
The fact that you have got the bankers and the civil rights
community supporting you, I look forward to supporting you as
well.
But I do want to get my one question in, which is, one of
the things that we came up with, actually working with
Secretary Mnuchin, was trying to put more capital into minority
depository institutions and CDFIs. And again, I want to thank
my Republican friends for helping on that. We put about $12
billion out, and we are almost going to double the amount of
tier one capital in that sector, that, by definition, lends to
low- and moderate-income individuals, more than 60 percent.
And Director Brainard, if you could just weigh in on what
other things we can do, because there are certain things. There
are private capital that wants to go into these institutions
but cannot because they are afraid of the change of control
rules. Will you commit to work with me, and others on this
Committee, on a bipartisan way, to make sure that this piece of
our financial sector, CDFIs and MDIs, get the kind of
regulatory relief and capital they need to continue to perform
critical, critical services?
Ms. Brainard. Yes, we will, Senator.
Senator Warner. That was a pretty quick answer. Thank you,
Mr. Chairman.
Chairman Brown. Both witnesses are good at quick answers.
Senator Tillis, from North Carolina, who always stays
within his 5 minutes.
Senator Tillis. Thank you, Mr. Chairman. I do, and I will.
Congratulations to both of you on your nominations. It should
be a proud moment.
Ms. Brainard, consensus has long been a top priority of the
Fed Board as it works on an apolitical and largely unified
front on monetary policy and regulatory decisions. If
confirmed, you are going to be elevated to the position as Vice
Chair. So with this in mind, would you believe the elevation of
your role to Vice Chair provides you with any special power or
authority to set Board agenda items?
Ms. Brainard. No. Quite the reverse. The Vice Chair role
traditionally is a role that supports the Chair in the
formulation of monetary policy and achieving consensus at the
FOMC, communicating that, and I look forward, if confirmed, to
taking on those responsibilities.
Senator Tillis. That is good to hear. I agree.
In your time on the Board you have been called the Fed's
great dissenter. Your initial dissent in 2018 was the first
time in over 6 years that a Governor has issued a dissent. You
have since set a new precedent with more than 20 dissents, none
of which, I believe, were joined by another Fed Governor.
The Fed is meant to be a collaborative institution. I think
we all know that. Governors have to convince other members of
the benefits of proposed changes or reforms. So given the
longstanding precedent consensus had on Board activities prior
to your term, as Vice Chair would you push for policy changes
you know lack Board consensus?
Ms. Brainard. No. I always work really hard. In fact, I
have put forward a number of rules that did achieve consensus.
It is always my preference. I dissented rarely. I always
supported implementation of the law, especially of S.2155.
There were some provisions that I particularly liked in that,
and I have said that publicly.
You know, I only dissented on areas where I thought they
went to the resilience of the largest institutions, because of
the potential financial stability implications, and only in
areas that were outside the implementation of the law and
really in the judgment of the Board. And when I did I always
worked with Vice Chair Quarles, Chair Powell to let them know
what concerns I had, you know, to see if we could arrive at an
agreement. I would always give them my statements ahead of
time, to let them correct me if I got something wrong and to
rebut it.
So, you know, I always tried to be extremely collegial. I
did not relish dissenting at all and only did it in a few cases
that were around those core issues around the largest
institutions.
Senator Tillis. I want to get on your political activity. I
think that you may have said that your behavior would be
different going forward. We know that you gave a max
contribution to the Presidential campaign for Hillary Clinton
in 2016. And I think that is probably the only Fed Governor
that has done that in nearly 22 years. I know of some who were
politically active but after they were confirmed as Governor
they eliminated their political activities.
So why did you think donating to the Clinton campaign
outweighed the importance of maintaining Fed's independence?
Ms. Brainard. I actually did that in consultation with our
ethics officer. Of course, we, you know----
Senator Tillis. Did they make it clear that that had not
occurred in quite some time?
Ms. Brainard. No, unfortunately. You know, it is rare. It
has occurred. It is certainly not something I have done since
then. You know, I do not think the appearances issue, you know,
is a good one for the Fed, so I have not done it. But yes, it
is clearly permissible, not something that I would have done
had I been there longer and understood that that was not
customary.
Senator Tillis. Thank you.
Ms. Thompson, could you provide more clarity about the
prospect of FHFA eventually releasing Fannie Mae and Freddie
Mac from conservatorship? Is there an anticipated timeframe,
and are you concerned about any negative market impacts?
Ms. Thompson. Senator, that is a great question. Certainly
we would defer to Congress on the exit from conservatorship for
the GSEs. But in the meantime there are a number of things that
we are doing. The enterprises are building capital. We are
encouraging the credit risk transfer program, and we are
establishing pricing. So we are also supervising them in a safe
and sound manner and making sure that they meet their mission
so that whenever they exit from conservatorship they will be
ready.
I would also mention that there are a number of
stakeholders that would likely need to be involved and engaged
in a discussion before that ever happened. the Treasury
certainly, as the majority owner of the GSEs, and we certainly
want to make sure that the taxpayers are adequately
compensated. We would probably have conversations with the Fed
and also the Justice Department on outstanding litigation. So
just a number of steps that would have to take place before the
enterprises would be able to exit conservatorship, and they
would have to meet their capital targets, which are quite vast.
Senator Tillis. Thank you. Again, congratulations.
Thank you, Mr. Chair.
Chairman Brown. Thank you, Senator Tillis.
Senator Warren, from Massachusetts, is recognized.
Senator Warren. Thank you, Mr. Chairman, and
congratulations, Governor Brainard, and congratulations, Ms.
Thompson, on your nominations.
So I would like to talk a little bit about inflation and
about the Fed's tools to deal with it.
Governor Brainard, let's start at the beginning. If the
economy is overheated, what is the Fed's primary tool to cool
it off?
Ms. Brainard. The Federal funds rate.
Senator Warren. Yeah, so increasing interest rates, in
other words.
But what if inflation is caused by kinks in the supply
chain? Prices jump because the supply chain is just not
functioning. Does the Fed have a tool to deal with that?
Ms. Brainard. No. We have a tool that operates on the
demand side, which is the Federal funds rate.
Senator Warren. OK. In other words interest rate adjustment
is your tool, and it does not work on things like supply chain
kinks.
When Chair Powell was here on Tuesday we discussed how
market concentration can lead to increasing prices. While
consumers are facing higher inflation, profit margins for
corporations have surged to their highest levels in 70 years.
Now inflation has not gone up because, one day,
corporations woke up and said, ``Hey, today we are going to be
greedy.'' No. Inflation has gone up at this moment because of
the way that prices are passed on in a more concentrated
market.
In a highly competitive market, when costs go up businesses
pass those costs along to their customers, but they cannot
expand their profit margins because other competitors are just
going to beat them down on prices. But in a very concentrated
industry, one with only a few competitors, a dominant
corporation can use the excuse of inflation for passing along
rising costs and then add in an extra bonus for themselves to
increase their profit margins. As Chair Powell put it on
Tuesday, those firms are, quote, ``raising prices because they
can.''
So, Governor Brainard, would you agree that increased
market concentration has allowed some corporations to profit
off pandemic disruptions by raising prices on consumer beyond
the increased costs that the corporations have to deal with?
Ms. Brainard. Well certainly a lot of economic research
would suggest that in concentrated industries individual
producers have more pricing power, so that kind of dynamic is
certainly possible.
Senator Warren. OK. So I know that the Fed has a role in
approving bank mergers, but with respect to broader
concentration, throughout the rest of the economy, does the Fed
have the tools to deal with increased concentration there?
Ms. Brainard. No.
Senator Warren. No. And that is really the point here.
Dealing with inflation requires the Fed to act if the problem
is an overheated economy, but dealing with rising consumer
prices also involves the FTC, the Department of Justice in
breaking up monopolies and investigating crooked price-fixing
schemes that also increase costs for hard-working families. And
that is why it is so important that the Biden administration is
taking action to fight corporate power by enforcing antitrust
laws and boosting competition.
Now, Governor Brainard, do you think that the steps that
the Administration is taking to address market competition and
price fixing have a role to play in helping families that are
facing rising prices?
Ms. Brainard. Well I certainly think that, you know, we are
hearing from working families around the country about
inflation, and some of it is in areas where we are seeing those
kinds of supply dynamics. But again, you know, we do have a
powerful tool and we are going to use it to bring inflation
down over time.
Senator Warren. Good. And look, I understand that, but
price stability is a core part of the Fed's mandate, and I know
you care about that. And I just want to make sure that we keep
our eye on all of the things that affect prices for consumers.
Today's price increases have many causes, and I hope that the
Fed treads carefully in using its tools to help lower prices
for American families. I am glad to see that the Administration
is using all the tools that it has to bring down prices over a
longer arc. That is our collective job, and I appreciate your
help in this and your thoughtful comments here.
Thank you, and again congratulations to both of you. I am
sorry, Ms. Thompson, that I did not get to questions with you,
but I am looking forward to supporting both of you. Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Hagerty, from Tennessee, is recognized.
Senator Hagerty. Thank you, Chairman Brown, Ranking Member
Toomey, for holding this important hearing, and I would like to
congratulate our nominees, Governor Brainard, Acting Director
Thompson. Congratulations on your nominations today. It is good
to be with you and I appreciate your time.
Before we start I would just like to highlight the fact
that we are in an unprecedented time. Governor Brainard and I
talked about this yesterday. But if you look at the consumer
price index that was released for this month, December over the
prior December, we are at a high that has not been seen in
almost four decades. The median age in America is 38 years old,
when you think about it. The average American has never seen
inflation at this level. So I want to underscore the fact and
appreciate the confidence you reflected, Governor Brainard, in
your ability to deal with this very carefully as we try to
undertake the challenge and get price stability back under
control.
For both of you I have a housekeeping question to ask
before we get started, for both Governor Brainard and Acting
Director Thompson. As a matter of housekeeping, have either of
you ever, currently or in the past, embellished any part of
your resume, your background, your publications, or any other
aspect of your accomplishments? Just a yes or no answer would
suffice.
Ms. Brainard. No.
Ms. Thompson. No.
Senator Hagerty. I expected that to be the case. Thank you.
Governor Brainard, I would like to turn to you. Again, I
appreciated the conversation that we had yesterday. And one of
the topics that we discussed is also one that I raised with
Chairman Powell on Tuesday, when he and I discussed, and that
is regarding the actions of CFPB Director Rohit Chopra and
interim FDIC Director Martin Gruenberg, in their attempt to
force out the FDIC Chairman before her term expired. This
destruction, both of institutional norms and historical
precedent, undermines the independence and the integrity of our
financial regulators, and I want to ensure that a similar
situation does not occur at the Fed.
So my question, Governor Brainard, is slightly different
from that you answered with Senator Tillis. Do you believe that
the Fed Chair has the ultimate discretion to set the Fed's
regulatory agenda?
Ms. Brainard. It is certainly the case that the Vice Chair
for Supervision and the Chair work together. But yes, the Chair
determines what goes to the Board for votes.
Senator Hagerty. Thank you. I appreciated your answer
yesterday and thank you for being clear today.
Acting Director Thompson, I would like to turn to you about
the stewardship of the FHFA, if I might. As Director of the
FHFA, you are meant to carry out the law, not to be a
policymaker. The Housing and Economic Recovery Act does not
permit indefinite conservatorships. By definition, no
conservatorship is meant to be permanent.
So my question to you is will you commit to do everything
in your power to fulfilling your statutory mandate to end the
conservatorships?
Ms. Thompson. Senator, that is a great question, and
certainly no one ever expected the enterprises or any financial
institution to be in conservatorship for 13 years, and
certainly we believe that Congress has a role and we will be
working to help in any way that we can to facilitate any
questions that you have. But we think that this is something
that Congress needs to work on as well.
Senator Hagerty. Well, is there any point in the law that
says that Congress must approve an exit conservatorship?
Ms. Thompson. I do not know that they must approve an exit
from conservatorship, but there are a number of issues that
Congress will have to address, specifically if the enterprises
exit conservatorship will the companies be private? Will they
be public? What form will they be in? There are just a host of
issues that would have to be considered, that Congress must
weigh in on. But certainly FHFA can get the enterprises ready.
Senator Hagerty. Well, Acting Director, if you are
concerned that the HERA Act does not provide adequate clarity I
hope that you will get back to me and my team as quickly as
possible with the areas that you see inadequacy in the
legislation, because my expectation is that the legislation is
clear and that an exit is called for.
I want to get to another point, though, and that has to do
with the recent reductions in GSE capital requirements and how
you see that reduction fit with the mission of working toward
exiting conservatorship.
Ms. Thompson. It is a great question, Senator, and I can
assure you, I firmly believe in safety and soundness of the
GSEs, and that would be really backed by the capital
requirements. I made two minor changes to the capital rule that
was finalized at the end of December 2020, and those changes
were really designed to promote the utilization of the credit
risk transfer program, and again, the credit risk transfer
program transfers mortgage credit risk from the enterprises to
the private sector.
We also made a change to not the leverage requirement but
the leverage buffer so that the buffer would not be static. It
would be more dynamic. And I believe the banking regulators are
also looking at the supplementary leverage ratio on the banking
side as well.
The changes that I made, just for context, before the
crisis the required capital for the enterprises was about $55
billion. Right now, even with the proposed changes that I have
recommended, the required capital is about $300 billion, which
is over five times what it was before the enterprises went into
conservatorship.
Senator Hagerty. I just think we need to be careful in this
regard, because in my home State of Tennessee housing prices
are up 20 percent. That is the case across the board, and
again, back to your overarching objective of getting these out
of conservatorship, I applaud a careful balancing act, an
independent perspective on that as well, and I look forward to
very conservative management there.
Chairman Brown. Thank you, Senator Hagerty.
Senator Van Hollen, of Maryland, is recognized.
Senator Van Hollen. Thank you, Mr. Chairman.
Congratulations to both of your on your nominations. You are
both eminently qualified for the positions you have been
nominated to, and I look forward to supporting your
nominations.
Dr. Brainard, let me thank you for your leadership in
getting the Fed to adopt a real-time payment system through
FedNow. As you know, people living paycheck to paycheck are
spending billions of dollars in overdraft fees or payday loans
because of the lack of a real-time payment system, and they are
bearing the costs of this inefficiency in our system.
So I have a very simple question. Are we on target for
launching FedNow next year?
Ms. Brainard. We are on target, and as you say it is
something that many community banks, other payments providers,
and community groups are very supportive of, and I think larger
banks are very supportive now as well.
Senator Van Hollen. Good. No, I am glad that more and more
people are supporting the effort.
As Chairman Powell acknowledge in his testimony before this
Committee on Tuesday, because of the American Rescue Plan we
have been able to lower unemployment in the country way ahead
of projections. At the 3.9 percent unemployment levels we saw
in December, that was a full year hitting that target, a full
year before what the Fed had projected, and 4 years before what
the Congressional Budget Office said projected. So that is the
good news.
On the other hand, we see disparities behind that number.
Black American unemployment is at 7.1 percent, and while long-
term unemployment has been cut in half over the past year we
still have about two million Americans who are long-term
unemployed, looking for work and not finding it for over 27
weeks. So how will these facts factor into your analysis in
considering whether we have achieved one of the main Fed goals
of full employment?
Ms. Brainard. Well as you noted, unemployment has come down
very rapidly, which is very welcome, but we still have between
3.5 and 5 million fewer jobs than we would have in the absence
of the pandemic, and some of those re going to come back more
slowly. So as we look at labor force participation we just
really have not seen the improvements there. It is between 1.5
percentage points looking at the total labor force, 1.1
percentage points looking at the prime-age labor force behind
where it was prepandemic. So that unemployment rate is higher
when you take into account nonparticipation.
Where are those people? Well, we see very big concentration
of missing jobs in leisure and hospitality, despite a lot of
openings. I think, you know, you have a lot of parents there of
young children, when we look at the data, who still cannot
quite go back because you have got school closures, and
particularly for young children still very, very limited
childcare options, and of course that hits Black and Brown
parents more, in terms of those statistics. And also concerns
about the virus, some sectoral reallocation.
So we are going to see that participation cycle lag the
unemployment cycle, but I have really strong confidence that we
are going to see that improve more slowly over coming quarters
and years.
Senator Van Hollen. Thank you, Dr. Brainard. As you know,
when we look at those figures, over 7 percent for Black
American employment, those are people who are looking for jobs
and unable to find them. On top of that, we have the issue of
people who are not looking for various reasons, and many of us
are pushing very hard to pass legislation to dramatically lower
the cost of childcare for those families.
Ms. Thompson, thank you for your current stewardship at
FHFA, and as you know, and we have been back and forth on this,
one of the major household costs faced by moderate- and low-
income families are their energy costs. In fact, for low-income
households the share of their budget on energy is three times
higher than for higher-income households. And if we can make
energy efficiency improvements we can cut those bills by 35
percent.
I wrote to you last August about this issue, urging you to
take actions to encourage more loans for energy efficiency.
Thank you for the actions you took in October. Can you just
elaborate a little bit on the importance of this issue and
whether there are other measures we can take to reduce these
costs for households?
Ms. Thompson. So thank you for the opportunity, Senator. We
believe that the energy standards have come a very long way
since the enterprises started engaging and ensuring that the
affordable housing units, in particular, on the multifamily
side, had these energy efficiencies.
We are encouraging the enterprises to, especially in the
low-income and affordable space, make sure that the loans that
they purchase have a component of energy efficiencies, and I do
believe that they give discounts for purchasing those loans.
Senator Van Hollen. I continue to work with you on that and
other aspects of affordable housing. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Lummis, from Wyoming, is recognized.
Senator Lummis. Thank you, Mr. Chairman, and
congratulations on your nominations, both of you. Acting
Director Thompson, we have not met. I hope we will have an
opportunity to do so in the near future. Governor Brainard,
thank you very much for the time you have spent with me and the
conversations we have had in the past year. I appreciate that
very much.
Governor Brainard, my questions are for you. As we have
discussed, Wyoming is the largest exporting State of energy in
the Nation, and that is because of our small population. We do
not consume very much of the energy we produce. We export it.
It is critically important to our economy and to our job base
and to American energy independence.
Do you believe the Federal Reserve has the authority,
either through rules or guidance, to broadly curtail community
banks' investments in oil, coal, or gas exploration?
Ms. Brainard. No. No, Senator.
Senator Lummis. Thank you. Do you understand the regulatory
burden that incorporating climate risk into bank regulation may
have on community banks in Wyoming?
Ms. Brainard. I do, and I do not favor asking community
banks to put in place those kinds of risk management. I think
to the extent that supervisory guidance is appropriate, it is
really appropriate for the large banks that have a big imprint,
not for small banks. We do not want to burden community banks,
in particular.
Senator Lummis. Thank you very much. Community banks in my
State are the backbone of banking, again because of our very
small population, so thank you so much.
As you know, I have a keen interest in Wyoming's special
purpose depository institution's applications, and is it a fair
characterization to state that the Federal Reserve is currently
making progress on the important legal and supervisory issues
surrounding the Wyoming special purpose depository institution?
Ms. Brainard. Yes, I think that is an accurate
characterization, Senator.
Senator Lummis. Thank you. Tell me why you believe
responsible financial innovation is important to both monetary
policy and bank regulation.
Ms. Brainard. Well we are seeing quite a bit of innovation
associated with technology. Consumers now have access to their
ability to make transactions using their mobile phones. These
kinds of things, I think, are very important. They are going to
continue to evolve. The financial sector has been a very
dynamic sector. I think it will continue to be, and we just
want to make sure that that is done within the existing
guardrails so that like activities are regulated in a like
manner, consumers are protected, and that is really our focus
on responsible innovation.
Senator Lummis. Do you believe it is important that
innovative financial technologies, like digital assets and
distributed ledgers, be inside the regulatory perimeter?
Ms. Brainard. Yeah, I do believe that, again, you know, the
focus should be on like activities, like risks being treated in
a like manner, and, of course, our existing regulatory
structure was designed for different kinds of charters and
institutions, and so that needs to be evolved. And of course we
welcome Congress taking a very important role in updating that
statutory framework.
Senator Lummis. OK. China has produced a digital yuan, a
central bank digital currency, but it seems to be available to
the retail customer, allowing the Communist Party of China to
surveil the uses of its central bank digital currency. As the
Fed and the Congress considers a central bank digital dollar,
do you believe it should be available to the retail customer,
or should the Fed CBDC be available only as it is now, to the
banking industry?
Ms. Brainard. Well this question about digital currency is
a big question, and we really are looking to Congress, in the
first instance, and the Administration to give us guidance in
this area. We want to make sure that we do the requisite
research on policy and technology so we are in a position to
move forward if Congress decides it is important to be able to
compete with China in this regard. Of course, privacy
protections are very important in any kind of approach that
might be taken.
Senator Lummis. Thank you very much. Again, congratulations
to you both on your nominations.
Mr. Chairman, I yield back.
Chairman Brown. Thank you, Senator Lummis.
Senator Smith, from Minnesota, is recognized.
Senator Smith. Thank you, Mr. Chair and Ranking Member, and
welcome to both of you. It is wonderful to have a chance to see
you in person after our virtual meetings, and I want to thank
you so much for your willingness to serve our country.
Ms. Thompson, I am going to start with you. As I said when
we spoke on the phone, it warms my heart to see a career public
servant have the opportunity to, and for us to have the
opportunity, of you leading this agency, so thank you so much.
I want to follow up on a question that Senator Brown
started with, touching on issues of gaps in home ownership, and
in Minnesota we have much to be proud of. We also face
significant challenges around racial equity, which is
essentially the proposition that prosperity in our State should
be equally shared. And the reality is that in the Minneapolis
metro area, as you may know, the home ownership rate for White
families is one of the highest in the country, about 70
percent, while home ownership for Black families is closer to
barely 20 percent. This is the largest gap in the whole
country.
And I might just note that this is the legacy of old
Federal policies that contributed to this, in addition to old
redlining. University of Minnesota has done a fascinating study
which tracks specifically that legacy in home values. Today you
still see the legacy of disparities in home values because of
this.
So Director Thompson, could you just talk to us, if you are
confirmed, which I hope you will be, how you see the work that
we have to do ahead to address this home ownership gap which
contributes directly, of course, to wealth inequality that we
face in our country?
Ms. Thompson. Thank you for the question, Senator, and
there is quite a bit of work that needs to be done in that
area. We do believe that qualified borrowers ought to be able
to, if they can, afford a home mortgage loan.
One of the things that has taken place at Fannie Mae, in
particular, is many potential homeowners are now renters, and
when you are looking at credit scores one of the things that
the traditional credit score does not take into consideration
would be rent payments. And typically a rent payment or a
mortgage payment is the largest payment that most people have
for their households.
And so Fannie Mae has taken the step to incorporate 12
months of positive rental payment into their credit scoring so
that the typical requirement of something being a debt as
opposed to an expense, which is what a rental payment is, is
now taken into consideration in a positive way, to help improve
the credit scoring process.
So we think there are a lot of little things around the
edges, looking at, you know, nontraditional credit scores, and
not using them as sole factors but as additional factors in
really providing access, sustainable access to credit and to
home ownership.
Senator Smith. I look forward to working with you on these
things. I think you are pointing out how we have sort of old,
systemic ways of doing things that end up having the
discriminatory impact, and if we look at them we can change
them and then start to change the path, create a much better
path for people in this country, which is why we are here. So
thank you.
Dr. Brainard, you and I had a chance to talk about a
variety of things when we spoke on the phone the other day.
Many of my colleagues have also just raised some of the
questions that you and I were discussing around full employment
and the disparities in employment amongst Black families versus
some White families in this country. And I want to just drill
down on a bit of what Senator Van Hollen was asking about. As
you pointed out, the Fed has limited tools in this category.
But could you just tell me, if we were to see interest rates
increase, would impact would we anticipate that having on
employment, particularly as we try to look at getting broad-
based employment?
Ms. Brainard. Well certainly today we see an economy that
has grown about 5.5 percent over the last year, and we have
seen those broad unemployment numbers coming down really
quickly, so there is a lot of underlying momentum in the
economy.
And so, you know, as we go forward on our plans to end
asset purchases, to begin to raise interest rates at some time
beyond that, to shrinking the balance sheet, I think we will do
it in a well-communicated way, a transparent way, to allow
markets to react in a measured way to it.
You know, I believe we will be able to see inflation coming
back down to target while the employment picture continues to
clear. There are some short-term constraints there that I think
are limiting people from coming back into the labor market. As
those are lifted I think we will have continued gains on
employment.
Senator Smith. Thank you. I am out of time. I just want to
take a moment to say that one of the biggest constraints, as
you and I have talked about, is that people do not have any
access to affordable childcare, and so they are left not being
able to work, even though they want to. That is one of the
things that we would address in the Build Back Better Act,
which I hope we pass.
Thank you. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Smith.
Senator Crapo is recognized from his office.
Senator Crapo. Thank you, Mr. Chairman, and let me start
out with you, Director Thompson. First of all, I very much
appreciated our visit last Tuesday. I just have one quick
question for you, which we discussed then, housing finance
reform, which, as you know, is a top priority of mine. And it
has been my view that Congress must find a pathway forward to
resolve the conservatorship of our GSEs and do so
expeditiously.
In that context I applaud Ranking Member Toomey for
releasing his housing finance reform principles last March,
which reflect many of the goals that I outlined when I was
addressing this issue as the Chairman of the Committee. These
principles include establishing stronger levels of taxpayer
protection, preserving the 30-year fixed-rate mortgage,
increasing competition among mortgage guarantors, ensuring a
level playing field for lenders of all sizes, and promoting
access to affordable housing.
And my question to you is, if confirmed as the FHFA
director, would you be willing to support legislation that is
consistent with these principles?
Ms. Thompson. Absolutely, Senator. Thank you.
Senator Crapo. Thank you. Nice, brief answer, and the right
answer. I appreciate it.
Let me move on to you, Governor Brainard. Again, welcome to
you too. I appreciated our visit the other day as well. The
first question I have for you is on inflation, which you have
already talked about today, but I, like all of us here, are
concerned about December's 7 percent rise in consumer prices
and today's record high producer price inflation reading of 9.7
percent. These high and persistent inflation numbers are, I
think, the greatest threat to our economic recovery and
household budget. And now it's clearly [inaudible] more Federal
deficit spending or taxing.
The question I have for you on this is, if I understood you
earlier in your testimony you said that you were confident that
we were going to get back to the 2 percent rate. The question I
have is how quickly do you see that happening? Is that
something that could be done in months, or are we talking
years, or what is the timeframe you expect to see us face in
trying to get control brought back to about a 2 percent target?
Ms. Brainard. Well thank you, Senator, for your question.
So I certainly also am very concerned about the high level of
inflation, and we are committed at the Federal Reserve to
bringing it back down to target, and we are taking a number of
actions. We have already decided to end asset purchases in the
first quarter. You have seen that the Committee has projected
several hikes over the course of the year. Of course we, you
know, will be in a position to do that I think as soon as asset
purchases are terminated, and we will simply have to see what
the data requires over the course of the year. And, you know,
we started to discuss shrinking our balance sheet.
In terms of the projections on inflation I think it will
remain high throughout the first two quarters. Certainly in the
Committee's projections you saw it coming down closer to 2.5
percent by the end of the year. But I think we should also take
these projections, you know, with a fair amount of caution, and
we will obviously try to bring it down, you know, as quickly as
we can but consistent with a sustained and strong recovery.
Senator Crapo. All right, thank you. And I realize it is
hard to predict these kinds of things but I appreciate your
projections.
Last question, and you have been asked about this also.
Senator Toomey talked to you about the pressure to choke off
credit to traditional energy companies, and I know Senator
Kennedy talked about the same thing. And I understood your
answers to that. I personally believe that choking off credit
to industries viewed as unfavorable or politically unacceptable
and controlling the allocation of capital is not a new concept.
You will recall Operation Choke Point from the Obama
administration years, and I certainly hope that President Biden
will consider this as he nominates those who deal with
regulatory policy at the Fed.
You have already indicated you do not believe that the
Federal Reserve should act in a way to try to choke off credit
to traditional energy companies. My question, though is, if
policies such as those Senator Toomey were talking about you
are utilized in our stress testing processes, does that not, in
and of itself, select specific types of industries if they are
going to be selected in that way and subject them to the
potential for increased capital requirements or some other type
of regulatory burden that would not be there had they not been
in that particular business?
Ms. Brainard. Yeah. So I think about supervisory guidance
as simply asking institutions, large institutions, to be
measuring, monitoring, and managing their risk. This is what we
ask them to do across the board. So I do not think it has a
particular sectoral cast to it.
And similarly on scenario analysis, you know, if I think
about concentrations of areas where, you know, wildfires are
becoming more frequent, or flooding is becoming more frequent,
if insurers are pulling back from covering those properties our
scenario analysis would simply allow us to see where are those
risks building up and are there certain counterparties that are
very exposed in terms of covering those risks, and might they
be subject to shock that could amplify financial instability
throughout our system?
So that is how I think about climate scenario analysis. It
is quite different than the stress tests that banks have
undergone under the traditional capital planning framework.
Senator Crapo. All right. Thank you.
Chairman Brown. Thank you, Senator Crapo.
Senator Reed, from Rhode Island, is recognized.
Senator Reed. Thank you very much, Mr. Chairman. First let
me commend the President for his nomination. Governor Brainard,
congratulations on your elevation to Vice Chair, and also Ms.
Thompson, congratulations for nomination as permanent Director
of the FHFA.
You all touched upon, in response to previous questions,
the critical role of housing in our economy, and I know Ms.
Thompson has already talked about some steps she would take
going forward to help expand the supply. But one of the
interesting things is this ties in also to the inflation
problem we are seeing right now. I believe, Governor Brainard,
that 30 percent of the consumer price index is based on housing
prices. As a result, if we do not get a handle on housing we
will not get an effective handle on inflation.
And with that in mind, raising interest rates, will that
help us? Hurt us? Will it make it more affordable for working
families to get good housing?
Ms. Brainard. So I think the question about workforce
housing and affordable housing, to the extent that we look at
it at the Federal Reserve, is really very much a supply side
question. You know, we do meet regularly with the home
builders, and, you know, they have been telling us, even before
the pandemic, that shortage of lots is an acute problem. So we
went into the pandemic with a shortage of affordable and
workforce housing, and of course the pandemic has exacerbated
materials delays and skilled tradesman availability. So all of
those things, I think, on the supply side are exacerbating
these issues.
Our tools are very limited on the supply side. You know, we
have some incentive under the Community Reinvestment Act, and
we are trying to improve the credit that we give there for
naturally occurring affordable housing as well as shoring up
those really important institutions that use housing subsidies
in partnership with banks. But our tools are limited on the
supply side.
Senator Reed. Thank you. Governor Brainard, are you aware
of an announcement made yesterday that Bank of England is
incorporating climate as part of their stress testing for all
their institutions?
Ms. Brainard. So I have not studied their most recent
statement there, no.
Senator Reed. But I would presume that their major
motivation is the economic impact, not on anything else, or
least--is that your view?
Ms. Brainard. So when we have talked to counterparts,
regulators in other countries such as the Bank of England and
the Europeans, Canadians, Australians, and others, there are
certainly taking on board just the financial risks associated
with climate change and trying to incorporate that into their
supervisory frameworks.
Senator Reed. And we have already seen some aspects of the
financial industry, particularly insurers, incur significant
losses, particularly in California and wildfires, so there is
definitely an economic effect that is being generated, I think
with more frequency, by climate. Is that your sense?
Ms. Brainard. Well I think the statistics that I saw
recently were about $630 billion worth of damages over the last
5 years from severe weather, and that is a historic high, and
of course we all see it in our home areas.
Senator Reed. One of the other aspects of inflation, which
is one of the most obvious ones, is at the gas pump, and that
is something--again, that is really beyond the specific control
of any agency in the United States Government because basically
pricing is set by a cartel. But what struck me is that the
production is not even up to the levels that they have set for
themselves. So do you have any insights on what is going on in
that market?
Ms. Brainard. So we do not have a lot of insights. Our
Dallas Reserve Bank tends to be, you know, closely studying
trends there. It is certainly true that about a quarter of
consumer inflation over the last year has come from food and
energy, but really disproportionately from energy. Those prices
at the pumps are hurting working Americans across the country.
Senator Reed. Thank you. And a quick question, Ms.
Thompson. One of the things we have seen recently is a trend
for private equity to buy up lots of homes--they have the
resources to do that--and take them out of the purchase market
and put them into their rental market, and in some cases with
the ability to dictate higher prices. Is there anything you can
do at your agency to look at that?
Ms. Thompson. Sure. Thank you for the question, Senator,
and we are taking a look at the private equity participation in
a couple of different areas, in the manufactured housing
communities where we are very insistent that they have
protections, and Fannie and Freddie will not purchase loans
unless there are protections for the communities, the owners,
and the renters.
We are also looking at our REO inventory, between Fannie
and Freddie there are probably 9,000 properties. But we have
established this first-look program that allows owner-occupants
and nonprofits to have the very first look at all the REO
properties that are available. And we have increased the number
of days from 30 to 45.
And we have been looking at the nonperforming loan sales as
well, and what we require is that any buyer has to go through a
waterfall where they have to offer borrowers in these pools
loan modification. And some of these borrowers have been
delinquent 3 or 4 years, but they still have to offer these
borrowers loan modifications.
We have also asked the enterprises to structure smaller
pools so that nonprofits can start buying and working with
these loans.
Senator Reed. Thank you, and I apologize for running over,
Mr. Chairman.
Chairman Brown. Thank you, Senator Reed.
Senator Cramer, from North Dakota, is recognized.
Senator Cramer. Thank you, Mr. Chairman, Ranking Member
Toomey. Thank you both and congratulations to both of you on
your nominations. And Governor Brainard, thank you for the
discussion yesterday. I enjoyed it very much. I found it
interesting. I liked most of your answers, quite honestly, so
now I am going to try to reconcile them a little bit after
yesterday's meeting.
And given today's conversation you have been quite
consistent, particularly in the last couple you referenced, in
response to climate scenario analysis as opposed to climate
stress tests, the example you used yesterday and that is fire.
So if you have a forest fire situation and there are insurers
backing out, that represents a risk.
But you used that in response to a climate question, not a
fire question. I think it was Senator Reed's question that you
referenced the record weather events.
I want to be really definitive about this issue, maybe as
definitive as you were with me yesterday. Are you in sync with
Chairman Powell's position, and he stated it a couple of times
a couple of days ago. You watched that. Would you say you are
pretty well in sync with his analysis, or his assessment of
climate and where it belongs in your mandates?
Ms. Brainard. Yes, Senator. Thanks for the question. Yes, I
am.
Senator Cramer. So he said that to the degree it fits
within your mandates, climate is one of many factors,
basically, and he said important but a very narrow one. So how
is it that you get so much more--now I am asking you to analyze
yourself, or your supporters--but I am trying to reconcile why
so many of our friends on the other side of the aisle think you
are wonderful on climate but they are not going to support
Chairman Powell for some of the same reasons. And I am just
wondering, how can I reconcile that in my mind? I am not asking
you to be my psychologist necessarily, but do you have any
thoughts or theories on why that might be?
Ms. Brainard. You know, we do operate within our statutory
mandates, and we talk a lot about what those are and what those
mean. So I think, generally speaking, those are the guardrails
that we operate within. You know, I do try to be aware of
emerging risks generally. You know, I thought it was important
to develop research in the area of digital finance, for
instance, several years ago. So I am looking out over the
horizon sometimes, and perhaps, you know, talk more about the
research. But we are very in sync in terms of what we actually
think our responsibilities as an institution are.
Senator Cramer. I want just--just a little bit of opining
on the recent question Senator Reed asked you on the supply
side and particularly gasoline, fuel. You rightly recognized
that that represents probably a quarter of the inflation. And,
by the way, it is going up as fast as inflation, the rest of
inflation, if not faster, as you probably know.
I, of course, come from a State that is now producing about
400,000 barrels of oil less than it did before. It has a lot of
capacity for more. The Bakken is cash starved, quite honestly,
and some of that is because of the signals that they are
getting banks, and banks are getting from others, that
investing in oil production is persona non grata.
Now, the demand is going up. The supply is being held down
by both rhetoric and policy. Most of it is not your policies
but it is the President's. And I worry that, frankly, we want
to transfer our climate guilt by suggesting that we should not
produce so much in the United States while global demand goes
up and our adversaries, who are not nearly as environmentally
friendly as we are, produce.
Does that matter, do you think, in these climate scenarios,
that we may very well be hurting our own economy and our own
production and our own job creation while transferring both the
opportunity and the guilt to another polluting country?
Ms. Brainard. So, you know, the question that you are
raising is a very big one that I do not study in terms of
energy policy. Generally I would just say that, you know, when
we do supervise institutions to see that they are managing
their material risks it is pretty pedestrian stuff. It is, ``Do
you have a risk management committee? Is that risk management
committee well informed? Do you have the right data? Do you
have the right models? Do you have the right controls?'' You
know, it is really not specific in any way to particular to,
you know, borrowers or sectors.
So, you know, I understand the concern that you are
raising, but our supervisory guidance is very much around
making sure those guardrails are there.
Senator Cramer. Thank you. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Cramer.
Senator Cortez Masto, from Nevada, is recognized from her
office.
Senator Cortez Masto. Mr. Chairman, Ranking Member, thank
you very much. Welcome to both of the nominees and thank you
for your service, and thank you for your commitment to serve,
moving forward.
Let me start with Acting Director Thompson of the Federal
Housing Finance Agency. Thank you so much for taking the time
to talk with me earlier about this particular issue. As you
well know, and we have discussed this, the third GSEs regulated
by the Federal Housing Finance Agency are the Federal Home Loan
Banks. In our discussion I noted that my office's research
discovered that the Federal Home Loan Bank that serves Nevada
has long neglected investments in our State, and as you well
know, this has been an issue for me.
So my question, Director Thompson, is will you commit to
working with my office to ensure that the Federal Home Loan
Bank of San Francisco improves on its record of investment in
Nevada?
Ms. Thompson. That is a great question, Senator, and thank
you for bringing this issue to my attention. It is my
expectation that the Federal Home Loan Banks would serve each
State within their districts, and I would mention to you that
the Home Loan Bank of San Francisco did change the scoring
mechanism so that Nevada is able to get their portion of an
affordable housing program. But there should not be a case
where there is a State that does not get a portion of the
affordable housing program from the banks.
Senator Cortez Masto. That is right. Thank you. And I know
they have made that change, and that was at my request. They
have been working with me, and I appreciate that, but I know
there is a role for you to play as the director. And in that
role I also know that in reviewing each Federal Home Loan
Bank's community lending plans only one included investments in
Native American communities.
So my next question is will you ensure that the community
lending plans are reviewed and appropriate to the needs of
their communities?
Ms. Thompson. Yes. Thanks again, Senator, for the question.
So as I committed to you, I will have conversations with all of
the bank presidents and the community investment officers that
reside in each of the Federal Home Loan Banks to talk to them
about filling the specific needs in their respective
communities. There should not be a case where there is a tribal
community that is not being recognized in the community lending
plans for the Federal Home Loan Banks, and we are going to have
those conversations and that will not be the case.
Senator Cortez Masto. Thank you. And Director, just one
final thing, beyond the affordable housing programs and other
voluntary programs. Thank you for your commitment there. I am
curious, do you have any other priorities with respect to the
oversight over the Federal Home Loan Banks?
Ms. Thompson. Sure. Yes. So we are looking at, right now,
after the--well, I should say the Federal Home Loan Banks play
a huge role in the financial system, and during the pandemic
they certainly were very much utilized. But the advances right
now are relatively low, and so we are looking at ways to just
oversee the home loan banks and make sure that the advances and
the earnings are appropriate. So I have got my supervisory team
working very closely with the home loan banks to make sure that
they are supervised in a safe and sound manner.
Senator Cortez Masto. Great. Thank you. I look forward to
working with you as well as we move through this process.
Governor Brainard, let me go back to you as well, and thank
you again, as always, for speaking with me. It is a pleasure to
welcome you back to the Committee. I know, in your decades-long
career in public service that you represented our interests on
an international stage. I also know, over the last few years,
that Chair Powell also has entrusted you to work closely with
former Secretary of Treasury Mnuchin and other appointees under
the former Administration in setting up the Federal Reserve's
response to the COVID-19 pandemic.
Clearly you have played a critical role at the Federal
Reserve, and I also know the committees you chair for. And so,
very briefly because my time is running out, can you tell me
how you work with the other Board members, the regional bank
presidents, and other agency heads to not only respond to the
pandemic and other monetary policy but also bank regulatory
challenges as well?
Ms. Brainard. Well, you know, we were as surprised, I
think, as everybody by the just incredible turmoil we saw in
the Treasury markets. I have never seen anything like that, and
so we needed to respond very quickly. And I think, you know, we
just worked seamlessly across the regulatory agencies. We did
need to relax some bank safeguards to make sure that they could
continue lending, to make sure that their existing loans would
not be considered impaired, and we stood up facilities very
quickly, and we also, once the turmoil passed, we were very
quick to wind them down.
And I think, generally speaking, we are in a much better
place today. As a result we have many Americans have jobs and,
you know, balance sheets that are much healthier, and many more
businesses are thriving today because of the efforts you did
here in Congress and the efforts that we did to carry out those
programs you asked us to undertake.
Senator Cortez Masto. Thank you. Thank you both again. Mr.
Chair, thank you.
Chairman Brown. Thank you, Senator Cortez Masto.
Senator Daines, from Montana, is recognized.
Senator Daines. Chairman, thank you. Welcome, Governor
Brainard. We had quite the CPI report yesterday, inflation
rising at the fastest pace in four decades. It takes me back to
when I graduated from high school.
In Montana and other mountain States annual inflation is
actually 8.6 percent, which is significantly higher than the
national average of 7 percent. Needless to say, I think this
report adds to the continuing string of bad news for Montanans
and Americans. On a year-over-year basis, real average weekly
earnings declined by 2.4 percent.
I have heard many of my colleagues on the other side of the
aisle say that inflation is nearing a peak. I distinctly
remember being right here, not long ago, challenging this
notion that inflation was transitory. We heard from very smart
people who were sitting right where you are, rejecting that
notion, and we were forcefully pushing back and saying we do
not think so.
Now, granted, forecasts are forecasts. You do not always
get them right.
I hope that inflation is nearing its peak, but I did not
see anything in this recent report that provides any sort of
confidence that inflating is fading in a meaningful way. In
fact, to the contrary, peeling it back, with what is going on
right now in China with the zero-COVID policy from Xi Jinping,
I think the supply chain disruptions will only increase.
I met with Montana grain growers just an hour ago. They
told me that one of the trucking companies that they depend on
just fired 14 employees because of the vax mandate. They cannot
get fertilizer back and forth across the Canadian border.
Fertilizer prices have doubled. This is a huge issue right now
for farmers, not talked about enough, but one more contributing
factor to the inflationary forces currently in this economy.
Chairman Powell told the Committee on Tuesday that high
inflation is a, quote, ``severe threat to the labor market.'' I
agree with that and I hope you do as well, Governor Brainard.
Turning to my questions, I would like to follow up on
Ranking Member Toomey's points regarding climate-related
financial risks. Over the past year you have delivered a number
of speeches suggesting that the Fed may take a more active role
in environmental policy. Specifically, you announced that the
Fed is, quote, ``developing scenario analysis to model the
possible financial risks associated with climate change,'' end
quote.
However, the Fed lacks both the experience and the
expertise in environmental matters. Further, actual climate
researchers have found that current climate models cannot be
used to provide financially meaningful information. This raises
the troubling prospect for many of us here today that the Fed's
work in this area is politically motivated rather than based on
actual data or expertise. And I say that respectfully as a
chemical engineer by degree.
My question for you, Governor Brainard, on what basis do
you believe the Fed is positioned to shape environmental
policy, given its lack of experience and expertise in this
area?
Ms. Brainard. Well thank you very much for your questions.
First on inflation, I could not agree with you more. It is very
higher, and we have a responsibility to bring inflation down.
We are orienting monetary policy to do that. We have
accelerated the tapering of asset purchase so that we can be in
a position to move on increasing the Federal funds rate, and we
have projected several increases this year and also talked
about having the balance sheet starting to shrink sometime
thereafter. So we are very focused on that, as Chair Powell
said.
With regard to the issues surrounding climate, we do not do
environmental policy at the Federal Reserve. As you say, it is
not our expertise. What we do have responsibility for is making
sure that supervised institutions are properly risk managing,
and we do have some sort of responsibility for understanding
potential financial stability implications, of a host of
different kinds of things, and that is where scenario analysis
comes in. You know, we do not have any expertise in disease and
pandemics, but certainly it turned out that the pandemic had
enormous financial stability consequences.
So it is just incumbent on us to be doing research to
understand how shocks could affect our financial system, and
that could include severe weather events and other aspects----
Senator Daines. And speaking of shocks, I think we all
remember the War of Yom Kippur. I mean, some of us are old
enough to remember what happened back in 1973, when we were
dependent on the Middle East for oil, and the shocking effect
that had when oil prices quadrupled, and the inflationary
effects, and in 1981, seeing 18.6 percent 30-year fixed
mortgages. It was devastating for so many Americans, including
farmers and ranchers and folks working hard every day to make
ends meet.
And speaking of politically motivated, with my
distinguished colleague here from North Dakota sitting next to
me, when we watched this President, with one stroke of a pen,
stop the Keystone XL pipeline, which actually reduces carbon
emissions because it is the most environmentally sound, minimal
amount of carbon emissions way to transport oil versus using
rail cars or trucks. Count us all in here as skeptics that
there has not been political motivation, and I hope that you
will guard the Fed, and I hope you will ensure that they stick
with their dual mandates.
So I asked this question to Chairman Powell this week, and
I would like to ask it to you as well. Do you think that
rolling blackouts--and I had just come from a hearing before I
came to this hearing on Tuesday, when Powell was here, where we
literally had folks talking about breaching dams in this
country. These are radical ideas. Do you think that rolling
blackouts due to a lack of stable baseload power poses a more
tangible, near-term threat to the stability of the financial
system?
Ms. Brainard. We try to take into account a whole host of
different risks to the system, so we are trying always to kind
of look out over the horizon and take into account a whole host
of risks, including from abroad. So we do try to do that. We
are not very successful always, but we certainly try.
Senator Daines. Yeah, well thank you, and again, my final
comment here. On the one hand we have our colleagues who are
sending the strongest message possible that we should stop
production of oil, natural gas, coal, even breaching dams in
some cases here. You cannot have it both ways, what this would
do with energy prices, what it is going to do to this economy
and inflation. That is why this car is spinning out of control
right now on the highway. And the Fed has its role, but I am
just very concerned about the policies coming from this
Administration that are having severe, creating severe harms
now for the American people. And we are seeing it at the gas
pump. We are seeing it with inflation in this economy. Thank
you.
Chairman Brown. Senator Ossoff, from Georgia, is recognized
from his office.
Senator Ossoff. Thank you, Mr. Chairman. Thank you to our
nominees.
What tools would you have at your disposal, at the Federal
Housing Finance Agency? What tools might Congress be able to
strengthen or offer to the agency to increase the supply of
housing in communities where there is an acute housing shortage
and a housing affordability crisis? Do you agree that
increasing supply, adding units, adding density is key to
resolving the crisis of affordable housing?
And, you know, when I look around the State of Georgia,
speak with community leaders, look at the housing market, 48
percent of folks in the city of Augusta say that affordable
housing is a very high need. Georgia has lost 11,000 affordable
housing units through the qualified contract exception, the
low-income housing tax credit, in recent decades. In Atlanta,
in Rome, in Savannah, in Albany, in rural communities, the
rents and the prices of homes are increasing at an alarming
rate.
So the question is what tools will you have at the agency
to increase housing supply, and do you believe increasing
housing supply is essential? And finally, will you work with me
and community leaders in those cities and communities across
the State of Georgia to identify solutions particular to the
needs of my State to help bring more housing supply online, add
units, and help folks afford homes?
Ms. Thompson. It is a great question, Senator, and
absolutely, supply is a major, major issue in housing, and the
supply issue really is exacerbated with respect to affordable
housing.
We certainly are an indirect--we do not have any direct
influence on supply, but one of the things that we have done is
through the Federal Home Loan Bank's affordable housing program
they are able to contribute to affordable projects around the
country, and we have also increased the enterprises' allotment
for low-income housing tax credit, and we increased their
allotment to help with the affordable housing supply and
affordable housing preservation.
We are really focused on working with our regulated
entities to do whatever we can in this space. We also have
allowed the enterprises to purchase manufactured housing, and
we also have allowed them to purchase these accessory dwelling
units. But in many cases there are local zoning ordinances that
get in the way of some of the affordable houses that could be
built or the types of affordable housing.
But we are very much committed to working with you and all
members of this Congress to try to do what we can to address
this issue.
Senator Ossoff. Thank you, Ms. Thompson. My time is limited
but just briefly I mentioned Atlanta, Albany, August, Columbus,
Savannah. This is a serious issue in communities across the
State. Will you commit to working with my office, elected
officials, community leaders, in those communities and others
to identify specific solutions, work collaboratively to bring
down the cost of housing, to bring down rents, and add more
housing supply in those communities?
Ms. Thompson. Absolutely, Senator.
Senator Ossoff. Thank you, Ms. Thompson.
Dr. Brainard, congratulations on your nomination for this
position. I would like to ask you a question about the
prevalence of retail investing and stock trading in the
leadership at the Federal Reserve. I want commend Chairman
Brown for his leadership, offering legislation to address this.
Is there a cultural problem? Is there widespread stock
trading potentially on the basis of proprietary or nonpublic
information with the expectation of upcoming policy
announcements at any level in the Federal Reserve, in your
opinion?
Ms. Brainard. I do not believe there is, but I think we
have all been surprised and dismayed by some of the financial
disclosures.
Senator Ossoff. Dr. Brainard, will you help to ensure that
the Fed complies with any lawful requests or commands for
records, documents, or information pertaining to stock trading
by current or former Federal Reserve officials, should Congress
wish to review those trades and their propriety?
Ms. Brainard. Yes.
Senator Ossoff. Thank you, Dr. Brainard, and a policy
question for you. What is your view of the distributional
effects of quantitative easing, over the long run, the relative
benefit to employment against the exacerbation of inequality by
driving up asset prices in a way that may favor those who hold
equities, hold assets, own homes as liquidity is added to
financial markets? Have you conducted any research? Has the Fed
conducted any research? Can you provide that research to the
Committee, and what is your personal view?
Ms. Brainard. I know there is some research on this. It is
not clear-cut. It tends to be the case that during recessions
wealth inequality diminishes and then it tends to increase
during recoveries. You know, we use quantitative easing only
when we have run out of room on the interest rate, and the
alternative of allowing unemployment rates to skyrocket would
be very, very bad, I think, for working Americans who really
rely primarily on their jobs for income.
So we stay very focused on that dual mandate and try to
protect employment in downturns, to the greatest extent
possible, using whatever tools we have.
Senator Ossoff. Thank you, Dr. Brainard. My time is up. I
will send you some additional questions for the record and look
forward to your responses. Congratulations again to you both
for your nominations.
I yield back, Mr. Chairman.
Chairman Brown. Thank you. Senator Toomey has some closing
questions and remarks, as do I, and we will wrap up.
Senator Toomey. Thank you, Mr. Chairman. I first want to
respond quickly to our colleague from Massachusetts who seemed
to be suggesting that inflation is the result of greedy
companies in highly concentrated industries. In fact, I do not
think the data supports the contention. I do not think that is
well correlated, that is to say the rate of inflation and the
extent to which an industry is consolidated. And, in fact, one
that I can think of that might be among the least concentrated
industries that I know of, the retail sale of used cars, is one
that has experienced one of the highest rates of inflation, 37
percent over the last year.
I also want to respond to Governor Brainard's statement
that the climate scenario analysis that she has been advocating
is not a stress test. It seems to me that is little more than a
semantic difference. Of course, the whole purpose is to test
whether banks are prepared to address perceived risks
associated with climate change, and then if the Fed determines
they are not to promulgate new regulatory requirements. That
sounds exactly like stress testing, whether or not you call it
by a different name.
And I am not alone in that view. The New York Times, not
exactly a conservative paper, said the same thing when it
reported on a speech that Dr. Brainard gave last October about
climate scenario analysis at the Fed's annual stress testing
conference. The Times wrote, and I quote, ``Ms. Brainard said
the Fed was developing climate-related scenarios for use in
bank safety checkups, which are often called stress tests,''
end quote.
The concern is there are many categories of risks to banks
and the financial system that nobody is advocating a separate
scenario analysis for, but there is an advocacy for the
scenario analysis for even lower risk, lower probability risk
problems in the climate space. The fact is the transition risk
associated with climate change is a political risk, and the
danger is this becomes a self-fulling prophecy. And the Fed
says do a scenario analysis, and the scenario you need to
analyze is the scenario in which we impose new regulations on
you that are problematic for your portfolio.
Finally let me just turn to Ms. Thompson. You and I may
have a different understanding of the HERA statute and other
statutes, because it is my view that HERA clearly does
authorize the FHFA to take the GSEs out of conservatorship. So
can you tell me specifically, is there something that is
lacking in legislation that you think is required for you to
move in that direction?
Ms. Thompson. Sure. Thank you for the question, Senator. So
it is my belief that the enterprises--actually, FHFA is going
to have to have a conversation with Treasury.
Senator Toomey. I agree with that.
Ms. Thompson. At the end state of the enterprises is
something that Congress would have to legislate. So if the
enterprises reach their capital requirements that we have
established we certainly would be having conversations with
lots of different stakeholders. But the end state, if Congress
wants the enterprises to come out as is, then that is, I think,
doable within the statute, but if there is another outcome, if
they wanted to be a utility or if they want other charters,
those are things that Congress is going to have to determine.
Senator Toomey. Well sure, if we wanted to change the
existing statutes and exchange existing charters then we would
have to pass legislation to do so. But my point is, that is not
the only option available. Would you commit to going as far as
you legally can in moving in the direction of coming out of the
conservatorship?
Ms. Thompson. Senator, that is a great question, and I will
commit to positioning the enterprises and working with the
Congress to do whatever is necessary to move them out of
conservatorship in a responsible and timely way. Now we would
certainly be wanting to work with Congress and other
stakeholders on this issue.
Senator Toomey. Well I appreciate that and I look forward
to working with you toward that very end.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
A few comments. A few closing comments. Thank you both, by
the way, for being here. For a moment about GSE reforms,
something where I hope we can reach consensus in this
Committee.
Many of my colleagues have talked about the importance of
that, of housing finance reform. Before the pandemic, as you
know, Acting Director, we had a series of hearings on GSE
reform. Consensus was emerging on what the system should look
like. Like I would like to put out a list of priorities where I
think we can reach agreement, and there will be some
differences of agree, I am sure, between and among all of us.
One, protecting access to affordable, 30-year, fixed-rate
mortgages; providing a catastrophic Government guarantee;
structuring loan guarantees like public utilities; providing a
regulated rate of return; serving the broad national markets;
serving lenders of all types and sizes equitably; maintaining a
duty to serve all markets, all borrowers; maintaining
affordable housing goals and metrics; expanding investments in
affordable housing; and maintaining the GSEs' successful
multifamily business models and ensure continued or better
access for financing of affordable rental housing.
These reforms would create a safe and sound system that
meets the needs of renters and homeowners across the country.
I am certainly happy to engage with the Ranking Member and
others on the Committee of both parties and getting, as we
spoke on the phone, getting the kind of technical assistance
that you are so good at, Acting Director, to provide to us.
I would also make one comment that Chair Powell raised the
same distinction on Tuesday as Governor Brainard today on
climate stress tests and climate stress scenarios.
Thank you. It was a full and productive discussion. I
applaud the Biden administration for the nomination of these
two eminently qualified women to these vitally important
positions in our Government. I look forward to supporting the
nominations of each of you. I urge my colleagues on both sides
to join me.
For Senators who wish to submit questions, these questions
are due at noon on Tuesday, the 18th of January. To the
nominees, we need your responses by Friday, January 24th.
Thank you for your testimony and appearing today. The
Committee is adjourned.
[Whereupon, at 10:52 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
It's amazing what a difference a year makes.
Today, we have safe and effective vaccines that are saving lives
and getting people back to work. 207 million Americans are now fully
vaccinated.
And our economy has weathered the storm and rebounded. In 2021, we
added a record 6.4 million new jobs--more than any year since 1939.
And it isn't just the jobs numbers--it's the quality of those jobs.
Workers are demanding raises, and they're finally getting them. They're
changing jobs at record rates, because people finally have some
options.
The past year has illustrated how our economy works best--when it
works for everyone.
Not just Wall Street. Not just the top 1 percent. Everyone.
Whether you punch a clock or swipe a badge, earn a salary or make
tips. Whether you're raising children, or caring for an aging parent.
No matter who you are, where you live, or what kind of work you do.
Economic growth won't mean much if it doesn't reach all workers--
families in Steubenville and Scranton and communities of all sizes, all
over the country.
The President has nominated Dr. Brainard and Acting Director
Thompson to important roles in our Government and our economy to put
those workers and their families at the center of our Government and
the center of our economy--to deliver results that actually improve
their lives.
Dr. Brainard is a leading economist who understands that a strong
economy is one where workers have power.
She is committed to a worker-centered monetary policy that boosts
employment and lifts wages--something that every member of the Fed's
rate setting committee has reaffirmed.
She has led the way in modernizing and strengthening the Community
Reinvestment Act--a landmark civil rights law passed to begin to undo
the shameful legacy of redlining and lending discrimination, and spur
investment in all neighborhoods and communities.
Through her leadership, the Fed listened to the people whose lives
and livelihoods are affected--civil rights leaders, affordable housing
advocates, local officials, and banks of all sizes. She brought
everyone to the table and is working to ensure banks meet the needs of
all our communities.
And during this pandemic, she has served as a steady hand--working
shoulder to shoulder with Chair Powell to stabilize our economy and
steer the country out of the abyss.
Dr. Brainard has a distinguished record of bipartisan service in
Government and academia. She joined the Federal Reserve in 2014. From
2009 to 2013, she served as Under Secretary for International Affairs
at the Department of Treasury. There, she played an instrumental role
in helping support the country's recovery from the global financial
crisis.
She has served in Administrations of both parties, serving as a
staff economist at the Council of Economic Advisers during the George
H.W. Bush administration and as deputy national economic adviser in the
Clinton administration. She was a professor of applied economics at the
Massachusetts Institute of Technology.
As Vice Chair, she will be tasked with supporting efforts--efforts
that are already underway--to empower workers and refocus our economy
on Main Street, and make sure that all Americans have good jobs with
growing paychecks and an affordable cost of living.
That also means supporting efforts to close the racial wealth and
income gaps that have barely shrunk in decades. As the Fed has noted,
``the average Black and Hispanic or Latino households earn about half
as much as the average White household and own only about 15 to 20
percent as much net wealth.''
When we all do better, we all do better.
With Governor Brainard as Vice Chair of the Fed, Americans will
have someone who understands that workers--not corporations, not Wall
Street--create economic growth. Her commitment to the success of all
Americans--from all walks of life and every region of the country--is
clear in all the work she's done, throughout her distinguished career.
Acting Director Thompson has a similarly long and distinguished
career in public service.
In her time as Acting Director, Ms. Thompson has taken meaningful
steps to put renters, homeowners, and families first.
Over the past 6 months, Ms. Thompson has:
Directed the GSEs to strengthen their plans to preserve
affordable housing and support manufactured housing and housing
in rural areas;
Expanded opportunities for middle class and low-income
homeowners to save money on their mortgages through
refinancing; and
Increased the focus on fair housing at the GSEs.
I can think of no other nominee as qualified to work to make homes
more available and affordable for families throughout the country while
strengthening the financial standing of the GSEs.
More than two dozen consumer advocates, civil rights organizations,
and housing advocates have all written to this Committee supporting
her.
Before being designated as Acting Director in June 2021, Ms.
Thompson served for 8 years as the Deputy Director for the Division of
Mission and Goals at FHFA.
There, she led an office responsible for the mission activities of
the GSEs and housing and regulatory policy under both Republican and
Democratic Directors--ensuring the safety and soundness of Fannie Mae,
Freddie Mac, and the Federal Home Loan Banks.
Prior to joining FHFA, she spent 18 years at the Federal Deposit
Insurance Corporation, or FDIC. At the FDIC, where she worked for seven
different chairpersons from both political parties--and in senior-level
positions, including Director of the Division of Supervision and
Consumer Protection and Director of the Division of Risk Management and
Supervision, helping to stabilize our Nation's banks.
Earlier in her career, she served at the Resolution Trust
Corporation, cleaning up and restoring faith in our financial system
after the Savings and Loan Crisis.
At FHFA, she will be in a position to tackle some of the most
pressing issues facing homeowners and renters, and to ensure the
stability of our housing finance system.
Whether you're looking to rent or to buy, housing had become too
expensive and too hard to find long before the pandemic began.
More than 50 years after passage of the Fair Housing Act, people of
color are far more likely to be denied for a mortgage, are far less
likely to own their own home, and are far more likely to pay more in
rent than they could afford.
And in just the past week, tragic fires in Philadelphia and the
Bronx have reminded us of how far we need to go to ensure that everyone
has a safe, affordable home.
FHFA has an important role to play in addressing each of these
challenges, and Acting Director Thompson has distinguished herself as
the person we need to lead this critical work.
Both of these nominees understand the challenges our economy faces.
They understand the people who make our economy work, like so many of
this President's nominees.
It's notable that as we recover from a pandemic that laid bare just
how hard women work--at paid jobs in the labor market, and at unpaid
jobs taking care of their families--we have two women poised to take
leading roles in our recovery.
I want to thank both nominees for their many years of exceptional
public service and their willingness to continue to serve our country.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Thank you, Mr. Chairman.
Governor Brainard and Ms. Thompson, welcome. You both have very
extensive experience in your respective fields. And I commend you for
your commitment to public service.
Governor Brainard has been nominated to serve as Fed Vice Chair.
The Fed's been granted significant independence to isolate it from
political influence. However, Congress has given the Fed very narrowly
defined monetary and regulatory missions.
First, the Fed's been tasked with conducting monetary policy to
promote stable prices and maximum employment. But the Fed's recent
actions have failed to maintain price stability.
Last year, Governor Brainard repeatedly insisted that inflation was
transitory. We have now had 9 consecutive months where inflation has
been more than two times the Fed's 2 percent target. That makes it
pretty clear that inflation is not transitory. Yesterday's CPI release
of 7.0 percent--the highest in 40 years--confirms that.
Inflation is a tax that is eroding Americans' paychecks every day.
Even though wages are growing, inflation is growing faster and causing
workers to fall further and further behind.
I appreciate that the Fed has pivoted towards normalizing monetary
policy to tackle inflation. But the Fed must also learn from its
mistakes.
That begins with the Fed's new monetary policy framework, of which
Governor Brainard was an author and an outspoken advocate. The
framework subordinated the Fed's price stability mandate to try and
maximize employment by allowing inflation to run hot.
Under it, the Fed looked beyond employment as a whole to consider
whether employment was ``broad based and inclusive.'' What this meant
was the Fed would sacrifice stable prices to see if it could achieve
higher employment gains in certain demographic groups.
As Governor Brainard explained last year, the Fed should look at
employment numbers on a ``disaggregated basis'' and use monetary policy
to narrow employment gaps between different ``racial and ethnic
groups.'' This framework would keep in place an inflation tax on all
Americans while the Fed decided which sub-groups of people should have
faster job growth over others.
The problem is monetary policy can never equalize employment rates
amongst different groups. In the end, the Fed would run the risk of
failing on both fronts of its dual mandate because you need stable
prices to achieve a strong economy and maximum employment. Given this,
the Fed should reevaluate its new framework.
The Fed also has the mission of monitoring the safety and soundness
of certain financial institutions. Under Chairman Powell, the Fed
enacted modest, sensible reforms that reduced regulatory burdens and
helped spur economic growth. But Governor Brainard was the sole
dissenter over 20 times on regulatory matters, an unprecedented number
at the Fed.
For example, she argued that the Fed's reforms of capital,
liquidity, and stress tests for smaller, less complex banks would
``weaken the safeguards at the core of the system.'' Yet, even though
the economy nearly collapsed at the start of the pandemic, the banking
system emerged exceptionally well-capitalized and served as a source of
strength for the economy, demonstrating the sensibility of these
reforms.
In addition to opposing these reforms, Governor Brainard has urged
the Fed to take an activist role on global warming, which is beyond the
Fed's expertise and mission. According to the New York Times, she has
``endorsed the use of supervisory guidance--the Fed's recommendations
to banks--to encourage financial institutions to curb their
exposures.''
I'm particularly concerned that she has advocated for the Fed to
shape environmental policy through so-called climate scenario analysis.
Not only does the Fed lack expertise in environmental matters, but
there is no reason to believe that global warming poses a systemic risk
to the financial system.
As I have noted before, we haven't found a single bank that has
failed in the modern era due to a severe weather event. There is a
``transition risk'' for banks associated with global warming, but it's
political and regulatory in nature. It's the risk that unelected
bureaucrats will attempt to impair the value of energy-related assets
by cutting-off credit to energy companies.
This isn't about whether climate change is a significant threat to
our society. It's about the fact that climate policymaking requires
tradeoffs between costs and benefits. These are inherently political
decisions, which is why they belong firmly in the domain of officials
who are elected and directly accountable to voters.
Now turning to Ms. Thompson. She has been nominated to serve as the
Director of the FHFA, where she has had a busy six months as Acting
Director.
In that time, she has proposed reductions in capital requirements
for Fannie Mae and Freddie Mac, suspended restrictions on the GSEs'
acquisitions of high-risk loans, required the GSEs to develop plans to
further what Democrats call ``racial equity,'' but what is really just
affirmative action in the housing space, and increased the GSEs'
affordable housing goals. Unfortunately, she hasn't prioritized ending
the GSEs' conservatorships.
I'm concerned the Administration is seeking to use FHFA and the
GSEs to take on more risk for taxpayers and expand affirmative action
into housing. That makes Ms. Thompson's nomination--notwithstanding her
extensive experience--a referendum on the Administration's radical
housing policy.
This policy contemplates more mortgages for higher risk borrowers,
repurposing the GSE as instrumentalities of social policy, and a
disappointing embrace of the failed GSE model. In a break from decades
of bipartisan housing finance reform efforts, this Administration is
using the power of the GSEs' conservatorships to command and control a
huge swath of the economy.
We are now asked to ratify this radical housing policy, and to take
ownership of the bailouts and foreclosures that will likely follow.
Especially given where we might be in the housing cycle, we should be
reluctant to do so.
Mr. Chairman, I look forward to hearing from today's nominees.
______
PREPARED STATEMENT OF LAEL BRAINARD
To Be Vice Chairman of the Board of Governors of the Federal Reserve
System
January 13, 2022
Chairman Brown, Ranking Member Toomey, and other Members of the
Committee, thank you for this opportunity to appear before you. I am
greatly honored to be nominated by President Biden to serve as Vice
Chair of the Board of Governors of the Federal Reserve System. If
confirmed to this position, I look forward to continuing to work with
Members of this Committee.
We are seeing the strongest rebound in growth and decline in
unemployment of any recovery in the past five decades. Over the past
year, unemployment has fallen by 2.8 percentage points, and growth is
estimated to be around 5\1/2\ percent, according to a variety of
private forecasts.
But inflation is too high, and working people around the country
are concerned about how far their paychecks will go. Our monetary
policy is focused on getting inflation back down to 2 percent while
sustaining a recovery that includes everyone. This is our most
important task.
When the pandemic struck in 2020, I worked closely alongside Chair
Powell and Secretary Mnuchin and many others, with the support of
Congress, to calm financial market turmoil and save American jobs and
businesses. When markets stabilized, I worked to responsibly wind down
the emergency facilities we established. Today the economy is making
welcome progress, but the pandemic continues to pose challenges. Our
priority is to protect the gains we have made and support a full
recovery.
Since 2014, as a member of the Federal Open Market Committee, I
have supported monetary policy that is responsive to evolving economic
conditions. Our approach helped sustain the longest recovery on record
with low inflation and millions of jobs.
More broadly, I have worked to safeguard and grow our economy
during the Administrations of five Presidents from both parties. I have
worked on the U.S. policy response to every major financial crisis over
three decades. I served at the Department of the Treasury as part of
the team responsible for supporting America's recovery from the Global
Financial Crisis and responding to the euro-area financial crisis. I
served at the White House as part of the team helping to safeguard the
American economy from the Asian financial crisis as well as financial
crises in Mexico, Brazil, and Russia. In some foreign countries, I saw
up close how high inflation hurts workers and families, especially the
most vulnerable.
I am committed to pursuing the Federal Reserve's congressionally
mandated goals of price stability and maximum employment and to
maintaining the strength and resilience of our financial system. I am
committed to the independent and nonpartisan status of the Federal
Reserve.
If confirmed, I look forward to supporting Chair Powell in carrying
out the responsibilities assigned to the Federal Reserve and in
fostering transparent communication and accountability to you and the
American people. I will bring a considered and independent voice to our
deliberations, drawing on insights from working people, businesses,
financial institutions, and communities--large and small--across the
country. I will support policies that are in the interests of the
American people and based on the law and careful analysis of the
evidence.
Before closing, I want to thank my husband and daughters for their
steadfast support of my work. And I would like to commend the
outstanding efforts of the individuals across the Federal Reserve
System who work so hard every day to serve the American public.
Senators, I thank you for this opportunity to appear before you and
for considering my nomination. I would be pleased to respond to any
questions.
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______
PREPARED STATEMENT OF SANDRA THOMPSON
To Be Director of the Federal Housing Finance Agency
January 13, 2022
Chairman Brown, Ranking Member Toomey, and Members of the
Committee. I first want to thank President Biden for nominating me to
serve as the Director of the Federal Housing Finance Agency (FHFA), it
is the greatest honor of my career to appear before you today.
Thank you to the Senators and the staff members with whom I have
met in advance of this hearing. If I am fortunate enough to be
confirmed, I look forward to meeting with and working with all of you
on the important issues at the FHFA.
I would like to introduce my sons, Jarrett and Aaron Nobles, who
are here with me today. And I would like to recognize and thank my
parents, Herman and Helen Lathan. While due to COVID considerations
they are not able to be here in person, the fact that my parents are
still alive to witness today's hearing is very meaningful to me. I was
born and raised on the South Side of Chicago to my extraordinary
parents who came to Chicago from Mississippi as part of the Great
Migration. My parents and family, along with the Chicago Public School
system, and my beloved Howard University right here in Washington, DC,
taught me hard work, determination, commitment, and perseverance. I
would like to specifically recognize the schools I attended that helped
me succeed: McDade Elementary School, Gillespie Jr. High School, and
Lindblom Technical High School, all on the South Side.
My nomination for Director of the FHFA is a great privilege. I
recognize that it is rare for a career public servant to have the
opportunity to lead a Federal agency, and, as the first African-
American woman nominated for this position, I appreciate the
opportunity to demonstrate my expertise, good judgement, and leadership
in this position.
I am proud of the work we have done at FHFA in my 8 years there.
The Agency plays a vital role in both promoting access to mortgage
credit nationwide and protecting the safety and soundness of the
housing finance system through our supervision of Fannie Mae, Freddie
Mac, and the Federal Home Loan Bank System (housing GSEs).
Throughout my 40-year career, with experience in mortgage markets
and Federal financial regulation at multiple agencies, I have seen what
it takes to lead a Federal agency and be effective in that role. In my
work at FDIC and FHFA, I have demonstrated leadership, management
ability, an understanding of the secondary mortgage markets and
industry, a fair and balanced perspective, and a strong belief in the
importance of the safety and soundness of America's financial
institutions.
During my time in Federal financial institution regulation, I have
witnessed and worked to end several financial crises. These crises
exposed some truths in housing finance. When I served as the FDIC's
head of supervision and consumer protection throughout the 2008
financial crisis, I witnessed firsthand the consequences of
irresponsible lending when hundreds of banks across the country were
closed and a record number of homes went into foreclosure.
I saw how the borrowers who received unsustainable loans and
predatory loan products were devastated in the downturn. And
historically underserved and disadvantaged communities were hit
especially hard. Years of progress in closing the home ownership and
wealth gaps were erased as a result. In fact, today the Black-White
home ownership gap is wider than it was in the 1960s, when lending
discrimination based on race was still legal. As a financial regulator,
I have long believed that safety and soundness and access to credit are
not mutually exclusive. Broad, fair access, and the stability of
financial institutions work together as pillars of the Nation's housing
finance system. Indeed, sustainable access to credit requires
sustainable lending standards. FHFA will continue to promote
sustainable and equitable access to credit in a safe and sound manner.
We will responsibly focus our efforts on the safety and soundness
mission Congress gave to FHFA and on the mission that Congress gave the
housing GSEs under our supervision--providing liquidity across the
Nation and especially supporting underserved markets like rural and
tribal areas, manufactured housing, and preserving affordable housing.
If confirmed, it would be an honor for me to serve as the FHFA
Director, and I will continue to be fair, balanced, and transparent.
Thank you for the opportunity to testify before you today. I am happy
to answer any of your questions.
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RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM LAEL BRAINARD
Q.1. Where have you excelled in past positions in attracting,
hiring, and promoting people of color in positions in your
organization? Where might there be room for improvement?
A.1. Research suggests, and my own experiences have shown, that
having greater diversity at the table--diversity of every
type--leads to less groupthink and better outcomes. I have made
increasing diversity and inclusion a priority in my career,
including focusing on hiring and promoting people of color. And
I have benefited, as have the organizations for which I have
worked, from the views of people of different backgrounds.
From the time of my service at the Department of Treasury
(Treasury), I have been pleased to see the diverse and highly
qualified team that worked with me at Treasury excelling and
making important contributions as they have advanced.
In my tenure at the Board of Governors (Board), I have
worked to ensure that Reserve Bank boards increasingly reflect
the communities that they serve. Our Class C directors, who are
selected by the Board, are noticeably more diverse than they
were 5 years ago. Minority representation among Class C
directors has increased by 31 percentage points over the past 5
years. Currently nearly two-thirds of Class C directors are
minorities. At present, more than half of Class C directors are
women, 33 percent of whom are minorities. The leadership of
Reserve Bank boards is also highly diverse. Among the 24
Reserve Bank Chairs and Deputy Chairs, 20 are diverse in terms
of race or ethnicity and/or gender. Of course, there remains
substantial room for improvement. To promote transparency and
accountability, information on gender, racial and ethnic, and
sectoral characteristics of the Boards of directors is posted
on the Board's website and updated annually.
Among the many benefits of having a diverse board is that
the Class B and C directors, those selected to represent the
public, lead the process to appoint presidents and other senior
Reserve Bank leaders. Over the past several years, the
professional, gender, and racial diversity of first vice
presidents and chief operating officers of the Reserve Banks
has increased. But further progress is necessary. In over 100
years, there has been one Black Reserve Bank president, two
Asian American presidents and no Latino president. We have
invested considerably in adopting best practices in outreach
and engagement to identify slates of highly qualified
candidates that are more diverse as well as in ensuring more
diverse interview panels. I work with the Board's Director of
the Office of Minority and Women Inclusion (OMWI), the Chief
Human Capital Officer, the Chief Operating Officer, and the
Directors of the Board's divisions to hire, retain, and promote
a diverse staff. This is a priority for the Board's Executive
Committee. I meet regularly with the OMWI Director to review
progress and to understand challenges and how we are addressing
them. As hiring decisions are made, I check to make sure the
OMWI has been involved to ensure implementation of best
practices.
We have been increasing our outreach in order to increase
diversity of Board economists, by building relationships with
students and schools at all levels to introduce them to the
Federal Reserve, through involvement in minority recruitment
events, partnering with the American Economic Association and
Howard University, and recruiting economists with more varied
research specializations. I have personally participated in a
variety of recruiting events, including the Conference for the
2017 Summer Training and Scholarship Program sponsored by the
American Economic Association and the National Science
Foundation, the Sadie T.M. Alexander Conference for Economics,
and the Board's Exploring Careers in Economics program.
If confirmed, I will continue to work with my colleagues at
the Board and with senior leaders throughout the System to make
further improvement.
Q.2. What specific measures will you use to evaluate the
success of the Federal Reserve in understanding and addressing
the needs of Black, Indigenous, and people of color (BIPOC)?
And, will you work with the Chair and Board to keep Congress
apprised, as appropriate, on the progress being made on these
measures?
A.2. If confirmed, I will work with the Chair and Board to keep
Congress apprised, as appropriate, on the progress being made
on these issues.
I will work to ensure the Federal Reserve carries out its
statutory responsibilities with regard to understanding and
addressing the needs of Black, Indigenous, and people of color
(BIPOC). The Federal Reserve has tools and responsibilities
with regard to monetary policy, as well as supervision and
regulation, which make important contributions to prosperity
that is widely shared among all groups.
By pursuing our statutory mandate, the Federal Reserve's
monetary policy actions promote maximum employment and price
stability--two foundations that improve economic outcomes for
all Americans--with those who have historically been left
behind standing the best chance of prospering in a strong,
stable economy with good job opportunities and low inflation.
The lengthy expansion that was brought to a close by the
pandemic showed the immense benefits that a strong labor market
with low inflation can provide to all communities, and
especially to low- and moderate-income (LMI) communities and
communities of color. But the COVID-19 crisis exacerbated
racial disparities as minority workers and small businesses
experienced disproportionate harm. The pandemic is a reminder
that these communities are the most vulnerable to economic
downturns and also that the Federal Reserve has powerful tools
to help support a strong recovery that includes everyone.
Currently we are seeing the strongest recovery in five decades
with strong growth and the creation of millions of jobs, but
inflation is too high. Monetary policy is focused on getting
inflation down to target, which is important for working people
from all communities who are concerned about how far their
paychecks will go, while sustaining a recovery that includes
everyone.
In support of its statutory responsibilities, the Federal
Reserve staff undertake important data collections on consumer
and small business finances and the economic wellbeing of
households broken out by wealth and income as well as race and
ethnicity. If confirmed, I will support this work, which
provides an important window into how well our policies are
achieving their goals.
The Federal Reserve also has important supervisory and
regulatory responsibilities that promote fair and equal access
to credit and financial services.
The Community Reinvestment Act (CRA) is an essential
regulation and supervisory tool to promote access to credit
investment in LMI communities. I have worked to strengthen CRA
regulations and evaluations to increase the effectiveness,
transparency and accountability in how banks are rated on their
affirmative obligation to meet the investment, credit and
banking services needs of their local communities, including
through improved access to home mortgage, small business, and
student lending for LMI households and communities. The CRA
evaluations are public and are taken into consideration in the
review of banks' applications for merger and acquisitions.
Currently, staff at the Board, Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of the
Currency (OCC) are working together to propose for public
comment revisions to the regulations that implement CRA.
Further, the Federal Reserve examines banks for compliance
and helps enforce the Fair Housing Act and the Equal Credit
Opportunity Act. In implementing our statutory
responsibilities, the Federal Reserve works to make sure that
the State member banks we examine have credit policies and
practices in place that are fair and do not prevent any
creditworthy consumer from getting access to credit, do not
result in discrimination in the pricing of credit, or redline
neighborhoods based on their racial and ethnic composition. If
examiners identify a pattern or practice of illegal
discrimination on any of the prohibited factors defined in the
laws, staff cite it and refer the case to the Department of
Justice for further enforcement.
To further support access to economic opportunity for
people of all levels of wealth and income, the Federal Reserve
has a long-standing program to promote the viability of
minority depository institutions (MDIs), which are mission-
oriented and dedicated to serving the banking and credit needs
of minority consumers and communities. As the COVID-19 pandemic
made clear, mission-oriented lenders, such as MDIs, Women's
Depository Institutions (WDIs), and community-development
financial institutions are important actors in serving the
financial needs of minority customers and small businesses, as
well as providing development resources to invest in minority
communities. We found that during the crisis these institutions
were highly effective at getting the smallest business loans to
the business borrowers that are hardest to reach. Through the
Federal Reserve System's ``Partnership for Progress'' (PFP)
program, we provide technical assistance and training in
collaboration with the FDIC and OCC to help MDI leaders
overcome the challenges inherent in providing banking services
to low- and moderate income and minority communities and
consumers. To further support financial institutions dedicated
to serving harder to reach market segments, we expanded our PFP
program to include WDIs.
Q.3. What is your plan for creating an inclusive working
environment for employees within your office?
A.3. An inclusive environment welcomes and values different
views and experiences. It is one in which people feel
comfortable to speak up--especially when offering views
contrary to those of colleagues and of leadership. It provides
everyone an opportunity to make an impact and improves decision
making and outcomes. To inform my own decision-making process,
I seek out input from a wide range of sources. And I make clear
that I benefit from hearing different views.
Generally, I think it is critical to remain engaged with
staff and create opportunities for dialogue. I make it a
priority to participate in division town halls and events
sponsored by employee resource groups. This provides me an
opportunity to get to know more of the Board's employees,
better understand their individual contributions, hear the
challenges they are facing as well as what they think is
working well and where there is room for improvement. It also
provides staff an opportunity to raise concerns with me
directly, increasing transparency and accountability.
As noted above, I work closely with the Director of the
Board's OMWI, Human Capital Officer, Chief Operating Officer,
and our division directors to hire, retain, and promote a
diverse staff. We have made this a priority for the Executive
Committee. I meet regularly with the OMWI Director to discuss
progress on priorities and to understand challenges and how we
are addressing them. As hiring decisions are made, I also
consult with her to ensure conformance with best practices. In
a culture and environment where employees feel supported and
valued. To hold ourselves accountable for advancing diversity
and inclusion, we have introduced the practice of Diversity and
Inclusion Scorecards.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM LAEL BRAINARD
Q.1. At your nomination hearing, Senator Tillis asked you about
the fact that you donated the maximum allowable individual
amount--$2,700--to Hillary Clinton's 2016 Presidential campaign
while you were a sitting Fed Governor. In your response to
Senator Tillis' question you asserted that other Fed Governors
have made political donations while they were serving on the
Fed Board of Governors. You said: ``it is rare, it has
occurred.'' Who are the other Fed Governors that have made
political donations while they were serving on the Fed Board of
Governors, when did they make these donations, what were the
amounts of their donations, and what are the names of the
recipients of these donations?
A.1. As I noted, I consulted with an ethics official who
informed me such donations are permissible, but I came to
recognize the concerns regarding appearances, and for those
reasons I have not made nor will I make any other donations
while a member of the Board of Governors of the Federal Reserve
System (Board). Regarding members of the Federal Reserve more
broadly, I am not aware of a comprehensive list; however, I
understand that publicly available sources reference donations
made by other Federal Reserve officials over time.
Q.2. In a 2019 testimony to the House Financial Services
Committee, Rep. Roger Williams asked if you were a capitalist
or a socialist. By his count, it is a question he has asked
nominees over 20 times before. All others--including your
cowitness at the hearing--have said capitalist. You refused to
answer the question, saying you don't ``think about in those
terms.'' The question is not complicated or abnormal. Both
capitalism and socialism are long traditions in the history of
economic thought. In the early 20th century, many influential
economists--including Abba Lerner and Oskar Lange--advocated
for Government-run economies. They sought to ``rationalize''
economic production, replacing markets with centralized
planning to improve economic efficiency. Notably, Paul
Samuelson praised the economic performance of the Soviet
Union--right up until it collapsed. Some continue to advocate
for socializing industries, including socialized banking via
the Federal Reserve.
Are you a capitalist or are you a socialist?
A.2. Capitalist.
Q.3. Please describe your role in updating the Federal
Reserve's Guidance on System Community Development (CD)
Function and CD Program Expectations in or around 2017.
Did you help draft the 2017 S-Letter on the Fed's CD
Function (S-2668)?
A.3. I was the Chair of the Committee on Consumer and Community
Affairs in 2017. In that capacity, I provided feedback to Board
staff on the System letter (S-Letter) they drafted (S-2668).
Other Board members also had an opportunity to provide such
feedback. Board members voted unanimously to approve S-2668 in
December 2017. Governor Bowman took over as Chair of the
Committee on Consumer and Community Affairs in 2018.
Q.4. Who else was involved in drafting this S-letter (S-2668)?
A.4. Board staff were involved in drafting S-2668, which is an
internal operating document providing guidance to the Federal
Reserve Banks on implementation of their community development
functions. The letter sought to update the guidance to reflect
existing practice to improve consistency across the Federal
Reserve System in support of the statutory mandates of the
Board, including supervisory and regulatory mandates for the
Community Reinvestment Act (CRA).
Q.5. Why did the Fed Board decide it was necessary to update
the Federal Reserve's Guidance on System CD Function and CD
Program Expectations in or around 2017?
When was this determination made, and who was involved in
making this determination?
A.5. Given the time that had passed since the last issuance of
the Community Development S-Letter (S-2473) in 1984, there was
broad agreement among Board members and members of the
Conference of Presidents that it was prudent to update the S-
Letter to better reflect existing practice. Board members voted
unanimously to approve the update to the S-Letter in December
2017.
Q.6. What changes did S-2668 make to the Fed Board's prior
guidance the Community Development/Community Affairs function?
A.6. The 2017 letter (S-2668) updates S-2473, which was
originally issued in 1984. The letter acknowledges that
community development is a core business function of the
Federal Reserve and describes how that function aligns with the
Board's purposes and functions. Specifically, S-2668 sets
expectations regarding (i) analysis and dissemination of
information regarding local financial needs and effective
approaches for attracting and deploying capital in support of
the Federal Reserve's CRA mandate; (ii) conducting applied
research and collecting data on local economic conditions and
on effective strategies for improving them; and (iii)
soliciting diverse views on issues affecting the economy and
financial markets in support of the Federal Reserve's financial
stability, supervisory, and regulatory responsibilities.
Q.7. S-2688 superseded prior Fed Board guidance set orth in S-
2442 (1981) and S-2473 (February 24, 1984). In order to put S-
2668 in context, please provide copies of S-2442 and S-2473.
A.7. I understand that Board staff have been coordinating with
your staff on this request.
Q.8. Did you or any other Federal Reserve Governor (including
the Chair) have any meeting(s) (or any other form of
communication) that discussed updating or broadening the
Community Development Function with anyone in the White House
prior to the 2017 release of S-2668?
If so, where was the meeting held and who was in
attendance?
What was the meeting about?
A.8. S-2668 is internal guidance to help facilitate the Federal
Reserve's implementation of its CRA responsibilities. The Board
of Governors approved S-2668 by a unanimous vote. I did not
consult with anyone in the White House on this matter.
Q.9. Did you or any other Federal Reserve Governor (including
the Chair) have any meeting(s) focused on updating or
broadening the Community Development Function with any outside
groups prior to the 2017 release of S-2668?
If so, where was the meeting held and who was in
attendance?
What was the meeting about?
A.9. I did not have any meetings to discuss S-2668 with any
outside groups prior to the Board's transmittal of the letter
to the Federal Reserve Banks.
Q.10. In December 2021, the 12-month CPI inflation rate was
+7.0 percent.
How much of this inflation can be attributed to the Fed's
interest rate policy?
How much of this inflation can be attributed to the Fed's
$4.6 trillion of asset purchases in 2020 and 2021?
How much of this inflation can be attributed to supply
chain disruptions?
How much of this inflation can be attributed to other
factors and what are they, if any?
A.10. As you note, inflation is too high, which hurts working
people and families, especially the most vulnerable. It is
difficult to undertake a precise quantitative decomposition of
the effects that the various factors you mention are having on
consumer price inflation, in part because we lack direct
information on the way that supply disruptions are contributing
to firms' costs, and how those costs are being passed through
to prices. The evidence that households, businesses, and market
participants appear to expect that the current high inflation
readings will subside over time and that the Federal Reserve
will meet its longer-term price stability goal of 2 percent PCE
price inflation provides some evidence that the bulk of the
recent increase in inflation is attributable to these pandemic-
related factors.
The Federal Reserve's interest rate policy actions and
asset purchases in response to the COVID-19 shock, combined
with rapid and sizeable fiscal support, helped to calm
financial turmoil, save American jobs and businesses, and
support a strong recovery. One way to get at the question about
isolating the contribution of aggregate demand from other
contributors is to compare inflation at similar levels of
unemployment before and after the pandemic. At 3.9 percent, the
current level of the unemployment rate is somewhat higher than
the 3.5 percent rate that was achieved on the eve of the
pandemic, when inflation was running around 2 percent, which
suggests that the contribution of aggregate demand--and hence
of monetary policy per se--to the recent increase in inflation
has probably not been large.
The recent high rates of consumer price inflation other
than food and energy mostly stem from an extraordinary and
sustained shift in the composition of consumer spending away
from in-person services and towards durable goods, combined
with supply-related constraints in those same sectors,
resulting from multiple waves of COVID-19. U.S. consumers
shifted spending toward goods--particularly durable goods--and
away from in-person services due to the pandemic. At the same
time, the availability of some of those same goods that are in
high demand has been curtailed by supply chain disruptions here
and especially abroad, as well as shipping constraints--due to
COVID-related or weather--related disruptions. At the same
time, labor shortages in many industries have exacerbated the
restricted supply of both goods and services in some sectors.
These labor shortages are themselves partly attributable to the
effects of the pandemic, as caregiving needs and ongoing fears
of the virus have weighed on labor force participation.
Q.11. Economists often describe quantitative easing (QE) as
working through a ``term premium effect.'' QE pushes down long-
term yields by reducing the supply of Treasury debt and
mortgage bonds.
To the best of your understanding, how much do the Fed's
portfolio holdings reduce the current 10-year Treasury yield?
If uncertain, provide a plausible range.
What models or analyses inform your estimate of the Fed
portfolio's TPE?
A.11. The effect of quantitative easing (QE) on financial
conditions and the macroeconomy is the subject of active
academic research, and a number of different channels have been
identified in that literature. The mechanism by which QE
affects the macroeconomy is generally through longer-term
interest rates, which are affected by the expected path of the
policy rate and by term premiums. QE can actually affect both
of those components of longer-term yields. QE can affect the
expected path of the policy rate through a signaling channel if
the public perceives the Federal Open Market Committee's (FOMC)
actions or communications about the balance sheet to imply a
different future path of the policy rate than they were
currently expecting. QE can directly affect term premiums in
part through a duration-risk channel by changing the total
amount of duration risk available to be held by private
investors.
There is a wide range of estimates of how much asset
holdings affect the 10-year yield through a term-premium
effect. One study \1\ that used data from early in the asset
purchase program in 2008-2009 after the onset of the global
financial crisis found effects that are equivalent to a 0.15
percentage point effect from net purchases that were equal to
10 percent of GDP, while another study \2\ found the equivalent
of a 2.4 percentage point effect for the same amount of net
purchases using different methods and a different sample
period. These are just two of the studies collected in Gagnon
(2016), \3\ which compares the estimates from a number of
papers in a consistent manner and illustrates the wide range of
estimates found in the literature. Importantly, many things
affect term premiums and the effect of an identical amount of
additional purchases is likely to be different in different
macroeconomic conditions, or under different shapes or slopes
of the yield curve.
---------------------------------------------------------------------------
\1\ Christensen, Jens, and Glenn Rudebusch. 2016. ``Modeling
Yields at the Zero Lower Bound: Are Shadow Rates the Solution?''
Advances in Econometrics 35: 75-125.
\2\ D'Amico, Stefania, and Thomas King. 2013. ``Flow and Stock
Effects of Large-Scale Treasury Purchases: Evidence on the Importance
of Local Supply''. Journal of Financial Economics 108, no. 2: 425-48.
\3\ Gagnon, Joseph (2016), ``Quantitative Easing: An
Underappreciated Success'', Peterson Institute for International
Economics, Policy Brief, April.
---------------------------------------------------------------------------
The range of estimates reinforces the uncertainty around
the precise magnitude of the term premium effects of these
purchases. While I retain a healthy level of humility about the
precision of the balance sheet tool, there is good evidence
that in both of the recent periods in which our policy rate
reached its effective lower bound, asset purchases helped
generate accommodative financial conditions in line with our
statutory objectives of achieving price stability and maximum
employment.
Q.12. Traditional monetarist analysis suggests a different
transmission mechanism for QE: the money supply. QE increases
the amount of reserves in the banking system. A greater level
of reserves earning a near-zero return drags down return on
equity, incenting banks to increase lending. Lending boosts
bank deposits, and therefore the money supply. In turn, all
else equal, the greater money supply increases aggregate
demand--and in the long run, prices.
Do you believe this mechanism is important for explaining
the transmission of monetary policy? Please explain your view
and share any relevant research.
Or if you do not yet have an informed view, will you commit
to studying it further and briefing me and my staff?
A.12. Traditional monetarist models emphasize the connection
between reserves and bank deposits. In such models, when banks
have excess reserves that are not earning interest, they
reallocate these funds into interest-bearing activities like
loans and investments. This activity in turn creates deposits
held by the public, and these deposits form part of measures of
the money supply like M2. This ``money multiplier'' paradigm--
in which the growth of reserves corresponds more or less
directly with the growth of the money supply as measured by
M2--does not appear to have been a very accurate description of
the relationship between bank reserves and the money supply in
recent decades. This likely reflects the fact that the modern
financial landscape contains elements not traditionally
included in money-multiplier-style models, including interest
on reserves and a binding lower bound on short-term interest
rates.
In recent decades financial innovation has loosened the
historical linkage between the M2 monetary aggregate and
economic variables like nominal GDP, real GDP, and inflation.
As I noted in my testimony, it remains the case that inflation
is fundamentally a monetary phenomenon. But M2 has diminished
in usefulness as an indicator of monetary policy and,
consequently, and monetary aggregates have not figured
prominently in the FOMC's monetary policy deliberations for
some time.
Q.13. FOMC participants have reevaluated their views on the
appropriate path of policy in light of recent inflation. In the
December 2021 Summary of Economic Projections, the median FOMC
participant projected three rate hikes in 2022, up from one
rate hike. All participants see inflation slowing. However,
three rate hikes would only raise overnight rates to between
0.75 percent and 1.00 percent. In real terms, interest rates
would still be sharply negative. While these projections are
not a committee forecast, these numbers suggest that
participants generally believe that inflation will fall despite
real interest rates remaining in negative territory.
How can the Fed curtail inflation while real interest rates
remain negative?
Does this imply that the neutral interest rate is now
negative, and so a less negative rate can be contractionary?
A.13. A mix of supply and demand factors are responsible for
the level of inflation that we are currently experiencing. Our
monetary policy tools work on the demand side, and are not
effective at addressing supply constraints. An important
component of my expectation that inflation will slow even as
rates remain below their longer-run level is the expectation
that supply constraints will ease during 2022. As constraints
ease and supply increases in the affected sectors, inflation in
these sectors should decelerate even if the level of demand
remains the same. This is the case for new and used motor
vehicles, where semiconductor supply constraints have been
significant, and inflation has been unusually high over the
past year. In addition to these supply-driven effects, the
steps we have taken recently to bring net asset purchases to a
close, as well as the projection you referenced for multiple
increases in the policy rate this year, will tighten the stance
of monetary policy and slow aggregate demand, also slowing
inflation.
Importantly, demand and inflation are influenced not just
by the present setting of monetary policy vis-a-vis the neutral
interest rate, but also by expectations regarding future
monetary policy. Monetary policy influences broader financial
conditions, through short- and longer-term interest rates, as
well as through their effects on other asset prices and the
broad value of the dollar. Longer-term interest rates, which
are affected by both the expected path of the policy rate and
the size of the balance sheet, are particularly important. As
expectations about the future of the policy rate and the
balance sheet shift, so too will broader financial conditions,
with attendant macroeconomic effects.
Q.14. In the past, you have spoken about the important role of
fiscal policy in supporting monetary policy when the Fed is
constrained by the zero lower bound. As I understand your view,
fiscal policy can support aggregate demand when the Fed's
primary tool (the overnight interest rate) is constrained. As
you said in an October 2020 speech, ``Further targeted fiscal
support will be needed alongside accommodative monetary policy
to turn this K-shaped recovery into a broad-based and inclusive
recovery.''[1] We have now seen the troubling result of that
support: tremendous inflation. And rather than fix our long-
term budget issues, my Democrat colleagues want to continue
deficit spending. Others have proposed radical changes to the
Fed's framework for monetary policy, such as allowing for
negative nominal interest rates, or purchasing corporate bonds
and equities. None of these radical proposals address the root
issue: the neutral interest rate has fallen close to zero.
[1] ``Achieving a Broad-Based and Inclusive Recovery'' (October
21, 2020), available at https://www.federalreserve.gov/
newsevents/speech/brainard20201021a.htm.
Do you agree that the potential growth rate is closely
connected to the neutral rate?
All else equal, for each percentage point increase in the
potential growth rate, how much would the neutral rate
increase? If uncertain, provide a plausible range.
In your view, what is the current neutral rate? If the
neutral rate were to rise, at what level would the zero lower
bound no longer be a salient concern for monetary policy?
What models or analysis informs your estimate of the
neutral rate, as well as the relationship between the neutral
rate and the potential growth rate?
A.14. Yes, the potential growth rate of the economy and the
neutral rate are closely connected and appear to share some
important drivers. That said, research results are mixed on the
overall strength of the relationship, and estimating the
neutral rate is challenging--a situation reflected in a wide
range of reported values.
Recent research \4\ shows that demographic factors are
likely important drivers of both the potential growth rate and
the neutral rate. That paper shows that demographic factors can
account for a little more than a 1 percentage point decline in
the equilibrium real interest rate since 1980, a magnitude
comparable to the roughly 1\1/4\ percentage point decline in
trend real GDP growth over the same period. This empirical
finding indicating nearly 1-for-1 movements in trend growth and
the neutral rate mirrors the 1-for-1 connection between
potential output growth and the neutral rate in the frequently
cited model, \5\ which made the 1-for-1 relationship between
the two variables a feature of the estimates. Other researchers
\6\ come to different conclusions, namely that the empirical
correlations between longer-run average GDP growth and longer-
run average real interest rates in both U.S. and international
data are not as strong as would be suggested by the strength of
the connections between the two series in theoretical models.
In sum, there are structural factors, such as demographics,
that are likely important drivers of both potential output
growth and the neutral rate--but this relationship is more
complicated than can be captured by simple models. An increase
in potential output growth is very likely to result in an
increase in the neutral rate, but the relationship is unlikely
to be one-to-one.
---------------------------------------------------------------------------
\4\ Gagnon, Etienne, Benjamin K. Johannsen, and David Lopez-
Salido. 2021. ``Understanding the New Normal: The Role of
Demographics''. IMF Economic Review 69 (2):357-90.
\5\ Thomas Laubach, John C. Williams; ``Measuring the Natural Rate
of Interest''. The Review of Economics and Statistics 2003; 85
(4):1063-1070.
\6\ Hamilton, James D., Ethan S. Harris, Jan Hatzius, and Kenneth
D. West. 2016. ``The Equilibrium Real Funds Rate: Past, Present, and
Future''. IMF Economic Review 64 (4):660-707.
---------------------------------------------------------------------------
A variety of evidence suggests the neutral rate it has
materially declined in recent decades. In the December Summary
of Economic Projections (SEP), the median longer-run level of
the nominal Federal funds rate was 2.5 percent, while the
median longer-run inflation expectation was 2 percent, which
would imply a real neutral rate of 0.5 percent. The level of
uncertainty around that estimate is significant.
It is difficult to say with certainty how much the neutral
rate would have to rise in order for the effective lower bound
to cease being a salient monetary policy concern. In prior
decades, the policy rate was cut by 4.5 to 5 percentage points
in an average recession--2 percentage points above the SEP
median longer-run level of the nominal Federal funds rate.
Q.15. Since 2020, the Fed has purchased about $4.6 trillion of
bonds.
With the benefit of hindsight, do you agree that the Fed's
QE program went on for too long?
A.15. Consistent with the Federal Reserve's statutory
responsibilities for achieving price stability and maximum
employment, the FOMC's purchases of longer-term Treasury
securities and of agency mortgage-backed securities were an
important tool in the Federal Reserve's response to the
pandemic. A significant fraction, $2.4 trillion of the $4.6
trillion you cite above, were purchased during the 3-month
window from mid-March to mid-June 2020, at the height of the
financial turmoil related to the onset of the pandemic. These
purchases were intended to restore orderly financial market
functioning in the early stages of the pandemic, thereby
supporting the flow of credit to households and businesses and
saving American jobs and businesses.
Subsequently, the Federal Reserve's asset purchases
provided necessary monetary accommodation consistent with our
statutory responsibilities for price stability and maximum
employment during a time when the Federal funds rate was at its
effective lower bound. As such, they helped reduce the severity
of the 2020 recession and supported the strongest recovery we
have seen in five decades. In December 2020, the FOMC
established outcome-based guidance indicating that asset
purchases would continue at their existing pace until
substantial further progress toward our statutory goals of
maximum employment and price stability had been met. In the
fall of 2021, the benefits of using outcome-based guidance
became clear, as the goal of substantial further progress was
achieved earlier than expected. The FOMC signaled following the
September 2021 meeting that the substantial further progress
threshold would soon be achieved, announced the tapering of
purchases in November 2021, and accelerated the pace of the
taper in December 2021 such that net purchases will end in
March 2022.
The FOMC's decisions regarding asset purchases have been
taken in support of the dual mandate and in a way that has been
transparently tied to economic outcomes on the labor market and
inflation.
Q.16. Going forward, would you support the Fed announcing a
specific horizon for its average inflation targeting?
A.16. Following a lengthy and considered process informed by
research and outreach, the FOMC unanimously adopted a monetary
policy framework. It includes a flexible average inflation
targeting (flexible AIT) strategy that seeks to achieve
inflation that averages 2 percent over time in order to ensure
that longer-term inflation expectations are well anchored at 2
percent.
The FOMC deliberated on whether to adopt a specific horizon
for its flexible AIT strategy and consulted a variety of
research on this topic. A formal average inflation targeting
(AIT) rule, under which the time horizon would be specified
numerically is appealing in theory. But ultimately the FOMC
determined that the drawbacks would likely outweigh the
benefits in practice. As the FOMC noted in the Statement on
Longer-Run Goals and Monetary Policy Strategy, the strategy
aims to conduct policy in a way that anchors inflation
expectations at 2 percent. The appropriate adjustment of
monetary policy to achieve this goal will depend on a wide
range of factors that could vary materially over time,
depending on the economic circumstances, which could not be
fully captured by a simple arithmetic formula pertaining to
average inflation over a fixed time horizon. The FOMC concluded
that a flexible AIT strategy is better matched to the highly
uncertain and dynamic context in which policymaking takes
place, and it is likely to be superior to mechanical AIT in
terms of ease of communication and implementation, as well as
in terms of the associated economic outcomes. Of course, the
FOMC may revise its views in the future, in light of subsequent
experience and research, which will also inform the evolution
of my own views.
Q.17. At a Financial Stability Oversight Council (FSOC) meeting
in 2021, Treasury Secretary Yellen expressed potential systemic
concerns resulting from ``liquidity risks'' associated with
open-end mutual funds and money market funds. It is concerning
that this will be used to justify an overreaching regulatory
regime for both products.
Do you believe that money market funds should be eliminated
as an investment vehicle?
A.17. No. The incentives for investors in prime and tax-exempt
money market funds to run to redeem their shares in moments of
crisis contributed to waves of large redemptions in 2008 and
2020, which placed enough stress on the broader financial
system to necessitate emergency actions to backstop financial
markets. Such vulnerabilities can be addressed by the
appropriate regulatory authority putting in place requirements
to mitigate the vulnerabilities so that money market funds can
continue to play an important role in the financial system. The
Securities and Exchange Commission (SEC) has regulatory
authority over money market funds.
Q.18. Do you support retaining the viability of open-end mutual
funds as an investment vehicle?
A.18. Yes. Both the global financial crisis and the experience
in 2020 demonstrated there can be vulnerabilities related to
maturity and liquidity transformation. Such vulnerabilities can
be addressed by the appropriate regulatory authority. The SEC
has regulatory authority over such funds.
Q.19. If confirmed, will you respect the SEC's jurisdiction to
regulate money market funds?
A.19. Yes.
Q.20. Do you believe that the in-kind redemption mechanism for
exchange-traded funds (ETFs) presents different liquidity
concerns than cash redemptions from traditional mutual funds?
If you believe there is a difference, please explain how that
affects your views on how to regulate ETFs.
A.20. I agree that in-kind redemption, in which securities are
delivered to the redeeming party, creates less incentive for
investors to run when compared with cash redemption. I defer to
the SEC on the appropriate regulation of exchange-traded funds
(ETFs).
Q.21. On July 12, 2016, former Federal Reserve Governor Daniel
Tarullo described the term ``shadow banking'' as evoking a
``sense of something hidden, furtive even'' in a speech.
Do you believe this term should apply to open-end mutual
funds registered with the SEC?
A.21. To the best of my knowledge, open-end mutual funds are
registered with the SEC, and data on such funds is available.
Q.22. In 2018, the House of Representatives voted 406-4 in
favor of the JOBS and Investor Confidence Act. Section 1501 of
that legislation would have replaced the Dodd-Frank Act's
stress test requirement applicable to SEC- and CFTC-regulated
entities with an authorization to adopt rules requiring
periodic analyses of financial condition, including available
liquidity, of such entities under adverse economic conditions.
Do you support this modification that the JOBS and Investor
Confidence Act would have made?
A.22. I defer to Congress regarding the creation of mandates,
and I would defer to the respective judgements of the Commodity
Futures Trading Commission and SEC regarding how they interpret
their Congressional mandates. Under the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), the
Federal Reserve implements a stress-testing regime for the
largest and most systemically important banking institutions,
and I believe this regime continues to support a well-
capitalized banking system and that it contributed to that
system's ability to weather the financial turmoil at the outset
of the pandemic. Reflecting our experience with stress testing
and our responsibilities under the Dodd-Frank Act, we also have
engaged in collaborative efforts among regulators--both
domestic and international--to develop macroprudential stress
testing for systemically important central counterparties.
Q.23. I am concerned about the FSOC's designations of
Systemically Important Financial Institutions (SIFIs). A SIFI
designation is troubling in part because it creates moral
hazard: it formalizes an institution's ``too big to fail''
status and creates the expectation that the taxpayers will bail
out a SIFI that falls into financial distress. Also troubling
is FSOC's history of exercising its SIFI designation powers.
Under the Obama administration, FSOC made overreaching SIFI
designations of nonbanks in a nontransparent manner and without
providing a clear path for dedesignation.
In 2019, FSOC issued a policy that made several
improvements to the nonbank designation process. These included
emphasizing that designation is a last resort, requiring cost-
benefit analysis and an assessment not only of the impact of a
risk but also the likelihood that it will be realized, as well
as creating both predesignation and postdesignation ``off-
ramps'' to help firms and regulators avoid or reverse SIFI
designation by mitigating systemic risks.
Will you commit that, if confirmed, you will support
ensuring that FSOC:
Continues to treat SIFI designation as a last
resort;
Maintains a transparent process for SIFI
designation;
Conducts robust cost-benefit analysis for all
designations; and
Provides institutions with the opportunity to avoid
designation and, if designated, a path to reverse such
designation?
A.23. Under the Dodd-Frank Act, Chair Powell is a member of the
Financial Stability Oversight Council (FSOC), and I have not
participated in the FSOC's deliberations regarding systemically
important financial institution (SIFI) designation.
Q.24. Under what conditions, if any, would you support the FSOC
or the Financial Stability Board (FSB) designating mutual
funds, ETFs, and money market funds as nonbank SIFIs?
A.24. As noted above, I have no role in FSOC designation.
Regarding the Financial Stability Board (FSB), FSB outcomes are
not binding on U.S. regulatory agencies, and the FSB does not
engage in designating mutual funds, ETFs, and money market
funds as nonbank SIFIs.
Q.25. Asset managers provide investment advice to clients. They
do not bear the risk of investments made by their clients
because asset managers do not own those assets.
Should asset managers be designated by the FSOC or the FSB
as nonbank SIFIs? If so, under what conditions?
A.25. As noted above, I do not have a role in FSOC designation,
and the FSB does not engage in designating asset managers as
nonbank SIFIs.
Q.26. Over the past few years, there have been several
disruptions in the U.S. Treasury market (both cash and
futures), which is generally considered to be the deepest and
most liquid market in the world.
Some Treasury market observers have expressed concerns
about regulatory fragmentation, with responsibilities divided
between five or more agencies. Others have called for specific
regulatory reforms, including (1) mandatory central clearing,
(2) amendments to bank capital rules, and (3) additional data
collection.
Do you believe that the current regulatory framework for
oversight of the Treasury market is adequate? If not, what
changes do you believe should be made?
A.26. The Treasury market is one of the most important and
liquid securities markets in the world. Businesses and
investors treat Treasury securities as risk free assets that
can be converted into cash at a moment's notice to meet
liquidity demands. This higher level of liquidity has been an
important property of Treasury markets for decades. However, as
you note, several disruptions have occurred in the Treasury
market in recent years during which the level of transactional
liquidity has declined, sometimes precipitously. The Federal
Reserve has been partnering with the U.S. Department of the
Treasury and other regulatory agencies in the Interagency
Working Group to examine the data to ascertain why Treasury
market liquidity has been fragile at moments of stress, and to
consider potential reforms that may help to increase Treasury
market resilience in moments of stress.
Your list above represents some of the more commonly
discussed reform measures. As was noted in the November 2021
report from the IAWG on Recent Disruptions and Potential
Reforms in the U.S. Treasury Market, there is a lot of analysis
yet to be done. The potential benefits and costs of expanded
central clearing and other steps to facilitate all-to-all
trading vary across market segments. Segments also differ in
the mechanisms available for market participants to access the
central counterparty and in the data available to the
authorities. The benefits, costs, and feasibility of expanded
clearing can depend on these differences between market
segments.
It is important to note that the Federal Reserve does not
have regulatory authorities over markets and trading venues,
which is more often the purview of the SEC. For instance, the
SEC's recent proposals extend the operational access,
disclosure, and regulatory oversight provisions of Regulation
ATS and the system integrity provisions of Regulation SCI to
Treasury-market trading venues.
The Federal Reserve has taken a more active role in
improving and increasing data collection within Treasury
markets. The Board approved a final rule requiring depository
institutions who reach certain thresholds of trading activity
in Treasury and Agency debt and mortgage-backed securities
transactions to report those transactions through the Financial
Industry Regulatory Authority's TRACE reporting system. That
requirement is scheduled to go into effect on September 1,
2022. The Federal Reserve has previously worked closely with
the Office of Financial Research on its collection of centrally
cleared Treasury repo market data, and we are supportive of
collecting similar data for the noncentrally cleared segment of
this market.
Q.27. On September 25, 2020, the FSOC released a statement on
its activities-based review of the secondary mortgage market.
FSOC's statement affirmed the overall quantity and quality of
the regulatory capital required by the Federal Housing Finance
Agency's (FHFA) June 30, 2020, proposed rule to establish a new
regulatory capital framework for Fannie Mae and Freddie Mac
(each, a GSE).[2] Specifically, FSOC stated that ``risk-based
capital requirements and leverage ratio requirements that are
materially less than those contemplated by the proposed rule
would likely not adequately mitigate the potential stability
risk posed by the Enterprises.''[3] FSOC also concluded ``it is
possible that additional capital could be required for the
Enterprises to remain viable concerns in the event of a
severely adverse stress.'' (emphasis added).[4] FSOC also
committed to ``continue to monitor . . . FHFA's implementation
of the regulatory framework to ensure potential risks to
financial stability are adequately addressed.'' On December 17,
2020, FHFA finalized a regulatory capital framework for the
GSEs that included leverage ratio requirements that were
identical to those in the proposed rule.[5]
[2] 85 FR 39,274.
[3] https://home.treasury.gov/system/files/261/Financial-
Stability-Oversight-Councils-Statement-on-Secondary-Mortgage-
Market-Activities.pdf
[4] Id.
[5] 85 FR 82,150.
FHFA has since proposed reducing the regulatory capital
required by both the risk-based capital requirements and the
leverage capital requirements of FHFA's final rule.[6]
[6] 86 FR 53,230.
In light of FSOC's commitment to monitor FHFA's
implementation of the GSEs' regulatory framework, which
includes the regulatory capital framework, did FHFA solicit
input from the Board of Governors of the Federal Reserve System
(the Fed) before proposing to reduce the aforementioned capital
requirements? If yes, please provide a copy of those comments.
Did the FHFA ask the Fed whether the proposed amendments to
the GSEs' regulatory capital framework would adequately address
potential risks to financial stability? If yes, please provide
a copy of the Fed's response on this question.
Has the Fed otherwise reviewed the proposed amendments to
the GSEs' regulatory capital framework?
A.27. By the Dodd-Frank Act, Chair Powell is a member of the
FSOC. I have not been involved in this issue.
Q.28. FHFA's proposed amendments include a proposed reduction
in the prescribed leverage buffer amount (PLBA). If finalized
as proposed, the amendments would reduce each GSE's PLBA by
two-thirds (from 1.5 percent of adjusted total assets to
approximately 0.5 percent) and its PLBA-adjusted leverage
capital requirements by one-quarter (from 4.0 percent of
adjusted total assets to approximately 3.0 percent).
As a participant in FSOC's secondary market review, would
FHFA's proposed amendments, if finalized, result in ``leverage
ratio requirements that are materially less than those
contemplated by [June 30, 2020] proposed rule''?[7]
[7] 86 FR 53,230.
A.28. By the Dodd-Frank Act, Chair Powell is a member of the
FSOC. I have not been involved in this issue.
Q.29. FSOC stated that ``a meaningful leverage ratio
requirement that is a credible backstop to the risk-based
requirements would address potential risks to financial
stability by ensuring that the capital requirements are
consistent with historical loss experiences during severe
stresses while mitigating model, measurement, and related risks
with a simple, transparent measure of risk.'' Taking into
account the 20 percent risk weight floor on mortgage exposures
(1.6 percent of the exposure amount), the floor on the stress
capital buffer (0.75 percent of adjusted total assets), and the
current sizing of each GSE's stability capital buffer (1.0
percent and 0.7 percent of adjusted total assets for Fannie Mae
and Freddie Mac, respectively), it appears exceedingly unlikely
that a GSE's risk-based capital requirement could ever be less
than the proposed leverage capital requirements of 3.0 percent
and 2.9 percent for Fannie Mae and Freddie Mac, respectively,
even if a substantial portion of a GSE's mortgage exposures
were subject to the risk weight floor.
As a participant in FSOC's secondary market review, and in
light of the apparently very remote prospect that the GSEs'
risk-based capital requirements could ever be less than the
proposed leverage capital requirements, would the proposed
amendments to the PLBA result in ``a meaningful leverage ratio
requirement'' and would the proposed leverage capital
requirements be ``a credible backstop to the risk-based
requirements'' within the meaning of FSOC's statement?
A.29. By the Dodd-Frank Act, Chair Powell is a member of the
FSOC. I have not been involved in this issue.
Q.30. As part of its rationale for the proposed amendments to
the PLBA, FHFA noted that ``Basel III standards require
systemically important banks to hold a tier 1 capital leverage
ratio buffer in excess of a 3 percent leverage requirement
equal to 50 percent of a GSIB's higher loss-absorbency risk-
based requirements.'' FHFA also stated that it intended to
amend the PLBA ``in a manner similar to the U.S. banking
regulators' proposal to set the eSLR buffer to one-half of the
GSIB surcharge'' and that ``a dynamic PLBA that is tied to the
stability capital buffer would further align the [Enterprise
Regulatory Capital Framework] with Basel III standards.''
Related to this, former Fed Vice Chair for Supervision Quarles
recently said ``[w]ith respect to the enhanced supplementary
leverage ratio (eSLR) that applies to U.S. global systemically
important banks (GSIBs), the best way to address this problem
is the approach endorsed by the Basel Committee: recalibrating
the fixed 2-percent eSLR buffer requirement to equal 50 percent
of the applicable GSIB capital surcharge, with corresponding
recalibration at the bank level.''[8]
[8] Governor Randal K. Quarles, ``Between the Hither and the
Farther Shore: Thoughts on Unfinished Business'' (Dec. 2,
2021), available at www.federalreserve.gov/newsevents/speech/
quarles20211202a.htm.
Importantly, a GSIB's eSLR buffer requirement is a percent
of risk-weighted assets, while a GSE's stability capital buffer
requirement is a percent of adjusted total assets. If the
intent were to align FHFA's approach to the PLBA with the Basel
Committee's approach to the eSLR buffer, would each GSE's
stability capital buffer requirement first need to be converted
to an equivalent that is expressed as a percent of risk-
weighted assets (e.g., by dividing the stability capital buffer
requirement by the average risk weight of the GSE's assets
(currently around 33 percent))?
A.30. The Government-sponsored enterprises (GSEs) are an
integral part of our housing finance system; therefore, it is
essential that they are fully capitalized and subject to
appropriate micro- and macroprudential standards to ensure they
do not pose a threat to financial stability. Congress has
charged the Federal Housing Finance Agency with oversight of
the GSEs, and therefore, they are best placed to make relevant
regulatory and supervisory decisions.
Q.31. You have stated that climate scenario analysis is
``distinct from our traditional regulatory stress tests at
banks.''[9] Given the short, nine-quarter time horizon of the
Federal Reserve's stress tests, it would be inappropriate to
use this exercise to assess climate-related risk. I am
concerned, however, that certain Federal Reserve officials are
advocating for incorporating climate scenarios into the stress
tests. For example, last year the Federal Reserve Bank of New
York (FRBNY) published a staff report on climate stress
testing,[10] which would seem to conflict with your statement
at the hearing that the Fed was not considering stress tests.
Do you wish to acknowledge that the Fed is in fact working on
climate stress testing options?
[9] https://www.federalreserve.gov/newsevents/speech/
brainard20210218a.htm
[10] https://www.newyorkfed.org/medialibrary/media/research/
staff-reports/sr977.pdf
A.31. I am not familiar with the staff paper you reference
above. The Federal Reserve System has a number of working paper
series and the papers in these series are independent research
by Federal Reserve staff, sometimes with outside coauthors.
Papers in these series do not represent official positions of
the Federal Reserve System and these papers are required to
carry a disclaimer identifying that fact.
Climate scenario analysis is designed to model the possible
financial risks associated with climate change and to assess
the resilience of individual financial institutions and the
financial system to these risks. It is a useful tool to assess
the links between climate-related risks and economic and
financial outcomes, which is distinct from the Federal
Reserve's regulatory stress-testing regime. Climate scenario
analysis and the regulatory stress tests serve different
objectives and seek to measure risks over different time
horizons. Climate scenario analysis is typically exploratory in
nature, longer-term, and considers plausible but novel
combinations of risks that are associated with substantial
uncertainty. The analysis would be used to identify and scale
risks across a range of plausible scenarios and would not be
tied to regulatory capital decisions or specific supervisory or
regulatory outcomes. Regulatory stress tests, by contrast, are
used to assess capital adequacy relative to specific shocks in
the short-term and have consequences for capital and
supervisory ratings.
Q.32. I am concerned that a recent Federal Reserve Bank of New
York (FRBNY) staff report on climate stress testing[11] is
predicated on numerous extreme and implausible assumptions,
including a 50 percent drop in the return on a ``stranded asset
portfolio,'' which is comprised predominantly of coal exposures
and a short position in the S&P 500, over a 6-month period. The
parameters of this paper raise concerns that it was
intentionally constructed to overstate the climate-related risk
of in-scope banks. If the Federal Reserve continues to study
climate-related risk, do you commit that research informing
policy decisions will be subject to public comment to ensure
its accuracy and objectivity?
[11] https://www.newyorkfed.org/medialibrary/media/research/
staff-reports/sr977.pdf
A.32. As I indicated in response to Question 25, I have not
read the staff paper you reference above. I view the Federal
Reserve's responsibilities related to assessing climate-related
risks through the lens of our prudential and financial
stability statutory responsibilities. From a prudential
perspective, the focus is on evaluating whether large
supervised institutions operate in a safe and sound manner and
manage all material risks, including those related to climate
change. From a financial stability perspective, the focus is on
identifying, assessing, and addressing climate-related risks to
financial stability, such as climate-related financial shocks
and financial system vulnerabilities.
Q.33. In a recent speech, Acting Comptroller of the Currency
Michael Hsu stated that ``[a] carbon tax can be thought of as
the transition risk equivalent of the `severely adverse'
scenario in CCAR.''[12]
[12] https://www.occ.gov/news-issuances/speeches/2021/pub-
speech-2021-116.pdf
As the Federal Reserve develops its approach to climate
scenario analysis, would it be appropriate for that scenario
analysis to include assumptions about future actions by
Congress?
If yes, please explain how the Federal Reserve would
forecast the future actions of Congress?
Would it be appropriate for the Federal Reserve to consider
potential future Congressional action in the context of climate
scenario analysis but not in other areas of its supervision?
Would it be appropriate for the Federal Reserve to consider
the pending expiration of numerous tax subsidies to green
energy sources as part of its climate scenario modeling/stress
tests?
A.33. Climate-related financial risks may have implications for
the safety and soundness of financial institutions and the
stability of the financial sector more broadly. Our role is to
ensure supervised institutions, and the financial system, are
resilient to material risks, including those related to climate
change.
At the Federal Reserve, we are carefully considering the
potential implications of such risks for financial institutions
and the financial system, with scenario analysis as a potential
key analytical tool for that purpose. Through scenario analysis
exercises, we can explore plausible, but novel, combinations of
risks that are associated with substantial uncertainty and
begin to dimension their potential effects on different asset
classes, regions, and sectors. This tool can help us assess the
financial system for vulnerabilities related to climate change
and deepen our understanding of the interconnections between
the climate, the economy, and the financial sector.
Climate scenario analysis exercises can consider a range of
potential outcomes. Physical risk scenarios could, for example,
include assumptions around the frequency and severity of severe
weather events, the impact of sea level rise on coastal
communities, or the availability or affordability of insurance.
Transition risk scenarios could, for example, include
assumptions related to an abrupt repricing of certain assets
triggered by shifts in policy, investor sentiment, or
technological innovation.
The fields of economics and risk management have a long
history of estimating the potential effects of policy changes
on variables such as economic growth and financial market
outcomes. Incorporating the effects of potential public policy
changes in this type of scenario analysis exercise is not a
forecast about what will happen, but rather a tool to assess
the resilience of our financial system to a range of outcomes
and to promote prudent risk management across these potential
outcomes.
Q.34. If the Fed receives authorization from Congress for the
creation of a central bank digital currency (CBDC), the Fed
will still have to make many crucial decisions regarding its
design and implementation.
The ability to freely transact without transaction level
Government monitoring should be a core component of any U.S.
CBDC. How important do you think individual privacy protections
are in the design of a CBDC? What privacy measures do you think
should be included in its design?
There is absolutely nothing in the history, experience,
expertise, or capabilities of the Fed that lend the Fed to
being a retail bank. Do you think that the Fed should provide
direct retail accounts for use with a CBDC, or for any other
purpose?
If existing law were to change and the Fed was given the
option by Congress to allow for retail accounts, do you believe
the Fed should make them available?
If the Fed were to issue retail accounts to individuals,
what could be some of the negative consequences to existing
private financial institutions that serve the American public?
A.34. Individual privacy protections are critical in the design
of any central bank digital currency (CBDC). It is important
that any potential CBDC safeguard the privacy of households'
payments transactions, a principle which was highlighted in the
Board's recently published discussion paper on CBDC. Similarly,
it is also fundamental that any potential CBDC prevent and
trace illicit activity, which requires the digital verification
of identities. To help us better understand possible ways to
achieve both aims effectively, we are soliciting ideas from a
wide range of stakeholders through our discussion paper.
It is the purview of Congress to determine whether it
should authorize the Federal Reserve to offer retail accounts
directly to consumers. To help us better understand the
perspectives of a broad range of stakeholders with regard to
CBDC, the Federal Reserve recently issued a discussion paper on
CBDC. The paper notes that initial analysis suggests that a
potential U.S. CBDC, if one were created, would best serve the
needs of the United States by being privacy-protected,
intermediated, widely transferable, and identity verified.
Q.35. Stablecoins offer tremendous potential benefits,
including greater payment speed, lower costs, expanded access
to the payment system, and programmability. I was disappointed
that the recent President's Working Group (PWG) report on
stablecoins failed to highlight these potential benefits and
recommended a regulatory response that would limit innovation.
Some would even go further, subjecting all stablecoins to
securities regulation, or prohibiting their issuance if the
Government were to issue its own digital currency that was
pegged to the value of the dollar.
Is there anything in the creation of a CBDC that ought to
preclude well-regulated, privately issued stablecoins from
coexisting with a CBDC?
A.35. No. Any potential CBDC should be viewed as a way to
expand payment options available to the public, rather than
restrict them. There is good reason to expect that multiple
types of digital payments will coexist, much like the variety
of payment options today. As you note, the key is that
privately issued stablecoins be well-regulated.
Q.36. Most stablecoins are pegged to the U.S. dollar, and many
are used in international markets. Could stablecoins contribute
to the dollar's use internationally?
A.36. Yes. This would depend on a variety of factors.
Q.37. Over the past year, there has been an increasing backlog
of bank merger applications pending Fed review. In recent
months, some have come to believe that a de facto moratorium on
bank mergers and acquisitions was in place at the Fed. As this
Committee has seen in another area under its jurisdiction,
namely, the Committee on Foreign Investment in the United
States (CFIUS) process, an informal moratorium could be put in
place by regularly sending requests for additional information
to applicants and claiming that the application is not yet
complete.
Are you aware of any formal or informal effort at the Fed
to delay the resolution of bank merger applications?
Do you believe that the Fed's current merger approval
process provides clear instructions to applicants such that
they can reasonably expect to submit a complete application
without multiple rounds of revisions and additional questions?
Will you commit not to deliberately delay the bank merger
application process, and to hold your staff accountable for
doing the same?
Will you commit to consider each application on its
individual merits?
A.37. I am not aware of any effort of this nature. Congress
provided a statutory timeframe in which to process bank merger
applications, and I have supported and will continue to support
matters moving to the Board in a timely manner.
As part of the evaluation process, the Board gathers
information necessary to form a complete record. Applicants are
given clear and detailed instructions regarding what is
required, and the staff may need to request additional
information or ask for clarification from applicants. In order
to make an informed decision, it is essential to have all
relevant information.
Congress specified a framework to evaluate merger and
acquisition applications comprised of a variety of factors that
we carefully evaluate--competition and future prospects,
financial and managerial resources, convenience and needs of
communities to be served, Community Reinvestment Act
performance, Bank Secrecy Act/Anti-Money Laundering compliance,
and financial stability. For each application, I consider the
specific record on those factors, and I commit to continuing
that practice.
Q.38. Congress established a set of requirements for the Fed
review of bank merger applications under the Bank Holding
Company Act (BHCA) by establishing specific factors for
consideration. The statute does not give the agency discretion
to depart from them.[13] Further, BHCA sets a 91-day deadline
for the Fed to approve or disapprove of the application after
the record is complete.[14] To ensure the Fed cannot ignore
this deadline, Congress structured the law to automatically
grant any merger application the Fed fails to act on within
that timeframe.[15] An express or de facto moratorium would
appear to directly contravene the law.
[13] See, Bank Holding Company Act, 12 U.S.C. 1842(c)(1).
[14] Id. 1842(b)(1).
[15] Id. 1842(b)(1).
Will you commit to review complete bank merger applications
expeditiously, as required by law?
Will you commit not to deliberately delay the bank merger
application process, and to hold your staff accountable for
doing the same?
Will you commit to consider each application on its
individual merits?
A.38. Yes. As stated in my response to Question 30, I commit to
reviewing matters expeditiously and on their individual merits,
and I will continue to support matters moving swiftly to the
Board.
Q.39. Please describe with particularity the process by which
you answered these questions for the record, including
identifying who assisted you in answering these questions along
with a brief description of their assistance.
A.39. As is my standard practice, I have engaged with Board
staff to receive their input in compiling these responses. The
responses to these questions and the views expressed are mine.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM LAEL BRAINARD
Q.1. While there has been some progress in diversifying the
Class C Directors chosen by the Fed, the Class B Directors
elected by member banks remain predominantly White, male, and
representative of banks and large businesses.
What specific steps would you take to help further
diversify the Boards of Directors at the Federal Reserve Banks?
A.1. The Federal Reserve should reflect the communities we
serve. The Federal Reserve was founded on a recognition of the
importance of bringing a diversity of perspectives to the
table. That is reflected in the twelve Reserve Banks, and their
branches, located in different regions across the country. We
have not yet achieved that standard on other dimensions.
Research suggests that having more diverse perspectives at the
table--diversity of every type--leads to less groupthink and
better outcomes.
I have worked to increase diversity among the Federal
Reserve System's boards of directors. Our Class C directors are
materially more diverse than they were 5 years ago. Minority
representation among Class C directors has increased by 31
percentage points, and currently nearly two-thirds of Class C
directors are minorities (22 percent of which are Hispanic/
Latino). Currently, more than half of Class C directors are
women, 33 percent of whom are minorities.
The leadership of Reserve Bank boards is also highly
diverse. Currently 20 of the 24 Reserve Bank Chairs and Deputy
Chairs are diverse in terms of race or ethnicity and/or gender.
As you reference in your question, Class B directors are
nominated and elected by the member banks in their respective
District, as are Class A directors. Although progress has also
been made among Class B directors, it is important to make
further progress.
The current recruitment processes focus on outreach;
tapping directors' professional networks to recruit in specific
sectors; leveraging relationships with members of the Federal
Reserve Board's and the Reserve Banks' numerous advisory
councils; and engaging with community and business contacts to
identify potential sources of candidates for director
positions. We continue to look for ways to broaden our outreach
efforts. I am committed to working with senior Reserve Bank
leaders to build upon these practices in order to identify more
diverse pools of candidates for director positions.
Q.2. One idea I believe could help is to bring greater
transparency and public participation into the selection
process. This would provide additional legitimacy to the Banks
and promote Fed leadership that actually represents the public
it oversees.
Would you support a venue for genuine public participation
in the Class B and C Director selection processes?
A.2. I support genuine public engagement on the Class B and C
director selection processes. As I noted in my response to
question #1, the current recruitment processes for director
positions involve building relationships and connecting with
members of the public. Senior Federal Reserve System staff
engage community, business, and labor leaders through a variety
of outreach and engagement forums to expose members of the
public to the Federal Reserve and its mission and to solicit
their input on best practices and gaps in recruiting for
director positions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM LAEL BRAINARD
Q.1. How does the financial stability of lower income
individuals factor into your view of the Fed's dual mandate?
A.1. The Federal Reserve promotes maximum employment and price
stability--its dual-mandate goals--and in doing so it directly
and positively affects the financial health of lower income
individuals. For all but the top 5 percent of the income
distributions, wage income makes up around 60 to 80 percent of
total income for working-age households (see, Feiverson et al.,
2020, pp. 9 to 11). \1\ As such, the Federal Reserve's policy
actions to promote maximum employment also support household
wage income and, in turn, the financial health of lower income
households. In this regard the Federal Reserve's broad and
inclusive definition of its maximum employment goal is
especially important. This goal means that we do not just look
at the headline unemployment rate, or any high-level aggregate,
when setting policy, but rather we monitor a wide range of
labor market indicators to assess whether progress toward
maximum employment is broad and inclusive. Our policies to
promote price stability also foster lower-income individuals'
financial health. High inflation takes a toll on families,
especially those with lower incomes who are burdened by the
higher costs of essentials like food, housing, and
transportation.
---------------------------------------------------------------------------
\1\ Laura Feiveson, Nils Goernemann, Julie Hotchkiss, Karel
Mertens, and Jae Sim (2020), ``Distributional Considerations for
Monetary Policy Strategy'', Finance and Economics Discussion Series
2020-073 (Washington: Board of Governors of the Federal Reserve
System). The analysis in this paper was prepared as background for the
Federal Open Market Committee's discussions at its December 2019
meeting on distributional considerations for monetary policy.
---------------------------------------------------------------------------
To better understand how the Federal Reserve's policy
actions affect the financial health of households--including
lower income households--the Federal Reserve has made a number
of enhancements to its data collections and to its community
outreach efforts. Enhancements to our data collections in
recent years include the development and publication of new
surveys--such as, the Distributional Financial Accounts, which
reports quarterly estimates of wealth, assets, and debt by race
and ethnicity, and the Survey of Household Economics and
Decisionmaking (SHED), which reports on the economic well-being
of American households, including among racial and ethnic
groups--and the enhancement of existing surveys--such as the
Survey of Consumer Finances (SCF), which in this year's survey
will include improved measures of racial disparities.
Enhancements to community outreach have most notably included
the launch of Fed Listens, which began in 2019 as a series of
events undertaken as part of our framework review and which we
have been continued since then. Fed Listens events, which take
place around the country and engage with a wide range of
individuals and groups--employee groups and union members,
small business owners, residents of low- and moderate-income
(LMI) communities, workforce development, organizations and
community colleges, retirees, and others--provide an
opportunity to hear about how monetary policy affects peoples'
daily lives and livelihoods and we view the stories that we
hear from these events to be a highly useful input into our
policy monetary deliberations.
A better understanding of how our monetary policy actions
affect different socioeconomic groups also helps us to better
conduct monetary policy in order to fulfill our dual mandate.
For example, Feiverson, et al. (2020), showed that the costs of
recessions to the society would be larger once we consider the
differences across households' abilities to access credit; as a
result, monetary policy strategies aiming to stabilize
inflation over longer time horizons, along lines similar to
what we adopted under the updated Statement on Longer-Run Goals
and Monetary Policy Strategy, would be more successful at
reducing the frequency of recessions and the severity of
unemployment-rate increases during recessions.
Q.2. When considering raising interest rates to curb inflation,
how does the effect of raising interest rates on low income
borrowers factor your decision?
A.2. Low-income households benefit from conditions of maximum
employment and low inflation, which is what our monetary policy
is designed to achieve. The U.S. economic expansion that
preceded the pandemic was historically unprecedented in its
length. The length of the expansion benefited low-income
Americans by providing a continuous increase in job
opportunities and growing levels of employment in a low
inflation environment. An important principle suggested both by
economic theory and by the economic experience of the United
States and other countries is that long expansions are
facilitated by price stability and stable longer-term inflation
expectations. Against this background, changes that the Federal
Open Market Committee (FOMC) makes to its target range for the
Federal funds rate--including rate increases when it judges
these to be appropriate--are designed to put in place a
monetary policy stance most consistent with achieving and
sustaining our dual mandate of maximum employment and price
stability. Our decisions take place in the context of our new
monetary policy framework, which recognizes that maximum
employment is a broad and inclusive goal, encompassing low-
income workers and those traditionally on the margin of the
labor force. For the reasons I indicated above, achieving our
maximum-employment goal on an ongoing basis requires creating
conditions consistent with long, noninflationary expansions.
Q.3. If confirmed, what steps will you take ensure that the
Federal Reserve works for people of all levels of wealth and
income?
A.3. If confirmed, I will work to ensure the Federal Reserve
carries out its statutory responsibilities with regard to
people around the country at all levels of wealth and income.
The Federal Reserve has tools and responsibilities with regard
to monetary policy on the one hand, as well as supervision and
regulation. Both make important contributions to widely shared
prosperity.
By pursuing our statutory mandate, the Federal Reserve's
monetary policy actions promote maximum employment and price
stability--two foundations that improve economic outcomes for
all Americans. Those who have historically been left behind
stand the best chance of prospering in a strong, stable economy
with plentiful job opportunities and low inflation.
The lengthy expansion that was brought to a close by the
pandemic showed the immense benefits that a strong labor market
with low inflation can provide to all communities, and
especially to LMI communities. The pandemic is a reminder that
LMI communities are the most vulnerable to economic downturns
and also that the Federal Reserve has powerful tools to help
support a strong recovery.
Currently we are seeing the strongest recovery in five
decades with strong growth and the creation of millions of
jobs, but inflation is too high. Monetary policy is focused on
getting inflation down to target, which is important for
working people who are concerned about how far their paychecks
will go, while sustaining a recovery that includes everyone.
The Federal Reserve staff undertake important data
collections on consumer and small business finances and the
economic wellbeing of households broken out by wealth and
income. If confirmed, I will support this work, which provides
an important window into how well our policies are achieving
their goals.
The Federal Reserve also has important supervisory and
regulatory responsibilities that promote fair and equal access
to credit and financial services.
The Community Reinvestment Act (CRA) is an essential
regulation and supervisory tool to promote access to credit
investment in LMI communities. I have worked to strengthen CRA
regulations and evaluations to increase the effectiveness,
transparency and accountability in how banks are rated on their
affirmative obligation to meet the investment, credit, and
banking services needs of their local communities, including
through improved access to home mortgage, small business, and
student lending for LMI households and communities. The CRA
evaluations are public and are taken into consideration in the
review of banks' applications for merger and acquisitions.
Currently, staff at the Board, Federal Deposit Insurance
Corporation (FDIC) and the Office of the Comptroller of the
Currency (OCC) are working together to propose for public
comment revisions to the regulations that implement CRA.
Further, the Federal Reserve examines banks for compliance
and helps enforce the Fair Housing Act and the Equal Credit
Opportunity Act. In implementing our statutory
responsibilities, the Federal Reserve works to make sure that
the State member banks we examine have credit policies and
practices in place that are fair and do not prevent any
creditworthy consumer from getting access to credit, do not
result in discrimination in the pricing of credit, or redline
neighborhoods based on their racial and ethnic composition. If
examiners identify a pattern or practice of illegal
discrimination on any of the prohibited factors defined in the
laws, staff cite it and refer the case to the Department of
Justice for further enforcement.
To further support access to economic opportunity for
people of all levels of wealth and income, the Federal Reserve
has a long-standing program to promote the viability of
minority depository institutions (MDIs), which are mission-
oriented and dedicated to serving the banking and credit needs
of minority consumers and communities. Through the Federal
Reserve System's Partnership for Progress (PFP) program, we
provide technical assistance and training in collaboration with
the FDIC and OCC to help MDI leaders overcome the challenges
inherent in providing banking services to LMI and minority
communities and consumers. To further support financial
institutions dedicated to serving harder to reach market
segments, we expanded our PFP program to include Women's
Depository Institutions (WDIs).
Q.4. How have the principles of economic inclusion changed the
way you approach your job and the way you work to achieve the
Fed's dual mandate since first joining the Board?
A.4. Working at the Federal Reserve, I am mindful that the
history of the institution and its policy mandates were
themselves shaped by the principles of economic inclusion, and
it is important to broaden the application of these
foundational values. Since its creation, the Federal Reserve
has always seen value in, and benefited from, regional and
sectoral diversity. That's why we have 12 Reserve Banks all
across the country and we have branches in communities spread
throughout each of the 12 districts. I see these different
points of view represented each time we meet at the FOMC and
when I visit Reserve Banks, and these perspectives are
invaluable. Just as it is important to reflect the communities
we serve in their regional and sectoral diversity, it is
important to do so with respect to racial, ethnic, and gender
diversity.
In addition, the call to pursue both price stability and
maximum employment, our dual mandate, has its roots in the
principle of economic inclusion. The 1977 introduction of the
mandate was spearheaded by Senator Hubert Humphrey and
Representative Augustus Hawkins. Representative Hawkins was a
prominent advocate of full employment, emphasizing its
importance not only for providing a job to every American
seeking work, but also for reducing poverty, inequality,
discrimination, and crime and improving the quality of life of
all people. Representative Hawkins emphasized that ``without
genuine full employment it would be impossible to eliminate
racial discrimination in the provision of job opportunities.''
\2\ The Humphrey-Hawkins Act itself noted that `` . . . full
employment would greatly contribute to the elimination of
discrimination based upon sex, age, race, color, religion,
national origin, handicap, or other improper factors.'' \3\
---------------------------------------------------------------------------
\2\ Augustus F. Hawkins (1975), ``Full Employment To Meet
America's Needs'', Challenge, vol. 18 (November/December), pp. 20-28.
\3\ The complete original language of the act (quoted text in
section 2B (4)) is available through FRASER on the Federal Reserve Bank
of St. Louis website at https://fraser.stlouisfed.org/title/full-
employment-balanced-growth-act-humphrey-hawkins-act-1034.
---------------------------------------------------------------------------
The stories we heard at Fed Listens events during the
review of our monetary policy framework would have sounded very
familiar to Representative Hawkins, and they provided FOMC
members with specific examples from communities around the
country consistent with what we were seeing in the research.
\4\ Having reached multidecade lows in aggregate measures of
unemployment, we were told by a number of community and labor
representatives that improving labor market conditions were
only beginning to reach their communities. \5\ Changes that we
made to the monetary policy framework as a result of the review
brought our longer-run goals and strategy into alignment with
key longer-run changes in the economy. Those changes also
recognized that a shortfalls approach to a broad and inclusive
definition of maximum employment gave us the best chance to
achieve full employment that includes everyone.
---------------------------------------------------------------------------
\4\ See, for example Stephanie R. Aaronson, Mary C. Daly, William
L. Wascher, and David W. Wilcox (2019), ``Okun Revisited: Who Benefits
Most from a Strong Economy?''
\5\ See, Board of Governors of the Federal Reserve System (2020),
``Fed Listens: Perspectives From the Public''.
---------------------------------------------------------------------------
Finally, I would note as I did in my hearing that these
principles of economic inclusion apply to both sides of our
mandate. Inflation is too high and working people around the
country are concerned about how far their paychecks will go.
Our monetary policy is focused on getting inflation back down
to 2 percent while sustaining a recovery that includes
everyone. This is our most important task.
Q.5. What actions have you taken to increase staff diversity at
the Fed during your time as member of the board of governors
and, if confirmed, what are the staff diversity goals you would
support as vice-chair?
A.5. I have made increasing diversity and inclusion a priority
in my career, and I have benefited, as have the organizations
for which I have worked, from the views of people of different
backgrounds. Research suggests, and my own experiences have
shown, that having more diverse perspectives at the table--
diversity of every type--leads to less groupthink and better
outcomes.
I work closely with the Director of the Board's Office of
Minority and Women Inclusion (OMWI), Chief Human Capital
Officer, Chief Operating Officer, and division directors to
hire, retain, and promote a diverse staff. We have made this a
priority for the Executive Committee. I meet regularly with the
OMWI Director to discuss progress on priorities and to
understand challenges and how we are addressing them. As hiring
decisions are made, I also consult with her to ensure
conformance with best practices. In order to attract a diverse
group of high talented individuals, we need to ensure that the
Board is a place that people want to work and that means
focusing on everything from recruitment strategies, to ensuring
we have competitive compensation and benefits, robust
opportunities for advancement, and a culture and environment
were employees feel supported and valued.
The Board is undertaking efforts to increase the diversity
of our economists by building relationships with students and
schools at all levels to introduce them to the Federal Reserve,
through involvement in minority recruitment events, partnering
with the American Economic Association and Howard University,
and recruiting economists with more varied research
specializations. I have personally participated in a variety of
such student recruiting events, including the Conference for
the 2017 Summer Training and Scholarship Program sponsored by
the American Economic Association and the National Science
Foundation, the Sadie T.M. Alexander Conference for Economics,
and the Board's Exploring Careers in Economics program.
Generally, I think it is critical to remain engaged with
staff and create opportunities for dialogue. I make it a
priority to participate in division town halls and events
sponsored by employee resource groups. This provides me an
opportunity to get to know more of the Board's employees,
better understand their individual contributions, hear the
challenges they are facing, as well as what they think is
working well and where there is room for improvement. It also
provides staff an opportunity to raise concerns with me
directly, increasing transparency and accountability.
Q.6. To what extent would you credit the upward pressure on
pricing that Americans are experiencing to actions taken by
businesses that leave them less resilient to shocks, such as
offshoring, market consolidation, and just-in-time
manufacturing, and how do these supply-side constraints factor
into the demand-side levers the Federal Reserve has at their
disposal?
A.6. It is certainly the case that supply chain disruptions
associated with the pandemic have contributed to today's high
inflation. In particular, supply chain bottlenecks associated
with semiconductor production in Asia have led to vehicle
production bottlenecks in the U.S. that have made an outsized
contribution to inflation over the past year. Similarly,
foreign port shutdowns in response to COVID-19 have contributed
to a substantial increase in shipping costs and shipping
delays.
That said, the Federal Reserve has powerful tools that
influence overall demand in the economy. The Federal Reserve is
positioning monetary policy to ensure that high inflation does
not become entrenched, consistent with our dual mandate goals.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM LAEL BRAINARD
Q.1. The National Association of Insurance Commissioners
completed its work on the Group Capital Calculation (GCC) and
the Federal Reserve has adopted its building block approach
(BBA). As you know, the International Association of Insurance
Supervisors (IAIS) is proceeding with its monitoring period of
the international capital standards (ICS), but its
comparability analysis of the aggregation method has been
delayed. Building on the work of the GCC and BBA, the
aggregation method is an equivalent implementation of a group
capital rule for large, internationally active insurers in the
United States. To date, Team USA has advocated in favor of the
IAIS treating the aggregation method as comparable. The U.S.
system of State-based insurance regulation is the gold standard
when it comes to protecting our insurance markets and insurance
consumers in South Dakota and across the country. I believe it
is imperative that Team USA get this right and forcefully
advocate on behalf of this system.
As Vice-Chair, will you work with the States and the
Federal Insurance Office to continue to advocate for the
aggregation method to be deemed comparable to the ICS?
A.1. Yes. I will support this position (respecting that the
Vice Chair for Supervision has the lead on this issue). The
Federal Reserve Board (Board) continues to work alongside its
U.S. partners to advocate for the Aggregation Method to be
deemed an outcome-equivalent approach for implementation of the
International Capital Standards (ICS). The short delay
experienced in developing the criteria that will be used to
assess comparability is not expected to impact the plan to
complete the assessment prior to the end of the monitoring
period. As currently constructed, the ICS would not be
appropriate as a capital rule for U.S. internationally active
insurance groups. Accordingly, the Board, the Federal Insurance
Office, State representatives, and the National Association of
Insurance Commissioners, as well as other interested
jurisdictions, have worked to develop the Aggregation Method,
which is comparable to the ICS and therefore an equivalent
implementation of a group capital rule for internationally
active insurers in the U.S.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM LAEL BRAINARD
Q.1. You have consistently dissented near unanimous Fed
decisions to roll back financial regulations, including a
recent dissent in June 2020, when the Fed considered changes to
the Volcker Rule. Your dissents included 12 in 2020 alone. Our
economy is reeling under the Administration's failed economic
policies, inflation remains at historic highs and consumers are
struggling to pay for basic necessities for their families.
Banks have consistently led the way throughout this crisis,
injecting trillions of dollars into the economy, lending to
consumers and small businesses while holding high levels of
capital. They've been part of the solution, not the source of
the crisis; not to mention they were evidently well capitalized
in 2020. What was your basis for objecting to these common
sense regulatory reforms if, as we saw, they clearly didn't
negatively impact financial stability?
A.1. For S.2155, the Economic Growth, Regulatory Relief, and
Consumer Protection Act, I supported the implementation of all
statutory provisions. I was pleased to support the exemption of
community banks from many Dodd-Frank Wall Street Reform and
Consumer Protection Act provisions, including the Volcker Rule.
I was pleased to support a lower leverage ratio for community
banks. I also supported the exclusion of reserves from the
leverage ratio for custody banks.
During the rulemaking process, there may be several votes
on the same issue--from an advance notice of proposed
rulemaking to a final rule--so there are just a handful of core
issues on which I dissented. S.2155 retained the requirement
for automatic application of enhanced prudential standards for
banks with $250 billion or more in assets and did not make any
changes specifically with regard to foreign banking
organizations. I dissented on those changes that went beyond
the provisions of S.2155 to reduce capital, liquidity, stress
testing, and resolution planning requirements on domestic banks
above $250 billion and to reduce requirements for large foreign
banking organizations. I did not see compelling legal changes
or analysis to justify these changes at a time when large banks
enjoyed robust profits and were the most competitive in the
world. Indeed, the strong capital and liquidity buffers that
had been built at the large banks in the years following the
Global Financial Crisis were important contributors to their
financial resilience during the COVID-19 market turmoil.
In those instances, I always worked with Vice Chair Quarles
and Chair Powell in a collegial manner to make them aware of my
concerns in advance.
Q.2. What is your view of the right regulatory framework for
banks and do you have a view on how less regulated nonbank
fintechs, offering retail banking services should be regulated
by the Fed?
A.2. Banks of all sizes play a critical role in our economy--
providing credit to households and businesses and serving as
financial intermediaries. Given this important role, it is
essential that they operate in a safe and sound manner and can
be resolved without posing risks to the system.
It is vital that banks have adequate capital and liquidity
buffers as well as systems to identify, monitor, and manage
material risks that are commensurate with the risks posed by
the institution. Community banks do not pose the same risks as
larger, more complex firms, so I am supportive of appropriate
relief for community banks.
With regard to nonbank fintechs, as well as financial
innovation more broadly, the Federal Reserve is focused on
responsible innovation and consumer protection, with a guiding
principle that like activity with like risks should be subject
to like regulation regardless of the legal entity. The Federal
Reserve Board's regulatory and supervisory authority is
generally limited to activities conducted by depository
institution holding companies, State member banks, and their
nonbank affiliates. I would welcome the Congress updating the
statutory framework as financial innovation continues to
evolve.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
FROM LAEL BRAINARD
Q.1. In a May 2021 speech, you seemed to signal support for
using a Central Bank Digital Currency (CBDC) as a pathway to
creating retail bank accounts at the Federal Reserve. I asked
Chairman Powell about this topic in February of last year--
specifically, whether the Fed was equipped to service
individual retail and commercial accounts. His reply was: ``No,
and of course we are not permitted under current law, and that
has never been our role and it's really not been the role of
other major central banks. It would be a quite dramatic change
in our role in the economy, and one that I think should require
very careful thought.''
Putting aside that the Federal Reserve would need approval
from Congress to engage in retail banking, do you believe the
Federal Reserve is equipped to service individual retail and
commercial accounts? Do you believe it would be wise for the
Federal Reserve to enter into this space?
A.1. The Federal Reserve recently issued a discussion paper on
central bank digital currency (CBDC). The paper notes that
initial analysis suggests that a potential U.S. CBDC, if one
were created, would best serve the needs of the United States
by being intermediated in addition to being privacy-protected,
widely transferable, and identity verified. I look forward to
receiving public comment on such an approach.
Q.2. You mentioned during the hearing that the Federal Reserve
attempts to track both domestic and international factors that
may impact inflation and the economy. Could you further detail
the extent to which the Federal Reserve is tracking how China's
zero-COVID policy could impact the health of global supply
chains?
A.2. The Federal Reserve is closely tracking potential
disruptions to global supply chains and is very focused on
potential risks stemming from China's zero-COVID policy.
Incoming data from manufacturing surveys continue to suggest
that global supply-chain bottlenecks are elevated, with firms
facing long delivery times and citing labor shortages as a
factor preventing them from operating at full capacity. Auto
production has been hit especially hard, with semiconductor
shortages emanating from Asia still hampering output.
Notwithstanding some improvement recently, ports in the United
States remain highly congested as record volumes of traded
goods are being transported.
Although both the supply of semiconductors and congestion
in the global shipping networks have seen modest improvements
of late, they remain vulnerable to further disruption. In
particular, the Omicron variant of COVID-19 is now hitting
Asia, with a renewed risk of disruption to labor supply in
Asian factories and Chinese ports.
Given China's importance to global supply chains and its
continuation of ``zero-tolerance'' policies, a ramping up of
very stringent and widespread lockdowns in China is a key
downside risk for supply chains. A number of cities and
provinces have implemented public health restrictions. The city
of Xi'an, which has been under lockdown for weeks, is an
important supplier of memory chips (processing roughly one-
tenth of the world's supply) to several multinational
companies. Similarly, the key port of Ningbo was partially
closed again around the turn of the year. If lockdowns become
more widespread across China, particularly in the industrial
port cities along the coast, disruptions in global supply
chains could be exacerbated and prolonged.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
FROM SANDRA THOMPSON
Q.1. Where have you excelled in past positions in attracting,
hiring, and promoting people of color in positions in your
organization? Where might there be room for improvement?
A.1. Over the last 2 years, we have continued our success in
attracting and hiring people of color. Minorities comprised
46.1 percent and 52.6 percent of our total hires in 2020 and
2021, respectively. These percentages reflect success across
all occupational groups and grade levels. We are proud of this
upward trend and will continue to make this a focal point of
our recruitment and outreach efforts.
We have also had success retaining and promoting employees
of color within FHFA. Between 2020 and 2021, the Agency saw a 9
percent reduction in the percentage of people of color and an
11 percent reduction in the percentage of women of color who
left FHFA. More than 50 percent of promotions went to people of
color in 2020 and 2021, and the percentage of promotions
representing women of color increased by 7 percent between 2020
and 2021.
Like other Federal agencies, we have experienced challenges
in hiring people of color into economist positions. We will
continue our outreach to minority organizations and use both
our entry-level Economists Program and our hiring of college
students and recent graduates to expose underrepresented groups
to the economist opportunities at the Federal Housing Finance
Agency (FHFA).
Q.2. What specific measures will you use to evaluate the
success of the Federal Housing Finance Agency in understanding
and addressing the needs of Black, Indigenous, and people of
color (BIPOC)? And, will you work to keep Congress apprised, as
appropriate, on the progress being made on these measures?
A.2. FHFA monitors fair lending data and risks presented by the
activities of Fannie Mae and Freddie Mac (the Enterprises). We
recently released data on Enterprise loan purchases and
Enterprise automated underwriting system approvals by race and
ethnicity, which will assist us in identifying whether the
Enterprises' programs and products address the need of BIPOC
borrowers (https://www.fhfa.gov/DataTools/Downloads/Pages/Fair-
Lending-Data.aspx).
We plan to expand on this public data release, including as
part of the implementation and evaluation of the Enterprises'
Equitable Housing Finance Plans, to keep the public informed
about how our regulated entities are doing in serving BIPOC
borrowers.
FHFA is also an active member of the Property Appraisal and
Valuation Equity (PAVE) task force, cochaired by the Department
of Housing and Urban Development's Secretary Fudge and
Ambassador Rice. The PAVE task force seeks to root out
discrimination in the appraisal and homebuying process and
includes subcommittees for data, education, enforcement, and
policy. To date, FHFA has executed data sharing agreements and
provided historical appraisal data to our interagency partners
in support of interagency efforts to research and examine the
issue of property valuation bias and support enforcement and
compliance with fair lending laws.
We are committed to working with Congress and keeping you
informed about these efforts.
Q.3. What is your plan for creating an inclusive working
environment for employees within your office?
A.3. FHFA works to maintain an inclusive working environment
and has leveraged diversity to develop an equitable and high-
performing culture as we pursue our mission. The data in our
response to the question above demonstrates our success in
recruiting, hiring, promoting, and retaining a diverse
workforce. The release of a new Agency Equal Employment
Opportunity (EEO) Policy Statement in August 2021 outlined an
Agency-wide commitment requiring accountability from all FHFA
staff in order to have a workplace where employees can reach
their potential in a safe environment based on mutual respect
and the freedom to exercise their civil rights. FHFA also
requires, as part of its performance evaluation process, that
executives and senior-level managers demonstrate support for
the Agency's diversity and inclusion initiatives, as well as
application of and compliance with applicable EEO laws and
regulations.
Q.4. Do you believe that our housing finance system must
protect broad access to affordable 30-year fixed-rate
mortgages; serve the broad, national market equitably; serve
lenders of all types and sizes equitably; preserve a
competitive primary mortgage market; maintain a duty to serve
all markets and all borrowers, including through affordable
housing metrics; expand investment in affordable housing; and
ensure continued or better access for financing of affordable
rental housing?
A.4. Yes, I believe those principles are inherent in the
current structure of the housing finance system, and I support
those principles in any future secondary mortgage market
structure that Congress may create. Furthermore, as Acting
Director of FHFA and, if confirmed, Director of FHFA, I intend
to follow these principles as I carry out my responsibilities
ensuring the safety and soundness of Fannie Mae, Freddie Mac,
and the Federal Home Loan Banks (housing GSEs or regulated
entities) and their ability to accomplish their mission.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM SANDRA THOMPSON
Q.1. Congressional Oversight--Please provide your philosophy on
how the Federal Housing Finance Agency (FHFA) will approach and
respond to Congressional information requests (both for
documentary information and oral testimony), if you are
confirmed.
A.1. If confirmed, I will ensure that FHFA continues to respond
to Congressional information requests in a timely and
transparent manner, in accordance with applicable law and
regulation.
Q.2. If confirmed, do you intend to respond to information
requests differently depending on who is making the
Congressional information request (whether it's the chair of
the Congressional committee, the Ranking Member, or another
member of Congress)? Please answer ``yes'' or ``no.'' If your
answer is ``yes,'' please explain.
A.2. If confirmed, I will work to respond to Congressional
information requests in a timely, consistent manner regardless
of the requestor, in accordance with applicable law and
regulation.
Q.3. Will you commit that, if confirmed, you will timely
respond to and fully comply with all information requests from
me? Please answer ``yes'' or ``no.'' If your answer is ``no,''
please explain.
A.3. If confirmed, I will respond in a timely manner to
Congressional information requests, in accordance with
applicable law and regulation.
Q.4. Will you commit that, if confirmed, you will make yourself
and any other FHFA employee expeditiously available to provide
oral testimony (including but not limited to briefings,
hearings, and transcribed interviews) to the Committee on any
matter within its jurisdiction, upon the request of either the
Chairman or Ranking Member? Please answer ``yes'' or ``no.'' If
your answer is ``no,'' please explain why.
A.4. If confirmed, I will make myself and FHFA staff available
to provide oral testimony, in accordance with applicable law
and regulation.
Q.5. Do you believe that FHFA may assert any privileges or
other legal justifications to withhold information (whether
records or oral testimony) from Congress? Please answer ``yes''
or ``no.''
A.5. FHFA strives to be open and transparent with Congress and
the public. The Agency, like other bank financial regulators
takes seriously its responsibility to protect from disclosure
certain information concerning its supervisory and regulatory
activities. FHFA commits to assert applicable and valid
privileges or other legal justifications, including the
examination privilege it shares with sister regulatory
agencies, only when necessary and justified after a fact-
specific analysis. Should this situation arise, I will work
with the appropriate Agency officials and provide responses
consistent with applicable law.
Q.6. If you answered ``yes'' to the preceding question, please
list every such privilege or other legal justification and
provide the legal basis for why you believe FHFA may use such
privilege or legal justification to withhold information from
Congress.
A.6. FHFA strives to be open and transparent with Congress and
the public. The Agency, like other bank financial regulators
takes seriously its responsibility to protect from disclosure
certain information concerning its supervisory and regulatory
activities. FHFA commits to assert applicable and valid
privileges or other legal justifications, including the
examination privilege it shares with sister regulatory
agencies, only when necessary and justified after a fact-
specific analysis. Should this situation arise, I will work
with the appropriate Agency officials and provide responses
consistent with applicable law.
Q.7. In an effort to be open and transparent with Congress and
the public, will you commit not to assert any such privilege or
legal justification against Congress that you listed above? If
not, why not? If so, please identify all such privileges or
legal justifications that you will commit to not assert against
Congress.
A.7. FHFA strives to be open and transparent with Congress and
the public. The Agency, like other bank financial regulators
takes seriously its responsibility to protect from disclosure
certain information concerning its supervisory and regulatory
activities. FHFA commits to assert applicable and valid
privileges or other legal justifications, including the
examination privilege it shares with sister regulatory
agencies, only when necessary and justified after a fact-
specific analysis. Should this situation arise, I will work
with the appropriate Agency officials and provide responses
consistent with applicable law.
Q.8. Proposed Amendments to the Enterprise Regulatory Capital
Framework (ERCF); Financial Stability Oversight Council (FSOC)
Review--On September 25, 2020, FSOC released a statement on its
activities-based review of the secondary mortgage market (the
FSOC statement). The FSOC statement affirmed the overall
quantity and quality of the regulatory capital required by the
Federal Housing Finance Agency's (FHFA) June 30, 2020 proposed
rule to establish a new regulatory capital framework for Fannie
Mae and Freddie Mac (each, an Enterprise). \1\ Specifically,
FSOC stated that ``risk-based capital requirements and leverage
ratio requirements that are materially less than those
contemplated by the proposed rule would likely not adequately
mitigate the potential stability risk posed by the
Enterprises.'' FSOC also concluded ``it is possible that
additional capital could be required for the Enterprises to
remain viable concerns in the event of a severely adverse
stress.'' \2\ (emphasis added) FSOC also committed to
``continue to monitor . . . FHFA's implementation of the
regulatory framework to ensure potential risks to financial
stability are adequately addressed.'' On December 17, 2020,
FHFA released a rule finalizing the ERCF (the final capital
rule) that included leverage capital requirements that were
identical to those in the proposed rule. \3\
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\1\ 85 FR 39,274.
\2\ Id.
\3\ 85 FR 82,150.
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A.8. N/A.
Q.9. Do you accept each of the findings and recommendations
made by FSOC in the FSOC statement? If not, please identify
each finding or recommendation with which you disagree and your
rationale for the disagreement.
A.9. I generally agree with the findings in the FSOC statement.
However, similar to approaches followed by other financial
regulators, FHFA intends to periodically review the final
capital rule and adjust various elements as necessary to ensure
the safety and soundness of the Enterprises. In the 2021
proposed rule, FHFA proposed selective refinements to the
leverage buffer and risk-based capital treatment of CRT, while
leaving the leverage ratio requirement unchanged.
Q.10. In particular, do you accept FSOC's finding that ``risk-
based capital requirements and leverage ratio requirements that
are materially less than those contemplated by the proposed
rule would likely not adequately mitigate the potential
stability risk posed by the Enterprises''?
A.10. I generally agree with FSOC's findings regarding the
quantity of required capital at the Enterprises. In the 2021
proposed rule, FHFA proposed selective refinements to the
leverage buffer and risk-based capital treatment of CRT, while
leaving the leverage ratio requirement unchanged.
Q.11. Do you accept FSOC's finding that ``[t]he alignment of
market participants' credit risk capital requirements across
similar credit risk exposures would mitigate risk to financial
stability by minimizing market structure distortions''?
A.11. I generally agree with FSOC's findings. In light of the
business models and mission of its regulated entities, FHFA
issued its final capital rule to create a going-concern
regulatory capital standard to ensure that each Enterprise
operates in a safe and sound manner and is positioned to
fulfill its statutory mission to provide stability, liquidity,
and ongoing assistance to the secondary mortgage market across
the economic cycle.
Q.12. Do you accept FSOC's recommendation that ``FHFA and other
regulatory agencies . . . coordinate and take other appropriate
action to avoid market distortions that could increase risks to
financial stability by generally taking consistent approaches
to the capital requirements and other regulation of similar
risks across market participants, consistent with the business
models and missions of their regulated entities''?
A.12. I generally agree that there should be coordination
between FHFA and other regulatory agencies to avoid market
distortions. FHFA, as the primary regulator for Fannie Mae and
Freddie Mac, utilizes the same principles and approaches as
other regulatory agencies to ensure that Enterprise capital
requirements are appropriate for the risks the Enterprises
retain, consistent with the business models and missions of the
Enterprises.
Q.13. FHFA has proposed amendments (the proposed ERCF
amendments) that would reduce the regulatory capital required
by both the risk-based capital requirements and the leverage
capital requirements set forth in the final capital rule. \4\
In light of FSOC's commitment to monitor FHFA's implementation
of the Enterprises' regulatory framework, which includes the
regulatory capital framework, did FHFA solicit input from the
Board of Governors of the Federal Reserve System (the Fed)
regarding whether the proposed ERCF amendments would adequately
address potential risks to financial stability? Has the Fed
otherwise reviewed the proposed ERCF amendments?
---------------------------------------------------------------------------
\4\ 86 FR 53,230.
A.13. Federal Reserve officials have publicly identified
binding leverage capital requirements under the Supplementary
Leverage Ratio (SLR) framework as an issue that must be
addressed so that banks' incentives are not skewed to seek more
risk and increase risk-taking. FHFA agrees with this guiding
principle for the Enterprises under the Enterprise Regulatory
---------------------------------------------------------------------------
Capital Framework (ERCF).
Q.14. What were the Fed's comments or other input on the
proposed ERCF amendments?
A.14. Federal Reserve officials have publicly identified
binding leverage capital requirements under the SLR framework
as an issue that must be addressed so that banks' incentives
are not skewed to seek more risk and increase risk-taking. FHFA
agrees with this guiding principle for the Enterprises under
the ERCF.
Q.15. Do you intend to ask FSOC as a council to review the
proposed ERFC amendments?
A.15. FSOC as a council does not routinely review its members'
rulemakings.
Q.16. Proposed Amendments to Capital Treatment of Credit Risk
Transfers (CRT)--The preamble to the proposed ERCF amendments
states that FHFA ``believes that the current CRT risk weight
floor may not achieve the proper balance between permitting CRT
and safety and soundness.'' Do you believe it is appropriate
for FHFA to foster or otherwise permit CRT at the expense of
safety and soundness? If not, what do you intend with respect
to the proper balance to be achieved between permitting CRT and
safety and soundness?
A.16. Fannie Mae and Freddie Mac are the largest holders of
mortgage credit risk in the United States. One of FHFA's
priorities is to facilitate moving that credit risk into the
hands of the private sector and away from the Enterprises and
taxpayers. We believe that the changes that we have proposed to
the capital rule will help facilitate the credit risk transfer
program and ensure that taxpayers are not at greater risk.
Q.17. The proposed ERCF amendments contemplate a 5 percent risk
weight floor on retained CRT exposures. The U.S. banking
regulators impose a 20 percent risk weight floor on similar
retained securitization exposures. Do you think the gap between
these similar credit risk exposures is consistent with FSOC's
recommendation that ``FHFA and other regulatory agencies . . .
coordinate and take other appropriate action to avoid market
distortions that could increase risks to financial stability by
generally taking consistent approaches to the capital
requirements and other regulation of similar risks across
market participants''?
A.17. Fannie Mae and Freddie Mac are the largest holders of
mortgage credit risk in the United States. One of FHFA's
priorities is to facilitate moving that credit risk into the
hands of the private sector and away from the Enterprises and
taxpayers. We believe that the changes that we have proposed to
the capital rule will help facilitate the credit risk transfer
program and ensure that taxpayers are not at greater risk.
Q.18. The preamble to the proposed ERCF amendments offers no
evidence that the ERCF's current 10 percent risk weight floor
is excessive relative to the risk on retained CRT exposures.
FHFA's primary argument is instead that the floor ``reduces an
Enterprise's incentives to engage in CRT.''
Do you think there is evidence that the 10 percent risk
weight floor is excessive relative to the risk on retained CRT
exposures?
If so, what is that evidence?
A.18. We believe that CRT contributes to the safety and
soundness of the Enterprises and that disincentivizing CRT can
contribute to increased risk for them and taxpayers. Fannie Mae
and Freddie Mac are the largest holders of mortgage credit risk
in the United States. One of FHFA's priorities is to facilitate
moving that credit risk into the hands of the private sector
and away from the Enterprises and taxpayers. We believe that
the refinements that we have proposed to the capital rule will
help facilitate the credit risk transfer program and ensure
that taxpayers are not at greater risk.
Q.19. In coming to a view of the question above, what is your
assessment of banking organizations' 2008 financial crisis
experience with securitizations as discussed in footnote 46 of
the final capital rule and footnote 74 of the proposal of the
ERCF, each of which sets forth the Federal banking regulators'
view that the 2008 turmoil in the financial markets
demonstrated the extent to which the credit risk exposure of
the sponsoring banking organization to such securitization
structures (and their related assets) had in fact been greater
than the agencies estimated, and more associated with
noncontractual considerations than the agencies had expected?
A.19. When I served as the FDIC's head of supervision and
consumer protection throughout the 2008 financial crisis, I
witnessed firsthand the consequences of irresponsible lending
when hundreds of banks across the country were closed and a
record number of homes went into foreclosure. As a financial
regulator, I have long believed that safety and soundness and
access to credit are not mutually exclusive. FHFA will continue
to promote sustainable and equitable access to credit in a safe
and sound manner, and ensure that the Enterprises are managing
and, as appropriate, transferring their credit risk to avoid
any repeat of the 2008 financial crisis.
Q.20. In the spring of 2020, counterparties to some of the
GSEs' so-called ``fixed severity'' CRT launched a vigorous
campaign to persuade FHFA not to require each GSE to transfer
to the counterparty losses for which the counterparty was, by
contract, otherwise obligated. Historically, FHFA has not
always transferred losses as permitted by CRT instruments. As
FHFA's Deputy Director for Housing Mission and Goals with
responsibility for those fixed severity CRT, how have these
experiences impacted your assessment of the risks with respect
to the effectiveness of each Enterprise's CRT in actually
transferring credit risk?
A.20. ``Fixed severity'' CRT transactions were among the first
issued by the Enterprises as they developed and refined their
offerings. The Enterprises no longer execute the ``fixed
severity'' CRTs, and these transactions represent a relatively
small and diminishing segment of the Enterprises' single-family
CRT programs. In the spring of 2020, FHFA instructed the
Enterprises to abide by the terms of the contracts in the
``fixed severity'' CRTs, and no adjustment was made.
Q.21. If confirmed as FHFA Director, so long as you remain
conservator for an Enterprise, can you commit that each
counterparty to a CRT will incur losses to the fullest extent
permitted by law and the terms of the applicable CRT?
A.21. CRT transactions have governing documents, and FHFA's
goal is to ensure that the Enterprises and counterparties
adhere to the terms established in those documents.
Q.22. How much has each Enterprise paid in underwriting fees on
CRT since the launch of the Enterprise's CRT program?
A.22. Please refer to the CRTs' governing documents for any and
all dealer fees. For example, the initial purchaser fees for
each of the Fannie Mae Connecticut Avenue Securities (CAS) CRT
transactions are publicly available in the respective Offering
Memorandum located on the Enterprise's website. The initial
purchaser fees for each of the Freddie Mac Structured Agency
Credit Risk (STACR) CRT transactions are publicly available in
the respective Private Placement Memorandum located on the
Enterprise's website.
Q.23. Proposed Amendments to Leverage Capital Requirements--The
proposed ERCF amendments include a proposed reduction in the
prescribed leverage buffer amount (PLBA). If finalized as
proposed, the PLBA amendments would reduce each Enterprise's
PLBA by two-thirds (from 1.5 percent of adjusted total assets
to approximately 0.5 percent) and its PLBA-adjusted leverage
capital requirements by one-quarter (from 4.0 percent of
adjusted total assets to approximately 3.0 percent).
The FSOC statement stated that ``a meaningful leverage
ratio requirement that is a credible backstop to the risk-based
requirements would address potential risks to financial
stability by ensuring that the capital requirements are
consistent with historical loss experiences during severe
stresses while mitigating model, measurement, and related risks
with a simple, transparent measure of risk.'' Taking into
account the 20 percent risk weight floor on mortgage exposures
(1.6 percent of the exposure amount), the floor on the stress
capital buffer (0.75 percent of adjusted total assets), and the
current sizing of each Enterprise's stability capital buffer
(1.0 percent and 0.7 percent of adjusted total assets for
Fannie Mae and Freddie Mac, respectively), it appears
exceedingly unlikely that an Enterprise's risk-based capital
requirement could ever be less than the proposed leverage
capital requirements of 3.0 percent and 2.9 percent for Fannie
Mae and Freddie Mac, respectively, even if a substantial
portion of an Enterprise's mortgage exposures were subject to
the risk weight floor.
In light of the apparently very remote prospect that an
Enterprise's risk-based capital requirement could ever be less
than the proposed leverage capital requirements, would the PLBA
amendment result in ``a meaningful leverage ratio requirement''
and would the proposed leverage capital requirements be ``a
credible backstop to the risk-based requirements'' within the
meaning of the FSOC statement?
A.23. There are a variety of circumstances and scenarios that
may lead to leverage capital requirements being binding in the
future. FHFA expects that the Tier 1 capital floor created by
the leverage ratio requirement plus leverage buffer will be in
place as a credible backstop to the risk-based capital
requirements throughout the economic cycle.
Q.24. As part of its rationale for the proposed ERCF amendments
to the PLBA, FHFA noted that ``Basel III standards require
systemically important banks to hold a tier 1 capital leverage
ratio buffer in excess of a 3 percent leverage requirement
equal to 50 percent of a GSIB's higher loss-absorbency risk-
based requirements.'' FHFA also stated that it intended to
amend the PLBA ``in a manner similar to the U.S. banking
regulators' proposal to set the eSLR buffer to one-half of the
GSIB surcharge'' and that ``a dynamic PLBA that is tied to the
stability capital buffer would further align the [ERCF] with
Basel III standards.'' Related to this, former Fed Vice Chair
for Supervision Quarles recently said ``[w]ith respect to the
enhanced supplementary leverage ratio (eSLR) that applies to
U.S. global systemically important banks (GSIBs), the best way
to address this problem is the approach endorsed by the Basel
Committee: recalibrating the fixed 2-percent eSLR buffer
requirement to equal 50 percent of the applicable GSIB capital
surcharge, with corresponding recalibration at the bank
level.'' \5\
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\5\ Governor Randal K. Quarles, ``Between the Hither and the
Farther Shore: Thoughts on Unfinished Business'' (Dec. 2, 2021),
available at www.federalreserve.gov/newsevents/speech/
quarles20211202a.htm.
---------------------------------------------------------------------------
Importantly, a GSIB's eSLR buffer requirement is a percent
of risk-weighted assets, while an Enterprise's stability
capital buffer requirement is a percent of adjusted total
assets. If the intent were to align FHFA's approach to the PLBA
with the Basel Committee's approach to the eSLR buffer, would
each Enterprise's stability capital buffer requirement first
need to be converted to an equivalent that is expressed as a
percent of risk-weighted assets (e.g., by dividing the
stability capital buffer requirement by the average risk weight
of the Enterprise's assets (currently around 33 percent))?
A.24. While the ERCF's Stability Capital Buffer and the GSIB
surcharge in the bank framework similarly attempt to quantify
the amount of systemic risk posed by the Enterprises and GSIBs,
respectively, they are not identical. The Enterprises and the
other financial institutions have different business models.
There are significant structural differences between the two
buffers in both derivation and application.
Q.25. How do you reconcile FHFA's statements that its proposed
ERCF amendments to PLBA are ``similar to the U.S. banking
regulators' proposal to set the eSLR buffer to one-half of the
GSIB surcharge'' and that ``a dynamic PLBA that is tied to the
stability capital buffer would further align the [Enterprise
Regulatory Capital Framework] with Basel III standards'' with
the very significant gap between FHFA's proposed PLBAs (0.5
percent and 0.4 percent for Fannie Mae and Freddie Mac,
respectively) and the PLBAs that would result under the Basel
Committee's approach (roughly 1.63 percent and 1.05 percent for
Fannie Mae and Freddie Mac, respectively)? \6\
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\6\ According to the fact sheet accompanying FHFA's proposed
amendments, Fannie and Freddie would have had a PLBA under the proposed
amendments of, respectively, 0.53 percent and 0.35 percent of adjusted
total assets as of March 31, 2021. That implies a stability capital
buffer, expressed as a percent of adjusted total assets, of 1.06
percent and 0.70 percent of adjusted total assets for Fannie and
Freddie, respectively. Those stability capital buffers can be converted
to an equivalent ratio expressed as a percent of risk-weighted assets
by dividing each by the Enterprise's average risk weight. While FHFA
has not disclosed the average risk weight for each Enterprise as of
March 31, 2021, the data in the fact sheet accompanying the 2020 final
rule suggests an average risk weight (risk weighted assets divided by
adjusted total assets) for Fannie Mae and Freddie Mac of respectively
33 percent and 32 percent, as of September 30, 2020. Using those
average risk weights, the stability capital buffer of Fannie Mae and
Freddie Mac was, respectively, 3.27 percent and 2.10 percent of risk-
weighted assets as of March 31, 2021. Dividing those by two would
result in a PLBA of 1.63 percent and 1.05 percent, and a PLBA-adjusted
leverage capital requirement of 4.1 percent and 3.5 percent, for Fannie
Mae and Freddie Mac, respectively.
A.25. While the ERCF's Stability Capital Buffer and the GSIB
surcharge in the bank framework similarly attempt to quantify
the amount of systemic risk posed by the Enterprises and GSIBs,
respectively, they are not identical. The Enterprises and the
other financial institutions have different business models.
There are significant structural differences between the two
---------------------------------------------------------------------------
buffers in both derivation and application.
Q.26. Do you think that a roughly 113 basis point difference
between the PLBAs for Fannie Mae under FHFA and the Basel
Committee's approaches--which amounts to more than $45 billion
as of September 30, 2021--is inconsistent with FHFA's
statements that the proposed ERCF amendments to the PLBA are
``similar to the U.S. banking regulators' proposal'' or
``align[ed] . . . with Basel III standards''?
A.26. While the ERCF's Stability Capital Buffer and the GSIB
surcharge in the bank framework similarly attempt to quantify
the amount of systemic risk posed by the Enterprises and GSIBs,
respectively, they are not identical. The Enterprises and the
other financial institutions have different business models.
There are significant structural differences between the two
buffers in both derivation and application.
Q.27. The preamble to the proposed ERCF stated that FHFA ``is
proposing a recalibration of the PLBA because a leverage ratio
that exceeds risk-based capital requirements throughout the
economic cycle could lead to undesirable outcomes at the
Enterprises . . . .'' (emphasis added) It matters whether the
leverage capital requirement is binding throughout the economic
cycle (potentially a problem) or instead a backstop that is
binding occasionally (which is entirely the intent). Notably,
the leverage capital requirements for Fannie Mae are not
currently binding, even after a long period of house price
appreciation that, among other causes, has resulted in more
than half of its single-family mortgage exposures being subject
to the 20 percent risk weight floor. What evidence did you
consider that the ERCF's leverage capital requirements actually
would exceed the risk-based capital requirements ``throughout
the economic cycle''?
A.27. There are a variety of circumstances and scenarios that
may lead to leverage capital requirements becoming the binding
constraint in the future. FHFA expects that the Tier 1 capital
floor created by the leverage ratio requirement plus leverage
buffer will be in place as a credible backstop to the risk-
based capital requirements throughout the economic cycle.
Q.28. The preamble to the proposed ERCF amendment did not
explain the flaws in the methodology originally used to
calibrate the PLBA. As described in the preamble to the final
capital rule, ``[t]he 1.5 percent PLBA is calibrated to ensure
that the PCCBA and PLBA have an effective complementary
relationship such that each is independently meaningful.'' FHFA
observed that: [T]he relative sizing of the PLBA is generally
consistent with the relative sizing of similar buffers under
the U.S. banking framework. A 1.5 percent PLBA for the
Enterprises is 37.5 percent of the 4.0 percent PLBA-adjusted
leverage ratio requirement to avoid payout restrictions. The
2.0 percent supplementary leverage ratio requirement of the
U.S. banking framework is 40 percent of the 5.0 percent buffer-
adjusted leverage ratio requirement to avoid payout
restrictions. (emphasis added)
A.28. FHFA also considered, among other things, that the PLBA-
adjusted leverage capital requirements were consistent with the
Enterprises' historical loss experiences during the 2008
financial crisis (approximately 4.8 percent of adjusted total
assets as of December 31, 2007) and that the Federal Home Loan
Banks are subject to a 4 percent leverage capital requirement.
Q.29. What flaws, if any, do you see in the methodology
originally used to calibrate the PLBA?
A.29. FHFA identified certain aspects of the ERCF that might
incentivize risk-taking and disincentivize the Enterprises from
distributing credit risk to private investors, which could
result in taxpayers bearing excessive undue risk for as long as
the Enterprises are in conservatorships and excessive risk to
the housing finance market both during and after
conservatorships. One such contributing aspect of the ERCF was
the fixed leverage buffer. FHFA's proposed refinements to the
capital rule sought comment on an adjustment to the buffer.
Q.30. Minimum Credit Risk Capital Requirements--Question 4 of
the proposed ERCF amendments asks ``[i]n light of the proposed
changes to the PLBA and CRT securitization framework, is the
prudential risk weight floor of 20 percent on single-family and
multifamily mortgage exposures appropriately calibrated.''
However, the preamble to the proposed ERCF amendments provides
no discussion of the critical role played by this floor in
ensuring that each Enterprise is appropriately capitalized. The
preamble also provides no discussion of the safety and
soundness risks, risks to financial stability, or other
implications posed by a potential reduction in the risk weight
floor on mortgage exposures. Will you commit to not change the
20 percent risk weight floor on mortgage exposures without full
notice and opportunity to comment on the specific change,
including a detailed preamble discussion of the implications of
that change?
A.30. FHFA follows the Administrative Procedures Act and
provided a 60-day comment period for the notice of proposed
rulemaking with refinements to the capital rule and received 89
comments from stakeholders. As Acting Director and, if
confirmed, Director, I will continue to follow the
Administrative Procedure Act for all rulemakings, including
requirements for public comment periods.
Q.31. The smallest possible risk weight on a mortgage exposure
is 50 percent under the U.S. banking framework and 20 percent
under the Basel Committee's framework (and then only for
certain low-risk mortgage exposures with an original loan-to-
value ratio less than 50 percent). Do you think a reduction in
the 20 percent risk weight floor on mortgage exposures would be
consistent with FSOC's recommendation that ``FHFA and other
regulatory agencies . . . coordinate and take other appropriate
action to avoid market distortions that could increase risks to
financial stability by generally taking consistent approaches
to the capital requirements and other regulation of similar
risks across market participants''?
A.31. I generally agree that there should be coordination
between FHFA and other regulatory agencies to avoid market
distortions. FHFA, as the primary regulator for Fannie Mae and
Freddie Mac, utilizes the same principles and approaches as
other regulatory agencies to ensure that capital requirements
are appropriate for the risks the Enterprises retain,
consistent with the business models and missions of the
Enterprises.
Q.32. What percent of each Enterprise's single-family mortgage
exposures currently would have a smaller risk weight in the
absence of the 20 percent risk weight floor? What percent of
each Enterprise's multifamily mortgage exposures currently
would have a smaller risk weight in the absence of the 20
percent risk weight floor? Will you commit to providing
periodic public disclosures as to the percent of each
Enterprise's single-family and multifamily mortgage exposures
that are subject to the 20 percent risk weight floor?
A.32. The requested detailed level of disclosure in your
request is generally not required of other financial
institutions, and this information is nonpublic at this time.
FHFA would be happy to discuss with you or your staff
separately on this topic.
Q.33. Do you agree that a reduction in the 20 percent risk
weight floor on mortgage exposures would increase the
procyclicality of the ERCF's risk-based capital requirements?
A.33. FHFA addressed the potential procyclicality in the ERCF
risk-based capital requirement in the final capital rule.
Potential procyclicality is primarily mitigated by the
countercyclical adjustment, which is specifically designed to
offset the benefit of house price appreciation in environments
of high house price growth. FHFA has not proposed any changes
to the countercyclical adjustment since the ERCF was finalized
in 2020.
Q.34. General ERCF Topics--Do you disagree with any of the
below statements in the preamble to the final capital rule that
finalized the ERCF? If so, with which of these statements do
you disagree and why?
``[E]ach Enterprise should be capitalized not only
to absorb losses as they are incurred in a severely
adverse stress, but also so that the Enterprise would
have sufficient regulatory capital after that stress to
continue to be regarded as a viable going concern by
creditors and other counterparties.''
``The differences between the business models,
statutory mandates, and risk profiles of the
Enterprises and banking organizations, however, should
not preclude the proposed rule's comparison of the
credit risk capital requirement of a large U.S. banking
organization for a specific mortgage exposure to the
credit risk capital requirement of an Enterprise for a
similar mortgage exposure.''
``The monoline nature of the Enterprises' mortgage-
focused businesses suggests that the concentration risk
of an Enterprise is generally greater than that of a
diversified banking organization with a similar amount
of mortgage credit risk. That heightened concentration
risk would tend to suggest that greater credit risk
capital requirements, relative to banking
organizations, could be appropriate for the Enterprises
for similar exposures, all else equal.''
``FHFA continues to believe that the regulatory
capital framework should not assume extraordinary
Government support, whether under the [Preferred Stock
Purchase Agreements] or otherwise. A central tenet of
the reforms following the 2008 financial crisis is that
the postcrisis regulatory framework should prevent
future taxpayer rescues of financial institutions.
Expectations of Government support increase risk to the
Enterprises' safety and soundness and the stability of
the national housing finance markets by undermining
market discipline and encouraging excessive risk
taking. Other regulatory capital frameworks generally
would not treat a line of credit or similar
arrangement, even one with a governmental actor, as a
form of regulatory capital.''
``The now apparent shortcomings of OFHEO's and the
Enterprises' precrisis credit models, and other well-
known failures of analytical models to accurately
predict risk, reinforce the need for a meaningful
degree of regulatory caution regarding any modeled
estimate of risk.''
A.34. FHFA identified certain aspects of the ERCF that might
incentivize risk-taking and disincentivize the Enterprises from
distributing credit risk to private investors. This could
result in taxpayers bearing excessive undue risk for as long as
the Enterprises are in conservatorships and excessive risk to
the housing finance market both during and after
conservatorships. Contributing aspects of this potential
outcome were the fixed leverage buffer and the risk-based
capital requirements for CRT.
Q.35. Did FHFA staff meet or otherwise consult with either
Enterprise on the proposed ERCF amendments before those were
published in the Federal Register? Did either Enterprise play
any role in the drafting or development of the proposed ERCF
amendments?
A.35. Neither Enterprise played a role in drafting or
developing the proposed ERCF amendments.
Q.36. Resolution Framework--In May 2021, FHFA finalized a rule
that requires each Enterprise to develop a plan to facilitate
its rapid and orderly resolution in the event FHFA is appointed
receiver. \7\ These resolution plans are intended to, among
other things, ``foster[ ] market discipline by making clear
that no extraordinary Government support will be available to
indemnify investors against losses or fund the resolution of an
Enterprise.'' \8\ Specifically, ``[i]n developing a resolution
plan, each Enterprise shall: . . . [n]ot assume the provision
or continuation of extraordinary support by the United States
to the Enterprise to prevent either its becoming in danger of
default or in default (including, in particular, support
obtained or negotiated on behalf of the Enterprise by FHFA in
its capacity as supervisor, conservator, or receiver of the
Enterprise, including the Senior Preferred Stock Purchase
Agreements entered into by FHFA and the U.S. Department of the
Treasury on September 7, 2008, and any amendments thereto).''
\9\ Related to this, Treasury's Housing Reform Plan released in
September 2019 recommended that ``[a] credible resolution
framework can ensure that shareholders and unsecured creditors
bear losses, thereby protecting taxpayers against bailouts,
enhancing market discipline, and mitigating moral hazard and
systemic risk.''
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\7\ 86 FR 23,577 (May 4, 2021).
\8\ Id. at 23,580.
\9\ 12 CFR 1242.5(b)(2).
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Do you agree with, or otherwise have any plans to change,
the requirement that ``each Enterprise shall: . . . [n]ot
assume the provision or continuation of extraordinary support
by the United States to the Enterprise to prevent either its
becoming in danger of default or in default (including . . .
the Senior Preferred Stock Purchase Agreements entered into by
FHFA and the U.S. Department of the Treasury on September 7,
2008, and any amendments thereto)''?
A.36. FHFA has no current plans to modify the regulation on
resolution planning. The Agency expects that credible
resolution plan submissions will include, at a minimum, the
scenario described in the rule where extraordinary Government
support is unavailable.
Q.37. Given FHFA's policy that, notwithstanding the Preferred
Stock Purchase Agreements, unsecured creditors of each
Enterprise should be at risk of loss upon an insolvency event
affecting the Enterprise, do you think the Securities and
Exchange Commission's regulations governing money market mutual
funds, registration requirements, or other market activity
should continue to give the Enterprises special treatment
(e.g., by treating them as Government securities for certain
purposes)?
A.37. The Preferred Stock Purchase Agreements provide certain
benefits to unsecured creditors of the Enterprises. FHFA defers
to the Securities Exchange Commission (SEC) on matters
associated with the application of SEC regulations and remains
open to consultation with SEC staff on Enterprise-related
matters.
Q.38. Exit From Conservatorship--At your nomination hearing,
you answered in response to a question from Senator Hagerty
that there are a number of issues that Congress will have to
address before the Enterprises may exit conservatorship. Please
itemize these issues that Congress must address in your view
and any other Congressional actions that you view as a
precondition to an Enterprise's exit from conservatorship. With
respect to each of these preconditions, what specific
provisions of statute authorize FHFA to indefinitely continue
an Enterprise's conservatorship pending Congress satisfying the
precondition? Please provide any relevant legal analysis that
inform your views on this question.
A.38. There is no statutory provision in the Safety and
Soundness Act that specifically addresses exit from
conservatorship; however, there are several open questions that
only Congress can address on the future structure and
functioning of the secondary mortgage market. Key questions
include whether the Enterprises should be subject to public-
utility-like regulation of pricing and returns, whether
additional GSEs would be chartered to compete with Fannie Mae
and Freddie Mac, and any potential changes to the Enterprises'
charters which are established in statute. Congress may also
want to address the Enterprises ownership structure, the issue
of an explicit guarantee or continuing support of the Treasury,
and other areas where FHFA has identified it lacks similar
authority to that of the other financial regulators, including
third-party examination authority.
As I mentioned during the hearing, there are related issues
that other parties would need to be involved in working
through, such as how the Senior Preferred Stock Purchase
Agreements are resolved to ensure that taxpayers are repaid for
their investment. In the absence of Congressional action, the
Enterprises must be managed under current law, including
building capital to meet the existing capital requirements
before any exit from the conservatorships.
Q.39. FHFA's resolution authorities are modeled on, and
substantially similar to, the resolution authorities of the
Federal Deposit Insurance Corporation (FDIC). You previously
worked in the FDIC's Division of Resolutions and Receiverships
and had a long career at the FDIC. Are you aware of any
conservatorship or receivership in which the FDIC deferred to
Congress on the resolution of a failed insured depository
institution or otherwise conditioned the completion of that
conservatorship or receivership on action by Congress? If so,
please identify the FDIC conservatorship or receivership and
the circumstances relating to it.
A.39. The FDIC has not to my knowledge deferred to Congress on
the resolution of a failed insured depository institution or
otherwise conditioned the completion of a conservatorship or
receivership on action by Congress. However, the Enterprises
differ from FDIC-insured institutions in that they operate with
congressionally granted charters, have different public policy
mandates, and currently operate with the explicit backing of
the U.S. Treasury.
Q.40. FHFA previously retained Houlihan Lokey as its financial
advisor for purposes of developing a roadmap for each
Enterprise's exit from conservatorship. Is Houlihan Lokey still
retained by FHFA as a financial advisor for these purposes?
A.40. FHFA continues to retain advisors to help FHFA assess the
financial positions of the Enterprises.
Q.41. Do you agree with the statement in the final capital rule
finalizing the ERCF that ``[p]ending legislation, FHFA, as
conservator of each Enterprise, is required by statute to act
`for the purpose of reorganizing, rehabilitating, or winding up
the affairs of [the Enterprise].' That definite and limited
statutory purpose does not authorize an indefinite
conservatorship.''?
A.41. There is no statutory provision in the Safety and
Soundness Act that specifically addresses exit from
conservatorship. There is also no statutory provision that
specifically either mandates or forbids indefinite
conservatorship. As noted in the question, the conservator or
receiver may be appointed ``for the purpose of reorganizing,
rehabilitating, or winding up the affairs of a regulated
entity.'' In addition, the statute authorizes FHFA as
conservator to ``take such action as may be (i) necessary to
put the regulated entity in a sound and solvent condition; and
(ii) appropriate to carry on the business of the regulated
entity and preserve and conserve the assets and property of the
regulated entity.'' From these provisions, it is reasonable to
infer that FHFA may release the Enterprises from
conservatorship when they are rehabilitated and are again in
sound and solvent condition. Achieving that state requires that
they achieve safe and sound capital levels, which in turn
requires a restructuring of the Treasury's current equity
position in the Enterprises. Treasury's equity position does
not count as either ``core capital'' under the statute or Tier
1 or Tier 2 capital under FHFA's recently adopted capital
regulation, which is based on the Basel capital regime for
banks.
Q.42. Housing Finance Reform--At your nomination hearing,
Senator Crapo asked you whether you would be willing to support
legislation that calls for ``increasing competition among
mortgage guarantors.'' In its recent annual reports to
Congress, FHFA has recommended that Congress provide FHFA with
chartering authority similar to that of other Federal financial
regulators like the Office of the Comptroller of the Currency.
Do you support Congress authorizing FHFA to charter competitors
to the Enterprises?
A.42. Only Congress can grant the authority to charter
competitors to the Enterprises, and I defer to Congress on the
future structure of the secondary housing market. I would note
that there are competing ideas circulating about the
appropriate future structure, from multiple, privately held
guarantors, to the Enterprises as utilities, to merging these
two companies into one Government agency. I am open to all
options at this time. I am not opposed to competition, as long
as the organization(s) can meet the same mission and safety and
soundness requirements as the Enterprises, including FHFA
oversight and regulation. FHFA will provide technical
assistance to Congress pursuing any structure they choose.
There are certain things that FHFA can address in reforming
the Enterprises without Congressional action, and we have done
so by building capital, transferring risk, strengthening
underwriting, and reviewing pricing and credit policies. It is
my priority and my responsibility to continue to focus on the
mission and safety and soundness of the Enterprises until such
time as Congress enacts housing finance reform legislation.
Q.43. Do you believe the duopoly market structure increases the
systemic importance of each GSE, fosters a market perception
that the Federal Government will not permit the GSE to default
on its financial obligations, undermines market discipline over
its risk taking, and thereby fosters excessive risk taking by
the GSE and exposes taxpayers to risk of future bailouts?
A.43. Fannie Mae and Freddie Mac are a critical part of the
secondary mortgage market infrastructure. FHFA currently has
the authority to ensure that the Enterprises meet stringent
capital requirements and other regulatory standards, and we set
those standards with this level of importance in mind. I defer
to Congress on the future structure of the secondary housing
market and whether there should be more than two GSEs with
these responsibilities.
Q.44. Equitable Housing Finance Plans--On which specific
statutory authorities (with cites to specific statutory
clauses) has FHFA relied in requiring each Enterprise to
develop an Equitable Housing Finance Plan? Please provide any
legal analysis that inform your views on this question.
A.44. Congress established FHFA to regulate the Enterprises to
ensure that the purposes of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (Safety and
Soundness Act), the Enterprises' statutory charters, and any
other applicable law are carried out. \10\ In doing so,
Congress recognized that the Enterprises have important public
purposes reflected in their statutory charters, and that they
need to be managed safely and soundly so that they continue to
accomplish their public missions. \11\ FHFA is also currently
conservator of the Enterprises. \12\
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\10\ 12 U.S.C. 4511(b)(1) and (2).
\11\ 12 U.S.C. 4501(1) (Enterprises and Federal Home Loan Banks
have important public missions), (2) (their continued ability to
accomplish their public missions is important, and effective regulation
is needed to reduce risk of failure), and (7) (Enterprises have
affirmative obligation to facilitate financing of affordable housing
for low- and moderate-income families consistent with their public
purposes, while maintaining a strong financial condition and a
reasonable economic return).
\12\ https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-
FHFA-Director-James-B-Lockhart-at-News-Conference-Annnouncing-
Conservatorship-of-Fannie-Mae-and-Freddie-Mac.aspx; 12 U.S.C. 4617(b)
(powers and duties of the conservator).
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With respect to the public purposes of the Enterprises, a
number of statutory and regulatory authorities that apply to
FHFA and the Enterprises speak to the need to advance equity
for homebuyers, homeowners, and tenants in the housing market.
\13\ The Equitable Housing Finance Plan framework that FHFA has
adopted as conservator is a tool for the Enterprises to
undertake sustainable and meaningful actions to advance equity
in the housing markets, while ensuring safety and soundness.
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\13\ These include providing ongoing assistance to the secondary
market for residential mortgages, including mortgages on housing for
low- and moderate-income families involving a reasonable economic
return that may be less than the return earned on other activities, and
promoting access to mortgage credit in central cities, rural areas, and
underserved areas. 12 U.S.C. 1716(3) and (4) (Fannie Mae charter
purposes); 12 U.S.C. 1451 note (b)(3) and (4) (Freddie Mac charter
purposes). They also include Enterprise affordable Housing Goals, see
12 U.S.C. 4561(a), 4562, and 4563; 12 CFR part 1282, subpart B, and
Enterprise Duty to Serve affordable housing needs of certain
underserved markets, see 12 U.S.C. 4565; 12 CFR part 1282, subpart C.
In addition, the Enterprises are required to report annually to
Congress on, among other things, assessments of their underwriting
standards and business practices that affect their purchases of
mortgages from low- and moderate-income families, and revisions to
their standards and practices that promote affordable housing or fair
lending. 12 U.S.C. 1723a(n)(2)(G) (Fannie Mae charter), 1456(f)(2)(G)
(Freddie Mac charter).
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FHFA's principal duties include ensuring that the
Enterprises operate consistent with safety and soundness and
with the public interest. \14\ FHFA and the Enterprises also
have statutory and other commitments related to the selection
of equitable solutions for borrowers and tenants in the housing
market. The Enterprises' Charter Acts, for example, provide
that one of the Enterprises' purposes is to promote access to
mortgage credit throughout the Nation (including central
cities, rural areas, and underserved areas). \15\ The Charter
Acts require the Enterprises, as part of their annual housing
reports, to assess their underwriting standards, policies, and
business practices that affect low- and moderate-income
families or cause racial disparities, along with any revisions
to these standards, policies, or practices that promote
affordable housing or fair lending. \16\
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\14\ 12 U.S.C. 4513(a)(1)(B)(i), (v).
\15\ 12 U.S.C. 1716(4) (Fannie Mae charter); 1451(b)(4) (Freddie
Mac charter).
\16\ 12 U.S.C. 1723a(n)(2)(G), 1456(f)(2)(G).
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The Housing Goals and Duty to Serve requirements are
critical elements for ensuring that the Enterprises fulfill
their mission and charters and serve low- and moderate-income
families and underserved populations. \17\ The Safety and
Soundness Act provides that, in meeting these requirements, the
Enterprises are required to take affirmative steps to assist
primary lenders to make housing credit available in areas with
concentrations of low-income and minority families. \18\ The
Equitable Housing Finance Plans will serve as a supplement to
existing FHFA and Enterprise requirements, programs, and plans,
and are designed to ensure a continued focus on housing equity
that is aligned with other critical objectives including safety
and soundness and other mission activities.
---------------------------------------------------------------------------
\17\ 12 U.S.C. 4561(a) (FHFA to establish annual housing goals by
regulation), 4562 (establishment of required categories of single-
family housing goals), and 4563 (establishment of required multifamily
affordable housing goals); 12 U.S.C. 4565 (Enterprise duty to
facilitate secondary mortgage market for very low-, low-, and moderate-
income families in certain underserved markets).
\18\ 12 U.S.C. 4565(b)(3)(A).
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Under the Fair Housing Act, all Federal agencies having
regulatory or supervisory authority over financial
institutions, including FHFA, are required to administer their
programs and activities relating to housing and urban
development in a manner that affirmatively furthers the
purposes of the Fair Housing Act, which includes providing for
fair housing throughout the United States. \19\
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\19\ 42 U.S.C. 3608(d); 42 U.S.C. 3601 et seq.
Q.45. Please describe with specificity any virtual, telephonic,
in-person, or other meetings or contacts you had with
representatives of the President, the Department of the
Treasury, or any other executive departments that relate to
FHFA's requirement that each Enterprise develop an Equitable
---------------------------------------------------------------------------
Housing Finance Plan.
A.45. During my 8 years at FHFA, I have discussed issues
relevant to the mortgage market, the GSEs' financial condition
and the Enterprises' conservatorships, and other relevant
activities and issues with various offices and divisions of the
executive branch. FHFA held a discussion with HUD in August
2021 to get their feedback on the Equitable Housing Finance
Plan and briefed the Federal Financial Institution Examination
Council (FFIEC) Joint Fair Lending Task Force in November 2021.
The Joint Fair Lending Task Force includes representatives from
the Federal Deposit Insurance Corporation, the Consumer
Financial Protection Bureau, the Office of the Comptroller of
the Currency, the Federal Reserve Board, the National Credit
Union Agency, the Federal Trade Commission, the Department of
Justice, HUD, and FHFA.
Q.46. Servicer Eligibility Requirements--FHFA previously
proposed increased net worth and liquidity requirements for GSE
servicers. The last FHFA Director determined to repropose those
requirements to incorporate the lessons learned from the spring
2020 stress.
Do you intend to repropose net worth and liquidity
requirements for GSE servicers?
What is the timing for that reproposal?
A.46. FHFA is currently revisiting the seller/servicer
eligibility standards and expects to post revised standards for
public comment shortly.
Q.47. GSE Mission and Footprint--Freddie Mac's charter act
provides that ``[t]he volume of the [Enterprise's] lending
activities and the establishment of its loan ratios, interest
rates, maturities, and charges or fees in its secondary market
operations under this paragraph, shall be determined by the
[Enterprise] from time to time; and such determinations shall
be consistent with the objectives that the lending activities
shall be conducted on such terms as will reasonably prevent
excessive use of the [Enterprise's] facilities, . . . .'' \20\
(emphasis added) Similarly, Fannie Mae's charter act also
provides that ``such determinations should be consistent with
the objectives that such purchases and sales should be effected
only at such prices and on such terms as will reasonably
prevent excessive use of the [Enterprise]'s facilities.'' \21\
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\20\ 12 U.S.C. 1454(a)(5).
\21\ 12 U.S.C. 1719(a)(1).
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How do you construe the scope of each of these requirements
that each Enterprise shall ``reasonable prevent excessive use
of the [Enterprise's] facilities''?
What steps are you taking to ensure that FHFA reasonably
prevents excessive use of an Enterprise's facilities?
A.47. The charter act provisions referred to above were enacted
prior to the prudential supervisory regime established by the
Safety and Soundness Act in 1992 and 2008. The Fannie Mae
charter act provisions were enacted in the 1950s at a time when
Congress intended that Fannie Mae transition from public to
private ownership and wanted to ensure that its business
activities were sufficiently disciplined that the company could
attract private capital. The comparable provision in the
Freddie Mac Act was enacted in 1970 at Freddie Mac's creation,
when Freddie Mac was initially owned by the Federal Home Loan
Banks. Since then, the very general mandate in the ``excessive
use'' provisions has been followed by much more specific and
robust supervisory tools, such as the Safety and Soundness
Act's capital requirements, its Prompt Corrective Action
regime, FHFA's Prudential Management and Operations Standards,
and the enforcement tools available to combat unsafe and
unsound practices. In light of these more robust tools, the
``excessive use'' provisions have never been defined,
interpreted, or applied by FHFA or its predecessor agencies. In
conservatorship, the objectives of those provisions are
furthered by FHFA's recently adopted Enterprise Regulatory
Capital Framework, its proposed capital planning rule, and its
mandate to the Enterprises upon entering conservatorship that
they manage to positive shareholders' equity while returning to
long-term profitability, and more recently that they meet
various minimum return-on-equity thresholds for their business
segments.
Q.48. Independence of Regulatory Agency--The U.S. Supreme Court
has recently held that the Director of FHFA may be removed by
the President without cause and at any time. Notwithstanding
these recent developments, will you commit to not exceed the
authorities of FHFA (including the limitations inherent in the
charter act of each Enterprise) even if directed by the
President to the contrary?
A.48. It is my intention to follow the law, including the
Housing and Economic Recovery Act of 2008, the Enterprises'
charter acts, and any other applicable law.
Q.49. Did you have any virtual, telephonic, in-person, or other
contact with representatives of the President, the Department
of the Treasury, or any other executive department before the
Supreme Court's decision in Collins v. Mnuchin? If so, did any
of those conversations or other contacts relate to the
leadership of FHFA following the potential removal of former
Director Calabria?
A.49. During my 8 years at FHFA, I have discussed issues
relevant to the mortgage market, the GSE's financial condition,
the Enterprises' conservatorships, and other relevant
activities and issues with various offices and divisions of the
executive branch. President Biden designated me as Acting
Director of FHFA after Dr. Calabria was released from the
Director position on June 23, 2021.
Q.50. Answering Questions for the Record--Please describe with
particularity the process by which you answered these questions
for the record, including identifying who assisted you in
answering these questions along with a brief description of
their assistance.
A.50. These responses were developed at my direction and with
drafting assistance from FHFA employees in several FHFA
Divisions and Offices, based on the subject matter. I have
reviewed and approved all of the responses, and any views
expressed in these responses are my own.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM SANDRA THOMPSON
Q.1. Nearly 5 percent of households are considered limited
English proficient. In 2017 FHFA agreed to include a question
on the uniform mortgage application for borrowers to indicate
their preferred language, but that requirement was removed by
our last FHFA Director.
If confirmed, will you make it a priority to ensure that
non-English speaking families can communicate with their
lenders in their preferred language?
A.1. Mortgages are one of the largest investments that many
Americans make and one of most complex financial transactions.
I feel strongly that it is important to have clear
communication between lenders and borrowers, and servicers and
borrowers. In my experience during the last financial crisis,
communication between servicers and borrowers in particular was
critical to ensuring that homeowners retained their homes.
Collecting language preference information would only
improve that communication. However, collecting this data was
not a part of the recent changes to the uniform residential
lending application (URLA) implemented in March 2021. FHFA has
developed a supplemental form for lenders that includes
questions on language preference. Currently the form is
optional to lenders to provide to borrowers, and it is the
borrower's choice to provide the information on the form to the
lender. There are also no channels established that would
ensure that a lender who originates the loan would share
language preference information with a servicer, or that the
data on language preference would be submitted to the
Enterprises.
We are currently addressing this issue and plan to start a
workstream to ensure that the data is collected and used
appropriately. I commit to update you and your staff as we make
progress on this initiative.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM SANDRA THOMPSON
Q.1. As Arizona begins to recover from the earlier stages of
the COVID-19 pandemic, many hardworking families who were
affected financially are beginning to get back on their feet.
Many were able to remain in their homes due to temporary
eviction moratorium and mortgage forbearance measures that have
since expired. What do you see the FHFA's role being in the
coming months as we recover from earlier waves of the pandemic
and in light of the widespread effects of the Omicron variant?
If confirmed, how will you utilize your role to advance housing
security and affordability as we face emerging challenges from
this variant?
A.1. Should I be confirmed as FHFA Director, my goal would be
to move the ball forward to advance safe, decent, affordable
rental opportunities and responsible mortgage lending. The
pandemic has impacted many aspects of the housing market,
including the significant increase in house prices. House price
growth was nearly 18 percent nationwide for the third quarter
of 2021, and there are a number of reasons for it, including
supply chain issues and local zoning restrictions. While this
improves the value of assets that the Enterprises own, dramatic
price growth challenges affordability, especially for first
time homebuyers, who are not able to afford home ownership. I
believe that it is possible for the Enterprises to do more to
assist potential homebuyers in underserved populations in a
sustainable, safe way and, if confirmed as Director, I intend
to focus the housing GSEs on their mission.
During the pandemic, one of the Agency's priorities was to
ensure that homeowners and renters would not be forced out of
their homes. As Acting Director of FHFA I announced changes
last year to help protect homeowners and renters living with
the ongoing uncertainty of the COVID-19 pandemic. This included
expanding the use of interest rate reductions and term
extensions for loan modifications for homeowners with a COVID-
19-related hardship and extending the availability of COVID-19
forbearance for multifamily properties backed by an Enterprise.
Renters in these properties are protected from eviction while
the loan is in forbearance. FHFA will continue to monitor this
evolving situation and adjust policies when warranted to help
families remain in their homes.
Q.2. Last year Arizona's housing market saw drastic increases
in prices for both buyers and renters, with demand for housing
in the Phoenix metropolitan area in particular far higher than
the available supply of housing. If confirmed, how will you
utilize your role as FHFA director to promote the stability of
housing prices and the availability of housing in Arizona?
A.2. Although there are several issues related to the supply of
housing that fall outside of FHFA's jurisdiction, I agree that
it is a critical issue that needs to be addressed. One
particular action we have recently taken to facilitate
increased supply of affordable rental housing is increasing the
Enterprises' Low-Income Housing Tax Credit (LIHTC) investment
caps to $850 million per Enterprise annually. The Enterprises
are also working on revising their Duty to Serve underserved
markets plans which are expected later this year. FHFA will
continue to focus on and look at ways we can encourage Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks to support
efforts to address our Nation's lack of affordable housing.
Q.3. Critical risk transfers (CRTs) are a tool that can be used
for reducing economic risk for taxpayers as a result of lending
in the housing market. CRT programs allow Government-sponsored
enterprises to manage and reduce risk, particularly during
times of severe economic stress. What benefits and challenges
do you see from the use of CRT for risk management? What do you
see the FHFA's role being in restoring the economics around
CRTs moving forward?
A.3. Fannie Mae and Freddie Mac are the largest holders of
mortgage credit risk in the country. CRT transactions transfer
a meaningful amount of credit risk to a broad set of global
investors, which helps to protect the Enterprises and taxpayers
from losses in severely stressful economic scenarios. CRT is an
important tool, especially while the Enterprises are in
conservatorships and are building up their capital, to mitigate
systemic risk to the housing finance market due to the
Enterprises' size and monoline business model. FHFA's recent
proposed changes to the capital rule will help facilitate the
credit risk transfer program and move mortgage credit risk into
the hands of private investors and away from the Enterprises
and taxpayers.
Q.4. The 2020 GSE capital rule finalized by the previous FHFA
director disincentivized GSE issuance of CRTs. This rule has
since been modified. If confirmed, what additional changes to
this rule will you consider, if any?
A.4. I am committed to ensuring the safety and soundness of the
Enterprises, and the CRT program is an important tool for the
Enterprises to manage their credit risk and protect taxpayers.
In September 2021, FHFA proposed changes to the capital rule by
refining the leverage buffer and the risk-based capital
treatment of CRT transactions. These amendments are intended to
provide the Enterprises incentives to distribute credit risk to
private investors through CRT and away from taxpayers.
FHFA also introduced proposed amendments to ERCF's required
public disclosures and for capital planning. These rules help
protect taxpayers by ensuring that the Enterprises properly
assess their risks and maintain the appropriate level of
capital.
If confirmed, similar to other prudential regulators, I
intend to periodically review the final capital rule and adjust
various elements as necessary to ensure the safety and
soundness of the Enterprises.
Q.5. Home ownership is one of the primary ways in which
individuals can build wealth and create greater futures for
themselves and their children. Many hardworking Arizona
families cannot afford to pay the 20 percent downpayment
required for a mortgage. What role do you envision mortgage
insurance will play in reducing costs for homebuyers?
A.5. As the largest asset most people ever own, home ownership
is part of the American dream and is key to building wealth and
giving families opportunities to better their lives. Even
though they have the ability to repay a mortgage, a significant
downpayment can be out of reach for some borrowers. For loans
with less than a 20 percent downpayment, borrowers can obtain
mortgage insurance through their lenders to meet the
Enterprises' requirements. The Enterprises' Charter Acts
require credit enhancement for loans with loan-to-value (LTV)
ratios greater than 80 percent.
The Enterprises also have affordable programs (Fannie Mae's
Home Ready and Freddie Mac's Home Possible) designed to make
home ownership more affordable for lower income borrowers
through lower mortgage insurance requirements and limitations
on delivery fees.
As FHFA Acting Director, and if confirmed as Director, my
focus will be on ensuring access to affordable mortgage credit
in a responsible, sustainable way.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM SANDRA THOMPSON
Q.1. Please clarify how the Federal Housing Finance Agency and
Property Appraisal and Valuation Equity interagency task force
intend to address racial bias within property appraisal.
A.1. FHFA is an active member of the Property Appraisal and
Valuation Equity (PAVE) task force, cochaired by the Department
of Housing and Urban Development's Secretary Fudge and
Ambassador Rice. The PAVE task force seeks to root out
discrimination in the appraisal and homebuying process and
includes subcommittees for data, education, enforcement, and
policy. To date, FHFA has executed data sharing agreements and
provided historical appraisal data to our interagency partners
in support of interagency efforts to research and examine the
issue of property valuation bias and support enforcement and
compliance with fair lending laws.
Q.2. If confirmed, what steps will you take to address racial
bias within property valuation?
A.2. FHFA is committed to addressing racial bias in property
valuation. As an initial step, FHFA recently provided
additional public transparency into appraisals by publishing an
Insights Blog post, ``Reducing Valuation Bias by Addressing
Appraiser and Property Valuation Commentary'', highlighting
appraiser commentary that raises fair lending risks. Also as
part of this effort, Fannie Mae updated its appraisal policies
addressing ``problematic'' phrases and code words that could
indicate underlying bias and recently published two research
papers on appraisal bias topics. Freddie Mac published
preliminary research suggesting that 12.5 percent of homes
appraised in Black communities were valued less than the
contract price.
In addition, as part of the ongoing appraisal modernization
project, FHFA is committed to mitigating bias through exploring
valuation alternatives and updating the Uniform Appraisal
Dataset (UAD). FHFA also continues to engage interagency
partners as part of the PAVE Taskforce and examine and address
the root causes of racial bias in property valuation.
Q.3. Do you support efforts to utilize technology to further
innovate the mortgage experience in order to provide greater
credit access to consumers?
A.3. Responsible use of technology presents a number of
opportunities for providing greater credit access to consumers
by helping to overcome obstacles that may affect underserved
populations. As an example, desktop appraisals leverage
information already available to appraisers so they can
complete property valuations quickly, leading to shorter
closing times and other efficiency gains. Desktop appraisals
can also help borrowers in rural communities more readily
obtain appraisals by reducing the time it would take for the
appraiser to travel distances to evaluate a property. After
permitting and carefully monitoring the use of desktop
appraisals as a temporary COVID-19 flexibility, FHFA recently
announced that the Enterprises will be adopting policies
permitting desktop appraisals in their Selling Guides. FHFA
will continue to work with the Enterprises to explore other
ways that careful, measured use of innovative technology can
provide greater credit access or improved risk management.
Q.4. What's your view on the role of AI and machine learnings
in mortgage access, and how should Federal Housing Finance
Agency approach these emerging technologies in its work?
A.4. The use of artificial intelligence (AI) and machine
learning (ML) among financial institutions is fairly new. The
technology offers the potential to lower costs, expand access,
and reduce the amount of time to originate and securitize
mortgages. AI/ML tools and systems can be used to support a
range of functions including customer engagement, risk
analysis, credit decision making, fraud detection and
information security. However, the use of AI/ML can expose
consumers and financial institutions to heightened risks as
well, so proper control and oversight of the technology is
important.
In response to the growing role of AI/ML over the past
several years, FHFA will issue an Advisory Bulletin which
provides risk management guidance to Fannie Mae, Freddie Mac,
and the Common Securitization Platform. As FHFA evaluates the
benefits and risks associated with the evolving role of
technology within the mortgage industry, we identified the need
for as set of AI/ML core ethical principles such as
transparency and security to manage decision making and prevent
algorithmic bias. These core principals are essential for the
Enterprises to ensure consistency across different business
activities and functions that interact with AI/ML to avoid
potential adverse outcomes.
Should I be confirmed, I intend to increase FHFA's
capability to evaluate the use of AI/ML at all of its regulated
entities to ensure responsible innovation, adoption, and use of
AI/ML. FHFA will also continue to engage with other regulators
and governmental entities to enhance understanding of AI/ML and
ensure that guidance and supervisory expectations regarding AI/
ML are clear and consistent.
Q.5. If confirmed, what role will Federal Housing Finance
Agency play as a regulator to ensure that any innovation
related policy changes with regards to Government Sponsored
Enterprises is equitable?
A.5. I recognize that there is still much work to be done to
make the housing finance system fairer for everyone--including
Black and brown communities, rural areas, and persons living
with disabilities. In September of 2021, I instructed the
Enterprises to develop an annual Equitable Housing Finance Plan
to identify and address barriers to sustainable housing
opportunities. The Enterprises, consistent with safety and
soundness, can responsibly undertake sustainable and meaningful
actions to advance equity in the housing markets, while
ensuring safety and soundness of the secondary housing market.
These plans will include enhancements to the Enterprises
current programs and products, consumer education initiatives
for both renters and homeowners, and plans to leverage
technology to improve sustainable underwriting. In addition,
FHFA also will require the Enterprises to submit annual
progress reports on the actions undertaken during the prior
year to implement their plans. These plans will be published in
the near future, and FHFA will continue to engage with
stakeholders to identify areas of opportunity for the
Enterprises to improve performance of its statutory mission.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM SANDRA THOMPSON
Q.1. Home ownership continues to become more and more
unaffordable for the middle class, a trend worsened by the
coronavirus pandemic. The Direct MI pilot programs, IMAGIN and
EPMI, which significantly lower the cost of Mortgage Insurance
for borrowers and decrease counterparty risk at the GSEs, have
temporarily been put on hold.
How can these Direct MI programs be more fully utilized
going forward to lower mortgage insurance costs for consumers,
increase counterparty diversification for the Enterprises and
reduce MI pricing disparity between large and small lenders?
A.1. The Integrated Mortgage Insurance (IMAGIN) pilot program
was previously conducted by Freddie Mac to test an alternative
form of mortgage insurance. Fannie Mae conducted a similar
pilot know as Enterprise Paid Mortgage Insurance (EPMI). The
pilots were designed to provide charter-required credit
enhancement through reinsurers. Key elements addressed
counterparty risk, diversification, collateralization for
exposure, certainty of coverage and lower costs to consumers.
As you may be aware, the pilot programs were allowed to expire
in 2021. FHFA will look at all of the costs associated with
purchasing a home and make responsible changes where
appropriate.
Q.2. Many first-time homebuyers, low-to-moderate income
borrowers, and minority borrowers use mortgage insurance,
either Private MI or Government MI via FHA, to obtain a
mortgage if they don't have the required 20 percent downpayment
as many don't today. These borrowers are usually affected by
Loan Level Price Adjustments, or additional fees added by the
GSEs that mortgage insurers already priced into the loan,
increasing the cost to the borrower.
Following your recent announcement on raising prices for
higher cost and second homes, is the FHFA planning on also
reducing the Loan Level Price Adjustment (LLPA) fees at the
GSEs that affect some borrowers, primarily First-Time
Homebuyers, by placing redundant fees on these loans?
A.2. I want to ensure that all Americans who have the ability
to repay and qualify are able to get an affordable loan, which
is a particular challenge for first-time homebuyers and low-
income borrowers. While FHFA recently adjusted loan level
pricing adjustments (LLPAs) for higher cost mortgages and
second homes, we also explicitly exempted from those changes
both Enterprises' affordable programs, Home Ready and Home
Possible, as well as first-time homebuyers with incomes at or
below 100 percent of area median income. In fact, with this
change, these first-time homebuyers will have lower LLPAs than
before.
This year, FHFA is also undertaking a holistic review of
guarantee-fee pricing and all of its components, but no
decisions have been made on any specific adjustments. However,
going forward I would be happy to keep you and your office
updated on our work in this area.
Q.3. As you know, the ``Economic Growth, Regulatory Relief, and
Consumer Protection Act'' (S.2155) that Congress passed and was
signed into law in May of 2018 included language (Section 310)
I authored and introduced with bipartisan cosponsors as the
``Credit Score Competition Act'' (S.1685). The provision
required FHFA to establish standards and criteria for the
validation and approval of credit scores that could be used by
mortgage lenders intending to sell their mortgages to Fannie
Mae or Freddie Mac. It's my understanding that FHFA and the
GSEs have made significant progress in implementing the
requirements of Section 310.
Can you provide an update on how the implementation process
is proceeding and when you anticipate there may, in fact, be
true credit score competition in the mortgage lending space?
A.3. I appreciate your efforts to ensure that the Enterprises
are using up to date and accurate credit score models.
Following the enactment of your legislation, FHFA published a
rule on Validation and Approval of Credit Score Models,
outlining the process as laid out in the law. The Enterprises
have been proceeding through these steps, and currently the
process is in its latter stages where the Enterprises conduct
business assessments of the applicants' credit score models.
Although I cannot opine on future competition in the credit
score space, the Enterprise Business Assessment phase does
require, among other components, an assessment of possible
competitive effects from using a particular credit score model.
The Enterprises' will submit their analysis for approval in the
first quarter of 2022, and I expect FHFA to make a decision on
updating the credit score by the end of the second quarter.
Q.4. The Federal Home Loan Bank system has provided liquidity
and stability for the residential mortgage markets and for
community development for nearly 90 years.
As the provision of financial services and particularly
mortgage finance continues to evolve, do you anticipate the
FHFA under your leadership will review access to the Federal
Home Loan Bank System to meet this changing landscape?
Will you provide to the Members of this Committee
recommendations for modernizing the membership of the Federal
Home Loan Bank System?
A.4. The FHLBanks have an important role serving as a reliable
source of liquidity for housing finance, community lending, and
asset-liability management for their members in all market
conditions. Because the FHLBank System provides advances when
needed, the FHLBanks played critical roles in the last two
economic crises, making advances to their members. Despite the
decrease in advances since the end of March 2020, the FHLBank
System is currently in a strong financial position and overall
safe and sound condition.
Congress established the eligibility for certain types of
financial institutions to become members of FHLBanks in section
4(a) of the FHLBank Act. In recent years, Congress expanded
FHLBank membership eligibility to include nondepository CDFIs
in 2008 and non-federally insured credit unions in 2015. FHFA
also addressed membership eligibility issues related to
insurance companies in a rulemaking in 2016, and the Agency
continues to clarify expectations on potential member
applications with the FHLBanks. We are reviewing the membership
regulation to determine if further clarification is needed.
FHFA stands ready to provide technical advice on any
changes that Congress may wish to propose for changes to
FHLBank membership. In my view, members of the FHLBanks should
have a clear nexus to housing finance, contribute to the safety
and soundness of the FHLBank System, support affordable housing
and community investment needs of the FHLBank districts, have
strong regulatory and supervisory oversight, and have reliable
resolution regimes should they encounter difficulties.
Q.5. Manufactured homes are the only form of unsubsidized
affordable home ownership and can have a significant role in
our affordable housing crisis. Yet, the Duty to Serve plans
that were proposed by the GSEs in May for 2022 to 2024 actually
reduce the number of manufactured home loans the GSEs intend to
purchase. This is in complete opposition to purpose of the GSEs
to facilitate access to affordable home ownership and the needs
of the country.
As Director, what are your plans for the GSEs' activities
with respect to manufactured housing?
I understand that FHFA is a member of a new White House
Task Force on expanding access to manufactured housing
financing. What do you envision as the desired outcomes for
this task force? What do you see as FHFA's role with this group
and how will you engage to ensure the task force is successful
in expanding financing for manufactured homes as a significant
resource of affordable housing?
A.5. Duty to Serve has had a measurable impact on the
manufactured housing market. Since its inception, the
Enterprises have increased manufactured housing financed as
real property and established consumer protections in financed
communities that protect renters and owners of manufactured
housing units from surprise increases in costs. Manufactured
housing can represent an affordable housing option for some
families and is one of the markets required in the Enterprises'
Duty to Serve plans. Since Duty to Serve took effect in 2018,
the Enterprises have purchased more than 82,000 eligible real
property manufactured housing loans for a total of more than
$11 billion in unpaid principal balance. FHFA has also worked
with stakeholders and industry to develop tenant protections
for manufactured homeowners and renters in Enterprise-financed
manufactured housing communities. These protections are now
required on all mortgage loans for these communities.
I recently asked the Enterprises to revise their Duty to
Serve plans for 2022-2024 to do more in these areas in a
sustainable way. The plans should explain how the Enterprises
are going to serve rural areas, focus on affordable housing
preservation for renters and homeowners, and expand liquidity
for the manufactured housing market all while maintaining
strong safety and soundness and underwriting criteria.
FHFA is participating on the White House Manufactured
Housing Task Force along with nine other Federal agencies. We
look forward to working across Government to support and
enhance the availability of safe, affordable, and energy-
efficient manufactured housing as an affordable housing option,
and specifically, the availability and affordability of
financing products and programs for this housing sector.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM SANDRA THOMPSON
Q.1. I understand that former Director Mark Calabria--and you
as then a key Deputy--worked on and had come very close to
finalizing a new rule governing the Products and Activities of
the GSEs--Fannie and Freddie. Whether in conservatorship or
down the road as entities exiting conservatorship, having
strong governance over what products and activities the GSEs
advance is very important for all participants in the vibrant
housing economy. The GSEs have very specific congressional
charters and a strong Products and Activities rule ensures that
the entities do not exceed those permissible activities
provided by the private markets.
Can you assure me and this Committee that this rule will be
a near term priority for FHFA?
A.1. Establishing and implementing a process to ensure that any
new product or activity of the Enterprises is analyzed and
reviewed by FHFA is an important step to complete before the
Enterprises can be released from conservatorship and presents
numerous challenges and regulatory considerations. FHFA is
diligently reviewing comments on the proposed rule and working
through the complexity of the issues raised during the public
comment period. As Acting Director and, if confirmed, as
Director, I can assure you FHFA will continue its work on this
issue.
Q.2. Freddie Mac recently issued directives on manufactured
housing projects which are in direct conflict with current law
in several States. In some instances, uniform adoption of these
standards would result in manufactured housing residents
receiving weaker protections than they would under State law.
This proposal by Freddie Mac was issued without warning,
without a formal notice and comment period, and appears to
reflect the priorities of activist housing organizations and
progressive policymakers. Will you commit to ensuring that:
(1) No additional steps are taken by either GSE without a
formal process to receive stakeholder feedback
(2) Any final proposal by either GSE is consistent with
existing State law
(3) Any approach in this space is motivated by what is best
for the long-term health of the manufactured housing market and
the U.S. taxpayers that support this activity, rather than any
politically motivated organization?
A.2. Manufactured housing is an important source of affordable
housing, especially in rural communities, and is a statutorily
required focus of the Enterprises' Duty to Serve. Owners and
renters of manufactured housing who rent a pad in a community
may face significant costs and difficulties in relocating their
units if a manufactured housing community owner unexpectedly
raises pad rents or cancels leases. Our analysis indicated that
State laws providing tenant protections were not consistent
across the country. In 2016, FHFA and the Enterprises developed
a set of tenant protections for manufactured housing
communities which FHFA included as part of the final rule
implementing Duty to Serve. The Duty to Serve rule received
significant public comment when it was proposed. FHFA also
posts the Enterprises' draft Duty to Serve plans for public
feedback and holds listening sessions on the Enterprises'
plans. In 2021, FHFA held a public listening session
specifically on manufactured housing, where we encouraged
interested parties to provide feedback.
The Agency included tenant pad lease protections in
manufactured housing communities in the Duty to Serve
regulation to encourage those communities to adopt tenant pad
lease protections or to enhance existing pad lease protections.
We believe that these protections help provide stability and
encourage strong manufactured housing markets. It is important
to note that these tenant protections are a minimum for
Enterprise manufactured housing loans and do not preempt any
State law that provides additional protections or higher
standards.
Q.3. During your confirmation hearing, in response to Sen.
Reed, you said that FHFA is ``very insistent that [manufactured
housing communities] have protections and Fannie and Freddie
will not purchase loans unless there are protections for the
communities, the owners and the renters.'' This comment seems
to be inconsistent with FHFA's final rule on Duty to Serve,
which encourages (rather than mandates) manufactured housing
communities to adopt or enhance existing tenant pad lease
protections and goes against the long-standing practice of the
GSEs to encourage adoption through pricing incentives. Can you
clarify FHFA's position on this issue?
A.3. FHFA's final Duty to Serve regulation encourages (rather
than mandates) the adoption of the tenant pad lease
protections. In 2021, Fannie Mae and Freddie Mac each made the
decision to only purchase manufactured housing community loans
with tenant pad lease protections. FHFA agrees with and
encourages this approach through Duty to Serve credit and
through the treatment of manufactured housing community loans
with tenant pad lease protections as mission-driven under the
Conservatorship Scorecard multifamily volume cap (Appendix A).
Q.4. In October 2020 your predecessor released for comment a
proposed rule on ``Prior Approval for Enterprise Products''
that would update the process for FHFA to review new activities
at the GSEs. This is a critical element of GSE oversight to
ensure that they comply with their congressional charters and
do not expand into areas of the housing finance system served
by private market participants. Given the comment period for
this proposed rule closed more than a year ago, do you have any
update on the timing for FHFA to issue a final rule?
A.4. Establishing and implementing a process to ensure that any
new product or activity of the Enterprises is analyzed and
reviewed by FHFA is an important step to complete before the
Enterprises can be released from conservatorship and presents
numerous challenges and regulatory considerations. FHFA is
diligently reviewing comments on the proposed rule and working
through the complexity of the issues raised during the public
comment period. As Acting Director and, if confirmed, as
Director, I can assure you FHFA will continue its work on this
issue.
Q.5. Acting Director Thompson, I understand that former
Director Mark Calabria--and you as then a key Deputy--worked on
and had come very close to finalizing a new rule governing the
Products and Activities of the GSEs--Fannie and Freddie.
Whether in conservatorship or down the road as entities exiting
conservatorship, having strong governance over what products
and activities the GSEs advance is very important for all
participants in the vibrant housing economy. The GSEs have very
specific congressional charters and a strong Products and
Activities rule ensures that the entities do not exceed those
permissible activities provided by the private markets. Can you
assure me and this Committee that this rule will be a near term
priority for FHFA?
A.5. Establishing and implementing a process to ensure that any
new product or activity of the Enterprises is analyzed and
reviewed by FHFA is an important step to complete before the
Enterprises can be released from conservatorship and presents
numerous challenges and regulatory considerations. FHFA is
diligently reviewing comments on the proposed rule and working
through the complexity of the issues raised during the public
comment period. As Acting Director and, if confirmed, as
Director, I can assure you FHFA will continue its work on this
issue.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
FROM SANDRA THOMPSON
Q.1. In a Bloomberg Opinion piece from 2020, former Freddie Mac
CEO, Don Layton details a specific action the FHFA can take to
reduced home ownership costs for first-time homebuyers. Mr.
Layton cites reducing the ``unnecessarily high cost of mortgage
insurance'' as a way that can tangibly help this segment of the
marketplace. He describes the significant built-in
administrative costs in the current marketplace and how better
utilizing a Direct MI program can tangibly reduce overall costs
to the homebuyer. Mr. Layton also illustrates how diversifying
the Enterprises counterparty base to further spread this risk
will reduce risks to both Enterprises and the American
taxpayers. Do you agree with Mr. Layton when he states, ``The
FHFA should immediately take a clear proconsumer and
procompetition stance by approving the pilot for full
implementation, making inexpensive and more reliable mortgage
insurance available to all borrowers who need it''?
A.1. The article referenced alludes to the Integrated Mortgage
Insurance (IMAGIN) pilot program that was previously conducted
by Freddie Mac to test an alternative form of mortgage
insurance. Fannie Mae conducted a similar pilot know as
Enterprise Paid Mortgage Insurance (EPMI). The pilots were
designed to provide charter-required credit enhancement through
reinsurers. Key elements addressed counterparty risk,
diversification, collateralization for exposure, certainty of
coverage and lower costs to consumers. As you may be aware, the
pilot programs were allowed to expire in 2021. FHFA will look
at all of the costs associated with purchasing a home and make
responsible changes where appropriate.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR DAINES
FROM SANDRA THOMPSON
Q.1. You have stated that you will be transparent. Aside from
mandated reports to Congress, what actions will you take?
A.1. If confirmed as Director, I will ensure that FHFA conducts
regular outreach to stakeholders, industry, and Congress,
including your office, and the offices of our authorizing
Committee members in both the Senate and the House of
Representatives. I have also publicly committed to stakeholders
and the industry that I will give them notice before the Agency
implements any decisions that involve significant changes.
FHFA will continue to provide regular updates to Congress
on the Agency's rulemaking and other regulatory actions. I also
commit that FHFA will make its subject matter experts available
for briefings and consultations, and when appropriate, will
assist in facilitating consultations with Fannie Mae, Freddie
Mac, and the Federal Home Loan Banks.
Q.2. Why is transparency important, and what methods are most
effective at maintaining it?
A.2. Transparency is a critical component of good governance.
In over three decades of public service in financial services
regulation, I've found that the most effective way of
maintaining transparency and accountability is by adhering to
strict legal and ethical standards. I believe that doing so is
also the best way to serve the public's interest.
I intend to continue FHFA's practice of soliciting public
feedback on important decisions. In addition to following the
Administrative Procedures Act providing for a public comment
period for rulemaking, FHFA publishes Requests for Input that
solicit public comment on potential policy decisions and
initiatives, hosts listening sessions, and publishes detailed
reports and descriptions of FHFA activities on the Agency's
website.
Q.3. Will you commit to striving to consistently allow notice
and comment periods that are substantially longer than 30 days?
A.3. Yes.
Q.4. What are the FHFA's weaknesses and how do you intend to
address them? Please share nuanced objectives versus
overarching goals.
A.4. FHFA faces a unique set of economic and environmental
factors that could influence the Agency's success in achieving
its mission. Before the pandemic took hold in 2020, the United
States was already facing a shortage of affordable housing
driven by the long-term decline in the construction of single-
family homes. The share of newly built smaller homes, which are
often more affordable for new or first-time homeowners, has
been declining since the early 1980s and is now nearing a 50-
year low. While house prices have been rising for the last
decade, the number of existing single-family homes for sale has
declined more than 30 percent.
The lack of affordable housing has become an even greater
challenge since the COVID-19 pandemic began when demand for
housing soared. In 2020, the monthly supply of new residential
homes sunk to historically low levels. Over the last year,
mortgage interest rates and housing inventory have both
remained low even as rapid house price growth continued. This
diminishing housing affordability is an additional barrier that
can affect equitable access to affordable home ownership and
rental housing, especially for first-time and first-generation
borrowers.
Another challenge will be to ensure that external events do
not negatively affect staff productivity and morale. FHFA staff
have been exceptionally resilient over the past 2 years while
addressing the economic impacts of the pandemic, leveraging
lessons learned from prior crises to ensure that families, both
homeowners and renters, were able to safely remain in their
homes. As the country emerges from the pandemic, the Agency
will continue to prioritize the safety of its workforce and
infrastructure.
In order to overcome any challenge, I believe it is
critically important to listen to FHFA's stakeholders:
Congress, other regulatory institutions, stakeholder
organizations, and market participants. In doing so, FHFA will
be able to develop a range of options to determine the most
effective policy solutions.
Q.5. Based on your 6 months experience as Acting Director
please share your insights of employee morale at FHFA?
A.5. During my tenure as Acting FHFA Director, I have been
inspired by the dedication, selflessness, and resilience seen
from FHFA employees. As we continue to navigate the uncertainty
of the pandemic, I believe our employees' commitment to the
mission is and has been unwavering. Employee morale, job
satisfaction, and overall engagement are a significant focus
for my leadership team and creating a culture of organizational
effectiveness and work life balance is a top priority for me.
During my tenure as Deputy Director for FHFA's Division of
Housing Mission and Goals, I used results from the annual
Federal Employee Viewpoint Survey (FEVS) to identify areas of
focus for employee morale. I will continue to use the annual
FEVS report as a resource for measuring employee morale and
developing relevant action plans.
Q.6. How do rural and frontier communities factor into your
vision for FHFA?
A.6. In my view, it is critically important that the housing
GSEs support home ownership in rural areas. Often in rural
areas the only lenders making loans are small community-based
lenders, and we must ensure that those lenders have access to
the secondary market on a level playing field with larger
lenders. Rural areas have other unique challenges, like finding
comparable appraisals and the complexity of lending on tribal
reservations, and the GSEs must provide programs that help to
address these challenges.
One of the reasons that I have focused Fannie Mae and
Freddie Mac on their statutory Duty to Serve underserved
markets is the rural component required by Congress. Since the
implementation of Duty to Serve, the Enterprises have more than
doubled the number of rural single-family loans purchased,
expanded outreach to rural partners, expanded multifamily
liquidity in rural areas, and worked closely with the
Department of Agriculture (USDA) to allow purchases of Sec. 515
rural housing mortgages.
Despite these accomplishments, I believe that the
Enterprises can do more, in a safe and sound manner, to support
rural housing. Accordingly, I have asked them to improve their
Duty to Serve plans for 2022. In November 2021, to provide
rural areas with access to additional financing, FHFA raised
the Low-Income Housing Tax Credit (LIHTC) investment limit for
the Enterprises to $850 million annually and required that half
of that be for underserved areas like rural and tribal areas.
The Federal Home Loan Banks (FHLBanks) also have a
responsibility to support home ownership in rural areas.
Nationwide, they are a source of residential loan liquidity for
depository institutions and community-based lending
organizations. In addition to the FHLBanks' core financing
programs, their Affordable Housing Programs provide funding for
property rehabilitation projects and home ownership in rural
areas. However, I believe the FHLBanks can increase their
support for rural areas in each State and take additional steps
to assess housing issues in tribal areas in every district.
Q.7. Please expound on your objectives for credit risk
transfer. It is critical that taxpayers are not on the hook in
the case of a severe market event.
A.7. The Enterprises are currently the largest holder of
mortgage credit risk in the United States. Credit risk transfer
(CRT) transactions are a way to transfer a meaningful amount of
mortgage credit risk to private investors in severely stressful
economic scenarios, which helps to protect taxpayers from
potentially large credit-related losses.
I view the transfer of unexpected credit risk to a broad
set of global investors as an important tool to reduce taxpayer
exposure to the risks posed by the Enterprises and to mitigate
systemic risk to the housing finance market caused by the size
and monoline nature of the Enterprises' businesses. CRT is an
effective mechanism for such a distribution of unexpected
credit risk especially while the Enterprises are in
conservatorships and have inadequate capital positions relative
to their overall books of business.
I am committed to strengthening the safety and soundness of
the regulated entities and believe that the modest changes we
have proposed to the Enterprises' capital rule will help
facilitate the CRT program and move credit risk away from the
Enterprises and the taxpayers and into the hands of private
investors.
Q.8. In December, a U.S. District Court ruled that trusts are
``covered persons'' under the Consumer Financial Protection
Act. As you know, trillions of dollars worth of consumer debt
is held in trust, a structure which is integral to our
securitization markets, including the GSE mortgage-backed
securities market.
What is the impact of this court decision?
Specifically, how will this decision impact the ability of
the GSEs to issue MBS going forward? Please provide FHFA's
expectations regarding any increased costs to the GSEs
securitization process and whether those costs will ultimately
be borne by U.S. homeowners.
A.8. The case mentioned in the question, CFPB v. National
Collegiate Master Student Loan Trust, has received a great deal
of attention from participants in the securitization business,
and is currently being appealed by the defendants. FHFA is
actively monitoring the case. We do not expect it to have a
significant effect on Enterprise securitizations or on
investors in Enterprise mortgage-backed securities due to the
distribution of compliance responsibilities among the various
participants in Enterprise securitizations, the robustness of
Enterprise servicing guides and contracts, and Enterprise
monitoring of servicers.
Q.9. Due to the current trade situation between China and the
United States, the current tariffs are contributing to an
increase of the cost of U.S. building materials, which is
further exasperating the supply shortage in the housing market.
What can be done to lessen the negative impact of the
increasing costs of U.S. building materials, specifically in
regards to the trade war with China?
A.9. FHFA's legal authorities are limited to the regulation and
supervision of the secondary mortgage market and its role as
conservator of Fannie Mae and Freddie Mac. The Agency's
authorities and activities are not related in any way to
international trade policy or any tariffs imposed by the U.S.
Government.
Q.10. Do you have any plans to change the current FHFA plans
for monitoring enterprises exiting Federal conservatorship?
What are your general thoughts on ending Federal
conservatorships over GSEs? What indicators (economic or
otherwise) should we be monitoring?
A.10. FHFA closely supervises the Enterprises and is focused on
ensuring that the Enterprises build capital and improve their
safety and soundness while in conservatorship. Adequate capital
is a necessary precondition for the Enterprises to exit from
conservatorship; however, this is not a calendar-driven event.
FHFA has taken additional steps beyond building capital to
ensure that upon their exit from conservatorship, we will not
have a repeat of the issues that lead to the financial crisis.
These steps include facilitating CRT transactions and improving
the Enterprises' transparency. There is still much more work to
be done to transfer risk, strengthen underwriting, and review
pricing and credit policies.
In order to end the conservatorships, it is essential that
Congress determines both the role of the Enterprises and the
secondary mortgage market's future structure. In addition, the
Department of Treasury, which possesses a significant economic
interest in the Enterprises, and other Federal agencies will
need to resolve a series of outstanding issues as part of the
process to end the conservatorships.
Q.11. Last year, former FHFA Director Calabria warned that
``when housing markets experience a significant downturn,
Fannie Mae and Freddie Mac will fail at their current capital
levels''.
If we experience a significant housing market downturn,
would Fannie Mae and Freddie Mac have the ability to meet
current obligations given their current capital levels?
How might Fannie and Freddie increase capital if they were
to be removed from conservatorship?
A.11. Under FHFA's capital rule, the Enterprises would need
approximately $300 billion of capital to meet their obligations
in the case of a significant housing market downturn and to
continue to support the housing market through the downturn.
The Enterprises currently have a net worth of approximately $68
billion. In conservatorship the Enterprises can only build
capital through retaining earnings, and I expect them to
continue to build their capital levels and utilize CRT to
ensure that taxpayers are not at risk. Outside of
conservatorship, the Enterprises would be able to build capital
through both retaining earnings and raising capital from the
capital markets.
Q.12. Currently, the United States and Canada are in a trade
dispute regarding softwood lumber, a common building material
for homes. The U.S. Department of Commerce nearly doubled its
duties on imported Canadian softwood lumber to 17.9 percent in
November.
What is your opinion on this current trade disagreement?
A.12. FHFA's legal authorities are limited to the regulation
and supervision of the secondary mortgage market and its role
as conservator of Fannie Mae and Freddie Mac. The Agency's
authorities and activities are not related in any way to
international trade policy or any tariffs imposed by the U.S.
Government.
Q.13. One of the GSEs main functions is to support small
lenders' access to capital markets they otherwise could not. On
the single-family side, FHFA has made progress creating a level
playing field. On the multifamily side, you've indicated there
remains work to be done. The GSEs recently put out guidelines
for small multifamily lenders but it appears that they don't
provide clarity and objective standards for these lenders.
Independent and smaller multifamily lenders are still being
shut out from serving their American communities.
As you noted in April of last year:
FHFA has nothing against the big players, but their size
means that they don't have to worry about accessing the capital
markets. Small lenders, on the other hand, may be able to
leverage local knowledge to best serve their communities. . . .
FHFA's current Duty to Serve regulation includes recognition of
the role small lenders can play in serving underserved markets.
But that very locality can also make it harder for them to
access capital markets.
Can you give us an update on your efforts, and how you will
define success in the multifamily lending side of the GSEs?
A.13. FHFA highlighted the importance of access for small
multifamily lenders by including it on the Enterprises' 2022
Conservatorship Scorecard. As a financial regulator for more
than 30 years, I have long been aware that smaller lenders have
local knowledge and relationships and may more effectively
serve underserved markets. The Enterprises will work with FHFA
throughout 2022 to assess opportunities to increase access to
Enterprise multifamily products for small and regional lenders.
FHFA's primary goal is to make certain the Enterprises have
qualified multifamily counterparties that can serve all markets
in need.
In early 2021, FHFA worked with the Enterprises to publish
lender eligibility requirements on their public websites.
Publishing more information on the Enterprises' lender
eligibility requirements is an important first step to provide
transparency and allow prospective lenders to easily understand
the criteria to become an Enterprise seller/servicer. I
recognize that more work is needed to ensure access for
qualified lenders.
Q.14. The FHFA annual performance and accountability report for
2021 reflected new priorities for the upcoming year, including
strengthening the safety and soundness of Fannie Mae, Freddie
Mac, and the Federal Home Loan Banks to protect the housing
finance system.
Can you offer any details of how the FHFA plans to meet
that new priority?
What role as Director will you play in maintaining that
priority?
A.14. As Acting Director and, if confirmed, Director of FHFA, I
will continue to use the authorities of the Director to
maintain strong oversight of the Enterprises as both regulator
and conservator. FHFA will continue to look at ways to
strengthen the safety and soundness of its regulated entities,
including by finalizing proposed enhancements to the
Enterprises' regulatory framework and transferring a
significant amount of credit risk from the Enterprises to
private investors. In November 2021, FHFA published the 2022
Conservatorship Scorecard for the Enterprises, which
establishes milestones on which Enterprise leadership is
assessed. I also intend to release a new FHFA Strategic Plan
this year which will further detail some of these objectives.
Q.15. According to the FHFA annual performance and
accountability report for 2021, assessment teams from FHFA
documented the actions that demonstrated compliance with
significant laws and regulations. The assessment determined
there were no material weaknesses that adversely affect the
compliance with laws and regulations.
Can you provide details of what that assessment entails,
and how it ensures unbiased third party compliance
verifiability?
A.15. FHFA conducts its assessment of internal controls over
the effectiveness and efficiency of its operations, reporting
(other than financial reporting), and compliance with
applicable laws and regulations in accordance with the Office
of Management and Budget's (OMB) Circular A-123. FHFA's
assessments for compliance with laws and regulations are
reviewed by FHFA's Office of General Counsel, and the
Government and Accountability Office conducts an audit of
FHFA's financial statements including compliance with laws and
regulations material to FHFA's financial statements.
Q.16. You mentioned that 104 counties were affected by the
increased rate of second-home mortgages disproportionately when
compared to counties with an increased median income. What
similarities do these counties have? Are any of these counties
in MT?
A.16. I would like to clarify that FHFA determined for 2022
that 121 counties in the United States are in high cost areas
and have conforming loan limits higher than the $647,200
national baseline. None of the 56 counties in Montana are above
the new national baseline. In fact, the new baseline limit is
higher than the highest median county home value in Bozeman
which reached $525,500 in 2021. Because of the rapid increase
in house prices last year, the conforming loan limit
significantly increased between 2021 and 2022 across the board.
For the highest cost areas in the country, the maximum
conforming loan limit is $970,800.
The formula for calculating the loan limit is defined in
the Housing and Economic Recovery Act, and FHFA does not have
flexibility in setting it. FHFA has announced an adjustment in
guarantee fees for ``high balance'' loans that are larger than
the $647,200 conforming loan limit, up to $970,800, and for
second home mortgages purchased by the Enterprises. We exempted
from these adjustments the Enterprise affordable programs and
first-time homebuyers with incomes at or below 100 percent the
area median income. The exemption ensures that the Enterprises
continue to provide strong support for affordable housing.
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