    [Senate Hearing 117-589]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 117-589

     OVERSIGHT OF REGULATORS: DOES OUR FINANCIAL SYSTEM WORK FOR EVERYONE?

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

                                    HEARING

                                   before the

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

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

       EXAMINING THE FINANCIAL SYSTEM TO MAKE SURE IT WORKS FOR EVERYONE

                                   __________

                                 AUGUST 3, 2021

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban Affairs

      [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                ______

                  U.S. GOVERNMENT PUBLISHING OFFICE
     21-112PDF          WASHINGTON : 2023

    ?

                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

                             Tanya Otsuka, Counsel

                    Corey Frayer, Professional Staff Member

                     Dan Sullivan, Republican Chief Counsel

                       Hallee Morgan, Republican Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                            TUESDAY, AUGUST 3, 2021

                                                                       Page

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

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

                                   WITNESSES

    Todd M. Harper, Chairman, National Credit Union Administration...     5
        Prepared statement...........................................    38
        Responses to written questions of:
            Chairman Brown...........................................    91
            Senator Toomey...........................................    93
            Senator Reed.............................................    97
            Senator Menendez.........................................    97
            Senator Van Hollen.......................................    97
            Senator Cortez Masto.....................................    99
    Jelena McWilliams, Chairman, Federal Deposit Insurance
      Corporation....................................................     7
        Prepared statement...........................................    54
        Responses to written questions of:
            Chairman Brown...........................................   101
            Senator Toomey...........................................   105
            Senator Reed.............................................   108
            Senator Van Hollen.......................................   109
            Senator Cortez Masto.....................................   113
    Michael J. Hsu, Acting Comptroller, Office of the Comptroller of
      the
      Currency.......................................................     9
        Prepared statement...........................................    82
        Responses to written questions of:
            Chairman Brown...........................................   117
            Senator Toomey...........................................   146
            Senator Reed.............................................   149
            Senator Menendez.........................................   151
            Senator Van Hollen.......................................   152
            Senator Cortez Masto.....................................   156

                                     (iii)

     OVERSIGHT OF REGULATORS: DOES OUR FINANCIAL SYSTEM WORK FOR EVERYONE?

                                  ----------

                            TUESDAY, AUGUST 3, 2021

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 10:07 a.m., via Webex and in room 538,
    Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
    the Committee, presiding.

              OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

        Chairman Brown. Thank you all for your cooperation in
    showing up on time.
        The hearing itself now will to come to order. We will hear
    testimony from the heads of three agencies responsible for
    protecting our financial system, and for making sure it serves
    everyone: the National Credit Union Administration, NCUA, the
    Federal Deposit Insurance Corporation, FDIC, and the Office of
    the Comptroller of the Currency, the OCC.
        Because of the work we have done with the Rescue Plan,
    putting money in people's pockets and making progress against
    this pandemic, our economy is starting to recover, adding more
    jobs every month. For the first time, workers are starting to
    reclaim a little bit of power in our economy. As we build on
    this progress, we need to make sure those gains end up in the
    pockets of working families, the people who made this progress
    possible. We need to make sure their money is protected.
        Together, those of you before us today embody the public
    backing of our banking system. Yet most people, frankly, do not
    know these agencies even exist, let alone know what you do.
    They see the letters NCUA and FDIC on the signs outside credit
    unions and banks, or emblazoned on the backs of credit cards.
    They do not think much about what they mean. And they should
    not have to. People are busy, working hard to support their
    families and raise their kids. They are supposed to be able to
    trust you, their watchdogs, to keep their money safe.
        When I talk to Ohioans, though, I hear the same message:
    people do not trust banks, especially the largest banks. They
    remember after the Great Recession, when we called it a
    ``recovery'' around here, workers did not get much of a raise
    and entire neighborhoods and towns were left behind. They have
    been burned by exorbitant fees, high minimum balances, and
    segregated second-chance accounts. They watch bigger banks buy
    up the smaller ones and close the local branches, making it
    harder and harder for small businesses and working families to
    get an affordable small business loan or a mortgage.
        It is happening in my home State, and it is happening
    across the country, in rural communities, in Black and Brown
    communities, and in all the communities that Wall Street has
    trampled over.
        And we know what happens when people do not have a credit
    union or a bank they trust in their community. They turn to
    expensive check cashers and shady payday lenders that prey too
    often on working families.
        Last week, before our hearing on extending the military's
    36 percent interest rate cap to everyone, I talked to a mother
    from Lorain, Ohio, who had to take out a payday loan to pay her
    bills. She ended up trapped in a cycle of debt. We know that
    story is all too common. Or people turn to so-called fintechs
    that claim to make banking easier and cheaper, but have few
    protections and put people's money at risk.
        I urged the CFPB to look into the risks of these kinds of
    fintechs like Chime, after customers were locked out of their
    accounts and could not get access to their own money, putting
    their ability to buy groceries, pay their bills, or make the
    rent at risk.
        These issues people have may not seem connected, but they
    all stem from the same big problem: big banks and corporations
    have too much unchecked power over our community and over our
    economy. We need no-fee accounts that allow everyone to open a
    bank account and have control over their money. We need to
    close the loopholes that allow so-called fintech firms to play
    by a different set of rules than banks and credit unions,
    leading to unfair competition and putting consumers' money at
    risk. And we need strong financial watchdogs that hold
    financial institutions accountable, and ensure that these
    institutions serve their customers and communities, instead of
    lining their own pockets.
        For too long we have had regulators who did not seem to
    think standing up to Wall Street was part of their job. They
    rolled back the rules that industry had spent years begging
    for. They rewarded themselves, instead of investing in the
    people they are supposed to serve.
        There are a lot of community-based institutions in my State
    and in all of your States, like CDFIs, MDIs, small credit
    unions, and community banks. They are the ones that are making
    the small business loans. They are the ones working with
    borrowers when they might miss a mortgage payment because of a
    sudden medical expense or a lost job. They stepped up to help
    their neighbors during the pandemic. It is your job, as the
    regulators, to make sure that all financial institutions, from
    Wall Street to Main Street, do the same.
        Regulators like the FDIC must change their approach to bank
    mergers--no more rubber-stamping every merger, leaving towns in
    Ohio and across the country with no branches. When mergers do
    happen, you need to make sure that banks live up to the
    promises that they made to the community. We should be cracking
    down on risky shadow banks that use the allure of shiny new
    ``financial technology'' to distract us from the fact that they
    are just payday lenders with a fancy app. And we need stronger
    capital requirements, so that banks and credit unions can
    continue to lend to and invest in their communities, in good
    times and bad times.
        We now have new leadership at the NCUA with Chair Harper,
    who is working on a bipartisan basis to strengthen the NCUA and
    ensure that credit unions serve their members and communities.
        I applaud Acting Comptroller Hsu for rescinding the
    misguided changes to the CRA that former Comptroller Otting
    rushed through. The legacy of Black codes and Jim Crow and
    redlining still holds back too many communities, and the OCC's
    rule did not serve CRA's core purpose, to ensure that banks are
    serving low-income communities and communities of color.
        I am glad that all three bank regulators--the Fed, OCC, and
    FDIC--are finally listening to feedback, and developing a
    proposal that will make sure banks serve everyone.
        And thankfully, President Biden is replacing Trump-era
    regulators with leaders who understand that their job is to
    stand up for working Americans, not for Wall Street. We need
    diverse regulators who know first-hand how our financial system
    has not delivered for large portions of the country.
        The people who oversee our country's economy need to
    reflect the Americans who make it work--Black and Brown
    communities, low-income communities, other underrepresented
    communities, and working families, from the rural South to the
    industrial Midwest, not just the wealthiest Washington
    insiders.
        If financial regulators do their jobs, working Americans
    should be able to trust that Government is looking out for
    them. They will not have to worry they will fall victim to a
    debt trap, or have their bank accounts zeroed out because of
    unfair overdraft fees. You are all public servants, and you are
    responsible for making sure that this economy and the financial
    system works for the American people.
        I look forward to hearing from you today.
        Senator Toomey.

             OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

        Senator Toomey. Thank you, Mr. Chairman. Today we will hear
    from the OCC, FDIC, and the NCUA about their recent regulatory
    actions. I want to welcome all the witnesses, with a special
    welcome to Chairman McWilliams, for whom this a homecoming of
    sorts, given her distinguished career as a senior staffer on
    this Committee.
        Throughout the pandemic, I have been encouraged by certain
    modest targeted regulatory changes to support the financial
    system. However, as the pandemic recedes, I am now concerned
    that the Biden administration is seeking to use financial
    regulation to advance social goals that are unrelated to
    banking, and its agency heads are contributing to the
    politicization of banking regulation without providing
    independent analysis. Such a shift would erode the longstanding
    nonpartisan objective of having independent regulatory
    agencies.
        As one example, the Administration's Executive order, or
    EO, on climate risks seeks to use financial regulation to
    further environmental policy objectives. Under the guise of
    ``assessing risk,'' the EO directs the regulatory agencies to
    undertake a range of actions, including the consideration of
    new or revised regulatory standards.
        But if the actual purpose was to assess risk, would it not
    it logically follow that actual analysis occur before jumping
    ahead to a policy response? This is the crucial point: the EO
    does not seek a neutral inquiry. Instead, it presupposes the
    conclusion that there is, in fact, specific climate-related
    financial stability risk that is not being properly accounted
    for by either institutions or regulators, and it pressures
    supposedly independent agencies to enact backdoor environmental
    policy without appropriate accountability, and while these
    agencies lack any expertise in environmental matters.
        I am concerned some agency heads are willingly
    participating in this politicized effort. For example, last
    week, Acting Comptroller Hsu announced the OCC would join the
    Network for Greening the Financial System, or the NGFS. an
    international organization whose stated aim is to, and I quote,
    ``mobilize mainstream finance to support the transition toward
    a sustainable economy,'' end quote. In other words, to have
    Government-allocated credit, which is antithetical to a free
    enterprise system.
        At a recent FSOC meeting, NCUA Chairman Harper helpfully
    ceded the point by asserting that credit unions, and I quote,
    ``will need to consider adjusting their fields of membership or
    altering lending portfolios,'' end quote, as a result of
    climate risk. But most credit unions are small institutions
    that serve their local communities. The suggestion that their
    fields of membership need to change because of climate change
    does not result from any actual risk assessment. It is simply
    based on politics.
        I am also deeply troubled by the Administration's apparent
    unwillingness to nominate an individual, perhaps at any point,
    to serve as Comptroller on a full-time basis. By installing Mr.
    Hsu as Acting Comptroller with no nominee in sight, the
    Administration appears to have every intention of indefinitely
    bypassing constitutionally required Senate confirmation.
        Four years ago, some Democrats expressed outrage that an
    Acting Comptroller was appointed. They wrote that, and I quote,
    ``The Comptroller must be nominated by the President and
    confirmed by the Senate,'' end quote. Now in that instance, the
    Acting Comptroller had only served for a grand total of 1 month
    before a permanent nominee was, in fact, sent to the Senate. In
    contrast, Mr. Hsu has served as Acting Comptroller for nearly 3
    months and we have not heard anything about any permanent
    nominee. Yet, I have heard no complaints from my Democratic
    colleagues about this fact.
        Rather than pursue social goals unrelated to banking,
    regulators should be looking for ways to increase competition
    and improve regulatory efficiency. Last month, the
    Administration issued an EO that is purportedly intended to
    increase competition. But upon closer look, the EO would only
    make it more difficult for small and medium-sized banks to
    merge, when doing so actually presents opportunities to compete
    more effectively against very large banks. The EO would,
    therefore, actually decrease competition within the banking
    system.
        If the Administration were serious about promoting
    competition, it would seek to reduce the regulatory burdens
    imposed by Dodd-Frank, which have contributed to an
    unbelievable decline in de novo banking activity over the past
    decade.
        According to the FDIC, between 1985 and 2011, the first
    full year under the Dodd-Frank Act, 183 new institutions were
    chartered every year on average--183. In the period from 2012
    to 2019, prior to the pandemic, we averaged 4 new charters per
    year.
        Now I am encouraged by the FDIC's work in this space under
    Chairman McWilliams, including revisions to the agency's
    process for reviewing deposit insurance proposals. These
    changes, I believe, have contributed to an uptick in de novo
    banks before the onset of the pandemic, but I think more can be
    done.
        And I am concerned that rather than facilitating de novo
    activity and encouraging innovation, Acting Comptroller Hsu has
    suggested that he will reconsider the OCC's recent approvals
    for national trust banks that provide digital asset custody
    services. Now these approvals were granted after extensive
    engagement and analysis, and they bring digital asset into the
    regulated financial system.
        The reality is the banking system is changing, banking is
    changing, and new products and services offered by innovative
    companies offer tremendous potential benefits for consumers.
    Regulators should want these innovative financial institutions
    to enter the regulated financial system, which would make it
    easier for them to become banks, for instance, add consumer
    protections, increase safety and soundness, and reduce risk.
        So I hope to hear from today's witnesses about how they
    will maintain independence in the face of pressure to
    politicize banking regulation, and I look forward to discussing
    steps their agencies are taking to increase competition,
    promote innovation, and improve regulatory efficiency, which
    will ultimately result in a stronger banking and financial
    system for all Americans.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Toomey. I will introduce
    today's witnesses. We will hear from NCUA Chair Todd Harper,
    FDIC Chair Jelena McWilliams, and Acting Comptroller of the
    Currency Michael Hsu. The leaders of these agencies are central
    to making sure our banking and financial systems work for
    everyone, for consumers, small businesses, and their
    communities.
        Mr. Harper, please proceed for 5 minutes. Thank you for
    joining us.

     STATEMENT OF TODD M. HARPER, CHAIRMAN, NATIONAL CREDIT UNION
                             ADMINISTRATION

        Mr. Harper. Chairman Brown, Ranking Member Toomey, and
    Members of the Committee, thank you for inviting me to discuss
    the credit union industry's performance and the NCUA's
    operations.
        Despite the COVID-19 pandemic's many economic blows, the
    credit union system has remained on a solid footing with strong
    capital levels and liquidity. As of the first quarter of 2021,
    the NCUA's credit union system had almost $2 trillion in assets
    and nearly 126 million members.
        If past recessions are indicative, it seems like that
    credit union performance will trail any labor market
    improvements by up to 2 years. The NCUA and credit unions
    should, therefore, prepare for that eventuality.
        Once pandemic relief efforts end, we will likely experience
    decreases in credit quality and increases in delinquencies and
    chargeoffs, which would affect credit union financial
    statements and could, if failures occur, impact the share
    insurance fund.
        Unfortunately, the pandemic has disproportionately affected
    low-income households, communities of color, and minority-owned
    businesses. The NCUA has encouraged credit unions to work with
    members experiencing hardship, and we, like my fellow
    regulators here at this table, have instructed examiners to
    refrain from criticizing a credit union's efforts to provide
    prudent relief for members.
        Through the Community Development Revolving Loan Fund, the
    NCUA is supporting low-income credit unions during these
    uncertain times. Although relatively small, these grants and
    loans make a big difference. Last year, the NCUA awarded $3.7
    million to 162 credit unions to assist in their pandemic
    response efforts. Although many more applied for the grant, the
    agency could not fund the demand because of limited
    appropriations. As such, I request that Congress consider
    increasing the fund's appropriations to $10 million.
        The pandemic has also prompted a heightened cybersecurity
    stance at our agency. In 2021, the NCUA will continue to
    provide guidance and resources to assist credit unions with
    strengthening their cyberdefenses, including funding grants and
    continuing pilot projects--for parallel grammar structure to
    harmonize information technology and cybersecurity exam
    procedures.
        The NCUA is further working to strengthen its consumer
    financial program and to ensure fair and equitable access to
    credit. This year, there is an increased emphasis on fair
    lending compliance, and agency staffers studying methods for
    improving consumer financial protection supervision for the
    largest credit unions, not primarily supervised by the CFPB.
        Additionally, since opening our Office of Minority and
    Women Inclusion one decade ago, we have made steady progress in
    advancing diversity. Two out of every five new hires in 2020 at
    the NCUA were people of color, and the agency achieved parity
    in executive gender diversity.
        The NCUA will continue to invest in diversity and inclusion
    by enhancing support for minority depository institutions and
    fostering initiatives to close the wealth gap. These efforts
    will advance economic equity and justice within the system and
    ensure a more equitable recovery.
        Finally, I would like to highlight three areas where
    legislative action would aid the agency in fulfilling its
    mission. First, FSOC, GAO, the NCUA's inspector general, and
    every NCUA chairman over the last decade have called for the
    agency to have examination and enforcement authority over
    third-party vendors. The continued transfer of operations to
    credit union service organizations and other third parties
    diminishes the NCUA's ability to assess risk within the system.
    To protect thousands of credit unions, millions of credit union
    members, and billions of dollars in assets potentially exposed
    to unnecessary risk, Congress should close this growing
    regulatory blind spot.
        Second, Congress should provide the NCUA with greater
    authority to proactively manage the Share Insurance Fund.
    Adopting a countercyclical approach to charging premiums would
    allow for an increase in insurance reserves during economic
    upturns to cover losses during downturns.
        And third, Congress should permanently adopt the temporary
    enhancements granted in the NCUA's Central Liquidity Facility
    as part of the CARES Act. The CLF's filing capacity has
    quadrupled with these reforms, and four out of five credit
    unions now have access to liquidity if other sources freeze up.
    Permanence would strengthen the shock absorbers for future
    liquidity events.
        In conclusion, in navigating the pandemic's economic
    fallout, the NCUA remains focused on addressing the needs and
    best interests of credit union members. We are also ensuring
    the safety and soundness of credit unions and protecting the
    Share Insurance Fund. I look forward to working with the
    Committee in support of these endeavors.
        Thank you.
        Chairman Brown. Thank you, Chair Harper. Chair McWilliams,
    you are recognized for 5 minutes.

       STATEMENT OF JELENA MCWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Ms. McWilliams. Thank you, Senator. Chairman Brown, Ranking
    Member Toomey, and Members of the Committee, thank you for the
    opportunity to testify today about the FDIC's supervisory,
    regulatory, and consumer protection efforts.
        Senator Toomey, I want to thank you personally for keeping
    the emphasis on de novo banks. In fact, between 2011 and until
    I assumed my chairmanship in June 18, we had eight true de novo
    approved, and we have had 43 since I assumed chairmanship, and
    we have 16 applications in the process, so thank you for
    emphasizing that.
        As my written testimony describes in more detail, we have
    made tremendous strides in these areas under my chairmanship,
    and especially during an unprecedented shock caused by the
    COVID-19 pandemic and the ensuing economic stress. We have
    worked hard to promote and preserve the Nation's minority
    depository institutions (MDIs), provide flexibility to banks to
    assist their communities during historic economic stress, and
    encourage responsible use of technology and innovation to reach
    the last mile of unbanked Americans, while maintaining our
    supervisory activities, regulatory process, and resolution
    preparedness.
        As the pandemic began to unfold in the United States,
    supervised institutions took steps to help consumers, well
    before Government support arrived, by allowing loan
    modifications with no fees, waiving fees on accounts, offering
    curbside services, providing digital options to customers, and
    instituting branch sanitation and employee health check
    procedures. Banks of all sizes originated the overwhelming
    majority of approximately $800 billion in Paycheck Protection
    Program loans.
        While we continue to be encouraged by the state of the
    banking sector as we enter our new normal, uncertainty remains
    and we are carefully monitoring conditions, from commercial
    real estate to agriculture to consumer lending to
    cybersecurity.
        Although we have focused heavily on ensuring that consumers
    have access to credit during the pandemic and that banks
    continue to operate in a safe and sound manner, we have
    continued our ongoing supervision, examination, and regulatory
    activities along the way. Last December, the FDIC updated our
    brokered deposit regulations to address the evolution of how
    banks offer services and products since the original rule was
    promulgated 30 years ago. We codified legally enforceable
    commitments of Industrial Loan Companies (ILCs) and their
    parent companies to ensure that the parent company serves as a
    source of financial strength for the ILC while providing
    clarity about our supervisory expectations of both the ILC and
    the parent.
        In January, we finalized guidelines establishing a new
    Office of Supervisory Appeals to help promote consistency among
    examiners and ensure accountability at the FDIC. And last
    month, we issued a proposal to simplify the deposit insurance
    rules for trust accounts and rationalize such rules for
    mortgage servicing accounts.
        The pandemic has only amplified how critical innovation is
    in our everyday activities. Our focus on innovation is aimed at
    ensuring that American banks remain competitive in our rapidly
    changing world, that American consumers have access to a broad
    array of financial products and services, that we can bring
    unbanked Americans into the financial fabric of this country,
    and do so in a way that will provide a path to economic and
    social inclusion.
        My focus on economic inclusion is informed in no small part
    by my personal experience. Last Thursday marked my 30th
    anniversary in the United States. For years, putting food on my
    table and having a roof over my head required working three to
    four minimum-wage jobs, and so the uneven impact of the
    pandemic and its recovery on different populations throughout
    the United States has been especially worrisome and, frankly,
    personal.
        I can assure you that the FDIC is using its authorities to
    support a safer, fairer, and more inclusive banking system,
    including novel approaches such as the creation of the Mission-
    Driven Bank Fund, that will channel private sector investments
    to support MDIs and Community Development Financial
    Institutions (CDFIs), a tech sprint to explore new technologies
    and techniques that can expand community banks' capabilities to
    meet the needs of unbanked households, a targeted public
    awareness campaign to inform consumers about the benefits of
    being banked, and a new diversity strategic plan with
    actionable steps that will help measure our progress over the
    next few years and support economic inclusion in our
    communities.
        As the FDIC makes progress on these issues, the dedicated
    public servants of the FDIC will continue to fulfill the
    agency's critical mission of maintaining stability and public
    confidence in the Nation's financial system.
        Thank you again for the opportunity to testify today, and I
    look forward to your questions.
        Chairman Brown. Thank you, Chair McWilliams. Welcome back.
    Acting Comptroller Hsu, welcome.

    STATEMENT OF MICHAEL J. HSU, ACTING COMPTROLLER, OFFICE OF THE
                      COMPTROLLER OF THE CURRENCY

        Mr. Hsu. Thank you, Chairman Brown, Ranking Member Toomey,
    and Members of the Committee, thank you for the opportunity to
    testify today.
        I am honored by Secretary Yellen's confidence to appoint me
    to this post of Acting Comptroller of the Currency. I am a
    career public servant and a bank supervisor at my core. My 19
    years of experience at multiple agencies have spanned periods
    of growth, crisis, reform, and recovery.
        My written testimony shares in more detail my priorities. I
    see four urgent problems requiring immediate attention:
    guarding against complacency, reducing inequality, adapting to
    digitalization, and acting on climate change. Let me briefly
    describe each.
        First, I believe the banking system is at risk of becoming
    complacent. Banks deserve credit for weathering the pandemic
    well thus far. I am concerned, however, that as the economy
    recovers and pressure to grow returns, overconfidence leading
    to complacency is a risk when prudent risk management is set
    aside in pursuit of profit. I see the losses related to
    Archegos, the froth in SPACs and crypto, and the recent buzz
    around buy now, pay later as potential warning flags. Today,
    bank leaders, boards of directors, and we supervisors must be
    especially vigilant.
        Second, reducing inequality must be a national priority, as
    reflected by the theme of this hearing. The pandemic has had a
    disproportionate impact on vulnerable groups, and the recovery
    threatens to leave them even further behind. Historically, many
    low-income individuals have been treated by banks as either
    credits to be avoided or credits to be exploited.
        I am committed to changing this, starting with
    strengthening the Community Reinvestment Act, or CRA. Last
    month, I announced that the OCC would propose rescinding the
    agency's 2020 rule and commit to working with the Federal
    Reserve and the FDIC to put forward a joint rulemaking that
    strengthens and modernizes the CRA. In doing so, we will make
    sure to seek public comment on any changes so that all voices
    are heard and considered.
        In addition, I recently encouraged participants in the
    OCC's Project REACh to aim higher in addressing barriers to
    financial inclusion, such as using alternative data to help
    bring those without credit scores into the financial
    mainstream.
        Preventing predatory lending is just as important as
    increasing financial inclusion. Following Congress' repeal of
    the True Lender rule, I instructed staff to gather and analyze
    data on bank-fintech partnerships in order to explore how we
    can identify and differentiate between harmful rent-a-charter
    arrangements and healthy partnerships that expand access to
    credit. That analysis will inform the development of future
    options to protect consumers and expand financial inclusion.
        Third, we financial regulators must collectively adapt to
    the digitalization of banking and finance and determine how
    fintechs, payment platforms, and digital assets fit into the
    regulated system. When I took office, I paused approvals of
    novel charters pending an internal review of the OCC's
    licensing framework and of recent interpretive letters.
        In June, the OCC, FDIC, and Federal Reserve established a
    sprint team to provider greater clarity and collaboration
    around digital assets and cryptocurrencies. In July, we were
    excited to join the President's working group in evaluating the
    risks of stablecoins and developing policy recommendations.
    These efforts seek to adapt to a rapidly changing landscape in
    a coordinated manner across agencies to facilitate responsible
    innovation while limiting regulatory arbitrage and races to the
    bottom.
        Fourth, we must recognize that climate change is a safety
    and soundness issue, and we must act accordingly. Banks,
    especially large banks, are exposed to both physical and
    transition risks from climate change. Identifying, measuring,
    and managing these risks is challenging.
        The OCC is taking a two-pronged approach. The OCC recently
    joined the Network for Greening the Financial System, NGFS, a
    group of central banks and supervisors from across the globe
    who share best practices. Second, we must support the
    development and adoption of effective climate change risk
    management practices at banks. I have asked staff to review and
    evaluate the current range of practices with an eye toward
    identifying best practices and laggards. The OCC recently
    appointed a Climate Change Risk Officer to lead this effort and
    to expand the agency's capacity to collaborate with
    stakeholders.
        Finally, my testimony reiterates the OCC's commitment to
    fostering well-managed community banks and allowing them to
    grow and thrive. We are mindful of the importance of tailoring
    our regulatory requirements and mitigating the burden our
    examination process can have on smaller institutions. We are
    leveraging technology and blending our onsite and offsite work
    and studying ways to further reduce fees charged to community
    banks in order to level the playing field with State-chartered
    and unregulated competition.
        Thank you again for this opportunity to testify, and I look
    forward to your questions.
        Chairman Brown. Thank you, Mr. Hsu.
        Chair Harper, recently Senator Reed and I introduced the
    Veterans and Consumers Fair Credit Act with Senators Van
    Hollen, who is here today, Senator Smith, and Senator Warnock.
    Our bill would extend the Military Lending Act's 36 percent APR
    cap when consumer loans to those left out of the original
    legislation--veterans, essentially all other consumers. What
    impact would this legislation have on loan products offered by
    federally chartered credit unions?
        Mr. Harper. Generally, Senator, currently there is a cap on
    interest rates with financial credit unions. It is 18 percent
    for most loans, except for our payday alternative loan product,
    which is a short-term, low-dollar loan product, and that goes
    up to 28 percent. Both of those figures are below the 36
    percent, so my answer is not at all.
        Chairman Brown. Thank you, Chair Harper.
        The FDIC has the authority to take action against anyone
    who misrepresents that it is an FDIC-insured bank. I
    understand, Chair McWilliams, that FDIC recently proposed a
    rule, because this has been happening more often. Is that
    correct?
        Ms. McWilliams. That is correct. There is a lot of
    confusion----
        Chairman Brown. Thank you. OK. Good. I hope the FDIC cracks
    down on nonbank companies that mislead consumers, yet during
    your tenure, Ms. McWilliams, you have expanded the reach of
    nonbank financial tech firms into the banking sector, rolling
    back rules that make it easier for nonbanks to engage in
    predatory lending and edge out small banks and credit unions.
    You have approved two industrial loan charters at the height of
    the pandemic. One of these companies, Square, has a poor track
    record on consumer complaints, but it just announced it will
    buy installment lender Afterpay for $29 billion, significantly
    expanding its lending business.
        We always hear promises about how financial technology and
    innovation will help the underbanked and foster financial
    inclusion, yet these promises always go unmet. Instead of doing
    favors for big business it is your job to protect consumers and
    depositors whose hard-earned money is ultimately at stake.
        Now, Mr. Hsu, a question for you. Over the last several
    years, the Fed's Vice Chair of Supervision, Mr. Quarles, led
    the effort to weaken capital requirements, as you know, for the
    largest banks through changes to stress-test models and so-
    called tailoring of the stress capital buffer. The Fed has also
    announced that it plans to seek comment on changes to leverage
    requirements at the biggest banks.
        Will you work to reverse the damage, Mr. Hsu, the Fed has
    done and urge for higher capital requirements in the biggest
    banks?
        Mr. Hsu. Maintaining strong capital requirements is an
    imperative. It is important that the banking system remain a
    source of strength for the economy and that they are held to
    the highest standards.
        Chairman Brown. OK. I will take that as a yes. Let me ask
    you one other question. Thank you again--as I mentioned in
    opening remarks--for starting the process of rescinding your
    predecessor's misguided Community Reinvestment Act rule. When
    Chair Powell was before this Committee recently, and a number
    of times over the last month, and then a number of times he
    said the Fed was committed to interagency comprehensive CRA
    modernization, and that the Fed and the OCC were jointly
    reviewing comments on the Fed's proposal.
        So two questions. Does the OCC share the Fed's commitment
    to comprehensive CRA modernization, and second, what do you
    think the timing will be for this proposal?
        Mr. Hsu. We do share the commitment, with the Fed and with
    the FDIC. We have all committed together, publicly, that we
    will be working together to strengthen and modernize the CRA.
        In terms of timing, it is hard to give any exact set of
    dates around that. There is a lot of urgency. I can share that
    the teams are working very quickly. We have given internal,
    kind of aggressive timelines on that. But it is a complicated
    rule, and we want to make sure that we do it right. And so
    that--we will be working with all deliberate speed.
        Chairman Brown. It is important that you do it. It is
    important that you do it right, of course. Thank you.
        Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman. Mr. Hsu, in
    statements to the press you suggested that the OCC's regulatory
    review would include the three conditional approvals the agency
    issued to national trust banks that provide digital asset
    custody services, approvals that, according to the OCC itself,
    can only be revoked if there is a material change to the
    information on which the agency relied. These approvals, which
    were granted only after extensive engagement analysis, would
    presumably improve safety and soundness and reduce risk by
    bringing digital asset activity into the regulated banking
    system.
        In recognition of these benefits, just last week the U.S.
    Marshal selected one of these institutions, Anchorage Digital,
    as its provider of digital asset custody for seized digital
    assets. Shouldn't we be encouraging more innovative financial
    institutions, including those that provide digital asset
    custody services, to enter into the regulating banking system
    if they choose, and would not that tend to result in increased
    oversight?
        Mr. Hsu. So I am very supportive of responsible innovation.
    The purpose of the review is to make sure that we are taking a
    holistic approach to both chartering and to the regulatory
    perimeter, to ensure that there is not regulatory arbitrage
    across different agencies and that there is not a race to the
    bottom and a shadow banking system. So we are trying to weigh
    all of these things.
        There are currently, on an interagency basis, we have this
    digital asset sprint initiative----
        Senator Toomey. I have got very limited time. I want to
    stress this, though. It seems to me companies operating in this
    space, in many cases they want to play by rules, they want to
    be regulated, they want to comply. I think it does a lot of
    damage to the credibility of the OCC, damages economically,
    when an institution receives an approval, stands up an
    operational business, complies with the conditions under which
    the approval was granted, and then it is subject to being
    pulled out from under them.
        Are you saying that the career staff at the OCC got it
    wrong and did not take these things into consideration when
    they issued this approval?
        Mr. Hsu. No. We are reviewing this cognizant of the
    standards and the practices of the past. We are doing this in
    order to be holistic and to ensure that we are making this
    decision in coordination with other agencies.
        Senator Toomey. Well, I would just urge you to keep very
    much in front of mind that they went through a full-blown, due
    process, bona fide process, and people ought to be able to plan
    on, when they get approval they can actually engage in the
    business that was approved.
        I would also want to just say, briefly, the CRA review, I
    think it was a big mistake to be reconsidering the CRA. It had
    been 25 years, and the updates were mostly about providing
    clarity, objectivity, and transparency. Can you commit to
    retaining those principles--clarity, objectivity, and
    transparency--in whatever direction this new rule goes?
        Mr. Hsu. Yes. In addition to strengthening and modernizing,
    as part of strengthening and modernizing the CRA, yes, I can
    commit to that.
        Senator Toomey. Very quickly, you have made several
    references to climate risks and eventually banks having to have
    new capital rules, which presumably means increased capital
    requirement to deal with climate risk. As you know, capital
    requirements are designed to absorb losses that can occur in
    the short run, but climate scenario analysis is really about
    50- and 100-year scenarios.
        Do you know of a single expert who can tell any of us how
    climate change is going to affect banks in, say, Lancaster
    County, Pennsylvania, next year?
        Mr. Hsu. Our focus right now is on risk management, the
    safety and soundness related to risk management. And really it
    is about recognizing that climate change presents risk
    management challenges and that banks need to prepare for both
    the physical and the transition risks related to climate
    change.
        Senator Toomey. OK. Well, let me put it this way. Are you
    aware of any banks that have failed in the United States due to
    Superstorm Sandy, Hurricane Andrew, California wildfires? Can
    you name a bank that failed as a result of not having planned
    for extreme weather events?
        Mr. Hsu. I cannot think of any at this time.
        Senator Toomey. Neither can I, and we have had a lot of
    extreme weather events over recent decades. So I would suggest
    that banks are probably aware of risks that they run.
        Chairman McWilliams, I was glad to see the FDIC's recent
    request for information on digital assets. I think there is
    tremendous potential benefits to consumers, to our economy,
    that comes from this distributed ledger technology, which could
    have all kinds of really constructive applications. Could you
    just share for us, what have you learned from banks and other
    financial institutions about some of the ways in which they are
    using this technology?
        Ms. McWilliams. Thank you, Senator Toomey, for that
    question. As you may know, the comment period closed on July
    16th. We are reviewing comments. And there is a lot of
    encouraging information, frankly, on how technology can benefit
    our banking system. One of the main responses we have gotten so
    far is about the benefits of the interbank payment network and
    the benefits that it can provide to entities that are within
    the network.
        I also think, if I may just add a personal note to this,
    the 20th century was America's century. The 21st century will
    not be America's century if we are not open to innovation and
    allowing our companies to compete with international
    competitors.
        Senator Toomey. Thanks, Mr. Chairman.
        Chairman Brown. Thanks, Senator Toomey. Senator Tester of
    Montana is recognized.
        Senator Tester. Thank you, Mr. Chairman, and thank you,
    Ranking Member Toomey, and I will tell you, Senator Toomey, we
    do agree. I do think we need a nominee for the OCC so we can
    vote on it and confirm. And since I am a Democrat you can put
    that down in the book. OK?
        For extreme weather events, I would also say this. This is
    an interesting year to talk about extreme weather. West of the
    Mississippi we are pretty much generally in a drought. East of
    the Mississippi, generally we have got more rain than we need.
    And we have burnt 3 million acres so far in the West, and the
    fire season has just started. I would hope that folks look at
    extreme weather events, because they are happening with more
    regulatory, and I think it would just be improper for them not
    to take a look at it, because it is getting to be a fact of
    life every year. Something weird is happening.
        I have said this before, maybe not in this Committee, but I
    have been--this will be our 44th harvest. It will be our worst
    harvest, by far--by far. Not just a little bit, but by far. It
    if gets any worse I will not even take the combine out of the
    shed. That is how bad it is.
        I want to thank you all for being here and for your
    testimony. This is for Ms. McWilliams for you, Mr. Hsu. You
    were talking about the Community Reinvestment Act. You were
    talking about how you are going to work together to update it.
    Will each of you commit to consider the unique needs in rural
    America as you update the CRA?
        Ms. McWilliams. Absolutely, Senator. That was one of my
    focal points last time around.
        Senator Tester. Thank you.
        Mr. Hsu. Yes.
        Senator Tester. And will you also incorporate the needs of
    Indian country, because it is kind of a different world when we
    are talking rural. And could I get your commitment for that?
        Ms. McWilliams. Absolutely, and we are also working on how
    to help Native American minority depository institutions,
    because we know that they are a lifeline in these communities.
        Senator Tester. I appreciate that.
        Mr. Hsu. Likewise, yes.
        Senator Tester. Thank you very much. I live in a little
    town that has got about 600 people in it. We had a bank called
    Wells Fargo. They pulled their branches out of a lot of small
    towns around. We were lucky. We got a community bank that
    stepped in and took over that portfolio. But the truth is we
    all know that capital is pretty important for a small
    community, and as I said, if we would not have been so lucky it
    certainly would have been another death knell in our small
    community.
        So as regulators, how will you ensure that financial
    institutions that you regulate will continue to serve rural and
    frontier communities, or do you not think that is part of your
    job?
        Ms. McWilliams. I am happy to go first. It is, I would say,
    the focal point of my job. I consider my job at the FDIC not
    just to preserve the safety and soundness of our banking system
    and financial stability and protect depositors and make sure we
    can resolve banks, but to ensure that community banks can
    survive, especially in communities of 600 people.
        We have done a number of things to make sure that the
    regulatory burden is commensurate with the risk profile of
    those institutions. We have focused on institutions in terms of
    their size, and making sure that our examiners appropriately
    examine them. These small banks have a staff of ten, and we
    send the examiners in the States as three, they have six people
    sitting there for 3 weeks looking at their books.
        So Senator, I am more than happy to give you a briefing on
    all the efforts we have done, but we have focused specifically
    on capital liquidity and regulation.
        Senator Tester. I appreciate that, and I hope you are doing
    that in the cyberrealm too?
        Ms. McWilliams. Yes.
        Senator Tester. Thank you. Go ahead, NCUA.
        Mr. Harper. Absolutely. I think we are doing a number of
    things. First of all, you have to remember that one in two
    credit unions are low-income credit unions, and many low-income
    credit unions are located in rural areas, and we work to
    support them with grants and other activities.
        Too, like the FDIC, we also scale our regulations based on
    size, as well as our supervision program. And then finally, one
    thing that we have been doing very recently is strongly
    encouraging all credit unions that are eligible to step up and
    step in and be part of the Emergency Capital Investment Program
    that is being put together by Treasury. We have had about 50
    credit unions that have applied for secondary capital. That
    low-collar capital, over a period of time, has the potentially
    really to help rural areas as well as urban areas.
        Senator Tester. And how do you ensure that they have a
    physical branch? Some people are locked in the 1970's like I
    am, and I like to walk into a brick-and-mortar place.
        Mr. Harper. I completely understand that, and I certainly
    remember, as a kid, walking to my local branch in order to make
    some deposit of money.
        One of the things we do is, again, by making sure that we
    right-scale our regulations so that they can continue to have
    that branch. But also, too, for underserved areas in
    particular, we have a requirement, under the service facilities
    requirement, that you have to have a physical location in the
    area. So if you want to serve it, you need to have a branch.
    That is one way we work to do that.
        Senator Tester. Well, I just want to thank you all for the
    work you do, and I did not get into my cyberquestions so I will
    probably submit some for the record. Thank you all very, very
    much.
        Chairman Brown. Thank you, Senator Tester.
        Senator Shelby, who is recognized, who told me earlier
    today this is his 35th year on the Committee. So Senator
    Shelby--and some of those years were as Chairman.
        Senator Shelby. Thank you, Mr. Chairman.
        Despite the challenges caused by the pandemic, our banking
    system overall has remained resilient, with strong capital and
    liquidity levels. But from 2008 to 2013, during the midst of
    the financial crisis, 489 FDIC-insured banks failed. In
    comparison, since March 20, it is my understanding that only 3
    banks have failed during that period.
        So, Chairman McWilliams, you deserve some credit, you and
    the FDIC board, much credit for the efforts here, I believe.
    What is your assessment, ma'am, on banks' resiliency during the
    COVID-19 and now, and what do you credit for the ability to
    withstand the effects of the pandemic?
        Ms. McWilliams. Thank you, Senator Shelby, and I want to
    congratulate you on your 35th anniversary.
        Senator Shelby. A long time.
        Ms. McWilliams. I would like to think that the years I
    spent on the Committee supporting you count for two, but we
    will go with 35.
        I will say that I was guided by my experience as a consumer
    protection attorney at the Federal Reserve during 2007, 2008,
    2009, and 2010, and we fielded hundreds of consumer calls
    during that time. So when the pandemic came upon us, I was not
    going to wait for the same volume of calls to come through. And
    so we started placing calls early to banks, asking them to work
    with their customers. We were, in fact, the first agency to
    issue a statement encouraging banks to work with their
    borrowers.
        Then we worked with our fellow regulators to negotiate with
    the Financial Accounting Standards Board (FASB), to make sure
    that loans that are modified in response to the pandemic, which
    were performing prior to the pandemic, were not then classified
    as troubled debt. And I would say that was the single most
    important thing we did early on in the pandemic--this was early
    March--to make sure that banks can modify loans and work with
    their customers.
        We have done a number of things to allow banks to dip into
    their capital buffers, to make sure that their is access to
    capital and that credit flows to local economies. We were
    concerned about small businesses shutting down as the
    Government shutdowns around the country became prevalent. And
    so I would say we were all hands on deck, to make sure that the
    lessons learned from 2008 do not get repeated, and that we are
    proactively engaged in what I subsequently use the professional
    term for, I call it the ``regulatory Whack-A-Mole.'' We tried
    to whack it before it showed up, and as a result of that we
    actually have been able to prevent bank failures, and we only
    had three banks fail during the pandemic and none due to the
    pandemic.
        Senator Shelby. Do you know of any bank that has been well
    capitalized, well managed, and well regulated, that has failed?
        Ms. McWilliams. Not to my best knowledge, Senator.
        Senator Shelby. What do you think is currently, that you
    are monitoring, that you can tell us here, could be potential
    problems for the banking system in the economy?
        Ms. McWilliams. So we are looking, Senator, at a number of
    factors that are, frankly, unprecedented in the nature of the
    pandemic. We saw, in Q2 of last year, about a 33 percent drop
    in our gross domestic product, on an annualized basis. That was
    a tremendous shock to our economy and to our banking system. We
    are also looking at unprecedented congressional actions to make
    sure that different packages of stimulus get distributed into
    the economy. We are cognizant of the potential for inflation
    down the road, and as somebody who came from a country where
    hyperinflation in the early 1990s was, I think, 113 trillion
    percent, I am personally very sensitive to this issue.
        We are also looking at cybersecurity risk, and we are also
    looking at commercial real estate. And with the new normal in
    how the pandemic changes the ability of people to work, what
    does that mean for the bottom line for banks and the commercial
    properties.
        Senator Shelby. If the threat, specter of inflation is a
    threat to our economy, is it also a threat to the banking
    system?
        Ms. McWilliams. Well, certainly it is a complex picture for
    banks. I would say that with the rising interest rates, the net
    interest margin on banks would probably fare better than it
    does with low interest rates, but the asset quality may
    deteriorate because people may not be able to make their
    payments, especially low- and moderate-income communities that
    we have been trying to help, especially hard during the
    pandemic.
        Senator Shelby. What is the status of FDIC reserve fund?
        Ms. McWilliams. So it has never been healthier. It is close
    to $120 billion. Because so much money flowed to the banks, our
    deposit-reserve ratio is below the statutory mandate, and we
    are on a path to get back to where we need to be, at 1.35
    percent. But I will tell you that the fund has never been
    healthier than it is today.
        Senator Shelby. Thank you. Thank you, Mr. Chairman.
        Ms. McWilliams. Thank you, Senator.
        Chairman Brown. Thanks, Senator Shelby. Senator Warner is
    recognized for 5 minutes, from Virginia.
        Senator Warner. Thank you, Mr. Chairman. You know, one of
    the issues from my work on the Banking Committee and on the
    Intel Committee, I want to thank you Chairman and particularly
    Senator Crapo. I think we did some good work last session on
    anti- money laundering act, which I know all of you have
    mentioned in your testimoneys. Maybe I will start with you, Mr.
    Hsu, and then go down the list.
        How would you characterize the implementation to date? I
    mean, this is a big bill. You know, we also got lots and lots
    of questions around beneficial ownership. How are we going to
    get this prioritized at an appropriate time? And also if you
    could talk, I think, Mr. Hsu, you probably have the most on
    this, but I would love to hear from the other panelists as
    well. How do we make sure the examiners are going to have the
    skill, knowledge? Will there be additional training? So talk
    about implementation and then talk about it down to the level
    of examiners, particularly since there is going to be so much
    more interaction with FinCEN now.
        Mr. Hsu. Sure. So there has been a lot of collaboration
    with FinCEN, the FDIC and other agencies, particularly on
    identification of the priorities, defining those priorities,
    and then that cascades through to how are the examiners going
    to approach that, and there are a lot of training manuals.
    There is a lot of work being done to ensure that----
        Senator Warner. Will there actually be additional training
    for the examiners?
        Mr. Hsu. I believe so. I would have to check with staff
    exactly how that is going to get played out. But I know right
    now there is a lot of focus on getting these priorities out and
    ensuring that these pending deadlines that are coming up to get
    these things done are met, to the ability that we can.
        It is complex. There is some complexity there. But we have
    been working on an interagency basis with FinCEN to get those
    things done.
        Senator Warner. I would like to get a more regular update.
    Maybe I can reach out to all of you.
        Mr. Hsu. Absolutely.
        Senator Warner. This is something I am very concerned
    about.
        Chair McWilliams, it is great to see you again.
        Ms. McWilliams. Nice to see you.
        Senator Warner. Could you and Chairman Harper also comment
    on this?
        Ms. McWilliams. Sure. Like Acting Comptroller Hsu said, we
    are working collaboratively. We understand the importance. I
    can tell you the banks, especially small banks, really
    desperately want to comply. Rules are very complex. We will
    provide whatever examination training we need to provide to our
    workforce, to make sure that they can work with our supervised
    entities to reduce some of the regulatory burden while
    providing clarity and a path to get a better system in place.
        Senator Warner. Chair Harper.
        Mr. Harper. And I would just add that in addition to what
    all my fellow regulators have said, we are meeting on a monthly
    basis, at the principals' level, along with staff, in order to
    make sure that coordination continues to go on. Staff is
    working and meeting at least weekly on different work streams.
    We too will conduct the necessary education. We certainly make
    BSA and AML compliance a priority for us. It is a supervisory
    priority this year, and I imagine it will continue to be in the
    future.
        Senator Warner. Well, I may follow up for the record with
    some specific questions about this implementation, and I want
    to make sure we stay on this, get it right, and I very much
    appreciate all your actions.
        I am going to start at the other end now with you, Chair
    Harper. You know, one of the things back from the December
    COVID relief bill, that I was very proud of, and again, worked
    with many Members of the Committee, particularly Senator Crapo,
    on, was making sure that we make additional investments in
    CDFIs and MDIs, the so-called ECIP program. A lot of credit
    unions fall into this category, and, you know, I do appreciate
    the attention that you have played with credit unions in
    educating them and making sure they are aware of the ECIP
    program, how we are able to participate.
        And I think particularly, because since credit unions
    cannot take Tier 1 capital, you are taking secondary capital. I
    just, on an overall basis, as we try to get additional capital
    into these institutions, that, you know, CDFIs serve low- and
    moderate-income communities, they have been disproportionately
    hit by COVID, speak to me as to how we can make sure that you
    can continue to lean forward without violating the safety and
    soundness requirements.
        And then, so I can get my question in, at least get from
    you and Chair McWilliams, one of the things I really enjoyed
    when we met and spent time together, if you could give me a
    quick update on your Mission Fund efforts. So Chair Harper and
    then Chair McWilliams.
        Mr. Harper. Certainly the entire board has been committed
    to getting education out on the ECIP. And, in fact, last time I
    checked we had about 47 credit unions that applied for
    secondary capital, at $1.6 billion. We are working hand in
    glove with the Treasury Department, which has to approve, on
    its side, the grant, but then we need to take and make sure
    that the capital can be used for secondary capital purposes.
    That is the way we are able to, if you will, accommodate the
    ECIP within the system.
        This is low-dollar, low-interest, long-term stable capital.
    We recognize that in the last crisis, credit unions that leaned
    in and lent out to low-income communities actually recovered
    more quickly, and that is one of the messages we have been
    carrying.
        Senator Warner. My time is up, but Chair McWilliams, could
    speak briefly about Mission Fund? Thank you, Mr. Chairman.
        Ms. McWilliams. Thank you Senator. The Mission Driven Bank
    Fund is actually a novel approach. It took some thinking
    outside of the box to come up with the idea of a private fund
    that would be backed by the FDIC in name and reputation, but
    would basically get private investments from companies, banks,
    et cetera, to support minority institutions, whether CDFIs or
    minority depository institutions and banks.
        Early on in my tenure I realized capital is what these
    entities need the most, plus technical assistance, and the fund
    will provide both. We are in the process of rolling out the
    fund. Everything moves slowly through the Government
    procurement process, but we are looking forward to having it up
    and standing by the end of the year, and we already have close
    to $200 million in private commitments.
        Chairman Brown. Thank you, Senator Warner. Senator Tillis
    from North Carolina is recognized.
        Senator Tillis. Thank you, Chairman. Welcome, everybody.
        Chair McWilliams and Acting Comptroller Hsu, I really do
    believe that risk-based pricing, powered by data analytics,
    enables an accurate assessment of a consumer's
    creditworthiness, which I think is critical for lenders who
    want to seek or provide quality credit options, to safeguard
    against the risk of default. The less creditworthy, who
    previously have been denied credit, can now receive
    appropriately price credit, in my opinion.
        I believe the Chamber of Commerce recently reported that
    historically underserved populations, including people of
    color, have seen greater access to credit under a risk-based
    system. So I also think it is good for the banking system to
    have a risk-based assessment for properly pricing the product.
        We saw the damage that can occur when we have lax
    regulations. It was, at least in part, responsible for the 2008
    financial crisis. So Chair McWilliams, as a regulator charged
    with resolving banks that fail, do you believe risk-based
    pricing is a very important tool?
        Ms. McWilliams. Yes, I do, and frankly, Senator, when I got
    my first credit card in the United States 30 years ago that
    probably would not have been possible if that was not in place.
        Senator Tillis. And Acting Comptroller Hsu.
        Mr. Hsu. I do, and I think one of the exciting developments
    and innovations is using additional data to inform those risk-
    based assessments.
        Senator Tillis. Chairman Harper, we talked just before the
    hearing. It is amazing that the 2 years have moved by on your
    term. I know you are in the chairman role and your underlying
    term has expired. Is that correct?
        Mr. Harper. Yes.
        Senator Tillis. I am kind of curious about your posture,
    moving ahead. Will you commit to hold any significant
    regulations, such as climate change, until your successor is
    nominated and confirmed?
        Mr. Harper. So, you know, certainly we, as a board, I view
    it that we are a board and that we need to develop consensus in
    interacting with one another. In fact, since I have joined the
    board with board member Hood, we have voted together more than
    90 percent of the time, and that is the way in which I operate.
        I think we do need to gather education and information. I
    am not looking to move quickly toward any regulation here, but
    I believe a proper first step would be for a request for
    information on the area of climate change before we would move
    anywhere.
        Senator Tillis. Thank you.
        Another topic that has come up recently, as an independent
    agency do you plan to follow President Biden's Executive order
    to require NCUA staff to get vaccinated or submit to regular
    testing?
        Mr. Harper. So actually I think it is a recommendation of a
    task force, not an Executive order, and we are currently
    evaluating it. I do respect our independence, however.
        Senator Tillis. Thank you. Thank you, Mr. Chair.
        Chairman Brown. Thank you, Senator Tillis. Senator Warren
    from Massachusetts is recognized.
        Senator Warren. Thank you, Mr. Chairman.
        So in recent years our banking sector has become more and
    more dominated by the largest banks. Community banks are being
    gobbled up by larger competitors or forced to shut down because
    they cannot compete on a level playing field. This results in
    more concentration and higher costs for consumers, and it
    increases systemic risks for our financial system, and fewer
    total banks.
        These transactions are happening in plain view of the
    Federal agencies whose job it is to keep our systems safe and
    competitive. In fact, every single bank merger requires
    affirmative approval from the Department of Justice and a
    banking regulator, banking regulators like the people we have
    in front of us today.
        So Chair McWilliams, the FDIC has a searchable data base of
    all merger applications the agency has received since 2013.
    That is over 7 years now. Do you know how many merger
    applications the FDIC has received in that time?
        Ms. McWilliams. I do not have the exact number.
        Senator Warren. I do. It is 1,124. Chair McWilliams, how
    many mergers, out of those 1,124, did the FDIC deny, total
    number of denials for any reason whatsoever?
        Ms. McWilliams. I do not have that number, Senator, but I
    know that we go through the statutory process requirements----
        Senator Warren. I do have the number. It is zero.
        So this is not just a problem at the FDIC. The FDIC, the
    Federal Reserve, and the OCC combined have not formally denied
    a single bank merger in 15 years. Merger review has become the
    definition of a rubber stamp, and the banks know it. And it is
    time for some changes.
        So just saying we are going to get tougher on this is not
    likely to persuade anyone, and certainly not a multibillion-
    dollar bank. Bright lines could help set a new tone.
        So let me ask you, Acting Comptroller Hsu, are banking
    agencies like yours currently required to reject mergers when
    the resulting bank will be bigger or more complex than our
    banking rule are set up to handle?
        Mr. Hsu. Are they required?
        Senator Warren. That is my question.
        Mr. Hsu. I believe one the statutory factors for bank
    merger review involves financial stability.
        Senator Warren. I am not asking the question, may you
    consider. I am looking for bright lines here. Are you required
    to reject a merger?
        Mr. Hsu. I do not believe so but I would have to check with
    my----
        Senator Warren. Well, I think the answer is no, you are not
    required, so you might want to look again.
        Let me ask about another possible bright line. What if the
    banks trying to merge do not receive the highest ratings in
    their community reinvestment act exams to measure how well they
    are serving their communities? Are you required to reject a
    merger then?
        Mr. Hsu. I do not believe so.
        Senator Warren. No, you are not.
        So how about one more bright line. What if the merger could
    result in increased costs for consumers because of a lack of
    competition? Are you required to reject the merger then?
        Mr. Hsu. I do not believe so.
        Senator Warren. So the data here show that regulators have
    no credibility on mergers, and sure, there are rules under
    which you review mergers, but in practice, for 15 years now,
    this has turned into a check-the-box exercise, where the
    outcome has been predetermined. Merger review has become a
    rubber stamp.
        That is why I was happy to see that President Biden's
    Competition Executive order called on the banking agencies to
    revamp their merger review guidelines to put an end to rubber
    stamping. And soon I will be introducing my Bank Merger Review
    Modernization Act, with Congressman Garcia, to revamp the bank
    merger process and strengthen and modernize the standards under
    which mergers are considered.
        Our regulators have a job to do, and it is our job here in
    Congress to make sure that they do it.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Warren. Senator Cortez
    Masto is recognized from Nevada for 5 minutes.
        Senator Cortez Masto. Thank you, Mr. Chairman and Ranking
    Member Toomey. Let's talk about extreme weather. It is
    happening all over the West, particularly, right now, if not
    the rest of the country.
        Chairman Harper, let me start with you. In your written
    testimony you noted that climate change may exacerbate
    concentration risks for some credit unions. How is NCUA
    identifying and working with these credit unions to reduce
    concentration risks that could be affected by wildfires,
    floods, or other extreme weather events, and what are these
    concentration risks that you mention?
        Mr. Harper. So when you go in and we look in--supervise a
    credit union, we will take a look at where its loans are, and
    one of the areas where you want to take a look at is maybe
    there are a number of homes within the floodplain, or primarily
    within a floodplain, or maybe it is an area that is more prone
    to wildfires. Is the credit union taking risk mitigation
    techniques to make sure that there is insurance there behind
    the product in order to protect their interest in the equity
    for which they have made the loan to? That is a little bit of
    the way that we are looking at it.
        I tend to think about extreme weather events in a slightly
    different way in climate change as it is happening, and it is
    my hometown that I think about. I grew up two miles from a
    major refinery in this country. There is a credit union tied to
    that refinery. What happens over time as that refinery perhaps
    changes its product line or moves on to something else? Does
    the credit union need to change its base on its field
    membership? Or just two blocks from where I grew up there was a
    major cornstarch processor, taking corn and turning it. What
    happens when the communities that are affected by the weather
    events, what happens to the credit union that is connected with
    that cornstarch processor?
        So I am taking a look at the micro and the macro level as
    we approach this issue.
        Senator Cortez Masto. That is wonderful, and I look forward
    to the work that you are doing, because in Nevada, in the West,
    as you well know, wildfires are just--it is a daily thing now--
    --
        Mr. Harper. No, and I know that----
        Senator Cortez Masto. ----and it having a devastating
    impact to our families, their structures, their businesses, our
    small businesses that are farmers and ranchers on the
    rangeland. So I am hoping that is part of your focus as well.
        Mr. Harper. Absolutely, and I know last year when we had
    the wildfires we had a number of credit unions that applied for
    Urgent Needs grants, because, for example, their HVAC systems
    were completely destroyed as a result of the wildfire and they
    need it, and we helped to fund and make sure that those small
    credit unions could have access to that.
        Senator Cortez Masto. Great. Thank you.
        Acting Comptroller Hsu, in your written testimony you
    recommend the OCC adopt a two-pronged approach to climate
    change. My question to you is how will you implement your two-
    pronged approach, and I am curious, what is your vision for the
    climate change risk officer?
        Mr. Hsu. So the first prong is to work with our partners
    and to share best practices. So we joined NGFS, as I mentioned
    earlier, the Network for Greening the Financial System. There
    is a lot to learn. Banks have lots of different kinds of
    exposures, and so it helps to work together with other agencies
    and our partners to learn what are the best practices, and the
    NGFS is a good forum. It is the leading forum by which to share
    those best practices. So we do not have to reinvent the wheel.
    That is a very important thing.
        We are also working with our interagency partners,
    particularly the Federal Reserve, which has a climate officer
    there as well.
        The vision for the climate officer is to really expand our
    capacity to work with those stakeholders and to work with
    banks, because the bank's risk management practices, some are
    developed, some are underdeveloped. We need resources to help
    accelerate the development and adoption of effective climate
    change risk management practices, and the new risk officer,
    Darrin Benhart, will help with that.
        Senator Cortez Masto. OK. Thank you. I appreciate that. And
    you mentioned--I guess this is my question for Ms. McWilliams--
    what are you doing to address the climate crisis? Acting
    Comptroller Hsu just talked about joining the Network for
    Greening the Financial System. Is that something you are
    considering? Can you talk a little bit about your thoughts
    around that?
        Ms. McWilliams. Sure. I am happy to. Thank you, Senator. So
    as you know we are a primary regulator of small banks in the
    United States. As a matter of fact, 84 percent of our banks,
    regulated entities, fall under $1 billion in assets, and a lot
    of them are actually, frankly, serving small communities like
    the rural communities in Nevada.
        For decades--I cannot even take credit for this--but for
    decades our supervisors have taken into account weather-related
    events, and as Chairman Harper mentioned, to the extent that
    you are in a flood zone or a perilous wind zone or fire zone,
    our examiners expect banks to take that into their underwriting
    practices. We do a risk council. We have six regional offices
    and in each office we have a regional risk council. They look
    at this issue based on that region. So in your region, in
    Nevada, California, et cetera, fires, earthquakes, et cetera,
    would be a prevalent issue to consider, and droughts as well,
    for agricultural lending, et cetera.
        So we are cognizant of the issues here. We know what our
    entities need to do. Our entities know what they need to do,
    and if they are not following prudent underwriting practices,
    protecting the collateral, making sure there is appropriate
    cash-flow resulting from their loans and the businesses that
    they support, they would be cited in the examinations. We are a
    part of the Basel Task Force on Climate Change, and we are also
    working through FSOC with our sister agencies on understanding
    how best to attack that.
        Senator Cortez Masto. Thank you. Thank you to all three of
    you. I appreciate the conservation.
        Chairman Brown. Thank you, Senator Cortez Masto. Senator
    Scott from South Carolina is recognized.
        Senator Scott. Thank you, Chairman Brown. Thank you all for
    being here with us today, and I want to ask a couple of
    questions.
        Chairman McWilliams, the FDIC has a long history of working
    with banks, including mission-driven institutions, to develop
    policies that support broader access to the financial system.
    Late last year, your agency announced efforts to develop a
    revolutionary Mission-Driven Bank Fund to create a streamlined
    pathway for private sector and philanthropic investment in
    FDIC-insured MDIs and CDFIs. This novel approach has the
    potential to affect positively millions of folks.
        Can you provide us with a brief update on the Mission-
    Driven Bank Fund and other recent economic inclusion
    developments at your agency?
        Ms. McWilliams. Thank you, Senator, and thank you for
    calling it revolutionary, because I sometimes feel that is
    literally what it took to get it set up at the FDIC. After I
    watched an episode of ``Shark Tank'' on a plane and thought,
    why don't we have a ``Shark Tank'' for minority banks, and that
    is how the idea about this Mission-Driven Fund really was born.
        We had to search statutory authorities to make sure that we
    stayed within our preserve and promote mandate for MDIs and
    CDFIs, and this Mission-Driven Bank Fund is in the process of
    being set up. We have a fund advisor. We are going to be able
    to actually commence the opening of the fund before the year
    end. We have over $100 million in private commitments, and I
    will be relentlessly advocating for investments in this fund
    through the rest of my tenure, because, frankly, it may be one
    of the most significant things we have done for minority banks,
    especially for African American banks, that have lacked access
    to capital, and this is going to be huge to move the needle for
    those banks.
        I can also tell you that I have taken the issue of minority
    depository institutions very seriously. We increased
    representation of minority banks on our Community Bank Advisory
    Council. We created an MDI subcommittee, so that they can share
    best practices. We have created, I call it speed dating from
    MDIs and non-MDIs, to basically highlight the benefit of
    teaming up with an MDI. We clarified that investments in MDIs
    for non-MDIs result in CRA credit. We have created a marketing
    campaign to promote the nature and the scope of minority banks
    in the United States, and I can assure you that until the day I
    am in no longer chairman I will focus on this as one of my main
    issues at the FDIC.
        Senator Scott. Well, you have done a really good job of
    making sure that (a) we stay in consistent communication about
    the important issues about MDIs and CDFIs, to make sure that
    there is greater access for folks who are creditworthy to find
    a path forward. And that is one of the things that we can do
    better, and you have, frankly, been a champion of doing it
    better, which is to find ways, from a creditworthy perspective,
    to pull resources to create access to small business.
    Entrepreneurs like myself depend on that access, and you are
    doing it in the most effective way possible, and I really
    appreciate that approach.
        Ms. McWilliams. Thank you.
        Senator Scott. For all three of you all on the panel, it
    was a couple of years ago when I led the Republican Banking
    Committee colleagues on a letter encouraging regulatory
    harmonization and coordination from the CFPB, OCC, Fed, FDIC,
    and NCUA to create a consistent small-dollar lending framework
    across all institutions in order to promote and expand small-
    dollar lending and credit options. That is why I am especially
    excited today by our agencies' issuance of joint small-dollar
    lending principles last year.
        Is there an update to that approach, and can I get more
    information about what you all are doing on the very important
    issue of small-dollar lending for folks throughout the Nation?
        Mr. Harper. I will start there. First of all, within the
    NCUA we allow Federal credit unions to make what we call payday
    alternative loans. These are low-dollar loans, up to $2,000, up
    to 1 year to pay it back, generally done at no higher than 28
    percent interest rate, plus a fee of up to $20 in it.
        What we have found is that these loans are performing
    generally well. I believe that the delinquencies in the last
    quarter were approximately 2.6 percent, and that the chargeoffs
    were in the neighborhood of about 5 percent overall on these
    loans.
        For us, these small-dollar loans are often a gateway in
    order to get people into the financial system. And I would also
    make one other observation. When the crisis first hit, we saw
    many credit unions step up and do zero percent, small-dollar
    loans for 90 days, then rising up to perhaps 5 percent, because
    they were so focused on serving their members.
        Senator Scott. Excellent. Thank you. Mr. Hsu.
        Mr. Hsu. Yeah. So the issue is extremely important for us.
    Under Project REACh, which I believe you had a role in
    sponsoring----
        Senator Scott. Yes.
        Mr. Hsu ----a couple of workstreams there really hit on
    this. So the first is on credit invisibles, 45 million people
    who do not have a credit score. That workstream has really
    taken off, and so there are both banks, community groups, civil
    rights groups have gotten together and really worked to figure
    out what are the alternative data sources that can bring them
    into the mainstream financial system. So that has been a huge
    effort.
        The other is on MDIs, on small businesses. Those are two
    other workstreams. So MDIs, 23 banks have signed the MDI
    Pledge, half-a-billion dollar technical assistance
    partnerships, and on small businesses consortium lending, other
    efforts to basically make these dollars available.
        Senator Scott. Thank you.
        Ms. McWilliams. If we have the time I would be happy to
    tell you that----
        Senator Scott. That is good idea, but we will keep talking
    until Chairman Brown says stop.
        [Laughter.]
        Ms. McWilliams. Thank you. I will speak very fast. This has
    been one of the focuses, or foci, I should say, when I joined
    the FDIC, because, frankly, we had a disjointed agency
    approach. The Fed had supervisory letters, OCC had a bulletin
    from 2018, FDIC had a rule from 2015, and then there was a CFPB
    rule. And when you have so much uncertainty in the regulatory
    framework, you know what the regulated entities do? They do not
    do it. And so it was important for us to hold hands together
    and be willing to sit at a table and come up with a joint
    process we issued as guidance, which, frankly, I am so grateful
    was commenced back in 2018, when I joined the FDIC, because by
    2020, we were able to issue that guidance and encourage small-
    dollar lending when the pandemic was upon us. So thank you for
    your support of this.
        Senator Scott. I will just finish with this, Mr. Chairman,
    the fact that Mr. Hsu is alluding to the fact that there is a
    way to find those who are credit invisible and bring them to
    light. And one of the things I want to note is that oftentimes
    those who are credit invisible may be creditworthy. So the
    question really is not a question about whether or not they
    deserve access to the opportunity to be banked and have access
    to the loans. To question this, can we, through the breadcrumbs
    in their portfolio, find the rent payment and the other things
    that would tell us that they will have a high success rate as
    it relates to helping those who are creditworthy become credit-
    visible. And in South Carolina, I think the number was around
    17 to 20 percent of the folks in my State find themselves
    credit-invisible. So thank you for your work.
        Chairman Brown. Thank you, Senator Scott. I will take Mr.
    Hsu's head nodding as his answer, if that is OK with you.
        Senator Smith is recognized.
        Senator Scott. I would like another 3 minutes, sir.
        [Laughter.]
        Chairman Brown. Next hearing, Senator Scott.
        Senator Smith. Point of order, Senator Scott.
        [Laughter.]
        Senator Smith. Thank you. Thank you, Chair Brown, and
    thanks so much to our panelists. And I actually appreciate the
    questions that Senator Scott is asking, and maybe I will follow
    up on this a little bit, just tilted a little bit more toward
    the CRA.
        So we all know, of course, that COVID has not been the
    great equalizer. We have seen it has hit hardest those that are
    already struggling with the inequities in our country,
    including frontline workers and elders and Black and Brown and
    indigenous communities, communities of color.
        I read a number today that I thought demonstrates this, and
    was so surprising to me. The National Bureau of Economic
    Research says that since the start of the pandemic the number
    of Black business owners dropped by 41 percent, compared to a
    17 percent decline for White business owners. So clearly we
    need to take intentional steps to address this challenge.
        So I am glad to see the OCC and the FDIC and the Fed are
    all coming together, committed to working jointly on a CRA
    final rule. And I want to just ask you, Mr. Hsu, if you could
    talk to us a little bit about how the CRA can be strengthened
    to specifically help address this gap in minority business
    ownership that we see in this data.
        Mr. Hsu. OK. So one thing I have learned is that the CRA is
    a very important law. I think there are many things that we can
    do. We currently have groups that are working pretty much
    around the clock on coming up with options to strengthen the
    CRA, to make sure that low- and moderate-income communities
    have their needs met. I am happy to have further briefings with
    you, kind of walk through some of those details.
        I have found the complexity to be both interesting, and I
    think this is why, on an interagency basis, it is so important
    that we do this together, so there is clarity and consistency
    in how it is done, so that banks and community groups have
    those needs met.
        Senator Smith. Thank you. And, Ms. McWilliams, I am going
    to come back to you. I am going to dive in a little bit deeper
    on something here. Earlier this year, in May, I chaired a
    Subcommittee hearing focused on housing needs of Native
    Americans, and we saw here, in this Committee, that one of the
    major barriers to accessing affordable home ownership, and
    housing in general, on Tribal lands, is the lack of lending on
    Tribal lands. There is, of course, a lot of complexity about
    lending on Tribal lands, and bank and credit institutions have
    many fewer branches on Tribal lands, leading to a high
    percentage of unbanked households in these communities.
        According to a 2016 report, commissioned by Treasury, CRA
    funds are rarely directed to Native communities, even though
    Native CDFIs would meet the CRA criteria. So could you comment
    on this and what more we could do in this area? And I would
    love to hear from both Mr. Hsu and also Ms. McWilliams.
        Mr. Hsu, would you like to go first?
        Mr. Hsu. Sure. So there have been some studies indicating
    that CRA requirements have slowed the debranching, if you will,
    in certain areas. So I think that is an interesting factor that
    is being taken into account as the teams are kind of working
    through how to strengthen and modernize the CRA.
        You know, branching is very, very important. There was an
    interesting meeting that we have had--we have been meeting with
    lots of different groups, and there was the head of a bank that
    serves those populations, and noted that it is a blend.
    Branches are necessary, but also digital, because of the
    geographic distances involved with those communities, improving
    kind of digital technology is equally important. So we were
    trying to find ways to meet all of the needs of those
    communities through all the different options.
        Senator Smith. Thank you. Ms. McWilliams.
        Ms. McWilliams. Thank you, Senator, for that question.
    Frankly, it is something that I have taken to heart, and in
    large part because I had an opportunity to drive through a
    number of Native American lands throughout the United States
    and saw the communities and the economic impact in those
    communities, and I did so actually during the pandemic, which
    was staggering in many cases.
        I believe that the CRA can be a great equalizer here. We
    can assign different formulas for investments in Native
    American businesses, in minority businesses in general, in MDIs
    that are Native American. We have worked extensively to make
    sure that they can sustain themselves and support their
    communities. I believe that the Mission-Driven Bank Fund that
    we are setting up is going to be an opportunity to, I would
    say, be a great equalizer in this space, and we hope to solicit
    and be able to get even more investments in the fund so that
    there is more capital to be distributed. We call it patient
    capital, because the point is not the return on the capital.
    The point is the impact of the capital in the communities, and
    we want to make sure that it gets compounded and magnified
    through different investments.
        We have also done a public relations campaign on the origin
    story about what MDIs, including Native American MDIs, do in
    their communities. I think people quite often forget that they
    are at the forefront of making sure those communities have
    access to credit. And given, I would say, the rural nature of
    those communities, it is essential--it is absolutely essential
    for us, as regulators, to have utmost focus on this issue and
    to make sure there is funding, capital, credit, and investments
    flowing to these communities. So thank you for your support.
        Senator Smith. Thank you. Well, Senator Scott talks about
    invisible communities, invisible when it comes to credit. This
    is clearly the case for many families living on Tribal lands.
    And then you layer on top of that the complexity of lending
    when land is held in trust, and it exacerbates the housing
    crisis that we see on Tribal lands. So thank you. I think this
    is something important for us to work on as we look toward
    these new CRA rules. Thank you.
        Chairman Brown. Thank you, Senator Smith. Senator Moran
    from Kansas is recognized for 5 minutes.
        Senator Moran. Thank you, Mr. Chairman. Chairman
    McWilliams, I have been an advocate for a long time, without
    sufficient success, for more transparency in financial
    regulators' examination frameworks. I have introduced a bill in
    numerous Congresses that we worked to get enacted into law,
    exam fairness legislation. We have had conversations about
    that. I have had conversations with your predecessor about
    that.
        I am looking for a robust, independent, supervisory appeal
    process, and last fall I was really pleased to see that the
    FDIC announced approval of a proposal to replace the current
    Appeals Review Committee with an independent, standalone Office
    of Supervisory Appeals staff with individuals external to the
    FDIC. You are taking the FDIC in a direction that I have been
    pursuing all regulatory agencies to pursue.
        Would you elaborate for me where the FDIC currently stands
    on this implementation of this plan?
        Ms. McWilliams. Thank you, Senator Moran, and I would say
    that you have been plenty successful in many ways during your
    tenure.
        I would say that when I joined the FDIC I focused on the
    appeals process because, frankly, I was a little bit shocked by
    the number. Between 2007 and 2020, over 13 years, we had over
    110,000 exams, and we only had about 50 appeals filed on those,
    which, when I did my math and I did have to pull the calculator
    out for this one, was 0.00045 percent. And so the number was
    just so staggeringly low that I said either something is wrong
    with our process or we are that good, and nobody is that good.
        And so we solicited input on how to improve the process. We
    held listening sessions through our Office of the Ombudsman,
    the external ombudsman, through our regional offices. We had
    roundtables. We talked to banks. We talked to stakeholders,
    just to understand what all goes into the bank's decision to
    appeal a supervisory decision. And we have set up this new
    Office of Supervisory Appeals that is currently is in the
    process of being staffed. As I mentioned earlier, the
    Government procurement process and the Government hiring
    process takes a while, so we are hoping to have this office
    staffed before the year end and fully operational and running.
        But I am hoping to have a more robust process, whatever
    numbers may come out of it, but I just did not think that
    0.00045 percent of appeals over 13 years was a good
    representation of a robust appeals process.
        Senator Moran. Well, it has been disappointing to me the
    number of financial institutions who are fearful of appealing,
    find the process not workable, as your evidence, as your
    statistics demonstrate, but just nervous about being somebody
    who appeals to the FDIC or to any other regulator, based upon
    what the consequences might be in a future exam.
        Mr. Hsu, anything that you would add for what is happening
    at the OCC?
        Mr. Hsu. I would start off by saying I believe our
    examiners are very, very good. I mean, we have a very intense
    process for examiners to get credentialed. It is a long
    training process. We have extensive trainings, manuals that are
    published to ensure there is fairness.
        We do have processes for dealing with appeals. It is a
    little bit different than what is at the FDIC, but I believe it
    is fair. I believe it is effective. We have oversight by
    multiple bodies to respond to complaints and things like that.
        So I believe, overall, we have got a pretty good system,
    but we are always open to improvements, and so open to working
    with your staff on suggestions.
        Senator Moran. I thank you for that. Until you said that I
    had forgotten that, I do not know, 40 years ago I applied and
    took the FDIC examiner's examination to become one. Thank you
    for the reminder.
        Let me ask Chairman McWilliams another question. First of
    all, I would applaud your leadership in prioritizing
    modernization of the outdated broker deposit standard,
    dictating relationships between insured depository institutions
    and third parties, such as fintech companies. This has occurred
    in the FDIC's final December rule.
        Can you explain to me and my colleagues the importance of
    amending Section 29 of the FDIC Act to provide FDIC's authority
    to modernize the broker deposit framework for community banks?
        Ms. McWilliams. Thank you, Senator. The brokered deposit
    regulations have not been updated in 40 years, before this most
    recent update, and the statute basically does not define
    brokered deposit. It defines broker of deposits. And so it
    becomes a little bit complex for us, on the regulatory side,
    with all the technological changes to accommodate everything
    that is happening in that space, especially with online banking
    channels, et cetera. So it was important for us to take a look
    at the regulations that are four decades old with a fresh eye,
    and we did.
        No matter how much we tried to make sure that our
    regulations on brokered deposits keep up to date with
    technological innovation, they are not going to be able to do
    so. And so one of the things that I, frankly, the only
    recommendation I have made to Congress, has been to update the
    rules themselves and perhaps put a limit on the growth of
    troubled institutions that is not tied to brokered deposits,
    but to allow them to grow a certain percentage, if any, once
    they reach a troubled condition, and not necessarily tied to a
    definition of assets, because they could get brokered deposits
    or they could get bad loans, and that could happen irrelevant
    of what our rules say. But a cap, basically asset growth cap
    for troubled institutions would solve that issue, and it would
    be a much easier tool for us versus us having to analyze a
    multitude of factors to ascertain if a new and novel product is
    a brokered deposit or not.
        Senator Moran. It would require legislation.
        Ms. McWilliams. It would require legislation, yes. Thank
    you.
        Senator Moran. Thank you very much.
        Chairman Brown. Thank you, Senator Moran. Senator Van
    Hollen of Maryland is recognized.
        Senator Van Hollen. Thank you, Mr. Chairman. Thank all of
    you for your testimony today.
        Mr. Hsu, I have some questions for you about overdraft
    fees, because this has become very big business for banks. In
    fact, the numbers I have seen show that in 2020 alone, banks
    generated $31 billion from overdraft fees, tens of millions of
    American families, and a lot of these folks are living paycheck
    to paycheck.
        One issue that I have been focused on for a long time is
    getting to real-time payments. I support the FedNow system,
    because some people deposit their checks but they take time to
    clear, and in the meantime they get hit with overdraft fees.
        I think there was a time when people used their debit cards
    and if there were not enough funds in their account it would
    just say ``insufficient funds,'' but now, as you know, the
    funds can be made available and the consumer may have no idea
    that they have overdrawn on their account.
        So I have a question for you. I have been looking at some
    of the banks, and under OCC's jurisdiction seeing that there
    are three financial institutions that make 100 percent of their
    profit on overdraft fees. And my question is very simple. Is a
    bank that makes 100 percent of its profits on overdraft fees a
    bank that is a safe and sound financial institution?
        Mr. Hsu. So concentrations in which revenues are derived,
    in any form, whether overdrafts or others, is a supervisory
    concern. So in those situations we take a very close look at
    that. That factors into our safety and soundness assessment. I
    cannot share those. That is confidential supervisory
    information. But that is certainly something we take a very
    close look at.
        Senator Van Hollen. But let me ask you this. I mean, this
    is a pretty extraordinary situation, right? We are talking
    about 100 percent. And I want to credit Aaron Klein at
    Brookings Institution who has done work in this. There are
    others that shockingly make about 50 percent of their profits
    on overdraft, which is a huge number, but my question is, if a
    financial institution is relying entirely on overdraft fees to
    stay a going concern, are they a safe and sound institution, by
    definition?
        Mr. Hsu. It certainly raises a lot of flags, and we follow
    up on those flags to ensure that firms are safe and sound.
        Senator Van Hollen. Well, there are three institutions we
    have seen. One is doing business as First Texas, the other is
    Academy Bank, and then there is Wood Forest. Wood Forest
    National Bank has 12 branches in the State of Maryland,
    including locations in Landover, Laurel, and Hanover. They are
    all, to my knowledge, located in Walmarts. And these are people
    who are paying a huge amount of money, not knowing that they
    have exceeded their balance. And it seems to me that if a
    financial institution is relying on overdraft fees for 100
    percent of its profits, that is a huge area of concern. In
    fact, it seems, by definition, that it is not safe and sound.
        What is in your toolbox now to prevent this kind of
    problem?
        Mr. Hsu. So I should state up front, I share your concern.
    I think excessive fees on overdrafts, predatory lending, high-
    cost debt traps, all these things should be prohibited. They do
    not have a place in the Federal banking system. We are looking
    very closely at overdrafts right now. We have got a review
    going on. These particular institutions have been identified,
    as well as other practices. We are going to use the full range
    of our toolkit, within our supervisory toolkit, to address it,
    some of these have been identified for some time, and we have
    been working on it. So there is a time element to different
    cases. I cannot speak to specific cases. I would be happy to
    follow up with your staff to kind of walk through all the
    different things that we are going through as we conclude this
    review.
        Senator Van Hollen. OK, and I appreciate that. As I said,
    we are talking about $31 billion a year, mostly impacting
    families who are going paycheck to paycheck. And it just seems
    to me that beyond these institutions you and your fellow
    regulators should be really digging down on this, because, as
    you know, there is some justification possibly for some small
    fee, but for the most part this is profit for every bank that
    is engaging in large charges for overdraft fees.
        And as you know, in many cases I can go to my 7-Eleven, not
    knowing I have overdrawn, buy a cup of coffee, a $35 overdraft
    fee, and then I can go down the road, in the same visit, still
    not knowing I have tripped my credit, and pay another overdraft
    fee. And I could do that ten times a day without even knowing
    it.
        Can you look at ways that people can be protected from
    this?
        Mr. Hsu. Yes. There is actually an interagency effort to
    address exactly that. They call it the $35 coffee. There is an
    effort, kind of draft work to address precisely that particular
    issue. More generally, though, I think one positive thing that
    has happened over the past year, and really picked up over the
    past several months, is some of the larger banks have really
    started reforming their overdraft programs and policies, to
    make them less punitive, more flexible. There are some leaders
    in that space. We encourage that, and we are encouraging all of
    the large banks to do exactly that, is to kind of rethink that
    so that it is both fair and it provides the flexibility that
    people need.
        Senator Van Hollen. Thank you. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Van Hollen. Senator
    Menendez from New Jersey is recognized.
        Senator Menendez. Thank you, Mr. Chairman. This is an
    incredibly important hearing. I want to thank you and the
    Ranking Member for holding it. Those financial institutions
    work for everyone, for everyone.
        As regulators, you oversee those financial institutions,
    and it is vital that your organizations look like the
    communities, the institutions you regulate and ultimately
    serve. So I appreciate some of the responses you have given,
    but I want to make clear that it is not enough to hire a
    diverse workforce, but you must ensure your leadership and
    senior staff are also diverse.
        Currently, only 8 percent of NCUA's senior staff, 3.9
    percent FDIC's executive management, and 5.6 percent of the
    OCC's senior-level positions, for example, are Latino. I think
    we can all agree the largest minority population in America,
    growing exponentially, that does not work.
        So can you all commit to significantly increasing Latino
    representation in your senior positions?
        Mr. Harper. I will start, Senator, and absolutely. For me,
    inclusion is highly important, having diverse views and
    perspectives need to be brought to the table. And we recognize
    that our Hispanic hiring is a weakness for the agency. We are
    underperforming there, and we are going to be working on that
    to bring more people in.
        Senator Menendez. All right. Chair McWilliams.
        Ms. McWilliams. Absolutely, Senator, and I can tell you
    also that I have some numbers in front of me, that we have an
    overall 2.6 percent increase in minority workforce, overall
    numbers, since I assumed my chairmanship, compared to 2.4
    percent over the 8 years prior, and 34 percent of our 2020
    examiner new hires were minorities, and our examiners represent
    about 50 percent of our workforce. And 31 percent of our
    overall workforce are minorities.
        The numbers speak----
        Senator Menendez. I was talking about senior staff----
        Ms. McWilliams. I understand, Senator, and I----
        Senator Menendez. ----and I appreciate those numbers. But
    the people in the corporate boardrooms and senior executive
    management suites and the people in your senior executive
    management are critical players in developing policies and
    having sensitivities to communities, so I hope you can do
    better.
        Mr. Hsu.
        Mr. Hsu. So we recently had a town hall where I talked
    about exactly this issue. In terms of progress for Latinos and
    Hispanics within the OCC, senior leadership, tone at the top,
    these things I emphasize to the entire staff. We need to do
    better at the OCC.
        Senator Menendez. Well, each of your agencies have an
    impact on capital formation and allocation, financial
    regulation, consumer protection issues, all of which impact, of
    course, every single community in the Nation. But if we have
    learned anything from the financial crisis, and now the
    pandemic, it is that its economic turmoil disproportionately
    harms minority communities. And if your workforce, particularly
    at senior levels, does not have adequate representation, the
    needs of those communities will continue to be overlooked and
    underserved, and that is why I raise this issue.
        Comptroller Hsu, I was very happy to read your proposal to
    rescind the Trump-era Community Reinvestment Act rule, which,
    in my view, would have gutted an important civil rights law,
    and I hope your work on a revamped CRA is going to help address
    minority small business owners' lack of access to credit, a
    problem that played a major role in how unequally the pandemic
    impacted minority communities.
        Now as part of all of your annual Office of Minority and
    Women Inclusion reports, each of your agencies report the
    results from diversity self-assessments submitted by the
    financial institutions you regulate. However, the submission
    rates for these voluntary reports seem extremely low--19
    percent for FDIC, 9.8 percent for OCC, and at NCUA only 188
    credit unions submitted such an assessment.
        Now, Chair McWilliams, as part of your diversity, equity,
    and inclusion strategic plan you propose to streamline and
    enhance your diversity self-assessment to increase submissions.
    What does ``streamline'' mean, because I hope ``streamline''
    here does not mean we are cutting down on useful information. I
    believe your agency should work toward increased participation
    rates in these diversity assessments, and increased
    participation should not come at the cost of critical
    information.
        Ms. McWilliams. Senator, actually I am glad you mentioned
    the number. The number is 19.5 percent response rate, which is
    the highest response rate, frankly, because I pushed for it,
    and 2020 is the year when we achieved the highest response rate
    from our institutions. As you are probably aware, the statute
    prevents us from mandating disclosures, so we are working
    through other means. We have, I would say, the best director on
    the planet, Nikita Pearson, and she has made this her priority.
    She is just a phenomenal addition to our team. And we are going
    to do whatever it takes to make sure that our expectations of
    banks are known and that we are working together in this area,
    both to increase our hiring of diverse candidates as well as to
    making sure that our institutions focus on this effort,
    especially to mirror the communities that they serve.
        Senator Menendez. But streamlining does not mean, I hope,
    giving up critical information. The reason we ask for this
    information is to be able to have the science and the facts to
    make the case when, in fact, institutions are not being
    diverse. So I hope that when--you know, sometimes I hear reform
    and I get nervous, because reform ends up being bad, worse than
    what we reformed. And when hear ``streamlining'' I get a sense
    that maybe we are cutting out critical information.
        Ms. McWilliams. Well, I will put your concerns to rest.
    Streamlining in this case meant creating an online portal that
    makes it easier for the institutions to comply and working with
    small banks to know how to comply.
        Senator Menendez. OK. And if I can have one final question,
    Mr. Chairman, do all of you, as leaders of your agency, have
    you set internal targets for the response rate of these
    voluntary self-assessment reports?
        Mr. Hsu. We do not have an internal target. I am
    disappointed by the response rate. We would be supportive of
    mandatory reporting.
        Senator Menendez. Do you have an internal----
        Ms. McWilliams. We do not have it because of the statutory
    language which prevents us from requiring this self-assessment.
        Senator Menendez. But you could still have an internal
    response rate goal, and try to make it clear to the
    institutions underneath you that it would be desirable for them
    to----
        Ms. McWilliams. We have done so.
        Senator Menendez. Uh-huh. So you have an internal response
    rate?
        Ms. McWilliams. Well, we have a response rate that is 19.5
    percent. That is an actual rate. And every year we strive to
    get that up.
        Senator Menendez. Is that what you have set as your goal,
    19.5 percent?
        Ms. McWilliams. I do not know, Senator, that we can set a
    goal, given that we cannot require it. But I can----
        Senator Menendez. You can always set a goal, even if
    something is not required. That is not an excuse.
        Comptroller, what can you tell me? I mean, I am sorry. Mr.
    Harper.
        Mr. Harper. Absolutely. No, we do not have a goal set,
    although we do seek to achieve to improve it year after year.
    I, and each of the board members, regularly speak about it. We
    will be having a diversity, equity, and inclusion summit where
    we will be emphasizing the need to increase----
        Senator Menendez. Well, diversity starts by a commitment at
    the top, by setting goals, and having entities and individuals
    that pursue those goals. So I look forward to working with all
    of you more intensely on this. Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Menendez. Senator Reed
    from Rhode Island is recognized for 5 minutes.
        Senator Reed. Thank you very much, Mr. Chairman. Let me
    thank the witnesses for their testimony.
        Mr. Hsu, along with Chairman Brown, Senator Merkley, and
    nine of my colleagues, I have once again reintroduced S. 2508,
    the Veterans and Consumer Fair Credit Act. Our legislation
    would very simply extend the existing Military Lending Act's 36
    percent annual percentage rate cap to all consumers. And it is
    my understanding that the Nation's largest banks, most of which
    you regulate, do not charge anywhere near 36 percent interest
    on any of their consumer credit products, and this would
    include JPMorgan, Bank of America, Citigroup, and Wells Fargo.
        And they are all supervised by OCC. So does OCC view
    charging a reasonable rate for consumer credit as indicative of
    strong and effective lending practices?
        Mr. Hsu. Yes.
        Senator Reed. That makes sense to me. Now small-dollar,
    short-term loans that are typically not made by these
    institutions are extended at exorbitant triple-digit rate
    interests that trap borrowers in cycles of debt. I note that 18
    States and the District of Columbia have strong interest rate
    caps that stop predatory loans. Seven of those States are
    represented by Members of this Committee on both sides of the
    aisle, and these States have successfully experimented with the
    APR caps and consumers, and our belief is that all Americans
    should have these protections.
        Does the OCC consider it abusive to set the practice for a
    bank to frequently make loans that borrowers cannot repay,
    because it appears to us that the business model of many of
    these institutions is to get them in, make the interest so
    crippling that they cannot get out and they are trapped. Would
    you consider that an abusive and deceptive practice?
        Mr. Hsu. Yes, and I think that this is actually written
    into the interagency guidance on small-dollar lending. The
    first factor is that borrowers can meet the initial terms of
    the obligation. So I think these instances that you raise of
    being rolled over continually at high fees are inconsistent
    with that guidance.
        Senator Reed. Thank you. And Chairman Harper, we had a
    testimony from a credit union official from Louisiana who
    testified that they have a loan called a PALs loan, which is
    designed to aid people who need short-term credit. And they do
    not typically charge that lending. I think you have an interest
    rate cap, don't you?
        Mr. Harper. We do.
        Senator Reed. What is it, sir?
        Mr. Harper. The general interest rate cap is 18 percent.
    For the PALs product, which you were speaking of, it is 28
    percent.
        Senator Reed. Twenty-eight percent overall, 18 except for
    the PAL?
        Mr. Harper. Correct.
        Senator Reed. And your institutions are able to thrive and
    to multiply?
        Mr. Harper. I will say that we have done some looking at
    the PALs product over time. Credit unions have been using it,
    but many more offer rates that are below the 18 percent cap for
    short-term dollar, and they have certainly been able to make it
    work.
        Senator Reed. Thank you. Well again, I think if we can move
    this legislation it will make immense progress in terms of
    helping those who really do need help to access credit at a
    reasonable rate. So I thank you all for your comments. Thank
    you.
        Thank you, Mr. Chairman.
        Chairman Brown. Thank you, Senator Reed, and Senator
    Toomey, thank you, and thanks to our witnesses for being here
    today and providing testimony. For Senators who wish to submit
    questions for the record, those questions are due 1 week from
    today, Tuesday, August 10. To the witnesses, you have 45 days,
    please, to respond to any questions.
        Thank you again. With that the hearing is adjourned. Thank
    you so much.
        [Whereupon, at 11:52 a.m., the hearing was adjourned.]
        [Prepared statements and responses to written questions
    supplied for the record follow:]
                  PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
        Today we'll hear testimony from the heads of three agencies
    responsible for protecting our financial system, and for making sure it
    serves everyone--the National Credit Union Administration or NCUA, the
    Federal Deposit Insurance Corporation or FDIC, and the Office of the
    Comptroller of the Currency or OCC.
        Because of the work we've done with the American Rescue Plan,
    putting money in people's pockets and making progress against this
    pandemic, our economy is starting to recover, adding more jobs every
    month. And for the first time, workers are starting to reclaim a little
    bit of power in our economy.
        As we build on this progress, we need to make sure those gains end
    up in the pockets of working families--the people who made this
    progress possible. And we need to make sure their money is protected.
        Together, those of you before us today embody the public backing of
    our banking system.
        Yet most people, frankly, don't know these agencies even exist--let
    alone know what they do. They may see the letters NCUA and FDIC on the
    signs outside credit unions and banks, or emblazoned on the backs of
    debit cards--but they don't think much about what they mean
        And they shouldn't have to. People are busy, working hard to
    support their families and raise their kids. They're supposed to be
    able to trust you, their watchdogs, to keep their money safe.
        But when I talk to Ohioans, I hear the same message: people don't
    trust banks--especially not the biggest ones.
        They remember after the great recession--when we called it a
    ``recovery,'' but workers didn't get much of a raise and entire
    neighborhoods and towns were left behind.
        And they've been burned by exorbitant fees, high minimum balances,
    and segregated second chance accounts. They watch bigger banks buy up
    the smaller ones and close the local branches, making it harder and
    harder for small businesses and working families to get an affordable
    small business loan, or a mortgage.
        It's happening in my home State, and it's happening across the
    country--in rural communities, in Black and Brown communities, and in
    all the communities that Wall Street has trampled over.
        And we know what happens when people don't have a credit union or a
    bank they trust in their community--they turn to expensive check
    cashers and shady payday lenders that prey on working families.
        Just last week, before our hearing on extending the military's 36
    percent interest rate cap to everyone, I talked to a mother from
    Lorain, Ohio, who had to take out a payday loan to pay her bills. She
    ended up trapped in a cycle of debt.
        We know her story is all too common.
        Or people turn to so-called fintechs that claim to make banking
    easier and cheaper, but have few protections and put people's money at
    risk.
        I urged the CFPB to look into the risks of these kinds of fintechs
    like Chime, after customers were locked out of their accounts and
    couldn't access their own money--putting their ability to buy
    groceries, pay their bills or make the rent at risk.
        These issues people have may not seem connected--but they all stem
    from the same big problem: big banks and corporations have too much
    unchecked power in our economy.
        We need to change that.
        We need No-Fee Accounts that allow everyone to open a bank account
    and have control over their hard-earned money.
        We need to close the loopholes that allow so-called fintech firms
    to play by a different set of rules than banks and credit unions,
    leading to unfair competition and putting consumers' money at risk.
        And we need strong financial watchdogs that hold financial
    institutions accountable, and ensure that these institutions serve
    their customers and communities, instead of lining their own pockets.
        For too long we have had regulators who didn't seem to think
    standing up to Wall Street was part of their job. They rolled back the
    rules that industry had spent years begging for. They rewarded
    themselves, instead of investing in the people they are supposed to
    serve.
        There are a lot of community-based institutions in Ohio, like
    CDFIs, MDIs, small credit unions, and community banks. They are the
    ones that are making the small business loans and working with
    borrowers when they might miss a mortgage payment because of a sudden
    medical expense or a lost job.
        They stepped up to help their neighbors during the pandemic. It's
    your job to make sure that all financial institutions--from Main Street
    to Wall Street--do the same.
        Regulators like the FDIC must change their approach to bank
    mergers--no more rubber-stamping every merger, leaving towns in Ohio
    and across the country with no branches. And when mergers do happen,
    you need to make sure that banks live up to the promises they made to
    the community.
        We should be cracking down on risky shadow banks that use the
    allure of shiny new ``financial technology'' to distract us from the
    fact that they are just payday lenders with a fancy app.
        And we need stronger capital requirements, so that banks and credit
    unions can continue to lend to and invest in their communities, in good
    times and bad.
        We have new leadership at the NCUA with Chair Harper, who is
    working on a bipartisan basis to strengthen the NCUA and ensure that
    credit unions serve their members and communities.
        And I applaud Acting Comptroller Hsu for rescinding the misguided
    changes to the Community Reinvestment Act that former Comptroller
    Otting rushed through.
        The legacy of Jim Crow and redlining still holds back too many
    communities, and the OCC's rule did not serve CRA's core purpose--to
    ensure that banks are serving low-income communities and communities of
    color.
        I'm glad that all three bank regulators--the Fed, OCC, and FDIC--
    are finally listening to feedback, and developing a proposal that will
    make sure banks are serving everyone.
        And thankfully President Biden is replacing Trump-era regulators
    with leaders who understand that their job is to stand up for working
    Americans, not Wall Street.
        We need diverse regulators who know first-hand how our financial
    system hasn't delivered for large portions of the country.
        The people who oversee our country's economy need to reflect the
    Americans who make it work--Black and Brown communities, low-income
    communities, other underrepresented communities, and working families,
    from the rural South to the industrial Midwest--not just the wealthiest
    Washington insiders.
        If financial watchdogs do your jobs, working Americans should be
    able to trust that Government is looking out for them. They won't have
    to worry they'll fall victim to a debt trap, or have their bank
    accounts zeroed out because of unfair overdraft fees.
        You are all public servants, and you are responsible for making
    sure that this economy and financial system works for the American
    people.
        I look forward to hearing from you today, and working with you and
    your agencies, to make that promise a reality.
                                     ______

                PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
        Thank you, Mr. Chairman.
        Today we will hear from the OCC, FDIC, and NCUA about their recent
    regulatory actions. Throughout the pandemic, I have been encouraged by
    certain targeted regulatory changes to support the financial system.
    However, as the pandemic recedes, I am now concerned the Biden
    administration is seeking to use financial regulation to advance social
    goals unrelated to banking, and its agency heads are contributing to
    the politicization of banking regulation without providing independent
    analysis. Such a shift would erode the longstanding nonpartisan
    objective of having independent regulatory agencies.
        As one example, the Administration's Executive order--or EO--on
    climate risks seeks to use financial regulation to further
    environmental policy objectives. Under the guise of ``assessing risk,''
    the EO directs the regulatory agencies to undertake a range of actions,
    including the consideration of new or revised regulatory standards.
        But if the actual purpose was to assess risk, wouldn't it logically
    follow that actual analysis occur before jumping ahead to policy
    responses? This is the crucial point: the EO doesn't seek a neutral
    inquiry. Instead, it presupposes the conclusion that there is, in fact,
    climate-related financial stability risk that's not being properly
    accounted for by either institutions or regulators, and it pressures
    supposedly independent agencies to enact backdoor environmental policy
    without appropriate accountability and while these agencies lack any
    expertise in environmental matters.
        I'm concerned some agency heads are willingly participating in this
    politicized effort. For example, last week, Acting Comptroller Hsu
    announced the OCC would join the Network for Greening the Financial
    System--or NGFS--an international organization whose stated aim is to
    ``mobilize mainstream finance to support the transition toward a
    sustainable economy''--in other words, Government-allocated credit,
    which is antithetical to a free enterprise system.
        At a recent FSOC meeting NCUA Chairman Harper helpfully ceded the
    point by asserting that credit unions ``will need to consider adjusting
    their fields of membership or altering lending portfolios'' as a result
    of climate risk. Most credit unions are small institutions that serve
    their local communities. The suggestion that their fields of membership
    need to change because of climate change does not result from any
    actual risk assessment; it's simply based on politics.
        I'm also deeply troubled by the Administration's apparent
    unwillingness to nominate an individual--perhaps at any point--to serve
    as Comptroller on a full-time basis. By installing Mr. Hsu as Acting
    Comptroller with no nominee in sight, the Administration appears to
    have every intention of indefinitely bypassing constitutionally
    required Senate confirmation.
        Four years ago, some Democrats expressed outrage that an Acting
    Comptroller was appointed. They wrote that ``the Comptroller must be
    nominated by the President and confirmed by the Senate.'' In that
    instance, the Acting Comptroller had only served for a grand total of
    one month before a permanent nominee was sent to the Senate. In
    contrast, Mr. Hsu has served as Acting Comptroller for nearly 3 months
    and we have not heard anything about a permanent nominee. Yet, I've
    heard no complaints from Democrats about this fact.
        Rather than pursue social goals unrelated to banking, regulators
    should be looking for ways to increase competition and improve
    regulatory efficiency. Last month, the Administration issued an EO
    that's purportedly intended to increase competition. Upon closer look,
    however, the EO would only make it more difficult for small and medium-
    size banks to merge when doing so actually presents opportunities to
    compete more effectively against very large banks. The EO would
    actually decrease competition within the banking system.
        If the Administration were serious about promoting competition, it
    would seek to reduce the regulatory burdens imposed by Dodd-Frank,
    which have contributed to a dramatic decline in de novo banking
    activity over the past decade.
        According to the FDIC, between 1985 and 2011--the year after Dodd-
    Frank was enacted--183 new institutions were chartered per year on
    average, compared with 4 per year between 2012 and 2019.
        I'm encouraged by the FDIC's work in this space under Chairman
    McWilliams, including revisions to the agency's process for reviewing
    deposit insurance proposals. These changes contributed to an uptick in
    de novo banks before the onset of the pandemic. However, I believe more
    can be done.
        And I'm concerned that rather than facilitating de novo activity
    and encouraging innovation, Acting Comptroller Hsu has suggested that
    he will reconsider the OCC's recent approvals for national trust banks
    that provide digital asset custody services. These approvals were
    granted after extensive engagement and analysis, and bring digital
    asset into the regulated financial system.
        The reality is banking is changing, and new products and services
    offered by innovative companies offer tremendous potential benefits for
    consumers. Regulators should want these innovative financial
    institutions to enter the regulated financial system and should make it
    easier for them to become banks, which adds consumer protections,
    increases safety and soundness, and reduces risk.
        I hope to hear from today's witnesses about how they will maintain
    independence in the face of pressure to politicize banking regulation.
    And I look forward to discussing steps their agencies are taking to
    increase competition, promote innovation, and improve regulatory
    efficiency--which will ultimately result in a stronger banking and
    financial system that better serves all Americans.
                                     ______

                      PREPARED STATEMENT OF TODD M. HARPER
                 Chairman, National Credit Union Administration
                                 August 3, 2021
        Chairman Brown, Ranking Member Toomey, and Members of the
    Committee: Thank you for inviting me to discuss the state of the credit
    union industry and to provide an update on the operations, programs,
    and initiatives of the National Credit Union Administration (NCUA).
        After more than 20 years of working on financial services policy
    issues, I have come to believe that effective financial institutions
    regulators, like the NCUA, need to be:

        fair and forward-looking;

        innovative, inclusive, and independent;

        risk-focused and ready to act expeditiously when necessary;
            and

        engaged appropriately with all stakeholders to develop
            effective regulation and efficient supervision.

        This regulatory philosophy is my North Star, and it is guiding the
    agency's response to the COVID-19 pandemic's economic fallout and
    positioning the NCUA for future challenges. This regulatory philosophy
    has also informed my priorities for the agency, which include capital
    and liquidity, consumer financial protection, cybersecurity, diversity
    and inclusion, and economic equity and justice.
        In my testimony today, I will first focus on the state of the
    credit union industry and the National Credit Union Share Insurance
    Fund before turning to the NCUA's response to the COVID-19 pandemic's
    economic fallout, with a particular emphasis on the road ahead. \1\ I
    will also highlight several recent rulemakings, as well as the agency's
    efforts to advance diversity and inclusion, improve consumer financial
    protection, and further economic equity and justice. I will then
    conclude with several legislative requests related to vendor authority,
    flexibility in managing the National Credit Union Share Insurance Fund,
    additional funding for the Community Development Revolving Loan Fund,
    and permanently extending the temporary enhancements of the Central
    Liquidity Facility.
    ---------------------------------------------------------------------------
         \1\ The term credit union is used throughout this testimony to
    refer to federally insured credit unions. The NCUA does not oversee
    State-chartered, privately insured credit unions.
    ---------------------------------------------------------------------------
    State of the Credit Union System
        Although the pandemic and its associated contraction in economic
    activity influenced credit union performance throughout 2020 and into
    the first quarter of 2021, the credit union system, as a whole, has
    remained on a solid footing.
        As of March 31, 2021, the number of Federal credit unions declined
    by 2.7 percent over the year ending in the first quarter of 2021, to
    3,167, and the number of State-chartered credit unions declined 2.0
    percent to 1,901. The decline in the number of credit unions mainly
    resulted from the long-running trend of consolidation across all
    depository institutions. This trend has remained relatively constant
    across all economic cycles for more than 30 years. During the last
    year, membership at all federally insured credit unions increased 3.6
    percent to 125.7 million. \2\
    ---------------------------------------------------------------------------
         \2\ March 31, 2021, Quarterly Data Summary, https://www.ncua.gov/
    files/publications/analysis/quarterly-data-summary-2021-Q1.pdf.
    ---------------------------------------------------------------------------
        Total assets in federally insured credit unions rose by $311
    billion, or 19.0 percent, over the year ending in the first quarter of
    2021, to $1.95 trillion. Credit union shares and deposits rose by $318
    billion, or 23.1 percent, to $1.69 trillion, reflecting the boost to
    income from Federal emergency relief payments to individuals and the
    sharp economywide increase in personal saving. The credit union
    system's net worth increased by $14.9 billion, or 8.3 percent, over the
    year to $195.3 billion in the first quarter of 2021.
        Strong asset growth led to a decline in the aggregate net worth
    ratio--net worth as a percentage of assets--from 11.00 percent in the
    first quarter of 2020 to 10.01 percent in the first quarter of 2021, a
    decrease of 99 basis points. Since the start of the COVID-19 pandemic
    the system's aggregate net worth for the system declined 1.36
    percentage points. The primary driver of this decline was continued
    elevated insured share growth in the first quarter of 2021, due
    primarily to the additional fiscal stimulus approved by Congress.
    Despite these declines, the credit union system remains well
    capitalized. \3\
    ---------------------------------------------------------------------------
         \3\ 12 U.S.C. 1782 (c)(D)(i)(II).
    ---------------------------------------------------------------------------
        The growth in assets and insured shares has also led to an increase
    in liquidity within the system, with the overall liquidity position of
    federally insured credit unions improving in 2020 and into the first
    quarter of 2021. Cash and short-term investments as a percentage of
    assets increased from 15 percent to 20 percent, reflecting a 61 percent
    increase in cash and short-term investments, from $247 billion in the
    first quarter of 2020 to $398 billion in the first quarter of 2021.
    Factors Affecting the Industry in 2021
        Looking ahead, the top priority for the NCUA is ensuring that the
    credit union system and the Share Insurance Fund are prepared to
    weather any economic fallout related to the pandemic. To protect the
    fund, the agency is actively monitoring certain segments of the system,
    including credit unions closely connected to the oil and gas, travel
    and leisure, and agricultural sectors, among others. The agency is also
    focusing on credit unions with elevated risks, such as those with large
    concentrations of commercial real estate loans relative to assets.
        Generally, the near-term outlook for the economy is favorable. A
    consensus of forecasters expects the pace of expansion this year will
    be the strongest in decades. Job creation will remain strong, leading
    to higher income and lower levels of unemployment. By the end of the
    year, the unemployment rate is forecast to be 4.9 percent. Stronger
    economic conditions are expected to boost longer-term interest rates,
    although they are not projected to reach prepandemic levels within the
    next year. Short-term rates are forecast to hold near current low
    levels.
        While the economic outlook is improving, credit unions could face a
    difficult environment for some time, as there are a number of risks on
    the horizon that could impede the economy's recovery. For example, the
    recession hit the lower end of the income distribution the hardest, and
    recovery could take longer for these households. Systemwide delinquency
    rates, which remained low throughout 2020 and into the first quarter of
    2021, could begin to rise as pandemic relief programs end. We are
    closely monitoring these metrics.
        The rising prevalence of the Delta variant of COVID-19, the slowing
    pace of vaccination, and the potential emergence of new COVID strains
    could delay the economy's return to a new equilibrium. These news
    strains could also potentially trigger new economic dislocations. If
    the economy's performance is worse than expected, labor market
    conditions could deteriorate, and interest rates may remain low for an
    extended period.
        Alternatively, persistently high inflation could lead the Federal
    Reserve's Federal Open Market Committee to pull back its asset
    purchases earlier and more than expected, boosting short-term interest
    rates. Tighter credit conditions typically constrain consumer and
    business borrowing and spending and cause economic growth to slow. If
    short-term rates rise more than long-term rates, the yield curve will
    flatten, putting downward pressure on credit union net interest
    margins. Although economic forecasts point to a steepening of the yield
    curve, the overall interest rate environment will remain challenging,
    particularly for credit unions that rely primarily on investment
    income.
        The ability to manage interest rate risk will remain a crucial
    determinant of credit union performance going forward. To remain on a
    sound footing, credit unions will also need to continue to pay careful
    attention to capital, asset quality, earnings, and liquidity.
        For its part, the NCUA will continue to adjust its supervision and
    examination program to address potential risks to the Share Insurance
    Fund and the broader system as economic and financial conditions
    evolve.
    State of the Share Insurance Fund
        Created by Congress in 1970, the Share Insurance Fund is backed by
    the full faith and credit of the United States and insures the share
    deposits at federally insured credit unions up to at least $250,000. As
    of March 31, 2020, the Share Insurance Fund insured $1.56 trillion in
    member deposits. \4\
    ---------------------------------------------------------------------------
         \4\ Id.
    ---------------------------------------------------------------------------
        Under the Federal Credit Union Act, one of the NCUA Board's primary
    missions is to protect the safety and soundness of the credit union
    system. An essential part of this responsibility is for the Board to
    maintain a strong and healthy Share Insurance Fund, which promotes
    confidence in our Nation's system of cooperative credit.
        The dramatic rise in insured shares throughout last year resulted
    in an equity ratio for the Share Insurance Fund of 1.26 percent at the
    end of 2020. \5\ This figure is 4 basis points higher than at the end
    of the second quarter of 2020, but it also represents a decline of 9
    basis points from the year-end 2019 level.
    ---------------------------------------------------------------------------
         \5\ Please see page 114 of the ``2020 NCUA Annual Report''
    available at https://www.ncua.gov/files/annual-reports/annual-report-
    2020.pdf.
    ---------------------------------------------------------------------------
        The elevated growth in insured shares continued into the first
    quarter of 2021. As a result of this growth, during the NCUA Board's
    May meeting, staff projected the equity ratio for the Fund will be 1.22
    percent in June 2021, less than 2 basis points away from the statutory
    minimum, and 4 basis points below the equity ratio reported at the end
    of 2020. \6\
    ---------------------------------------------------------------------------
         \6\ Staff Briefing, ``Share Insurance Fund Quarterly Report'', May
    2021 NCUA Board Meeting, available at https://www.ncua.gov/files/
    agenda-items/AG20210520Item1a.pdf.
    ---------------------------------------------------------------------------
        If the equity ratio falls below 1.20 percent, or the NCUA Board
    projects it will within 6 months, the Federal Credit Union Act requires
    the NCUA Board to establish and implement a restoration plan within 90
    days. \7\ The restoration plan must detail how the Board would increase
    the equity ratio to at least the statutory minimum of 1.20 percent--
    before the end of an 8-year period beginning upon the implementation of
    the plan, and other such conditions as the Board determines to be
    appropriate.
    ---------------------------------------------------------------------------
         \7\ 12 U.S.C. 1782 (c)(D)(2).
    ---------------------------------------------------------------------------
        Except for a temporary increase resulting from the consolidation of
    the Temporary Corporate Credit Union Stabilization Fund with the Share
    Insurance Fund, the equity ratio has steadily declined since 2014, even
    with fewer credit union failures causing losses to it. The primary
    drivers of this trend are the steady growth in insured shares and
    reduced investment income resulting from a persistent low interest-rate
    environment. Based on the current interest-rate environment, even with
    a return to modest insured share growth levels and relatively low
    credit union failure losses to the fund, the agency expects the equity
    ratio to continue its downward trajectory. As a result, it seems likely
    that the Board will need to adopt a restoration plan at some point
    absent a sizable change in these underlying fundamentals.
    NCUA's COVID-19 Response
        Throughout the COVID-19 pandemic, the NCUA has focused on three
    priorities:

        Protecting the health and safety of NCUA staff and
            contractors so the agency can continue to perform its mission;

        Assessing the impact of COVID-19 on credit union members
            and operations; and

        Analyzing how the pandemic will affect the future financial
            condition of credit unions and the Share Insurance Fund.

        Agency examiners continue to work closely with credit unions to
    obtain documentation and complete examination procedures offsite, so
    credit unions can, in turn, focus on providing services to their
    members.
    Phase One Return to Onsite Operations
        Last month, the NCUA announced that it would begin Phase One of its
    return to onsite operations on July 19, 2021. This decision was made
    following extensive analysis and after conversations with the NCUA's
    public health consultant and other financial services regulators.
    During Phase One, NCUA staff may only volunteer to work onsite in
    locations where public health data indicate that pandemic conditions
    have sufficiently moderated. To the extent they exceed the NCUA's
    safety protocols for Phase One, NCUA staff working onsite in credit
    unions will generally be expected to follow credit union policies
    related to safety and security. \8\
    ---------------------------------------------------------------------------
         \8\ NCUA staff will be expected to follow credit union policies to
    the extent that they do not violate employee rights or conflict with
    local, State, or Federal laws.
    ---------------------------------------------------------------------------
        To the extent possible, the NCUA will respect a credit union's
    preference not to have examination staff onsite during this initial
    phase. However, the NCUA reserves the right to conduct onsite work at a
    credit union, if necessary, to address severe and time-sensitive
    matters. Additionally, NCUA staff will coordinate with State
    supervisory authorities when working onsite in federally insured,
    State-chartered credit unions.
    Supervisory Priorities in 2021
        Recognizing the continued challenges credit unions face due to the
    pandemic's economic fallout, the NCUA updated its supervisory
    priorities in January 2021 to focus its examination activities on the
    areas that pose the highest risk to the industry and the Share
    Insurance Fund. Some of the agency's supervisory priorities are reviews
    of credit unions' efforts to:

        Maintain sufficient loss reserves;

        Comply with the Bank Secrecy Act and anti- money laundering
            laws and regulations;

        Implement CARES Act provisions applicable to credit unions
            as well as those provisions that were extended through the
            Consolidated Appropriations Act, including the suspension of
            the requirement to categorize certain eligible loan
            modifications as troubled debt restructurings;

        Comply with consumer financial protection laws and
            regulations;

        Monitor and control credit risk;

        Protect information systems and strengthen cybersecurity
            defenses;

        Transition from the use of LIBOR; and

        Manage for the potential liquidity risk due to the economic
            impact of the pandemic.

        As the pandemic and its economic and financial disruptions evolve,
    the NCUA will continue to update its policies and procedures to enhance
    its supervision program and to provide necessary guidance to the
    industry.
        Over the last year, the NCUA has also established priorities to
    focus examination and supervisory activities on credit unions posing
    the greatest risk to the credit union system. Of highest priority are
    credit unions experiencing significant financial or operational
    problems. This priority includes credit unions that have asked for
    assistance and those the NCUA determines may need assistance based on
    their financial and operational conditions. NCUA examiners will
    continue working with these credit unions to identify what assistance,
    if any, is needed.
        Additionally, the NCUA recognizes the need to ensure our Nation's
    financial services system is not used for illicit or terrorist
    financing. The agency continues to work closely with its counterparts
    at other banking regulatory agencies to adopt the significant changes
    occurring under the Anti- Money Laundering Act and Corporate
    Transparency Act of 2020. \9\ The NCUA will also rely on the Treasury
    Department and the Financial Crimes Enforcement Network to consult and
    coordinate implementation of those laws, as appropriate.
    ---------------------------------------------------------------------------
         \9\ Enacted into law as part of the National Defense Authorization
    Act for Fiscal Year 2021 (PL: 116-283), which is available at https://
    www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf.
    ---------------------------------------------------------------------------
    Regulatory Flexibility Measures
        Throughout 2020, the NCUA provided temporary and targeted
    regulatory flexibility to enable federally insured credit unions to
    manage their operational and financial risks while meeting their
    members' needs and adapting to social distancing measures within their
    communities.
        In December 2020, the NCUA Board approved an extension of the
    effective date of certain regulatory requirements to help federally
    insured credit unions remain operational and provide appropriate
    liquidity management flexibility to address economic conditions caused
    by the pandemic. Specifically, the temporary final rule:

        Raised the maximum aggregate amount of loan participations
            that a federally insured credit union may purchase from a
            single originating lender to the greater of $5,000,000 or 200
            percent of the credit union's net worth;

        Suspended limitations on the eligible obligations that a
            Federal credit union may purchase and hold; and

        Suspended the required timeframes for the occupancy or
            disposition of properties not being used for Federal credit
            union business or that have been abandoned.

        Each of these temporary modifications were set to expire on
    December 31, 2020, but the Board extended these measures through
    December 31, 2021, due to the continued effects of COVID-19 on credit
    unions and their members.
        In April 2021, the NCUA Board also renewed an interim final rule
    that temporarily modifies certain prudential requirements to help
    ensure federally insured credit unions remain operational and able to
    provide needed financial services during the COVID-19 pandemic. This
    interim final rule is substantively similar to the interim final rule
    approved by the Board in May 2020.
        Specifically, the interim final rule makes two temporary changes to
    the NCUA's prompt corrective action regulations. The first change
    reduces the earnings retention requirement for federally insured credit
    unions classified as adequately capitalized. The second change permits
    an undercapitalized credit union to submit a streamlined net worth
    restoration plan if it becomes undercapitalized predominantly because
    of share growth. If a credit union becomes less than adequately
    capitalized for reasons other than share growth, it must still submit a
    net worth restoration plan under the current requirements in the NCUA's
    regulations.
        These temporary measures will remain in place until March 31, 2022.
    Central Liquidity Facility
        Following the temporary statutory enhancements provided in the
    CARES Act and their extension in the Consolidated Appropriations Act,
    2021, as well as related changes to the agency's regulations, the
    Central Liquidity Facility (CLF) experienced a significant increase in
    its membership and borrowing capacity. \10\ I want to thank the
    Chairman, Ranking Member, and the Members of this Committee for
    supporting these enhancements in March 2020, as well as their extension
    last December. And, as I will outline later, I respectfully request
    that these reforms be made permanent to better protect the credit union
    system from future liquidity events.
    ---------------------------------------------------------------------------
         \10\ The Central Liquidity Facility provides the credit union
    system with a contingent source of funds to assist credit unions
    experiencing unusual or unexpected liquidity shortfalls during
    individual or systemwide liquidity events. The CLF also serves as an
    additional liquidity source for the Share Insurance Fund, which helps
    to ensure the credit union system and the fund remain strong. Member
    credit unions own the CLF, which is managed by the NCUA. Membership in
    the CLF is open to both federally insured credit unions and privately
    insured credit unions.
    ---------------------------------------------------------------------------
        As of June 30, 2021, the number of regular members of the CLF,
    which consists of consumer credit unions, was 346, up from 283 members
    in April 2020. Additionally, all 11 corporate credit unions became
    agent members in May 2020, meaning most of their member credit unions
    also have access to CLF liquidity. In total, 4,107 credit unions, or 81
    percent of all federally insured credit unions, now have access to the
    CLF, either as a regular member or through their corporate credit
    union.
        New memberships added $1.6 billion in additional total subscribed
    capital stock plus surplus to the CLF. Under the temporary authority
    granted by the CARES Act and later extended, the CLF can borrow 16
    times its total capital through the end of 2021. As of June 30, 2021,
    the facility's borrowing authority stood at $36.0 billion, an increase
    of $25.5 billion since April 2020. \11\
    ---------------------------------------------------------------------------
         \11\ Please see Central Liquidity Facility Monthly Reports, which
    are available at https://www.ncua.gov/support-services/central-
    liquidity-facility/monthly-reports.
    ---------------------------------------------------------------------------
        The NCUA encourages all credit unions to consider joining the CLF
    to bolster the system's access to emergency liquidity, should the need
    arise. And, there are several credit unions exploring joining the CLF,
    which would further increase capacity.
    Grants and Loans To Support Members and Underserved Communities
        Through its stewardship of the Community Development Revolving Loan
    Fund (CDRLF), the NCUA provides grants and loans to low-income-
    designated credit unions that use this funding to improve and expand
    services to members, build capacity, and stimulate local economic
    activity. Although relatively small in size, these grants make a big
    difference to low-income and minority credit unions working to provide
    more and better services to their members and communities.
        In 2020, Congress appropriated $1.5 million for CDRLF technical
    grants. Congress has not provided an appropriation for the loan
    component of the CDRLF since 2005. Instead, the NCUA revolves loan
    funds to qualified credit unions to the extent possible. The urgent
    need grants the agency provides to low-income credit unions that
    experience unforeseen disruptions to their operations are funded from
    income generated by the CDRLF loan portfolio.
        It should be noted that the NCUA does not use any appropriated
    funds to administer the CDRLF. Every penny of the appropriations goes
    to eligible credit unions and their member-owners.
        Last year, the NCUA made the strategic decision to devote almost
    all its CDRLF efforts to help credit unions and their members meet the
    significant challenges posed by the COVID-19 pandemic. Overall, the
    NCUA received 432 technical assistance grant and loan requests for a
    total of $7.6 million. The agency's funding capacity allowed it to only
    award $3.7 million in technical assistance grants and loans to 165
    credit unions. \12\
    ---------------------------------------------------------------------------
         \12\ In 2020, the NCUA received 417 grant applications requesting
    $3.9 million in funding. The agency awarded approximately $1.6 million
    in technical assistance and minority depository institution mentoring
    grants to 156 credit unions. The NCUA also approved $2.25 million in
    loans to nine credit unions.
    ---------------------------------------------------------------------------
        Additionally, the NCUA awarded 149 credit unions in 42 States and
    the District of Columbia more than $968,000 in urgent need grants. Of
    these credit unions, 144 received more than $930,000 in funding to
    assist with their operational needs resulting from the pandemic. Five
    credit unions received $37,000 in urgent needs grants to repair damage
    to their credit unions because of a natural disaster or another
    unexpected event.
        In 2021, the NCUA will administer approximately $1.5 million in
    CDRLF grants to qualified low-income-designated credit unions, subject
    to the availability of funds. This year, two of the grant initiatives
    focus on supporting minority depository institutions and reaching the
    underserved to provide greater access to safe and affordable financial
    services in urban, rural, and other underserved areas. A maximum of
    $50,000 and $25,000 per awardee will be available as part of the
    Underserved Outreach and Minority Depository Institution Mentoring
    initiatives, respectfully.
        As part of the 2021 grant round, the NCUA has received 280 grant
    applications requesting approximately $4.7 million. The number of
    applications submitted in 2021 was down from 2020, but the total amount
    requested was nearly $700,000 more than requested the previous year.
    The NCUA will announce the awardees in September.
    Working With Borrowers Affected by COVID-19
        Tragically, the COVID-19 pandemic has disproportionately affected
    low-income communities and communities of color. Besides being at a
    greater risk of contracting the virus, residents of underserved areas
    are more likely to experience pandemic-related economic and financial
    disruptions. Many minority-owned businesses have also been acutely
    affected by the suddenness and depth of the economic shock resulting
    from the lockdowns that were implemented to contain the spread of the
    virus. Rural and underserved communities, too, have been hard hit by
    COVID-19, and these are the areas that minority depository institutions
    (MDIs) and low-income-designated credit unions predominately serve.
        As cooperative, member-owned financial institutions that reinvest
    their earnings, many credit unions have a long history of assisting
    their member-owners in times of need. Throughout the COVID-19 pandemic,
    the NCUA has encouraged credit unions to work with members experiencing
    hardship by extending the terms of repayment, or otherwise
    restructuring their members' debt obligations.
        When prudent, credit unions may modify terms for new loans to
    members, as doing so may help consumer and business members better
    manage any impact on their financial well-being due to COVID-19. The
    NCUA has also instructed its examiners to refrain from criticizing a
    credit union's efforts to provide prudent relief for members, when
    conducted in a reasonable manner with proper controls and management
    oversight.
        During the pandemic, millions of credit union members received
    Government stimulus and child tax credit payments. Although lawmakers
    intended for consumers to spend this funding on necessities like food,
    shelter, utilities, and medical care, in certain instances some
    financial institutions, including some credit unions, instead used
    these stimulus payments to cover overdraft fees, outstanding debts, and
    other liabilities.
        Financially stressed American consumers deserve better treatment.
    Many federally insured credit unions have voluntarily decided to
    protect their members' relief payments from collection, garnishment,
    and the right of offset. In doing so, these credit unions are
    demonstrating the cooperative philosophy at the heart of the credit
    union movement. Legislative action to protect the latest round of
    stimulus and child tax credit payments from garnishment and offset
    would protect consumers and help families struggling during the
    pandemic downturn.
    Cybersecurity Efforts in Response to COVID-19
        On the issue of cybersecurity, fraudsters and hackers continue
    their attempts to undermine the very integrity of our interconnected
    financial system through deception and cyberattacks. To compete, credit
    unions must be able to safely and securely use technology to deliver
    member services and to adopt financial innovations to ensure the
    industry's long-term success. Each of us, however--the NCUA, State
    supervisory authorities, vendors, and credit unions--must work together
    to promote innovation with an emphasis on security and equity.
        The pandemic has prompted a heightened cybersecurity stance for the
    agency and the industry, with an emphasis on credit union service
    continuity, remote workers' security and compliance, and flexibility
    regarding agency supervision and examination processes. The NCUA has
    seen increasing fraudulent activity--such as phishing, identity theft,
    and credential acquisition; ransomware; and cyberenabled fraud
    methods--within the credit union system. Emerging cyberattacks are a
    persistent threat to the financial sector, and the likelihood of these
    threats adversely affecting credit unions and consumers is rising
    because of advances in financial technology and increases in the use of
    remote workforces and mobile technology for financial transactions.
        The NCUA continues to promote cybersecurity best practices in
    credit unions, and reviews of credit union information systems and
    assurance programs remain a supervisory priority for the agency.
    Building upon its industry outreach efforts in 2020, the NCUA is
    continuing to provide guidance and resources to assist credit unions
    with strengthening their cyberdefenses. As part of its 2021 CDRLF grant
    initiative, the agency is again funding cybersecurity grants.
        The NCUA is also examining ways to strengthen cybersecurity reviews
    during regular examinations of credit unions. In 2020, the agency began
    piloting the Information Technology Risk Examination for Credit Unions
    (InTREx-CU). InTREx-CU harmonizes the IT and cybersecurity examination
    procedures shared by the Federal Deposit Insurance Corporation (FDIC),
    the Federal Reserve System, and many State financial regulators,
    thereby generating a consistent approach across all community-based
    financial institutions. In 2021, the NCUA is continuing to integrate
    this tool into its cybersecurity reviews with the goal of deploying the
    tool systemwide in late 2022 or early 2023.
    Recent Rulemakings
        I would now like to turn to several recent rulemakings and actions
    taken by the NCUA Board since last November. These matters include
    updating the credit union rating system, increasing the amount of
    capital within the system to absorb losses, facilitating the ability of
    credit unions to work with borrowers experiencing financial trouble,
    and amending the agency's risk-based capital rules to ensure greater
    comparability with those of banks, as required by the Federal Credit
    Union Act. Additional information about the Board's regulatory actions
    can be found on the NCUA's public website. \13\
    ---------------------------------------------------------------------------
         \13\ Information on the NCUA Board's regulatory actions can be
    found at https://www.ncua.gov/about/ncua-board/board-meetings-agendas-
    results.
    ---------------------------------------------------------------------------
    Proposed Rule: Adding Interest Rate Sensitivity or ``S'' to the CAMEL
            Rating System
        In January 2021, the NCUA Board approved a proposed rule that would
    add the ``S'' (Sensitivity to Market Risk) component to the existing
    CAMEL rating system, thus updating the rating system from CAMEL to
    CAMELS, and redefine the ``L'' (Liquidity Risk) component in the rating
    system. This proposal would enhance clarity and allow the NCUA, State
    supervisory authorities, and federally insured credit unions to better
    distinguish between liquidity risk and sensitivity to market risk. The
    amendment would also enhance consistency between the regulation of
    credit unions and other financial institutions.
        The estimated implementation of this proposal is approximately 1
    year, or as early as the first quarter of 2022. The comment period on
    this proposed rule closed on May 10, 2021.
    Subordinated Debt Final Rules
        In December 2020, the Board approved a final rule that amends
    various parts of the NCUA's regulations to permit low-income-designated
    credit unions, complex credit unions, and new credit unions to issue
    subordinated debt for purposes of regulatory capital treatment. One
    month later, the Board unanimously approved a final rule that amends
    the NCUA's corporate credit union regulation to clarify that corporate
    credit unions may purchase subordinated debt instruments issued by
    consumer credit unions and specifies the capital treatment of these
    instruments for corporate credit unions that purchase them.
        Together, these two rules have the potential to increase capital
    within the credit union system and better protect the Share Insurance
    Fund--and taxpayers--from losses. Both rules become effective on
    January 1, 2022.
    Joint-Ownership Share Account Final Rule
        In February 2021, the Board approved a final rule amending the
    NCUA's regulation governing the requirements for a share account to be
    separately insured as a joint account. The final rule provides
    federally insured credit unions with an alternative method to satisfy
    the membership card or account signature card requirement.
        The change is especially important given the challenges posed by
    COVID-19 and the resulting economic uncertainty. If the pandemic's
    economic fallout contributes to the failure of a federally insured
    credit union, the changes will facilitate the prompt payment of share
    insurance on joint accounts. The final rule went into effect on March
    26, 2021.
    Capitalization of Interest Final Rule
        In June 2021, the NCUA Board approved a final rule that removes the
    prohibition on the capitalization of interest in connection with loan
    workouts and modifications. This final rule also gives credit unions
    parity with banks, Fannie Mae, Freddie Mac, and the Federal Housing
    Administration, all of which had already allowed servicers to
    capitalize interest as part of a prudent modification program.
        For borrowers experiencing financial hardship, a prudently
    underwritten and appropriately managed loan modification, consistent
    with consumer financial protection laws and safe-and-sound lending
    practices, is generally in the long-term best interest of both the
    borrower and a credit union. Such modifications may allow borrowers to
    remain in their homes and to help minimize the costs of default and
    foreclosure for both the credit union and its member.
        The rule removes the prohibition on credit unions from capitalizing
    interest on loan modifications while maintaining the important
    prohibition on a credit union capitalizing credit union fees and
    commissions. It also establishes consumer financial protection
    guardrails like ability to repay requirements and prohibits predatory
    lending practices, such as negative amortization, to ensure that the
    addition of unpaid interest to the principal balance of a mortgage loan
    will not hinder the borrower's ability to make payments or become
    current on the loan. These measures apply to workouts of all types of
    member loans, including commercial and business loans.
        Importantly, in those cases where State law applies and is more
    stringent, credit unions must comply with those consumer financial
    protection standards. As a result, this rulemaking establishes a
    regulatory floor, not a ceiling for consumer financial protection.
        The final capitalization of interest rule became effective on July
    30, 2021.
    Proposed Rule Creating the Complex Credit Union Leverage Ratio and
            Other Amendments to the NCUA's 2015 Risk-Based Capital Rule
        At its July 2021 meeting, the NCUA Board approved a proposed rule
    that amends the NCUA's capital adequacy regulation to provide a
    simplified measure of capital adequacy for federally insured credit
    unions classified as ``complex.'' \14\
    ---------------------------------------------------------------------------
         \14\ A complex credit union is defined in the NCUA's risk-based
    capital rule as any federally insured, natural-person credit union with
    $500 million in assets or greater, as defined in the NCUA's 2018
    supplemental risk-based capital rule. Please see https://
    www.govinfo.gov/content/pkg/FR-2018-08-08/pdf/2018-16888.pdf.
    ---------------------------------------------------------------------------
        The proposed rule would modify the NCUA's capital adequacy
    regulation and provide a simplified measure of capital adequacy that
    federally insured credit unions classified as complex can opt into. The
    new Complex Credit Union Leverage Ratio (CCULR) gives complex credit
    unions that maintain a minimum net worth level and meet other
    qualifying criteria a streamlined framework to manage capital in their
    institutions. Provided that a credit union in the CCULR framework
    maintains the minimum net worth ratio, it would be considered well
    capitalized.
        The new CCULR is comparable to the Community Bank Leverage Ratio
    that went into effect in January 2020. Under the NCUA's proposal, the
    minimum net worth level under the CCULR framework would initially be 9
    percent on January 1, 2022, and this level would gradually increase to
    10 percent by January 1, 2024. Using December 31, 2020, financial
    performance data, the NCUA estimates that most complex credit unions
    would be able to meet the CCULR's initial net worth requirement of 9
    percent.
        The proposed rule would also make several amendments to update the
    NCUA's final risk-based capital rule, such as addressing asset
    securitizations issued by credit unions, clarifying the treatment of
    off-balance sheet exposures, and deducting certain mortgage servicing
    assets from a complex credit union's risk-based capital numerator. The
    proposed rule also updates several derivative-related definitions and
    clarifies the definition of a consumer loan.
        Comments on the proposed rule are due 60 days after publication in
    the Federal Register.
    Climate Financial Risk
        Extreme weather events are accelerating, and the number and costs
    of climate-related natural disasters are often hitting disadvantaged
    communities the hardest. Financial regulators, like the NCUA, have a
    responsibility to foster resiliency to all material risks to financial
    institutions, including those related to climate change. By measuring,
    monitoring, and mitigating such risks, the NCUA can fulfill its core
    obligations of maintaining the safety and soundness of credit unions,
    protecting consumers, and safeguarding the Share Insurance Fund.
        Additionally, the agency must consider not only the macroeconomic
    impact of climate change, but also the microeconomic context. Most
    credit unions focus on mortgage, auto, and small business lending. Over
    time, climate change will affect the value of collateral like homes and
    commercial properties, especially in areas affected by extreme weather.
    Additionally, a credit union's field of membership may be tied to
    communities or activities that may be dramatically affected by climate
    change, like farming or fossil fuels. Credit unions serving such
    populations must consider adjusting their fields of membership or
    altering their lending portfolios to remain resilient over the long
    term.
        The NCUA will continue to examine the effects of climate financial
    risk on the credit union system and on other areas of the financial
    sector. The agency will also continue to engage with other regulatory
    agencies as part of the Financial Stability Oversight Council and other
    interagency working groups on the issue of climate financial risk
    within the broader financial system and economy.
    Diversity, Equity, and Inclusion
        The NCUA has a long-standing commitment to diversity, equity, and
    inclusion, and these important values are reflected in the agency's
    policies and practices.
        Numerous studies have demonstrated that organizations that
    prioritize the creation of a more diverse and inclusive workplace
    experience greater staff motivation, improved customer service, and
    higher employee retention, all of which lead to greater efficiencies
    and better financial performance. Thus, these principles are vital for
    the continued health and success of the credit union system.
        As part of its efforts, the NCUA will host its second Diversity,
    Equity, and Inclusion (DEI) Summit taking place November 2 through 4.
    The 2021 DEI Summit builds on the success of the agency's 2019 summit
    and will provide credit union industry professionals who are committed
    to advancing diversity, equity, and inclusion a forum to share best
    practices, address challenges to advancing diversity, and learn how the
    NCUA can support the industry in its efforts.
        The principles of diversity, equity, and inclusion are also being
    embraced more widely within the credit union industry. For example,
    several industry leaders formed the Credit Union DEI Collective, which
    serves as a resource on all things related to DEI within the credit
    union system. Additionally, there have been efforts within the credit
    union system to make DEI part of the core principles of the cooperative
    credit system.
    NCUA's Workforce Diversity
        With respect to its workforce, the NCUA continues to exceed the
    Civilian Labor Force in the Black/African American, Asian/Pacific
    Islander, and Multiracial groups. In 2020, 41.5 percent of new hires at
    the NCUA were people of color, and gender diversity among the agency's
    executives achieved parity for the first time. Additionally, 15.4
    percent and 4.2 percent of the NCUA's workforce identify as having
    disabilities and targeted disabilities, respectively. These figures
    exceed the Federal employment goals established in Section 501 of the
    Rehabilitation Act of 1973.
        The NCUA also works to advance the agency's mission and create a
    greater sense of belonging within its workforce through seven employee
    resource groups. After establishing the program in 2018, the NCUA has
    269 employees, or 23.4 percent of the workforce, participating in one
    or more of these employee resource groups. This level is more than
    twice the benchmark participation rate for successful programs.
        Additionally, in May 2020, under the leadership of then-Chairman
    Rodney Hood, the agency launched its Culture, Diversity, and Inclusion
    Council. Comprised of 18 employees across the agency's business lines,
    in both supervisory and nonsupervisory roles, the Council's mission is
    to identify and advance a positive, high-performing organizational
    culture that will allow the NCUA to achieve its mission; support the
    agency's strategic goal of attracting, engaging, and retaining a highly
    skilled, diverse workforce by cultivating an inclusive environment; and
    assist and advise leadership on the implementation of strategic
    diversity and inclusion priorities.
        In 2020, the Council conducted an agencywide culture and climate
    survey, in which a majority (59 percent) of the NCUA's staff
    participated. These survey results were combined with results from
    subsequent focus groups to assess employee perceptions of the NCUA's
    culture. The Council is now analyzing the results and developing
    recommendations to address the issues identified in the survey. They
    will present their findings and recommendations to the agency's
    leadership in September.
    Supplier Diversity
        The NCUA also understands the importance of developing and
    maintaining a base of suppliers and contractors where a diverse group
    of businesses is well-represented.
        In 2020, 33.2 percent of the agency's reportable contracting
    dollars were awarded to minority- and women-owned businesses, a
    decrease of 9.8 percentage points from 43.0 percent in 2019. \15\ Most
    of the decline was seen in technology purchasing, where the minority-
    and women-owned business contract spend was 33.3 percent in 2020
    compared to 44.8 percent in 2019.
    ---------------------------------------------------------------------------
         \15\ Please see page 20 of the NCUA's ``OMWI Report to Congress
    2020'' available at https://www.ncua.gov/files/publications/2020-omwi-
    congressional-report.pdf.
    ---------------------------------------------------------------------------
        Despite this decline, 2020 was a relatively strong year for the
    NCUA's supplier diversity performance. And, the agency's performance
    continues to demonstrate the positive impact of intentional and
    consistent inclusion of proven, qualified, and responsive minority- and
    women-owned businesses in the competitive procurement process.
    Assessing Diversity Policies and Practices of Regulated Entities
        The NCUA's voluntary Credit Union Diversity Self-Assessment tool
    assists credit unions in implementing the diversity standards set forth
    in the Interagency Policy Statement Establishing Joint Standards for
    Assessing the Diversity Policies and Practices of Entities Regulated by
    the Agencies. \16\ Credit unions are encouraged to annually use and
    submit the self-assessment to the NCUA.
    ---------------------------------------------------------------------------
         \16\ 80 FR 33016, available at https://www.federalregister.gov/
    documents/2015/06/10/2015-14126/final-interagency-policy-statement-
    establishing-joint-standards-for-assessing-the-diversity-policies.
    ---------------------------------------------------------------------------
        In 2020, 188 federally insured credit unions, 115 Federal and 73
    State-chartered, submitted self-assessments, an increase of 59.3
    percent over 2019. These credit unions varied in the number of
    employees and asset size. Of those credit unions submitting results,
    104 had more than 100 employees, representing 15.1 percent of the
    credit unions in this category. The aggregate number of employees
    working at these credit unions represented 13.6 percent of employees at
    all federally insured credit unions at the time. Asset sizes for the
    responding credit unions ranged from just above $1 million to more than
    $15 billion, with 142 of the 188 credit unions, or 75.5 percent,
    reporting $100 million or more in assets.
        While the volume of self-assessment responses received has steadily
    increased, the NCUA recognizes the need for higher industry response
    rates. The NCUA's leadership will, therefore, continue to encourage
    more credit unions to participate.
    Modernization of the NCUA's Examination Systems
        Under the agency's Enterprise Solution Modernization Program, the
    NCUA is developing new technology to replace several existing systems
    that are at the end of their service lives.
        The NCUA's current examination system, AIRES, is a custom-built,
    25-year-old system based on outdated technology. Given the age of AIRES
    and the importance of an electronic examination system to the mission
    of the agency, priority was given to the development of its
    replacement, the Modern Examination and Risk Identification Tool, or
    MERIT. To successfully deploy this new system, it was necessary to
    stand up the technology architecture, infrastructure, and security
    posture needed for a full modernization. MERIT and its related systems
    will be continually improved in the operations and maintenance phase of
    MERIT's lifecycle.
        Besides better and more robust financial analytics, MERIT provides
    numerous improvements over the legacy AIRES examination system,
    including better controlled access to examination data across the
    organization and greater efficiency in reporting.
        Simultaneous to MERIT's development, the NCUA has been exploring
    the concept of virtual examinations of credit unions. By identifying
    and adopting alternative methods to remotely analyze much of the
    financial and operational condition of a credit union, with equivalent
    or improved effectiveness relative to current examinations, it may be
    possible to significantly reduce the frequency and scope of onsite
    examinations.
        The pandemic and offsite operational posture resulted in the
    implementation of virtual processes during 2020 to continue the
    agency's supervision of the credit union industry. This unplanned need
    provided an incubator and learning environment to identify effective
    and ineffective strategies for remote or virtual examinations. The
    agency is studying longer-term strategies to institutionalize the
    lessons learned during the pandemic for future changes within the
    virtual examination program. The full implementation of MERIT in the
    coming months will also facilitate the ability of the agency to conduct
    more of its supervisory efforts remotely in the future.
    Consumer Financial Protection
        Equally vital to the members of credit unions is consumer financial
    protection and fair and equitable access to credit. To that end, the
    NCUA is working to strengthen its consumer financial protection program
    to ensure that all consumers receive the same level of protection,
    regardless of their financial provider of choice. The agency can do
    more to protect consumers' interests and ensure that the credit union
    system lives up to its commitment to serve members.
        Specifically, the agency is developing a proposal to enhance
    consumer compliance examination procedures for the largest credit
    unions that are not primarily examined for consumer financial
    protection by the Consumer Financial Protection Bureau (CFPB),
    performing targeted consumer compliance examination procedures in every
    Federal credit union exam, and developing consumer compliance training
    materials for examiners and credit unions. The agency is also placing
    an increased emphasis on fair lending compliance.
        Regarding discrete consumer financial protection issues, the NCUA
    continues to focus on compliance with the forbearance provisions of the
    CARES Act and efforts to help consumers who are experiencing financial
    difficulties due to the pandemic. Whether it entails reworking an
    existing loan due to financial stress or delaying payments, the agency
    expects credit unions to work with their members as forbearance
    agreements roll off and foreclosure moratoriums expire.
        Further, the agency has encouraged credit unions to be proactive
    and prepare for how they will handle the financial difficulties their
    members will experience as the pandemic's economic fallout continues.
        The NCUA can also do more to improve the financial capability and
    personal finance knowledge of the member-owners of credit unions.
    Financial education plays a key role in helping consumers better
    understand how to save, earn, borrow, invest, and protect money wisely.
    Additionally, consumers who have a strong foundation in personal
    finance are essential to a healthy credit union system.
        During the final months of 2020 and into the first quarter of 2021,
    the NCUA worked in partnership with other Federal agencies to raise
    awareness of the importance of financial education. The agency cohosted
    webinars with the CFPB, Internal Revenue Service, and the FDIC on such
    topics as financial readiness for servicemembers, veterans and their
    families; the Earned Income Tax Credit and Voluntary Income Tax
    Assistance program; and access to federally insured accounts at banks
    and credit unions for young people.
        Going forward, the NCUA will continue to collaborate with other
    Federal agencies and stakeholders to raise awareness of consumer
    financial protection laws and regulations and the importance of
    financial literacy. The agency's online consumer resources educate
    consumers and support credit unions and their efforts to provide
    financial education to their members. We are evaluating ways to improve
    this website.
    Economic Equity and Justice
        Last year's nationwide Black Lives Matter demonstrations heightened
    public awareness of economic equity and justice. The NCUA and credit
    unions each have important roles to play in advancing this important
    goal.
        Research conducted after the last economic downturn found that
    credit unions that leaned in and increased lending within underserved
    communities recovered more quickly than those that did not. Research
    has also shown that there are three primary ways to close the wealth
    gap. One is to open and regularly fund a retirement account; another
    way is to own a home; and the third way is to start a business.
        Given the cooperative philosophy that underlies the credit union
    movement, credit unions have a moral obligation to step up and help
    people of color recover and start anew in the months ahead. Through
    these efforts, credit unions can help ease the financial impact of
    COVID-19 and systemic racism on communities of color, and the result
    will be a more vibrant economic outcome for everyone in society.
        The NCUA is working to address these issues as part of its
    Advancing Communities through Credit, Education, Stability and Support
    Initiative (ACCESS), which began under then-Chairman Hood, and through
    its CDRLF technical assistance grants and other efforts. As part of the
    ACCESS initiative, a working group at the NCUA is examining ways to
    modernize the chartering process to help ensure that groups that want
    to form new Federal credit unions can do so in an efficient manner, a
    priority for Board Member Kyle Hauptman.
        As noted earlier, the NCUA provides grants and loans through the
    CDRLF. These grants and loans make a tremendous difference to small,
    low-income and minority credit unions working to provide more and
    better services to their members and communities or seeking to bolster
    their own capacity. The NCUA expects to announce the 2021 grant
    awardees at the beginning of September.
        The NCUA also continues its efforts to preserve and grow the number
    of MDI credit unions. At the end of 2020, 520 federally insured credit
    unions had self-certified as MDIs. Together, these credit unions served
    4.3 million members, held more than $51.1 billion in assets, and
    represented 10.2 percent of all federally insured credit unions.
        The agency assists these vital institutions by:

        Offering technical assistance grants and training sessions;

        Facilitating mentor relationships between smaller MDI
            credit unions and larger MDI credit unions;

        Negotiating financial support to sustain MDIs;

        Delivering guidance to groups establishing new MDIs; and

        Approving new charter conversions and field-of-membership
            expansions to facilitate new opportunities for growth.

        Additionally, the agency is hosting a series of regional MDI
    roundtables in 2021 to gain a greater understanding of the evolving
    needs of these institutions, and how the agency can improve its MDI
    preservation program. The first of these forums occurred on June 30 and
    two more are planned for the end of the September. The agency also has
    plans for a broader MDI symposium after completion of the regional
    roundtables in the fall of 2021.
        By enhancing support for small, low-income, and MDI credit unions,
    enforcing fair lending laws, and advancing initiatives to close the
    wealth gap, the NCUA can address the disparities created by centuries
    of systemic discrimination and exacerbated by the pandemic. The agency
    can also ensure that the cooperative nature of the credit union system
    lives up to its mission of meeting the credit and savings needs of
    consumers, including those of modest means.
    Legislative Requests
        To ensure the NCUA has the necessary tools to protect against
    economic and financial stress, as well as increase opportunities for
    underserved communities, I would like to close by briefly highlighting
    four areas where legislative action would aid the agency in fulfilling
    its statutory mission.
    Vendor Authority
        The NCUA requests the Congress enact legislation to provide the
    agency examination and enforcement authority over third-party vendors,
    including credit union service organizations (CUSOs).
        In 1998, the NCUA was granted some third-party vendor authority to
    address the Y2K changeover, but that authority expired in 2002. Since
    then, the NCUA's Inspector General, the Financial Stability Oversight
    Council, and the Government Accountability Office have all called for
    the restoration of this authority. \17\
    ---------------------------------------------------------------------------
         \17\ Please see the following: U.S. Government Accountability
    Office, GGD-99-91 ``Enhancing Oversight of Internet Banking'' (July
    1999) https://www.gao.gov/assets/ggd-99-91.pdf, Office of Inspector
    General, OIG-20-07, ``Audit of the NCUA's Examination and Oversight
    Authority Over Credit Union Service Organizations and Vendors''
    www.ncua.gov/files/audit-reports/oig-audit-cusos-vendors-2020.pdf.
    Annual Reports of the Financial Stability Oversight Council 2015, 2016,
    2017, 2018, available at https://home.treasury.gov/policy-issues/
    financial-markets-financial-institutions-and-fiscal-service/financial-
    stability-oversight-council/studies-and-reports/annual-reports/fsoc-
    annual-reports-archive. See U.S. Government Accountability Office, GAO-
    04-91, ``Financial Condition Has Improved, but Opportunities Exist To
    Enhance Oversight and Share Insurance Management'' (October 2003)
    https://www.gao.gov/products/gao-04-91.
    ---------------------------------------------------------------------------
        Currently, the NCUA may only examine CUSOs and third-party vendors
    with their permission, and vendors, at times, decline these requests.
    Further, vendors can reject the agency's recommendations to implement
    appropriate corrective actions to mitigate identified risks. For
    example, in the past, several vendors refused to implement the NCUA's
    recommendations to improve network security and safeguard sensitive
    member information due to cost concerns. This stands in stark contrast
    to the authority of our Federal banking agency counterparts.
        Increasingly, activities that are fundamental to the credit union
    mission and operations, such as loan origination, lending services,
    Bank Secrecy Act and anti- money laundering compliance, and financial
    management, are being outsourced to entities that are outside of the
    NCUA's regulatory oversight. In addition, credit unions are
    increasingly using third-party vendors to provide technological
    services, including information security, and mobile and online
    banking. Member data are also being stored on vendors' servers. The
    pandemic, which has accelerated the industry's movement to digital
    services, has only increased credit union reliance on third-party
    vendors.
        While there are many advantages to using these service providers,
    the concentration of credit union services within CUSOs and third-party
    vendors presents safety and soundness and compliance risk for the
    credit union industry. For example, the top five credit union core
    processor vendors provide services to approximately 87 percent of total
    credit union system assets. Additionally, the top five CUSOs provide
    services to nearly 96 percent of total credit union system assets. A
    failure of even one of these vendors represents a significant potential
    risk to the Share Insurance Fund and the potential for losses from
    these organizations are not hypothetical. Between 2008 and 2015, CUSOs
    contributed to more than $300 million in losses to the Share Insurance
    Fund alone. \18\
    ---------------------------------------------------------------------------
         \18\ Office of Inspector General, OIG-20-07, ``Audit of the NCUA's
    Examination and Oversight Authority Over Credit Union Service
    Organizations and Vendors'' www.ncua.gov/files/audit-reports/oig-audit-
    cusos-vendors-2020.pdf (See p. 14).
    ---------------------------------------------------------------------------
        The continued transfer of operations to CUSOs and other third
    parties diminishes the ability of the NCUA to accurately assess all the
    risks present in the credit union system and determine if current CUSO
    or third-party vendor risk-mitigation strategies are adequate. This
    leaves thousands of credit unions, millions of credit union members,
    and billions of dollars in assets potentially exposed to unnecessary
    risks.
        As such, the NCUA requests the comparable authority as our
    counterparts on the Federal Financial Institutions Examination Council
    to examine third-party vendors. I look forward to working with this
    Committee on legislation to close this growing regulatory blind spot.
    National Credit Union Share Insurance Fund Improvements
        Three enduring lessons of the financial crisis in 2008 are the
    critical importance of well-funded deposit insurance systems to
    maintain financial stability during times of stress; the need for
    flexibility to properly prepare for and navigate through future crises;
    and the establishment of appropriate incentives for financial
    institutions to mitigate risk.
        During the financial crisis of 2008-2010, the failure of five large
    corporate credit unions threatened the stability of the credit union
    system and the viability of the Share Insurance Fund. In response,
    Congress approved the creation of the Temporary Corporate Credit Union
    Stabilization Fund in May 2009, to accrue the losses from the failed
    corporate credit unions and assess insured credit unions for such
    losses over time. Without the creation of the Corporate Stabilization
    Fund, these losses would have been borne by the Share Insurance Fund,
    depleting its retained earnings and equity and significantly impairing
    credit unions' one percent contributed capital deposit.
        This episode demonstrated that significant failures or other large
    shocks to the system could quickly deplete the Share Insurance Fund's
    equity levels. Therefore, it is essential the NCUA Board have the
    ability to build up the fund's reserves during periods of economic
    prosperity and financial stability, so that it is more resilient during
    periods of economic and financial stress.
        The Dodd-Frank Wall Street Reform and Consumer Protection Act made
    several changes to the Federal Deposit Insurance Act to increase the
    authority to manage the Deposit Insurance Fund. One provision increased
    the Deposit Insurance Fund's minimum reserve ratio from 1.15 percent to
    1.35 percent. \19\ Another provision removed the 1.50 percent upper
    limit on its designated reserve ratio and eliminated the requirement
    that dividends be provided from the Deposit Insurance Fund when the
    reserve ratio is between 1.35 percent and 1.50 percent. \20\
    ---------------------------------------------------------------------------
         \19\ P.L. No. 111-203, 334(a), 124 Stat. 1376, 1539 (codified at
    12 U.S.C. 1817(b)(3)(B)); see also 75 FR 79286 (Dec. 20, 2010)
    available at https://www.fdic.gov/regulations/laws/federal/2010/
    10finaldec20.pdf.
         \20\ Id.
    ---------------------------------------------------------------------------
        Congress did not make similar statutory changes to the Federal
    Credit Union Act's provisions governing the Share Insurance Fund
    following the financial crisis more than a decade ago. As a result,
    under current law, the NCUA does not have the appropriate flexibility
    necessary to manage the Share Insurance Fund in a manner consistent
    with the growing size and complexity of the credit union industry, as
    well as with broader national financial stability goals.
        To address these concerns, the NCUA seeks changes to the statutory
    provisions contained in the Federal Credit Union Act to enable the NCUA
    Board to proactively manage the Share Insurance Fund. In particular,
    the agency requests the following legislative changes:

        Increase the Share Insurance Fund's capacity by removing
            the 1.50 percent statutory ceiling on its capitalization;

        Remove the limitation on assessing premiums when the equity
            ratio exceeds 1.30 percent, granting the NCUA Board more
            discretion on the assessment of premiums; and

        Institute a risk-based premium system.

        These recommended changes, if enacted, would allow the NCUA Board
    to build, over time, enough retained earnings capacity in the Share
    Insurance Fund to effectively manage a significant insurance loss
    without impairing credit unions' contributed capital deposits in the
    Share Insurance Fund, thus avoiding situations like the one that led to
    the creation of the Corporate Stabilization Fund during the last
    financial crisis. Moreover, these changes would generally bring the
    NCUA's statutory authority over the Share Insurance Fund more in line
    with the statutory authority over the operations of the FDIC's Deposit
    Insurance Fund.
    Central Liquidity Facility
        The CARES Act contained a provision that provided the NCUA with an
    important tool to ensure continued liquidity of the system as it
    responded to the COVID-19 pandemic. This provision, which was
    reauthorized in the Consolidated Appropriations Act, is set to expire
    on December 31, 2021. The NCUA respectfully requests that Congress make
    the enhancements to the NCUA's CLF granted in the CARES Act permanent
    for the stability of the credit union system moving forward.
        Before enactment of the CARES Act, the CLF had the authority to
    borrow provided its obligations did not exceed 12 times the subscribed
    capital stock and surplus of the CLF (that is, the sum of its retained
    earnings and capital stock). The CARES Act temporarily increased the
    multiplier from 12 to 16, meaning that, for every $1 of capital and
    surplus, the CLF can now borrow $16. Because a credit union that joins
    the CLF pays in only half of the subscribed capital stock subscription
    amount, the CLF can now borrow $32 for each new dollar of paid in
    capital it raises.
        Second, the CARES Act temporarily relaxes the requirements on agent
    membership, making such membership more affordable for corporate credit
    unions. An agent member is no longer required to buy capital stock for
    all its member credit unions; it may buy CLF capital stock for a chosen
    subset of the credit unions it serves.
        Third, the CARES Act changed the definition of ``liquidity needs''
    to include the needs of any credit union, not only consumer credit
    unions. This new definition broadens access by allowing the CLF to meet
    the liquidity needs of corporate credit unions.
        Lastly, the CARES Act provides more clarity about the purposes for
    which the NCUA Board can approve liquidity need requests by removing
    the phrase ``the Board shall not approve an application for credit the
    intent of which is to expand credit union portfolios.'' The NCUA Board
    now has more flexibility and discretion to approve applications for CLF
    members that have made a reasonable effort to first utilize primary
    sources of funding. This change increases the transparency and
    efficiency of the loan-approval process by removing doubt about whether
    a credit union's portfolio may expand if it borrows from the CLF to
    meet liquidity needs.
        The growth in the number of CLF's members and its borrowing
    authority, as noted earlier, is a testament to our Nation's credit
    unions coming together in a time of crisis to strengthen the national
    system of cooperative credit. However, it is important that these
    temporary enhancements to the CLF are made permanent.
        We know from experience that any time there are economic
    contractions, we can expect credit unions' liquidity needs to rise.
    And, in a manner similar to firefighters responding to a blaze, the
    NCUA needs to be ready to provide that emergency liquidity quickly
    before the lack of liquidity spreads and undermines the strength and
    stability of the credit union system. Those liquidity needs may spike
    after the current expiration date of these statutory changes, or they
    may increase during a future economic crisis. Permanence would provide
    regulatory certainty for federally insured credit unions during the
    current crisis and bolster the credit union system's ability to respond
    to future emergencies.
    Community Development Revolving Loan Fund
        Finally, demand for CDRLF grants regularly exceeds supply. During
    the COVID-19 pandemic, the communities served by low-income credit
    unions and MDIs are disproportionally affected by the pandemic's
    financial and economic disruptions. As such, I respectfully request
    that the Congress increase CDRLF appropriations to $10 million. With
    more funding, the agency could increase the number of credit unions
    receiving grants and increase the size of the grants it makes,
    deepening the program's impact in underserved communities.
    Conclusion
        In conclusion, the NCUA appreciates the continued support of the
    Senate Committee on Banking, Housing, and Urban Affairs for a strong
    credit union system and its members, as well as the goals, priorities,
    initiatives, and employees of the NCUA.
        Unquestionably, the last 17 months were an unusual period in which
    the many participants within the credit union system rose to numerous
    challenges. In that regard, I would like to express my deep gratitude
    and appreciation to the NCUA's employees and my fellow Board members,
    including former Chairman Rodney E. Hood, who led the agency throughout
    much of the first year of the crisis. The NCUA staff and Board are
    fundamental to the agency's effectiveness. None of us could have
    anticipated the extraordinary circumstances in which we found
    ourselves, yet the NCUA team has exhibited tremendous resilience in
    responding to the pandemic.
        As we continue to smartly and safely navigate through the pandemic-
    induced economic crisis and plan for the future, the NCUA will stay
    focused on addressing the needs and best interests of credit union
    members, while also ensuring the safety and soundness of credit unions
    and protecting the Share Insurance Fund from losses. By staying focused
    on these issues, the agency will ensure that the cooperative credit
    union movement achieves its full potential and address long-standing
    issues of economic equity and justice.
        I look forward to working with all of you in support of these
    endeavors. Thank you.
                                     ______

                    PREPARED STATEMENT OF JELENA MCWILLIAMS
                Chairman, Federal Deposit Insurance Corporation
                                 August 3, 2021
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                      PREPARED STATEMENT OF MICHAEL J. HSU
         Acting Comptroller, Office of the Comptroller of the Currency
                                 August 3, 2021
    Introduction
        Chairman Brown, Ranking Member Toomey, and Members of the
    Committee, I am pleased to provide an update on the activities underway
    at the Office of the Comptroller of the Currency (OCC) to ensure that
    national banks and Federal savings associations operate in a safe,
    sound, and fair manner.
        In May, I was sworn in as Acting Comptroller of the Currency. It is
    a tremendous honor to work with the 3,500 dedicated professionals of
    the OCC. I appreciate the confidence Secretary Yellen has shown in me
    by appointing me to this important post and I look forward to building
    on the agency's long history and rich heritage.
        I am a career public servant and a bank supervisor at my core. My
    experiences at the Securities and Exchange Commission, U.S. Department
    of the Treasury, International Monetary Fund, and the Board of
    Governors of the Federal Reserve System over the past 19 years have
    spanned periods of growth, crisis, reform, and recovery. I have seen
    firsthand the benefits that financial innovation and healthy
    competition can bring, as well as the harm that excessive risk taking,
    ineffective risk management, poor internal controls, and lax compliance
    can inflict on families and businesses, the banking system, and the
    economy. I am proud to have worked alongside some of the smartest and
    most dedicated public servants in the world to repair and restore
    confidence in the financial system so that consumers, businesses, and
    communities can save, borrow, and participate in the economy.
        Promoting fairness and inclusion in banking is a fundamental part
    of the OCC's mission. The events of the past 2 years have compelled me
    and many others to consider whether we are achieving fairness across
    many aspects of society, including banking. I look forward to working
    with Members of the Committee, fellow regulators, community groups,
    bankers, academics, and the staff of the OCC to ensure that the banking
    system works for everybody, especially those who are vulnerable,
    underserved, and unbanked.
        My testimony today focuses on my priorities for the OCC and the
    review of key regulatory standards and pending actions that I initiated
    upon taking office. I also include an update on my thinking about
    community banks.
    Priorities
        As Acting Comptroller, I have a responsibility to address urgent
    problems and issues facing the OCC and the Federal banking system. I
    see four challenges requiring the agency's immediate attention: (1)
    guarding against complacency by banks, (2) reducing inequality in
    banking, (3) adapting to digitalization, and (4) acting on the risks
    that climate change presents to the financial system.
    (1) Guarding Against Complacency by Banks
        I believe the banking system is at risk of becoming complacent.
    Despite a once-in-a-lifetime pandemic, the banking system remains
    healthy. Key measures of financial strength--capital and liquidity
    ratios--are strong. Bank capital levels are well above where they were
    before the Great Recession, and bank liquidity is substantially higher.
        Banks are also profitable. The Federal banking system in the first
    quarter of the year increased profits significantly, driven in large
    part by reserve releases. The average return on equity (ROE) was 14.2
    percent; a year ago it was under 4 percent. However, I am concerned
    that overconfidence leading to complacency is a risk as the economy
    recovers. Sound risk management remains critical. The $10 billion in
    losses related to Archegos, a nonbank ``family office,'' serve as a
    reminder of that.
        Many large banks have ambitious growth plans, a robust merger
    outlook, and a ``risk on'' posture evident from investor calls. Many
    community banks face strategic planning challenges and are compelled to
    grow, organically or through mergers, to achieve economies of scale.
    When done prudently, growth can provide significant benefits to
    consumers, communities, investors, and the U.S. economy. When done in
    an unsafe, unsound, and unfair manner, however, excessive growth can
    cause significant damage. One of our most important tasks as bank
    supervisors is to identify, assess, and act before that is the case.
        My experience has made me sensitive to certain signals.
    Capitulation is one. In a dynamic economy, there is a constantly
    evolving set of products, practices, and clients that banks avoid, or
    limit exposure to, based on their risk appetite. For instance, at the
    height of the pandemic, most banks avoided cryptorelated activities,
    limited their exposures to Special Purpose Acquisition Companies
    (SPACs), and passed on offering buy now, pay later (BNPL) products and
    services.
        Today, things are different. In some cases, banks have done the
    work necessary, developed the risk management capabilities, and put in
    place the appropriate resources to engage prudently with these
    products, practices, and clients. In other cases, because of market
    demand and a fear of missing out on attractive profit opportunities,
    some banks have set aside their initial risk management concerns and
    engaged in these products. Distinguishing between cases that are
    appropriate and those that are not is a task for supervision (as
    distinct from regulation) and a critical component of guarding against
    complacency in the current environment.
        Capital distributions are another watch point. Subsequent to the
    Federal Reserve's 2021 stress testing announced in June, the U.S. bank
    holding companies have announced share buybacks in excess of $13.5
    billion and dividends of $11.3 billion. Additionally, these banks
    holding companies have announced negative provisions year to date in
    excess of $20.5 billion. Some of these banks also announced reinstating
    prior buyback plans or other plans to further distribute capital. The
    optimism reflected in these moves is a positive sign but should be
    tempered with caution. The OCC's spring Semiannual Risk Perspective
    report shows that credit risk remains elevated for some segments.
    Assistance programs and Federal, State, and local stimulus have
    suppressed past-due levels. As these programs expire, and with
    uncertainty from the Delta COVID variant increasing, the banking
    industry is at risk of assuming a ``mission accomplished'' moment. We
    are continuing to closely monitor bank actions to ensure they maintain
    their focus on sound credit risk management practices as well as
    proactively work with borrowers who are exiting forbearance. We expect
    banks to manage their capital prudently in light of the continued
    uncertainty and to prevent avoidable foreclosures by notifying
    borrowers of the options available to them so they can make informed
    decisions for their specific situations.
        Complacency is not a binary state. It often starts with small
    tradeoffs. One example is how banks respond to earnings pressures.
    Despite very low funding costs from low rates, loan growth is flat to
    declining. The CARES Act programs had a profound impact on the business
    of banks, particularly mid-sized and community banks. Commercial and
    industrial loans, driven by PPP lending, expanded 3.1 percent in 2020.
    However, absent the PPP, C&I lending would have shrunk 9.1 percent.
    With such compressed margins, banks of all sizes may be tempted to
    reach for yield, operate beyond their risk appetites, or compromise
    their sound risk management.
        Another example is IT/operational risk and cybersecurity. To manage
    expenses, some banks have postponed investing to update their IT
    systems and have deferred maintenance of existing technology, leading
    to increases in operational and cybersecurity risks. Recent
    cyberincidents have used ransomware in attacks perpetrated against
    organizations such as Colonial Pipeline, Steamship Authority of
    Massachusetts, JBS (the world's largest meatpacker), and the
    Washington, DC, Metropolitan Police Department. Additionally, software
    used by Managed Service Providers (MSP) was leveraged in a mass
    ransomware incident against over 1,000 small business customers over
    the July 4th holiday weekend. The OCC has been coordinating with the
    Federal Reserve and FDIC to conduct cybersecurity reviews at the
    largest banks, and last year issued a paper on Sound Practices to
    Strengthen Operational Resilience, \1\ as well as a Notice of Proposed
    Rulemaking (NPR) on Computer Security Incident Notification. \2\ The
    NPR is intended to ensure that the Federal banking agencies have timely
    notice of cybersecurity incidents at banks and their service providers
    that have the potential to be disruptive to the operations and
    customers of banks. The OCC is reviewing comments on the NPR and
    engaging with the industry to institute best practices in this area.
    ---------------------------------------------------------------------------
         \1\ OCC News Release 2020-144. ``Agencies Release Paper on
    Operational Resilience'', October 30, 2020 (https://occ.gov/news-
    issuances/news-releases/2020/nr-ia-2020-144.html).
         \2\ OCC News Release 2020-175. ``Agencies Propose Requirement for
    Computer Security Incident Notification'', December 18, 2020 (https://
    www.occ.gov/news-issuances/news-releases/2020/nr-ia-2020-175.html).
    ---------------------------------------------------------------------------
        Finally, the OCC has been working on an interagency basis and
    directly with the banks we supervise to prepare for the cessation and
    replacement of the London Interbank Offered Rate (LIBOR). Our efforts
    are focused on ensuring OCC-supervised institutions mitigate any
    potential disruption from the LIBOR transition. Along with the Federal
    Reserve and FDIC, we have instructed banks to cease creating new LIBOR-
    based contracts as quickly as is practicable, and no later than
    December 31, 2021. The OCC expects banks to demonstrate that their
    LIBOR replacement rates are robust and appropriate for their risk
    profile, nature of exposures, risk management capabilities, customer
    and funding needs, and operational capabilities. The agency supports
    the identification of the Secured Overnight Financing Rate (SOFR) as a
    sound replacement rate. OCC examiners will be closely evaluating the
    robustness of other rates that banks look to use.
        Being vigilant and guarding against complacency will help ensure
    that the banking system remains safe, sound, and fair, and can continue
    to support a strong economic recovery.
    (2) Reducing Inequality in Banking
        Reducing inequality in banking must be a national priority. The
    events of the last 2 years have brought our history of financial
    inequality into sharp relief. Research by the Brookings Institute
    illustrates the stark economic inequality faced by communities of
    color. In the average U.S. metropolitan area, homes in neighborhoods
    where the share of the population is 50 percent Black are valued at
    roughly half the price of homes in neighborhoods with no Black
    residents, suggesting that the most important source of generation
    wealth building has been denied this segment of the population. \3\
    ---------------------------------------------------------------------------
         \3\ Andre Perry, Jonathan Rothwell, and David Harshbarger. ``The
    Devaluation of Assets in Black Neighborhoods'', Metropolitan Policy
    Program at Brookings. November 2018.
    ---------------------------------------------------------------------------
        The pandemic has had a disproportionate impact on minority
    households and businesses and threatens to further exacerbate financial
    disparities. The Federal Reserve's Survey of Household Economics and
    Decision making, known as SHED, provides further evidence of the
    historical disparities experienced by communities of color and the
    impact the pandemic has had on the most vulnerable within our Nation.
    The report from that survey released in May showed the gap in financial
    well-being between White adults and Black and Hispanic adults grew by 4
    percentage points since 2017, and more than a third of Black and
    Hispanic adults reported doing worse financially than prior to the
    pandemic. \4\ Black and Hispanic households have been more likely to
    lose income and have trouble making rent or mortgage payments during
    the pandemic, \5\ and minority-owned small businesses have been hit
    harder than White-owned small businesses. \6\ The recovery threatens to
    leave these and rural communities even further behind. \7\
    ---------------------------------------------------------------------------
         \4\ ``Economic Well-Being of U.S. Households in 2020'', Board of
    Governors of the Federal Reserve System. May 2021.
         \5\ Sharon Cornelissen and Alexander Hermann. ``A Triple Pandemic?
    The Economic Impacts of COVID-19 Disproportionately Affect Black and
    Hispanic Households'', Joint Center for Housing Studies. Harvard
    University. July 7, 2020.
         \6\ Andre Dua, Deepa Mahajan, Ingrid Millan, and Shelley Stewart.
    ``COVID-19's Effect on Minority-Owned Small Businesses in the United
    States'', McKinsey. May 27, 2020.
         \7\ Emily Moss, Kriston McIntosh, Wendy Edelberg, and Kristen
    Broady. ``The Black-White Wealth Gap Left Black Households More
    Vulnerable'', Brookings Institute. December 8 2020 (https://
    www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-
    left-black-households-more-vulnerable/).
    ---------------------------------------------------------------------------
        Banks can play an important role in preventing this and closing the
    wealth gap. Historically, many low-income individuals have been treated
    by banks as either credits to be avoided or credits to be exploited.
    The OCC's twin mission of ensuring that banks provide fair access to
    financial services and treat customers fairly speaks to both of these
    challenges. To address this problem, I have focused the agency on
    several priorities.
        First, the OCC is working to strengthen regulations implementing
    the Community Reinvestment Act (CRA). Shortly after I took office, I
    initiated a review of the OCC's May 2020 final rule implementing the
    CRA. That review has concluded. Based on the disproportionate impact of
    the pandemic on vulnerable groups, the comments provided on the Federal
    Reserve's advance notice of proposed rulemaking (ANPR), and the lessons
    we have learned based on the partial implementation of the 2020 rule, I
    decided that the best course of action was to propose rescinding the
    OCC's 2020 final rule and commit to working with the Federal Reserve
    and FDIC to put forward a joint rulemaking that strengthens and
    modernizes the CRA. \8\ Our proposal to rescind the rule will include
    consideration of how to effect an orderly transition to a new rule. I
    am committed to following the Administrative Procedure Act, including
    seeking public comment on any changes so that all voices are heard and
    considered.
    ---------------------------------------------------------------------------
         \8\ OCC News Release 2021-76, ``OCC Statement on Rescinding Its
    2020 Community Reinvestment Act Rule'', July 20, 2021 (https://
    www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html) and
    OCC News Release 2021-77 ``Interagency Statement on Community
    Reinvestment Act Joint Agency Action'', July 20, 2021 (https://
    www.occ.gov/news-issuances/news-releases/2021/nr-ia-2021-77.html)
    ---------------------------------------------------------------------------
        Second, we must prohibit predatory and discriminatory practices
    while promoting financial inclusion and increased access to credit for
    the unbanked and underbanked. Overdraft programs are a good example.
    This Committee recently shined a light on the harms to consumers from
    excessive fees related to overdrafts. \9\ It is unacceptable for bank
    customers to get trapped in a cycle of high cost debt. I look forward
    to seeing greater innovations by banks for programs that can help
    customers navigate unexpected needs for credit.
    ---------------------------------------------------------------------------
         \9\ See, for example, Politico, ``Warren Calls for Overdraft Fee
    Crackdown After Blasting Dimon'', May 26, 2021, (https://
    www.politico.com/news/2021/05/26/warren-overdraft-crackdown-dimon-
    491020).
    ---------------------------------------------------------------------------
        As discussed below, the debates around the OCC's True Lender rule,
    which Congress overturned under the Congressional Review Act in June,
    also highlight the need for greater clarity and potential action in
    these areas.
        Third, the institutions we supervise need to be more diverse and
    inclusive at every level-from their board rooms to their leadership
    teams to their employees. Diversity of background and thought will make
    these institutions stronger, fairer, and more connected to their
    communities. Data would help. Currently, banks voluntarily report
    diversity data to the Federal banking regulators, however less than 20
    percent of banks provide such reports. Increasing participation in such
    reporting would provide greater visibility into the diversity of the
    banking industry and where progress is and isn't being made.
        We also need to call out racial, gender, and other biases and push
    for change where needed. For instance, the OCC has been monitoring
    increasing concerns about racial bias in appraisals, particularly in
    residential lending. We are addressing this issue in several ways,
    including by participating in the Administration's interagency effort
    to address inequity in home appraisals.
        Finally, in addition to regulatory action and supervision, we have
    used our status as a respected and knowledgeable Federal banking agency
    to convene leaders and inspire action toward solving long-standing
    problems within our financial system. Such is the goal of Project
    REACh.
        Origin and Scope of Project REACh
        Just over 1 year ago, in the midst of the Nation's calls for racial
    and economic equality, the OCC conceived and launched the ``Roundtable
    for Economic Access and Change'' (known as Project REACh). \10\ Project
    REACh brings together leaders of banking, civil rights, technology, and
    business organizations to identify and reduce specific barriers that
    prevent underserved and minority communities from full, equal, and fair
    participation in the Nation's economy. Project REACh convenes those
    with the ability to help reduce inherent and structural obstacles so
    underserved populations have the same opportunities to succeed and
    benefit from the Nation's financial system as others. The OCC has
    dedicated staff supporting the project.
    ---------------------------------------------------------------------------
         \10\ OCC News Release 2020-89, ``OCC Announces Project REACh To
    Promote Greater Access to Capital and Credit for Underserved
    Populations'', July 10, 2020, (https://occ.gov/news-issuances/news-
    releases/2020/nr-occ-2020-89.html).
    ---------------------------------------------------------------------------
        Shortly after launch, the participants of Project REACh identified
    several key barriers to financial inclusion and equity for underserved
    populations, including lack of usable credit scores, low rates of home
    ownership, and poor access to capital for minority-owned and small
    businesses. Four national workstreams were formed to address those
    barriers, and each workstream has made considerable progress. At the
    recent 1 year anniversary of Project REACh, I encouraged participants
    to aim even higher and asked the workstream leads to devise
    ``moonshot'' goals for the next 2 years--goals that will motivate and
    inspire action and outcomes that underserved communities will be able
    to feel. \11\ Each workstream is described below.
    ---------------------------------------------------------------------------
         \11\ OCC News Release 2021-75, ``OCC Marks the First Anniversary
    of Project REACh'', July 15, 2021, (https://www.occ.gov/news-issuances/
    news-releases/2021/nr-occ-2021-75.html)
    ---------------------------------------------------------------------------
        Inclusion for credit invisibles: Forty-five million Americans--
    disproportionately poor and minority--lack a credit score and cannot
    obtain mortgages, credit cards, or other lending products.
        Yet many people in this segment demonstrate financial
    responsibility through payment of rent, utilities, and other recurring
    financial obligations. Project REACh participants are evaluating models
    that use alternative data sources, including rent payments, utility
    bill payments, and other direct debit authorizations to demonstrate on-
    time payment history and boost the measurable creditworthiness of many
    Americans. Some of the banks engaged in this workstream are working
    with technology firms to develop a pilot program that would evaluate
    data and boost the creditworthiness of gig economy workers. These can
    help tear down a major barrier to economic access for millions of
    consumers and minority entrepreneurs, who currently rely on their
    personal credit to secure business loans. Today, some large banks are
    in the process of issuing credit cards and other consumer lending
    products to individuals with no credit score. Other progress in this
    area has been reported in the press regarding a collaborative effort to
    test the use of alternative data and underwriting to provide broader
    responsible access to credit for previously underserved people. \12\
    This could potentially provide millions of customers with a path to
    joining the financial mainstream.
    ---------------------------------------------------------------------------
         \12\ Peter Rudegeair and AnnaMaria Andriotis. ``JPMorgan, Others
    Plan To Issue Credit Cards to People With No Credit Scores'', Wall
    Street Journal. May 13, 2021, (https://www.wsj.com/articles/jpmorgan-
    others-plan-to-issue-credit-cards-to-people-with-no-credit-scores-
    11620898206).
    ---------------------------------------------------------------------------
        Revitalization of Minority Depository Institutions (MDIs): The
    number of MDIs has declined over the years. The remaining MDIs are
    critical sources of credit and financial services in their communities,
    but face challenges with accessing capital, adopting new technology,
    and modernizing their infrastructures. Project REACh recognizes
    opportunities for partnerships that deliver sustained financial
    assistance to help MDIs remain a vibrant part of the economic
    landscape. The OCC has expanded relationships between larger banks and
    MDIs through capital investments dedicated to improving the
    technological infrastructure of MDIs so they can offer the same
    benefits to their customers like remote capture and faster electronic
    payment platforms.
        Last fall, we developed a pledge for larger banks to support MDIs.
    \13\ To date, 23 banks have signed the pledge to provide dedicated
    technical assistance to help with talent development for MDI staff, as
    well as diversification of product offerings, and have committed nearly
    half-a-billion dollars in investments to MDIs. Most recently, we
    facilitated a meeting between the
    ---------------------------------------------------------------------------
         \13\ See Project REACh Pledge to Strengthen Minority Depository
    Institutions. OCC (https://www.occ.gov/news-issuances/news-releases/
    2020/nr-occ-2020-166a.pdf).
    ---------------------------------------------------------------------------
        National Bankers Association, which represents minority financial
    institutions, and three of the largest service providers to mid-sized
    and community banks to assess how they can build better business
    relationships with MDIs and offer more affordable, innovative solutions
    to them.
        Increasing home ownership and the inventory of affordable housing:
    Home ownership is one of the primary ways that families build wealth.
    Notably, since the Great Recession, the home ownership gap between
    Blacks and Whites has grown to its highest level in 50 years. \14\ One
    of the biggest barriers to home ownership for minority borrowers is
    that they do not have enough for a downpayment. Working with civil
    rights and community-based groups, several participating banks have
    developed or expanded downpayment assistance programs for minority and
    underserved homebuyers. These programs work in conjunction with
    community groups with counselors approved by the U.S. Department of
    Housing and Urban Development to provide consumers educational support
    for eligibility in these programs.
    ---------------------------------------------------------------------------
         \14\ Urban Institute, ``Breaking Down the Black-White
    Homeownership Gap'', Feb. 21, 2020.
    ---------------------------------------------------------------------------
        To increase the inventory of affordable housing, particularly in
    densely populated markets, Project REACh participants are exploring
    converting bank-owned housing inventories into affordable homes through
    low-cost transfer and renovation loans. This has included proposals to
    repurpose underutilized and surplus commercial real estate into mixed-
    use facilities that would include residential property and provide
    additional homebuying opportunities.
        Expanding access to capital for minority-owned and small
    businesses: Project REACh participants also are engaged in evaluating
    models and strategies that facilitate loan participations and
    consortium lending to minority-owned and small businesses. The effort
    involves developing a consortium model whereby MDIs, community
    development financial institutions (CDFIs), and larger banks
    collaborate to support agricultural businesses and emerging commercial
    enterprises and industries in rural and native communities, such as
    clean energy and broadband.
        To support small businesses more generally, other Project REACh
    participants are identifying the challenges of collateral requirements
    and transitioning entrepreneurs from over-utilization of consumer
    credit towards establishing a commercial credit profile and small
    business identity that meets the qualifications for small business
    trade lines. Participants also are currently developing a comprehensive
    guide for entrepreneurs to point them to the resources they need along
    the business development continuum.
        Finally, a few participating Project REACh banks have created and
    offered virtual procurement showcases for minority-owned enterprises
    and entrepreneurs from underserved communities to build better business
    relationships and provide opportunities for growth and expansion.
        While the four workstreams noted above are national in scope, the
    path to economic inclusion is often local. Needs differ across
    communities and markets. That is why we have created area-specific
    demonstrations of Project REACh where local stakeholders directly voice
    what their needs are and how to overcome their specific and unique
    economic barriers. Regional programs and efforts have expanded to Los
    Angeles, Detroit, Washington, DC, and Dallas.
        OCC's Commitment to Diversity and Inclusion\15\
        As an agency, we also need to do our part to reduce inequality and
    improve our own diversity and inclusion. I am committed to promoting
    these efforts and ensuring that they remain areas of focus for my
    Executive Committee.
    ---------------------------------------------------------------------------
         \15\ Testimony of OMWI Director Joyce Byrd Cofield before the
    House Financial Services Subcommittee on Diversity and Inclusion,
    September 8, 2020, for a detailed explanation of our diversity and
    inclusion programs (https://www.occ.gov/news-issuances/congressional-
    testimony/2020/ct-occ-2020-118-written.pdf).
    ---------------------------------------------------------------------------
        The OCC engages in comprehensive hiring, recruitment, and employee
    retention strategies to support efforts to enhance agency diversity. We
    also provide a wide range of formal and informal career development
    opportunities to provide our employees leadership skills, which are
    crucial for career development.
        Additionally, the OCC has eight employee network groups, \16\ each
    of which serve as a collective voice in communicating workplace
    concerns and providing input to management around diversity and
    inclusion programs within the OCC. These have proven to be a valuable
    means to attract and retain employees from diverse backgrounds and
    create an inclusive work environment.
    ---------------------------------------------------------------------------
         \16\ These employee network groups are the Coalition of African-
    American Regulatory Employees (CARE); Generational Crossroads; HOLA;
    Network of Asian Pacific Americans (NAPA); PRIDE; The Women's Network
    (TWN); Veterans Employee Network (VEN); and the Differently Abled
    Workforce Network (DAWN).
    ---------------------------------------------------------------------------
        Such efforts have made some progress. Over the past 10 years, the
    OCC's total minority workforce has increased, and manager and senior-
    level manager positions held by minorities and women also have
    increased. \17\ While the trend is positive and strides have been made,
    much more needs to be done.
    ---------------------------------------------------------------------------
         \17\ The OCC's minority population has increased from 30 to 36
    percent. Manager positions held by minority and female populations
    increased from 21 to 28 percent and 37 to 39 percent respectively.
    Senior level manager positions held by minority and female employees
    increased from 20 to 25 percent and 27 to 30 percent respectively.
    ---------------------------------------------------------------------------
        For the third consecutive year, the OCC is hosting its High School
    Scholars Internship Program (HSSIP) this summer, a 6-week paid
    internship for nearly 100 minority students from public and charter
    high schools in the District of Columbia. This program provides an
    opportunity for students to explore a variety of career paths at the
    OCC, gain an understanding of the financial services industry, and
    engage in enrichment activities on financial literacy and leadership
    fundamentals. This year's program was expanded and now includes interns
    being placed at the Securities and Exchange Commission and the National
    Credit Union Administration. In addition to our HSSIP program, the OCC
    has provided minority college students paid internship opportunities
    for more than a decade through its National Diversity Internship
    Program.
    (3) Adapting to Digitalization
        The business of banking is changing rapidly and is driven by three
    related trends: (1) the mass adoption of digital technology, (2) the
    rise of new payments capabilities, and (3) technological innovations
    outside of the banking system, including in the digital asset and
    decentralized finance (DeFi) space.
        For me, it is hard not to feel some deja vu. In the 1990s and
    2000s, ``disintermediation'' was the watchword. Securities firms and
    capital markets were disintermediating bank lending and the innovation
    focused on financial engineering (credit default swaps, collateralized
    debt obligations, etc.). While this led to greater efficiency in the
    allocation of credit from savers to borrowers, it also gave rise to a
    large and less regulated shadow banking system, which eventually
    collapsed and contributed to the Great Recession.
        Today, the financial industry is again being disintermediated but
    in a different way. Instead of securities firms and capital markets, it
    is fintechs and technology platforms. Instead of lending, it is
    payments processing. Instead of financial engineering, it is
    application programming interfaces, machine learning, and distributed
    ledgers.
        These trends cannot be stopped. They bring great promise, but also
    risks. Banks and the regulatory community must adapt to them.
        My primary concern is that the regulatory community is taking a
    fragmented agency-by-agency approach to these trends, just as it did in
    the 1990s and 2000s. To the extent there is interagency coordination,
    it tends to be tactical, to deal with a pressing issue, such as
    Facebook's Libra proposal, now called Diem. The key strategic question
    which the regulatory community must answer collectively is: Where
    should we set the regulatory perimeter? To my knowledge, there is
    neither a shared understanding of the answer to that question nor an
    overarching strategy to achieve it.
        At the OCC, the focus has been on encouraging responsible
    innovation and we created an Office of Innovation for this purpose. The
    agency also updated the framework for chartering national banks and
    trust companies and interpreted crypto custody services as part of the
    business of banking, actions which I have asked staff to review.
        My broader concern is that some of these initiatives were not done
    in full coordination with all stakeholders. Nor do they appear to have
    been part of a broader strategy related to the regulatory perimeter. I
    believe addressing these tasks together should be a priority.
        As a first step to increase interagency coordination, the OCC,
    FDIC, and Federal Reserve have established a Digital Assets Sprint
    Initiative (previously dubbed the ``Crypto Sprint'') to provide greater
    clarity and collaboration around digital assets, including
    cryptocurrencies. The initiative is comprised of a series of sprints
    focused on providing an active, coordinated, and timely response to
    questions and issues raised by rapid growth in that space. The first
    sprint focuses on developing a common taxonomy for digital assets and
    agreed upon definitions to ensure a common language and understanding
    of the basic terms and concepts for future discussions. The second
    sprint centers on understanding use cases and risks associated with
    cryptocurrencies and digital assets. The third sprint concentrates on
    potential gaps in regulation and supervision and prioritizing those
    gaps for additional consideration. The fourth sprint will consider the
    policy needs based on the work conducted during the previous sprints.
        On a related note, we have been focused on stablecoins and are
    pleased to join the President's Working Group in evaluating their risks
    and developing policy recommendations. Stablecoins are important
    because cryptocurrency trading and DeFi rely significantly on
    stablecoins to function and to scale. The recent bank-like run on the
    Iron Finance stablecoin serves as a reminder that the stability of
    stablecoins cannot be taken for granted.
        Finally, I would like to share my preliminary perspective on
    licensing and charters. Notwithstanding the strong oversight and
    enhanced provisions the OCC requires, I share the concerns of those who
    maintain that providing charters to fintechs may convey the benefits of
    being part of the Federal banking system without its responsibilities.
    I also agree with those who recognize that refusing to charter fintechs
    may encourage growth of another shadow banking system outside the reach
    of Federal regulators. Put simply, denying a charter will not make the
    problem go away, just as granting a charter will not automatically make
    a fintech safe, sound, and fair. I will expect any fintechs that the
    OCC charters to address the financial needs of consumers and businesses
    in a fair and equitable manner and support the important goal of
    promoting the availability of credit. Recognizing the OCC's unique
    authority to grant charters, we must find a way to consider how
    fintechs and payments platforms fit into the banking system, explore
    the appropriate use of sandboxes to encourage responsible innovation,
    and coordinate with the FDIC, Federal Reserve, and the States to limit
    regulatory arbitrage and races to the bottom.
    (4) Acting on the Risks That Climate Change Presents to the Financial
            System
        As Secretary Yellen has noted, climate change poses an existential
    risk. Multiple Government agencies are charged with addressing the
    environmental and social problems that climate change presents. Our
    focus at the OCC is on understanding how climate change may affect the
    safety and soundness of the institutions we supervise.
        For banking supervisors, the issue is straightforward: banks are
    exposed to physical and transition risks presented by climate change.
    Physical risks include the increased frequency, severity, and
    volatility of extreme weather and long-term shifts in global weather
    patterns and their associated impact on the value of financial assets
    and borrowers' creditworthiness. Transition risks relate to adjustments
    to a low-carbon economy and include associated policy changes from
    Congress and other authorities, technology changes, and litigation.
        The actions that need to be taken are less simple. Banks and
    supervisors are still developing methods for identifying, measuring,
    and managing physical and transition risks. Based on my observations,
    this will not be an easy or swift task.
        Given this, I believe the OCC can help most if it adopts a two-
    pronged approach. First, we must engage with and learn from others. The
    OCC already participates in the Basel Committee on Banking
    Supervision's Task Force on Climate-Related Financial Risks. The group
    has taken stock of member initiatives on climate-related financial
    risks, cataloguing them for member organizations to benefit from one
    another's experience. Building on this, the OCC recently joined the
    Network for Greening the Financial System (NGFS), a group of central
    banks and supervisors from across the globe interested in addressing
    climate change through the sharing of best practices and development of
    climate and environment-related risk management. The more perspectives
    and experiences we can leverage, the better.
        Second, we must support the development and adoption of effective
    climate risk management, especially at large banks. I have asked staff
    to review and evaluate the current range of practices, with an eye
    towards identifying best practices and laggards. In addition, I
    recently announced the appointment of Darrin Benhart as the agency's
    first Climate Change Risk Officer. \18\ The creation of that position
    will significantly expand the agency's capacity to collaborate with
    stakeholders and to promote improvements in climate change risk
    management at banks. Darrin brings a wealth of supervisory, policy, and
    leadership experience to the role. Managing the risks of climate change
    will require a collective effort and Darrin will help us work with all
    stakeholders of the Federal banking system.
    ---------------------------------------------------------------------------
         \18\ OCC News Release 2021-78, ``OCC Announces Climate Change Risk
    Officer, Membership in the NGFS'', July 27, 2021. (https://www.occ.gov/
    news-issuances/news-releases/2021/nr-occ-2021-78.html)
    ---------------------------------------------------------------------------
        The OCC is committed to collaborating with Treasury and other FSOC
    members, as well as market participants and international standard-
    setting bodies to inform our approach to the financial stability
    implications of climate change. As Acting Comptroller, I will work to
    ensure the agency is proactive in this space and acts with the sense of
    urgency.
    Reviews
        Shortly after I started as Acting Comptroller, I directed a review
    of key regulatory standards and matters pending before the agency.
    Those items include the OCC's True Lender rule, the 2020 Community
    Reinvestment Act (CRA) final rule as discussed above, interpretative
    letters and guidance regarding cryptocurrencies and digital assets, and
    pending licensing decisions and standards. For each topic, the review
    is considering a full range of internal and external views, the impact
    of changed circumstances, and a range of alternatives.
        On June 30, President Biden signed legislation to repeal the OCC's
    True Lender rule under the Congressional Review Act. I respect the
    action by Congress to repeal this rule. Predatory lending has no place
    in the Federal banking system. Indeed, promoting fairness is a critical
    part of the OCC's mission. I have instructed staff to gather and
    analyze data on bank-fintech partnerships in order to explore how we
    can differentiate between harmful rent-a-charter arrangements and
    healthy partnerships that expand financial inclusion. That analysis
    will inform the development of options to protect consumers and expand
    financial inclusion.
        I expect the review of charter applications and interpretive
    letters to conclude later this summer, around the same time as the
    Digital Assets Sprint Initiative and PWG effort on stablecoins. In the
    meantime, we are open to processing bank charter applications involving
    institutions that are engaged in traditional lending activities, that
    would obtain or maintain Federal deposit insurance, and whose parent
    companies would be subject to supervision by the Federal Reserve.
    Community Banks
        While much of my initial focus has been on the Federal banking
    system as a whole, I also have been spending time considering issues
    unique to community banks.
        The OCC's community bank supervision program oversees nearly 850
    community institutions with assets under $1 billion. Community banks
    play a crucial role in providing consumers and small businesses with
    essential financial services and a source of credit that is critical to
    economic growth and job expansion. Community banks and their employees
    strengthen our communities through their active participation in the
    civic life of their towns.
        Overseeing the safety and soundness of community banks is central
    to the mission of the OCC. The OCC recognizes the important roles they
    play, and we are committed to fostering a regulatory climate that
    allows well-managed community banks to grow and thrive. We recognize
    community banks do not pose the systemic risk to the Federal banking
    system as larger institutions and should be regulated, supervised, and
    assessed accordingly.
        We are particularly mindful of the burden our examination processes
    can have on smaller institutions. At the OCC, we are incorporating
    successes and lessons of the last 18 months to make community bank
    examinations less disruptive by leveraging technology and blending
    onsite and offsite work, while maintaining our high standards and
    quality of supervision.
        We also want to level the playing field for federally chartered
    institutions and their unregulated and State-chartered competitors. For
    example, while we recognize that the Federal Reserve and FDIC absorb
    their costs of supervising State banks, the total assessments paid by
    OCC-supervised community banks generally exceed the assessments paid by
    their State counterparts. We are currently studying ways to further
    reduce community bank assessments.
        For community banks, appropriate tailoring of regulations and
    supervision is important. I am committed to continuing to identify
    opportunities to tailor our supervisory expectations--for instance,
    with regard to climate change risk management--while maintaining the
    safety and soundness of our community banks.
    Conclusion
        I am committed to ensuring that OCC-supervised banks operate in a
    safe and sound manner, meet the credit needs of their communities,
    treat all customers fairly, and comply with laws and regulations. As we
    work to ensure that the Federal banking system continues to serve as a
    source of strength to the recovering U.S. economy, we will also be
    focused on guarding against complacency, reducing inequality, adapting
    to digitalization, and acting on climate change.
            RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                          FROM TODD M. HARPER

    Q.1. Most of the CDFIs and MDIs in Ohio are credit unions, and
    they are critical to supporting traditionally underserved
    communities. What can the NCUA do to strengthen CDFIs and MDIs
    and ensure that they have the resources they need to invest in
    their communities?

    A.1. One of my top priorities as NCUA Chairman is to preserve
    and grow Minority Depository Institutions and Community
    Development Financial Institution credit unions. Through its
    Minority Depository Institution Preservation Program, the NCUA
    provides support to MDIs through training and resource
    assistance. If the MDI qualifies by holding a low-income
    designation, the Community Development Revolving Loan Fund
    grant and loan program, which includes mentoring grants, is
    available as part of the agency's MDI Mentoring Initiative.
        The MDI Mentoring Initiative connects strong and
    experienced credit unions to provide guidance to small MDI
    credit unions to increase their ability to thrive and serve
    low-income and underserved populations. A mentoring grant may
    be used for eligible expenses associated with facilitating a
    new mentorship relationship. Funding approval is based on the
    small MDI's ability to demonstrate a well-developed plan for
    the mentoring assistance it would receive from a mentor credit
    union.
        Additionally, demand for the Community Development
    Revolving Loan Fund, which funds MDI Mentoring Initiative
    Grants, regularly exceeds the amount of funds available for
    these grants. As an NCUA Board Member and now Chairman, I have
    called for increasing appropriations for the Community
    Development Revolving Loan Fund. With more funding, the agency
    could increase the number of credit unions receiving grants and
    increase the size of the grants, deepening the program's impact
    in communities served by MDIs. The NCUA does not use
    appropriated funds to administer the Community Development
    Revolving Loan Fund. Thus, every penny of appropriations goes
    to eligible low-income credit unions and their member-owners.
        The NCUA also supports more credit unions obtaining the
    CDFI certification by offering a streamlined CDFI certification
    application. Under the streamlined process, the NCUA performs
    an initial analysis on behalf of a potential applicant to
    reduce applicant burden. A low-income-designated credit union
    seeking certification submits its data on loan originations to
    the NCUA. The agency then analyzes the data, the credit union's
    products and services, its target market, and other indicators
    to determine its likelihood for certification. If a credit
    union is qualified to use this process, the NCUA will provide
    it with a streamlined application form, its analysis, and other
    data needed for the application, which the credit union can
    then complete and submit to the CDFI Fund for a certification
    decision.

    Q.2. Ensuring that all financial institutions do not violate
    fair lending, civil rights, and consumer protection laws is a
    key part of making sure our financial system works for
    everyone. What can the NCUA do to strengthen its supervision of
    credit union compliance with consumer protection laws? How is
    consumer compliance risk related to safety and soundness risk?

    A.2. A key priority of mine as an NCUA Board member and now as
    NCUA Chairman has been building up the NCUA's consumer
    compliance program for larger credit unions. The financial
    system only works properly when institutions make services
    available to all on a fair and equitable legal basis.
        In 2020, NCUA examiners completed targeted reviews in all
    risk-focused and small credit union examinations to evaluate
    compliance with various consumer financial protection laws and
    regulations. Through quality control checks, the agency
    observed several issues suggesting that some credit unions may
    not be paying close attention to consumer financial protection.
        In some cases, NCUA's examiners found weaknesses in credit
    unions' management systems, which can lead to compliance
    issues, violations, or harm to consumers if not adequately
    addressed. The agency also observed notable shortfalls in
    complying with the Fair Credit Reporting Act, the Electronic
    Fund Transfer Act, and the Truth in Lending Act.
        If left unchecked, these problems could lower consumer
    credit scores, lead to expensive fees, and increase the cost of
    credit. To address these and other issues, especially as the
    industry grows in complexity, the NCUA must create a dedicated
    program to supervise for compliance with consumer financial
    protection and fair lending laws.
        In doing so, the agency will better protect consumers'
    interests, ensure that the credit union system lives up to its
    commitment to serve members, and provide a more comparable
    level of consumer protection oversight as Federal bank
    regulators, which already conduct regular consumer compliance
    examinations and assign a separate rating for consumer
    compliance outside of the CAMEL score. The NCUA's efforts to
    enhance oversight of consumer financial protection rules will
    not only protect credit union members, but also all credit
    unions from the reputational risks resulting from the missteps
    of others.
        Finally, consumer compliance risk relates to safety and
    soundness when a credit union failing to comply with consumer
    laws and regulations is subject to civil actions resulting in
    significant payouts, especially in class action cases. The
    fallout from negative publicity and reputational harm from such
    actions can lead to a loss of credit union members. Depending
    on the size and financial condition of a credit union, those
    losses could potentially lead to reduced net worth and
    liquidity, a CAMEL composite rating downgrade, and
    administrative actions with the NCUA.

    Q.3. Machine learning--when computers optimize data based on
    relationships they find without the traditional and
    prescriptive algorithm--is one of the key features of
    artificial intelligence. Whether due to the fact that existing
    data has biases against specific groups or machine learning
    establishing new relationships between certain traits and
    certain groups that do not necessarily have causal properties,
    machine learning can perpetuate discrimination and systemic
    racism. You recently issued a joint request for information on
    financial institutions' use of artificial intelligence,
    including machine learning. How does your agency aim to reduce
    the risk of AI perpetuating discrimination and systemic racism
    through machine learning? Will you commit to enforcing fair
    lending, consumer protection, and civil rights laws and
    existing supervisory policies when it comes to the use of AI by
    the institutions you regulate?

    A.3. The NCUA has taken several steps to stay abreast of the
    rapidly advancing use of technology in providing financial
    services. The agency, for example, is in the process of
    standing up a Financial Technology and Access unit and hiring a
    Director. The NCUA also participates in several initiatives
    with our fellow financial services regulators in which we meet
    regularly to discuss new technologies and how they affect
    lenders, borrowers, and regulators.
        Our fair lending staff are aware of the potential for
    lending models powered by artificial intelligence or subject to
    machine learning to lead to discrimination. To some extent,
    examining lending patterns for discrimination or racial
    disparity is the same regardless of whether decisions are made
    solely by humans or by algorithms. Through examinations and
    supervision contacts, our fair lending staff analyze a credit
    union's review of loan applications, approvals, and pricing the
    same regardless of the technology used in decision-making.
    However, because the NCUA lacks the statutory authority to
    directly examine third-party service providers, we must review
    credit union compliance management systems to see whether they
    are capable of using advanced technology properly.
        Additionally, I am fully committed to ensuring that credit
    unions are fully compliant with all fair lending and
    antidiscrimination laws. The Request for Information you
    referenced is a continuation of the NCUA's and other Federal
    regulators' efforts to ensure we understand these complex
    systems. In 2019, the agency, in conjunction with the Board of
    Governors of the Federal Reserve System, the Consumer Financial
    Protection Bureau, the Federal Deposit Insurance Corporation
    and the Office of the Comptroller of the Currency, issued an
    Interagency Statement on the Use of Alternative Data in Credit
    Underwriting. The Statement informed credit unions that while
    using such data, especially in connection with automated
    underwriting systems, can lead to efficiencies and potentially
    expand the availability of credit, credit unions, and other
    financial institutions must continue to comply with fair
    lending laws and other relevant consumer protection laws and
    regulations.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                          FROM TODD M. HARPER

    Q.1. In your written testimony before the Senate Banking
    Committee on August 3, 2021, you stated that ``a credit union's
    field of membership may be tied to communities or activities
    that may be dramatically affected by climate change, like
    farming or fossil fuels. Credit unions serving such populations
    must consider adjusting their fields of membership or altering
    their lending portfolios to remain resilient over the long
    term.'' I am troubled by your suggestion that the NCUA would
    use its power to force or pressure credit unions to stop
    lending to legal businesses, particularly given that regulators
    tried something similar in the past, the Obama-era Operation
    Chokepoint scandal.
        Given the above, how will the NCUA evaluate which credit
    unions meet the criteria you mentioned above and what actions
    does the NCUA plan to take against credit unions that fail to
    ``alter their lending portfolios?''

    A.1. The NCUA is not suggesting credit unions stop lending to
    certain members or business types. The suggestion to adjust
    fields of membership or alter lending portfolios was made to
    help credit unions remain resilient in the face of emerging
    markets and structural changes occurring through the economy.
    The NCUA continues to enhance a forward-looking regulatory and
    supervisory approach.
        Historically, structural market or economic changes have
    threatened credit unions viability, in particular, if a credit
    union is overly concentrated in a segment of the marketplace.
    Examples include Base Realignment and Closure decisions, plant
    closures in heavy industry like steel manufacturing, auto
    manufacturing, and other large manufacturing operations moved
    offshore with minimal notice. Credit unions that showed
    resilience were diversified and expanded their fields of
    membership to reduce dependence on a single organization.
        Likewise, credit unions overly exposed to risk
    concentrations remain the source of some of our greatest losses
    to the National Credit Union Share Insurance Fund. To that end,
    the NCUA aims to identify institutions with concentrations of
    risk through a lack of diversification and work with those
    institutions to ensure they remain resilient whether they be in
    areas subject to increasingly extreme weather events or
    concentrations in matured industry segments.

    Q.2. How will stripping away field of membership rules that
    allow credit unions to focus on the particular needs of their
    communities allow for greater financial inclusion and access to
    credit for consumers?

    A.2. The NCUA is not stripping away field of membership rules.
    The NCUA recommends credit unions whose membership consist
    primarily of persons working in maturing industries understand
    the risks and take steps to diversify their portfolios to
    ensure greater economic resilience over the longer term.
    Diversification is a sound busines practice for a credit union,
    and collectively helps to protect the Share Insurance Fund from
    excessive risks.
        Over the years, the NCUA has a history of working with
    credit unions affected by structural economic changes including
    the garment industry in the Northeast; automotive, steel, and
    other heavy manufacturing along the Midwest and Great Lakes
    region; and nationally with the Base Realignment and Closure
    Commissions to name a few. Expansion of the field of membership
    for these credit unions diversifies and mitigates concentration
    risks.

    Q.3. In your statement for the March 31, 2021, Financial
    Stability Oversight Council (FSOC) climate risk meeting, you
    stated that ``over time, climate change will affect the value
    of collateral like homes and commercial properties, especially
    in areas affected by extreme weather and vehicles as we
    transition to electric and hybrids.''
        Beyond the purchase of flood insurance in instances where
    such insurance is required, are you suggesting that borrowers
    will be unable to obtain financing through a credit union
    without agreeing to progressive environmental covenants, such
    as agreeing to install solar panels?

    A.3. No. Over time, climate change may affect the value of
    collateral, like homes and commercial properties, especially in
    areas affected by extreme weather. My goal is to ensure that
    our regulated institutions remain resilient against all
    material risks, including the risks to collateral held for
    security for a loan that is subject to risks posed by climate
    change and the increase in climate-related natural disasters.
    In our oversight, the NCUA should evaluate whether credit
    unions are addressing those risks through insurance or other
    risk-mitigation techniques.

    Q.4. Further, are you are suggesting loans backed by internal
    combustion engine vehicles would be rated as higher risk when
    compared to a similar loans for electric vehicles?

    A.4. No. The market will drive the value of vehicles. My
    remarks were referring to transition risk and the process of
    adjusting to a low-carbon economy and not to the level of risk
    associated with lending on gas powered automobiles.
        That being said, the market-driven value of collateral
    vehicles will also be affected as some consumers transition
    away from fossil fuels and towards electric cars, hybrid
    automobiles, and ride-sharing services. All the major car
    makers have hybrids, plug-in hybrids, and electric vehicles
    available now and some automakers have announced they will be
    all electric by 2030. Industry analysts are projecting that
    this transition to electric vehicles will reduce the demand for
    gas-powered vehicles. It is prudent for credit unions to be
    cognizant of these changes during strategic planning and risk
    mitigation discussions.

    Q.5. Given the length of an auto loan is 5 to 7 years, does the
    NCUA have evidence of changes in a vehicle's collateral value
    within that time period?

    A.5. While the NCUA monitors the state of the automotive market
    and its effects on credit union auto lending, as a regulator we
    do not monitor for precise changes in collateral value for new
    or used auto loans. We examine credit unions to determine
    whether safe and sound practices are being employed in their
    credit risk management practices. Our interest is in whether a
    credit union has sufficient collateral coverage throughout the
    life of the loan.

    Q.6. In addition to record high prices for new and used
    vehicles, according to Experian, \1\ only 2 percent of all new
    vehicle registrations in the first quarter of 2021 were for
    electric vehicles. If the NCUA were to limit access to credit
    for 98 percent of the auto market in order to achieve the Biden
    administration's climate goals, wouldn't the NCUA be violating
    its mission ``to ensure the Nation's system of cooperative
    credit remain safe and sound''?
    ---------------------------------------------------------------------------
         \1\ See https://www.experian.com/content/dam/noindex/na/us/
    automotive/market-trends/q1-2021-experian-automotive-quarterly-market-
    trends-briefing-final-ext.pdf.

    A.6. The NCUA is not limiting access to credit. In fact, the
    agency's goal is to increase access to save, fair, and
    affordable credit for credit union members. The NCUA examines
    credit unions to determine whether safe-and-sound practices are
    being employed in their credit risk management practices. The
    agency's interest is in whether a credit union has sufficient
    collateral coverage. My statement at the March 31, 2021,
    Financial Stability Oversight Council meeting acknowledges that
    climate change will impact collateral values over time as
    extreme weather events become more frequent across the country.
    It is prudent for credit unions to consider these changes and
    ---------------------------------------------------------------------------
    the potential impacts to their portfolios and business lines.

    Q.7. I understand the NCUA has launched a working group to
    identify climate risk in credit union portfolios. My
    understanding is that zero losses in NCUA's Office of Inspector
    General Material Loss Reviews have been attributed to climate
    change. What empirical data, particularly concerning credit
    union losses, are you relying on to reach a conclusion that
    climate risk should be an integral part of NCUA's oversight
    mission?

    A.7. As the prudential regulator and insurer for credit unions,
    the NCUA must assess ways in which climate change poses
    financial risk to federally insured credit unions and the Share
    Insurance Fund. To understand, monitor and mitigate these
    risks, the NCUA assembled an internal climate financial risk
    working group.
        The NCUA is also participating with the interagency
    Financial Stability Oversight Council's Working Group on
    Climate Risk. Other participating agencies include the U.S.
    Department of the Treasury, Federal Reserve Board, Office of
    the Comptroller of the Currency, Federal Deposit Insurance
    Corporation, Securities and Exchange Commission, Commodity
    Futures Trading Commission, Consumer Financial Protection
    Bureau, Federal Housing Finance Agency, and the National
    Association of Insurance Commissioners.
        The financial sector is undertaking a broad evaluation of
    the financial risks associated with climate change and how to
    best prepare for potential market disruptions associated with
    climate change. Central banks around the world and other global
    financial regulatory agencies are engaged in similar efforts.
        Although the NCUA Office of Inspector General has not
    attributed losses directly to climate change, I am aware of at
    least one credit union that failed because of Hurricane
    Katrina, and there is anecdotal evidence that several others
    failed or were forced to merge when their membership did not
    return to the area in the aftermath of Katrina. The credit
    union that failed cost the Share Insurance Fund more than
    $500,000.
        Climate disasters result in damage to credit unions and, in
    many cases, losses to records and systems. In 2020 alone, there
    were 22 billion-dollar-plus disasters, costing the U.S. economy
    $95 billion. \2\ Further, climate disasters not only impact a
    credit union's membership, but also the officials and employees
    of a credit union who live in the same community and face the
    same risks as their membership. Climate disasters can also
    affect the physical assets of the commercial space in which a
    credit union conducts business.
    ---------------------------------------------------------------------------
         \2\ See, https://www.ncei.noaa.gov/news/national-climate-202012.
    ---------------------------------------------------------------------------
                                    ------

             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                          FROM TODD M. HARPER

    Q.1. At the hearing, you stated that federally chartered credit
    unions are subject to an interest rate ceiling of 18 percent
    for most loans and 28 percent for payday alternative loans. Are
    State-chartered credit unions subject to any such interest rate
    ceilings?

    A.1. Only federally chartered credit unions are subject to the
    loan rate ceiling as set forth in 12 U.S.C. 1757(5)(A)(vi).
    State-chartered credit unions are subject to State usury laws.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                  SENATOR MENENDEZ FROM TODD M. HARPER

    Q.1. My home State of New Jersey and 47 other States have
    passed legislation authorizing some form of cannabis for
    regulated medical or adult-use purposes. But we all know that
    businesses that serve this market have found themselves shut
    out of the banking system and forced to operate exclusively in
    cash, often creating serious public safety risks in our
    communities.
        The SAFE Banking Act, which I cosponsored, would fix this
    problem by allowing banks to provide financial services to
    cannabis businesses. I also introduced the CLAIM Act, which
    would ensure that legal marijuana and related businesses have
    access to comprehensive and affordable insurance coverage.
        Do you believe that financial institutions and marijuana-
    related businesses need legislative clarity on these issues?

    A.1. Yes. Credit unions would benefit from legislative clarity
    on the legality of financial institutions providing banking
    services to cannabis-related businesses.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR VAN HOLLEN FROM TODD M. HARPER

    Q.1. While the U.S. continues to experience a disturbing uptick
    in economic and racial inequality, we must recognize that
    climate change is increasingly a threat multiplier for these
    economic trends and harms. Lower income households and lower
    income communities alike face trouble financing the predisaster
    resilience measures and postdisaster recovery efforts that they
    need to avoid further growth of the wealth gap. Climate-fueled
    disasters disproportionately affect lower income communities
    and households: they can act as tipping points for families and
    individuals on the edge, pushing the marginally homeless into
    homelessness, those living paycheck-to-paycheck into debt and
    financial insecurity, and consuming any small savings that had
    been accumulated for housing, education, or other purposes.
        How have practices like redlining--perhaps used by
    financial institutions you supervise--led to climate
    vulnerabilities for lower income communities and communities of
    color? What are you doing right now to study the effects that
    redlining had and continues to have on modern access to
    financial services, particularly related to climate impacts?

    A.1. I am aware of articles and studies linking specific
    redlined neighborhoods to negative environmental circumstances
    exacerbated by climate change. But, I am unsure how involved
    credit unions were historically, and the NCUA has no
    independent data or research related to this specific issue.
    The NCUA's fair lending examination program, however, does
    examine for redlining and reverse redlining. Specific
    supervisory policies and examination strategies addressing
    climate vulnerability will be considered as we continue to
    study the effects of climate change on credit unions and the
    communities they serve.
        Redlining and reverse redlining are areas of focus for the
    NCUA. The NCUA, for example, is part of the President's
    Property Appraisal and Valuation Equity initiative, otherwise
    known as PAVE, and the agency is also evaluating our
    supervisory policy to understand causal relationships and
    mitigating policies and procedures necessary to address the
    impact of appraisal bias. As the NCUA continues to study
    climate impact on credit unions and the communities they serve,
    the agency will work toward effective supervisory policies to
    address equity in climate resilience.

    Q.2. How can we stop this feedback loop of vulnerability? What
    regulatory tools do you have to make sure lower income
    households and communities have access to the full range of
    financial services they need to contend with the increasing
    impacts of the climate crisis?

    A.2. Regulating credit unions differs from the mandate and work
    of other prudential regulators because credit unions are by
    definition member-owned. In this context, the NCUA is focusing
    on how to incorporate climate considerations into the agency's
    core obligations of maintaining the safety and soundness of
    credit unions, protecting credit union members, and
    safeguarding the National Credit Union Share Insurance Fund.

    Q.3. Flooding and wildfires are two climate-crisis fueled
    disasters that are leading insurers to withdraw from vulnerable
    communities. In California, for instance, a moratorium on
    withdrawal is the only thing protecting some wildfire
    threatened communities from loss of insurance, but prices have
    skyrocketed and coverage limits have fallen.
        What are the consequences of the withdrawal of insurers on
    the availability of credit in affected communities (in terms of
    mortgages, municipal loans, and small business loans)?

    A.3. Withdrawal of some or all hazard insurers from climate
    vulnerable communities will raise the cost of financing and
    limit access to credit. The National Flood Insurance Program is
    required under law if a property financed by a credit union is
    located in a special flood hazard and the community is
    participating. Recent efforts to increase private market
    participation has expanded access to insurance for flood
    vulnerable communities; however, the costs to insure remain a
    challenge for underserved and low-income communities which
    could affect housing affordability.

    Q.4. What are you doing right now to monitor whether banks and
    credit unions are withdrawing credit from vulnerable
    communities in response to the loss of insurance or other
    physical impacts from the climate crisis?

    A.4. As of now, the NCUA has not identified concerns with
    insurability through our credit union examination program. To
    the extent that credit unions may withdraw or expect to
    withdraw credit from certain affected communities because of
    the lack of insurers in those areas, the NCUA will maintain
    awareness of these developments through our examiners, who
    conduct reviews of credit unions, and possibly other channels,
    including credit union trade groups.

    Q.5. High-cost lenders often argue that because of fixed
    underwriting and back office costs, it is not economically
    feasible to provide responsible, small-dollar loan products
    that comply with a 36 percent rate cap. Do you think that's
    true? Why or why not?

    A.5. No, I do not think that is true. Small-dollar short-term
    loans are typically for very short periods, with virtually no
    underwriting of the borrower making them typically riskier than
    traditionally underwritten loans. In addition, setup and
    administrative costs are usually recovered through an
    application or processing fee. The cost is imputed into the
    APR, and with very short-term loans, the imputed APR will
    exceed 36 percent. Herein lies the challenge for small dollar
    lenders. The NCUA Payday Alternative Loan (PALs) program is
    designed to limit charges to member borrowers to cost recovery
    through restricted application fees of no more than $20 and a
    maximum interest rate of 28 percent. Many credit unions are
    successfully managing PALs programs under those terms. In
    addition, many other credit unions make small-dollar short-term
    loans outside of the PALs program and below the agency's
    current 18-percent interest cap.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR CORTEZ MASTO FROM TODD M. HARPER

    Q.1. How are your agencies implementing the significant changes
    occurring under the Anti- Money Laundering and Corporate
    Transparency Act of 2020? Are there any concerns with
    implementation of this law that we should be aware of?

    A.1. The NCUA is meeting weekly with the Financial Crimes
    Enforcement Network (FinCEN) and the other Federal banking
    agencies to discuss implementation of the Anti- Money
    Laundering Act (AMLA) and the Corporate Transparency Act (CTA).
    The NCUA is preparing to implement the various provisions of
    the AMLA and the CTA, as needed, as FinCEN issues guidance on
    the various rules and provisions involved.
        Regarding concerns about implementation, the agency does
    not have any currently. FinCEN is still determining how to
    implement many of the provisions under AMLA and CTA.

    Q.2. How does NCUA's Community Development Revolving Loan Fund
    grant initiative support cybersecurity investments?

    A.2. Cybersecurity has been a top concern--including a
    supervisory priority--for the agency for many years. As such,
    cybersecurity and digital services are consistently included as
    one of the eligible categories for Community Development
    Revolving Loan Fund technical grants. The NCUA annually
    approves the initiatives the agency funds with its CDRLF
    appropriation. Except for 2020, when the Board made the
    strategic decision to target grants to assist credit unions
    with meeting the unique challenges of the COVID-19 pandemic,
    digital services and cybersecurity have been prominent:

        2021: 83 grants totaling $529,517;

        2019: 73 grants totaling $550,612;

        2018: 141 grants totaling $1,251,670;

        2017: 151 grants totaling $1,065,395;

        2016: 112 grants totaling $752,529; and

        2015: 82 grants totaling $735,778 for digital
            product development and 103 grants totaling $732,818
            for cybersecurity and fraud prevention.

        Digital service and cybersecurity grants may be used for a
    variety of projects, including strengthening a credit union's
    financial data systems to better detect and defend against
    cyberattacks, improve outreach, and offer members secure,
    digital financial services.
        Finally, demand for the Community Development Revolving
    Loan Fund, which funds cybersecurity and digital development
    grants, regularly exceeds the amount of funds available for
    these grants. As an NCUA Board Member and now Chairman, I have
    regularly called for increasing appropriations for the
    Community Development Revolving Loan Fund. With more funding,
    the agency could increase the number of credit unions receiving
    grants and increase the size of the grants. The NCUA does not
    use appropriated funds to administer the Community Development
    Revolving Loan Fund. Thus, every penny of appropriations goes
    to eligible low-income credit unions and their member-owners.

    Q.3. How is NCUA examining ways to strengthen cybersecurity
    reviews during regular examinations of credit unions?

    A.3. The NCUA's examination program for information technology
    and cybersecurity leverages two main tools:

        Automated Cybersecurity Examination Tool (ACET):
            The ACET allows the NCUA and credit unions to determine
            the maturity of a credit union's information security
            program. The assessment incorporates appropriate
            cybersecurity standards and practices established for
            financial institutions. The assessment maps each of its
            declarative statements to these best practices found in
            the Federal Financial Institutions Council's IT
            Examination Handbook, regulatory guidance, and leading
            industry standards like the National Institute of
            Standards and Technology's Cybersecurity Framework.

        Information Technology Risk Examination for Credit
            Unions (InTREx-CU): The NCUA is piloting InTREx-CU, an
            enhanced, risk-based approach for conducting IT
            examinations, designed to identify and address IT and
            cybersecurity risks.

        Finally, the NCUA is enhancing the agency's current IT
    examination training program to include how to perform an
    effective review of a credit union's IT security controls.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                         FROM JELENA MCWILLIAMS

    Q.1. The FDIC often issues guidance to help financial
    institutions and facilitate recovery in areas that have been
    affected by severe storms, flooding, tornadoes, or other severe
    weather and natural disasters. How many disaster relief
    financial institution letters has the FDIC issued since 2015?
    Please provide the number of FILs per year, and a breakdown by
    FDIC region and State.

    A.1. Since January 2015, the FDIC has issued 86 Financial
    Institution Letters (FILs) to help financial institutions
    facilitate recovery efforts for areas that were affected by
    severe weather and offered individual assistance through a
    major disaster declaration.
        The table below describes how many FILs were issued per
    year and by FDIC region and State.
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Q.2. Congress recently acted on a bipartisan basis to overturn
    the OCC's ``true lender'' rule, which allowed predatory lenders
    to evade State interest rate laws through ``rent-a-bank''
    schemes. The FDIC supervises most of the banks that are
    facilitating these evasive and usurious loans. While the FDIC
    has said that it disapproves of rent-a-bank schemes, it has
    done nothing to crack down on these predatory practices. Will
    the FDIC take action to protect consumers and prevent banks
    from helping predatory lenders?

    A.2. The FDIC is statutorily empowered to examine FDIC-
    supervised institutions and the banking-related functions and
    operations performed by third parties that partner with banks
    for compliance with all applicable laws and regulations,
    including consumer protection laws and regulations.
        FDIC-supervised institutions and other banking
    organizations are permitted to contract with third parties in
    connection with their product and service offerings. These
    third-party relationships can increase the availability of
    consumer products and improve customers' access to, and the
    functionality of, banking services, such as mobile payments,
    credit-scoring systems, and customer point-of-sale payments.
    Competition, advances in technology, and innovation in the
    banking industry contribute to banking organizations'
    increasing use of third parties to perform business functions,
    deliver support services, and facilitate providing existing and
    new products and services.
        Regardless of whether a banking organization conducts
    activities directly or with a third party, the banking
    organization must conduct the activities in a safe and sound
    manner and in a manner consistent with applicable laws and
    regulations, including those designed to protect consumers. The
    FDIC uses its statutory authority to regularly examine FDIC-
    supervised institutions and the banking-related functions and
    operations performed by third parties. In those examinations,
    the FDIC evaluates--in addition to general safety and soundness
    risks--a third party's compliance with applicable laws and
    regulations, such as consumer protection laws and regulations
    related to fair lending and unfair or deceptive acts or
    practices. The FDIC pursues appropriate corrective measures,
    including enforcement actions, to address violations of law and
    regulations by an FDIC-supervised institution or a third party.
        Specifically regarding interest rates, section 27 of the
    Federal Deposit Insurance Act (FDI Act) permits a State bank to
    ``export'' to out-of-State borrowers the interest rate
    permitted by the State in which the State bank is located, and
    to preempt the contrary laws of such borrowers' States. Enacted
    in 1980, section 27 was patterned after section 85 of the
    National Bank Act, which similarly allows national banks to
    ``export'' the interest rates of their home States to borrowers
    residing in other States. A State may opt out of the coverage
    of section 27 by adopting a law, or certifying that the voters
    of the State have voted in favor of a provision, stating
    explicitly that the State does not want section 27 to apply
    with respect to loans made in that State. Iowa and Puerto Rico
    have opted out of the coverage of section 27 in this manner.
        Over the years, interpretative questions have arisen
    regarding section 27 of the FDI Act. For example, to address
    questions regarding the appropriate State law that should
    govern the interest charges on loans made to customers of a
    State bank chartered in one State (its home State) but that has
    a branch or branches in another State (its host State), the
    FDIC published FDIC General Counsel's Opinion No. 11 in May
    1998. More recently, the FDIC issued a final rule in 2020
    addressing two statutory gaps in section 27 to clarify the law
    governing the interest rates that State banks may charge. In
    these and other actions, the FDIC has sought to interpret
    section 27 in a manner consistent with the goals of section 27
    as outlined by Congress.

    Q.3. Machine learning--when computers optimize data based on
    relationships they find without the traditional and
    prescriptive algorithm--is one of the key features of
    artificial intelligence. Whether due to the fact that existing
    data has biases against specific groups or machine learning
    establishing new relationships between certain traits and
    certain groups that do not necessarily have causal properties,
    machine learning can perpetuate discrimination and systemic
    racism. You recently issued a joint request for information on
    financial institutions' use of artificial intelligence,
    including machine learning. How does your agency aim to reduce
    the risk of AI perpetuating discrimination and systemic racism
    through machine learning? Will you commit to enforcing fair
    lending, consumer protection, and civil rights laws and
    existing supervisory policies when it comes to the use of AI by
    the institutions you regulate?

    A.3. Artificial intelligence (AI) has the potential to augment
    financial institutions' decision making, expand access to
    credit, and enhance services available to a broad range of
    consumers and businesses if properly managed. The appropriate
    use of AI could also expand inclusion in our financial system
    by improving access to credit and lowering the cost of credit.
    However, the FDIC expects institutions to manage potential
    risks resulting from the use of AI, including by reviewing and
    testing data and decision-making methodologies for continued
    compliance with fair lending and other consumer protection
    requirements. The recent joint request for information
    regarding the use of AI \1\ sought commenters' views regarding
    the topic of fair lending. Our staff is reviewing the comments
    submitted in response to the request for information. The FDIC
    is committed to examining FDIC supervised institutions for
    compliance with fair lending, consumer protection, and all
    other applicable laws and regulations, and to taking
    appropriate supervisory action to rectify any violations.
    ---------------------------------------------------------------------------
         \1\ Board of Governors of the Federal Reserve System (Federal
    Reserve), Bureau of Consumer Financial Protection, FDIC, National
    Credit Union Administration, and Office of the Comptroller of the
    Currency (OCC), Request for Information and Comment on Financial
    Institutions' Use of Artificial Intelligence, including Machine
    Learning, 86 FR 16837 (March 31, 2021), available at https://
    www.govinfo.gov/content/pkg/FR-2021-03-31/pdf/2021-06607.pdf.
    ---------------------------------------------------------------------------
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                         FROM JELENA MCWILLIAMS

    Q.1. Recently, the Biden administration suggested that
    excessive bank consolidation has made the markets for financial
    services uncompetitive. This seems to ignore that there are
    over 5,000 banks serving consumers across the country, in
    addition to countless nonbank financial institutions competing
    with banks to offer financial services. It also seems designed
    to distract from the much-needed conversation about how to make
    this already-competitive market even more robust by encouraging
    de novo bank formation.
        It has been further suggested by some, including at the
    August 3, 2021, Senate Banking Committee hearing at which you
    testified, that the lack of formal bank merger denials by the
    financial regulators means that the regulators ``rubber stamp''
    bank merger applications and contribute to supposed market
    concentration. However, this ignores the unfortunate practice
    of financial regulators who historically have commonly delayed,
    restarted, or otherwise complicated the bank merger process
    rather than conclude the review and issue a firm denial, so
    that applicants instead are left to give up and simply withdraw
    or not refile their applications. Unfortunately, this problem
    has often plagued de novo applications as well. When
    considering any application from regulated entities, it should
    be uncontroversial to expect regulators to be thorough and
    careful, and simultaneously transparent, consistent, and fair.
        Your important efforts to improve processes at the FDIC,
    and to provide transparency and regulatory certainty, have had
    significant positive effects on the banking system including
    the sharp increase in de novo banks under your leadership. It
    should be a goal across the Government to replicate that
    success and help make the market for financial services even
    more robust and competitive, not by preventing banks from
    adapting, but by encouraging new banks to enter the market.
        How can the financial regulators improve processes, such as
    reviewing applications for mergers and for de novo bank
    charters?
        How has the FDIC reviewed merger applications under your
    leadership?
        Do historical merger application denial rates present an
    accurate picture of the number of mergers sought compared with
    the number approved?
        What processes and policies at the FDIC have been most
    helpful in encouraging de novo bank formation?
        What other regulatory or legislative changes could help
    encourage de novo bank applications?

    A.1. Encouraging bank formation has been one of my key
    priorities at the FDIC. \1\ Since I was sworn in as Chairman on
    June 5, 2018, aided by the improvements in the de novo
    application process summarized below, the FDIC has approved 45
    de novo banks, compared to just eight de novo banks approved
    between January 1, 2011, and June 5, 2018. \2\ Because an
    overly burdensome application process can deter prospective
    banks from applying or completing an application, in 2018 we
    began a series of initiatives to improve the de novo
    application process. At a high-level, these efforts included:
    outreach and requests for comments on process improvement;
    measures to enhance transparency of the FDIC's evaluation
    criteria and expected timeframes; and enhancing the timeliness
    and clarity of the FDIC's feedback to applicants.
    ---------------------------------------------------------------------------
         \1\ See Jelena McWilliams, ``We Can Do Better on De Novos'', Am.
    Banker (Dec. 6, 2018), available at https://www.americanbanker.com/
    opinion/fdic-chairman-jelena-mcwilliams-we-can-do-better-on-de-novos.
         \2\ Number of approvals does not include shelf charters (new banks
    formed to acquire a failed bank or another bank), conversions (which
    includes credit unions converting into banks, or new banks that are
    spin-offs of existing banks), or new subsidiaries of a banking
    organization that already has an affiliated bank.
    ---------------------------------------------------------------------------
        More specifically, to better understand the perspective of
    applicants, we conducted multiple FDIC-hosted roundtables
    across the country to gather feedback from stakeholders about
    what was working well and what needed improvement in the de
    novo application process. We also sought input through a
    request for information to gather additional ideas for
    enhancements, specifically asking for comment regarding the
    ``transparency and efficiency of the process, and any
    unnecessary burdens that have become a part of the process.''
    \3\ The FDIC also established a voluntary draft application
    filing process to allow applicants an opportunity to receive
    feedback on applications before formally filing the
    application. \4\ Staff developed a Handbook for Organizers and
    published it on the FDIC website to serve as a resource for
    interested parties. \5\
    ---------------------------------------------------------------------------
         \3\ See FDIC, ``Request for Information on the FDIC's Deposit
    Insurance Application Process'', 83 FR 63,868 (Dec. 12, 2018),
    available at https://www.govinfo.gov/content/pkg/FR-2018-12-12/pdf/
    2018-26811.pdf.
         \4\ See FDIC, ``Review Process for Draft Deposit Insurance
    Proposals'', FIL-82-2018 (Dec. 6, 2018), available at https://
    www.fdic.gov/news/financial-institution-letters/2018/fil18082.html.
         \5\ See FDIC, ``Applying for Deposit Insurance: A Handbook for
    Organizers of De Novo Institutions'' (Dec. 2019), available at https://
    www.fdic.gov/regulations/applications/depositinsurance/handbook.pdf.
    ---------------------------------------------------------------------------
        The FDIC also updated policies, procedures, and delegations
    of authority to improve the application process. The FDIC
    further improved transparency into the applications process by
    making public the procedural manuals that guide FDIC reviews of
    applications, updating and publishing internal processing
    timeframe goals, and making performance metrics public to
    enable interested parties to monitor FDIC performance against
    the established timeframes. \6\ This allows interested parties
    to understand the application process and see final
    dispositions. Publication of internal processing timeframe
    goals and actual performance also supports the internal
    monitoring of pending applications at all levels of the FDIC.
    ---------------------------------------------------------------------------
         \6\ See FDIC, ``Bank Application Resources'', available at https:/
    /www.fdic.gov/regulations/applications/resources/.
    ---------------------------------------------------------------------------
        Importantly, FDIC officials at Regional Offices and the
    Washington Office are accessible to interested parties to
    respond to questions and discuss specific applications and the
    applications process generally. These discussions are helpful
    for both applicants and regulators as well because they are a
    useful tool to avoid misunderstandings and allow the parties to
    address complex or unusual aspects of a proposal early in the
    process.
        Although we are encouraged by the increase in de novo
    activity thus far, we continue to explore whether there are
    additional steps that could further encourage de novo banks.
    Like any dynamic industry, the banking sector needs new
    startups entering the marketplace to bring forth new capital,
    talent, ideas, and ways to serve customers, and we will
    continue to work to encourage de novo bank formation.
        Merger applications are evaluated against the statutory
    factors contained in section 18(c) of the FDI Act. Staff
    thoroughly analyzes these factors and approves or recommends
    approval if the application satisfies the statutory factors. As
    with de novo applications, the FDIC has increased the
    transparency related to the processing of merger applications
    by posting performance metrics related to its processing of
    merger applications to the FDIC's public website. This allows
    the public to monitor FDIC performance against the established
    internal timeframe goals. Additionally, the FDIC issues its
    policies, procedures, and delegations relevant to merger
    applications publicly to serve as a resource to the industry
    and other interested parties.
        Historical merger application denial rates do not present
    an accurate picture of the number of mergers sought compared
    with the number approved. Applicants usually choose to withdraw
    an application before receiving a public denial. However,
    applications may be withdrawn for any number of reasons, so a
    withdrawn application does not necessarily indicate a possible
    denial. The FDIC's Trust Through Transparency webpage \7\
    includes a running 12 months of data related to merger
    application disposition, including approvals, denials,
    withdrawals, and returns, as well as a search tool that may be
    used to review disposition of an individual merger application.
    FDIC annual reports also include application data.
    ---------------------------------------------------------------------------
         \7\ See FDIC, ``Trust Through Transparency'', available at https:/
    /www.fdic.gov/about/initiatives/trust-throughtransparency/.
    ---------------------------------------------------------------------------
                                    ------

             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                         FROM JELENA MCWILLIAMS

    Q.1. The Federal Reserve, OCC, and FDIC in January 2021
    published a joint notice of proposed rulemaking (NPR) on
    cybersecurity that would require a bank to notify its regulator
    of cybersecurity breaches within 36 hours. The NPR would also
    require a bank's service providers to notify the bank if it
    experiences a cybersecurity breach. As a result of
    cyberbreaches at banks, personal and account information of
    customers have been compromised. Please describe the importance
    of notification and disclosure obligations for cybersecurity
    incidents.

    A.1. The FDIC recognizes that a severe computer security
    incident may impair the ability of a banking organization to
    provide financial services to its customers for an extended
    period of time, or even threaten its viability. There is,
    however, no Federal requirement that banking organizations
    promptly notify regulators of such incidents unless such an
    incident involves unauthorized access to sensitive customer
    information.
        It is important to the banking regulators' missions that
    they be notified of significant computer-security incidents.
    For example, prompt notice of incidents may alert the banking
    regulators to systemic issues. In addition, an incident may so
    severely impact a banking organization that it can no longer
    serve its customers, creating a risk of failure. In these
    cases, the sooner the agencies know of the event, the better
    they can assess the extent of the threat and take appropriate
    action.
        The FDIC, the Federal Reserve, and OCC received 35 comment
    letters in response to the proposed rulemaking. FDIC staff have
    reviewed the comment letters received and are collaborating
    with the other agencies on issuing a final rule.

    Q.2. The Federal Reserve, OCC, and FDIC are in the process of
    implementing revisions to their capital rules. The Basel
    Committee's revised methodology for calculating operational
    risk would, if implemented, replace a dynamic and risk-
    sensitive measure with a more static approach. According to the
    Basel Committee's analysis, this change could result in a
    meaningful reduction in the aggregate operational risk capital
    requirements for the largest, most internationally active U.S.
    banks. Can you provide assurances that the forthcoming
    revisions to the agencies' capital rules will not result in the
    largest banks holding less capital to protect against
    operational risk, including cybersecurity breaches?

    A.2. The global financial crisis showed the importance of our
    largest banks appropriately managing, measuring, and
    maintaining sufficient capital to protect against operational
    risk. However, the global financial crisis also highlighted the
    difficulties that were associated with the existing operational
    risk model in appropriately measuring operational risk
    exposure. As a result, the Basel Committee revised its
    methodology for calculating operational risk to remove reliance
    on banks' internal models and, instead, to use a standardized
    approach. This move by the Basel Committee was intended to
    replace the internal-model driven approach which proved to be
    problematic during the financial crisis.
        According to the Basel Committee analysis released in
    December 2020, the revised methodology for calculating
    operational risk would reduce the operational risk capital
    requirement for banks in some jurisdictions while increasing
    required capital for others. The Federal banking agencies are
    currently considering the implementation of the Basel III
    reforms in the United States and are reviewing the changes to
    the operational risk framework, including how to implement the
    new standardized approach for operational risk for the largest,
    most internationally active banks so that these banks have
    sufficient capital to protect against potential operational
    risk losses. The agencies will seek public comment on any
    proposal to implement the Basel III reforms, including the
    standardized approach for operational risk, and will carefully
    consider your concerns on this matter as well as those received
    from the public.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
               SENATOR VAN HOLLEN FROM JELENA MCWILLIAMS

    Q.1. Since the 2008 recession, many bank branches nationwide
    have shut their doors, with 6,008 banks closing between 2008
    and 2016, over 6 percent of branches nationally. On the State
    level, Maryland had the third highest proportional losses, with
    246 bank branches closing, representing a 13.8 percent loss.
    Nationally, 22 percent of adults are underbanked or unbanked,
    with lower income individuals or those in racial or ethnic
    minority groups being more likely to fall into this category.
        Putting the issue of de novo bank charter applications
    aside, can the rules under the Community Reinvestment Act be
    modernized in ways that reverse this troubling trend of banking
    desserts in places like Baltimore? What can we do to stem the
    tide of these branch closures?

    A.1. Examiners review and evaluate the accessibility and
    effectiveness of retail services of large banks under Community
    Reinvestment Act (CRA) Performance Evaluation rules. This
    review includes a review of the impact of any branch closures
    on such access. Specifically, examiners evaluate the
    accessibility of an institution's branch offices and
    alternative delivery systems and their effectiveness when
    delivering retail banking services within low- and moderate-
    income (LMI) geographies and to LMI individuals.
        In addition, and as indicated in our July 2021 interagency
    statement, \1\ the FDIC is committed to working with the OCC
    and Federal Reserve to issue jointly a single rule to
    strengthen and modernize regulations implementing the CRA. We
    will be guided in this rulemaking by the CRA's fundamental
    purpose of encouraging banks to help meet the credit needs of
    their communities, including LMI neighborhoods, consistent with
    safe and sound banking practices.
    ---------------------------------------------------------------------------
         \1\ See FDIC, ``Interagency Statement on Community Reinvestment
    Act Joint Agency Action'', (July 20, 2021), available at fdic.gov/news/
    press-releases/2021/pr21067.html.

    Q.2. While the U.S. continues to experience a disturbing uptick
    in economic and racial inequality, we must recognize that
    climate change is increasingly a threat multiplier for these
    economic trends and harms. Lower income households and lower
    income communities alike face trouble financing the predisaster
    resilience measures and postdisaster recovery efforts that they
    need to avoid further growth of the wealth gap. Climate-fueled
    disasters disproportionately affect lower income communities
    and households: they can act as tipping points for families and
    individuals on the edge, pushing the marginally homeless into
    homelessness, those living paycheck-to-paycheck into debt and
    financial insecurity, and consuming any small savings that had
    been accumulated for housing, education, or other purposes.
        How have practices like redlining--perhaps used by
    financial institutions you supervise--led to climate
    vulnerabilities for lower income communities and communities of
    color? What are you doing right now to study the effects that
    redlining had and continues to have on modern access to
    financial services, particularly related to climate impacts?

    A.2. For a number of reasons, many communities have lived in
    areas where financial services have been costly or difficult to
    obtain. We have prioritized trying to improve access to
    financial services in these communities; we describe these
    efforts in Question 3 immediately below. The FDIC has also
    conducted research on the effects of climate events
    (hurricanes, drought, and wildfires) on local economic and
    banking conditions. We recognize that some LMI customers live
    in areas more vulnerable to the effects of climate change. As
    part of our research, we have analyzed economic conditions in
    LMI areas before and after climate events, and this is an area
    we continue to explore.
        The FDIC remains steadfast in its commitment to increasing
    access to financial services for traditionally underserved
    communities, and we are taking a number of novel actions to
    tackle these pressing issues, as described in further detail
    below.

    Q.3. How can we stop this feedback loop of vulnerability? What
    regulatory tools do you have to make sure lower income
    households and communities have access to the full range of
    financial services they need to contend with the increasing
    impacts of the climate crisis?

    A.3. Financial inclusion is integral to the FDIC's mission of
    maintaining stability and public confidence in the Nation's
    financial system and is integral to ensuring that lower income
    households have access to the full range of mainstream
    financial services. It is a top organizational priority for the
    agency and is the focus of a specific corporate performance
    goal. The FDIC is taking a multipronged approach to tackle the
    issue of closing the gap in financial inclusion.

    Conducting Targeted Public Awareness Campaigns

        In early April 2021, the FDIC launched a public awareness
    campaign to inform consumers about the benefits of developing a
    relationship with a bank in two metropolitan areas, Atlanta-
    Sandy Springs-Alpharetta, Georgia, and Houston-The Woodlands-
    Sugar Land, Texas, to join the banking system. \2\ As part of a
    pilot, FDIC ran streaming audio, digital display, mobile video
    ads, and streaming television ads in these communities between
    early April and early July. Having a basic checking account can
    be an important first step to becoming part of the financial
    fabric of this country and we are pleased that an increasing
    number of banks are offering low-cost and no-fee accounts that
    work for people with limited means.
    ---------------------------------------------------------------------------
         \2\ See FDIC, ``#GetBanked'' (April 5, 2021), available at
    www.fdic.gov/GetBanked.
    ---------------------------------------------------------------------------
        The campaign aimed to help achieve the goal of ``promoting
    the availability, access, and use of affordable, insured
    transaction and savings accounts,'' as outlined in the FDIC
    Economic Inclusion Strategic Plan. \3\ The FDIC's public
    awareness campaign is part of a multiyear initiative, which
    includes efforts to encourage more banks to offer low-cost and
    no-fee accounts, to promote stronger local networks that can
    connect people to the banks, and to lead communications
    initiatives.
    ---------------------------------------------------------------------------
         \3\ This plan promotes the widespread use of affordable and
    sustainable products and services from insured depository institutions
    that help consumers and entrepreneurs meet their financial goals. See
    FDIC, ``Economic Inclusion Strategic Plan'' (June 2019), available at
    https://www.fdic.gov/consumers/community/documents/eisp.pdf.
    ---------------------------------------------------------------------------

    Collaborating With Minority Depository Institutions (MDIs) and
            Community Development Financial Institutions (CDFIs)

        We know that community banks, including MDIs and CDFIs, are
    often the financial lifeblood of many communities and can play
    an outsized role in closing the gap in financial inclusion.
    Adopting new technologies that meet the demands of consumers
    can be especially difficult for these banks, however, which
    lack the economies of scale of larger institutions. Therefore,
    the FDIC is pursuing an array of solutions to foster innovation
    at community banks to increase their ability to serve their
    communities and to compete effectively in the modern era. For
    example, this month the FDIC announced the launch of the
    Mission-Driven Bank Fund, a capital investment vehicle being
    developed by the FDIC that will channel private sector
    investments to support MDIs and CDFIs. \4\ Microsoft and Truist
    Financial Corporation are anchor investors and Discovery, Inc.
    is a founding investor, bringing the combined initial
    commitment to $120 million, with additional investments
    expected. The fund will support MDIs and CDFIs to build size,
    scale, and capacity that will in turn allow them: to provide
    affordable financial products and services to individuals and
    businesses; to stimulate economic and community development;
    and to build opportunity and prosperity. The FDIC will not
    manage the fund, contribute capital to the fund, or be involved
    in the fund's investment decisions.
    ---------------------------------------------------------------------------
         \4\ See FDIC, ``FDIC Launches Mission-Driven Bank Fund'' (Sept.
    16, 2021), available at https://www.fdic.gov/news/press-releases/2021/
    pr21086.html; FDIC, ``FDIC Seeks Financial Advisor To Establish New
    `Mission-Driven Bank Fund' To Support FDIC-Insured Minority Banks and
    Community Development Financial Institutions'' (Nov. 18, 2020),
    available at https://www.fdic.gov/news/press-releases/2020/
    pr20125.html.
    ---------------------------------------------------------------------------
        Bringing together stakeholders through the inclusion tech
    sprint The FDIC's Office of Innovation, FDITECH, announced a
    tech sprint in June that explores new technologies and
    techniques that would help expand the capabilities of community
    banks to meet the needs of unbanked households. \5\ FDITECH is
    using tech sprints as a novel tool to tackle the gap in
    financial inclusion. A tech sprints brings together a diverse
    set of stakeholders in collaborative settings for a short
    period of time to intensely focus on specific challenges with
    implications for the FDIC or its regulated entities.
    ---------------------------------------------------------------------------
         \5\ See FDIC, ``FDITECH Launches Tech Sprint To Reach More
    Unbanked People'', FIL-43-2021 (June 16, 2021), available at https://
    www.fdic.gov/news/financial-institution-letters/2021/fil21043.html.
    ---------------------------------------------------------------------------
        This tech sprint was designed as a public challenge to
    banks, nonprofits, private companies, and others to help us
    reach that ``last mile'' of unbanked Americans. Specifically,
    the FDIC has asked participants to answer the following
    question: ``Which data, tools, and other resources could help
    community banks meet the needs of the unbanked in a cost-
    effective manner, and how might the impact of this work be
    measured?'' Eight teams came together for a demonstration day
    on September 10, 2021; three winning teams were selected. \6\
    ---------------------------------------------------------------------------
         \6\ See FDIC, ``FDITECH Selects Eight Teams in Tech Sprint To
    Reach the Unbanked'' (Aug. 12, 2021), available at https://
    www.fdic.gov/news/press-releases/2021/pr21071.html; FDIC, ``FDITECH
    Selects Three Winning Teams in Tech Sprint To Reach the Unbanked''
    (Sept. 13, 2021), available at https://www.fdic.gov/news/pressreleases/
    2021/pr21085.html.
    ---------------------------------------------------------------------------

    Harnessing Innovative Solutions

        The FDIC is using its authorities to better understand
    technological advancements occurring in the market place that
    have the potential to expand access to financial services while
    ensuring compliance with applicable consumer protection and
    privacy laws. For example, the FDIC, along with the other
    Federal bank regulatory agencies, issued a statement
    encouraging the responsible use of alternative data in credit
    underwriting. \7\ Using alternative data can improve the speed
    and accuracy of credit decisions and help firms evaluate the
    creditworthiness of consumers who might not otherwise have
    access to credit in the mainstream credit system.
    ---------------------------------------------------------------------------
         \7\ See ``Federal Regulators Issue Joint Statement on the Use of
    Alternative Data in Credit Underwriting'' (Dec. 3, 2019), available at
    https://www.fdic.gov/news/news/press/2019/pr19117.html.
    ---------------------------------------------------------------------------
        Additionally, in March of this year, we issued an
    interagency request for information on financial institutions'
    use of AI, including machine learning. \8\ AI has the potential
    to expand credit access in various ways, including through
    innovative use of data and more accurate, lower-cost
    underwriting.
    ---------------------------------------------------------------------------
         \8\ See ``Request for Information and Comment on Financial
    Institutions' Use of Artificial Intelligence, Including Machine
    Learning5'', 86 FR 16837 (Mar. 31, 2021), available at https://
    www.govinfo.gov/content/pkg/FR-2021-03-31/pdf/2021-06607.pdf.

    Q.4. Flooding and wildfires are two climate-crisis fueled
    disasters that are leading insurers to withdraw from vulnerable
    communities. In California, for instance, a moratorium on
    withdrawal is the only thing protecting some wildfire
    threatened communities from loss of insurance, but prices have
    skyrocketed and coverage limits have fallen.
        What are the consequences of the withdrawal of insurers on
    the availability of credit in affected communities (in terms of
    mortgages, municipal loans, and small business loans)?

    A.4. Insurance and Government-support programs contribute to
    the resilience of community banks and borrowers affected by
    climate events. In some of the most common and hardest-hit
    areas, including the States of Florida with hurricanes and
    California with wildfires, States have provided supplementary
    insurance programs. Increases in the cost of insurance in areas
    that have been negatively affected by climate events could
    erode property values, among other consequences.

    Q.5. What are you doing right now to monitor whether banks and
    credit unions are withdrawing credit from vulnerable
    communities in response to the loss of insurance or other
    physical impacts from the climate crisis?

    A.5. Analyzing whether banks are withdrawing credit from
    communities as a result of climate events is difficult. Call
    Reports do not capture the geographic location of collateral or
    borrowers, and therefore our research (see response to Question
    2 above) thus far has not included an analysis of loans before
    and after the climate events.
        Furthermore, attributing causation to changes in credit for
    specific populations or communities can be particularly
    challenging. Nonetheless, the FDIC has not seen evidence that
    banks are withdrawing credit from communities in response to
    the loss of insurance or other physical impacts from the
    climate crisis in a widespread or systematic way. Still,
    monitoring, improving, and preserving access to credit and
    banking services for vulnerable communities remains a top
    priority for the FDIC, and we are continually challenging
    ourselves to do more to address the gap in financial inclusion.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR CORTEZ MASTO FROM JELENA MCWILLIAMS

    Q.1. How are your agencies implementing the significant changes
    occurring under the Anti- Money Laundering and Corporate
    Transparency Act of 2020? Are there any concerns with
    implementation of this law that we should be aware of?

    A.1. The agencies are coordinating with each other and with the
    Financial Crimes Enforcement Network (FinCEN) to implement the
    changes required by the Anti- Money Laundering Act of 2020 (AML
    Act), including the Corporate Transparency Act.
        In June, FinCEN published the first Anti- Money Laundering/
    Countering the Financing of Terrorism (AML/CFT) Priorities, in
    consultation with the FDIC, other Federal functional
    regulators, the Attorney General, relevant State financial
    regulators, and relevant national security agencies. \1\
    Concurrent with FinCEN's publication of the AML/CFT Priorities,
    the FDIC, along with other Federal banking agencies and FinCEN,
    issued a statement (1) affirming banks are not required to
    incorporate the AML/CFT Priorities into their risk-based Bank
    Secrecy Act (BSA) compliance programs until the effective date
    of the final revised regulations requiring such an adjustment;
    and (2) confirming examiners will not examine banks for the
    incorporation of the AML/CFT Priorities into their risk-based
    BSA compliance programs until the effective date of final
    revised regulations. \2\
    ---------------------------------------------------------------------------
         \1\ See FinCEN, ``Anti- Money Laundering and Countering the
    Financing of Terrorism National Priorities'', (June 30, 2021),
    available at https://www.fincen.gov/sites/default/files/shared/AML-
    CFT%20Priorities%20(June%2030%2C%202021).pdf.
         \2\ See FDIC, ``Interagency Statement on the Issuance of the Anti-
    Money Laundering/Countering the Financing of Terrorism National
    Priorities'', (June 30, 2021), available at https://www.fdic.gov/news/
    financial-Institutionletters/2021/fil21046.html.
    ---------------------------------------------------------------------------
        Relevant to the AML/CFT Priorities, the FDIC, in
    coordination with the other Federal banking agencies, plans to
    amend its BSA compliance program rule conforming to FinCEN's
    AML compliance program rule changes. The FDIC also plans to
    amend its suspicious activity reporting regulation consistent
    with changes to be implemented by FinCEN, as applicable.
        The FDIC has provided examiner and staff training regarding
    AML Act requirements. The FDIC has also provided an information
    session at a meeting of its Advisory Committee on Community
    Banking addressing AML/CFT Priorities, BSA/AML compliance
    program rule amendments, and changes to beneficial ownership
    data collection. The FDIC will continue to provide training to
    examiners and relevant staff, and to bankers regarding the
    implementation of the AML Act requirements.
        The AML Act created two new Bank Secrecy Act Advisory Group
    (BSAAG) subcommittees. An FDIC deputy director is serving as a
    cochair of the BSAAG Subcommittee on Information Security and
    Confidentiality. The FDIC also has representation on the BSAAG
    Subcommittee on Innovation and Technology and has volunteered
    to colead a FinTech Symposium working group. These
    subcommittees will sunset 5 years after AML Act enactment, but
    may be renewed for 1 year periods after sunset.
        The FDIC, along with other Federal Financial Institutions
    Examination Council (FFIEC) agencies, and in close
    collaboration with FinCEN, will update the FFIEC Bank Secrecy
    Act/Anti- Money Laundering Examination Manual for changes
    resulting from implementation of the AML Act.

    Q.2. Please detail agency oversight regarding rent-a-bank
    schemes that permit lenders to avoid State usury caps?

    A.2. The FDIC is statutorily empowered to examine FDIC-
    supervised institutions and the banking-related functions and
    operations performed by third parties that partner with banks
    for compliance with all applicable laws and regulations,
    including consumer protection laws and regulations.
        FDIC-supervised institutions and other banking
    organizations are permitted to contract with third parties in
    connection with their product and service offerings. These
    third-party relationships can increase the availability of
    consumer products and improve customers' access to, and the
    functionality of, banking services, such as mobile payments,
    credit-scoring systems, and customer point-of-sale payments.
    Competition, advances in technology, and innovation in the
    banking industry contribute to banking organizations'
    increasing use of third parties to perform business functions,
    deliver support services, and facilitate providing existing and
    new products and services.
        Regardless of whether a banking organization conducts
    activities directly or with a third party, the banking
    organization must conduct the activities in a safe and sound
    manner and in a manner consistent with applicable laws and
    regulations, including those designed to protect consumers. The
    FDIC uses its statutory authority to regularly examine FDIC-
    supervised institutions and the banking-related functions and
    operations performed by third parties. In those examinations,
    the FDIC evaluates--in addition to general safety and soundness
    risks--a third party's compliance with applicable laws and
    regulations, such as consumer protection laws and regulations
    related to fair lending and unfair or deceptive acts or
    practices. The FDIC pursues appropriate corrective measures,
    including enforcement actions, to address violations of law and
    regulations by an FDIC-supervised institution or a third party.
        Specifically regarding interest rates, section 27 of FDI
    Act permits a State bank to ``export'' to out-of-State
    borrowers the interest rate permitted by the State in which the
    State bank is located, and to preempt the contrary laws of such
    borrowers' States. Enacted in 1980, section 27 was patterned
    after section 85 of the National Bank Act, which similarly
    allows national banks to ``export'' the interest rates of their
    home States to borrowers residing in other States. A State may
    opt out of the coverage of section 27 by adopting a law, or
    certifying that the voters of the State have voted in favor of
    a provision, stating explicitly that the State does not want
    section 27 to apply with respect to loans made in that State.
    Iowa and Puerto Rico have opted out of the coverage of section
    27 in this manner.
        Over the years, interpretative questions have arisen
    regarding section 27 of the FDI Act. For example, to address
    questions regarding the appropriate State law that should
    govern the interest charges on loans made to customers of a
    State bank chartered in one State (its home State) but that has
    a branch or branches in another State (its host State), the
    FDIC published FDIC General Counsel's Opinion No. 11 in May
    1998. More recently, the FDIC issued a final rule in 2020
    addressing two statutory gaps in section 27 to clarify the law
    governing the interest rates that State banks may charge. In
    these and other actions, the FDIC has sought to interpret
    section 27 in a manner consistent with the goals of section 27
    as outlined by Congress.

    Q.3. Please detail agency oversight of businesses making loans
    to franchise businesses. \3\ Does the agency see high rates of
    defaults in franchise businesses, including loans guaranteed by
    the SBA?
    ---------------------------------------------------------------------------
         \3\ Cortez Masto, Catherine. ``Strategies To Improve the Franchise
    Model: Preventing Unfair and Deceptive Franchise Practices'' April
    2021. https://www.cortezmasto.senate.gov/imo/media/doc/
    Franchise%20Report%20from%20the%20Office%20of%20Senator%20Cortez%20Masto
    .pdf

    A.3. The FDIC takes a risk-focused approach to examinations in
    which we evaluate the safety and soundness of the financial
    institution by assessing its risk management systems, financial
    condition, and compliance with applicable laws and regulations,
    while focusing on the bank's highest risks. The examination
    process seeks to strike an appropriate balance between
    evaluating the condition of an institution at a certain point
    in time and evaluating the soundness of the institution's
    processes for managing risk in all phases of the economic
    cycle. By evaluating an institution's risk management
    practices, examiners look beyond the financial condition of a
    bank at a point in time, to how well it can respond to changing
    market conditions given its particular risk profile. The FDIC
    expects institutions to have appropriate risk management
    programs relative to their size, complexity, business model,
    and risk profile to help bank management identify, measure,
    monitor, and control risk. This approach applies regardless of
    whether the institution engages in franchisee or Small Business
    Administration-related lending activities.
        As part of the examination process and based on the risk
    identified during examination planning, examiners will perform
    an appropriate level of transaction testing to verify the
    adequacy of and adherence to internal policies and procedures;
    the accuracy and completeness of management and financial
    reporting; the adequacy and reliability of internal control
    systems; the effectiveness of the bank's risk management
    processes and practices; and compliance with applicable laws
    and regulations.
        As this process applies to the loan portfolio, examiners
    will assess aggregate performance metrics and select a sample
    of loans that is of sufficient size, scope, and variety to
    enable examiners to reach reliable conclusions about the
    overall management of individual loans, loan portfolio
    segments, and the loan portfolio as a whole for the items
    discussed above relative to the bank's lending function. The
    loan sample will be tailored based on an institution's business
    model, complexity, risk profile, and lending activities. The
    results of the loan review inform assessments of an
    institution's asset quality, underwriting practices, and credit
    risk management in order to support Report of Examination
    findings and assigned ratings under the Uniform Financial
    Institution Rating System.
        When assessing a bank's loan portfolio, examiners will
    encourage institutions to work with borrowers who may be unable
    to meet their contractual payment obligations. The FDIC will
    not /criticize an institution that mitigates credit risk
    through prudent actions consistent with safe and sound
    practices as such proactive measures are generally in the best
    interests of institutions, their borrowers, and the economy.
        Regarding franchise business loans, identification of the
    level of defaults in franchise businesses, including those
    guaranteed by the Small Business Administration, would be
    observed on individual examinations through the process
    outlined above. However, the FDIC does not collect, store, or
    aggregate this data on an industrywide basis based on
    information obtained during examinations. Nor is such
    information collected in the Consolidated Reports of Condition
    and Income (Call Reports) with that granularity. The Call
    Reports include line items for past due and nonaccrual loans
    for a bank's aggregate commercial and industrial loan portfolio
    and for past due and nonaccrual loans that are wholly or
    partially guaranteed by the U.S. Government for the entire loan
    portfolio, with no additional granularity for either line item.
                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN BROWN
                          FROM MICHAEL J. HSU

    Q.1. The largest banks, though holding a disproportionate share
    of all bank assets, account for less than one percent of the
    enforcement actions. Overall, since 2011, the number of
    enforcement actions has declined to below the average during
    2000-2007. A plurality of enforcement actions are issued by the
    FDIC, followed by the Federal Reserve System. While some of
    this can be accounted for by difference in volume of
    institutions supervised, this is also indicative of a pattern
    in which big banks are not being held accountable to the full
    extent necessary to ensure the overall health of our financial
    system. As the primary regulator for a significant number of
    large banks, the OCC has a responsibility to ensure
    systemically important institutions are held accountable for
    harms committed. The OCC enjoys a substantial amount of
    flexibility in its application of enforcement actions and more
    must be done to protect against harmful actions committed by
    large financial institutions. What measures are being taken to
    strengthen enforcement actions against big bank misconduct?

    A.1. Under my leadership at the Office of the Comptroller of
    the Currency (OCC), I am taking a strong approach to using our
    statutory authority to take enforcement actions against the
    institutions we supervise. The OCC takes enforcement actions
    against banks for violations of laws, regulations, final agency
    orders, conditions imposed in writing, or written conditions;
    or deficient practices, including those that are unsafe or
    unsound. The OCC also takes enforcement actions against current
    or former institution-affiliated parties (IAP) in response to
    violations of laws, regulations, final agency orders,
    conditions imposed in writing, or written agreements; unsafe or
    unsound practices; or breaches of fiduciary duty.
        The OCC's enforcement actions are based on full
    consideration of all the specific facts and circumstances of
    each case, in accordance with our Enforcement policies. \1\ The
    OCC has taken significant enforcement actions against several
    large bank institutions it supervises. \2\
    ---------------------------------------------------------------------------
         \1\ See Policies and Procedures Manual 5000-7, ``Civil Money
    Penalties'' (Nov. 13, 2018); Policies and Procedures Manual 5310-3,
    ``Bank Enforcement Actions and Related Matters'' (Nov. 13, 2018); and
    Policies and Procedures Manual 5310-13, ``Institution-Affiliated Party
    Enforcement Actions and Related Matters'' (Nov. 13, 2018).
         \2\ In Appendix A herein, we have provided data pertaining to the
    number of large bank institution enforcement actions from 2012 to
    present. During this period nearly all banks in the large bank
    portfolio had some form of an enforcement action against them and were
    assessed over $5 billion in CMPs.
    ---------------------------------------------------------------------------
        Most recently, on September 9, 2021, the OCC assessed a
    $250 million civil money penalty (CMP) against Wells Fargo Bank
    based on the bank's unsafe or unsound practices related to
    deficiencies in its home lending loss mitigation program and a
    cease and desist order (C&D) based on the bank's failure to
    establish an effective home lending loss mitigation program. In
    addition to requiring the bank to correct its deficiencies and
    establish an effective loss mitigation program, the C&D imposes
    activity restrictions on the bank. The C&D restricts the bank,
    while in effect, from acquiring certain third-party residential
    mortgage servicing.
        In 2018, the OCC issued a $500 million CMP and C&D against
    Wells Fargo. The OCC also issued a $400 million CMP and C&D
    against Citibank in 2020. Each of these actions were broad in
    scope, addressing critical risk management and governance
    deficiencies identified through examination work.
        The OCC also recently secured significant individual
    enforcement actions against senior level executives formerly at
    Wells Fargo. This includes a prohibition order and $17.5
    million CMP against former CEO John Stumpf, a $3.5 million CMP
    and a Personal Cease and Desist Order (PC&D) against former
    General Counsel James Strother, a $1.25 million CMP and PC&D
    against former Chief Risk Officer Mike Loughlin, and a $2.25
    million CMP and PC&D against former Chief Administrative
    Officer Hope Hardison, among others. \3\
    ---------------------------------------------------------------------------
         \3\ A hearing on the Notice of Charges the OCC filed against three
    additional Wells Fargo former senior officers commenced on September 3,
    2021. The Notice cites the individual's respective roles in the Bank's
    widespread, systemic, and long-standing sales practices misconduct
    problem. Carrie Tolstedt's (former head of the Community Bank) case
    remains stayed.

    Q.2. Machine learning--when computers optimize data based on
    relationships they find without the traditional and
    prescriptive algorithm--is one of the key features of
    artificial intelligence. Whether due to the fact that existing
    data has biases against specific groups or machine learning
    establishing new relationships between certain traits and
    certain groups that do not necessarily have causal properties,
    machine learning can perpetuate discrimination and systemic
    racism. You recently issued a joint request for information on
    financial institutions' use of artificial intelligence,
    including machine learning. How does your agency aim to reduce
    the risk of AI perpetuating discrimination and systemic racism
    through machine learning? Will you commit to enforcing fair
    lending, consumer protection, and civil rights laws and
    existing supervisory policies when it comes to the use of AI by
    ---------------------------------------------------------------------------
    the institutions you regulate?

    A.2. The OCC is committed to enforcing all applicable fair
    lending, consumer protection, and civil rights laws and
    existing supervisory policies for supervised financial
    institutions. This includes ensuring that banks' use of
    artificial intelligence (AI) supported tools and services
    doesn't perpetuate discrimination and systemic racism and
    provides for consumer protections.
        While existing supervisory policies and guidance may not
    explicitly refer to AI, they are principles-based and are
    relevant in instances where AI approaches may be used. The OCC
    conducts full-scope examinations of every supervised financial
    institution on a 12- to 18-month cycle, including ongoing
    supervision at the largest banks, based on the bank's
    characteristics, such as asset size and financial condition. As
    part of every supervisory cycle, the OCC issues a report of
    examination that includes a consumer compliance assessment. The
    OCC has fair lending examination procedures that discuss how to
    assess potential fair lending issues in mortgage lending, such
    as overt discrimination or disparate treatment in the
    underwriting, pricing, steering, and marketing of mortgage
    loans, among other things. The OCC has also developed agency-
    specific consumer compliance examination procedures to assess
    lenders' compliance with the Fair Credit Reporting Act, Fair
    Housing Act, and Equal Credit Opportunity Act. Additionally,
    the OCC has supervisory guidance on model risk management,
    which outlines a framework to address risks that stem from
    using tools such as credit scoring models for underwriting.
        In addition, the OCC is currently reviewing the comments
    received from the joint request for information on financial
    institutions' use of artificial intelligence, including machine
    learning, that was issued by the banking agencies. The request
    for information included questions addressing compliance and
    consumer protection topics related to the use of AI. Once the
    comment review is complete, the OCC will determine any next
    steps that should be taken in coordination with the other
    regulatory agencies.

    Q.3. The OCC often issues guidance to help financial
    institutions and facilitate recovery in areas that have been
    affected by severe storms, flooding, tornadoes, or other severe
    weather and natural disasters. How many disaster relief
    guidance letters has the OCC issued since 2015? Please provide
    the number per year, and a breakdown by OCC region and State.

    A.3. The following chart summarizes the OCC's issuances since
    2015 to notify banks of natural disasters and to facilitate
    recovery in these areas. Given the increase in number and
    severity of natural disasters due to climate change, the OCC
    recognizes the importance of these issuances for banks and
    their customers. The OCC's Natural Disaster Resource Center \4\
    gathers on a single page these issuances and other helpful
    links for banks and their customers.
    ---------------------------------------------------------------------------
         \4\ Refer to https://www.occ.gov/topics/supervision-and-
    examination/bank-operations/major-disaster-news-center/occs-major-
    disaster-news-center.html.
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        For more localized weather emergencies, OCC staff are in
    contact with banks as the emergencies occur. The local OCC
    field office gathers information about the localized emergency
    and stays in close contact with the bank(s) to monitor the
    situation and assist with any needed recovery efforts. The
    field office also informs the relevant OCC district office or
    OCC Headquarters, as appropriate, of the emergency and stays
    informed of the status of operations of the affected bank(s).
    Separately, while banks are not required to tell the OCC if
    they close for emergencies, most do. When they do, staff report
    the information to the respective senior managers and OCC
    Headquarters, as appropriate.
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                    ------

            RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                          FROM MICHAEL J. HSU

    Q.1. At the August 3, 2021, Senate Banking Committee hearing,
    in response to questions, you indicated that the OCC's
    regulatory review of the three conditional approvals the agency
    issued to national trust banks that provide digital asset
    custody services was part of a holistic review to ensure
    decision making was ``in coordination with other agencies.''
        What statutory authority do other executive branch and
    independent agencies have to approve or deny OCC charters?

    A.1. The OCC has sole authority to approve or deny OCC
    charters. As appropriate, the OCC frequently coordinates with
    the other Federal banking agencies--the FDIC and the Federal
    Reserve--particularly when the OCC applicant also has separate
    applications pending with the other agencies connected to its
    OCC application.
        For example, an applicant may have a charter application
    pending with the OCC, as well as an application pending with
    the Federal Reserve for its parent company to become a holding
    company, and an application pending with the FDIC for Federal
    deposit insurance. Even in the case of an application that is
    only sent to the OCC--such as an application for an uninsured
    national trust bank--the OCC may coordinate with other agencies
    to help promote uniform standards, particularly to the extent
    that the application presents novel issues or activities.

    Q.2. Do you believe the OCC has the authority to revoke a
    charter if the institution meets all of the agency's own
    criteria for approval?

    A.2. The OCC approves charter applications in two steps: (1)
    preliminary conditional approval and (2) final approval.
        Preliminary conditional approval is granted if the factors
    the OCC considers in reviewing charter applications are
    favorable; this approval permits the organizers to proceed with
    organizing the bank.
        Receipt of final approval (and the issuance of a charter)
    from the OCC is contingent upon the completion of all key
    phases of organizing the bank as determined by the OCC. If all
    requirements are met, the OCC will grant final approval. Prior
    to final approval, there is no charter to revoke because the
    charter has not yet been issued.
        The OCC has the statutory authority to revoke a charter in
    certain circumstances, such as knowing violation of the
    National Bank Act (12 U.S.C. 93(a)) or violations of the
    Federal Reserve Act (12 U.S.C. 501a).

    Q.3. If so, on what basis?

    A.3. See the response to Question 2 above.

    Q.4. You mentioned that the OCC was coordinating with other
    agencies to look at digital assets as a whole, even though the
    OCC is entrusted with statutory responsibility for issuing
    national trust charters. Are other financial regulators
    involved in the OCC's retroactive review of these three
    national trust charter approvals?

    A.4. The OCC is currently coordinating with other agencies to
    consider the role of digital assets in the banking system as a
    whole. The OCC retains the sole authority to act on the pending
    national trust charter proposals.

    Q.5. At the August 3, 2021, Senate Banking Committee hearing,
    when asked about the relationship between banking and climate
    change, you stated that the OCC's focus currently is on risk
    management, and that ``climate change presents risk management
    challenges, and that banks need to prepare for both the
    physical and transition risks related to climate change.''
    However, previously, you had stated that regulators will
    ``eventually'' have to incorporate climate-related risks into
    bank capital rules. This statement raises concerns that you are
    prejudging the outcome of the agency's analysis of climate-
    related risks. As the OCC and other bank regulators analyze
    this issue, do you commit to follow the data, no matter where
    it leads?

    A.5. As I noted in my testimony and oral statement, our focus
    at the OCC is on understanding how the financial risks
    associated with climate change may affect the safety and
    soundness of the institutions we supervise. Banks, especially
    large banks, are exposed to both physical and transition risks
    from climate change.
        The OCC is working to ensure banks establish sound risk
    management frameworks around climate risk. This will include
    the gathering and assessment of data to measure, monitor and
    control risks. Similar to other risks, the gathering of
    information about the level of risk is a key component that
    will drive bank management and regulators actions to address
    the risk. Capital requirements are just one of the many tools
    bank boards of directors and regulators can use to ensure risks
    stay within established risk appetite limits.
        Identifying, measuring, and managing risks from climate
    change is challenging and the OCC is in the early phases of
    engaging with the industry on climate risk data. The OCC is
    committed to working with our institutions, other regulators
    and industry groups such as the Basel Committee on Banking
    Supervision's Task Force on Climate-Related Financial Risks and
    the Network for Greening the Financial System to analyze
    climate-related data. We plan to use this information to
    support the development and adoption of effective risk based
    climate change risk management practices at banks.

    Q.6. Since leaving the Federal Reserve for the OCC, you have
    appointed a number of other former Federal Reserve officials to
    senior positions at the OCC. A number of former Federal Reserve
    officials now work within the Treasury Department as well.
    Interagency regulatory experience can be beneficial and can
    help to smooth interagency coordination. However, it is also
    important to guard against an independent agency exerting undue
    influence elsewhere in the Federal Government, especially in
    another independent agency.
        This would undermine both agencies' independence and raise
    concerns about the ability of unelected Federal Reserve
    officials to exert power beyond their own agency's
    jurisdictional boundaries. What steps have you taken to ensure
    that the OCC remains independent from the Federal Reserve?

    A.6. I believe it is vital to maintain the OCC's independence.
    I have valued independent thinking over my entire career, which
    has included positions at the Securities and Exchange
    Commission, U.S. Department of the Treasury, International
    Monetary Fund, and the Board of Governors of the Federal
    Reserve System. Although my current responsibilities
    necessarily involve interactions with staff from other Federal
    agencies, my focus as Acting Comptroller is on promoting the
    OCC's mission to oversee the safety and soundness of the
    national banking system and safeguarding our place as an
    independent agency. The 3,500 members of OCC's career staff
    provide valuable advice on critical decisions, and I intend to
    promote an environment where staff feels comfortable sharing
    different views.

    Q.7. In May 2021 you announced a ``review of key regulatory
    standards and matters pending before the agency,'' including
    (1) the Community Reinvestment Act, (2) interpretive letters
    and guidance regarding cryptocurrencies and digital assets, and
    (3) pending licensing decisions. The review was expected to
    conclude this summer. However, the OCC has disclosed virtually
    no details about the review to date, and not made any
    announcement regarding the results of this review or next
    steps, other than announcing it will work with the other
    regulators on a Community Reinvestment Act rule.
        What is the scope of this regulatory review?

    A.7. As Acting Comptroller I asked for regulatory reviews to
    include the 2020 Community Reinvestment Act (CRA) final rule,
    interpretative letters addressing novel cryptocurrency, digital
    asset, and distributed ledger related activities, the
    interpretive letter addressing trust banks and fiduciary
    activities, and pending licensing applications that involve
    such activities. The review is considering a full range of
    internal and external views, the impact of changed
    circumstances, and a range of alternatives. The scope of each
    review is described below.
        CRA: On September 8, 2021, the OCC issued a proposal to
    rescind its 2020 Community Reinvestment Act Rule and replace it
    with rules adopted jointly by the Federal banking agencies in
    1995, as amended. This action facilitates the ongoing
    interagency work to modernize the CRA regulatory framework and
    promote consistency for all insured depository institutions.
        OCC Interpretive Letters: The OCC is reviewing the
    activities authorized in recent OCC Interpretive Letters,
    including Interpretive Letter 1170, addressing the authority to
    provide cryptocurrency custody services on behalf of customers;
    Interpretive Letter 1172, addressing the authority to accept
    and hold deposits that serve as reserves for stablecoins that
    are backed on a 1:1 basis by fiat currency and held in hosted
    wallets; and Interpretive Letter 1174, addressing the use of
    distributed ledger technology and stablecoins to facilitate
    bank-permissible payments activities. The OCC is also reviewing
    OCC Interpretive Letter 1176 addressing the authority of the
    OCC to charter national banks within the scope of 12 U.S.C.
    27(a) and the standards the OCC considers when assessing
    whether an activity is conducted in a fiduciary capacity under
    12 U.S.C. 92a.
        Pending Licensing Applications: The OCC has paused the
    consideration of several pending charter applications. The OCC
    expects that once it has completed its review of cryptocurrency
    and distributed ledger activities, as well as its review of
    permissible activities for national trust banks, it will be
    able to act on the pending applications.

    Q.8. What is its expected output?

    A.8. The expected output of this review includes the proposed
    rescission of the 2020 CRA rule, actions on the pending
    licensing applications, and reconsideration of the scope of the
    interpretive letters. Specifically:
        CRA: The OCC issued a proposal to rescind and replace the
    CRA rule on September 8, 2021, and has been coordinating with
    the Federal Reserve and the FDIC on a joint proposal to
    strengthen and modernize the CRA regulatory framework.
        Interpretive Letters: The OCC will consider a variety of
    options regarding the interpretive letters and permitted
    activities.
        Pending Licensing Applications: The OCC expects that once
    it has completed its review of cryptocurrency and distributed
    ledger activities, as well as its review of permissible
    activities for national trust banks, it will be able to act on
    the pending applications.

    Q.9. What is the expected timing for its conclusion?

    A.9. The OCC expects to conclude its review of these matters as
    follows:
        CRA: After considering any public comments on the CRA
    rescission proposal, the OCC would aim to issue a final rule in
    December or early in 2022. The OCC, Federal Reserve, and FDIC
    plan to issue a joint proposed rule that would strengthen and
    modernize the CRA regulatory framework next year.
        Licensing Applications/Interpretive Letters: The OCC
    anticipates that the review of pending licensing applications
    and the Interpretive Letters, including any decision to
    recalibrate the scope of the interpretive letters, will likely
    conclude in 2021.
                                    ------

             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                          FROM MICHAEL J. HSU

    Q.1. The Federal Reserve, OCC, and FDIC in January 2021
    published a joint notice of proposed rulemaking (NPR) on
    cybersecurity that would require a bank to notify its regulator
    of cybersecurity breaches within 36 hours. The NPR would also
    require a bank's service providers to notify the bank if it
    experiences a cybersecurity breach. As a result of
    cyberbreaches at banks, personal and account information of
    customers have been compromised. Please describe the importance
    of notification and disclosure obligations for cybersecurity
    incidents.

    A.1. The OCC views the receipt of timely notification of
    significant cybersecurity events as an important component of
    the oversight of the safety and soundness of the Federal
    banking system. The OCC and banking regulatory counterparts
    have long-standing guidelines, dating back to 2005, addressing
    response programs for unauthorized access to customer
    information in alignment with the Gramm-Leach-Bliley Act
    (GLBA). A key component of such response programs includes
    notification to the primary Federal regulator and customers
    impacted. However, the growing sophistication of cyberthreats
    and increasing targeting of critical infrastructure has
    highlighted risks to financial institutions and banking
    customers beyond the breach of sensitive customer information.
        As part of the proposed Computer-Security Incident
    Notification Requirements for Banking Organizations and Their
    Bank Service Providers, the OCC and other Federal banking
    agencies note that it is important that the primary Federal
    regulator also be notified as soon as possible of a significant
    computer-security incident that could jeopardize the viability
    of the operations of an individual banking organization, result
    in customers being unable to access their deposit and other
    accounts, or impact the stability of the financial sector.
    Timely knowledge and response to notification incidents
    affecting banking organizations is important to the agencies'
    missions for a variety of reasons, including the following:

        the receipt of notification-incident information
            may give the agencies earlier awareness of emerging
            threats to individual banking organizations and,
            potentially, to the broader financial system;

        an incident may so severely impact a banking
            organization that it can no longer support its
            customers, and the incident could impact the safety and
            soundness of the banking organization, leading to its
            failure. In these cases, the sooner the agencies know
            of the event, the better they can assess the extent of
            the threat and take appropriate action;

        based on the agencies' broad supervisory
            experiences, they may be able to provide information to
            a banking organization that may not have previously
            faced a particular type of notification incident;

        the agencies would be better able to conduct
            analyses across supervised banking organizations to
            determine and respond to systemic risks. The agency
            response may be to improve guidance, adjust supervisory
            programs, and provide information to the industry to
            help banking organizations protect themselves; and

        receiving notice would enable the primary Federal
            regulator to facilitate and approve requests from
            banking organizations for assistance through the U.S.
            Treasury Office of Cybersecurity and Critical
            Infrastructure Protection (OCCIP).

        Recognizing that in the initial stages of any event there
    will be limited information, the agencies have focused only on
    notification of the incident and not an expectation of detailed
    reporting. This focus is to allow the agencies to more quickly
    respond in order to provide support and assess the potential
    impact across the banking sector.

    Q.2. The Federal Reserve, OCC, and FDIC are in the process of
    implementing revisions to their capital rules. The Basel
    Committee's revised methodology for calculating operational
    risk would, if implemented, replace a dynamic and risk-
    sensitive measure with a more static approach. According to the
    Basel Committee's analysis, this change could result in a
    meaningful reduction in the aggregate operational risk capital
    requirements for the largest, most internationally active U.S.
    banks. Can you provide assurances that the forthcoming
    revisions to the agencies' capital rules will not result in the
    largest banks holding less capital to protect against
    operational risk, including cybersecurity breaches?

    A.2. Banks entered the Covid pandemic with strong capital
    positions, and the OCC, in conjunction with the Federal Reserve
    and FDIC, will carefully consider the impact on capital of any
    proposals to change the U.S. capital framework for banks. The
    agencies are developing a notice of proposed rulemaking that
    would revise the capital requirements applicable to the largest
    U.S. banking organizations. The proposal is intended to address
    the transparency of the regulatory capital framework and to
    promote a level playing field between the largest U.S. banks
    and global banks in other jurisdictions.
        Implementing the Basel Committee's revised methodology for
    calculating operational risk would not necessarily result in a
    meaningful reduction in the aggregate operational risk capital
    requirements. The revised Basel methodology for calculating
    operational risk considers a bank's size, the complexity of its
    activities, and provides a more transparent operational risk
    capital calculation than the current approach. It also provides
    for incorporation of a bank's history of operational losses in
    setting capital requirements, if deemed appropriate by a
    jurisdiction's regulators.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                  SENATOR MENENDEZ FROM MICHAEL J. HSU

    Q.1. My home State of New Jersey and 47 other States have
    passed legislation authorizing some form of cannabis for
    regulated medical or adult-use purposes. But we all know that
    businesses that serve this market have found themselves shut
    out of the banking system and forced to operate exclusively in
    cash, often creating serious public safety risks in our
    communities.
        The SAFE Banking Act, which I cosponsored, would fix this
    problem by allowing banks to provide financial services to
    cannabis businesses. I also introduced the CLAIM Act, which
    would ensure that legal marijuana and related businesses have
    access to comprehensive and affordable insurance coverage.
        Do you believe that financial institutions and marijuana-
    related businesses need legislative clarity on these issues?

    A.1. The OCC supports legislative clarity on the disparity
    between Federal and State laws in this area. This disparity has
    created significant challenges for both cannabis-related
    businesses and national banks and Federal savings associations
    that need to be resolved. Furthermore, a lack of access to
    banking by cannabis and related businesses that are legal under
    State law means many operate in a cash-only environment, which
    can result in public safety concerns and an increase in
    dangerous crimes due to the inability of these businesses to
    properly deposit and safeguard funds. In the absence of new
    legislation, the OCC will continue to supervise national banks
    and Federal savings associations and ensure that those that
    provide services to cannabis-related businesses have Bank
    Secrecy Act compliance programs that comply with legal
    requirements, including compliance with BSA-related
    requirements for customer due diligence and for identifying and
    reporting transactions that are suspicious or violate Federal
    law, and follow applicable FinCEN guidance.
                                    ------

                   RESPONSES TO WRITTEN QUESTIONS OF
                 SENATOR VAN HOLLEN FROM MICHAEL J. HSU

    Q.1. Since the 2008 recession, many bank branches nationwide
    have shut their doors, with 6,008 banks closing between 2008
    and 2016, over 6 percent of branches nationally. On the State
    level, Maryland had the third highest proportional losses, with
    246 bank branches closing, representing a 13.8 percent loss.
    Nationally, 22 percent of adults are underbanked or unbanked,
    with lower income individuals or those in racial or ethnic
    minority groups being more likely to fall into this category.
        Putting the issue of de novo bank charter applications
    aside, can the rules under the Community Reinvestment Act be
    modernized in ways that reverse this troubling trend of banking
    desserts in places like Baltimore? What can we do to stem the
    tide of these branch closures?

    A.1. The bank regulatory agencies are open to considering
    approaches that could create additional incentives to retain
    branches, particularly in underserved markets. The 1995 CRA
    regulation considered both the location and closure of branches
    in the evaluation of CRA performance of large banks (banks with
    average assets of at least $1.322 billion over the last 2
    years). This was intended to provide some incentive to slow
    branch closures in low- and moderate-income (LMI) areas.
        In addition, the public is provided a venue, outlined in
    the Comptroller's Licensing Manual booklet, ``Branch
    Closings'', to request that the OCC convene a public meeting to
    discuss the impact of an interstate national bank branch
    closure. The OCC convenes a meeting if all the criteria
    identified in the booklet are met. The OCC periodically
    conducts such meetings, and, in certain circumstances,
    alternatives have been identified which address financial
    services needs in those LMI communities.
        While branches remain important to many consumers, it also
    important to recognize the growing use of online and mobile
    banking. According to the FDIC, more than a third (34 percent)
    of American households used mobile channels as their primary
    method of accessing bank accounts in 2019, up 18.4 percentage
    points from 2017, with the largest gains in mobile banking
    adoption among Black, Asian, and Hispanic Americans. The OCC's
    2020 CRA rule and the 1995 CRA rule give CRA consideration for
    investments in expanded broadband access to promote digital
    banking as a means to bridge the financial access divide
    between middle- and high-income and low- or moderate-income
    (LMI), distressed, and underserved areas. CRA consideration is
    also given to the availability and effectiveness of a bank's
    alternative delivery mechanisms and the extent to which retail
    banking services are tailored to the convenience and needs of
    each geography, including to LMI individuals and areas. For
    example, CRA provides opportunities for banks to work with
    individuals and communities affected by the Covid pandemic,
    including on ways to effectively make retail banking services
    available during the emergency.
        While the percentage of households that are completely
    unbanked (5.4 percent) is at the lowest level since the FDIC
    first reported this measure in 2009, the absolute number of
    unbanked households remains high at 7 million. Several banks
    have joined an effort to reduce the number of unbanked and
    underbanked persons through a certification program called
    BankOn, which is run by the Cities for Financial Empowerment
    Fund. The program is designed to expand access to transactional
    accounts to address the structural challenges facing unbanked
    and underbanked households with certified products, including
    those with low costs, online bill-pay, no overdraft fees, and
    transaction capabilities such as a debit or prepaid cards as
    well as access to Federal child tax credit and other emergency
    payments.
        The OCC is exploring additional ways to consider retail
    banking products and branch-based services in CRA evaluations
    as we work collaboratively with the other agencies on a new CRA
    rule.

    Q.2. While the U.S. continues to experience a disturbing uptick
    in economic and racial inequality, we must recognize that
    climate change is increasingly a threat multiplier for these
    economic trends and harms. Lower income households and lower
    income communities alike face trouble financing the predisaster
    resilience measures and postdisaster recovery efforts that they
    need to avoid further growth of the wealth gap. Climate-fueled
    disasters disproportionately affect lower income communities
    and households: they can act as tipping points for families and
    individuals on the edge, pushing the marginally homeless into
    homelessness, those living paycheck-to-paycheck into debt and
    financial insecurity, and consuming any small savings that had
    been accumulated for housing, education, or other purposes.
        How have practices like redlining--perhaps used by
    financial institutions you supervise--led to climate
    vulnerabilities for lower income communities and communities of
    color? What are you doing right now to study the effects that
    redlining had and continues to have on modern access to
    financial services, particularly related to climate impacts?

    A.2. The OCC recognizes the disproportionate effect that
    climate change is having on low-income communities and
    communities of color. The OCC recently appointed Darrin Benhart
    as the agency's new Climate Change Risk Officer. Mr. Benhart is
    an experienced OCC examiner and manager, who will lead the
    OCC's internal and interagency efforts to consider and address
    the financial implications of climate change on banks. The OCC
    has also recently created and staffed a new subcommittee of its
    National Risk Committee with members from throughout the
    agency. The efforts of this Subcommittee will focus on
    gathering and assessing information on all aspects of risks
    created or exacerbated by climate change. The work of this
    subcommittee and the Climate Change Risk Officer will include
    developing a better understanding of the interactive effects of
    climate change and inequality on lower-income communities and
    communities of color.

    Q.3. How can we stop this feedback loop of vulnerability? What
    regulatory tools do you have to make sure lower income
    households and communities have access to the full range of
    financial services they need to contend with the increasing
    impacts of the climate crisis?

    A.3. For communities that are impacted by extreme weather, the
    OCC seeks to ensure that lower income households and
    communities have access to a range of financial services in
    federally declared disaster areas--including those resulting
    from climate related events. Under the OCC's 2020 CRA rule,
    banks may receive CRA credit for activities they undertake in
    response to these Federal disaster designations if those
    activities are related to Federal, State, local, or tribal
    government programs or initiatives that are consistent with a
    bona fide Government recovery plan or if they meet other
    qualifying activity criteria under the regulation. OCC will
    consider in a bank's CRA evaluation qualifying activities for
    36 months following the date of disaster designation. The OCC
    may issue a written notice to extend the time-period during
    which activities will be considered in cases where there is a
    continuing demonstrable need. The 1995 CRA rule allows banks to
    receive credit for certain activities in communities designated
    by the Federal Government as major disaster areas.
        In addition, as part of the interagency work on CRA
    modernization, the agencies are considering public comments
    responding to the FRB's CRA ANPR regarding the expansion of CRA
    eligibility for disaster preparedness and climate resilience
    activities in certain targeted geographies.

    Q.4. Flooding and wildfires are two climate-crisis fueled
    disasters that are leading insurers to withdraw from vulnerable
    communities. In California, for instance, a moratorium on
    withdrawal is the only thing protecting some wildfire
    threatened communities from loss of insurance, but prices have
    skyrocketed and coverage limits have fallen.
        What are the consequences of the withdrawal of insurers on
    the availability of credit in affected communities (in terms of
    mortgages, municipal loans, and small business loans)?

    A.4. Insurance products provide confidence during the bank
    underwriting approval process that credit will be repaid if
    unplanned risk events occur, and the availability of insurance
    to support credit underwriting decisions is critical. However,
    bank supervisors do not have direct oversight over decisions
    made by insurance underwriters to withdraw the availability of
    insurance in a community.
        The withdrawal of insurers has the potential to increase
    the cost of insurance for borrowers, which could affect the
    ability of borrowers to repay their debt and, in turn, bank
    underwriting decisions. In addition, those remaining insurers
    would have a more concentrated exposure to the community and
    may need to increase the cost of their products. While credit
    may still be available, it potentially would be at a higher
    cost due to the increased insurance cost.

    Q.5. What are you doing right now to monitor whether banks and
    credit unions are withdrawing credit from vulnerable
    communities in response to the loss of insurance or other
    physical impacts from the climate crisis?

    A.5. Promoting fairness and inclusion in banking is a
    fundamental part of the OCC's mission, and we recognizes the
    disproportionate effect that climate change is having on low-
    income communities and communities of color. To ensure that
    national banks and Federal savings associations treat customers
    fairly and provide fair access to financial services, the OCC
    examines these institutions for compliance with laws and
    regulations. These OCC's supervisory activities include fair
    lending risk assessments during every examination cycle, risk-
    based examinations for compliance with the prohibitions on
    unfair, deceptive, or abusive acts or practices, and review of
    assessment areas under the Community Reinvestment Act to
    prevent arbitrary exclusion of low and moderate income
    geographies from the bank's assessment areas.
        Identifying, measuring, and managing risks from climate
    change is challenging, and the OCC is in the early phases of
    engaging with our supervised institutions and the industry. We
    are committed to working with OCC-supervised institutions,
    other regulators, and industry groups such as the Basel
    Committee on Banking Supervision's Task Force on Climate-
    Related Financial Risks and the Network for Greening the
    Financial System to analyze climate related data. The OCC also
    engages with the Federal Insurance Office through the FSOC
    process. Led by the new Climate Risk Committee and Officer, the
    OCC intends to use information from these and other sources to
    encourage the adoption of effective risk-based risk management
    practices at banks and the development of additional risk-based
    supervisory approaches to address the financial risk arising
    from climate change.

    Q.6. High-cost lenders often argue that because of fixed
    underwriting and back office costs, it is not economically
    feasible to provide responsible, small-dollar loan products
    that comply with a 36 percent rate cap. Chairman Harper and
    Acting Comptroller Hsu: Do you think that's true? Why or why
    not?

    A.6. The OCC expects the banks it supervises to engage in
    responsible lending to all consumers. Well-designed small-
    dollar lending programs can result in successful repayment
    outcomes that facilitate a customer's ability to demonstrate
    positive credit behavior and transition into additional
    financial products. The Federal banking agencies and NCUA
    issued interagency principles for offering responsible small-
    dollar loans in May 2020 because the agencies recognized the
    important role that responsibly offered small-dollar loans can
    play in helping customers meet their ongoing needs for credit
    due to temporary cash-flow imbalances, unexpected expenses, or
    income shortfalls, including during periods of economic stress,
    national emergencies, or disaster recoveries.
        With respect to cost structure, costs to be covered in a
    lending operation vary substantially based on the lender's
    business model, infrastructure, cost of capital, cost of
    funding, and cost to acquire customers. Traditional brick and
    mortar operations with multiple locations are typically more
    expensive than newer business models that make use of the
    internet. However, the newer lending models may have higher
    capital and funding costs until they achieve a strong
    reputation in the marketplace. Finally, many traditional and
    newer lending operations face a very high cost to acquire new
    customers that often results in unprofitable operations that
    must be overcome to continue in business.

    Q.7. Is it possible for OCC-supervised institutions to design
    responsible, small-dollar loan products that comply with a 36
    percent rate cap? Isn't it true that banks can also earn
    additional fees and revenues once a customer graduates from
    small dollar loans to other products, and that the cost-benefit
    analysis of a longer-term bank-customer relationship may in
    fact be net positive for banks?

    A.7. As noted in the 2020 interagency Responsible Small Dollar
    Lending Principles, \1\ banks are well-positioned to be
    responsible small-dollar lenders due to their ability to
    leverage existing infrastructure and customer acquisition
    activities and their advantages relative to costs of capital
    and funding. Responsible small-dollar products should be judged
    holistically across all their terms (e.g., price, repayment,
    tenor) relative to their overall ability to deliver affordable
    and successful repayment without causing undue cycles of debt.
    ---------------------------------------------------------------------------
         \1\ Refer to OCC Bulletin 2020-54, ``Small-Dollar Lending:
    Interagency Lending Principles for Offering Responsible Small-Dollar
    Loans'', available at https://www.occ.gov/news-issuances/bulletins/
    2020/bulletin-2020-54.html.
    ---------------------------------------------------------------------------
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                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR CORTEZ MASTO FROM MICHAEL J. HSU

    Q.1. How are your agencies implementing the significant changes
    occurring under the Anti- Money Laundering and Corporate
    Transparency Act of 2020? Are there any concerns with
    implementation of this law that we should be aware of?

    A.1. Implementation of most of the requirements in the Anti-
    Money Laundering and Corporate Transparency Act of 2020 (AML
    Act) are the responsibility of the Treasury Department and
    FinCEN with the OCC largely having a consultative role.
    However, the OCC has been working closely with the Treasury
    Department, FinCEN, and the other Federal Banking Agencies
    (FBAs) to ensure that the changes being made to the Bank
    Secrecy Act (BSA) that involve the OCC are enacted as quickly
    and as seamlessly as possible. We note that consistent with the
    implementation of the AML Act, the OCC is also reviewing its
    BSA-related regulations, guidance, and supervisory processes,
    training and procedures to determine if additional changes are
    needed.
        The actions to implement the AML Act to date include:

        On June 30, 2021, FinCEN issued the first
            governmentwide anti- money laundering and countering
            the financing of terrorism (AML/CFT) priorities in
            accordance with section 6101 of the AML Act after
            consultation with various agencies including the OCC.

        At the same time, FinCEN, the OCC, and other FBAs
            issued an Interagency Statement on the Issuance of the
            AML/CFT National Priorities to clarify for the banking
            industry that there are no immediate expectations that
            banks take action to implement the priorities until the
            related implementing regulations are effective. The
            statement further clarified that, although not required
            by the AML Act, the OCC and FBAs planned to revise
            their BSA regulations, as necessary, to address how
            these priorities will be incorporated into banks' BSA
            requirements.

        The OCC is one of the cochairs of the newly formed
            Bank Secrecy Act Advisory Group (BSAAG) Subcommittee on
            Innovation and Technology. Established under Section
            6207 of the AML Act, the purpose of this Subcommittee
            is to study and make recommendations on how to
            encourage, support development of, and reduce obstacles
            to innovative AML and CFT compliance efforts.

        The OCC and the other FBAs are also participating
            in several ongoing consultations with FinCEN regarding
            various other sections of the AML Act. These
            consultations include: (1) the formal review of BSA
            regulations and guidance pursuant to Section 6216; (2)
            revisions to FinCEN's Beneficial Ownership regulations
            pursuant to Section 6403, commonly referred to as the
            Corporate Transparency Act; (3) revisions to suspicious
            activity report and currency transaction report filing
            requirements, pursuant to Sections 6202, 6204, and
            6205; and (4) requirements for annual AML/CFT training
            of Federal examiners reviewing compliance with the BSA
            pursuant to Section 6307.

        The OCC will continue to work with FinCEN and the other
    FBAs on these and other requirements for implementation of the
    AML Act.

    Q.2. Your written testimony notes that some financial
    institutions have postponed investing in updates to their IT
    systems and have deferred maintenance of existing technology,
    even with high levels of profit. How will the OCC ensure that
    financial institutions adequately address operational and
    cybersecurity risks?

    A.2. The OCC views operational and cybersecurity risks facing
    the Federal banking system as top concerns, as noted in the
    OCC's Semiannual Risk Perspective, Spring 2021, and is focused
    on supervision of banks' cybersecurity preparedness. The OCC
    highlights common areas of concern and effective supervisory
    practices in order to support the banking industry's effort to
    strengthen cybersecurity. The OCC recently highlighted key
    efforts to ensure supervised banks appropriately address
    operational and cybersecurity risks in its ``Report on
    Cybersecurity and Resilience of the Federal Banking System'',
    submitted to Congress pursuant to the Consolidated
    Appropriations Act, 2021.
        Key efforts include:

        The OCC issues regulations, rules, and supervisory
            guidance addressing the safety and soundness of banks,
            including operational risk and cybersecurity. While
            there are a number of issuances related to these
            topics, recent examples of efforts related to
            operational and cybersecurity risks include the Notice
            of Proposed Rulemaking for Incident Reporting and
            proposed updates to Third Party Risk Management
            guidance. The OCC often coordinates with other banking
            agencies for the development and issuance of rules and
            guidance.

        The OCC conducts full-scope examinations of every
            supervised financial institution on a 12- to 18-month
            cycle, including ongoing supervision at the largest
            banks, based on the bank's characteristics, such as
            asset size and financial condition. As part of every
            supervisory cycle, the OCC issues a report of
            examination that includes an Information Technology
            (IT) assessment. This assessment includes examination
            of operational, technological, and cybersecurity risks
            and bank managements' efforts to control and mitigate
            those risks. Detailed supervisory strategies are
            developed for each bank and updated as needed
            throughout the supervisory cycle to address emerging
            issues, including risks associated with cyberthreats
            and vulnerabilities. Examiners will also leverage the
            FFIEC IT Examination Handbook and FFIEC Cybersecurity
            Assessment Tool, along with other resources, in
            conducting examinations.

        The OCC actively monitors for emerging
            cybersecurity threats through engagement with Federal
            and industry partners to help inform policy and
            supervision efforts. The OCC's Critical Infrastructure
            Policy unit is responsible for identifying and
            assessing systemic operational risk that could degrade
            or interrupt the Federal banking system and lead to
            national economic and security concerns. As part of
            these efforts, the OCC monitors the Financial Services
            Information Sharing and Analysis Center (FS-ISAC),
            Homeland Security Information Network, Financial Crimes
            Enforcement Network, and other open-source,
            cyberrelated information feeds to maintain situational
            awareness of evolving financial sector risks.
            Additionally, the OCC coordinates with U.S. Treasury
            Office of Cybersecurity and Critical Infrastructure
            Protection (OCCIP) and other Financial and Banking
            Information Infrastructure Committee members on
            cybersecurity and critical infrastructure matters.

    Q.3. Please detail agency oversight of businesses making loans
    to franchise businesses. Does the agency see high rates of
    defaults in loans to franchise businesses, including loans
    guaranteed by the SBA?

    A.3. The OCC supervises franchise lending under its
    ``supervision by risk'' approach. Using this approach to
    oversight, lending activities that are viewed as higher risk,
    more concentrated, or exhibiting abnormal default rates or loss
    rates, or exhibiting patterns of customer complaints, are
    identified and prioritized for specific review, monitoring, and
    reporting by the OCC. The OCC does not currently identify
    franchise lending as a higher-than-normal risk or concentrated
    lending activity warranting greater-than-routine attention.
        We have not identified any abnormal default or loss rates
    in franchise lending during the normal course of our
    supervision. Generally, banks align loans into similar or
    related groups using industry standard taxonomies such as the
    North American Industry Classification System (NAIC) or the
    Global Industry Classification Standard (GICS) codes to ensure
    these portfolios are consistently identified. Franchise lending
    does not have separate NAIC or GICS coding to permit ready
    identification, regardless of any SBA guaranty.