[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\
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     \4\ Id.
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    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.
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     \5\ Please see page 114 of the ``2020 NCUA Annual Report'' 
available at https://www.ncua.gov/files/annual-reports/annual-report-
2020.pdf.
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    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\
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     \6\ Staff Briefing, ``Share Insurance Fund Quarterly Report'', May 
2021 NCUA Board Meeting, available at https://www.ncua.gov/files/
agenda-items/AG20210520Item1a.pdf.
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    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.
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     \7\ 12 U.S.C. 1782 (c)(D)(2).
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    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\
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     \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.
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    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.
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     \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.
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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.
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     \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.
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    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\
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     \11\ Please see Central Liquidity Facility Monthly Reports, which 
are available at https://www.ncua.gov/support-services/central-
liquidity-facility/monthly-reports.
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    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\
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     \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.
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    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\
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     \13\ Information on the NCUA Board's regulatory actions can be 
found at https://www.ncua.gov/about/ncua-board/board-meetings-agendas-
results.
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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\
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     \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.
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    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.
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     \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.
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    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.
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     \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.
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    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\
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     \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\
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     \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.
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    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.
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     \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).
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    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\
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     \3\ Andre Perry, Jonathan Rothwell, and David Harshbarger. ``The 
Devaluation of Assets in Black Neighborhoods'', Metropolitan Policy 
Program at Brookings. November 2018.
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    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\
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     \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/).
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    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.
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     \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)
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    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.
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     \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).
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    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.
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     \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).
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    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.
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     \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)
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    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.
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     \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).
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    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
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     \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).
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    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.
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     \14\ Urban Institute, ``Breaking Down the Black-White 
Homeownership Gap'', Feb. 21, 2020.
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    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.
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     \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).
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    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.
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     \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).
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    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.
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     \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.
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    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.
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     \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)
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    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.
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                                ------                                


        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.
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    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.
---------------------------------------------------------------------------
                                ------                                


               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.