[Senate Hearing 115-133]
[From the U.S. Government Publishing Office]
S. Hrg. 115-133
NOMINATIONS OF JOSEPH OTTING AND RANDAL QUARLES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
THE NOMINATIONS OF:
Joseph Otting, of Nevada, to be Comptroller of the Currency, Office of
the Comptroller of the Currency
__________
Randal Quarles, of Colorado, to be a Member of the Board of Governors
of the Federal Reserve System, and Vice Chairman for Supervision, Board
of Governors of the Federal Reserve System
__________
JULY 27, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Joe Carapiet, Senior Counsel
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
THURSDAY, JULY 27, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 1
Senator Brown................................................ 2
WITNESSES
Richard Burr, Senator from the State of North Carolina........... 1
NOMINEES
Joseph Otting, of Nevada, to be Comptroller of the Currency,
Office of the Comptroller of the Currency...................... 5
Prepared statement........................................... 36
Biographical sketch of nominee............................... 38
Responses to written questions of:
Senator Brown............................................ 59
Senator Sasse............................................ 66
Senator Reed............................................. 70
Senator Menendez......................................... 71
Senator Heitkamp......................................... 72
Senator Schatz........................................... 74
Senator Cortez Masto..................................... 76
Randal Quarles, of Colorado, to be a Member of the Board of
Governors of the Federal Reserve System, and Vice Chairman for
Supervision, Board of Governors of the Federal Reserve System.. 6
Prepared statement........................................... 46
Biographical sketch of nominee............................... 47
Responses to written questions of:
Senator Brown............................................ 79
Senator Sasse............................................ 88
Senator Reed............................................. 90
Senator Menendez......................................... 92
Senator Heitkamp......................................... 94
Senator Schatz........................................... 97
Senator Cortez Masto..................................... 98
Additional Material Supplied for the Record
Letters submitted in support of the nomination of Joseph Otting.. 115
Letter submitted in support of the nominations of Joseph Otting
and Randal Quarles............................................. 121
(iii)
NOMINATIONS OF JOSEPH OTTING AND RANDAL QUARLES
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THURSDAY, JULY 27, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs
Washington, DC.
The Committee met at 9:59 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Michael Crapo, Chairman of the
Committee, presiding.
Chairman Crapo. And would the witnesses for our hearing
please come and take their seats, and while they are doing
that, Senator Shelby cannot be here for his questioning time,
and so he has asked for just like a minute to make a quick
statement.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Mr. Chairman, I will be real quick today.
I just want to say I will not be here. I have got to
preside over an appropriations hearing, but I believe that the
President has sent us two good nominees. One, we have waited a
long time on the Vice Chairman of Supervision for the Fed--Mr.
Quarles, Mr. Otting--and I think they are outstanding nominees.
I hope that you--the hearing goes well and we can expedite
these nominees and get them in place.
Thank you.
Chairman Crapo. Thank you, Senator Shelby.
All right. The hearing will come to order.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
This morning we will consider the nominations of Mr. Joseph
Otting to be Comptroller of the Currency and the Honorable
Randal Quarles to be a Member of the Board of Governors of the
Federal Reserve System and Vice Chairman for Supervision of the
Board of Governors of the Federal Reserve System.
Welcome to both of you.
Mr. Otting. Thank you.
Chairman Crapo. And congratulations to you on your
nominations to these important offices.
I see that you have friends and family sitting with you,
and I welcome them here today as well.
These two positions are critically important to ensuring a
safe, sound, and vibrant financial system, and we are fortunate
to have two highly qualified individuals to consider for these
posts.
Mr. Otting brings a particular expertise and understanding
of our banking system from a long career in financial services.
As head of the OCC, Mr. Otting would oversee supervision of all
national banks and Federal savings associations as well as
Federal branches and agencies of foreign banks. Having served
in leadership positions at various financial institutions in
the past, I am confident that Mr. Otting will bring strong
leadership to the OCC.
Mr. Quarles has a wealth of government and private-sector
experience as well dealing with both domestic and international
financial markets. He is no stranger to public service, having
previously served in multiple top posts in the Treasury
Department. As Vice Chairman for Supervision, Mr. Quarles would
play a key role in developing regulatory and supervisory policy
for the Federal Reserve System.
President Obama never designated anyone for this role.
Instead, former Fed Governor Dan Tarullo acted as the de facto
Vice Chairman for Supervision in various ways, including by
chairing the Federal Reserve Board's Committee on Supervision
and Regulation, overseeing the Large Institution Supervision
Coordinating Committee, and representing the Fed at the
Financial Stability Board and in Basel, among other functions.
In February, Chair Yellen committed in a hearing that she
expected President Trump's nominee for Vice Chairman for
Supervision will have the same responsibilities that Governor
Tarullo had, including heading the Federal
Reserve's Committee on Supervision and Regulation and
representing the Fed at the Financial Stability Board and in
Basel. I look forward to working with Mr. Quarles in this
effort.
Congratulations again on your nominations, and thank you
and your families for your willingness to serve.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and welcome to the
witnesses.
I appreciate holding today's hearing. I thank the witnesses
for their willingness to enter public service.
This Committee under the previous Chairman, not the
gentleman whom I respect sitting next to me, waited 2 years and
never did hearings on two Federal Reserve nominees. I am glad
that this Chairman and the Democrats are willing to move
forward on a nominee of the President, of the party that is not
ours, unlike what this body, this Committee failed to do for 2
long years.
You are seeking, all of you--the two of you are seeking to
follow in the footstep of two people, each in the Fed and OCC,
who are dedicated public servants and did a great deal to make
our financial system safer.
Mr. Quarles served as Treasury's Under Secretary for
Domestic Finance in the years leading up to the 2008 financial
crisis. His job was to coordinate oversight of the financial
industry and ensure Government watchdogs were looking out for
the best interest of American taxpayers. However, many of his
statements leading up to the crisis lead me to wonder whether
he was asleep at the switch or willfully turning a blind eye to
Wall Street abuses and excesses.
Contrary to Mr. Quarles' predictions in 2006, the economy
was--quote, was not, as he said, ``strong''; the financial
sector was not, as he said, ``healthy''; and our future was
not, as he said, ``bright.'' The banks were not, in fact, as he
said at the time, ``well capitalized,'' and as a result,
taxpayers paid billions to bail these banks out, while Mr.
Quarles and his company turned a profit off of the crisis.
Exotic mortgage products were not confined to, as he said,
quote, ``upper-income individuals that can manage a sizable
increase in their monthly mortgage payment,'' unquote. Shady
loans were pitched to sheet metal workers in Parma, Ohio;
school teachers in Cleveland, Ohio; servicemembers from Wright-
Patterson Air Force Base in Dayton, Ohio.
The financial crisis devastated the Ohio families that lost
their jobs and their homes and their savings, but for wealthy
bank executives, for private equity investors, the crisis was
hardly life-changing. It was an opportunity to profit by
flipping failing banks bought at rock-bottom prices and
foreclosing on working families, all while raking in taxpayer
dollars.
I have said this in Committee before. My wife and I live in
ZIP Code 44105 in Cleveland. In 2007, the first half of that
year, more homes were foreclosed on than any ZIP Code in the
United States of America. So I see--I see the aftermath of that
every day I am in Ohio, which is 4 or 5 days almost every week.
Mr. Otting's bank made money by kicking seniors out of
their homes and then turned around and said the Government made
them do it. Mr. Quarles bemoaned the role of the Government as
a player in the financial sector rather than a referee. These
sentiments would ring a little less hollow had their banks not
accepted $2.5 billion from the FDIC to protect them from
losses. Apparently, they believe in Government help for Wall
Street, just not families in ZIP Code 44105.
In the wake of the crisis, the FDIC was forced to step in
to share losses at failed banks, banks like IndyMac and
BankUnited, to prevent a bigger hit on the insurance fund. Mr.
Quarles and Mr. Otting then stepped in and made good money
after those banks had been propped up by taxpayers.
According to the Columbus Dispatch, Ohio's most
conservative newspaper, 2,000 Ohioans were foreclosed on by
OneWest in our six largest counties alone from 2009 to 2015
while Mr. Otting served as its CEO. In fact, he was held
accountable for robo-signings by the Office of Thrift
Supervision, the predecessor to the agency he now hopes to run.
My concern is not whether today's nominees have a great--
have a wealth of experience--they do--running, working for
banks. My concern is whether they will work for American
taxpayers and working families.
We have made a lot of progress in the 7 years since we
passed Wall Street reform. One-fifth of the rules, however,
remain unfinished. Instead of finishing the job, Wall Street's
allies in this town try to take us backward, weakening or
eliminating important safeguards.
We already see this at some of the agencies that have
removed Wall Street reform from their agendas and attacked
other
agendas--other agencies--excuse me--for doing their jobs. This
collective amnesia reminds me all too well of 2006. Big banks
make record profits, yet they claim they are besieged by their
overseers, the regulators.
The banks' refrain is to be expected. What is not
acceptable is for the referees to join the chorus.
I look forward to hearing from our witnesses.
Chairman Crapo. Thank you.
We will now--will the nominees please rise now and raise
your right hands, and we will administer the oath. This
constitutes two questions. First, do you swear or affirm that
the testimony you are about to give is the truth, the whole
truth, and nothing but the truth, so help you God?
Mr. Otting. I do.
Mr. Quarles. I do.
Chairman Crapo. And then, second, do you agree to appear
and testify before any duly constituted Committee of the
Senate?
Mr. Otting. I do.
Mr. Quarles. I do.
Chairman Crapo. Thank you. Take your seats.
Your written statements will be made a part of the record
in its entirety. I think you have already been advised we
allocate you 5 minutes for an introductory oral statement.
I again remind my colleagues on the Committee that the time
for questioning is 5 minutes and ask cooperation of all to try
to maintain those timeframes.
Before you begin your statement, I invite you, if you would
like to do so, to introduce any of your family members who are
in attendance, and, Mr. Otting, you may proceed.
Mr. Otting. OK. Thank you very much, Chairman Crapo.
First of all, I would like to introduce my wife and best
friend, Bonnie Otting, who is sitting behind me. Sometimes you
get lucky in life, and I am forever grateful the day that we
had the opportunity to meet. She has always been my compass in
life, and for that, I love you.
In addition, I would like to recognize Bonnie's father,
Herman Espinoza, who could not be with us today due to his
health and age of 94. Herman is a first-generation immigrant
who came to the United States to pursue the American dream so
his family could live a better life. One of his proudest
moments was when he was granted his U.S. citizenship.
My mother, Grace Ann McQuillen Otting, is with us today
also. She has been my guiding light in life, instilling in me a
strong moral compass and helping me appreciate the values of
sound family life. She taught school for 35 years and was an
inspiration to many students.
I would also like to acknowledge my late father, James
Otting, and mother-in-law Jessie Espinoza. My father taught me
very many valuable lessons in life, not the least of which were
his business acumen, focus on family, and his commitment to
serving his community. From Bonnie's mother, I learned the
value of kindness to others and that love can solve many
things.
Last, I would like to introduce my sister, Julie Ardell
Otting, and my brother, James Otting, who are also with us
today. Over the years, we have learned the value of love,
companionship, and the ability to be dependent on each other.
Thank you very much.
Chairman Crapo. Thank you, and, again, welcome to your
family.
Mr. Otting. Thank you.
Chairman Crapo. You may begin your statement.
STATEMENT OF JOSEPH OTTING, OF NEVADA, TO BE COMPTROLLER OF THE
CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Otting. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, it is an honor to appear before you
today.
I am grateful to be nominated by President Trump to be the
Comptroller of the Currency, and if confirmed for this role, I
would be honored to serve the citizens of the United States of
America.
Thank you to all the Committee Members I had an opportunity
to meet. I enjoyed the opportunity to meet some of you for the
first time and to get reacquainted with others, but most
importantly, I appreciated the opportunity to learn more about
the issues you feel are important to the people of America. For
those who I did not get to meet, if confirmed, I look forward
to meeting and working with you in the future.
I grew up in a Midwestern family where my father was an
entrepreneurial businessperson and my mother, as I indicated,
was a school teacher. At the young age of 10, I learned the
value of business, client relationships, and leadership from my
father while working at his businesses, often doing the jobs at
that age that nobody else wanted to do. I also observed how my
father--how hard work, willingness to take risk, and family
support led to success. I learned from my mother, who taught
school during the day, raised three children and went to
college at night, that hard work and dedication can make a
difference.
I studied at the University of Northern Iowa, following a
family tradition of my mother, sister, and ultimately my
brother to the university. During the summer and holiday
breaks, my father would have me work at his businesses and
arranged other roles, which included working at an electrical
dam for a regional utility, commercial construction, and at a
bakery, all great roles for building character, an appreciation
for people and their individuality, and how leadership can make
a difference.
After college, I was fortunate to be chosen to be part of
Bank of America's training program in California. It was an
experience that forever changed my life. I gained insight into
the banking system from the other side of the table and
discovered how banks can help consumers and businesses with
services, deposits, and loans. It is in this industry that I
spent the next 34 years of my life and learned the importance
of serving employees, the community, customers, and
shareholders.
My banking experience has allowed me to work for one of the
largest banks in the United States, two well-respected regional
banks, and a community bank. I have touched virtually every
segment of the industry, including serving consumers,
businesses, trust functions, private banking, investment
services, human resources, compliance, audit, treasury,
financial management, and operations. This experience provides
a broad base of knowledge that would be helpful and insightful
if I was chosen to be the Comptroller.
In 2010 I decided to leave an executive position at an
established financial institution because I felt Southern
California was in need of a hometown bank. When approached
about the idea, I knew it would be challenging and a tremendous
amount of work but ultimately an achievement for myself and the
company. With the assistance of many dedicated men and women of
OneWest Bank, we were able to create the largest hometown bank
in Southern California. It was able to grow beyond just being a
mortgage company and being able to serve the needs of local
businesses, families, and consumers. Hopefully, helping build
this company is something that I will and will remain proud of.
After a successful merger in 2015, I left the organization
and became an entrepreneurial person returning to me roots in
real estate and small business.
The mission of the OCC is to ensure that national banks,
Federal savings and loans, and foreign operations of
international banks operate in a safe and sound manner, provide
fair access to financial services, treat customers fairly, and
comply with applicable laws and regulations. If confirmed as
Comptroller of the Currency and given the opportunity to lead
the men and women of the agency, I pledge to honor the OCC's
mission and cooperate and work with this Committee and all
Members of Congress.
Thank you for your time today. I look forward to answering
any questions the Committee may have, and I am honored to share
this hearing with Mr. Quarles.
Chairman Crapo. Thank you, Mr. Otting.
And, Mr. Quarles, you may begin.
Mr. Quarles. Thank you, Mr. Chairman.
I would like to introduce my wife, Hope Eccles, who is with
me here today; my parents, Ralph and Beverly Quarles; and our
niece, Liza Burnett, who is interning here on the Hill and can
be with us today.
Chairman Crapo. Well, thank you, and, again, we welcome
your family.
Mr. Quarles. My statement?
Chairman Crapo. Yes. Please go forward.
STATEMENT OF RANDAL QUARLES, OF COLORADO, TO BE A MEMBER OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AND VICE
CHAIRMAN FOR SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM
Mr. Quarles. Chairman Crapo, Ranking Member Brown, Members
of the Committee, thank you for this opportunity to appear
before you today.
I am honored that the President has nominated me to serve
as a Member of the Board of Governors of the Federal Reserve
System and as the Board's Vice Chairman for Supervision, and I
am grateful for the privilege of your consideration. And I am
also very grateful for the support not only of my wife and
family who are here, but of our three children, Randy, Spencer,
and Hope Jr., who have put up with a lot in their lives from
their father's public service.
The Federal Reserve System occupies a central position in
our country's policy infrastructure for promoting a strong
economy and the stability of the financial system and
supporting robust job growth in a context of price stability. I
can assure the Committee that were I to be confirmed as a
Governor of the Federal Reserve, I would be strongly committed
to all these objectives.
The specific position for which I have been nominated, Vice
Chairman for Supervision, has a particular role in ensuring the
safety, soundness, and efficient operation of the financial
system. As recognized by the Treasury's recent report,
regulatory policies that have been enacted since the financial
crisis have improved the safety and soundness of the system,
but as with any complex undertaking, after the first wave of
reform, with the benefit of experience and reflection, some
refinements will undoubtedly be in order.
Former Governor Dan Tarullo, who was one of the principal
architects of many of these reforms, said as much himself in a
valedictory speech that he gave in April on the occasion of his
leaving the board, stating that there are clearly some changes
that can be made without endangering financial stability. The
key question will be ensuring that as we continue to refine the
system over time, we do so while maintaining the robust
resilience of the system to shocks.
I believe that I am well qualified to undertake that role.
As this Committee knows, I have had experience over my career
with the financial sector from many different points of view. I
have been a practicing lawyer versed in the granular
technicalities of the most complex aspects of the regulatory
system. At the other end of the spectrum, I have been an
investor in small community banks. I am familiar with the
particular benefits and challenges that those institutions
face.
And I have been a financial regulatory policymaker under
two different Presidents in two different decades. In fact, my
first tour of duty in public service was during a similar
period of response after a financial crisis, arriving in 1991
during the clean-up phase of the savings and loan crisis and
facing the insolvency of the FDIC's insurance fund.
While this experience has given me substantive insight into
the issues that the Federal Reserve's Vice Chairman for
Supervision will face, it has also reinforced my commitment to
what I think is the single most important characteristic of a
good policymaker, that he be humble, humble about the
constraints on our understanding of complex systems, humble
about the fallibility of our judgments, and humble about how
our assumptions and views influence even what we believe to be
our most data-driven and analytical conclusions.
As a consequence, were I to be confirmed for this position,
I would approach this undertaking as I try to approach every
task, with a continual openness to input from every source. In
particular, I would look forward to working with the Members of
this Committee on both sides of the aisle and their staffs to
understand the challenges that face the financial system as
they evolve over time.
Thank you for the honor of this hearing, and I look forward
to answering your questions.
Chairman Crapo. Thank you, Mr. Quarles.
And, Mr. Quarles, I will start and will start with you
first.
Immediately prior to leaving the Fed, former Governor
Tarullo gave a speech highlighting areas where regulatory
relief could be appropriate, in his opinion. Former Governor
Tarullo said, one, the $50 billion SIFI threshold should be
changed; two, the Volcker rule is too complicated and may be
having a deleterious effect on market making, particularly for
some less liquid issues; three, community banks should have a
much simpler capital regime; four, the supplementary leverage
ratio should be revisited; five, the $10 billion asset
threshold for company-run stress test is too low; and six, the
Federal Reserve should consider eliminating the qualitative
portion of CCAR for all banks.
Mr. Quarles, do you agree with all of these
recommendations?
Mr. Quarles. I actually do agree with all of those
recommendations. I think they are very much in line with how I
would approach regulation.
Chairman Crapo. Well, thank you.
And this second part of this question may be something you
want to take a little bit of time and think about and respond
later, but if you have any ideas right now, are there any
additional areas of regulatory relief that you think it would
be appropriate for us to look at?
Mr. Quarles. I think that one important area that was not
mentioned in that list is transparency. I would want that to be
a theme of the Federal Reserve's regulatory activities, were I
confirmed for this position.
I think that both as an appropriate relationship between
the regulator and the regulated and also as a matter of
improving the content of regulation, it is important for
regulators to be very clear about the principles that are
driving their decisions and about the expectations they have
for the regulated system.
I think an example of that, although it is only one
example, is the lack of transparency that has surrounded the
CCAR stress test up to now. So I do think that the Federal
Reserve can look at being more transparent about those
activities and can do it in a way that does not in any way
reduce the effectiveness of those tests.
Chairman Crapo. Well, thank you. I appreciate that, and as
you have further observations, I welcome you relaying them to
us.
Mr. Otting, I enjoyed meeting with you last week, and at
our meeting, we spent some time discussing your time as an
executive at OneWest. There has been some controversy about
OneWest, and would you like to take a little minute or two here
to respond to some of the questions that have already been
raised and, frankly, to describe for the Committee your tenure
at OneWest?
Mr. Otting. Thank you, Chairman Crapo.
First of all, in 2008 was when IndyMac failed. It was taken
over by the FDIC, and it operated until March of 2009. In March
of 2009, an investment group led by Steven Mnuchin acquired the
bank and renamed the entity OneWest Bank. As we all know, this
was a very difficult time in America in the middle of the
financial crisis.
The investment group bought IndyMac because they believed
in an American recovery, that they could rebuild and create a
regional bank and save thousands of jobs. Going into IndyMac
can only be described as what a fireman feels when he gets to
the front door of a five-alarm fire. The bank had almost
200,000 loans in default. The men and women of OneWest Bank
were working diligently to save the homes of thousands of
Americans.
While some of those who focus on the homes that were lost--
and this was clearly a tragedy--we like to focus on the 80
percent, roughly, of the 160,000 homes that were able to be
saved, and those Americans are in those homes today.
We did this by having some very creative initiatives. We
were the first to offer principal forgiveness. We lowered
interest rates, and we modified payments and moved principal to
the back so people could afford their homes.
Another area the bank received attention was the servicing
of mortgages. The bank through the acquisition of IndyMac
assumed a large portfolio of non-owned servicing of mortgages.
We were doing them as a third-party servicer. These portfolios
often had restrictive agreements on what both the bank--actions
they could take regarding those agreements.
In April of 2011, OneWest Bank and all the large mortgage
servicers in America signed a consent order to review and
improve servicing practice and standards. A significant part of
this order was the review of foreclosures and modifications
completed in 2009 and 2010. For OneWest Bank, this involved
reviewing 175,000 borrowers that were in foreclosure.
Ultimately, OneWest Bank was the only bank, 1 out of 14,
that actually completed that look-back of the foreclosures.
This was completed by an independent third party under the
engagement and supervision of the OCC. The results prove that
OneWest Bank had a very low error rate, and independent
Government reviews routinely demonstrated that we had the most
effective loan modification of any program. These are facts
that are available in the public arena.
We also took litigation efforts against some of the holders
of the mortgages to allow us to have similar actions against
their portfolios. For any errors that were identified--and
there were errors, but they were small and in the small basis
points--the bank made full restitution to the borrowers to the
tune of almost $9 million.
If it were not for the hardworking employees of OneWest
Bank, I believe that many more foreclosures would have
happened, numerous job losses would have occurred, and Southern
California consumers and businesses would have been left
without an additional bank that could provide loans and
products and services.
Thank you, Chairman Crapo, for allowing me to address that.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you.
Mr. Otting, I will start with you, and thank you for that
explanation. I want to pursue that further.
The Columbus Dispatch article I mentioned, one, the most
conservative newspaper in Ohio, OneWest denied loan
modifications or gave the runaround to homeowners like Carla
Duncan, a social worker from Cleveland Heights who was current
on her mortgage. As CEO of OneWest, you signed the consent
order that I mentioned in my opening statement for shoddy
services and improper foreclosures related to the practice of
robo-signing, which you did not mention in your robo-signing, I
do not believe you mentioned in your answer to Chairman Crapo.
In other words, you permitted your bank to break the rules
while in the process making life harder for homeowners like Ms.
Duncan across the country trying to stay in their homes. How do
we trust that you will not allow banks to skirt the rules and
harm their customers as their regulator?
Mr. Otting. Thank you, Senator Brown, for the question.
First of all, just for a correction, I did sign the consent
order, but we did not confirm or deny the accusations in the
consent order. The follow-up review reviewed 175,000 borrowers.
In the area of did we not provide modifications, I believe the
number--I could be wrong--was roughly 35 out of 29,000
modifications that were reviewed.
We did make 29 mistakes, and I apologize to the American
people for that. But the error rate was incredibly low, and so
my viewpoint is if you look at the actual facts, there is a
false narrative out there about the OneWest Bank servicing
operation. I think you would walk away feeling very good about
our operations.
Senator Brown. Well, it is a false narrative to you, not to
those that lost their homes. More on that in a moment.
Mr. Quarles, year before the beginning of the financial
crisis while in charge of the Office of Treasury, responsible
financial regulation, you downplayed the risks emerging in the
financial sector. You touted its resiliency. You said, ``I can
assure you that my colleagues and I at Treasury are doing
everything in our power to make our financial system even more
resilient in the future.''
In retrospects--in retrospect, do you believe you and your
colleagues at Treasury did everything you could have and should
have to prevent the crisis, and what more--if not, what more
should have been done? And be as precise as you can.
Mr. Quarles. Thank you, Senator. I appreciate that question
because I have, obviously, reflected since the crisis on the
measures that were taken leading up to the crisis.
We were aware--I guess the right way to put it is that we
believed that even given the information that we had from the
regulatory system that the risks that were building up in the
system were manageable, we did believe that there were measures
that could be taken to improve the resiliency of the regulatory
system and the ability of the regulatory system to understand
risk, and we were beginning a process of presenting a program
for change that would have improved the regulatory system.
With the benefit of hindsight, we could have been more
aggressive in pushing that program forward and in putting those
ideas forward.
As I think you can appreciate and all the Members of this
Committee can appreciate, in advance of the financial crisis,
the political obstacles to the changes that we thought would be
appropriate to improve regulation would have been formidable,
and so we were proceeding cautiously. With the benefit of
hindsight, I would say it was probably too cautious to putting
forward----
Senator Brown. Right. But implicit and political obstacles
are the power of--and the influence of Wall Street on this
Committee?
Mr. Quarles. I would not say it was so much the power and
influence of Wall Street on this Committee. I think, you know,
one of the ways in which I think that on a clean slate,
financial regulation could be improved would be to have a much
simpler, clearer, less kaleidoscopic construction of the
regulatory system that would make it easier for the regulators
to understand where risk is and where it is not.
The political obstacles to that were less those of the
industry versus the Committee and more those of people of
goodwill having differing views in a time that was not a crisis
as to what the right answers were. It had been a longstanding
question that changing those rules was going to be difficult.
I do think it is a very fair question to ask what could we
have done differently, and I think my answer would be we could
have moved more quickly. We could have been more aggressive in
pushing some of these regulatory changes that we wanted to push
but believed would be politically difficult.
Senator Brown. And last, back to you, Mr. Otting. Treasury
released its report recently on financial regulation as
required by the President's Executive order. Much of that
report focused on rolling back rules for the Nation's largest
banks, including decreasing capital requirements. Do you agree
we should roll those rules back for the Nation's largest banks?
Mr. Otting. I believe there were a lot of recommendations
in that report, and I do support a number of those specifically
as they deal with community banks and small banks across
America.
Senator Brown. Yeah, but that was not my question.
Specifically, I knew--I knew from our individual conversation
that was the case, but----
Mr. Otting. I think the capital structure that we have in
place today is highly complex, and I think it needs to be
examined. And I would be--welcome to sit down and have dialogue
with you on that.
Senator Brown. Well, you said in our conversation on
Tuesday that you think the rules for the largest banks are
appropriate and should not be weakened.
Mr. Otting. Well, I said I--overall, I think that the
regulatory system we have in place today has resulted in banks
understanding their risks much better than they ever have, and
we have better capital levels.
I do think that we have created--you know, in 150 years, we
have had many provisions and laws that have come through the
banking system. Seven years ago when Dodd-Frank was put in
place, I think it has opened up to look at some of the
characteristics, but I am a believer of a well-capitalized
banking system and a banking system that understands its risk.
Senator Brown. Well, I am concerned that a President who
says we should drain the swamp, as he surrounds himself with
him almost looking like a Wall Street executive retreat in his
President's Cabinet, I am concerned about a report coming from
Treasury suggesting decreasing capital requirements.
I will just close with this. I just hope that you are not
part of any effort to weaken capital requirements. That clearly
is the wrong direction for a stable banking system.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman, and thank you,
gentlemen, for joining us today.
Let me start with Mr. Quarles. Thanks for visiting with me
recently in my office. I enjoyed our discussion, and I want to
follow up a little bit on one aspect of that which relates to
the resolution authority of Dodd-Frank.
As you know, I made it clear, among the many very serious
flaws in Dodd-Frank, one that has bothered me from the
beginning is the resolution authority that grants very
disturbing discretion to regulators in the case of a failing
institution and puts taxpayers at risk for having to bail out a
failing financial institution.
It has always been my view that the right way to resolve
the failure of a big financial institution is to do it in
bankruptcy, where the losses would be taken by shareholders and
unsecured creditors, where creditors could know with complete
transparency how they will be treated, because it is a matter
of precedent and law, and where similarly situated creditors
would be treated the same way. These are fundamental principles
of bankruptcy, and yet it seems to me as long as we have this
resolution authority and a bankruptcy code that needs to be
modified, there is a danger that in the event that a big
financial institution gets into trouble, we would have--we
would use this flawed authority.
So I have legislation that would amend the bankruptcy code.
It is designed to enable bankruptcy to work for even a very
large, very complex financial institution, and I would just
like to get your thoughts on whether, A, you believe it is
necessary and appropriate to amend the bankruptcy code for this
purpose and whether you would work with me and this Committee
to try to get to that goal so that we would never have to worry
about taxpayers having to bail out a financial institution
again.
Mr. Quarles. Well, thank you, Senator.
I think a theme throughout my career of my approach to
policymaking and particularly to regulation has been that the
discretion of policymakers and regulators--particularly
regulators--should be as constrained as possible, and where
discretion remains, those regulators should be as clear as
possible about how they will exercise it in the future so that
their actions are predictable and there is less uncertainty as
to what their policy will be.
In connection with that, I do think that it is a very
valuable effort. Indeed, the right way to approach continuing
to improve the environment for the resolution of financial
institutions is to improve the operation of the bankruptcy code
so that a financial institution could fail in the same way that
any other institution fails, and the rules surrounding that
would be understood as they are for any other institution with
as little exercise of discretion as is possible.
I think that, as you have noted, there is more work that
needs to be done to improve the bankruptcy code, a lot of
questions that surround how one can do that, but I believe that
is achievable, and I would be happy to work with you and your
staff on that effort.
Senator Toomey. Great. Thank you.
I am going to run out of time, so I just want to be
quickly--I want to touch on CCARs. And, Mr. Quarles, you
mentioned earlier, if I understood you correctly, that you
think there should be more transparency in the methodology.
I just want to mention for the Committee's benefit a
reminder of the GAO report on CCARs. In addition to--we know
how incredibly costly it is to comply with this regime, but the
models and testing procedures are not transparent according to
GAO. But not only that, the Fed has not done enough to assess
whether CCAR is inadvertently pro-cyclical, and, of course, if
it is, there is a danger that it actually could contribute to
systemic risk through the dynamic of the crowded trades that
you have alluded to.
So I would just urge you to seriously consider that
possibility and the extent to which really CCAR is even
necessary anymore, especially given the DFAS mechanism.
Very quickly, Mr. Otting, if I could just ask you a
question. One of the other things about Dodd-Frank that I find
very problematic is the SIFI designations. I object to the
concept, but I acknowledge that it is the law.
Nevertheless, the process by which the FSOC has made the
designations has been so badly flawed that, as you know, a
court has ruled that it is impermissible in at least one case.
You would be a member of the committee making designations.
I think it is irrefutable that the process has been opaque.
That institutions subject to the designation do not know the
criteria by which they are designated. That there is no well-
defined process by which a firm could choose to discontinue the
activity that would cause a designation. There is no well-
defined process for a de-designation.
Given all of these fundamental flaws, which at least one
court has agreed, do you think it is appropriate that there
would not be any additional nonbank SIFI designations until at
least this process is changed?
Mr. Otting. Senator Toomey, first of all, I agree with all
the points that you made, and I think it--both of us, as a
Committee, to sit down and bring greater definitions to those
before we would designate another SIFI. So I do agree with you.
Senator Toomey. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So after the 2008 crisis, Congress put the Fed in charge of
supervising the biggest banks and created a new position, this
Vice Chair for Supervision that was supposed to lead that
effort. That means if you are confirmed to this position, Mr.
Quarles, you will have more influence than any other person
over the regulation of the big banks.
Now, given that enormous power, the number one thing we
need from the Fed's Vice Chair for Supervision is a
demonstrated willingness to stand up to the interests of the
big banks that threaten the financial institutions, but when I
look at your 30-year career spinning through the revolving door
of the private sector, Mr. Quarles, I just do not see it. You
have got 15 years representing big banks at a New York law firm
working on some of the mergers that created the too-big-to-fail
banks that we have today. You have two stints at the Treasury
Department, including shortly before the 2008 crisis, where you
insisted that the banks were well capitalized enough to survive
a housing downturn--it turns out they were not--and more than a
decade in private equity and investment management, where you
have argued repeatedly for weaker rules for the biggest banks.
So that is not a track record that should give Americans a
whole lot of confidence in you.
But what I want to do is try to look ahead on this. The big
banks and financial firms have a lobbying organization called
the Financial Services Roundtable, or FSR, and it has no
community bank members. It is purely the big guys. FSR recently
submitted a 124-page wish list of financial rule rollbacks for
the Treasury Department.
So I want to go through some of these and see how your
views line up with the views of the big banks. So first one
here, FSR would like to see the stress test relaxed for the Fed
and give it stress test models to the banks before the actual
test. They want to see the test ahead of time. Do you support
those changes?
Mr. Quarles. Well, not having read the FSR's report, I do
not know all of the details about the----
Senator Warren. Wait, wait. Let me get this straight. You
have been nominated to be the head of Fed Supervision, and you
have not read this from the FSR?
Mr. Quarles. I have not read that report.
Senator Warren. OK. So we will ask the question, then, more
generally: Do you think that stress test standards need to be
relaxed and the banks need to see them in advance?
Mr. Quarles. I think that transparency around the content
of the test with the public in general, which would include the
regulated entities, is a benefit.
Senator Warren. So they ought to be able to see the test in
advance?
Mr. Quarles. I believe that that would----
Senator Warren. And you think they ought to be relaxed?
Mr. Quarles.----improve the conduct of regulation.
I do not have a view as to whether they ought to be
relaxed----
Senator Warren. All right.
Mr. Quarles.----in part because I am not--because of the
lack of transparency, I am not perfectly familiar with all of
the content of the test.
Senator Warren. OK. So you think they ought to see the test
in advance, which is what they are asking for, and you do not
have an opinion on whether or not they ought to be weakened.
How about capital? FSR would like a bunch of changes to the
calculation of how capital and leverage requirements that would
have the effect of lowering--all of which would have the effect
of lowering these standards. Do you believe that capital and
leverage standards should be lowered?
Mr. Quarles. I do not have a view as to whether they should
be higher or lower.
I do think that more can be done to ensure that in setting
the capital for the full range of institutions in the system
that we can be more sensitive to the character of each
institution in determining the appropriate----
Senator Warren. So you think it should be lowered for some
but raised for others?
Mr. Quarles. Again, in advance of the analysis, I could not
tell you----
Senator Warren. So you do not have an opinion on that.
What about the Volcker rule, which prohibits the banks from
making risky bets with their own money? FSR wants to cut the
rule back so that the banks can make more of those kinds of
investments. Do you agree with FSR that the Volcker rule should
be cut back so that it should place fewer restrictions on the
banks?
Mr. Quarles. I agree with former Governor Tarullo that the
complexity of the rulemakes it very difficult to apply, and
that we should work to try to simplify the application of the
rule.
Senator Warren. Well, now, that is easy. If you just want
to simplify it, you would support Glass-Steagall. Right? Do you
support Glass-Steagall?
Mr. Quarles. Well, as you know, Senator, the key provisions
of Glass-Steagall are still in force----
Senator Warren. Well----
Mr. Quarles.----which are Sections 16 and 21 of the Banking
Act----
Senator Warren. No, no.
Mr. Quarles.----of 1933.
Senator Warren. The key provisions of Glass-Steagall are
not enforced any more. They have been repealed.
Mr. Quarles. No. The ancillary provisions, which are
Section 20 and 32----
Senator Warren. Which are the ones which permit the big
banks----
Mr. Quarles.----of the Banking Act of 1933----
Senator Warren.----to be able to engage in these combined
activities that Glass-Steagall were supposed to separate. That
is what is now permitted.
Mr. Quarles. Well, the core provisions actually prevent the
bank from engaging in that, so Section 16 and 21----
Senator Warren. So you think we are perfectly protected if
we took away Volcker? Is that what you are saying, and we do
not need Glass-Steagall?
Mr. Quarles. I am sorry. I did not catch the first part of
the question, ma'am.
Senator Warren. You are saying we are protected if we took
away Volcker and did not put Glass-Steagall in its place? That
is why nothing went wrong in 2008?
Mr. Quarles. Well, I do not think that the re-imposition of
those--of the ancillary provisions governing affiliates, which
are Sections 20 and 32, would, in fact, have made a difference
in the financial crisis. But, usually, when people are talking
about today about the re-imposition of Glass-Steagall, they are
talking about ensuring that the depository institution is
protected from risks in another part of a large financial
institution.
Senator Warren. You know----
Mr. Quarles. I think that is a very worthy goal.
Senator Warren. I am over my time, and so I want to be
respectful here.
But I am just looking for any area where you disagree with
the major financial institutions, and I am not hearing it. The
primary purpose of this job is to be able to stand up to the
largest financial institutions in this country. You have no
history of having done that, and sitting here right now, all
you can say is, gee, I have not thought about that.
We just went through a devastating financial crisis less
than a decade ago because powerful people in Government let
powerful financial institutions call the shots. We cannot go
down that road again. We need people in Government who are
willing to stand up to large financial institutions, and we
need people who have a demonstrated history of that. And you
simply do not, Mr. Quarles.
Thank you. I apologize for running over, Mr. Chair.
Chairman Crapo. Thank you.
Senator Rounds.
Senators Rounds. Mr. Quarles, I am just curious, and I will
give you a chance to kind of respond on the comments here. Do
you believe that a strong regulatory process is appropriate?
Mr. Quarles. Absolutely, Senator.
Senator Rounds. Do you believe that a regulatory process
which clearly defines what the rules are is appropriate?
Mr. Quarles. That, I also agree with.
Senator Rounds. Do you believe that the regulations should
be such that the--that there is an understanding of what the
expectations are of any bank, regardless of its size, should be
in place?
Mr. Quarles. I think that that is not only appropriate; it
is necessary for the regulations to be effective.
Senator Rounds. Do you think that there are regulations in
place today that make it difficult for financial institutions
to understand the direction that the regulators expect them to
go without going back in and asking for additional information
time and time again?
Mr. Quarles. I think that is true in many areas of the
current system.
Senator Rounds. I have been aware of concerns that certain
bank risk exposure regulations have inadvertently impacted
liquidity in the listed options market. The regulations fail to
account for the risk-mitigating nature of options and are
impeding access to central clearing and hampering market
liquidity by artificially constraining clearing members and
their customers who make markets. It is concerning when markets
that effectively provide portfolio insurance to investors are--
well, let us just say adversely impacted by banking regulations
because the regulations are not sufficiently precise to account
for the offsetting characteristics of options.
Are you committed to exploring ways to remedy this unforced
error, including via interpretive relief from the Board of
Governors?
Mr. Quarles. I think that would be a very appropriate area
for us to look into. I do not have all of the details around
that
question, but I think that question and questions like it are
important areas for the board to examine.
Senator Rounds. Post-crisis, our Nation's banks, especially
the largest, hold significant levels of capital. Governor
Powell and Secretary Mnuchin have echoed this in the past while
testifying before Congress. Additionally, you recently noted
that you do not believe that we will likely--that you believe
that we will likely not see another financial crisis in our
lifetimes due to post-crisis reforms.
In June, the Fed announced that all banks had enough
capital to pass a stress test, including both the quantitative
and the qualitative elements of CCAR, and you did not object to
a single bank's capital plan.
I have heard discussion of potential Fed proposal
incorporating G-SIB surcharge into CCAR as the new post-stress
minimum capital requirements. Would you support the inclusion
of the G-SIB surcharge in CCAR?
Mr. Quarles. I would have to look at that question in more
depth, but at this point, I think that is something that is
definitely worthy of looking at.
Senator Rounds. Would you drop us a note back on that as a
take-it-for-the-record, please? Would you?
Mr. Quarles. Yes, I would be very happy to.
Senator Rounds. Thank you.
I would like to--for both of you, I would like to discuss
questions that I recently had the chance to ask Federal Reserve
Governor Powell at another recent hearing. I had the
opportunity to ask Governor Powell about the supplemental
leverage ratio, or SLR. As I told Governor Powell, it is a
blunt instrument that fails to account for very safe
investments like cash deposited at central banks.
In particular, institutions that provide custodial services
have raised concerns that the SLR fails to account for very
safe investments like cash deposited within the central banks.
In response to one of my colleagues on the House side,
Chairman Yellen acknowledged that these concerns, in a question
for the record, and said that the Federal Reserve Board is
actively considering these suggestions and other suggestions
about how to improve the cost-benefit balance for our leverage
ratio requirements.
Can both of you discuss any suggestions you would have to
improving the ESLR and--or the SLR and the ESLR? My concern is
this. Mutual funds right now--if we want mutual fund investors
to have the least expensive approach, then one of the ways we
do that is by considering whether or not investments in a
central bank, like these do--they invest back in, in
treasuries, in a custodial nature--should we include or should
we take that out of the denominator in determining what the
ESLR is or the SLR is? Is that something that should be fairly
considered, just to bring down the price to investors in mutual
funds?
Mr. Quarles. Well, I think that the practical consequences
of those regulations, of any regulations and particularly with
respect to the leverage ratio regulations, should definitely be
taken into account in determining the character of the
regulation.
So in looking at that proposal as well as a whole range of
proposals about how to address the leverage ratio, I think that
that is something that we ought to be looking at. Yeah.
Senator Rounds. Sir?
Mr. Otting. Senator Rounds, thank you much for the
question.
I too think it should be examined, as we discussed in your
office. I think the complexity that we built via Dodd-Frank and
the capital structure makes it incredibly difficult for banks
to bounce around between all the categories--risk base,
leverage--and I do think that when you look at some of the
assets that are held on the balance sheet, they really have
limited to no risk. And I do think it is impairing certain
segments of the industry, as you described.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
Gentlemen, welcome. Thank you for your willingness to
serve. Welcome to your family members as well. I appreciate the
opportunity to meet with you in person. Sorry our meeting had
to be rescheduled, and so always look forward to that
opportunity.
But, Mr. Quarles, I would like to start with you, and let
me just say I think your actions in the past are important for
us to figure out how you are going to pursue your roles
currently that you have been nominated for. So some of the
questions are going to be some of the past actions and the work
that you have done in the past.
So, Mr. Quarles, one of the things I want to understand,
that you have been a member of the board of directors at FINRA
since 2015. Correct?
Mr. Quarles. Yes, ma'am.
Senator Cortez Masto. OK. And FINRA is the organization
that is supposed to serve as a watchdog for Wall Street. You
qualify as the, quote, ``public Governor'' on FINRA's board,
which is the slot that is meant to represent the investing
public when it comes to how FINRA operates. Correct?
Mr. Quarles. That is correct, ma'am.
Senator Cortez Masto. OK. And as the qualified--as a public
interest representative, you qualified even though you have
investments in lines of credit from many firms regulated by
FINRA, and you also serve, currently on the board of directors
for the U.S. Chamber of Commerce, during that time. Is that
correct?
Mr. Quarles. Yes, ma'am.
Senator Cortez Masto. OK. And the Chamber of Commerce has
repeatedly sued regulatory agencies to overturn investor
protections on behalf of its Wall Street members. If confirmed
to the position at the Fed, how can we trust you to balance the
public interest against the interests of Wall Street, given the
obvious conflicts in your current role? Can you explain that to
me?
Mr. Quarles. In the same way that in representing the
public on the FINRA board, I have done that without any
influence from or even discussion with the Chamber of Commerce.
I think that it is possible to exercise responsibilities, given
the nature of the duties that a person has.
Senator Cortez Masto. So when the Chamber of Commerce,
which includes Wall Street, some of the Wall Street's biggest
banks and accepts their contributions, sues to overturn rules
on their
behalf, you are--are you in a role of supporting those actions
by the Chamber of Commerce, even though you sit on the opposite
side as a public interest representative with FINRA?
Mr. Quarles. If there were any specific decision that
involved a matter of which the Chamber of Commerce was a party,
I would recuse myself. That has not arisen while I have been on
the board.
Senator Cortez Masto. So you have never recused yourself
while you are on the board of the U.S. Chamber and/or FINRA in
relationship to your interactions on both?
Mr. Quarles. No matters have arisen that would have
required that.
Senator Cortez Masto. OK. And if confirmed to the Fed, will
you use your position to try and stop the CFPB's arbitration
rule?
Mr. Quarles. I do not believe I have a role with respect to
that.
Senator Cortez Masto. So that is a no?
Mr. Quarles. I have not given any thought as to how I would
affect that. The CFPB is an independent regulator and
appropriately so. With regard to it, I think that the robust
enforcement of the consumer rules is an important policy
matter, and I certainly support that.
Senator Cortez Masto. Thank you.
Did you ever use your slot on FINRA's board to advocate for
the Chamber's position on arbitration?
Mr. Quarles. No, ma'am.
Senator Cortez Masto. OK. Thank you.
My time is running low. So, Mr. Otting, let me jump back to
some questions in a follow-up to the conversation you were
having with Senator Brown.
If I understand this correctly, you said that 160,000 homes
were saved, and when you say 160,000 homes were saved, they
were actually modified? People were able to stay in their
homes. Is that correct?
Mr. Otting. They did not go through foreclosure. That is
correct.
Senator Cortez Masto. OK. And then 175,000 nonbanked--non--
I guess homes that were not in your portfolio were the subject
of a separate modifications, or can you explain that $175,000
figure you cited?
Mr. Otting. There were 175 loans that went through the
consent order look-back, which was done by an independent
consultant under the guise of the OCC.
Senator Cortez Masto. OK. And it is true that OneWest is
the only bank that did not settle the independent foreclosure
review. Correct?
Mr. Otting. That is correct.
Senator Cortez Masto. OK. And so can you----
Mr. Otting. Well, can I----
Senator Cortez Masto. Sure, go ahead.
Mr. Otting. The other bank settled. OneWest Bank was the
only one who completed the look-back that had the actual
results associated with the consent order.
Senator Cortez Masto. OK. Thank you.
And can you tell me how many actual loan modifications did
OneWest provide to Nevadans during your tenure while you were
there? Do you know?
Mr. Otting. I do not have that number.
Senator Cortez Masto. OK. I appreciate that.
Can you--let me just say this. As the Comptroller of the
Currency, you are going to be entrusted with tremendous
responsibility. The decisions the Comptroller makes impact
whether borrowers can keep their homes or whether we have
another economic crisis, as you well know, and we have talked
about this when we were together.
Can you point to a single area where you think additional
consumer protection is needed?
Mr. Otting. I think there is a lot of discussion today
about small-ticket dollar amounts for lending activities, and
what came out of Dodd-Frank was a fairly, highly complicated
product that almost requires you to underwrite a $2,500 loan,
like a mortgage. And I think that is one area that would
require a lot of input and discussion to be able to make those
products available. We have kind of pushed those out of the
banking sector, and I think they should be actually back into
the banking sector, where oversight and regulation can allow
those to be offered in a fair and economic manner.
Senator Cortez Masto. To the exclusion of the CFPB?
Mr. Otting. No, not to the exclusion. In participation.
Senator Cortez Masto. OK. Thank you.
I notice my time is up. Thank you very much.
Mr. Otting. You are welcome.
Chairman Crapo. Thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman, for holding this
hearing today, and thank you to the nominees for joining us
today.
At their core, both the Federal Reserve and the OCC are
bank regulators, yet due to nonbank SIFI designations from
FSOC, they now oversee a huge chunk of the insurance industry.
Having sold insurance for more than 20 years and being well
versed in the business, I think it is time to reconsider the
designation process. The President agrees per his executive
order earlier this year.
Insurance has primarily been regulated on the State level,
and nonbank SIFI designations are a deviation from a system
that has worked well for about 150 years.
FSOC and its Federal regulators lack an understanding of
the differences in business models between banks and insurance
companies. Insurance firms simply do not pose the same systemic
risk, but the added costs associated with a council's
designations have an outsized impact on the economy at large.
For example, life insurers are the largest investors in
corporate bonds in the United States, the same bonds that fund
business growth in South Carolina. They also manage 20 percent
of all defined contribution plan assets and 14 percent of IRA
assets. Many Americans have entrusted life insurers with their
savings.
I will ask Mr. Quarles first and then Mr. Otting: Does the
business of insurance pose the same systemic risk as banking?
Mr. Quarles. Well, I think that it would be difficult to
say that the business of insurance posed the same systemic
risks as banking. I mean, principally, as is also obvious,
systemic risk is created when you have organizations that have
liabilities that can run, short-term liabilities that can all
be called very quickly, that are funding activities that are
very interconnected with the rest of the system and usually of
a size that the disruption of that interconnectedness would
result in severe problems for the system.
Insurance companies--and particularly life insurance
companies--I guess in some theoretical way could have a run if
all of the policyholders showed up and asked for the cash
surrender of the value of their policies at the same time, but
that is such a remote and historically unprecedented
possibility that I do not think it is a practical one to
consider.
So I think that the risks that are posed by insurance
companies are quite different.
Senator Scott. Thank you.
Mr. Otting?
Mr. Otting. Senator Scott, thank you for the question.
I agree with Mr. Quarles. I do think the funding source--
and as long as the core business is in line with the mission of
an insurance company, I do not agree that it poses the same
risk as a financial institution.
Senator Scott. Thank you.
Do you support legislative efforts to ensure there is
always a voting member on FSOC with insurance expertise?
Mr. Otting. Absolutely.
Mr. Quarles. I think that would be wise.
Senator Scott. Thank you.
I am looking forward to our Chairman and our Ranking Member
continuing their efforts to make this a reality.
For regulatory purposes, the Federal Reserve often uses
arbitrary asset thresholds like $250 billion or $50 billion or
$10 billion. These levels seems to come with very little rhyme
or reason. At the same time, multiple regulations, which
utilize these thresholds, including Basel framework, include
waiver language that allows the Fed to exercise discretion on a
case-by-case basis. In other words, you can tailor regulations
as you see fit.
Mr. Quarles, would you use this discretionary power under
the law, and if so, under what circumstances?
Mr. Quarles. Well, I think that one of the important
general themes of regulation is ensuring that the character of
the regulation is adapted to the character of the institution
being regulated, what has become the word ``tailoring.'' I
fully support that, and I think that it is not only appropriate
to recognize the different levels of risk and types of risk
that different institutions in the system pose, but then it
also makes for better and more efficient regulation. And
efficient regulation allows the financial system to more
efficiently support the real economy.
So I do think that we should look very carefully--and will
certainly be an advocate for that were I confirmed--at
tailoring capital regulation and other types of regulation to
the particular character of the institutions that are
regulated, and that includes their size, and it includes other
aspects of their character.
Senator Scott. Thank you very much.
Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman, and a special
thank-you to the Honorable Senator from Indiana for letting me
go ahead of him. Thank you very much. I appreciate that.
First of all, Mr. Otting, Mr. Quarles, thanks for both
being here today. I very much appreciate it.
Mr. Otting, when you were in my office earlier this week--
and thank you for coming in--we talked a little bit about
NeighborWorks, and at that moment in time, you were not up to
speed on it. I told you I was going to ask you some questions
on NeighborWorks at this hearing, and hopefully, you have
gotten up to speed. Have you had a chance to take a look at it?
Mr. Otting. I have. I went to graduate school over the last
24 hours.
Senator Tester. Oh, good for you.
[Laughter.]
Senator Tester. Well, the question is, is that, What is
your view on NeighborWorks? You are going on--you are going to
be a director of that program. It is an affordable housing
program. What is your view of it?
Mr. Otting. Senator Tester, we--there is a representative
from the OCC. It is not currently the acting nor was Mr. Curry
in that role when he left, but it is one of the more senior
persons that does sit on the board and actually is the
chairman----
Senator Tester. Yeah.
Mr. Otting.----of the NeighborWorks.
I would say, you know, I have spent a lot of time. I have
noticed--you know, I went and looked at the budget.
Senator Tester. Yeah.
Mr. Otting. It was $200 million last year. One-hundred-
eighty of it came from appropriations. About 20 of it came from
really foundation gifts.
I also went out and spoke with people in Nevada last night
at a very late time on the east coast here and learned about
the organizations----
Senator Tester. Yeah.
Mr. Otting.----what they do about going back to the
communities really across the United States and offering
consultative and----
Senator Tester. Yeah.
Mr. Otting.----data of how you do that.
Senator Tester. Yeah.
Mr. Otting. And I think, you know, you know my perspective
on affordable housing.
Senator Tester. Yeah.
Mr. Otting. It is a critical element of our economy, and I
also think we have to find a way for an organization like
NeighborWorks to be able to maintain their place in America.
Senator Tester. OK. And so I assume by your previous
statement that you do not intend to be the rep on the
NeighborWorks?
Mr. Otting. I did not say that. I was just clarifying when
you said----
Senator Tester. OK.
Mr. Otting.----that I was on that.
Senator Tester. Oh, yeah. I am sorry. I meant to say your
position.
Mr. Otting. Yes.
Senator Tester. Do you intend to fill that, or do you
intend to appoint?
Mr. Otting. It is a role I have historically played in the
communities that I lived in.
Senator Tester. Good.
Mr. Otting. And so I would be honored to be considered for
that.
Senator Tester. Good.
As you well know, the President slashed the budget of
NeighborWorks from $140 to $27 million, also cut a lot of other
affordable housing programs.
I asked you this in the office, and I will ask you this. If
these are programs you believe in, are you willing to push back
and talk about the positive impacts of these programs and
potentially help us get to a point where the funding is at a
reasonable level?
Mr. Otting. I would be happy to.
Senator Tester. I appreciate that, and I appreciate that
answer too, by the way, because oftentimes we do not get that
straight-up kind of stuff. I appreciate that.
The next line of questioning is something we also took in
my office that is critically important for my support of you. I
will just tell you this, because when we talked about robo-
signing in my office, your exact words were ``This is a false
narrative.''
And I went back and I looked at the consent orders with the
Office of Thrift Supervision, which no longer exists, but which
part of that job is going to be in the OCC and the other
regulators. And here is what it said about OneWest, of which
you were a big part of. It says that, ``Numerous affidavits or
other mortgage-related documents were not properly notarized.''
That is a quote, and this is quote too:
Litigated foreclosure proceedings without always ensuring that
a promissory note or mortgage document were properly endorsed
or assigned, and that OneWest failed to devote sufficient
financial staffing and managerial resources to ensuring proper
administration of its foreclosure processes.
Can you tell me what that is if that is not robo-signing?
Mr. Otting. Well, I do not believe that is robo-signing.
First of all, when we signed the consent order, we did not
confirm or deny the accusations in the consent order. That was
a fairly generic consent order that all banks were asked to
sign and really did not have a choice.
The issue--I think the issue of documentation and robo-sign
are two separate things. There was an organization called MERS
where most of notes and deeds of trust were electronically
stored, and there was a provision at that time where you could
use the MERS system to be able to do foreclosures. And when the
OCC came in and the OTS, they found that there were lots of
errors in that system, and they forced upon the banks to clean
that up, which we did.
Senator Tester. I got it. I got it, and I appreciate----
Mr. Otting. But if I could comment on the robo-signing----
Senator Tester. Yes.
Mr. Otting.----for you, I would be happy to do that.
Senator Tester. Yes, go ahead.
Mr. Otting. So, in my mind, there are a lot of definitions
to robo-signing. I think if--like I told you in your office, if
we all wrote it down, my guess is we would have different
descriptions of it. There are four key ways that I would answer
did OneWest Bank robo-sign. The first is, did we have a process
and controls to review the affidavits and complete those at
OneWest Bank? We did. Were there errors from time to time? I
could--I do not have that statistic, but I would tell you there
were.
Second of all, in some accusations of robo-signing, it was
that people signed other people's names. I can tell you that
was never done at OneWest Bank, that Bill Jones signed for
Sally Smith.
The third, the third issue was--was that were they properly
notarized, and we had all our notarization activity occurred in
one location. People sat next to each other. They knew those
people. They were not doing it remotely.
And, last, the critical component of a foreclosure is that
the affidavit is the person who is signing that affidavit
validated principal past due and amount due, and quite frankly,
we found no errors when that person was doing that work.
Senator Tester. And I would just say this--and I am way
over time, Mr. Chairman, and just bear with me just for a
second. But if, in fact, you were to sign off on an agreement
that was not accurate--I do not know why you would do that
being in business and especially in the banking business.
Mr. Otting. I would agree with you.
Senator Tester. And this is pretty darn clear when it says
litigated foreclosure proceedings without always ensuring that
the promissory note or mortgage document were properly endorsed
or assigned.
Now, I would imagine that if the Office of Thrift
Supervision found that happened once or twice, this would not
be in there. It happened--it had to happen with some
regularity, and I got it. I am not saying that, but it does say
properly endorsed or assigned.
Mr. Otting. I would appreciate the opportunity to have a
follow-up discussion with you.
Senator Tester. We can do that.
Mr. Otting. So we can--I can try to gather data and bring
it in----
Senator Tester. OK.
Mr. Otting.----from public sources.
Senator Tester. Well----
Mr. Otting. But I can tell you, similar to Secretary
Mnuchin, we have kicked this thing five ways to Sunday.
Senator Tester. I know, but----
Mr. Otting. But there were errors. I do not want you to
think that we never made errors----
Senator Tester. No, I----
Mr. Otting.----because that--we did make errors.
Senator Tester. I am going to close it out real quick, and
we will talk. But the issue is you are going to be ahead of the
OCC.
Mr. Otting. That is correct.
Senator Tester. You are going to be supervising people who
potentially did the same thing that was claimed on OneWest.
Mr. Otting. That is correct.
Senator Tester. All right. Thank you.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair.
Thank you, gentlemen, for being here, and congratulations
to you and your family on your nominations.
Someone earlier said, Mr. Quarles, that they were concerned
with you doing the revolving door between regulatory roles and
out in the private sector. I actually find that refreshing
versus bureaucrats that just ride this escalator to learn how
to regulate, regulate, regulate more, so I think that is a good
thing, not a bad thing. And I am impressed with your past
experience in both, in both settings.
First, to either one of you, do you think Glass-Steagall
caused the 2008 financial crisis?
Mr. Quarles. Well, as I had mentioned in the context of the
previous----
Senator Tillis. Give me a real quick yes or no or maybe,
because I have got a couple other ones.
Mr. Quarles. Oh, you have got a couple other ones.
I do not believe so. I think that keeping the depository
institutions safe from other activities in a larger
organization is important.
Senator Tillis. I am going to get back to that in a follow-
up.
How about you, Mr. Otting?
Mr. Otting. I do not.
Senator Tillis. Now, the Fed Chair Volcker has said that he
actually thinks that the rule should be simplified. Do you all
agree with the former Fed Chair?
Mr. Quarles. I do.
Senator Tillis. Yeah. I have tried to give somebody that,
you know, is watching this and does not understand what we are
talking about in terms of the regulatory overreach a kind of
visual, and, Mr. Quarles, you and I talked about this briefly.
I have done the math since our meeting the other day.
Mr. Otting, I have not had the pleasure to meet with you,
but I will look forward to it.
But there are some--some of the larger, more complex banks
will submit as many as 80 to 100,000 pages--80 to 100,000
pages--annually to be compliant with the CCAR, the stress test
submission. That is seven--if you line up those pieces of
paper, long end, that is 17 miles, yet it is 81 volumes of
``War and Peace.'' It is close to 20 or 30 feet of shelf space.
Now after they submit it, we hear regulators going into
these agencies a week or so later. I do not know if anybody in
here can read 81 volumes of ``War and Peace'' in a week and
digest it, but my guess is no regulator can.
So it raises a question about how valuable that information
is, and one thing that I think we have to look at is, of
course, we would--many of these larger banks, many of the
smaller banks regulatory do stress tests. Can you talk about
why you think the transparency is not--I think some people are
suggesting it is kind of giving somebody the answer key before
they take the exam. Can you--can you tell me why you think that
transparency is important and still provide you with that--the
regulatory--I mean, having the lens into that, that it is not
an issue to be actually transparent, and let the institutions
kind of know what they have got to be up against?
Mr. Quarles. Well, I think there----
Senator Tillis. And, Mr. Otting, I am happy to have you
opine as well.
Mr. Otting. OK.
Mr. Quarles. I think there are a number of aspects of that.
It is not giving the entity the answer key; it is giving them
the questions. It is giving them the test. So it is a little
difficult.
I mean, if the situation we are in now----
Senator Tillis. Yeah. But the suggestion is that if they
get it, then they can game the system, but I just do not--I do
not get that, particularly for these institutions who are
regularly doing stress tests anyway.
Mr. Quarles. I think that, certainly, the benefits of
transparency outweigh any of the theoretical costs, because if
you are clear about what it is that you expect, you will
inevitably get more compliance. Plus, you will get feedback--
and not only from the banks, but from the public--as to how the
test can be improved.
Senator Tillis. And who ultimately pays for the cost of
this? At the end of the day, if we keep on ratcheting up the
cost, who ultimately pays for this?
Mr. Quarles. The consumer.
Senator Tillis. Yeah. The little guy.
Mr. Quarles. Exactly.
Senator Tillis. I wanted to ask a question about--and, Mr.
Otting, I will start with you. How many tips are there on a
spear, a classical spear?
Mr. Otting. Two.
Senator Tillis. Two.
So we have got five--or four or five on the regulatory
spear for the financial services industry. Right?
Mr. Otting. Yes.
Senator Tillis. We have people--and let us get away from
the big banks for a minute. Let us deal with the community
banks or the midsize banks. We have got four or five regulatory
agencies on any given day going into a bank, pretending to be
at the tip of the spear. Does that make sense? Is there some
way that we can actually get to a point where we have certainty
and responsibility around the regulators so that the financial
services industry, whether you are a small community bank or a
super bank, actually knows who they should be answering to for
a given set of regulatory regimens?
Mr. Otting. Well, I would say for the record, I misspoke.
It should be one tip, not two.
Senator Tillis. Yeah, I know.
Mr. Otting. But----
Senator Tillis. I gave you a pass. I was going to look it
up on the Internet later on, but----
[Laughter.]
Mr. Otting. But I will say one of the complexities----
Senator Tillis. There are two ends.
Mr. Otting. Yes.
Complexities of the regulatory body when you talk to a
financial institution is often similar entities are asking for
same information. One is coming in the door when the other is
going out, and the lack of coordination makes it very difficult
on the industry.
Senator Tillis. And this is an area where I will ask you
all to commit to not being territorial and deciding that you
are right, there is only one tip of the spear, and you are the
tip. I think there are logical--assignments are a rational
basis for one to take the lead and the other to follow and
provide that clarity to the financial services industry.
If you really do want to help the little guy, you better
stop passing the regulatory costs down to them by adding a
regulatory burden.
I worked at Pricewaterhouse. Regulations were good for us,
put my kids through college, but I think we have to simplify
these things so that we get to right-size regulations.
Otherwise that money goes down to that individual depositor,
that individual small business, the people who are using these
financial institutions, and I hope that you all will get in
there, right-size the regulations. Regulations exist for a
reason, but do it in a way that actually is responsible,
predictable, and as lean as possible, because I think it will
have an enormously positive impact on the movement of capital
in this country and getting growth where we need it to be.
Thank you. I look forward to supporting your nominations.
Oh, and, Mr. Quarles, I hope you do not have an opportunity
to deal with the arbitration rule, because I hope we repeal
that long before you ever get there.
Chairman Crapo. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. Thank you both
for being here.
I would just like to let you know real--obviously, these
are positions of incredible importance and that the American
people are counting on you.
I just want to quickly let you know the results of what
happened in 2008 in my congressional district that I
represented at the time. Elkhart County, 20 percent-plus
unemployment. The Chrysler transmission plant, that was in my
district. Over 5,000 people worked there; a little bit later,
less than 100. So that is 4,900 people who are wondering how
they are going to pay their mortgage, how they are going to
feed their family, how they are going to be able to make ends
meet.
Small businesses in my district, I met with one after
another that had lines of credit that were all called, and
these lines of credit that were called, these are small
businessmen who had worked all their lives, small businessmen
and--women who then at that point had to have a fire sale of
assets in order to cover the line of credit. Twenty percent
unemployment, lines of credit being called, people losing jobs
because we had a financial collapse caused by Wall Street, but
it was not--it was not Wall Street who at the end of the day
got the pain. It was--it was the folks I live with in Indiana.
And so when you miss it, the real result is people losing
their houses who did nothing wrong other than show up for work
every day and work nonstop to take care of their family, and
that is the obligation and the responsibility of these jobs
that you are walking into.
And I just wanted to ask a couple questions. Mr. Quarles,
one of the things I saw was that the ratings agencies basically
were selling ratings. Were you aware that they were taking B
and BB, stuffing them together, and then having that be rated
AAA by the agencies at the time?
Mr. Quarles. The exact mechanics of some of that rating
agency practice, I was not aware of, but I was--we were looking
at the rating agencies and their practices is something that we
were in the process of doing when I was there.
Senator Donnelly. Did you see anything that caused you to--
caused concern for you back then when you looked at their
practices? Because you could see the products that they were
putting together.
Mr. Quarles. I would say that while we did not appreciate
the depth of the problem, it was something that we were looking
at. I think that was an issue that was evident and should have
been more evident to us.
Senator Donnelly. Synthetic CDOs, pure gambling is what it
struck me as. Do those kind of things concern you? Do you think
they are appropriate?
Mr. Quarles. I spoke at the time against excessively
complex derivative products, so yes, they did concern me. And I
do not believe that they are appropriate. Yes.
Senator Donnelly. Mr. Otting, what lessons did you take
from the crisis that you would bring to this job? I mean, we
were looking at basically the Wild West, synthetic CDOs, rating
agencies that would take B's and C's, and you put enough of
them together, and all of a sudden, you have a AAA. And, as I
said, the people that suffer live in Indiana and lose their
jobs.
Mr. Otting. Senator Donnelly, thank you for the question.
I too have experienced pain of people who I have personally
met with who went through the foreclosure process. It is a
life-changing event for those people, especially when, as you
said, they are hardworking Americans.
At the time of the crisis, I worked at U.S. Bank, and we
never participated in any of the subprime----
Senator Donnelly. Right.
Mr. Otting.----activities. We always felt that people, you
know, needed to have the proper credit, proper underwriting.
Senator Donnelly. When you were working with the other
people there, did you ever look at some of this and say this is
crazy?
Mr. Otting. We did. We did. In fact, I--there was a point
in time where there used to be kind of a matrix with high-to-
low--to loan value and high/low FICO, and if somebody had a
really good FICO, maybe they justified a higher loan-to-value,
or if they had a bad FICO, they better be less loan-to-value.
When the boxes flipped where you could have low FICO and high
loan-to-value, we knew this was----
Senator Donnelly. I am almost out of time, so I want to ask
one more question, which is as you look ahead, you know,
obviously, I want to make sure that it does not happen again.
Everybody does. What concerns you the most? Student loans, or
is there anything on the horizon that you look at and go,
``This could be a problem''?
Mr. Otting. I think--I think student loans are an issue if
you really look at it from an underwriting perspective, and I
think the auto loan market, it got a little overcooked. It has,
I think, pulled back a little bit now, where terms were getting
aggressive, loan-to-values were getting aggressive, and now I
think with the insight of the OCC examining, they have pulled
back some of the auto-lending activities.
Senator Donnelly. Mr. Quarles?
Mr. Quarles. I would agree with both of those points.
Senator Donnelly. Anything else that concerns you as you
look?
Mr. Quarles. You know, I continue to be concerned about
the--some of the level of complexity in the system I do not
think that we have given enough thought, and that we can give
more thought as to how various parts of it relate to each
other.
Senator Donnelly. Thank you, Mr. Chairman.
Mr. Otting. Could I add one thing, Chairman?
Chairman Crapo. Briefly.
Mr. Otting. You asked me about what concerns me about
America today. My big concern is that a lot of people at the
lower end or echelon of the banking are not qualifying for
banking products and services. You have branches going away.
You have people concerned when they walk into branches, the
kind of questions people are asking about opening up accounts,
and I think there needs to be a real focus of how do we make
banking available for the lower economic and ethnic people
across America.
I think there are some tools to do that with automation. We
did that at OneWest Bank, where we really focused on bringing
people in and making banks available to them when they were not
in their neighborhood, so----
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Quarles, you left the Treasury Department in 2006 and
joined The Carlyle Group, a private equity firm in 2007. After
you left the Administration, you publicly advocated to change
the rules limiting private equity investment in banks. Is that
correct?
Mr. Quarles. That is correct, Senator.
Senator Menendez. Now, in September of 2008, the Federal
Reserve announced a policy shift allowing for private equity
firms to take larger ownership stakes in banks. In May of 2009,
The Carlyle Group acquired, along with two other firms--$12.8
billion--BankUnited. Is that correct?
Mr. Quarles. That is also correct.
Senator Menendez. As part of that deal, the FDIC agreed to
cover most of the losses, and in total, the FDIC made $1.6
billion in payments, more than any other loss-sharing agreement
during the financial crisis.
Ultimately, BankUnited failure cost the FDIC $5.7 billion,
and The Carlyle Group and other private equity investors walked
away with more than $2 billion. That sounds pretty much to me
like IndyMac and OneWest.
So it seems, Mr. Quarles, that you used your remaining
influence in the Administration to change the rules to make it
easier for your new employer, a private equity titan, to turn
America's struggling community and regional banks into cash
cows, and in so doing, you gave little regard for the
communities served by these banks.
And I hope my colleagues are acutely aware of the
consolidation of community banks, that they understand what we
are talking about here. Mr. Quarles lobbied the Government so
that his employer could invest in deals where the FDIC would
take on all the risk. The private equity investors would reap
all the benefits, and the future of the community banks
involved was merely an afterthought. And that worries me in the
context of some of the comments that you and I discussed
yesterday about your views on regulatory oversight, changes in
that regulatory reform, changes in the Wall Street reform that
came in the aftermath of the world's worst financial--or the
Nation's worst financial crisis, where we were told by Ben
Bernanke we were going to have a global financial meltdown. And
so I worry about that.
Mr. Otting, I heard the answers you gave to Senator Tester
on robo-signing, and I think--just like Secretary Mnuchin, I
think there is a misstatement of the facts here, but I think
Senator Tester did a good job on focusing on that.
Let me ask you something else. Did OneWest engage in the
practice of dual tracking, offering a struggling homeowner the
hope of a modification while simultaneously pursuing a
foreclosure?
Mr. Otting. Mr. Menendez, that was an industry practice.
Senator Menendez. I did not ask you that.
Mr. Otting. And so----
Senator Menendez. I asked you did OneWest engage in it. Yes
or no?
Mr. Otting. The answer to that is yes. We did, and it was
an industry practice that we discontinued once it was
identified in the consent order as not to be an acceptable
practice.
Senator Menendez. Will you commit to provide the total
number of foreclosures and loan modifications completed in each
of the States represented by Members of this Committee prior to
the Committee's vote on your nomination?
Mr. Otting. I do not have access to that data. It is the--
and it is owned by CIT Bank, and we could--you can request that
information from them, but I would not have any influence over
that.
Senator Menendez. You do not have the wherewithal to ask
them to provide that?
Mr. Otting. I do not.
Senator Menendez. Well----
Mr. Otting. Will ask, but I do not know if they would
comply.
Senator Menendez. I understand that while you may not have
direct access to the information, you certainly can be helpful
in requesting CIT provide this information prior to the
Committee voting on your nomination. I hope you would do that.
Mr. Otting. Are you asking for me to request that
information?
Senator Menendez. Yes.
Mr. Otting. I do not think that that is my position,
Senator, to request that information from CIT.
Senator Menendez. Well, let me just say New Jersey was
particularly hard hit by the 2008 financial crisis, and it
continues to have the highest foreclosure rate in the Nation.
So as long as
homeowners in New Jersey continue to struggle with foreclosure,
I am not going to forget OneWest's practices and expect you
will take seriously my request for this information, and you
are going to a position for which this information is critical.
I cannot understand nominees who must understand that based
upon the positions they have been nominated to and positions
they have taken in the past that one does not come prepared to
reconcile--or try to reconcile those views. So I have a problem
with that.
Finally, Mr. Quarles, you and I spoke about a rules-based
approach to monetary policy, and you told me you do support a
rules-based approach to monetary policy. Do you accept the
analysis that suggests that following a strict Taylor rule
would undermine the Fed's ability to achieve its full
employment mandate? And talk to me about the full employment
mandate as part of your dual obligation. We talked a lot about
the one side of that obligation. We did not talk very much
about the full employment side and your views on that.
Mr. Quarles. Certainly, Senator. I think that the Taylor
rule is merely one example of a rule. I am not advocating the
adoption of the Taylor Rule to guide Fed policy.
With respect to the employment mandate as part of the dual
mandate that faces the Federal Reserve, I think that is an
important element of the Federal Reserve's obligations. I would
take it very seriously.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
That concludes the questioning, except that Senator Brown
has asked to ask two more questions. So we will do that, and
then the hearing will conclude.
Senator Brown. Before Senator Menendez leaves, I was a
little--perhaps the collective amnesia has spread to me
personally from this, but my understanding in my office when I
pointed out the information that Senator Menendez just asked
you for, I had asked Secretary Mnuchin in six different
letters. Senator Menendez and I sit on the Finance Committee
together. I believe he signed a couple of those letters asking
for the information he just asked you about. I thought you said
in my office that you would be willing to make that request to
get that information for us, so I would like to reiterate that
you----
Mr. Otting. I do not believe I--if I led that impression, I
did not say I would seek that information.
Senator Brown. Well, I would like to ask you----
Mr. Otting. I said I would help participate, but it is
solely at CIT's decision whether they will release that.
Senator Brown. I understand that, but I think a request
from the designee for the--to be the Comptroller might get
their attention, and it did not get their attention through the
whole process. When Secretary Mnuchin was nominated, we all--a
number of us asked him repeatedly. He would not disclose that,
and he would not try to disclose that information. We went a
number of letters and could not get it. So I would ask you to
help us with that, to commit to help us try to get that
information.
Mr. Otting. Yes. As I said, I would be happy to help
support, but I do not feel it is my position to request that
information.
Senator Brown. I am sorry to hear that.
Thank you, Senator Menendez, for that.
My two questions about this, one--one is, Mr. Otting--and
earlier you had talked about the 38 people, I guess, you just
apologized to in my question earlier, and I want to follow up
on that.
The OCC's April 2014 report on the consent orders we
discussed found that OneWest did not comply with rules to
protect active duty servicemembers, borrowers not in default,
modification requests, and others. The report, the consent
order said that there were 10,700, not the 38, I believe,
number that you cited an hour or so ago. Why not apologize to
the 10,700?
Mr. Otting. Yeah. The 10,000 number was--there was an
accepted practice. If you had a de minimis dollar amount at the
close of escrow--when an escrow would close, you would get a
bid for a title policy, an appraisal policy, for other
activities, and often these would be 2 cents. And so the
thought was that between relatively small-dollar amounts, we
did not ask for nor give refunds.
When the OCC came in and said we had to be 100 percent
accurate on those transactions--and so anybody--99 cents or
less on those--we gave them the actual dollar amount. In
certain circumstances, it was 10 cents plus $25, and we scaled
that up. But we ended up reimbursing every one of those dollar
amounts.
Senator Brown. OK. I want to know more about that.
Mr. Quarles, last question for you. You earlier--you had
said, quote, ``Markets are always ahead of the regulators.
Frankly, that is how it should be. It is analogous to the
advice that my father provided me,'' that, quote, ``If you do
not miss at least two or three planes a year, you are spending
too little time at the airport''--I am sorry--``you are
spending too much time in airports''--sorry about that--
unquote. If the regulators are not--you went on to say, ``If
the regulators are not a little behind the market in a few
areas at any given time, they would be stifling innovation and
evolution,'' unquote.
We have all been guilty of using unfortunate analogies, but
what concerns me that this--is that this world view contradicts
the ideas that you were--the idea that you were doing
everything in your power to prevent a crisis. It concerns me
even more that you believe that oversight agencies, like the
one you hope to run, should, in fact, miss risks, miss a plane
here and there, should miss risks in the system. The last time
you missed those risks, it cost my ZIP Code and my State and
our country, lots of people, their homes, their jobs, their
retirement savings. You claim it is in the name of innovation,
but the question is at what price.
So do you stand by your statement that regulators should
be, quote/unquote, ``behind the market''?
Mr. Quarles. That is probably the most unfortunate use of
language that I have ever made, and I do not stand behind that
statement.
Senator Brown. Thank you. Thank you. And thank you for what
you said in your earlier statement about humility. Those are
two things we do not always see in this Committee.
My last--just last thing I would like to say is when Chair
Yellen was nominated and confirmed, I asked her to come to
Cleveland and see what--see what the real economy looked like
and learn a little more about manufacturing and what decision
she would make as Chair of the Federal Reserve, the impact, and
she did that, went to Alcoa, got to operate--sort of, kind of
operate a 50,000-ton press. And considering what Mr. Otting's
bank, the impact it had on my neighborhood and beyond,
considering what some of the statements from Mr. Quarles--and I
so much appreciate your comments a minute ago--I would like to
invite both of you, once confirmed, to come to my State.
President Lincoln once said that while his staff wanted to
keep him in the White House to win the war and free the slaves
and preserve the union, he said, ``I have to get my public
opinion bath and go out among people,'' and I would like to
invite each of you, if confirmed, to Ohio to join me in
learning more about an economy in the Midwest.
Mr. Quarles. I would be delighted to do that.
Senator Brown. Thank you both.
Mr. Otting. Back to Cleveland for me.
Senator Brown. Back to Cleveland for a Midwestern guy.
Thank you.
Chairman Crapo. Thank you.
And I understand Senator Cortez Masto has one brief
question, I hope.
Senator Cortez Masto. I do. Just a clarification. Thank
you, Mr. Chair.
So, Mr. Otting, in your answers to Senator Tester, did I
hear right that you said that OneWest did not engage in robo-
signing?
Mr. Otting. I said when I answered the question that there
could have been errors, they were not identified in the robo-
signing, but our process is in place. And, again, what I would
comment on is that I think a lot of people have different
definitions of robo-signing. Mine is, did we have a process for
the affidavits? Second of all, did anybody sign any affidavits
of another person's name? Third was the data check before
somebody signed the affidavit, and last, was a notarization
process done? And I would respond that we did do those at
OneWest Bank accurately. There may have been exceptions. I am
not aware of those exceptions, and they were not identified as
any issues in the interim OCC report that reported our results.
Senator Cortez Masto. OK. Here is my concern, and very
briefly. I have in front of me the consent order between the
Office of Thrift Supervision and OneWest.
Mr. Otting. Right.
Senator Cortez Masto. And, specifically, it states that
OneWest Bank engaged in unsafe or unsound banking practices
relating to mortgage servicing and the initiation and handling
of foreclosure proceedings. Specifically, those unsound
practices included filed or caused to be filed in State and
Federal courts or in local land records, offices--and this is--
and it happened in Nevada--numerous affidavits or other
mortgage-related documents that were not properly notarized,
specifically that were not signed or affirmed in the presence
of a notary, litigated foreclosure and bankruptcy
proceedings, and initiating nonjudicial foreclosure proceedings
without always ensuring that the promissory note and mortgage
document were properly endorsed or signed and, if necessary, in
the possession of the appropriate party. That is robo-signing.
That is what is in this consent order that says that you have
done.
Mr. Otting. The things that were made, if you will know, we
did not confirm or deny. You have to look at the results that
came from the----
Senator Cortez Masto. Then why did you sign the consent
order? If you did not agree with the decision----
Mr. Otting. Have you ever had to sign a consent order?
Senator Cortez Masto. Actually, I was Attorney General of
the State of Nevada.
Mr. Otting. You basically do not have a choice. When the--
--
Senator Cortez Masto. So you are telling me that your
company----
Mr. Otting. You do not have a choice.
Senator Cortez Masto.----did not engage in this, but you
were forced under duress to sign this consent order?
Mr. Otting. I hope you are never in the position that I
was. I had great pride. I had been at that company a little
less than a year, and I was--I would argue I had to, for the
benefit of our employees, sign that consent order, when I did
not agree with what was described. The words that were inserted
in there were ``do not confirm or deny.'' I think I would
encourage you to look at the results that were produced in
2014. I would be happy to get those over to your office. I
think it paints a different story of OneWest Bank.
Senator Cortez Masto. If you did not engage in the
practices, then you should not have signed the consent order,
Mr. Otting, but----
Mr. Otting. I wish--I wish it was that easy.
Senator Cortez Masto.----I appreciate your comments.
Mr. Otting. I wish it was that easy.
Senator Cortez Masto. Thank you very much. It was very
instructive.
Chairman Crapo. Thank you.
And that does conclude the questioning and the hearing,
with the exception of a few final announcements.
Before I do that, though, I want to again thank you both
for coming in and participating today at the hearing, and I
thank you for your willingness to serve the country.
Mr. Otting. Thank you.
Chairman Crapo. For Senators, all follow-on questions need
to be submitted by Tuesday, August 1st, and for our witnesses,
response to those questions are due by the following Monday
morning, August 7th. So please respond quickly to the questions
as you receive them.
With that, the hearing is adjourned.
Mr. Otting. Thank you.
Mr. Quarles. Thank you.
[Whereupon, at 11:35 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF JOSEPH OTTING
To Be Comptroller of the Currency, Office of the Comptroller of the
Currency
July 27, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
it is an honor to appear before you to today. I am grateful to be
nominated by President Trump to be the Comptroller of the Currency, and
if confirmed for this role, I would be honored to serve the citizens of
the United States of America.
Thank you to all of the Members of the Committee I had an
opportunity to meet. I enjoyed the opportunity to meet some of you for
the first time, and to get re-acquainted with others, but most
importantly, I appreciated the opportunity to learn more about the
issues you feel are important to the people of America. For those I did
not get to meet, if confirmed, I look forward to meeting and working
with you in the future.
I would like to introduce my wife and best friend of 27 years,
Bonnie Otting. Sometimes you get lucky in life and I am forever
grateful for the day we met. You have always been my compass in life
and for that I love you. In addition, I would like to recognize
Bonnie's father, Herman Espinoza, who could not be with us today due to
his health and age of 94. He is a first generation immigrant who came
to the United States to pursue the American dream, so his family could
live a better life. One of his proudest moments was when he was granted
his U.S. citizenship.
My mother, Grace Ann McQuillen Otting, is with us today. She has
always been my guiding light in life, instilling in me a strong moral
compass and helping me appreciate the values of a sound family life.
She taught school for 35 years and was an inspiration to so many
students.
I would also like to acknowledge my late father, James Otting, and
mother-in-law, Jesse Espinoza. My father taught me many valuable
lessons in life, not the least of which were his business acumen, focus
on family and his commitment to serving his community. From Bonnie's
mother, I learned the value of kindness to others and that love can
cure many things.
Lastly, I would like to introduce my sister Julia Ardell and my
brother James Otting. Over the years we have learned the value of love,
companionship and dependence on each other.
I grew up in a Midwestern family where my father was an
entrepreneurial business person and my mother, as I indicated, was a
school teacher. At the young age of 10, I learned the value of
business, client relationships and leadership from my father while
working at his businesses. Often doing the jobs no one else wanted to
do! I also observed from my father how hard work, willingness to take
risks and family support led to success. I learned from my mother, who
taught school during the day, raised three children and went to college
at night, that hard work and dedication can make a difference.
I studied at the University of Northern Iowa, following a family
tradition of my mother, sister and ultimately my brother to the
University. During the summers and holiday breaks my father would have
me work at his businesses and arranged other roles which included
working at an electrical dam for a regional utility, a commercial
construction site and at a bakery. All great roles for building
character, an appreciation for people and their individuality, and how
leadership can make a difference.
After college, I was fortunate to be chosen to be a part of a
management training program for a leading national financial
institution. It was an experience that forever changed my life. I
gained insight into the banking system from the ``other side'' of the
table and discovered how banks help consumers and businesses with
services, deposits, products and loans. It is in this industry I spent
the next 34 years of my life and learned the importance of serving
employees, the community, customers, and shareholders.
My banking experience has allowed me to work for one of the largest
banks in the Nation, two well respected regional banks, and a community
bank. I have touched virtually every segment of the industry including
serving consumers, businesses, trust functions, private banking,
investment services, legal, human resources, compliance, audit,
treasury, financial management, operations and technology. This
experience provides a broad base of knowledge that will be helpful and
insightful in the role as Comptroller.
In 2010 I decided to leave an executive position at an established
financial institution because I felt that Southern California was in
need of a ``hometown bank.'' When approached about the idea, I knew it
would be challenging and a tremendous amount of work, but ultimately an
achievement for myself, the company, and the region. With the
assistance of the many dedicated women and men of OneWest Bank, we were
able to create the largest hometown bank headquartered in Southern
California. It was able to grow beyond primarily mortgage originations
to a bank with a full suite of products and services for local
businesses, families and consumers. Helping build this company is
something I am and will remain proud of. After a successful merger, I
left the organization in late 2015 and became an entrepreneur focusing
my efforts on real estate and small businesses.
The mission of the OCC is to ensure that national banks, Federal
savings and loans and foreign operations of international banks operate
in a safe and sound manner, provide fair access to financial services,
treat customers fairly, and comply with applicable laws and
regulations.
If confirmed as Comptroller of the Currency and given the
opportunity to lead the women and men of the agency, I pledge to honor
the OCC's mission and cooperate and work with this Committee and all
members of Congress.
Thank you for your time today. I look forward to answering any
questions the Committee may have.
PREPARED STATEMENT OF RANDAL QUARLES
To Be a Member and Vice Chairman for Supervision, Board of Governors of
the Federal Reserve System
July 27, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity to appear before you today. I am honored
that the President has nominated me to serve as a Member of the Board
of Governors of the Federal Reserve System and as the Board's Vice
Chairman for Supervision, and I am grateful to have the privilege of
your consideration. I am also very grateful for the support of my
family--my wife, Hope Eccles, our three teenage children, Randy,
Spencer, and Hope, Jr., and my parents, Ralph and Beverly Quarles.
The Federal Reserve System occupies a central position in our
country's policy infrastructure for promoting a strong economy and the
stability of the financial system, and supporting robust job growth in
a context of price stability. I can assure this Committee that, were I
to be confirmed as a Governor of the Federal Reserve Board, I would be
strongly committed to these objectives.
The specific position for which I have been nominated--Vice
Chairman for Supervision--has a particular role in ensuring the safety,
soundness, and efficient operation of our financial system. As
recognized by the Treasury report, regulatory policies enacted since
the financial crisis have improved the safety and soundness of the
financial system. But as with any complex undertaking, after the first
wave of reform, and with the benefit of experience and reflection, some
refinements will undoubtedly be in order. Former Governor Daniel
Tarullo, who was one of the principal architects of many of these
reforms, indicated as much himself in a valedictory speech that he gave
in April on the occasion of his leaving the Board, stating that ``there
are clearly some changes that can be made without endangering financial
stability.'' The key question will be ensuring that, as we continue to
refine the system over time, we do so while maintaining the robust
resilience of the system to shocks.
I believe that I am well qualified to undertake this role. As this
Committee knows, I have had experience over my career with the
financial sector from many different points of view. I have been a
practicing lawyer versed in the granular technicalities of the most
complex aspects of the regulatory system; at the other end of the
spectrum, I have been an investor in small, community banks, and am
familiar with the particular benefits of those institutions and the
challenges they face; and I have been a financial regulatory
policymaker under two different presidents in two different decades. In
fact, my first tour of duty in public service was during a similar
period of response after a financial crisis--arriving in 1991 during
the clean-up phase of the savings and loan crisis and facing the
insolvency of the FDIC's Bank Insurance Fund.
While this long experience has given me substantive insight into
the issues that the Federal Reserve's Vice Chairman for Supervision
will face, it has also reinforced my commitment to what I think is the
single most important characteristic of a good policymaker: the need to
be humble--humble about the constraints on our understanding of complex
systems, humble about the fallibility of our judgments, and humble
about how our own assumptions and views influence even what we believe
to be our most data-driven and analytical conclusions. As a
consequence, were I to be confirmed for this position, I would approach
this undertaking--as I try to approach every task--with a continual
openness to input from every source. In particular, I would look
forward to working with the Members of this Committee on both sides of
the aisle, and your staffs, to understand the challenges that face the
financial system as they evolve over time.
Thank you again for the honor of this hearing, and I look forward
to responding to your questions.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOSEPH
OTTING
Q.1. If confirmed, will you commit to reply to every oversight
or other letter and request for information from all Members of
the Banking Committee in a timely manner?
A.1. I am committed to furthering a constructive relationship
between Congress and the OCC, and responsiveness to
congressional requests for information is a critical element of
that relationship. I believe that the OCC should provide
appropriate, useful responses to all members of Congress. If
confirmed, I will act accordingly.
Q.2. In June, the Treasury put out a report suggesting many
changes to the regulatory structure, and we know the impact of
deregulatory policies advocated by Treasury in past
Administrations.
If confirmed, you will represent an independent agency. Do
you commit to being independent from the Administration,
including Treasury Secretary Mnuchin, and to speak out if you
think a legislative or regulatory recommendation threatens the
financial stability of our economy, consumer protection, or
safety and soundness of our banking system?
A.2. Yes. Treasury has put out a thoughtful and practical
document in response to the President's Executive order to
guide the efforts to implement much needed change to the
current financial regulatory system. The OCC has shared
responsibility with the other banking and financial regulators
on a significant portion of the Report's recommendations. I
understand that many of these are focused on the capital and
liquidity rules and the Volcker rule. If confirmed, I look
forward to carefully studying each recommendation and working
with my fellow regulators and members of Congress.
OneWest/CIT
Q.3. As you know, despite numerous requests by many members of
the Senate to Mr. Mnuchin, we have still not received State-by-
State data regarding OneWest's foreclosures. Will you reach out
to your former employer CIT and request that they provide this
data to me and other Senators who have requested it?
A.3. I am no longer employed by OneWest/CIT and do not have
access to its internal records, including the information you
are requesting.
Q.4. Under the terms of the Independent Foreclosure Review that
OneWest completed as part of consent orders issued by your
regulator, how much did OneWest pay to service men and women
for violations of the Servicemember Civil Relief Act? How many
mortgages were recommended by the consultant for remediation?
A.4. I am no longer employed by OneWest/CIT and do not have
access to its internal records. In April 2014, the OCC reported
that the independent foreclosure review undertaken by OneWest
had recommended 54 mortgages for remediation related to this
issue. To the best of my recollection, a number of these errors
were the result of inaccurate information we received when
utilizing the Defense Manpower Data Center, or DMDC, which we
later discovered routinely misstated active duty status, and
OneWest paid restitution of $2,946,986 as recommended by the
review. More information is available at the following link:
https://www.occ.gov/news-issuances/news-releases/2014/nr-occ-
2014-65a.pdf.
Q.5. How many borrowers were not in default when OneWest
initiated the foreclosure process, and how much did OneWest
provide in compensation?
A.5. In April 2014, the OCC reported that the independent
foreclosure review had recommended 23 mortgages for remediation
relating to this issue out of 178,886 mortgages tested. The
review recommended compensation of $730,719 which, to the best
of my recollection, OneWest paid. More information is available
at the link above.
Q.6. How many mortgage modifications were denied in error?
A.6. In its April 2014 report, the OCC stated that the
independent foreclosure review had recommended 43 mortgages for
remediation relating to this issue out of 29,964 mortgages
tested. More information is available at the link above.
Q.7. According to the Form 8-K filed by CIT Group in July 2014,
following its merger with OneWest, you would join CIT as Co-
President, and CEO of CIT Bank. This remained true in
subsequent 8-K filings, including one made in July 2015. The
CIT-OneWest merger was completed in August 2015. CIT then
announced that it was terminating your employment in another 8-
K filing in December 2015. Please describe the reason(s) for
your sudden termination from CIT.
A.7. The Board and CEO determined they wanted to consolidate
the bank management and holding company structure and thus
eliminated my position.
Q.8. The redlining complaint against OneWest filed with HUD
suggests redlining had been a problem since at least 2011.
While you were CEO, were you aware of the bank's low lending
levels to African Americans, Latinos, and Asians, and low
number of branches outside of majority white communities? If
not, why not? If so, why didn't you take steps to address the
problem?
A.8. This document was filed with HUD well after my departure
from CIT. During my time at OneWest/CIT, I was not aware of any
violations of the Fair Housing Act.
Q.9. When you testified before the Federal Reserve during the
consideration of the application for the merger between OneWest
and CIT, you blamed current regulations for OneWest's high
foreclosure numbers. If confirmed, what regulatory changes will
you propose to make it easier to modify mortgages? Do you
support servicing reforms?
A.9. In my testimony, I was referring to a Department of
Housing and Urban Development (HUD) policy under Mortgagee
Letter 2015-11, which required mortgagees to initiate
foreclosure on reverse mortgages when borrowers were past due
on certain property charges by de minimis amounts. I understand
that HUD modified certain aspects of this policy when, on March
30, 2016, it issued Mortgagee Letter 2016-07. If confirmed, I
look forward to working with the OCC's career staff to ensure
that institutions supervised by the OCC operate in a safe and
sound manner and that consumers have fair access to financial
services.
Q.10. 2014 Steven Mnuchin joined the Board of Relatively Media,
a customer of OneWest Bank. Jim Wiatt was also on the Boards of
OneWest Bank and Relatively Media. In the spring of 2015, Mr.
Mnuchin resigned from the Relatively Media board, OneWest bank
swept $50 million from Relativity Media accounts, and
Relatively Media filed for bankruptcy. In bankruptcy
proceedings OneWest was listed as an owed creditor, and CIT
stated in its September filing that it was owed $38.5 million
by OneWest.
Did OneWest's regulators ever raise concerns about the
relationship between OneWest and Relatively Media, or the roles
of Steven Mnuchin and Jim Wiatt on the Relatively Media Board?
Where any concerns by the regulators raised since Mr. Mnuchin
was also an investor in Relatively Media? Did the OneWest Board
of Directors, which you were a member, ever discuss any of the
transactions involving Relatively Media? If so, what was
discussed?
A.10. Relativity Media maintained a lending relationship
through a syndicated bank facility that comprised a number of
banks, including OneWest Bank. The lending relationship was
reported as required under Regulation O to the OCC.
To the best of my recollection, the OneWest Bank lending
relationship with Relativity Media was approved at the Board
level, all amendments or changes were also approved by the
Board, and Secretary Mnuchin and Jim Wiatt recused themselves
from any action at the bank as it related to Relativity Media.
Wells Fargo
Q.11. A little over a year ago, the OCC and CFPB took
enforcement actions against Wells Fargo for creating over 1
million fraudulent accounts for their customers possibly going
back as far as 2007. We know now that the OCC had taken many
steps prior to the enforcement action to get Wells Fargo to
address these issues, yet somehow the former CEO and the Board
of Directors were allegedly unaware of the issues at the
national bank until late 2014 or early 2015 when the LA Times
wrote a story about the practices.
If confirmed, as Comptroller what will you do to ensure
that situations like the one at Wells Fargo which harmed
consumers for over a decade don't happen at other banks? Do you
think that the OCC is aggressive enough in enforcing the law?
A.11. The OCC and CFPB have taken enforcement action against
Wells Fargo for the creation of the fraudulent accounts.
Clearly, the creation of fraudulent accounts has no place in
our banks. If I am confirmed as Comptroller, I will review the
OCC's internal documentation concerning the Wells Fargo case
and take any actions necessary going forward.
Q.12. The enforcement action against Wells Fargo related to the
fraudulent accounts is not the only OCC enforcement action
against Wells Fargo. The OCC has taken 11 actions against Wells
Fargo since 2005. And some of the misconduct that occurred at
this bank took place while they were under consent orders
issued by the OCC and other regulators for other misconduct,
including violations of the Servicemembers Civil Relief Act.
Unfortunately, this level of recidivism is not unique to
Wells Fargo. This isn't just about strong regulatory
supervision and enforcement but also about the culture at banks
where violations of the law are just one of the costs to do
business.
If confirmed, what will the OCC do to prevent the largest
banks from engaging in repeated misconduct?
A.12. If confirmed, I will use every available means to prevent
banks from engaging in repeated misconduct. The OCC has a
variety of tools that it can use, ranging from guidance to
onsite supervision and examination to enforcement action, when
warranted.
I believe the OCC's greatest resource is its staff of
highly trained, professional bank supervisors and support
personnel (including lawyers, analysts, policy experts, and
economists). The OCC staff are very effective in conducting
their examinations, identifying and communicating risks to bank
management and boards of directors, and holding banks
accountable for actions necessary to correct identified
deficiencies. For examiners to succeed, as Comptroller, I will
work to ensure they are empowered to make the important
judgment calls necessary to ensure banks operate in a safe and
sound manner, provide fair access to financial services, treat
customers fairly, and comply with applicable laws and
regulations. Further, I will ensure that they have the
leadership, support, resources, guidance and policy, and world-
class training necessary to ensure that the banks they
supervise adhere to all appropriate laws and regulations.
To help prevent banks from engaging in repeated misconduct,
the Federal banking system also needs clear rules and
standards. The OCC has implemented enforceable heightened
standards for bank management and boards of directors. The
standards require an effective risk governance framework,
established guidelines for board responsibilities, and are
enforceable under part 30 of the OCC's regulations.
When banks fail to comply with applicable laws and
regulations or engage in unsafe or unsound banking practices,
the OCC also has a variety of enforcement tools which it can
use to hold banks accountable for their actions.
At the same time, if the responsibilities of regulators and
law enforcement agencies overlap, as Comptroller I would ensure
the OCC maintains collaborative working relationship with other
regulatory and law enforcement agencies who play an important
role in ensuring our financial system operates as it should and
benefits the consumers, businesses, and communities it serves.
Q.13. Do you think that the OCC is doing enough to hold the
Board of Directors of the largest national banks accountable
for misconduct?
A.13. As mentioned above, the OCC established enforceable
heightened standards that describe the responsibilities of
Boards of the largest national banks and Federal savings
associations. These standards include ensuring an effective
risk governance framework, providing active oversight of
management, and exercising independent judgment. If confirmed,
I would ensure that OCC examiners continue to apply these
standards to the largest banks and look for opportunities to
improve these standards.
Regulation and Supervision
Q.14. You've been in the banking industry for nearly 40 years,
but have no experience as a financial regulator. Why do you
want the job as the top regulator of national banks?
A.14. The U.S. banking system is the best in the world. I think
we can make it even better to support economic growth,
innovation and accessibility for all Americans while
maintaining safety and soundness. I want to lead an effort to
help make this happen.
Q.15. You have only worked at banks regulated by the Office of
the Comptroller of the Currency, the agency you are nominated
to lead. Do you think the OCC is a fair regulator? What do you
think it does well? What will you try to improve or change?
A.15. The staff of the OCC have consistently been identified as
one of the most talented, thorough, and advanced regulatory
groups in Government. In my view, examiners in charge of the
safety and soundness of the banking industry must constantly
ask themselves and banks what risk they believe there is in the
system and ensure that these risks do not impair the U.S.
economy. If confirmed, I hope to harness technology to monitor
and oversee the industry while minimizing the impact to banks.
Q.16. One of the most significant accomplishments of the OCC
after the 2008 financial crisis was its heightened supervision
program for the Nation's largest banks. If confirmed, will you
continue and strengthen this program? How?
A.16. To be clear, I support strong and effective regulation of
our banking system. I would not support changes that would harm
the safety and soundness of our banking system. It is important
to keep in mind that the U.S. banking system today is
dramatically better capitalized than it was before the
financial crisis and that it is subject to a more rigorous set
of regulations. If confirmed, I will engage in a continuous
review of our regulatory framework to ensure our system is safe
and sound and that regulations are efficient, effective, and
appropriately tailored so that the financial sector can
continue to foster economic growth.
Q.17. Acting Comptroller Noreika has proposed that the OCC be
given the authority to both charter and grant deposit insurance
to national banks. The lesson from the 1980s on this is
problematic. Do you support this proposal? What is the
rationale for combining the deposit insurance and chartering
decision in one agency?
A.17. The referenced proposal raises significant issues related
to the relationship of chartering banks and insuring deposits,
as well as interagency responsibilities. If confirmed, I will
carefully review this matter and related issues.
Q.18. The OCC has proposed issuing national bank charters to
nonbank fintech firms. This proposal is controversial and is
currently the subject of a lawsuit initiated by State
regulators. Supporters believe this will encourage innovation.
Critics of this effort have raised questions about its effect
on the marketplace, the payment system, and potential
consequences for small community institutions, as well as the
tax payer. What do you think about a
national charter for fintech firms? How do you propose to
address concerns raised?
A.18. I am supportive of initiatives that encourage economic
growth and innovation, and believe this is an area that
requires input and discussion amongst industry and Federal and
State regulatory bodies to determine the appropriate path
forward.
Q.19. The OCC has a history of working to undermine strong
State-based consumer protections through preemption--
effectively making State mortgage and usury caps moot. This
happened in Cleveland leading up to the financial crisis. Do
you think the OCC should respect States' authority to protect
consumers from predatory bank products offered within their
borders? Instead of attacking State consumer protections,
should the OCC set minimum standards and allow States to
improve upon them?
A.19. I support appropriate preemption for national banks.
States play a very important role in consumer protection when
not preempted by Federal laws and should continue to do so.
Q.20. Do you think that if a regulatory agency that is being
consulted by another regulatory agency for a rulemaking had
safety and soundness concerns about the rule under
consideration that they would raise that concern as soon as
possible? Does it make sense that an agency would wait 2 years
into the rulemaking to raise these concerns?
A.20. I believe the banking regulators can improve their
coordination in the rulewriting process. During that process,
issues should be raised within a reasonable period of time.
Q.21. Will you commit to making policy based on fair and
transparent analysis of data, and to make that analysis
available to Committee Members for scrutiny? Specifically, will
you share any and all analysis OCC staff or leadership has
prepared on the safety and soundness impacts of the CFPB's
arbitration rule?
A.21. If confirmed, I will work to make sure that the OCC
continues to conduct rigorous analyses of data, and to share
data where appropriate.
Q.22. Will you provide community banks with the resources and
technical assistance necessary to keep up with quickly changing
cybersecurity threats? How do you plan to reduce the burdens
that the threat of breaches poses to small institutions?
A.22. Yes. Community banks are a vital part of our Nation's
banking system and as their regulator, we should continually
seek ways to support these banks in serving the consumers,
businesses, and communities that depend on them. One
significant challenge is cybersecurity. Supporting the Nation's
community banks with this and other issues would be a priority
of mine.
If confirmed, I would continue the OCC's commitment to
provide community banks with the informational resources and
technical assistance necessary to keep up with cybersecurity
threats. The OCC also has made it a priority to continually
review and consider ways to reduce burdens on community banks
that relate to regulatory or business requirements.
Finally, while not exclusively focused on cybersecurity,
one of the primary purposes of the OCC's Office of Innovation
is to support community banks to understand and take advantage
of innovation in a safe and sound way to enhance the banking
products and services available throughout our Nation.
Q.23. At your nomination hearing, you said you agree with the
June Treasury Report's recommendations to provide regulatory
relief to small banks and credit unions. What changes to law
would do the most to lower compliance costs and other
regulatory burdens for small banks and credit unions with
assets under $10 billion without jeopardizing safety and
soundness?
A.23. I support the Treasury's recommendations and am
personally committed to improving the financial regulatory
framework. I believe that regulations must be appropriately
tailored to the risk posed by community banks and other banks
to consumers, businesses, and the financial system. If
confirmed, I will seek to improve the current regulatory system
to avoid a one-size-fits-all approach to banking regulation,
which will help reduce burdens and costs on small banks that
pose very limited risk to the safety and soundness of the
banking and financial system.
More specifically, if confirmed, I will work with my fellow
regulators to continue their current efforts to reduce the
burden on small banks from being required to obtain appraisals
for relatively small commercial real estate and other loans in
rural areas and other areas suffering a shortage of certified
appraisers. I also believe that the frequency of examinations
should be better tailored to banks' CAMELS ratings and capital
levels. If confirmed, I will also continue the ongoing work of
the OCC and other banking agencies to reduce the size and
content of quarterly Call Reports based on the size,
complexity, and systemic riskiness of banks. Finally, the
application of the Volcker rule to community banks should be
reconsidered to exempt small banks with de minimis trading
activities.
Q.24. After the financial crisis, and the failure of the Office
of Thrift Supervision to appropriately regulate thrifts, the
agency was merged with the OCC. Are there any specific
priorities you have regarding the regulation of thrift banks?
A.24. Federal Savings Associations continue to play an
important role in meeting the financial services needs of
people across the country. There are 368 Federal savings
associations with more than $760 billion in assets.
The supervision of Federal savings associations is now
fully integrated into the OCC, and the agency regulates all
national banks and Federal savings associations consistent with
its mission. If confirmed, I would seek to continue to ensure
the safety and soundness of both national banks and Federal
thrifts.
Q.25. If confirmed, you will be a voting member of the
Financial Stability Oversight Council. What emerging financial
stability risks would you want to focus on?
A.25. If confirmed, I look forward to serving as a voting
member of the Financial Stability Oversight Council and would
collaborate with other Council members to identify potential
emerging threats and vulnerabilities in the U.S. financial
system. The Council has focused on several areas that are
critical to OCC-supervised institutions, including, for
example, cybersecurity and the critical role of central
counterparties.
Q.26. If confirmed, you will also be a member of the FDIC's
Board of Directors. What do you think about the FDIC's Orderly
Liquidation Authority?
A.26. The financial crisis showed us how necessary it is to
have an effective resolution regime for failing banks. As for
the OLA specifically, I understand that Treasury is working on
a response to an April 2017 Presidential Memorandum that
requires it to thoroughly review OLA and provide a report to
the President on its findings. I would like to review that
report fully before discussing the future of OLA.
Miscellaneous
Q.27. In your ethics disclosures you list your ownership of
many residential properties in California and Nevada. Did you
own these properties before the financial crisis? If not, when
did you purchase each property, did you receive financing for
any of these purchases, what bank(s) originated those loans?
Were these arm's length transactions?
A.27. The Nevada properties were purchased between 2013-2016
and the California properties were purchased in the timeframe
of 2006-2016. One of the Nevada investment purchases had a
short-term loan provided by UBS, which since has been paid off.
My primary residence is the only Nevada property that has a
loan against the property and that is with UBS. Three of the
California properties have mortgages as identified in my
financial disclosure, two from UBS and one from the Otting
Family Trust. To the best of my knowledge and belief, these
transactions were concluded on commercially reasonable terms.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM JOSEPH
OTTING
Q.1. My constituents tell me that the EGRPRA report
inadequately highlighted concrete ways to reduce the regulatory
paperwork burden. What more can the OCC do to reduce the
regulatory burden on community banks?
A.1. The EGRPRA report provided to Congress in March 2017,
describes ongoing steps the agencies plan to pursue jointly,
and actions the OCC has taken independently to reduce the
regulatory paperwork burden on supervised entities. I believe
this report is a good first step toward meaningful burden
reduction, and work already has been accomplished to reduce
burdens in certain areas.
As Comptroller, I would continue to look for additional
ways to reduce unnecessary burden and promote economic
opportunity while ensuring that the Federal banking system
continues to operate in a safe and sound manner, provide fair
access to financial services, treat customers fairly, and
comply with applicable laws and regulations.
Q.2. Our financial system has become increasingly consolidated
as community banks and credit unions either close their doors
or merge with larger institutions.
Q.2.a. Are you concerned about this pattern? Why?
A.2.a. I am concerned about the increasing consolidation of
community banks and if confirmed I will examine this trend to
ascertain if regulatory burden is a cause. These institutions
play an outsized role in the economy, lending to small and mid-
size businesses that fuel economic growth.
Q.2.b. What services can these smaller institutions provide
that larger institutions cannot provide?
A.2.b. Community banks, due to their unique insight into the
credit needs of their communities and close relationships with
their customers, are able to deliver financial services in ways
larger institutions cannot and thus play a vital role
supporting economic growth in cities and towns around the
country. Community banks serve as essential engines of
``relationship'' lending to small and mid-size businesses,
farms, and consumers in individual communities.
Q.3. Multiple anecdotes from my constituents make it clear that
there are several Nebraska counties where mortgages are not
originated because of over-regulation. What is the best way to
address this problem from a regulatory standpoint?
A.3. While I cannot comment on the particular challenges of the
counties in Nebraska, I support Treasury's findings from its
June report to the President on how to better align our
financial regulatory system with the needs of consumers and
businesses. I understand that Treasury's report made several
recommendations to modify regulations that are negatively
affecting the ability of creditworthy American families to gain
access to affordable mortgages.
Q.4. My understanding is that only two banks have opened since
the passage of Dodd-Frank, including Bird in Hand Bank in
Pennsylvania, which has a customer base that is around half
Amish.
Q.4.a. Why do you believe this is the case? The dearth of de
novo banks is an important issue and adversely affects the
availability of banking services.
A.4.a. As Comptroller, I would work to identify opportunities
to eliminate barriers to de novo banks, including looking for
ways to make the chartering and deposit insurance approval
process more efficient.
There are a variety of factors contributing to the low
number of de novo banks since 2008, including slow economic
growth, a
sustained period of historically low interest rates, industry
consolidation, competition from nonbank financial service
providers, and challenges with obtaining deposit insurance.
In his June 22 testimony, the Acting Comptroller discussed
possible ways to make deposit insurance approvals more
efficient by leveraging the chartering approval process
conducted by the primary prudential authority. As Comptroller,
this would be a subject that I would continue to explore.
Q.4.b. What potential impacts does this have on our financial
system?
A.4.b. Consolidation of banks and the lack of de novo activity
can reduce the availability of banking services where they are
needed most and contribute to stagnation within the industry. A
healthy, diverse Federal banking system requires an efficient
process for new companies seeking to engage in the business of
banking to become national banks.
Q.4.c. Is there anything more the OCC can do to encourage the
opening of new banks?
A.4.c. In his June 22 testimony, the Acting Comptroller
discussed possible ways to make deposit insurance approvals
more efficient by leveraging the chartering approval process
conducted by the primary prudential authority. As Comptroller,
this would be a subject that I would continue to explore. I am
hopeful that making the de novo process more efficient will
result in more interest by new entrants into the national
banking system.
In addition, if confirmed, I would continue to be receptive
to more innovative approaches to banking. De novo banks can be
a source of responsible innovation and taking an affirmative
stance toward innovation that enhances banking services,
products, and operations can encourage more companies to
explore opportunities to become banks.
Q.5. As you know, in December of 2016 the OCC released a
whitepaper discussing the possibility of a fintech charter,
entitled, ``Exploring Special Purpose National Bank Charters
for Fintech Companies.''
Q.5.a. Do you intend to move the OCC forward on finalizing a
fintech charter? Why or why not? If so, please provide a
timeline on these efforts.
A.5.a. If confirmed, I look forward to evaluating the merits
and value of the OCC's proposed approach to chartering
financial technology companies engaged in the business of
banking. As financial technology accelerates, it is important
to ensure that companies engaged in the business of banking
have the appropriate oversight and regulatory structure in
place.
Companies engaged in the business of banking should have
the option of pursuing their businesses as a federally
chartered bank, if they meet the standards and criteria for
becoming a national bank. Any company that earns a national
bank charter should be held to the same high standards, laws,
and regulations applicable to other national banks.
Q.5.b. Does the OCC have sufficient statutory authorization to
implement a fintech charter? Why or why not?
A.5.b. The authority to grant national bank charters and
Federal thrift charters is well established and includes the
authority to charter limited purpose national banks.
The authority to grant special purpose national bank
charters is described in 12 CFR 5.20 Section 520.(e)(1). I
support the OCC in defending its authority against the
challenge being brought by the Conference of State Bank
Supervisors (CSBS) and the New York Department of Financial
Services (NYDFS).
While CSBS and NYDFS are challenging the OCC's authority
articulated in 12 CFR 5.20(e)(1) to grant special purpose
national bank charters to uninsured, nondepository fintech
companies engaged in the business of banking, the OCC has other
authorities to charter full service national banks as well as
trust banks, banker's banks, and credit card banks, which may
be chartered using the OCC's broad authority under 12 U.S.C.
27(a) and (b); 12 U.S.C. 1841(c)(2)(D) and (F).
Q.5.c. Under what legal circumstances is the OCC allowed to
regulate fintech companies?
A.5.c. The OCC can only regulate those fintech companies that
choose to become a national bank or that provide services to a
national bank as a third-party service provider. The OCC would
have authority to regulate any fintech company that becomes a
national bank under the same laws and regulations that grant
the OCC authority to administer the Federal banking system. And
the OCC would have authority to regulate fintech companies to
the extent that the agency has authority to oversee third-party
service providers to national banks, Federal savings
associations, or Federal branches of foreign banks. The vast
majority of fintech companies operate under State authorities
and are likely to continue to do so.
Q.5.d. What concerns, if any, do you have with the OCC's
fintech charter, as outlined in the previously mentioned
December 2016 whitepaper?
A.5.d. The proposal by the OCC is a thorough and thoughtful
proposal. It is important to ensure we have a Federal banking
system that can adapt to the changing needs of the market and
its customers. If confirmed, I will take the opportunity to
carefully consider the proposal, its potential impact on
products and services offered to customers of the Federal
banking system, and the possible effects on other institutions
that make up the Federal banking system.
Q.6. As you know, the OCC recently released a bulletin
entitled, ``Frequently Asked Questions to Supplement OCC
Bulletin 2013-29,'' which provided some regulatory guidance for
banks that partner with fintech companies. However, I am told
there is still confusion about such partnerships, including
when fintech companies will be treated as third-party service
providers, as well as the regulatory implications of this
arrangement.
Q.6.a. Should the OCC provide further guidance to banks about
their partnership with fintech companies, including when
fintech companies will be treated as third-party service
providers, and the corresponding regulatory implications for
banks? If so, please provide a timeline for such efforts.
A.6.a. This is a very important question, particularly as banks
rely more upon third-party service providers and explore other
partnerships to serve their customers better and enhance their
operations. If confirmed, I will look for opportunities to
enhance OCC guidance in this area.
Communication is key to successful supervisory
relationships. Banks with questions about partnering with
fintech companies can always discuss their concerns with
assigned supervisory staff or with staff within the OCC's
Office of Innovation.
Q.6.b. Under what conditions have onsite bank examiners treated
fintech companies as third-party service providers?
A.6.b. In my experience as a bank executive, bank regulators
treat a company as a third-party service provider when a bank
contracts with the company to engage its services. OCC Risk
Management Guidance defines a third-party relationship as any
business
arrangement between a bank and another entity, by contract or
otherwise. The OCC expects a bank to practice effective risk
management regardless of whether the bank performs the activity
internally or through a third party. A bank's use of third
parties does not diminish the responsibility of its board of
directors and senior management to ensure that the activity is
performed in a safe and sound manner and in compliance with
applicable laws.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JOSEPH
OTTING
Q.1. The Federal Reserve, OCC, and FDIC in 2016 published a
joint advance notice of proposed rulemaking (ANPR) on
cybersecurity, asking for comment, among other things, on
whether boards of directors should have adequate expertise in
cybersecurity. Citing the ANPR: ``a cyber incident or failure
at one interconnected entity may not only impact the safety and
soundness of the entity, but also other financial entities with
potentially systemic consequences.'' Other than the
solicitation of comments, we are not aware of any material
progress on this ANPR. If confirmed, may I have a personal
commitment from each of you that you will work with the FDIC
and each other on advancing this cybersecurity ANPR?
A.1. I support the fact that this Administration has made the
security and resiliency of the U.S. financial system a key
priority. Effective coordination and dialogue is vital to
further promoting effective cybersecurity. If confirmed, you
have my commitment that I will work with staff at the OCC to
continue to pursue appropriate and productive work to help
promote effective cybersecurity.
Q.2. The OCC and the Federal Reserve are each authorized to
enforce the Military Lending Act (MLA), which is a bipartisan
law enacted in 2006 that sets a hard cap of 36 percent interest
for most loans to the military. On July 22, 2015, the
Department of Defense finalized MLA rules that closed prior
loopholes that allowed unscrupulous lenders to prey upon
servicemembers and their families. Do you support these
stronger MLA rules? If confirmed, will you support and enforce
these strong MLA rules to the fullest extent possible?
A.2. If confirmed, I would support and enforce strong MLA
rules.
Q.3. As part of its duties, the OCC is also expected to enforce
the Servicemembers Civil Relief Act (SCRA), but SCRA
enforcement of the 6 percent interest cap on loans incurred
prior to active duty or the SCRA's foreclosure protections has
been inconsistent and subject to the discretion of our
financial regulators. If confirmed, can you tell me how you
will prioritize SCRA enforcement?
A.3. If confirmed, I would be supportive of SCRA being part of
the regulatory exam process and would endorse a horizontal
review in the industry.
Q.4. The Comptroller is supposed to be independent from the
Administration and while it is part of the Treasury Department,
it is an independent bureau. In the financial regulatory space,
can you point to anything where you do not agree with the
position taken by either the Trump administration or Secretary
Mnuchin?
A.4. If confirmed, I will carry out my duties consistent with
applicable law, in a manner free from undue influence.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JOSEPH
OTTING
Q.1. Please provide State-by-State numbers of the total number
of foreclosures and loan modifications completed by OneWest.
While you may not currently have direct access to this
information, you can request that CIT provide this information
prior the Banking Committee's consideration of your nomination.
A.1. I am no longer employed by OneWest/CIT and do not have
access to its internal records, including the information you
are requesting.
Q.2. In the wake of the financial crisis, Congress enacted a
provision, section 956 of Dodd-Frank, to require financial
regulators to jointly issue rules to ban incentive pay
practices at large financial institutions that encourage
inappropriate risk-taking. In May of 2016, the financial
regulators including the Federal Reserve Board and the OCC
proposed a rule to implement section 956. More than a year
later, the rulemaking still has not been finalized. The Wells
Fargo fraudulent account scandal uncovered last year, where
senior executives were given bonuses for ``successes in cross-
selling,'' underscores the need for rules regarding incentive-
based compensation agreements. Last month, the Office of
Management and Budget published updated regulatory agendas, and
the rulemaking was removed from the OCC's agenda.\1\
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Q.2.a. Will you commit to prioritizing the section 956
rulemaking and ensuring that it is part of the OCC's regulatory
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agenda?
A.2.a. Section 956 of the Dodd-Frank Act requires financial
regulators to jointly issue rules relating to enhanced
compensation structure reporting. The OCC, together with the
other designated Federal regulators, published a proposed joint
rule on this matter in June 2016. If confirmed, I would urge
all the regulators to work together to finalize the rule as
required by statute.
Q.2.b. Will you commit to implementing section 956 of Dodd-
Frank?
A.2.b. As Comptroller, I would work to fulfill all of the
statutory obligations of the office.
Q.2.c. Will you commit to implementing all congressionally
mandated rulemakings?
A.2.c. As Comptroller, I would work to fulfill all of the
statutory obligations of the office.
Q.3. In 2015, while you were Chair of the California Chamber of
Commerce, the organization placed a State bill, AB 244, on its
``jobs killer'' list and urged State legislators to oppose it.
The bill would have protected from foreclosure surviving
spouses who have a legal interest in a home but who were not
listed on the mortgage. In the same year, you said at the
public hearing regarding the merger of OneWest and CIT Group,
``Let me be clear, we urge and fully support a moratorium on
foreclosure of nonborrowing spouses.'' When you were publicly
representing OneWest, you took a sympathetic tone toward
borrowers, but when you were making policy decisions for your
association, you staked out a position that would harm the very
borrowers you claimed to want to help. How do you reconcile
these two positions?
A.3. I had no direct involvement in the decision by the Chamber
regarding AB 244.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM JOSEPH
OTTING
Q.1. Your testimony raised a lot of important issues related to
consumer rights and the proper balance of regulations in our
economy. I think it's important to remember that you are
nominated for a position of public trust and with that comes a
different set of priorities and obligations than what you might
have experienced in the private sector. Your decisions will
greatly impact not only the bottom line of the financial
institutions that you regulate, but as we saw all too
tragically during the financial crisis, regulatory decisions
can have a dramatic impact on the well-being of individuals and
their families.
If confirmed, how do you intend to separate yourself from
past conflicts and carry out your duties independently so that
you can serve the public's best interest?
A.1. If confirmed, I will adhere to all applicable ethics laws,
rules, and policies. Should I have a question concerning my
ethical obligations, I will seek the counsel of appropriate
ethics staff.
Q.2. As you're well aware Wells Fargo was fined $180 million
last year by regulators, including the OCC, for setting up
fraudulent accounts for its customers.
I'm curious to know your views on the role the OCC should
play in preventing these types of scandals? Do you believe more
should be done in the future to avoid this type of systemic
fraud, and if so, what would you recommend?
A.2. As a former bank executive, I can tell you the primary
responsibility for preventing such abuse and ensuring
incentives are properly aligned to motivate appropriate
behavior and achieve business goals rests with the bank
leadership and boards. As Comptroller, I would look for
additional opportunities to ensure bank boards and management
fully understand their roles and responsibilities in preventing
this behavior.
If confirmed, I believe it is critical to empower OCC's
cadre of professional community, midsize, and large bank
examiners and ensure that they have the support, resources, and
training necessary to exercise their responsibilities to ensure
that the banks they supervise adhere to all appropriate laws,
regulations and other issuances. Ongoing supervision is the
most effective tool the agency has to affect change.
Consumer fraud has no place in the Federal banking system
and I believe in providing examiners authority to consider
appropriate remediation activities, up to and including formal
enforcement actions, when the circumstances warrant.
The OCC conducted an internal review of its supervision of
Wells Fargo, which included several recommendations. As
Comptroller I will look to ensure these recommendations have
been implemented effectively and continue to look for
opportunities to enhance our supervision of large, complex
banks.
The OCC is also conducting a horizontal review of the sales
practices among large and midsize national banks. I look
forward to discussing the findings when that review is complete
and working with staff to correct any deficiencies they
identify.
Q.3. During our one-on-one yesterday we covered some important
ground as it relates to regulatory relief for community banks.
I appreciate your comments on the need for relief in mortgage
lending and rural appraisals. Another area that I believe is
ripe for regulatory overhaul is small dollar lending. In North
Dakota, we have several community banks that are trying to help
extend small dollar credit to customers, but can't because of
regulatory uncertainty and onerous compliance standards.
There's analysis that shows banks and credit unions could offer
safe loan alternatives at prices six times lower than payday
lenders. I believe it's far better to have these loans made by
well-regulated community banks that know their customers and
have their long-term financial interests in mind.
LWill you commit to working with banks to enable
them to offer new reasonable and safe installment loans
to their customers that can be a true alternative to
payday loans?
A.3. Access to a diverse set of credit products is essential
for consumers across America. I support adjustments to our
regulatory
approach designed to decrease our population of unbanked and
underbanked consumers and bring more of these consumers into
the financial mainstream. I also support innovation in banking
and a marketplace with a level playing field for all financial
institutions that will increase competition, which is
ultimately beneficial to consumers. You have my commitment to
work with your office on these matters.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JOSEPH
OTTING
Q.1. Mr. Otting, in our one-on-one meeting, you and I had a
chance to talk about the Wells Fargo scandal. I was encouraged
to hear your view that their behavior was totally unacceptable.
I also agree with your assessment that the corporate culture,
with its drive to cross-sell and an obsession with sales
targets, was at the heart of the problem. Since that
conversation, we have learned of yet another Wells Fargo
scandal. This one involved charging consumers for high priced
auto insurance that they did not need, without their knowledge.
The high cost of the auto insurance pushed roughly 274,000
Wells Fargo customers into delinquency and resulted in almost
25,000 wrongful vehicle repossessions.
Q.1.a. What will you do to prevent these types of scandals from
happening again?
A.1.a. I understand that following the OCC's enforcement action
against Wells Fargo last September, the agency undertook a
thorough review of its supervisory activities to determine any
lessons learned that it could utilize going forward. The OCC
made its lessons learned findings public on April 19, 2017. I
believe that the OCC is in the process of institutionalizing
the recommendations included in this report, which is intended
to correct supervisory deficiencies identified. As Comptroller
I will look to ensure these recommendations have been
implemented effectively and continue to look for opportunities
to enhance our supervision of large, complex banks.
The OCC is also conducting a horizontal review of the sales
practices among large and midsize national banks. I look
forward to discussing the findings when that review is
complete, working to correct any deficiencies staff identify,
and determining what additional steps can be considered to
prevent such practices from recurring.
Consumer fraud has no place in the national banking system
and I believe in providing examiners authority to consider
appropriate remediation activities, up to and including formal
enforcement actions, when the circumstances warrant. OCC
examiners will have my strong backing to exercise their
supervisory judgment, and take enforcement or other remedial
actions to ensure banks operate in compliance with appropriate
law and regulations.
Q.1.b. At what point do these kinds of violations become a
safety and soundness concern for the banks the OCC supervises?
A.1.b. I do not have first-hand knowledge of the sales
practices at Wells Fargo, but treating customers unfairly and
failure to implement effective controls against fraud are
safety and soundness issues. No bank can operate in a safe and
sound manner for long if it abuses its customers and allows
misaligned incentives to motivate improper behaviors.
The OCC's enforcement action against the bank (September 8,
2016) states clearly that the agency found the bank's sales
practices to be unsafe or unsound. See https://www.occ.gov/
news-issuances/news-releases/2016/nr-occ-2016-106a.pdf and
https://www.occ.gov/news-issuances/news-releases/2016/nr-occ-
2016-106.html.
Q.1.c. Do you think banks' compensation practices are
contributing to the problem of banks harming their consumers in
order to increase profits?
A.1.c. In the case of the OCC's enforcement action against
Wells Fargo for its sales practices violations, the OCC
identified unsafe or unsound practices in the bank's risk
management and oversight of its sales practices and noted that
the bank's incentive compensation program and plans were not
aligned properly and fostered unsafe and unsound practices.
Based on my personal experience, it is critical that a bank's
sales culture and compensation be properly aligned to avoid any
actual or perceived inappropriate incentives.
Q.1.d. In the auto insurance scandal, consumers who fell behind
in paying their auto loan or had their car repossessed likely
have negative trade lines on their credit report that will
haunt them for years. These errors on their credit report will
lower their credit score, prevent them from getting loans in
the future or increase the cost of borrowing, and make it
harder for them to get hired or rent an apartment.
What will you do as Comptroller of the Currency to ensure
that (1) Wells Fargo works with credit reporting agencies to
remove the negative trade lines on consumer credit reports as a
result of the scandal, and (2) Wells Fargo helps impacted
consumers verify that their credit reports no longer contain
negative information related to this scandal?
A.1.d. If confirmed, I will carefully review the OCC's
supervisory record and findings relating to Wells Fargo auto
loan practices and ensure that appropriate action--up to and
including formal enforcement action if necessary--is taken to
ensure that any adverse impacts to consumers of such practices
are fully addressed.
Q.2. It does not require too much imagination to understand why
the financial industry is lobbying against the CFPB's new rule
banning mandatory arbitration. They have been able to avoid all
kinds of lawsuits by taking away consumers' right to go to
court.
But it is very troubling that one of the most vocal
opponents to the new rule was the Acting Comptroller of the
Currency. He claims that the rule poses a safety and soundness
risk to banks. However, he has not provided any evidence to
support that claim. In fact, several of the largest banks do
not use them. And those institutions that have chosen to stop
using mandatory arbitration--Bank of America, Capital One,
JPMorgan Chase--are no less safe or sound as a result.
Q.2.a. What should the OCC's role be when it comes to weighing
in on rules issued by other financial regulators, like the
CFPB's arbitration rule?
A.2.a. By statute, the CFPB has exclusive authority to
prescribe regulations administering certain consumer protection
laws, and is required to consult with the prudential regulators
prior to proposing a rule and during the rulemaking process. If
during the consultation process, a prudential regulator
provides a written objection to all or any part of a proposed
rule, the CFPB must describe the objection and how it is
addressed. This process is critical to ensure meaningful input
by the OCC into CFPB regulations and to avoid any unintended
consequences of a CFPB rule on the national banking sector and
to ensure consistent application of the rules by multiple
regulators.
The statute also provides for the review and stay of rules
for safety and soundness reasons under the Financial Stability
Oversight Council. As member of the council and the primary
prudential regulator of the Federal banking system, the
Comptroller of the Currency has an important role to play
ensuring rules do not adversely affect the safety and soundness
of the Federal banking system. It is important for the agencies
to maintain a positive collaborative relationship to ensure
such concerns are addressed early and relevant data and
information are shared so that each agency has the opportunity
to fully consider such matters in exercising their independent
authorities.
Q.2.b. How would you evaluate whether the CFPB rule presents
safety and soundness concerns?
A.2.b. To evaluate whether the CFPB rule regarding arbitration
agreements presents safety and soundness concerns, one would
look at its potential effects on the Federal banking system as
a whole as well as the institutions within that system. One
would seek to ascertain the rules' impact on the banks' ability
to mitigate risk and limit liability, on reserves, and on the
availability and cost of the products and services it offers.
The effects need to be evaluated in context to determine the
cumulative impact, rather than in isolation.
In general, as part of the OCC's statutory consultative
role, it is crucial that CFPB provide the OCC with adequate
information, findings, and data that OCC economists, policy
experts, and examiners may review in order to determine any
safety and soundness or other potential implications of
proposed rules. If confirmed, I will expect that the CFPB will
engage with the OCC early and often as it develops regulations
to ensure that the consultation process is meaningful, and that
we have the information we need to provide feedback and
recommendations to the bureau to accommodate any safety and
soundness concerns that may arise.
Q.3. If there is a lack of evidence that the CFPB rule
undermines banks' safety and soundness, will you retract Acting
Comptroller Noreika's opposition to the rule?
A.3. I believe this is a complicated matter--one which I will
give serious attention to if I am confirmed. If confirmed, I
commit to work faithfully to help ensure the safety and
soundness of national banks and Federal savings associations,
and will work closely with the members of the FSOC to help
assure U.S. financial stability.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
JOSEPH OTTING
Q.1. How many foreclosure completions did OneWest (the Bank)
engage in during your employment at the Bank? How many
foreclosure completions were in Nevada?
A.1. As I am no longer employed by OneWest/CIT and do not have
access to its internal records, I do not have sufficient
information to answer this question.
Q.2. An April 2014 report from the OCC indicated that OneWest
improperly foreclosed on 54 servicemembers in contravention of
the Service Member Civil Relief Act.\1\ How many of those
servicemembers resided in the State of Nevada?
---------------------------------------------------------------------------
\1\ https://www.occ.gov/news-issuances/news-releases/2014/nr-occ-
2014-65a.pdf.
A.2. As I am no longer employed by OneWest/CIT and do not have
access to its internal records, I do not have sufficient
---------------------------------------------------------------------------
information to answer this question.
Q.3.a. Secretary Mnuchin in his questions for the record to the
Senate Finance Committee following his confirmation hearing
suggested that OneWest modified the loans of approximately
2,150 Nevadans. But his answer conflated modification offers
with actual modifications. Everyone who has worked with
homeowners understands that an offer from a bank to modify a
loan is not the same thing as a modification. How many
completed loan modifications did OneWest provide to Nevadans
during your tenure?\2\ How many of those completed loan
modifications included a reduction in the borrower's principal
amount?
---------------------------------------------------------------------------
\2\ http://static.politico.com/bc/9e/81e33aa74b5980daa9ffdeb7cba9/
steven-mnuchin-responses-to-senate-finance-committee.pdf.
A.3.a. As I am no longer employed by OneWest/CIT and do not
have access to its internal records, I do not have sufficient
---------------------------------------------------------------------------
information to answer this question.
Q.3.b. In your response to my question at your confirmation
hearing, you said, ``a lot of people have different definitions
of `robo-signing.' '' What is your definition of what's
colloquially referred to as ``robo-signing?'' Do any of the
Office of Thrift Supervision's findings on pages 2 and 3 of
OneWest's 2011 consent order constitute what is colloquially
known as robo-signing?\3\
---------------------------------------------------------------------------
\3\ https://www.occ.gov/static/ots/misc-docs/consent-orders-
97665.pdf.
A.3.b. I do not believe that OneWest Bank engaged in practices
that are commonly associated with this term. I am also not
---------------------------------------------------------------------------
aware of any legal definition of this term.
Q.4. In response to one of my questions at your confirmation
hearing, you seemed to suggest that because OneWest had a
``process'' in place to handle residential real estate mortgage
foreclosures, that it was evidence that the Bank did not, in
fact, ``robo-sign'' or engage in unsafe or unsound banking
practices. Would you concede that a bank merely having a
process in place is insufficient to guard against unsafe or
unsound banking practices, and that such processes must
actually be followed by employees of the bank? For example, a
OneWest employee testified in a 2009 deposition that she signed
6,000 documents per week, mostly affidavits, and that she did
not check the figures outlined in the affidavits.\4\ Does the
behavior described in this deposition constitute ``robo-
signing?'' Did OneWest's ``processes'' prove sufficient to
guard against this misconduct?
---------------------------------------------------------------------------
\4\ http://4closurefraud.org/2009/11/15/full-deposition-of-the-
infamous-erica-johnson-seck-re-indymac-federal-bank-fsb-plaintiff-vs-
israel-a-machado-50-2008-ca-037322xxxx-mb/.
A.4. Banks should take appropriate steps to comply with all
applicable laws, rules, and policies, including those relating
to safety and soundness. Often, this counsels in favor of
adopting internal processes as well as implementing and, as
necessary, updating, reasonable controls to provide for
adherence to those processes. As demonstrated by the
independent foreclosure review, under the policies and
procedures in place at OneWest, the bank experienced relatively
low rates of irregularities associated with its mortgage
activities. Additionally, it is my understanding based on the
testimony you cite that the employee was not describing her
individual workload but rather the activity of multiple
---------------------------------------------------------------------------
employees.
Q.5. Please elaborate on the answer you provided to me during
your oral testimony and indicate why you signed the 2011
consent order between OneWest and the Office of Thrift
Supervision if you believed that the findings in the consent
order did not accurately reflect the practices of the Bank at
that time.
A.5. After due consideration, we believed that this was the
most appropriate course of action at the time.
Q.6. In your oral response to my questions at the hearing, you
seemed to indicate that consent orders which do not require
admissions of guilt are somehow invalid or coercive on the part
of the Government. Given these views, if confirmed, will the
OCC require admissions of guilt when entering into a consent
order with a regulated institution?
A.6. If confirmed, I look forward to considering this issue in
consultation with career staff at the OCC. I believe that the
OCC should take appropriate action to vigorously enforce the
laws within its jurisdiction.
Q.7. When asked about ``dual tracking'' at your confirmation
hearing, you responded that OneWest's behavior was not
significant
because it was ``industry practice,'' insinuating that it was
permissible because it was common. Please elaborate on your
views on the practice commonly known as ``dual tracking.'' Also
please describe the relevance of whether or not it was industry
practice in your answer.
A.7. I did not testify that OneWest's activities regarding
these issues were ``not significant'' because they were
``industry practice.'' I believe that a bank's actions
regarding mortgage modifications and foreclosures must be
undertaken consistent with applicable law. Thus, I do not
believe that ``industry practice'' should necessarily be
dispositive with respect to any determination by a bank
regarding these issues. To the best of my recollection, OneWest
initially implemented policies and procedures consistent with
guidance set by Treasury and the Government-Sponsored
Enterprises; Treasury performed regular audits of OneWest,
which received industry-leading quality scores; and OneWest
modified its policies and procedures over time based on new
regulatory feedback and guidance. As a general matter, I
believe that loss mitigation efforts--including loan
modifications--as an alternative to foreclosure can be
beneficial for both borrowers and financial institutions.
Q.8. In 2015, the California State house considered legislation
(AB 244) that would've clarified that widowed homeowners were
protected by the State's Homeowner Bill of Rights. The purpose
of the legislation was to protect surviving spouses living in a
home that went to foreclosure after their spouse died. At that
time, you were Chairman of the California Chamber of
Commerce.\5\ The Chamber lobbied against that bill, putting it
on a list of ``jobs killers.''\6\ What was your role in placing
this legislation on the ``jobs killers'' list?
---------------------------------------------------------------------------
\5\ http://advocacy.calchamber.com/2014/12/16/calchamber-elects-
2015-board-officers/.
\6\ http://advocacy.calchamber.com/policy/bill-tracking/job-
killers/2015-job-killers/.
A.8. I had no direct involvement in this decision.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RANDAL
QUARLES
Q.1. While at the Treasury Department you negotiated the
financial services provisions of six free trade agreements and
described ``liberalization of financial services'' as ``vital''
to U.S. trade policy. Wall Street has sought to include
financial regulation in trade agreements, most recently in the
Transatlantic Trade and Investment Partnership (TTIP), as a
backdoor way of weakening Wall Street reform. Secretary Lew,
Governor Tarullo, and others pushed back on those efforts and
argued that financial regulation should be addressed outside of
trade policy. Do you agree that financial regulation should be
negotiated outside of broader trade agreements?
A.1. I continue to believe that liberalization of financial
services through increased market access and national treatment
for U.S. financial firms in foreign markets is vital to U.S.
trade policy. Traditionally, the financial services provisions
of our trade agreements have been negotiated separately from
the other provisions. Rather than being led by the Office of
the United States Trade Representative (USTR), the negotiation
of these provisions has been led by Treasury (which coordinates
input from all the U.S. financial regulators), and the
provisions are placed in separate chapters reflecting a
recognition of all parties that the prudent and efficient
operation of the financial sector has a foundational role for
all other sectors of the economy and therefore should not be
subject to compromises and tradeoffs with those other sectors.
This insulation of the financial services provisions during the
negotiating process also recognizes that discussions regarding
financial regulation already occur regularly in various
international bodies with financial services expertise, such as
the Basel Committee, the Financial Stability Board, and the
International Association of Insurance Supervisors.
The process I have described above was true of all the
trade agreements for which I negotiated the financial services
provisions, and this separation was scrupulously respected by
USTR throughout the negotiating process. I support this
bifurcation and believe it is well designed to ensure that the
financial services provisions of trade agreements are
calibrated to preserve financial stability while also providing
a broader and fairer playing field for U.S. firms.
Q.2. In September 2016, Governor Tarullo announced that the
Board of Governors would be incorporating some modified form of
the GSIB capital surcharge into the CCAR's minimum common
equity ratio that apply to the U.S. GSIBs. When Senator Rounds
asked you about your position on this change, you responded
that you would want to look at the question in more depth, but
that it is definitely worth looking at. Having had more time to
consider the question, do you support this change for the 2018
CCAR process?
A.2. I understand that the Federal Reserve has previously
committed that any change to incorporate the globally
systemically important bank (GSIB) surcharge into the
Comprehensive Capital Analysis and Review stress testing would
have to go through the normal notice and public comment process
of rulemaking. If I were to be confirmed, I look forward to
studying the issue more in-depth and working with members of
the Federal Reserve Board (Board) to further evaluate the
benefits and costs associated with adoption of such a measure.
Q.3. In your 2016 Wall Street Journal op-ed you said:
But the consequence of a dramatic increase in bank capital is
an increase in the cost of bank credit, meaning higher interest
rates across the board. Those who favor much higher bank
capital argue this would not happen, because investors would
accept lower returns if the banks they put their money in were
safer. In the real world of capital markets, however, there are
not enough natural investors in bank equity seeking utility-
like returns.
Q.3.a. Please provide all of the relevant literature upon which
you are basing your assertion that a ``dramatic increase in
bank capital is an increase in the cost of bank credit[.]''
Q.3.b. Do the prospective increased costs outweigh the
associated benefits to increased financial stability,
particularly when accounting for the cost of the recent
financial crisis?
Q.3.c. Please provide supporting evidence for your assertion
that ``there are not enough natural investors in bank equity''
should capital requirements be increased substantially. What is
a ``natural'' investor, and what distinguishes them from other
types of investors?
A.3.a.-c. The stability of the U.S. financial system is
supported by the safe and sound operation of banking
institutions. One of the most important prudential measures for
ensuring that stability is bank capital. Of course, there is a
tradeoff between higher bank capital levels that increase the
resiliency of individual institutions and the system as a
whole, and the cost of that capital. A goal of regulation
should be to balance to protection of financial stability in a
way that promotes economic growth and business opportunity.
Equity investors hold an institution's riskiest securities
and as a consequence demand a return for that risk that is
higher than the institution's debt holders in any given capital
structure. Although in ideal conditions the return demanded on
the equity should fall in proportion to increases in the firm's
equity and reductions in its debt, actual capital markets
differ from ideal conditions in a variety of ways: there is a
tax preference for debt; there are higher direct and indirect
transaction costs for issuing equity; a material portion of a
bank's debt is insured (its deposits) and the insurance premium
is not fully related to the risk covered; and both real and
perceived asymmetries in information between an institution and
its investors result in an underpricing of the riskiest
securities and an overpricing of the less risky. As a result,
equity financing is
materially more expensive for a financial institution than debt
financing, and there is persuasive literature that relates this
higher cost of financing to a higher cost of credit provided by
banks (e.g., Cosimano and Hakura 2011; ECB 2015; de Ramon, et
al. (2012); Francis and Osborne (2009)).\1\
---------------------------------------------------------------------------
\1\ Cosimano, Thomas F. and Dalia S. Hakura (2009). ``Bank Behavior
in Response to Basel III: A Cross-country Analysis.'' IMF Working Paper
WP/11/119; ``Euro Area Bank Lending Survey'' (January 2015); de Ramon,
Sebastian J.A., et al. (2012). ``Measuring the Impact of Prudential
Policy on the Macroeconomy: A Practical Application to Basel III and
Other Responses to the Financial Crisis,'' Financial Services Authority
Occasional Paper Series, No. 42; Santos, Andre Oliveira and Douglas
Elliott (2012). ``Estimating the Costs of Financial Regulation.'' IMF
Staff Discussion Note SDN/12/11; Martin-Oliver, Alfredo et al. (2013).
``Banks' Equity Capital Frictions, Capital Ratios, and Interest
Rates.'' International Journal of Central Banking, Vol. 9, No. 1,
p.183.
---------------------------------------------------------------------------
Relatedly, there is a growing body of literature that
analyzes the effect of bank capital levels on the quantity as
well as the cost of credit. For example, Board Governors have
cited the following studies. Furfine \2\ analyzes data on large
U.S. commercial banks between 1989 and 1997 and concludes that
a 1-percentage point increase in capital standards reduces loan
growth by 5.5 percent. Berrospide and Edge \3\ find a more
modest impact. Using U.S. bank holding company data from 1992
to 2009, the authors conclude that a 1-percentage point
increase in capital requirements reduces loan growth by roughly
0.7 to 1.2 percentage points. Other studies tell a similar
story using non-U.S. data. For instance, Francis and Osborne
\4\ find, using U.K. data, that a 1-percentage point increase
in capital requirements reduces bank lending by approximately
1.2 percent. Finally, Martynova's \5\ survey of the
literature--mostly of studies using non-U.S. data--shows that
an increase in capital requirements by 1 percentage point
reduces loan growth by 1.2 to 4.6 percentage points.
---------------------------------------------------------------------------
\2\ Furfine, Craig (2000). ``Evidence on the Response of U.S. Banks
to Changes in Capital Requirements.'' BIS Working Papers No. 88.
\3\ Berrospide, Jose M. and Rochelle M. Edge (2010). ``The Effects
of Bank Capital on Lending: What Do We Know, and What Does It Mean?''
Federal Reserve Board Finance and Economics Discussion Series 2010-44.
\4\ Francis, William B. and Matthew Osborne (2012). ``Capital
Requirements and Bank Behavior in the U.K.: Are There Lessons for
International Capital Standards?'' Journal of Banking and Finance, 36,
803-816.
\5\ Martynova, Natalya (2015). ``Effect of Bank Capital
Requirements on Economic Growth: A Survey.'' DNB Working Paper No. 467.
---------------------------------------------------------------------------
As your question notes, however, whether the costs outweigh
the benefits of higher capital is a separate issue. There is a
growing body of research regarding the costs and benefits of
bank capital that addresses the impact of capital standards on
economic growth. A number of studies, also cited by Board
Governors, including the Basel Committee on Banking
Supervision,\6\ the Bank of England,\7\ the Federal Reserve
Bank of Minneapolis,\8\ and Firestone et al.\9\ suggest that
higher bank capital requirements (up to a point) are good for
long-term credit availability and economic growth, but that
with levels of capital beyond that point, social welfare is
decreased. While the optimal level of capital varies between
studies, the basic framework is the same.
---------------------------------------------------------------------------
\6\ Basel Committee on Banking Supervision (2010). ``An Assessment
of the Long-Term Economic Impact of Stronger Capital and Liquidity
Requirements.''
\7\ Brooke, Martin et al. (2015). ``Measuring the Macroeconomic
Costs and Benefits of Higher U.K. Bank Capital Requirements.'' Bank of
England Financial Stability Paper No. 35.
\8\ Federal Reserve Bank of Minneapolis (2016). ``The Minneapolis
Plan to End Too Big To Fail.''
\9\ Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ``An
Empirical Economic Assessment of the Costs and Benefits of Bank Capital
in the U.S.'' Federal Reserve Board Finance and Economics Discussion
Series 2017-034.
---------------------------------------------------------------------------
Q.4. In the same op-ed, you said:
Focusing on bank size is politically appealing but diverts
attention from the major source of systemic risk in the
financial sector: a shortage of stable deposits. Banks are but
one part of an interconnected financial sector providing over
$40 trillion of credit to the economy, but that credit is
supported by only about $11 trillion of bank deposits.
The gap must be closed largely with professionally managed,
`wholesale' funding, such as short-term repurchase agreements.
Wholesale funders are quick to pull their support by not
rolling over short-term credit if they perceive those funds are
at risk. This leads to periodic runs on financial institutions
and the resulting demand for Government intervention to prevent
the failure of those institutions. Substantial wholesale
funding is necessary to sustain the current level of financial-
sector credit that supports the economy.
Whether there are 10 big banks in the country or 10,000 small
ones, there will still be insufficient stable financing from
deposits, and a resulting reliance on wholesale funds.
In 2013, Governor Tarullo told this Committee that the ``issue
of short term, nondeposit, runnable funding'' is ``the one I
think we should be debating in the context of too-big-to-fail,
and in the context of our financial system more generally.''
Q.4.a. Do you agree with Governor Tarullo that more needs to be
done to address the issue of short-term wholesale funding?
A.4.a. Since the time of Governor Tarullo's testimony, the
Board has undertaken several efforts to address banking
organizations' use of short-term wholesale funding. For
example, the Board has implemented the liquidity coverage ratio
and has proposed the net stable funding ratio to increase large
banking organizations' resilience to disruptions in short-term
wholesale funding. In addition, the Board adopted the GSIB
surcharge rule, which takes U.S. GSIBs' reliance on short-term
wholesale funding into account in the calibration of each
GSIB's capital surcharge, and adopted a long-term debt
requirement for U.S. GSIBs. If confirmed, I look forward to
further evaluating the benefits and costs associated with
adoption of such measures.
Q.4.b. In 2013, the GAO found that ``the use of programs by
institutions of various sizes were driven in part by
differences in how institutions funded themselves,'' and that
large banks holding companies received a higher ratio of
support relative to their total assets because they ``relied
less on deposits as a source of funding and more on short-term
credit markets and participated more in programs created to
stabilize these markets.''
Do you agree that ``focusing on size'' may be an
appropriate approach, to the extent that larger financial
institutions (particularly bank holding companies) rely on more
wholesale funding?
A.4.b. Large banking firms tend to have more complex risk and
funding profiles relative to smaller firms. Accordingly, for
some regulations it may be appropriate to use size-based
thresholds to determine their scope of application. For other
regulations, it may be appropriate to consider factors in
addition to size in setting their scope of application, given
the considerable variation in risk and funding profiles and
systemic footprints across large firms.
Q.4.c. Do you support the following measures that have been
proposed to mitigate the risks posed by short-term wholesale
funding:
i. LThe supplementary leverage ratio?
ii. LThe liquidity coverage ratio?
iii. LThe net stable funding ratio? If so, will you making
finalizing the net stable funding ratio rule a
priority?
iv. LUniform margin requirements for securities financing
transactions? If so, will you make proposing a rule for
uniform margin requirements for securities financing
transactions a priority?
A.4.c. As noted in the above response, the Board has undertaken
several measures aimed at mitigating the risks of over-reliance
on short-term wholesale funding, including the liquidity
coverage ratio and the GSIB risk-based capital surcharges. The
supplementary leverage ratio, while not specifically targeted
toward short-term wholesale funding, also impacts firms'
funding decisions. The net stable funding ratio and margin
requirements for securities financing transactions could
further mitigate potential risks to financial stability
associated with different types of short-term wholesale
funding. I have not had the benefit of the extensive review and
analysis conducted by the Federal Reserve in the course of
developing these measures, and thus, if confirmed, I look
forward to further evaluating the benefits and costs associated
with adoption of such measures.
Q.5. In January 2014, the Board announced an Advanced Notice of
Proposed Rulemaking on financial holding companies' commodities
activities. In September 2016, the report released by the
Board, the OCC, and the FDIC pursuant to section 620 of Wall
Street Reform, on banks' securities activities recommended that
Congress rescind two authorities under the Bank Holding Company
Act--the merchant banking authority under section 4(k) and the
grandfathered authority under section 4(o). Later that month,
the Board released a proposed rule to limit some of the
financial holding companies' commodities activities.
Q.5.a. While at the Treasury Department, did you have any
involvement in the 2003 joint report with the Board of
Governors on Financial Holding Companies under the Gramm-Leach-
Bliley Act or the 2005 Treasury Department report on the Impact
of the Gramm-Leach-Bliley Act on Credit to Small Businesses and
Farms?
A.5.a. These reports were prepared by the Office of Domestic
Finance of the Treasury. During the periods of their
preparation, I was serving in the Office of International
Affairs (as Assistant Secretary in 2003, and as Assistant
Secretary and Acting Under Secretary during the first part of
2005). The Office of International Affairs has no policy
responsibility for the matters discussed in these reports, and
I was not involved in their preparation.
Q.5.b. Do you support the Board's recommendations in the
section 620 report?
A.5.b. The Board's recommendations in the 620 report were the
result of an extended review of the history and operation of
the provisions under consideration. Having not had the benefit
of that
review, my views on the 620 report are not yet formed. If
confirmed, I would look forward to understanding and exploring
these issues with the other Board members.
Q.5.c. Do you support the Board's proposed rule, and will you
make finalizing the rule a priority?
A.5.c. The proposed rule invited public comment on additional
prudential requirements and limitations on the physical
commodities activities of financial holding companies (FHCs) to
address the risks the activities may pose to FHCs and their
subsidiary insured depository institutions. I understand that
the Board received a wide range of comments from a variety of
interested parties, including Members of Congress, academics,
physical commodity end users and producers, public interest
groups, and FHCs. I think it would be inappropriate for me to
express a view in advance of reviewing all of these comments,
and thus, if I am confirmed, I will review the proposal and
comments to consider what future action may be appropriate.
Q.6. In 2008, you editorialized in the Wall Street Journal
against the restrictions on bank ownership imposed by the Board
and the FDIC, and in 2009 you editorialized against aspects of
the FDIC's proposed rule imposing additional restrictions on
bank ownership by private equity funds. Did you have any
contact with the Board concerning rules governing bank
ownership? If so, please provide such contacts.
A.6. I spoke informally with Governor Randall S. Kroszner, at
his request, in the fall of 2008 about potential safeguards to
allow the safe expansion of the pool of bank capital given the
need for such capital during the financial crisis, and had one
formal meeting to discuss the issue with Governor Daniel
Tarullo in March 2009.
Q.7. As I mentioned during your hearing, in 2015 Bloomberg
Television interview, you said:
The Government should not be a player in the financial sector.
It should be a referee. And both the practice and the policy
and the legislation that resulted from the financial crisis
tended to make the Government a player. It put it on the field
as opposed to simply reffing the game.
Please explain your views as to what distinguishes being a
``player'' from being a ``referee,'' as it relates to financial
regulation.
A.7. My approach to policymaking, and particularly to
regulation, has been that the discretion of policymakers, and
particularly of regulators, should be as constrained as
possible. Where discretion remains, regulators should be as
clear as possible about how they will exercise it in the future
so that their actions are predictable and there is less
uncertainty as to what the policy will be.
Q.8. In 2011, at an Atlantic Council event, you said:
I have come to believe that there is a fundamental problem with
resolution mechanisms that allow substantial discretion for
Governments to act in particular cases, which Dodd-Frank . . .
does. The consequence of that is that it multiplies uncertainty
in a time of crisis because you're not going to act until you
know what the Government is going to do . . . I think
ultimately the only really workable solution, which is to sort
of have something that is like a bankruptcy regime--a rules-
based approach as opposed to something that says, `and then
`Mr. Wizard' will decide what to do.'
Q.8.a. Do you believe that Title II Orderly Liquidation
Authority, as implemented by the FDIC's Single Point of Entry
approach, allows ``substantial discretion'' to regulators in
the event of an orderly liquidation?
A.8.a. The Department of the Treasury is reviewing the
authorities of the Federal Deposit Insurance Corporation (FDIC)
under the
Orderly Liquidation Authority (OLA), and I will review the
Treasury report on OLA. Where the law provides regulators with
discretion, regulators should be as clear as possible about how
they will exercise their discretion. Since my 2011 statement,
the FDIC has provided additional clarity regarding the single
point of entry (SPOE) strategy it may employ under OLA. In
addition, the Board has issued rulemakings to facilitate the
resolution of global systemically important banking
organizations, including an SPOE resolution under OLA.
Regulators should continue their efforts to provide as much
clarity as possible regarding the resolution of systemically
important financial institutions.
Q.8.b. Do you believe that some sort of bankruptcy regime for
large, complex financial institutions is the only ``rules-based
approach'' to the failure of such an institution?
A.8.b. Conceptually, there could be many ways to constrain the
discretion of Government actors to improve the certainty and
predictability of their actions in the event of a financial
institution's distress, of which bankruptcy is one but not the
only one. An advantage of the bankruptcy process is that there
is a long history of practice and interpretation that provides
further clarity about how the system will operate in specific
cases in the future. This is among the reasons it would be
beneficial if the Bankruptcy Code could be amended so that a
financial institution could fail in the same way that any other
institution fails, and the rules surrounding that would be
understood as they are for any other institution.
Q.8.c. Do you believe that imposing different national
bankruptcy regimes on the respective subsidiaries of a large,
international financial institution multiplies uncertainty?
A.8.c. Whether the entry of a subsidiary of a large,
international banking organization into a separate insolvency
proceeding
impedes the orderly resolution of the organization depends on a
number of factors, including the structure of the organization,
the functions of the subsidiary, and the circumstances that
cause the failure. The Board and the FDIC (agencies) are
responsible for reviewing the plans of many large,
international banking organizations for their orderly
resolution under the U.S. Bankruptcy Code. The agencies have
provided guidance to the internationally active firms that the
firms should take steps to address resolvability obstacles
related to their foreign subsidiaries. To further reduce
uncertainty, large, international banking organizations and
their domestic and foreign regulators should continue their
efforts to plan for and coordinate the potential resolution of
these organizations and should be as clear as possible as to
how such resolutions may occur.
Q.8.d. In your hypothetical scenario, is ``Mr. Wizard'' always
a financial regulatory agency, or could such person also
include a bankruptcy judge or trustee?
A.8.d. In my view, a critical issue in the resolution of
financial firms is to improve the predictability and certainty
of the course of resolution, and limiting the discretion of
Government actors is an important element of that process.
Accordingly, improving the speed and certainty of outcomes in
the bankruptcy process, including the predictability of
decisions made by judges in that process, is central to the
improvements that should be made to the Bankruptcy Code for the
resolution of financial institutions. The Board and FDIC have
made progress through the resolution planning, or ``living
will,'' review process to make the largest banking
organizations easier to resolve under the current Bankruptcy
Code. I support improving the Bankruptcy Code so that the rules
surrounding the bankruptcy of a large financial company would
be understood as they are for any other company with as little
exercise of discretion as possible.
Q.9. Related to monetary policy, do you agree with the
``unconventional'' steps taken by Federal Reserve Chairman
Bernanke during the crisis? Since the crisis, do you think the
Federal Open Market Committee has been on the right course of
gradually increasing interest rates, and taking steps to begin
to unwind their balance sheet later this year?
A.9. The financial panic and associated steep economic downturn
in 2008/2009 was the most severe financial and economic crisis
faced by the United States and the world since the Great
Depression. In those circumstances, Congress, the
Administration, and many Federal agencies including the Federal
Reserve took extraordinary steps to address the crisis. I am
not in a position to judge the merits of every single action
taken by the Federal Reserve over this period, but it is clear
that the economy was in very serious trouble at the end of
2008.
Regarding the current trajectory of monetary policy, if
confirmed, I expect to benefit from interactions with
colleagues on the Federal Open Market Committee (FOMC) in
assessing the appropriate course of policy. Broadly though, it
does appear that the FOMC's approach to date in gradually
raising the Federal funds rate and preparing to reduce the size
of its balance sheet in a gradual and predictable fashion has
been effective in fostering the goals of maximum employment and
stable prices while at the same time returning the stance of
monetary policy to a more normal setting.
Q.10. If confirmed, you will be a member of the Federal Open
Market Committee. What experience will you bring to this role?
Are there any changes in how monetary policy is currently
conducted that you will advocate for?
A.10. Over the course of my career, I have gained broad
experience in economic and financial issues, both from a
private sector perspective in working with both large and small
financial firms and from a policy perspective in serving in
senior policy positions in two previous Administrations. Based
on this experience, I have developed a mature understanding of
the key monetary policy issues confronting the FOMC. Of course,
if confirmed, I expect to add to this experience from
interactions with colleagues on the FOMC.
I support the basic framework for the conduct of monetary
policy established by the Congress. The Congress has directed
the Federal Reserve to promote two basic goals--maximum
employment and stable prices. The Federal Reserve has an
important degree of
operational independence in how it conducts policy to achieve
these goals--but that operational independence comes with an
obligation to be accountable and transparent to the public and
the Congress.
The Federal Reserve has taken many steps over recent years
to enhance transparency and accountability in the conduct of
monetary policy. I would certainly support any additional steps
in this area that would both enhance Federal Reserve
transparency and support the effective conduct of monetary
policy.
Q.11. You have said in the past that Federal Reserve should
adopt a monetary policy rule, like the Taylor rule. As you
know, the Federal Reserve currently uses a variety of monetary
policy rules,
including the Taylor rule, in its analysis and monetary policy
decisionmaking, but does not rely solely on rules to determine
interest rate adjustments. Do you agree with the Federal
Reserve's current approach, or are you advocating that the Fed
use a single rule?
A.11. The Federal Reserve has made substantial progress over
the last 25 years in becoming both clearer and more consistent
in explaining its monetary policy decisions. I believe, though,
that there is still room for the Federal Reserve to do more in
developing and explaining a clearly delineated and broadly
measurable strategy that would improve current understanding
and reduce future uncertainty concerning the expected course of
monetary policy. My commitment to a greater focus on rules in
the conduct of policy is not inconsistent with the Federal
Reserve's progress in improving its transparency, nor a
dramatic change in direction, but a recognition that the
Federal Reserve can and should continue to improve the clarity
and consistency of the framework in which it conducts monetary
policy. This discipline can improve the policy itself, and
improve the understanding of that policy by markets and by the
public.
Q.12. How important is it for the U.S. central bank to be
independent?
A.12. I support the basic framework for the conduct of monetary
policy established by the Congress. The Congress has assigned
to the Federal Reserve the goals of monetary policy, and the
Federal Reserve has an important degree of operational
independence in how it conducts policy to achieve these goals.
Independence of the central bank is critical in insulating the
conduct of monetary policy from political pressures that can
lead to ineffective policy and poor macroeconomic outcomes.
Research has demonstrated that central banks that are subject
to political pressures are generally less effective in
achieving their macroeconomic objectives; for example, some
historians have suggested that political pressures on the
Federal Reserve may have contributed to policy mistakes and the
``Great Inflation'' of the late 1960s and 1970s.
While I am a strong supporter of the independence of the
Federal Reserve, the Federal Reserve is a public institution
and its
independence comes with an obligation to be transparent and
accountable to the Congress and the public in the conduct of
monetary policy. Over time, the FOMC has made considerable
strides in enhancing transparency. For example, it now issues
statements following every meeting, the Chair holds a press
conference four times each year, FOMC participants prepare
quarterly economic projections, detailed minutes of FOMC
meetings are published 3 weeks following each meeting, and full
transcripts of meetings and supporting documents are released
to the public with a 5-year lag. These steps have significantly
enhanced Federal Reserve transparency and have also supported
the effectiveness of monetary policy by allowing the public to
better understand and anticipate the Federal Reserve's policy
decisions. If confirmed, I would support any additional steps
that the Federal Reserve could take that would enhance both
Federal Reserve transparency and the effective conduct of
monetary policy.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM RANDAL
QUARLES
Q.1. Our financial system has become increasingly consolidated
as community banks and credit unions either close their doors
or merge with larger institutions.
Q.1.a. Are you concerned about this pattern? Why?
Q.1.b. What services can these smaller institutions provide
that larger institutions cannot provide?
A.1.a.-b. Community banks play a critical role in our financial
system and economy. While the consolidation trend in the
industry has continued over the past 30 years, I believe that a
number of factors in the post financial crisis environment have
exacerbated the challenges facing these institutions, including
the substantially increased cost of regulatory compliance.
Despite this trend, community banks continue to support local
economies and serve as a key source of financing to households
and small businesses.
Research conducted over many years has concluded that
community banks provide several distinct advantages to their
customers compared to larger banks. For example, given their
smaller size and less complex organizational structure,
community banks are often able to respond with greater agility
to lending requests. In addition, reflecting their close ties
to the communities they serve and their detailed knowledge of
their customers, community banks are able to provide
customization and flexibility to meet the needs of their local
communities and small businesses. Community banks are
particularly important for rural communities, where the closing
of a bank can be associated with a material decline in local
economic activity.
Recognizing the important role of community banks in our
diversified banking industry, if confirmed, I will work with my
colleagues at the Federal Reserve to supervise and regulate
community banks in a way that fosters safe and sound operation
without limiting their capacity to support the financial needs
of their communities.
Q.2. Constituents in my State tell me that the EGRPRA report
inadequately highlighted concrete ways to reduce the regulatory
paperwork burden. What more can the Federal Reserve do to
reduce the regulatory burden on community banks?
A.2. As noted in my previous answer, community banks play a
critical role in our financial system and economy. If
confirmed, I will work with my colleagues at the Federal
Reserve to supervise and regulate community banks in a way that
fosters safe and sound operation without limiting their
capacity to support the financial needs of their communities. I
believe more can be done to better tailor regulation and
supervision for community banks in a manner that is appropriate
to their small size and simplicity. I look forward to working
with Congress and others at the Federal Reserve to identify
further ways to effectively reduce burden.
Q.3. Multiple anecdotes from my constituents suggest that there
are several Nebraska counties where mortgages are not
originated because of over-regulation. What is the best way to
address this problem from a regulatory standpoint?
A.3. I believe that we should make efforts to right-size
regulations to reduce burden for community banks consistent
with safety and soundness and consumer protection, so they can
properly serve their communities. I understand that the
financial regulators discuss compliance and supervisory issues
related to the mortgage regulations on a regular basis. If
confirmed, I look forward to participating in these interagency
communications to seek ways to reduce burden and improve access
to safe and appropriate mortgage loan products.
Q.4. My understanding is that only two banks have opened since
the passage of Dodd-Frank, including Bird in Hand Bank in
Pennsylvania, which has a customer base that is around half
Amish.
Q.4.a. Why do you believe this is the case?
Q.4.b. What potential impacts does this have on our financial
system?
Q.4.c. Is there anything more the Federal Reserve can do to
encourage the opening of new banks?
A.4.a.-c. Historically, new bank formations have been cyclical
and have fallen after the financial crises in the 1980s and
1990s before recovering as economic conditions improved.\1\
Recent research has supported this and has shown that a portion
of the decline in new charters since the crisis can be
explained by factors such as a weak economy, low interest
rates, and weak demand for banking services.\2\ Nonetheless,
from my experience as an investor in community banks since the
crisis, I know that the widely recognized
increased cost of regulatory compliance is an important factor
deterring many investors who might potentially contemplate the
formation of a new institution.
---------------------------------------------------------------------------
\1\ https://www.fdic.gov/regulations/examinations/supervisory/
insights/sisum16/SI_Summer16.pdf.
\2\ https://www.federalreserve.gov/econresdata/feds/2014/files/
2014113pap.pdf.
---------------------------------------------------------------------------
Potential impacts of fewer de novo bank entrants include
lack of innovation, reduced competition, lack of local lending,
and reduced availability of credit.
The Federal Reserve does not have chartering authority for
insured depository institutions, which is the responsibility of
the States and the Office of the Comptroller of the Currency,
nor does the Federal Reserve grant deposit insurance. If
confirmed, however, I would expect to work with the other U.S.
Federal and State banking agencies to prudently explore ways to
increase new bank formation.
Q.5. I'm concerned that our Federal banking regulatory regime
relies upon arbitrary asset thresholds to impose prudential
regulations, instead of relying on an analysis of a financial
institution's unique risk profile.
Q.5.a. Should a bank's asset size be dispositive in evaluating
its risk profile in order to impose appropriate prudential
regulations?
A.5.a. One of the important general themes of regulation is
ensuring that the character of the regulation is adapted to the
character of the institution being regulated, what has become
referred to as tailoring. I fully support tailoring, and I
think that it is not only appropriate to recognize the
different levels of risk and types of risk that different
institutions in the system pose, but that it also makes for
better and more efficient regulation. Efficient regulation
allows the financial system to more efficiently support the
real economy.
I believe a variety of approaches could be taken to
determine which prudential regulations should apply to which
banks in the U.S. banking system. For some regulations or for
some bank populations, a simple fixed-asset threshold may work.
For other regulations or bank populations, a more complex,
multi-factor approach may be appropriate. If I were to be
confirmed, I would stand ready to work with Congress and my
colleagues at the Federal Reserve on appropriate tailoring
thresholds.
Q.5.b. If not, what replacement test should regulators follow?
A.5.b. Broadly speaking, I support tailoring regulations in
such a way that reduces the risk that financial distress in the
banking industry would cause substantial harm to the U.S.
economy, without imposing undue burden on smaller community and
regional banking organizations whose failure would not cause
notable harm to the U.S. economy. I understand that Congress is
currently considering whether and how to raise existing
statutory thresholds in the Dodd-Frank Wall Street Reform and
Consumer Protection Act, and that the Federal Reserve has
expressed support for increasing these thresholds. I, too,
would support these efforts. As noted above, I believe a
variety of approaches could be taken, and I would stand ready
to work with Congress and my colleagues at the Federal Reserve
on the design of such an approach, if I were to be confirmed.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM RANDAL
QUARLES
Q.1. The Federal Reserve, OCC, and FDIC in 2016 published a
joint advance notice of proposed rulemaking (ANPR) on
cybersecurity, asking for comment, among other things, on
whether boards of directors should have adequate expertise in
cybersecurity. Citing the ANPR: ``a cyber incident or failure
at one interconnected entity may not only impact the safety and
soundness of the entity, but also other financial entities with
potentially systemicconsequences.'' Other than the solicitation
of comments, we are not aware of any material progress on this
ANPR. If confirmed, may I have a personal commitment from each
of you that you will work with the FDIC and each other on
advancing this cybersecurity ANPR?
A.1. Cybersecurity continues to be a major concern for the
financial sector. If I were to be confirmed, I would be
committed to finding ways to strengthen the resiliency of the
financial sector against cyber risks.
One of my priorities would be to harmonize our supervisory
expectations with those of other regulators in the financial
sector as much as is practical. Therefore, an important step
would be to reach a consensus on as many of the core elements
of the advance notice of proposed rulemaking as possible.
Q.2. The OCC and the Federal Reserve are each authorized to
enforce the Military Lending Act (MLA), which is a bipartisan
law enacted in 2006 that sets a hard cap of 36 percent interest
for most loans to the military. On July 22, 2015, the
Department of Defense finalized MLA rules that closed prior
loopholes that allowed unscrupulous lenders to prey upon
servicemembers and their families. Do you support these
stronger MLA rules? If confirmed, will you support and enforce
these strong MLA rules to the fullest extent possible?
A.2. The Military Lending Act (MLA) provides special consumer
protections for servicemembers and their dependents. In
enacting the MLA, the Congress directed the Department of
Defense to issue implementing regulations after consulting with
the Federal Reserve and other agencies. I understand the
Federal Reserve staff has worked with Defense Department staff
to carry out that mandate and, if confirmed, I will support
that effort and the Federal Reserve's full enforcement of the
MLA at the institutions it supervises.
Q.3. Half of the Federal Reserve's dual mandate is to achieve
maximum employment. How would you support this part of the dual
mandate to ensure that Rhode Islanders have more jobs?
A.3. The Federal Reserve System occupies a central position in
our country's policy infrastructure for promoting a strong
economy and the stability of the financial system, and
supporting robust job growth in the context of price stability.
I can assure you that if I were to be confirmed, I would be
strongly committed to all these objectives. With respect to the
employment mandate, I believe it is an important element of the
Federal Reserve's obligation, and I would take it very
seriously.
If I were to be confirmed, in my capacity as a Federal
Reserve Board member and as Vice Chair for Supervision, I would
work to refine and enhance regulations in ways that promote a
safe and sound financial system and that support the flow of
credit to households and businesses. As I have noted on
previous occasions, I believe there are opportunities to
simplify and streamline regulations, particularly for smaller
financial institutions, which have a particular role in
supporting the small businesses that are the engines of job
creation. Easing regulatory burdens can help to foster improved
access to credit, as well as more business and employment
opportunities, without sacrificing the gains of recent years in
strengthening the financial system.
If confirmed, I look forward to engaging with Federal
Reserve Board members and staff to gain an accurate and
complete picture as possible on overall and specific labor
market conditions.
Q.4. The White House has asked the Treasury Department to
review the orderly liquidation authority (OLA) established by
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The statutory purpose of OLA is ``to provide the necessary
authority to liquidate failing financial companies that pose a
significant risk to the financial stability of the United
States in a manner that
mitigates such risk and minimizes moral hazard.'' I would like
to highlight some existing OLA provisions and ask you whether
you support them.
In the case of a failure of a megabank, do you support the:
Lmandatory removal of the megabank's executives and
board members responsible for the failure?
LFDIC's authority to claw back compensation from
executives or directors substantially responsible for
the failure?
Lstatutory mandate that ``taxpayers shall bear no
losses from the exercise of any authority'' under OLA?
A.4. Avoiding taxpayer loss and reducing moral hazard, which
these provisions of Orderly Liquidation Authority (OLA)
address, are important goals for the resolution of a large,
systemically important financial company, and thus I fully
support the objectives of these provisions. The Department of
the Treasury is reviewing OLA, and if I am confirmed, I will
give the resulting report serious review.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDAL
QUARLES
Q.1. In January, the Minneapolis Federal Reserve published a
report estimating that if the Federal Open Market Committee had
been required to follow the Taylor Rule for the last 5 years,
2.5 million more Americans would be out of work today.
Q.1.a. Do you accept the analysis that suggests strictly
following the Taylor Rule would undermine the Federal Reserve's
ability to achieve its full employment mandate?
Q.1.b. Assuming this analysis is correct, and adhering to a
strict Taylor Rule or other monetary policy rule would result
in the loss of a large number of jobs, would you still argue in
favor of following such a rule?
A.1.a.-b. Of course, in general, it is difficult to say how the
economy would have behaved in the past if the Federal Reserve
or any other part of the Government had followed a different
set of policies. That basic difficulty is compounded many times
over when examining the possible effects of alternative polices
during a period that includes the aftermath of the most severe
financial crisis since the Great Depression.
My commitment to a greater focus on rules in the conduct of
policy, however, is not a back-door effort to reduce the
Federal Reserve's commitment to its dual mandate. Rather, it is
to acknowledge that there is still room for the Federal Reserve
to do more in developing and explaining a clearly delineated
and broadly measurable strategy that would improve current
understanding and
reduce future uncertainty concerning the expected course of
monetary policy. In determining whether a particular policy
rule or strategy is effective, an important element of that
assessment is whether it supports the Federal Reserve's
congressional mandates, including the full employment mandate.
Thus, if the best analysis of a monetary policy rule's
projected effects were that it would be inconsistent with the
dual mandate, the Federal Reserve should not adopt that rule.
And if experience over time demonstrated that the practical
application of a rule was leading to outcomes that were
inconsistent with the dual mandate, the rule should be refined
or replaced.
The Federal Reserve has made substantial progress over the
last 25 years in becoming both clearer and more consistent in
explaining its monetary policy decisions. My commitment to a
greater focus on rules in the conduct of monetary policy is
neither inconsistent with that progress, nor a dramatic change
in direction, nor a prioritization of one element of the dual
mandate over another, but rather a recognition that the Federal
Reserve can and should continue to improve the clarity and
consistency of the framework in which it conducts monetary
policy. This discipline can improve the policy itself, and
improve the understanding of that policy by markets and by the
public.
Q.2. In the wake of the financial crisis, Congress enacted a
provision, section 956 of Dodd-Frank, to require financial
regulators to jointly issue rules to ban incentive pay
practices at large financial institutions that encourage
inappropriate risk-taking. In May of 2016, the financial
regulators including the Federal Reserve Board and the OCC
proposed a rule to implement section 956. More than a year
later, the rulemaking still has not been finalized. The Wells
Fargo fraudulent account scandal uncovered last year, where
senior executives were given bonuses for ``successes in cross-
selling,'' underscores the need for rules regarding incentive-
based compensation agreements.
Q.2.a. Will you commit to implementing section 956 of Dodd-
Frank?
A.2.a. Incentive compensation is important to attract qualified
employees and executives to financial institutions. It is also
important that compensation programs do not distort incentives
for employees to act in the long-term interest of the
institution.
If confirmed, I would look forward to working with the
other agencies to understand the issues raised in this
rulemaking and fulfilling the requirements of the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
Q.2.b. Will you commit to implementing all congressionally
mandated rulemakings?
A.2.b. If confirmed, I am committed to fulfilling the
requirements of all laws to which the Federal Reserve has been
given authority by the Congress.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM RANDAL
QUARLES
Q.1. Looking through your past statements, it's clear that you
believe we need to have a financial system that takes on risk
in order to get innovation and growth in our economy. However,
as we saw during the financial crisis, too much risky behavior
can lead to outright fraud and manipulation of markets, which
ultimately led to widespread systemic harm. I strongly believe
that criminal penalties for executives can deter the type of
fraud and market manipulation that led to the 2008 crisis. If
an executive acts recklessly and that recklessness results in
substantial economic harm to the economy, he should be held
criminally liable. Do you believe thoughtful changes to our
white collar criminal standards and penalties would be an
effective tool for protecting our financial system?
A.1. As the Federal Reserve has publicly stated, no individual
and no institution should be exempt from prosecution when they
commit a crime. The Justice Department has the sole authority
to indict or seek Federal criminal fines or other sanctions and
to criminally prosecute individuals for their actions. The
Federal Reserve may bring enforcement actions against and
remove an institution-affiliated party in certain circumstances
if they have violated a law or regulation or engaged in unsafe
and unsound practices. When warranted, the Federal Reserve also
has the authority to impose fines. I believe the Federal
Reserve should take whatever action is appropriate to ensure
individuals subject to the Federal Reserve Board's (Board)
jurisdiction comply with the law and act consistently with
safety and soundness principles.
Q.2. As I'm sure you're aware the economy in North Dakota and
rural America more generally is facing headwinds from a variety
of factors including a strong dollar, potential trade
restrictions and low commodity prices.
Q.2.a. To take just the issue of trade, I'm interested to know
how you would factor the Administration's trade policies into
your monetary policy decisions and efforts to achieve economic
growth at the Fed?
A.2.a. Monetary policy decisions should be based on an
assessment of realized and expected progress toward the Federal
Reserve's employment and price stability objectives.
International trade is an important part of the U.S. economy,
so trade developments should be an important aspect of that
assessment. In addition to the current state of trade and trade
policy, monetary policy should also consider several factors
that could affect the outlook for trade, including movements
incurrency and commodity markets as well as prospects for
economic growth abroad.
Q.2.b. Do you believe that we can achieve economic growth at
rates of 3 percent with a restrictive policy on trade?
A.2.b. With the economy now close to full employment, a step-up
from recent growth rates of around 2 percent to a sustained 3
percent growth rate would require some combination of a
sustained increase in productivity growth from its recent weak
trend or an improvement in the trend in labor force growth
despite the downward pressures being exerted by the aging baby-
boom cohorts. An assessment of a trade policy's effect on
growth would need to involve an assessment of its effect on
these two factors.
Q.2.c. Beyond regulatory changes and taxes, what steps should
we be taking to increase productivity and achieve more robust
GDP growth?
A.2.c. In my view, a combination of more encouragement for
private investment, more-effective regulation, better
education, and improved public infrastructure would contribute
positively toward increasing productivity and improving GDP
growth. I do not believe there is a single, unalterable
combination of these proposals that would have to be followed
to have a positive effect, and Congress could choose from a
variety of specific policies addressing these issues in order
to further this objective.
Q.3. As part of the EGRPRA process, regulators identified
access to timely appraisals--especially in rural America--as a
major challenge for small lenders. Yet the report itself did
little to address residential appraisal requirements.
Q.3.a. Do you share my concerns that the appraisal system in
rural America is broken?
A.3.a. As both my wife and I come from families involved in
agriculture in the West, I am very aware of concerns about the
availability of appraisers in rural areas. I understand that
the Board, Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the
National Credit Union Administration recently issued an
advisory addressing some of the ways institutions can address
the issue of appraiser availability. If confirmed, I look
forward to hearing from the industry stakeholders to understand
their positions on this regulatory action. It is an issue I
take very seriously.
Q.3.b. What concerns would you have with raising the
residential exemption threshold--which was last modified in
1994--above its current limit of $250K?
A.3.b. I understand that the Federal banking agencies are in
the process of evaluating the current threshold. The Board,
OCC, and FDIC recently issued a proposal to increase the
transaction size threshold for requiring appraisals for
commercial real estate transactions, and in that proposal have
requested comments on many aspects of the appraisal
regulations, including whether the appraisal threshold for
residential transactions should be raised to reduce burden,
consistent with safety and soundness and consumer protection.
If confirmed, I look forward to hearing what the public has to
say about that proposal and better understanding the issues
involved. It is also my understanding that the bulk of the
residential mortgage market is subject to the appraisal rules
of other Government entities, such as the Government-Sponsored
Enterprises or the Federal Housing Administration. If
confirmed, I would support working with those other entities to
harmonize appraisal rules for residential mortgages.
Q.4. On several occasions before the Banking Committee Governor
Tarullo testified that the dollar asset thresholds in Dodd-
Frank such as the $50 billion threshold for SIFI designation,
is far too high.
Q.4.a. Do you believe regulators could effectively address
systemic risk if the threshold were raised above $50 billion?
A.4.a. One of the important general themes of regulation is
ensuring that the character of the regulation is adapted to the
character of the institution being regulated, what has become
referred to as tailoring. I fully support tailoring, and I
think that it is not only appropriate to recognize the
different levels of risk and types of risk that different
institutions in the system pose, but that it also makes for
better and more efficient regulation. Efficient regulation
allows the financial system to more efficiently support the
real economy.
I believe a variety of approaches could be taken to
determine which prudential regulations should apply to which
banks in the U.S. banking system. For some regulations or for
some bank populations, a simple, fixed-asset threshold may
work. For other regulations or bank populations, a more
complex, multi-factor approach may be appropriate. If I were to
be confirmed, I would stand ready to work with Congress and my
colleagues at the Federal Reserve on appropriate tailoring
thresholds.
Q.4.b. Are there specific provisions in Dodd-Frank which you
believe are particularly costly or unnecessary for a certain
subset of banks above the $50 billion threshold?
A.4.b. Broadly speaking, I believe that smaller community and
regional banking organizations, whose failure would not cause
notable harm to the U.S. economy, can be supervised in a way
that promotes safe and sound banking without being subject to
the enhanced regulations that apply to larger banking firms. I
support efforts to consider whether and how specific
regulations should be tailored in a way that reduces the risk
that bank failures or distress will have a harmful impact on
economic growth, without imposing undue burden. I support
efforts to raise the $50 billion threshold in the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
to reduce regulatory burden on some regional banks, and, if
confirmed, I am open to discussing the best way to accomplish
that goal.
Q.4.c. Are there specific provisions in Dodd-Frank which you
believe are necessary for all banks above $50 billion in assets
that should be retained in order to mitigate systemic risk?
A.4.c. If confirmed, one of my first priorities will be to
engage in a comprehensive review of rules to ensure we have a
system in place that promotes the safety and soundness of
individual institutions, protects the stability of the U.S.
financial system, and fosters economic growth and business
opportunity. In advance of such a review, I do not have a final
view on any specific provisions that should remain in place for
all banks over $50 billion. However, I support efforts to raise
the $50 billion threshold in the Dodd-Frank Act to reduce
regulatory burden on some regional banks with assets over $50
billion, and, if confirmed, I am open to discussing the best
way to accomplish that goal.
Q.4.d. What concerns do you have with having a purely
qualitative test for identifying systemic risk?
A.4.d. I believe a variety of approaches could be taken to
measure a firm's ``systemic footprint.'' While there is merit
to considering a qualitative test--since size is not a perfect
proxy for risk--care would have to be taken in crafting such a
test to ensure that measuring an institution's standing under
the various qualitative elements did not itself become a
burdensome compliance effort even for banks that ought clearly
to be exempt. If I were to be confirmed, I would stand ready to
work with Congress on the design of an approach to measuring
firms' systemic importance.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM RANDAL
QUARLES
Q.1. This Administration's narrative is that Dodd-Frank is
constraining lending because compliance is so costly. However,
Federal Reserve data shows that banks' commercial lending is at
an all-time high--far higher than pre-recession levels--and
bank profits are also at an all-time high. The largest banks
all passed their stress tests and were given the green light to
increase dividend payments and stock buybacks. This is above
the high levels we saw in 2016, when the largest banks had over
$100 billion to spend on dividends.
Q.1.a. Do you agree that these are signs that banks are
thriving?
A.1.a. The stability of the U.S. financial system is supported
by the safe and sound operation of banking institutions. One of
the most important prudential measures for ensuring that
stability is bank capital. Of course, there is a tradeoff
between higher bank capital levels that increase the resiliency
of individual institutions and the system as a whole, and the
cost of that capital. A goal of regulation should be to balance
to protection of financial stability in a way that promotes
economic growth and business opportunity.
Since the financial crisis, banks have substantially
improved their capital planning practices and their capital
adequacy. Bank lending in the United States has grown steadily
since the crisis and U.S. banks are providing significant
support to U.S. economic activity.
If confirmed, I will work with Congress and my colleagues
at the Federal Reserve to ensure we have in place a financial
regulatory system that protects U.S. financial stability and
maximizes long-term economic growth and credit availability.
Q.1.b. Do you think the amount of capital that banks are
devoting to dividends and stock buybacks is a problem for our
long-term economic growth?
A.1.b. We need a resilient, well-capitalized, well-regulated
financial system that promotes the safety and soundness of
individual institutions, protects the stability of the U.S.
financial system, and fosters economic growth and business
opportunity.
Having sufficient capital is essential to the resiliency of
the largest banking organizations, as undercapitalized firms
may be unable to lend and act as a financial intermediary
during stress. Such undercapitalization impeded the ability of
banks to lend and was a key contributor to the weakness in
economic activity following the financial crisis. Nonetheless,
higher levels of capital--at least at some point--may increase
the cost of capital to banks, reduce lending, and potentially
affect long-term economic growth. If confirmed, I will work
with Congress and my colleagues at the Federal Reserve to
ensure that capital requirements are well-calibrated to the
risks of the activities and exposures of the banking industry
and are sensitive to the character of each institution.
Q.2. In addition to the fake accounts scandal, we recently
learned that Wells Fargo charged consumers for high priced auto
insurance that they did not need, without their knowledge. The
high cost of the auto insurance pushed roughly 274,000 Wells
Fargo customers into delinquency and resulted in almost 25,000
wrongful vehicle repossessions.
Q.2.a. What will you do to prevent these types of scandals from
happening again?
A.2.a. As I mentioned during my confirmation hearing, the
robust enforcement of the consumer rules is important. I
understand that the Federal Reserve has authority to address
violations of law and unsafe and unsound practices at the
institutions it supervises, and, if confirmed, I am committed
to taking whatever action is appropriate based on the facts and
circumstances. This would extend to the Board's supervisory
responsibilities for Bank and Financial Holding Companies,
including for the governance structure and enterprise
compliance risk management and controls of these holding
companies.
Q.2.b. At what point do these kinds of violations become a
safety and soundness concern for the banks the Fed supervises?
A.2.b. I understand that the Federal Reserve has authority to
address violations of law and unsafe and unsound practices at
the institutions it supervises, and, if confirmed, I am
committed to taking whatever action is appropriate based on the
facts and circumstances of each situation. The Federal Reserve
has taken enforcement actions against firms for compliance and
other risk management failures that demonstrated overall
weaknesses in a firm's risk management framework and internal
controls. I consider robust and effective risk management,
including compliance risk management, an essential aspect of
safety and soundness.
Q.2.c. Do you think banks' compensation practices are
contributing to the problem of banks harming their consumers in
order to increase profits?
A.2.c. While incentive compensation is an important tool in
successful management of financial institutions and is critical
to attracting qualified employees and executives, improperly
structured incentive-based compensation arrangements may
encourage inappropriate risk-taking at financial institutions.
If confirmed, I look forward to engaging with Federal Reserve
Board members and staff to better understand the impact of
incentive compensation practices on the safety and soundness of
financial institutions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
RANDAL QUARLES
Q.1. Please describe the steps you took as a Public Governor on
FINRA's Board of Governors to manage your conflicts of
interest.
A.1. The Financial Industry Regulatory Authority (FINRA) asks
all prospective Governors to disclose board and corporate
affiliations prior to service on its Board. Sitting Governors
also have an ongoing obligation to update those disclosures
annually and as circumstances warrant; FINRA circulates an
annual questionnaire to which all Governors respond which
identifies and records any changes to such affiliations.
FINRA's governance team (Office of the Corporate Secretary
and Office of the General Counsel) reviews agendas prior to
Board and Committee meetings to determine whether any items
appear to be a conflict for a specific Governor based on the
standards set forth in the FINRA Board's Code of Ethics and
Business Conduct (attached). If a potential conflict of
interest is identified, the matter will be referred to the
Board Conflicts Committee for consideration and determination
of whether the matter requires recusal. If this review
determines that there is an apparent conflict of interest, the
Corporate Secretary will notify the Governor of the need to
recuse himself or herself and notify the Board Conflicts
Committee, and ensure that the affected Board member is recused
from the discussion and voting. Board members are also asked to
notify the Conflicts Committee if they are aware of a need for
recusal that has not been identified through the process
described above.
During my tenure as a Governor, there were no matters
identified by FINRA or by myself as being an actual or apparent
conflict of interest.
Q.2. During your tenure on FINRA's Board of Governors, did you
ever raise with FINRA ethics counsel any issues that may have
raised the need to recuse yourself from Board decisionmaking?
If so, how was that issue resolved?
A.2. No.
Q.3. Please provide copies of FINRA's corporate governance
guidelines and Board Member code of conduct.
A.3. Attached is the Code of Ethics and Business Conduct and
the Corporate Governance Guidelines.
Q.4. Please identify and describe any board committees you
served on while on FINRA's Board of Governors.
A.4. I serve on three Committees at FINRA: the Executive
Committee, Management Compensation Committee, and the
Regulatory Policy Committee.
Executive Committee
The Executive Committee is comprised of all Committee
chairs and is authorized to exercise all the powers and
authority of the Board in the management of the business and
affairs of the Corporation between meetings of the Board. I
began serving on this Committee effective July 15, 2016.
Management Compensation Committee
The Management Compensation Committee reviews and
recommends changes to FINRA's Compensation Policy with the
primary objective that it attract, develop and retain high
performing individuals who are capable of achieving FINRA's
mission of ensuring market integrity and investor protection.
The Committee
reviews the plans for the development, retention, succession
and retirement of key executives of the Corporation and its
subsidiaries. I began serving on this Committee effective
November 10, 2015.
Regulatory Policy Committee
The Regulatory Policy Committee advises the Board with
respect to the regulatory policies and strategy of FINRA
programs. The Committee develops and/or adopts necessary or
appropriate regulatory policies and strategy and makes
recommendations to the Board on regulatory rule proposals. I
began serving on this Committee effective November 10, 2015.
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