[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?
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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
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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?
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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\
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\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.
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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).
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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''?
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\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
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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.
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\2\ See, https://www.ncei.noaa.gov/news/national-climate-202012.
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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.
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\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.
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\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/.
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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.
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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.
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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.
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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\
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\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.
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\1\ Refer to OCC Bulletin 2020-54, ``Small-Dollar Lending:
Interagency Lending Principles for Offering Responsible Small-Dollar
Loans'', available at https://www.occ.gov/news-issuances/bulletins/
2020/bulletin-2020-54.html.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM MICHAEL J. HSU
Q.1. How are your agencies implementing the significant changes
occurring under the Anti- Money Laundering and Corporate
Transparency Act of 2020? Are there any concerns with
implementation of this law that we should be aware of?
A.1. Implementation of most of the requirements in the Anti-
Money Laundering and Corporate Transparency Act of 2020 (AML
Act) are the responsibility of the Treasury Department and
FinCEN with the OCC largely having a consultative role.
However, the OCC has been working closely with the Treasury
Department, FinCEN, and the other Federal Banking Agencies
(FBAs) to ensure that the changes being made to the Bank
Secrecy Act (BSA) that involve the OCC are enacted as quickly
and as seamlessly as possible. We note that consistent with the
implementation of the AML Act, the OCC is also reviewing its
BSA-related regulations, guidance, and supervisory processes,
training and procedures to determine if additional changes are
needed.
The actions to implement the AML Act to date include:
On June 30, 2021, FinCEN issued the first
governmentwide anti- money laundering and countering
the financing of terrorism (AML/CFT) priorities in
accordance with section 6101 of the AML Act after
consultation with various agencies including the OCC.
At the same time, FinCEN, the OCC, and other FBAs
issued an Interagency Statement on the Issuance of the
AML/CFT National Priorities to clarify for the banking
industry that there are no immediate expectations that
banks take action to implement the priorities until the
related implementing regulations are effective. The
statement further clarified that, although not required
by the AML Act, the OCC and FBAs planned to revise
their BSA regulations, as necessary, to address how
these priorities will be incorporated into banks' BSA
requirements.
The OCC is one of the cochairs of the newly formed
Bank Secrecy Act Advisory Group (BSAAG) Subcommittee on
Innovation and Technology. Established under Section
6207 of the AML Act, the purpose of this Subcommittee
is to study and make recommendations on how to
encourage, support development of, and reduce obstacles
to innovative AML and CFT compliance efforts.
The OCC and the other FBAs are also participating
in several ongoing consultations with FinCEN regarding
various other sections of the AML Act. These
consultations include: (1) the formal review of BSA
regulations and guidance pursuant to Section 6216; (2)
revisions to FinCEN's Beneficial Ownership regulations
pursuant to Section 6403, commonly referred to as the
Corporate Transparency Act; (3) revisions to suspicious
activity report and currency transaction report filing
requirements, pursuant to Sections 6202, 6204, and
6205; and (4) requirements for annual AML/CFT training
of Federal examiners reviewing compliance with the BSA
pursuant to Section 6307.
The OCC will continue to work with FinCEN and the other
FBAs on these and other requirements for implementation of the
AML Act.
Q.2. Your written testimony notes that some financial
institutions have postponed investing in updates to their IT
systems and have deferred maintenance of existing technology,
even with high levels of profit. How will the OCC ensure that
financial institutions adequately address operational and
cybersecurity risks?
A.2. The OCC views operational and cybersecurity risks facing
the Federal banking system as top concerns, as noted in the
OCC's Semiannual Risk Perspective, Spring 2021, and is focused
on supervision of banks' cybersecurity preparedness. The OCC
highlights common areas of concern and effective supervisory
practices in order to support the banking industry's effort to
strengthen cybersecurity. The OCC recently highlighted key
efforts to ensure supervised banks appropriately address
operational and cybersecurity risks in its ``Report on
Cybersecurity and Resilience of the Federal Banking System'',
submitted to Congress pursuant to the Consolidated
Appropriations Act, 2021.
Key efforts include:
The OCC issues regulations, rules, and supervisory
guidance addressing the safety and soundness of banks,
including operational risk and cybersecurity. While
there are a number of issuances related to these
topics, recent examples of efforts related to
operational and cybersecurity risks include the Notice
of Proposed Rulemaking for Incident Reporting and
proposed updates to Third Party Risk Management
guidance. The OCC often coordinates with other banking
agencies for the development and issuance of rules and
guidance.
The OCC conducts full-scope examinations of every
supervised financial institution on a 12- to 18-month
cycle, including ongoing supervision at the largest
banks, based on the bank's characteristics, such as
asset size and financial condition. As part of every
supervisory cycle, the OCC issues a report of
examination that includes an Information Technology
(IT) assessment. This assessment includes examination
of operational, technological, and cybersecurity risks
and bank managements' efforts to control and mitigate
those risks. Detailed supervisory strategies are
developed for each bank and updated as needed
throughout the supervisory cycle to address emerging
issues, including risks associated with cyberthreats
and vulnerabilities. Examiners will also leverage the
FFIEC IT Examination Handbook and FFIEC Cybersecurity
Assessment Tool, along with other resources, in
conducting examinations.
The OCC actively monitors for emerging
cybersecurity threats through engagement with Federal
and industry partners to help inform policy and
supervision efforts. The OCC's Critical Infrastructure
Policy unit is responsible for identifying and
assessing systemic operational risk that could degrade
or interrupt the Federal banking system and lead to
national economic and security concerns. As part of
these efforts, the OCC monitors the Financial Services
Information Sharing and Analysis Center (FS-ISAC),
Homeland Security Information Network, Financial Crimes
Enforcement Network, and other open-source,
cyberrelated information feeds to maintain situational
awareness of evolving financial sector risks.
Additionally, the OCC coordinates with U.S. Treasury
Office of Cybersecurity and Critical Infrastructure
Protection (OCCIP) and other Financial and Banking
Information Infrastructure Committee members on
cybersecurity and critical infrastructure matters.
Q.3. Please detail agency oversight of businesses making loans
to franchise businesses. Does the agency see high rates of
defaults in loans to franchise businesses, including loans
guaranteed by the SBA?
A.3. The OCC supervises franchise lending under its
``supervision by risk'' approach. Using this approach to
oversight, lending activities that are viewed as higher risk,
more concentrated, or exhibiting abnormal default rates or loss
rates, or exhibiting patterns of customer complaints, are
identified and prioritized for specific review, monitoring, and
reporting by the OCC. The OCC does not currently identify
franchise lending as a higher-than-normal risk or concentrated
lending activity warranting greater-than-routine attention.
We have not identified any abnormal default or loss rates
in franchise lending during the normal course of our
supervision. Generally, banks align loans into similar or
related groups using industry standard taxonomies such as the
North American Industry Classification System (NAIC) or the
Global Industry Classification Standard (GICS) codes to ensure
these portfolios are consistently identified. Franchise lending
does not have separate NAIC or GICS coding to permit ready
identification, regardless of any SBA guaranty.