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House Financial Services Subcommittee Roundtable with Financial Regulators

House Financial Services Subcommittee on Consumer Protection and

Financial Institutions

“Virtual Roundtable – Update from Prudential Regulators”

Wednesday, May 13, 2020

Key Topics & Takeaways

  • Federal Reserve Liquidity Facilities: Waters noted that most small businesses do not need a $500,000 loan, the minimum requirement for the Main Street loan facility, asking if the Fed will eliminate this “unnecessary” barrier. Quarles explained that the PPP is intended for the smallest firms, the Main Street facility is intended for midsize firms, and the corporate credit facilities are meant for the largest firms. He noted that the minimum loan requirement has already been lowered once, and the Fed is open to considering additional evolutions as things develop. Rep. David Scott (D-Ga.) expressed concerns about the design of the municipal facility such that smaller jurisdictions cannot apply directly and must go through their state government. Quarles said that the Fed is continuing to look at the administrative issues of the facility, adding that lending to larger jurisdictions allows speedier deployment. Rep. Barry Loudermilk (R-Ga.) also asked about TALF and whether securities backed by consumer loans could be included as eligible collateral. Quarles said they are continuing to look at the issue and reiterated the initial need to balance speed of deployment with proper administration of these facilities. He said this is an issue they are receiving significant input on and are looking into it further.
  • Forbearance: McWilliams agreed that forbearance is important, saying the FDIC has done extensive outreach to banks, state regulators and examiners on this new framework whereby loans modified for the purposes of the pandemic are not classified at TDR.
  • Market Risks: Quarles said strain on the financial sector will increase the longer the crisis continues, and that because there is a significant level of uncertainty about how the crisis will evolve, he would not want to predict how it will affect the industry. He said it is important to ensure that financial institutions are resilient in a variety of ways, noting that they entered the crisis in a position of strong capital, strong liquidity, and have served an important role in responding to this crisis. Quarles noted that the Fed is currently conducting a stress test on the largest institutions in the interest of making decisions based on the most granular, data-driven analysis possible.

Witnesses

Opening Statements                   

Subcommittee Chairman Gregory Meeks (D-N.Y.)

In his opening statement, Meeks called this a timely discussion amid the healthcare and economic devastation of the COVID-19 pandemic, noting that millions have lost their jobs and source of income, compounding the economic impact. Meeks said that thanks to the Dodd-Frank Act and its implementation in the decade since the 2008 financial crisis , the nation’s banking sector has emerged as a “relatively bright spot” in this crisis, acting as a capital buffer and working with clients to restructure mortgages and loans and to extend credit. Meeks expressed “serious concerns” about the implementation of the Paycheck Protection Program (PPP) and the prioritization of loans to large listed companies over smaller businesses and minority communities, though he acknowledged that it seems many of these issues are being addressed in the second installment of loans. Meeks also expressed concerns about how long the nation’s banks and credit unions can endure the current crisis, and whether the capacity of small banks, minority depository institutions (MDIs), and community development financial institutions (CDFIs) can overcome the challenges they will face if the crisis lasts into the fall or into next year.

Subcommittee Ranking Member Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer said the committee and regulators need discuss the steps must be taken to ensure the health of the American economy. He said Congress and the administration have taken “drastic measures” to respond to the economic crisis the COVID-19 pandemic has presented, delivering much-needed funding to hospitals, healthcare providers, state and local governments, small businesses and the American people. He noted that regulators have been providing needed forbearance and flexibility to financial institutions as well as liquidity directly to borrowers and investors in key credit markets. In particular, he said that the troubled debt restructuring (TDR) provisions have allowed institutions to work with their customers and restructure their loans without the TDR accounting classification. Luetkemeyer said that despite this progress, he remains concerned about how regulators will treat assets that have been impaired as a result of COVID-19, saying it is clear many industries will continue to struggle as businesses and consumers adjust to this new economic climate. He said that regulators should look at additional accounting and examination relief for assets impaired by the pandemic, specifically suggesting that for a period of two years examiners should provide deference on all impaired loans and leases, and those loans should be exempt from certain negative accounting classifications. He concluded that regulators must allow institutions the certainty they need to work with their customers and provide them with the necessary forbearance to get through this crisis.

Committee Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters said that as the nation faces this pandemic, it is imperative that Congress and the regulators respond with unyielding focus and energy to help those that are struggling. She noted the introduction of the Heroes Act in the House, which would provide an additional $3 trillion in needed relief to renters, homeowners, consumers and small businesses. Waters said the financial regulators must do their part and encourage financial institutions to help their customers, and must not undermine the system’s resiliency or weaken consumer protections. She called on the regulators to halt any pending rulemakings not related to the crisis and not use the crisis as an “excuse” for financial deregulation.

Committee Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry said it is important to ensure this health crisis, which has become an economic one, does not further morph into any other kind of crisis. To that end, he said it is essential that the regulators remain focused on following through on the agenda they have set for the financial industry, ensuring it is properly regulated while addressing the regulations that are “ill-fitting” to the current crisis. He called on the regulators to take an “aggressive look” at regulations that do not fit the current challenges the country is facing and work together with Congress to address them.

Testimony

The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System

In his opening statement, Quarles said the last two months have been a time of “exceptional economic hardship,” noting that Congress has demonstrated an extraordinary willingness to address this hardship. He outlined the Fed’s approach to supporting the nation’s economy, maintaining the supply of credit, and reducing the economic impact of the current crisis. He said the measures adopted to contain the pandemic triggered a deep, abrupt, and global financial shock. Quarles noted that the reforms that followed the 2008 financial crisis allowed banks to enter this crisis in a position of strength that has enabled them to lend to creditworthy firms, absorb new deposits, and process a flood of transactions for investors, businesses and households. Quarles said that the Fed’s efforts have applied to a range of financial institutions, including both community development financial institutions (CDFIs) and minority depository institutions (MDIs), both of which are important to financing small businesses and community development in low- and moderate-income (LMI) areas, adding that CDFIs and MDIs are eligible to participate in the Paycheck Protection Program Liquidity Facility, which will help small business lending by the firms. Quarles concluded that the banking system has shown resilience, but “the storm is not over,” saying firms must continue to work with borrowers to offer flexibility.

The Honorable Joseph Otting, Comptroller, Office of the Comptroller of the Currency

In his opening statement, Otting said that America’s banks entered this crisis well-equipped to play a role in federal relief programs. He continued that capital and liquidity are strong and asset quality is good, and banks have acted quickly to provide relief to customers and communities by providing Paycheck Protection program (PPP) loans, mortgage forbearance and foreclosure relief. Otting said that the OCC is working to support the orderly function of the banking system and is in regular communication with the banks it supervises to understand the challenges they face and work through issues, noting that the OCC has issued 40 pieces of guidance, statements and interim final rules that clarify regulatory expectations regarding capital, liquidity, accounting and customer accommodation. He added that the OCC has also implemented enhanced market data collection to closely monitor the markets and provide real-time awareness of the financial condition of the banks. He added that the OCC continues to support the vibrancy of minority depository institutions and community development institutions and their customers, noting that these institutions support communities across the country where capital is scarce and difficult to maintain.

The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation

In her opening statement, McWilliams emphasized that the FDIC has taken swift, decisive action to maintain stability and public confidence in the nation’s financial system. McWilliams explained that to enhance the resiliency of the banking system, the Federal Deposit Insurance Corporation (FDIC) has encouraged banks to work with affected customers and communities and increased flexibilities for banks to meet the needs of customers, foster small business lending, protect consumers, increase financial options, and is actively monitoring the financial system. She added that their supervisory and regulatory response is guided by a focus on enabling banks to best serve their communities during this difficult time. She said that as the FDIC encourages banks to take prudent steps to work with customers, they are mindful of the most vulnerable groups hardest hit by the pandemic and resulting economic shocks. McWilliams concluded that the FDIC continues to evaluate open rulemakings and will prioritize rules that are necessary or appropriate at this time that will not disrupt or add unnecessary uncertainty to the market.

The Honorable Rodney E. Hood, Chairman, National Credit Union Administration

In his opening statement, Hood explained that the National Credit Union Administration (NCUA) has swiftly implemented the provisions of the CARES Act affecting credit unions and has taken several actions to improve the flexibility and strength of the central liquidity facility. He noted the NCUA is working with the Small Business Administration (SBA) to provide guidance and resources so credit unions can continue to participate in the PPP. Hood added that regulatory relief to ensure federally insured credit unions remain operational and liquid will help the NCUA fulfill its critical mission of protecting the safety and soundness of the system.

Question & Answer

Federal Reserve Liquidity Facilities

A number of committee members asked about the various liquidity facilities that have been stood up by the Fed in response to the crisis. Waters noted that most small businesses do not need a $500,000 loan, the minimum requirement for the Main Street loan facility, asking if the Fed will eliminate this “unnecessary” barrier. Quarles explained that the PPP is intended for the smallest firms, the Main Street facility is intended for midsize firms, and the corporate credit facilities are meant for the largest firms. He noted that the minimum loan requirement has already been lowered once, and the Fed is open to considering additional evolutions as things develop.

Rep. Nydia Velazquez (D-N.Y.) asked why U.S. territories, including Puerto Rico, were excluded from participating in the municipal liquidity facility. Quarles said that the territories’ problems are not caused by a COVID-19-induced cashflow issue, so taking on additional debt would not improve their situation. Rep. David Scott (D-Ga.) expressed concerns about the design of the municipal facility such that smaller jurisdictions cannot apply directly and must go through their state government. Quarles said that the Fed is continuing to look at the administrative issues of the facility, adding that lending to larger jurisdictions allows speedier deployment.

Rep. Bill Foster (D-Ill.) asked about the pricing methodology of the municipal facility, inquiring whether it is risk-based or if there are other factors taken into consideration. Quarles said all facilities are intended to serve as a backstop to private finance. Quarles continued that the pricing was ranked “somewhat higher” at the time of issuance in order to achieve that objective and the price is driven primarily by the risk involved.

Rep. Andy Barr (R-Ky.) expressed concern about the commercial real estate market, asking whether the term asset-backed securities loan facility (TALF) can be accessed to forestall foreclosures or if the formation of another facility is under consideration. Quarles said the Fed is not currently considering the formation of an additional facility, but they are monitoring the situation closely to consider the appropriate response. Rep. Barry Loudermilk (R-Ga.) also asked about TALF and whether securities backed by consumer loans could be included as eligible collateral. Quarles said they are continuing to look at the issue and reiterated the initial need to balance speed of deployment with proper administration of these facilities. He said this is an issue they are receiving significant input on and are looking into it further.

Rep. Ben McAdams (D-Utah) asked how the Fed decides which corporate bonds are purchased through the primary or secondary corporate credit facilities. Quarles explained that the underwriting criteria is set by the Treasury Department and the Fed, and the investment manager is purely an administrative agent not responsible for policy or underwriting decisions. He said they use credit ratings to determine who is eligible and the facility will generally lend to all those who meet the term sheet criteria. Quarles added that the intention is to buy and hold investments and that they are now also buying ETFs.

Forbearance

Luetkemeyer said that it will be important that the regulators transmit to staff and examiners the importance of forbearance to give banks the tools they need. McWilliams agreed, saying they have done extensive outreach to banks, state regulators and examiners on this new framework whereby loans modified for the purposes of the pandemic are not classified at TDR.

Community Reinvestment Act Reform

Meeks asked McWilliams if she remains committed to not agreeing to any Community Reinvestment Act (CRA) reforms that are not consistent with the law’s original intent, particularly its civil rights roots. McWilliams reaffirmed her commitment to the original intent of the CRA.

Other Market Risks

Meeks asked about the principle market risks the Fed is monitoring that could strain the banking sector if the crisis persists. Quarles said the strain will increase the longer the crisis continues, and that because there is a significant level of uncertainty about how the crisis will evolve, he would not want to predict how it will affect the industry. He said it is important to ensure that financial institutions are resilient in a variety of ways, noting that they entered the crisis in a position of strong capital, strong liquidity, and have served an important role in responding to this crisis. In response to a question from Rep. Denny Heck (D-Wash.), Quarles noted that the Fed is currently conducting a stress test on the largest institutions in the interest of making decisions based on the most granular, data-driven analysis possible.

MDIs and CDFIs

Meeks asked what the FDIC is doing to support MDIs and CDFIs. McWilliams explained that they are doing extensive outreach to these institutions to understand their needs, what is happening in their communities and how the FDIC can be of service.

Waters asked if the Fed will track and publish regular updates on what size and kinds of lenders, particularly MDIs and CDFIs, and lending via Main Street loans. Quarles responded that they will.

PPP Loan Forgiveness

Rep. Scott Tipton (R-Colo.) asked how the regulators will handle PPP loan forgiveness and whether the Financial Stability Oversight Council (FSOC) has discussed it. McWilliams said the regulators are working on an interagency basis to discuss exactly how they will treat PPP loan issues. She acknowledged that there is uncertainty and banks are concerned about liability issues, so the regulators are taking this into consideration. Quarles agreed.

Other Rulemakings

McHenry said he has encouraged the regulators to finalize a number of rulemakings as quickly as possible in light of the “choppy economic waters” the country is in. Quarles said it is important to consider the contributions of the regulatory framework to efforts to support the economy, saying some of those can be in the form of targeted temporary changes that have already been implemented, specifically noting the supplemental leverage ratio. He continued that other rulemakings that have been in development for some time can be supportive of the economy generally, and where that is consistent with the crisis, they intend to continue to move forward with them.

Brokered Deposits

Reps. Roger Williams (R-Texas) and Tipton asked about brokered deposits and whether now is the right time for a legislative solution to address the asset growth cap. McWilliams said it would be good for Congress to act in this area and provide flexibility, saying firms are being penalized for their inability to engage in brokered deposits.

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