[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.

                                  
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