[House Report 112-182]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 112-182
======================================================================
TO INSTRUCT THE INSPECTOR GENERAL OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION TO STUDY THE IMPACT OF INSURED DEPOSITORY INSTITUTION
FAILURES, AND FOR OTHER PURPOSES
_______
July 26, 2011.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Bachus, from the Committee on Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 2056]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Service, to whom was referred
the bill (H.R. 2056) to instruct the Inspector General of the
Federal Deposit Insurance Corporation to study the impact of
insured depository institution failures, and for other
purposes, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. INSPECTOR GENERAL STUDY.
(a) Study.--The Inspector General of the Federal Deposit Insurance
Corporation (FDIC) shall conduct a comprehensive study on the impact of
the failure of insured depository institutions.
(b) Definitions.--For purposes of this Act--
(1) the term ``insured depository institution'' has the
meaning given such term in section 3(c) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c));
(2) the term ``private equity company'' has the meaning given
the terms ``hedge fund'' and ``private equity fund'' in section
13(h)(2) of the Bank Holding Company Act of 1956 (12 U.S.C.
1851(h)(2)); and
(3) the term ``paper-loss'' means any write down on a
performing asset held by an insured depository institution that
causes such institution to raise more capital in order to cover
the write down.
(c) Matters To Be Studied.--In conducting the study under this
section, the Inspector General shall address the following:
(1) Loss-sharing agreements.--The effect of loss-sharing
agreements (LSAs), including--
(A) the impact of loss-sharing on the insured
depository institutions that survive and the borrowers
of insured depository institutions that fail,
including--
(i) the impact on the rate of loan
modifications and adjustments;
(ii) whether more types of loans (such as
commercial (including land development and 1-
to 4-family residential and commercial
construction loans), residential, or small
business loans) could be modified with fewer
LSAs, or if LSAs could be phased out
altogether;
(iii) the FDIC's policies and procedures for
monitoring LSAs, including those designed to
ensure institutions are not imprudently selling
assets at a depressed value;
(iv) the impact on the availability of
credit; and
(v) the impact on loans with participation
agreements outstanding with other insured
depository institutions;
(B) the FDIC's policies and procedures for
terminating LSAs and mitigating the risk of acquiring
institutions having substantial assets remaining in
their portfolio when the LSAs are due to expire;
(C) the extent to which LSAs provide incentives for
loan modifications and other means of increasing the
probability of commercial assets being considered
``performing'';
(D) the nature and extent of differences for
modifying residential assets and working out commercial
real estate under LSAs; and
(E) methods of ensuring the orderly end of expiring
LSAs to prevent any adverse impact on borrowing, real
estate industry and the Depositors Insurance Fund.
(2) Paper losses.--The significance of paper losses,
including--
(A) the number of insured depository institutions
that have been placed into receivership or
conservatorship due to paper losses;
(B) the impact on paper losses of raising more
capital;
(C) the effect of changes in the application of the
fair value of real estate accounting rules and other
accounting standards;
(D) whether field examiners are using proper
appraisal procedures with respect to paper losses; and
(E) methods of stopping the vicious downward spiral
of losses and write downs.
(3) Appraisals.--
(A) The number of insured depository institutions
placed into receivership or conservatorship due to
asset write-downs and the policies and procedures for
evaluating the adequacy of an insured depository
institution's allowance for loan and lease losses.
(B) The policies and procedures examiners use for
evaluating the appraised values of property securing
real estate loans and the extent to which those
policies and procedures are followed.
(C) FDIC field examiner implementation of guidance
issued December 2, 2010, titled ``Agencies Issue Final
Appraisal and Evaluation Guidelines''.
(4) Capital.--
(A) The factors that examiners use to assess the
adequacy of capital at insured depository institutions,
including the extent to which the quality and risk
profile of the insured institution's loan portfolio is
considered in the examiners' assessment.
(B) The number of applications received by the FDIC
from private capital investors to acquire insured
depository institutions in receivership, the factors
used by the FDIC in evaluating the applications, and
the number of applications that have been approved or
not approved, including the reasons pertaining thereto.
(C) The policies and procedures associated with the
evaluation of potential private investments in insured
depository institutions and the extent to which those
policies and procedures are followed.
(5) Workouts.--The success of FDIC field examiners in
implementing FDIC guidelines titled ``Policy Statement on
Prudent Commercial Real Estate Loan Workouts'' (October 31,
2009) regarding workouts of commercial real estate, including--
(A) whether field examiners are using the correct
appraisals; and
(B) whether there is any difference in implementation
between residential workouts and commercial (including
land development and 1- to 4-family residential and
commercial construction loans) workouts.
(6) Orders.--The application and impact of consent orders and
cease and desist orders, including--
(A) whether such orders have been applied uniformly
and fairly across all insured depository institutions;
(B) the reasons for failing to apply such orders
uniformly and fairly when such failure occurs;
(C) the impact of such orders on the ability of
insured depository institutions to raise capital;
(D) the impact of such orders on the ability of
insured depository institutions to extend or modify
credit to existing and new borrowers; and
(E) whether individual insured depository
institutions have improved enough to have such orders
removed.
(7) FDIC policy.--The application and impact of FDIC
policies, including--
(A) the impact of FDIC policies on the investment in
insured depository institutions, especially in States
where more than 10 such institutions have failed since
2008;
(B) whether the FDIC fairly and consistently applies
capital standards when an insured depository
institution is successful in raising private capital;
and
(C) whether the FDIC steers potential investors away
from insured depository institutions that may be in
danger of being placed in receivership or
conservatorship.
(8) Private equity companies.--The FDIC's handling of
potential investment from private equity companies in insured
depository institutions, including--
(A) the number of insured depository institutions
that have been approved to receive private equity
investment by the FDIC;
(B) the number of insured depository institutions
that have been rejected from receiving private equity
investment by the FDIC; and
(C) the reasons for rejection of private equity
investment when such rejection occurs.
(d) Report.--Not later than one year after the date of the enactment
of this Act, the Inspector General shall submit to Congress a report--
(1) on the results of the study conducted pursuant to this
section; and
(2) any recommendations based on such study.
(e) Coordination Between FDIC IG, Treasury IG, and Federal Reserve
IG.--In carrying out this section, the Inspector General of the FDIC
shall consult with the Inspectors General of the Treasury and of the
Federal Reserve System, and such Inspectors General shall provide any
documents or other material requested by the Inspector General of the
FDIC in order to carry out this section.
SEC. 2. FUNDING.
The FDIC shall make available from the portion of the FDIC budget
allocated to management expenses, sums allowing the FDIC Inspector
General to complete this study.
SEC. 3. GAO STUDY.
(a) Study.--The Comptroller General of the United States shall carry
out a study on the following:
(1) The causes of high levels of bank failures in states with
10 or more failures since 2008.
(2) The procyclical impact of fair value accounting
standards.
(3) The causes and potential solutions for the ``vicious
cycle'' of loan write downs, raising capital, and failures.
(4) An analysis of the community impact of bank failures.
(5) The feasibility and overall impact of loss share
agreements.
(b) Report.--Not later than the end of the 1-year period beginning on
the date of the enactment of this Act, the Comptroller General shall
issue a report to the Congress on the study carried out pursuant to
subsection (a).
PURPOSE AND SUMMARY
The purpose of H.R. 2056 is to instruct the Inspector
General of the Federal Deposit Insurance Corporation (FDIC) to
investigate and report on the impact of the procedures used by
the FDIC to resolve failed depository institutions. In
addition, H.R. 2056 instructs the Government Accountability
Office (GAO) to analyze underlying economic causes and effects
of the high level of bank failures since 2008. Both the
Inspector General of the FDIC and the GAO must make reports to
Congress on the results of their respective studies no later
than one year after enactment of H.R. 2056.
H.R. 2056 instructs the Inspector General of the FDIC to
address the following: (1) the effect of loss-sharing
agreements; (2) the significance of paper losses (i.e., asset
write downs that force depository institutions to raise more
capital); (3) the consistency of procedures used by examiners
for appraising collateral values; (4) the factors examiners
consider when assessing capital adequacy; (5) the success of
FDIC field examiners in implementing FDIC guidelines for
commercial real estate workouts; (6) the impact of cease and
desist orders on troubled institutions; (7) the FDIC's
procedures for evaluating potential private investment in
insured depository institutions; and (8) the impact of the
FDIC's policies on private investment in insured depository
institutions.
H.R. 2056 further instructs the GAO to address the causes
of the recent rash of bank failures and to evaluate the impact
of these failures on local communities. Also, to address the
impact of fair value accounting, the GAO must suggest potential
solutions for the cyclical nature of asset write downs and
depository institution failures.
BACKGROUND AND NEED FOR LEGISLATION
After a six-year period in which only 35 banks failed
nationwide, the pace of bank failures increased dramatically in
the past two years: 140 institutions failed in 2009, while 157
failed in 2010. These failures have been concentrated in
certain states; since 2008, ten states have had more than ten
bank failures. The rash of bank failures has led some to
question whether the FDIC's procedures for resolving troubled
banks are appropriate in light of current economic conditions
and whether these procedures have been consistently applied in
the wake of the financial crisis.
H.R. 2056, introduced by Representative Westmoreland,
addresses these concerns by directing the Inspector General of
the FDIC and the GAO to thoroughly study and report on a wide
range of policies and procedures used by the FDIC in its
supervision of troubled and failing institutions.
HEARINGS
The Subcommittee on Financial Institutions and Consumer
Credit held a legislative hearing on July 8, 2011 entitled
``Legislative Proposals Regarding Bank Examination Practices.''
The following witnesses testified:
Mr. James H. McKillop, President and CEO,
Independent Bankers Bank of Florida on behalf of the
Independent Community Bankers of America
Mr. Michael Whalen, President and CEO, Heart
of America Group
Professor Simon Johnson, Ronald A. Kurtz
Professor of Entrepreneurship at the Massachusetts
Institute of Technology's Sloan School of Management
Mr. George French, Deputy Director, Division
of Risk Management Supervision, Federal Deposit
Insurance Corporation
Ms. Jennifer Kelly, Senior Deputy
Comptroller for Mid-Size/Community Bank Supervision,
Office of the Comptroller of the Currency
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
July 20, 2011 and ordered H.R. 2056, as amended, favorably
reported to the House by voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto.
There were no record votes taken on amendments or in connection
with ordering H.R. 2056 reported to the House. A motion by
Chairman Bachus to report the bill, as amended, to the House
with a favorable recommendation was agreed to by voice vote.
During consideration of H.R. 2056, the following amendment
and motion were considered by the Committee:
1. An amendment offered by Messrs. Westmoreland and Scott
of GA and Mrs. Maloney, no. 1, to make technical changes, to
require a separate study by the U.S. Comptroller General, and
to require participation and coordination from the Inspectors
General of the Treasury and Federal Reserve System with the
Inspector General of the FDIC in completing the study, was
agreed to by voice vote.
2. A motion offered by Mr. Bachus to move the previous
question on H.R. 2056 was agreed to by voice vote.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
The purpose of H.R. 2056 is to instruct the Inspector
General of the Federal Deposit Insurance Corporation (FDIC) to
investigate and report on the impact of the procedures used by
the FDIC to resolve failed depository institutions. In
addition, H.R. 2056 instructs the Government Accountability
Office (GAO) to analyze underlying economic causes and effects
of the high level of bank failures since 2008. Both the
Inspector General of the FDIC and the GAO must make reports to
Congress on the results of their respective studies no later
than one year after enactment of H.R. 2056.
H.R. 2056 instructs the Inspector General of the FDIC to
address the following: (1) the effect of loss-sharing
agreements; (2) the significance of paper losses (i.e., asset
write downs that force depository institutions to raise more
capital); (3) the consistency of procedures used by examiners
for appraising collateral values; (4) the factors examiners
consider when assessing capital adequacy; (5) the success of
FDIC field examiners in implementing FDIC guidelines for
commercial real estate workouts; (6) the impact of cease and
desist orders on troubled institutions; (7) the FDIC's
procedures for evaluating potential private investment in
insured depository institutions; and (8) the impact of the
FDIC's policies on private investment in insured depository
institutions.
H.R. 2056 further instructs the GAO (1) to address the
causes of the recent rash of bank failures, (2) to evaluate the
impact of these failures on local communities, and (3) to
address the impact of fair value accounting with suggestions on
potential solutions for the cyclical nature of asset write
downs and depository institution failures.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
COMMITTEE COST ESTIMATE
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
July 26, 2011.
Hon. Spencer Bachus,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 2056, a bill to
instruct the Inspector General of the Federal Deposit Insurance
Corporation to study the impact of insured depository
institution failures, and for other purposes.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Dan Hoople.
Sincerely,
Douglas W. Elmendorf.
Enclosure.
H.R. 2056--A bill to instruct the Inspector General of the Federal
Deposit Insurance Corporation to study the impact of insured
depository institution failures, and for other purposes
H.R. 2056 would direct the Government Accountability Office
(GAO) and the Inspector General of the Federal Deposit
Insurance Corporation (FDIC) to study and report to the
Congress on several matters relating to bank failures. Expenses
of the FDIC are classified as direct spending; therefore, pay-
as-you-go procedures would apply. However, CBO estimates that
any costs incurred by the Inspector General would be offset by
premiums collected from insured depository institutions,
resulting in no net effect on direct spending over the next
five years. Enacting this legislation would not affect
revenues. CBO estimates that any additional cost to GAO would
also be insignificant.
The bill contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act and
would not affect the budgets of state, local, or tribal
governments.
H.R. 2056 would direct the Inspector General of the FDIC to
conduct a study on several matters relating to bank failures,
including: loss-share agreements, accounting methodologies,
factors used to assess the adequacy of bank capital, and agency
policies and procedures. The Inspector General would be
required to report to the Congress no later than one year after
enactment. Resources to conduct such a study would be derived
from the Deposit Insurance Fund.
The legislation also would direct the GAO to conduct a
study on the causes of certain bank failures, the impact of
bank failures on communities, the effectiveness of loss-share
agreements, and fair value accounting standards. The GAO would
report findings and recommendations to the Congress no later
than one year after enactment. CBO estimates that completing
this study would cost less than $500,000 in 2012, subject to
the availability of appropriated funds.
The CBO staff contact for this estimate is Dan Hoople. The
estimate was approved by Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
H.R. 2056 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Inspector General study
This section defines the terms ``insured depository
institution,'' ``private equity company,'' and ``paper-loss.''
It requires the FDIC's Inspector General to study eight issues
raised by bank failures.
The first matter to be studied pertains to loss-sharing
agreements. The study is directed to address: (1) the impact of
loss-sharing agreements on the insured depository institutions
that survive and the borrowers of those institutions that fail;
(2) the FDIC's policies and procedures for terminating loss-
sharing agreements and mitigating the risk of acquiring
institutions having substantial assets remaining in their
portfolio when the agreements are near expiration; (3) the
extent to which loss-sharing agreements provide incentives for
loan modifications and other means of increasing the
probability of commercial assets being considered
``performing''; (4) the nature and extent of differences for
modifying residential assets and working out commercial real
estate under loss-sharing agreements; and (5) methods of
ensuring the orderly wind-down of expiring loss-sharing
agreements to prevent any adverse impact on borrowing, real
estate, and the Deposit Insurance Fund.
The second matter to be studied pertains to paper losses.
The study is directed to address: (1) the number of insured
depository institutions that have been placed into receivership
or conservatorship due to paper losses; (2) the impact that
raising more capital could have on paper losses; (3) the effect
of changing the application of fair value of real estate
accounting rules and other accounting standards; (4) whether
field examiners are using proper appraisal procedures with
respect to paper losses; and (5) methods of stopping losses and
write downs.
The third matter to be studied pertains to appraisals. The
study is directed to address: (1) the number of insured
depository institutions placed into receivership or
conservatorship due to asset write-downs and the policies and
procedures for evaluating the adequacy of an insured depository
institution's allowance for loan and lease losses; (2) the
policies and procedures examiners use for evaluating the
appraised values of property securing real estate loans and the
extent to which those policies and procedures are followed; and
(3) FDIC field examiner implementation of guidance issued
December 2, 2010, titled ``Agencies Issue Final Appraisal and
Evaluation Guidelines.''
The fourth matter to be studied pertains to capital, and is
required to address: (1) the factors that examiners use to
assess the adequacy of capital at insured depository
institutions; (2) the number of applications received and
approved by the FDIC from private capital investors to acquire
insured depository institutions in receivership and the factors
used in evaluating the applications; and (3) the policies and
procedures associated with the evaluation of potential private
investments in insured depository institutions and whether they
are followed.
The fifth matter to be studied pertains to workouts, and is
required to address the success of FDIC field examiners in
implementing FDIC guidelines regarding workouts of commercial
real estate loans, including whether field examiners are using
correct appraisals and whether there is a difference in
implementation between residential and commercial workouts.
The sixth matter to be studied pertains to the application
and impact of consent orders and cease and desist orders. The
study is directed to address: (1) whether these orders have
been applied uniformly and fairly across all insured depository
institutions; (2) the reasons for failing to apply uniform and
fair orders when failures occur; (3) the impact of those orders
on the ability of insured depository institutions to raise
capital; (4) the impact of the orders on insured depository
institutions' ability to extend or modify credit to existing
and new borrowers; and (5) whether individual insured
depository institutions have improved enough to have the orders
removed.
The seventh matter to be studied pertains to the
application and impact of FDIC policies, including: (1) their
impact on the investment in insured depository institutions,
especially in states where more than ten such institutions have
failed since 2008; (2) whether the FDIC fairly and consistently
applies capital standards when such institutions are successful
in raising private capital; and (3) whether the FDIC steers
potential investors away from insured depository institutions
that may be in danger of being placed in receivership or
conservatorship.
The eighth and final matter to be studied pertains to the
FDIC's handling of potential private equity investment in
insured depository institutions, including the number of
insured depository institutions that have been (1) approved to
receive private equity investment by the FDIC and (2) rejected
from receiving private equity investment by the FDIC and the
reasons for those rejections.
The FDIC Inspector General is required to submit the
results of the study and any recommendations to Congress within
a year of the bill's enactment. The Inspector General is also
required to consult with the Inspectors General of the Treasury
and of the Federal Reserve System, and they are required to
provide any documents or other material requested by the FDIC
Inspector General in order to carry out this section.
Section 2. Funding
This section requires the FDIC to make available from its
management expenses such sums as necessary to allow the FDIC
Inspector General to complete the study.
Section 3. GAO study
This section requires the GAO to carry out a study on the
following: (1) the causes of high levels of bank failures in
states with ten or more failures since 2008; (2) the
procyclical impact of fair value accounting standards; (3) the
causes and potential solutions for the cycle of loan write
downs, capital raises, and failures; (4) an analysis of the
community impact of bank failures; and (5) the feasibility and
overall impact of loss-share agreements.
The GAO is required to submit a report on this study to
Congress within a year of the bill's enactment.