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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
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
(
Available at: http: //www.govinfo.gov /
U.S. GOVERNMENT PUBLISHING OFFICE
WASHINGTON
28–282 PDF
:
2018
For sale by the Superintendent of Documents, U.S. Government Publishing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
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SHERYL
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
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C O N T E N T S
THURSDAY, JULY 27, 2017
Page
Opening statement of Chairman Crapo .................................................................
Opening statements, comments, or prepared statements of:
Senator Shelby ..................................................................................................
Senator Brown ..................................................................................................
1
1
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 ...............................................................................
Prepared statement ..........................................................................................
Biographical sketch of nominee .......................................................................
Responses to written questions of:
Senator Brown ...........................................................................................
Senator Sasse ............................................................................................
Senator Reed ..............................................................................................
Senator Menendez .....................................................................................
Senator Heitkamp .....................................................................................
Senator Schatz ...........................................................................................
Senator Cortez Masto ................................................................................
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 .....................................................
Prepared statement ..........................................................................................
Biographical sketch of nominee .......................................................................
Responses to written questions of:
Senator Brown ...........................................................................................
Senator Sasse ............................................................................................
Senator Reed ..............................................................................................
Senator Menendez .....................................................................................
Senator Heitkamp .....................................................................................
Senator Schatz ...........................................................................................
Senator Cortez Masto ................................................................................
ADDITIONAL MATERIAL SUPPLIED
FOR THE
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RECORD
Letters submitted in support of the nomination of Joseph Otting ......................
Letter submitted in support of the nominations of Joseph Otting and Randal
Quarles ..................................................................................................................
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NOMINATIONS OF JOSEPH OTTING AND
RANDAL QUARLES
THURSDAY, JULY 27, 2017
U.S. SENATE,
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.
COMMITTEE
ON
BANKING, HOUSING,
AND
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
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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.
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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 lifechanging. 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 robosignings 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
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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
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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,
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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
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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.
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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.
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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
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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——
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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.
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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.
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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.
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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 124page 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.
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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.
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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
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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.
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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
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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?
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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,
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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.
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Senator TESTER. Thank you, Mr. Chairman, and a special thankyou 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.
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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.
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Senator TESTER. Yes, go ahead.
Mr. OTTING. So, in my mind, there are a lot of definitions to robosigning. 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 robosign. 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 followup 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.
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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
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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.
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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
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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.
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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-tovalues were getting aggressive, and now I think with the insight
of the OCC examining, they have pulled back some of the autolending 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
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30
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
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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 rulesbased 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.
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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.
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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
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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.]
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[Prepared statements, biographical sketches of nominees, responses to written questions, and additional material supplied for
the record follow:]
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PREPARED STATEMENT OF JOSEPH OTTING
TO BE COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER
CURRENCY
OF THE
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
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37
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.
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STATEMENT FOR COMPLETION BY PRESIDENTIAL NOMINEES
Name:
Otting
Joseph
Michael
(00..)
(l.asl)
Position to whidt nominated: Comptroller of the Currency
Date of nominAtion: 06-06-1017
Date of birth:
l7
(Oay)
11
1957
(Moolll)
(Year)
Place of birth: Maquoketa, lA
Marital Status: Mairied
Full name of spouse: Yvoune Rita Ottiag
Name and ages of children: NIA
Dates
attended
Eduutlou:
Institution
Honon
·and awards:
Degrees
received
Dates of
Maquokm High School 9m-sn6
HSDiploma
Sn6
University ofNorthem.
Iowa
9n6-S/81
BA
S/81
Graduate School ofCmtit 7/90 • 7/92
and F-.nancial Mant&ement
NIA
CerrifiC8le ofcompletion
received 7192
Lisl below all scholarships, fellowships, honorary degrees, military medals, honol81}'
society memberships and any other special recognitions for outstanding service or
achievement.
• Killebrew Thompson Memorial recognition for Service and Dedication as Chairman
of the Board
·CalChamber recognition for Devoted and Dedicated Leadership as O!air of the
Board
·University ofNorthem Iowa President's Club
•Have received numerous other community and civic recognitions
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72717013.eps
2
39
Membenhips: List below all membelships and offices held in professional, fraternal, business, scholarly,
civic. charitable and olher organizations.
Organization
Dates
OffiCe held (If any)
Prior C!loitut ofehe Boord.
Cuzrmt E=llveCommillee
8l1d Bcerd Member
KiRdlrtw Thompsen Memorial
Prior Choinnan or 111e Boatd,
Cllrrtlll Board Manbet
Soulhan Higttlaods Oolraub
Co-OiainnanlBoerd Membel
NBikloal Rlfle Associllion
Member
~Cklb
Prior Boanl Member and
Trtasurer and eumot member
Wilsllire CC
Member
Calir.mia Btok<n Allocilllioo
Boord Member
lOOOubofLosAn&<les
Member
fiiiWiol Scnoica ROUlldbllle
Member
Mltmosota OIIJIIber ofCllllllliO!Oe Board Membel
MiMeapolis Ollb
Member
Orqoo Busioess Clluacil
8oerd Member
Portlmcl Bllsiness Alliwe
8oerd Memter
Asscdaled Oregon lndllllries
Boord Member
WmtleyCC
Member
ArUa3100 Club
Member
Otep cc
Membu
Ortp8811kers Associolion
Boatd Member
SOLV l'olllders Cilde
Member
Los AQgtles Chlmbet ofCommer.e Boenl Membu
LA Ecoooalie DMiopmalt C«p Boenl Member &E=Itive
Commillee
Calirornia ChamberofCMmcrce
2009 • Plesont
2007-Presa>~
2016 • Presmt
2017. Presetll
1997-Presetlt
1996 • Plesont
200?-2013
2013 ·201$
2014.2015
2004-2006
2006·2003
2002· 2003
2002-2003
2002-2003
2003-2010
2003-2009
2002-2003
2002·2003
2003-2003
-1996
·1996
Employmmt record: List below all positions held since college, iMiuding the title or description ofjob,
name of employment, location of work, and inclusive dates of employment.
Bank of America N.A. 11/81· 5186
Bakmfldci,CA
Positions ht.ld: Mw~tmetll Trainee Prostam, ~suma Baaldlli Officu, Small Business 1111<1 a Middle Market Leeder, Pltfetred 81Dkia&
Officer and Ass'lllnodt Mana&et
Uni011 Bank Of California 5186 • 12101
Los Angeles, CA and Sao Dieco, CA
Posi1ions hdcl: Middle Matkel Relllionstoip ManaJtr, T""' Leader ofRduionship Maaa&at, Re&ional ~and Group Head
US BalCOm 12101- 2110
Portllacl, OR, MiODeOpOiis, MN 8l1d Los A.... CA
~itioos held: Portland Matkel Pmic!<Jd, Elllenl Re&ioaol ExecWve and Vice Cbainnan ofCommercW Banking
OneWest Bank and 1MB HoldCo 2{10 • 8/15
Paladciii,CA
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72717014.eps
Positioos held: President.-.! CEO ofOote West Bank, PresidenlofiMB HoliiCo ,.d Boanl member of One\Vesl Bank. Responsible forlhe
ltwitioa of 1 dtrlft dlartmd noortvae COJDlliiiY Into 1 filM sel'lice National Banking tlla1md flllaJICial insliMion oiT<ti~~g a suhe of
40
book ill& ptoductund services tobusiness and com~~mers. Sllccessfully metgcd OneWest lltd IMBI!ddCo loto lbe OT 01g111izadon lltd
llti«ialed and impkmeoted a comprdtcnsl.. CRA plan w~b co"""unity based Olpllilllion!
CIT Group Iu. and CIT Bank 8115 ·lUIS
PasadMo,CA
Pooitiooslodd: Presideol and cro ofCIT Bank N.A. and eo.l'ltsident ofCIT Group, Inc.
Ocean Blvd LLC 1116 ·Present
l..lsVeps.NV
Posilioclbeld:tdznosiocManber
F.llllty is aboldine compa~~y LLC lilaC owns 2S% ofSHGC LLCas its sole-
SHGC. LLC 2/16 • Presmt
l..lsVCCANV
Pooilioohdd: Co-~ l'lrW:r lltd """'"" oflhe advfsooy boord
Lake Blvd LLC U16 · Present
Pooitlooheld:~Manbet
The Otting Family Trast3110 ·Present
Pooitloo held: eo.r.-
Government
experience:
List any experieooe in or direct 8SS(J(:iation with Federal, State, or local governments,
including any advisory, consul1lltive, honorary or od!er part time service or positions.
·While acting as Market President for US Bank in Portland, OR in the 2001 • 2003 time
frame I participated in a task force sponsored by a State Senator to review options to
close budget deficits
Published
Writings:
List the titles, publishels and dates of books, articles, reports or other published materials
you have written.
- None
Political
Affiliations
11d activities:
Political
Contributiou:
List memberships and offices held in and services rendered to all political parties or
election committees during the last I0 years.
• Registered Republican
·Trump tntnsition team volunteer
Itemize all political contributions of$500 or more to any individual, campaign
organization, political party, political action committee or similar entity during tbe last
eight years and identify specific amounts, dates, and names
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RECIPIENT
41
11108/16
10124116
10119117
10117116
09/lll/16
09/Jil/16
091l0116
09/ll/16
09/ll/16
09122115
06.WI4
ILWI4
09/)()114
07111113
06124113
01111113
lll/23/12
0100112
1~11
09m/ll
o&A)4/II
07114111
01120111
Ol/14111
Qualificalions:
Joe llcck via Friends ofJoe Hedt rot US Sc•
T'rumjiVictor)'
<$2,700>
$3$,0110
$3,0110
CaiChombcr PAC
Jason <llalklz via Fricnils ollasoo Chall<tt
Troy Gowcly lor Consms
Dfmll bsa lor Con&fCS$
Tramp Molce Amtri<J Grtot
Joe Httk via Friends or Joe Hed< for uss.la!()o Chall'etz via Fricn<lsoi'J11$011 Qa!Teu
Ritlanl Bloom for California Sllle Assembly
RidlaniBioom lOr Cllifomia SIIIC A=lb!y
Ridlord Bloom lor Califomia SWt Assclllbly
SclllleCOOSCMIMs fund
Dfm!IISSI (or CIII1S'ess
CaiO>amber PAC
CA O..km Association F<dcral PAC
MR..,.,cyll' Ryan via Ronmty F« Ptaideo~ loc
CA Bookm Association Fecla11 PAC
MRClOlOCY>'P R)'lll via Ronmty F« Ptcsideot, loc.
<$2,700>
$2,700
$2,700
$10,000
$2,700
$2,700
$1,0110
$4,100
$2,SOO
$2,000
$1,0110
$2,SOO
$200
S2,SOO
S8IIO
$2,SOO
$1,000
$1,000
$1,2$0
S2SO
$200
Colehombtr PAC
Tim l'lwlally via Pawlenly For Presi<falt
Tim Pawkoly via Powltnly For Presi<falt
CA BlntcnAssociolioo Fcdtnll PAC
CAa..kmAssocialiooftdtdiPAC
State fully your qualifications to serve in the position to which you have been named
(attach sheet)
See attached Exhibit A
Futare employment
relationshipl:
I. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.
•As ®scribed in the Ethics Agreement that I have entered into with the U.S.
Deparunent of the Treasury Assistmt General Counsel of Law, Ethics and
Regulations, wbich has been provided to the Committee, if confirmed by the
Senate, I will sever all such connections and parti<:ipation in business affairs
As part of my prior employment with US Bancorp, I am eligible to receive a defined
benefit plan and snpplemental plan benefits. If confirmed by the Senate, I wiU 110(
receive these benefits during my tenure as Comptroller.
2. As far as can be foreseen, state whether you have any plans after completing
govemment service to rtsume employment, affiliation or practi<:e with your previous
employer, business firm, association or organization.
·After completing government service, I would plan on returning to managing and
leading family real estate and small business investments.
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5
42
3. Has anybody made you a commitment to ajob after you leave government?
-No
4. Do you expect to serve the full tenn for which you have been appointed?
• Yes
Potetllial oonllitb
of iDterest:
I. Describe any financial anangements or deferred compensation agreements or other
continuing dealings with business associates, clients or customers who will be
affected by policies which you will influence in the position to which you have been
nominated.
-None
2. List any investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.
• In connection with the nomination process, I have begun consulting the Office of
Government Ethics and the Department of the Treasury's desigoated agency ethics
officials to identify any potential conflicts ofinterest Any potential conflicts of
interest will be resolved in accordance with the terms ofan ethics agreement that I
will enter into with the department's desigoated agency ethics official and that will
be provided to this committee.
·
3. Describe any business relationship, dealing or financial transaction (other than tax
paying) which you have had during the last 10 years with the Federal Government,
whether for yourself, on behalfof a client, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which
you have been nominated.
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-In connection with the nomination process, I have begun consulting with the Office
of Government Ethics and the Department of the Treasury's desigoated agency
43
ethics officials to identify any potential conflicts of interest. Any potential conllicts
of interest will be resolved in acoordance with the·terms of an ethics agreement that I
will enter into with the department designated agency ethics offici&! and that will be
provided to this committee.
4. List any lobbying activity during the past ten years in which you have engaged in for the
purpose of directly or indirectly inllueneing the passage, defeat or modification of any
legislation at the national level of government or affecting the administration and
execution of national law or public policy.
-No~
5. Explain how you will resolve any conflict of interest that may be disclosed by your
responses to the items above.
N/A
Civil, criminal and
invatigatoey
actions:
LGive the full derails of any civil or criminal proceeding in which you were adefendant
or any inquiey or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.
I have not been a defendant in any criminal proceeding or the subject of a govemmeotal
inquicy or investigation to the best ofknowledge. I have not been a defendant in any civil
proceedings other than those where I was named as a co-defendant in my official capacity
as President and CEO of OneWest Bank N.A. and President of 1MB Holdco. Asearch
for these on Bloomberg Law and LexisNexis, resulted in the
following cases, which to the best ofmy knowledge represents all cases.
Cases
• Calderon v. Otting
• Moon v. Moynihan
• Kuzner v. OneWest Bank
• Lucero v. Freddie Mac Equity
Plus I·ESIC Ltd P'ship
• Arlen Paul Odegard v. Joseph
Co-D
Co-D
Status
Dismissed 3/24/14
Dismissed 4121111
Dismissed 10/16/14
Dismissed 7/28/15
D
Dismissed with prejudice 2118/11
Co-D
Dismissed 217/14
. Role
D
Co-D
• Hernandez v. OneWest Bank
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Otting
44
- Clark v. Keys
Co-D
- Guevara v. FDIC
Co-D
- Clark v. Boyle
Co-D
- Metcalfe v. Williams
Co-D
- Larson v. OneWest Bank
Co-D
- Diaz v. Dimon
Co-D
- New Jersey v. Financial Freedom Co-D
- Colebrook v. App
Co-D
- New Jersey v. Otting
D
-Colebrook v. Otting
Co-D
- New Jersey v, Otting
D
- Phayer v. OneWest Bank
Co-D
- Parson-Janrhett v. Karl
Co-D
- City of Macon v. Otting
D
- St. Clairev. OneWest Bank
Co-D
- Texas v. Otting
D
- Ganz v. Otting
D
- St. Clair v. OneWest Bank
Co-D
- English v. Otting
Co-D
- Carson v. Indymac Mortgage Co-D
- Anlhony v. Otting
Co-D
Dismissed 5/26/16
Filed 10/6/14
Dismissed 10/1/2014
Dismissed 6/6/20 II
Filed 2121/14
Filed 4/27/15
Dismissed 9/15/15
Dismissed 8114115
Dismissed 8113/15
Dismissed 5128115
Dismissed 4116/2015
Dismissed 3125115
Dismissed 1127/14
Expunged 1/9/2014
Di~missed 10/15/13
DiSmissed I 0/22/13
Closed 2/28n013
No complaint served; Closed 11115/12
Closed 9/21/12
Dismissed 9/20/11
Judgment for Defendants 3/30115
Do Defendant
Co-D • Co-Defendant
2. Give the full de1ails of any proceeding, inquiry or investigation by any professional
associalion including any bar association in which you were the subject of the
proceeding, iDquiry or investigation.
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- Not Applicable
45
Exhibit A
Joseph M. Otting
Statement« QuallfiCalions to Serve as the
Comptroller of the Currency
It is a great honor to be nominated to ser.<e our countty as the Comptroller of the Currency. I
share the goals and values of the Office ol the Complroller of tile Currency wtllch are to operate
the national banldng system In a safe and sound manner. In addffion, I am oommHted that tile
OCC should promote oompetltion amongst the National Banks and ensure that all Amerieans
have fair and equal aooess to financial services.
As a y()Ung man growing up in a t.idwestern family, I was able to wffness the importanoe and
C$$CIICCI of our banking eyutem. I81Ni how looel beonkel$ provided needed capital to small
business OWnet'S, Including my father, as well as consumer and residential loans to families,
including my own. I also saw the support and oommilment bank$ make to their commun~ies by
supporting hometown venues, nonprofit$ that provide valuable seNi<:es, little league teams. and
other children's activities and programs.
During the oourse ol my 30 plus yesrs as a banker, I have seen how a healthy and safe banking
system can change people's lives. I have Observed dreams turn Into suooess as families are
able to buy their first car, purchase a new home, start a new business, send their chRdnen to
college and save for retirement • all dh the assistanca ol the banking system. I have also
Observed ~n the brillg system does not work, lnc!udilg bank$ being sla!ved for capHal,
which nesub in job losses, redudion of services for cients and bank failures.
My banldng career has spanned the segments ol consumer, smaH business, middle market,
COiporate lending, private banking, personal trust and Investing activities, regulatory
compliance, legal, technology and operations and audit. I have been'regulated by the OffiCe of
the Comptroller for the majorffy of my career. The lnst~utions I worked for and the areas under
my leadership were held In high negaro and In compHanoe wffh laws and regulations. When
issues were kfentif1ed or cited, we worked tirelessly to improve, correct and oompty wffh the
regulations. As a leader of persoMel, I alWays emphasized to our teams the Importance of
having a professional and respected relationship with our regulators.
In addition to my wo11< as a banker, I have worked hard to suppolllocal oommunmes by
development and overa!ght of Communffy Reinvestment Act plans and programs and my
personal participation in local nonprofffs. A halima111 of my fife and career has been to.provide
aeoess to communffy based organizations to teD their stoly and assist in their mission to allow
all Americans to gain aooess lo financial services, housing, ecklcation, and employment.
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If oonllrrned as Comptroller ol the Currency, ff would be my great honollo join tha talented
women and men of tile OCC, and blend their knowledge and experience with my banking
industry and oommunlty experience, to ensure that we execute lhe mission of the 01ganization
and fulfill our obligation to the America people.
46
TO BE
A
PREPARED STATEMENT OF RANDAL QUARLES
MEMBER AND VICE CHAIRMAN FOR SUPERVISION, BOARD OF GOVERNORS
THE FEDERAL RESERVE SYSTEM
OF
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.
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47
STATEMENT FOR COMPLm ONBY PRESIDENTIAL NOMINEES
Name:
Quarles
Randal
Position to wbith nominated:
Keith
Member and VIce Chairman for Supervision
Board of Governors of the Federal Reserve System
Date of nomination: July 11, 2017
Dateef birtb:
Plate of birtb:
os
Marital Status:
San Francisco, California
September 1957
FIIU name of spoDSe: Clista Hope Eccles
Married
Name aad ages of clilldren:
Randal Eccles Quarles (18)
Spencer Robert Eccles Quarles (16)
Emily Hope Eccles Quarles (13)
Edmtioa:
Institution
Yale Law School
Columbia University
Degrees
Dates
attended
received
Dates of
degrees
g/81-6/84
J.D.
1984
9f76-6m
A.B.
lg81
l}So-6/81
BrighamYoung University Sfls-4/76
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N/A
List below all scholarships, fellowships, honorary degrees, military medals, honorary
Hoaors
VerDate Nov 24 2008
None
48
audAwards:
society memberships and any other special recognitions for outstanding service or
achievement.
Alexander Hamilton Award (Treasury Department's highest honor)
Treasury Department's Meritorious Service Award
A.B. degree awarded summa cum laude
Phi Beta Kappa
NationalMerit Scholar
Sterling Scholar (Utah)
List below all memberships and offices held in professional, fraternal, business,
scholarly, civic, charitable and other organizations.
Memberships:
Organization
Offioe held (if any)
Dates
Organization
Position
Church of Jesus Christ of Latter·day Saints Sunday SchoolTeacher
_(g/14- present)
U.S. Chamber of Commerce
Member, Board of Directors
(3/og- present)
BalticAmerican Freedom Foundation
Board Member
(6/u- present)
Association of the Bar of the City of New
Member, Committee on
York
Banking law
Dates of
Affiliation
From birth
_3109 • present
6/u · present
4195-2016
(4/95- gfg8)
American Bar Assoc.i ation
Center for FinancialStability
Financial Services Volunteer Corps
Metropolitan Club (Washington DC)
Alta Club (Salt Lake City)
Valley Club (Hailey, Idaho)
Yale ClubofNewYork City
Salt lake Country Club
None
Member, Board of Directors
(9/11- present)
Member, Board of Directors
(7/16-present)
None
None
None
None
None
l/94-2016
g/u- present
7/16- present
6/o6- present
3/15-present
z/oz- j)resent
s/95- present
9/97- present
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49
Employment record:
Employer
The Cynosure Group
Financial lndustry
RegulatOIY Authority
(FINRA)
The Carlyle Group
List below all positions held since college, including the title or description ofjob,
name of employment, location of work, and inclusive dates of employment.
Title
Location
Dates
Managing Director 79 S. Main Street, Salt Lake City, lh4- present
Utah
Member, Board of 1735 KStreet, NW, Washington, 7/15- present
Directors
D.C.
Managing Director 1001 PennsylvaniaAvenue, NW,
Washington, D.C.
U.S. Department of
Under Secretary for 1500 PennsylvaniaAvenue, NW,
Treasury
Domestic Finance Washington D.C.
U.S. Department of
Assistant Secretary 1500 PennsylvaniaAvenue, NW,
Treasury
for International
Washington, D.C.
Affairs
International Monetary U.S. Executive
70019111 Street, N.W.
Fund
Director
Washington D.C.
Davis Polk &Wardwell Partner
450 Lexington Avenue, New
York NewYork
Davis Polk &Wardwell Assodate
450 Lexington Avenue, New
York, New York
U.S. Department of
Deputy Assistant 1500 Pennsylvania Avenue, NW,
Secretary for
Washington, D.C.
Treasury
Financial
Institutions Policy
U.S. Department of
Special Assistant to 1500 Pennsylvania Avenue, NW,
Treasury
the Secretary of
Washington, D.C.
the Treasury
Davis Polk &Wardwell Associate
1Chase Manhattan Plaza, New
York, New York
Davis Polk &Wardwell Summer Assodate 1Chase Manhattan Plaza, New
York, New York
Milbank, Tweed, Hadley Summer Assoc.iate 1Chase Manhattan Plaza, New
&McCloy
York, New York
Milbank, Tweed, Hadley Paralegal
1Chase Manhattan Plaza, New
&McCloy
York New York
8/o7-12/13
8/05-10/06
4fo2-8/o5
8/01-4/02
6/94-7/01
l/93• 6/94
2/92 ·l/93
s/91· 2/92
8/84- s/91
5183-9/83
sJS2- 9/82
sJS1- 9/81
Government
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50
Exptrieace:
List any experience in or direct association with Federal, State, or local governments,
including any advisory, consultative, honorary or other part time service or positions.
Under Secretary for Domestic Finance, Department ofTreasury (2oos-2oo6)
Member, Air Transport Stabilization Board (2005-2006)
Assi.stant Secretary for InternationalAffairs, Department of Treasury (2002-2005)
Member, Board of Directors, Overseas Private Investment Corporation (2003-2005)
U.S. Executive Director, InternationalMonetary Fund (2001-2002)
U.S. Executive Director, European Ba~k for Reconstruction and Development (2002)
Deputy Assistant Secretary for Financial Institutions Policy, Department of Treasury (1992-1993)
Special Assistant for Banking Legislation, Department ofTreasury (1990-1992)
Published
Writings:
List the titles, publishers and dates of books, articles, reports or other published materials
you have written.
fitle
Publisher
•Focusing on Bank Size,
Missing the Real Problem•
•Herding Cats: Collective
Action Clauses in Sovereign
Debt-TheGenesisofthe
Project to Change Market
Practice in 2001 through
2003.
•Let Private Equity Help the
Banks"
•Private Equity Can Save the
Banks"
Testimony before the Senate
Banking Committee on
Modernization of Insurance
Requlation
Comment on "The Euro and
The Dollar: Toward a Finance
G·2?" in The Euro at FNe:
Ready for aGlobal Role
Testimony before the House
Committee on Financial
Services on the US·EU
Financial Markets Dialoaue
Testimony before the Senate
Banking Committee on US
Date
Wall Street Journal
March 31, 2016
Duke Journalof Law and
Contemporary Problems
Fall2o1o
Wall Street Journal
June 30, 2009
Wall Street Journal
May31, 2oo8
Congressional Record
Julp8, 2006
Institute for International
Economics
Aprilloos
Congressional Record
Map3,2004
Congressional Record
March 10, 2004
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51
Economic and Financial
Policy Toward Arqentina
Testimony before the House
Financial Services
Committee on US·EU
Financial Markets Dialogue
"U.S. Law Considerations in
Foreign Bank Acquisitionsof
U.S. Banking Institutions' in
Regulation ofForeign Banks
"Door Opens Wider to E·
Commerce for Financial
Holdinq Companies'
·us Banking Law
Developments•
"financial Services Reformin
the UnitedStates- An
Analysis of the Gramm·
Leach· Bliley Act'
"International Banking
Activities•
"A Religion of Clerks"
Political
AJfdiations
and activities:
April22, 2002
Congressional Record
Lexis Publishing
2000
InternationalFinancial Law
Review
October 2000
InternationalTaxReview
July 2000
Davis Polk & Wardwell
March 2000
l*rnationalFinancialLaw
Review
Sunstone Magazine
October 1989
originally written August
1g8o, republished May1g85
List memberships and offices held in and services rendered to all political parties or
elec:tion committees during the last I0years.
Delegate, Salt Lake County Convention, Utah Republican Party-2014
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52
Political
Contributions:
Itemize all political contributions of$500 or mort to any individual, campaign
organization, political party, political action committee or similar entity during the last
eight years and identify specific amounts, dates, and names of rteipients.
candidate I PAC I Organization
Amount
Year
Free and Strong America PAC Inc.
$
s,ooo
2009
Free and Strong America PAC Inc.
s 2,000
2010
Majority Committee PAC
$
5,000
2010
National Republican Senatorial Committee
s 2,500
2010
Portman for Senate Committee
s 2,400
2010
Bennett Election Committee Inc.
s 2,400
2010
),000
2010
·Free and Strong America PAC Inc.
$
Romney for President Inc.
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VerDate Nov 24 2008
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53
Mike Crapo for U.S. Senate
2016
National Republican Senatorial Committee
2016
Qualifications:
State fully your qualifications to serve in the position to which you have been named.
(attach sheet)
See Attached Rider A
Future employment
relationships:
1. Indicate whether you will sever all connections with your present employer, business
firm, association or organization if you are confirmed by the Senate.
Yes.
2. As far as can be foreseen, state whether you have any plans after completing
government service to resume employment, affiliation or practice with your previous
employer, business firm, association or organization.
No.
3. Has anybody made you a commitment to ajob after you leave government?
No.
4. Do you expect to serve the full term for which you have been appointed?
Yes.
Potential conflicts
of interest:
1. Describe any financial arrangements or deferred compensation agreements or other
continuing dealings with business associates, clients or customers who will be affected
by policies which you will influence in the position to which you have been
nominated.
Inconnection with the nomination process, Ihave consulted with the Office of
Government Ethics and the Federal Reserve Board's designatedagency ethics
official to identify potentialconflicts of interest. Anypotential conflicts of interest
will be resolved inaccordance withthe temns of an ethics agreement that Ihave
entered into with theagency's ethics official and that has been provided to this
Committee. Iam not aware of any other conflicts of interest.
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54
2. List any investments, obligations, liabilities, or other relationships which might involve
potential conflicts of interest with the position to which you have been nominated.
Inconnection withthe nomination process, Ihave consulted with the Office of
Government Ethics and the Federal Reserve Board's designated agency ethics
official to identify potential conflicts of interest. Any potential conflicts of interest
will be resolved in accordance withtheterms of an ethics agreement that Ihave
entered into with the agency's ethics officialand that has been provided to this
Committee. Iam not aware of any other conflicts of interest.
3. Describe any business relationship, dealing or fmancial transaction (other than tax
paying) which you have had during the last 10 ye&S with the Federal Government,
whether for yourself, on behalf of aclient, or acting as an agent, that might in any
way constitute or result in a possible conflict of interest with the position to which you
have been nominated.
In connection with the nomination process, Ihave consulted with the Office of
Government Ethics and the Federal Reserve Board's designated agency ethics
official to identify potentialconflicts of interest. Any potential conflicts of interest
will be resolved inaccordance withthe terms of an ethics agreement that Ihave
entered intowiththe agency's ethics official and that has been provided tothis
Committee. Iam not aware of any other conflicts of interest.
4. List any lobbying activity during the past ten ye&S in which you have engaged in for the
purpose of directly oi indirectly influencing the passage, defeat or modification of any
legislation at the national level of government or affecting the administration and
execution of national law or public policy.
None. As listed above, I have testified before Congress several times, most recently
in 2006.
5. Explain how you will resolve any conflict of interest that may be disclosed by your
responses to the items above.
In connection withthe nomination process, Ihave consulted with the Office of
Government Ethics and the Federal Reserve Board's designated agency ethics
official to identify potentialconflicts of interest. Any potential conflicts of interest
will be re.solved inaccordance withthe terms of an ethics agreement that Ihave
entered intowiththe agency's ethics officialand that has been provided to this
Committee. Iam not aware of any other conflicts of interest.
Civil, crimiual and
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55
investigatory
actioos:
I. Give the full derails of any civil or criminal proceeding in which you were a defendant
or any inquiry or investigation by a Federal, State, or local agency in which you were
the subject of the inquiry or investigation.
None.
2. Give the full details of any proceeding, inquiry or investigation by any professional
association including any bar association in which you were the subject of the
proceeding, inquiry or investigation:.
None.
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56
Randol Quortes
Nomination Questionnaire
Senate Committee on Bonking,
Housing, arid Urban Affairs
RIDER A
The Vice Chairman for Supervision of the Boord of Governors of the Federal
Reserve System requires someone with a range of diverse qualifications. He
should hove:
o deep technical expertise in financial services regulation;
o a dearvision for financialservices regulation that is based on the rule of law;
o extensive experience with both the Federal Reserve and the larger financial services
bureaucracy;
o practical exposure to and understandingof the full range of financial services firms,
large and small;
o a dear vision for monetary policy for the Federal Reserve to promote a strong
economy and price stability;
o the leadership to advance the policy objectives of the United States insuch
internationalforums as the Basel Committee, Financial Stability Board, Financial
Markets Regulatory Dialogue, and other international organizations affecting
financial regulation.
My career has prepared me in each of these areas.
o Technical Expertise: In addition to my extensive government experience, Ihave
beenthe co-head ofthe financial institutions group at Davis Polk & Wardwell, one
ofthe leading financial services law firms in the country (and the youngest head of
the group in the firm's history). There, Iadvised many of the most sophisticated
financial institutions in the world on a wide range of regulatory matters.
o Vision for Regulation: Ihave participated inorled comprehensive reviews of the
financial regulatory structure intwo different presidential administrations, which
has given me a clear view ofthe sensible objectives of financial regulation and the
means of achieving them.
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o Bureaucratic Experience: As the Under Secretary of the Treasury for Domestic
Finance, Icoordinated financial regulatory policy with all the various regulatory
agencie.sof the President's Working Group on Financial Markets (the Fed, the OCC,
the FDIC, the SEC, and others).
57
Randal Quartes
Nomination Questionnaire
Senate Committee on Banking,
Housing, and Urban Affairs
o Full Range of Financial Services Firms: My experience at Davis Polk and the
Treasury was focused on large, complex institutions and questions of systemic
vulnerability. At the Carlyle Group, by contrast, Ifocused on small and mid-sized
financial institutions, where Igained valuable insight into the issues facing such
institutions and their customers.
o Monetary Policy: As the Assistant Secretary of the Treasury for International
Affairs, Ihelped lead the area of the Treasury that coordinates dollar policy for the
US. In this capacity, Iworked closely with both members and staff of the Federal
Reserve Board on monetary policy and financial stability issues. Thi.s collaboration
gave me a keen appreciation of the range of policies that are likely to foster a strong
economy in a context of price stability. Iwill bring avaluable perspective to FOMC
deliberations based on my comprehensive work in both government and the private
sector.
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o International: As U.S. Executive Director of the IMF and as Assistant Secretary of
the Treasury for International Affairs, Iwas the lead US representative in a wide
range of international discussions on financial structure and stability and cross·
borderfinancial regulation, leading the U.S.JE.U. financialregulatory dialogue and
the U.S. delegations to the Financial Stability Forum throughout this period. In the
execution of these responsibilities, Irepresented the Treasury on over uo different
internationalmissions to nearly so different countries and regularly worked with
ministers, central bank governors, and the most senior officials of the finance
ministries and central banks oftheG-7, G·S, G·10, and G-20.
58
SOURCES OF INCOME LAST 3YEARS
v-.
V.-:
Yw:
Salary
Fca, roydies
Di•iclcnds
lmete$1
Gifts
ReniS
Ttlll
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Odlcr-aceedita S500
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-byState 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?
(59)
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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/newsissuances/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 CoPresident, 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?
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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
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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.
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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?
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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
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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
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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 shortterm 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
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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
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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?
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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.
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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?
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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
Q.2.a. Will you commit to prioritizing the section 956 rulemaking
and ensuring that it is part of the OCC’s regulatory 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
1 https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATIONlGETl
AGENCYlRULElLIST¤tPub=true&agencyCode=&showStage=active&agencyCd=1500&Image
58.x=56&Image58.y=6&Image58=Submit.
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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 DoddFrank?
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?
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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.
• Will 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.
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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/newsissuances/news-releases/2016/nr-occ-2016-106a.pdf and https://
www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016106.html.
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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
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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.
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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?
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?
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 ‘robosigning.’ ’’ 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
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?
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,
1 https://www.occ.gov/news-issuances/news-releases/2014/nr-occ-2014-65a.pdf.
2 http://static.politico.com/bc/9e/81e33aa74b5980daa9ffdeb7cba9/steven-mnuchin-responsesto-senate-finance-committee.pdf.
3 https://www.occ.gov/static/ots/misc-docs/consent-orders-97665.pdf.
4 http://4closurefraud.org/2009/11/15/full-deposition-of-the-infamous-erica-johnson-seck-reindymac-federal-bank-fsb-plaintiff-vs-israel-a-machado-50-2008-ca-037322xxxx-mb/.
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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
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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?
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
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/.
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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
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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
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.
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.
Q.4. In the same op-ed, you said:
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.
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.
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.
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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. The supplementary leverage ratio?
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ii. The liquidity coverage ratio?
iii. The net stable funding ratio? If so, will you making finalizing
the net stable funding ratio rule a priority?
iv. Uniform 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.
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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?
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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
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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
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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
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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
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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.
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.
1 https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum16/
SIlSummer16.pdf.
2 https://www.federalreserve.gov/econresdata/feds/2014/files/2014113pap.pdf.
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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?
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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.
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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:
• mandatory removal of the megabank’s executives and board
members responsible for the failure?
• FDIC’s authority to claw back compensation from executives or
directors substantially responsible for the failure?
• statutory 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
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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 DoddFrank?
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
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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 institutionaffiliated 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.
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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?
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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
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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 alltime 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 longterm 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
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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
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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
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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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Code of Ethics and Business Conduct for
the Board of Governors of FINRA and
the Board of Directors of its Subsidiaries
[Adopted by FINRA Board on December 3, 2008; Amended September 19, 2013.)
lN7'RODUCTION
FINRA sttVes as the primary private-sector regulator of America's securities industry. Our
focus and purpost is investor protection and market integrity.
Becaust integrity and excellence sttVe as the foundation for everything we do, we have adopted
a Code of Conduct for FINRA's employees, utcluding its offiCers. The Code explicitly applies to
the activities of I'INRA's employees; but it also defines our expecl3tions of everyone who acts
on our behalf, including the Governors of FINRA and the Directors of its subsidiaries. You,
too, are amb..ssadors for FlNRA, and should at all times demonstrnte honesty, integrity, fairness
and excellence.
We have provided each of you with a copy of our Code of Conduct In addition, we have
prepared this Code of Erltics and Business Conduct for the Board of Governors of FINRA and
the Board of Directors of its Subsidiaries. This Code highlights those issues that are particularly
relevant to your duties as Governors and Directors. Please review this Code and retain a copy
where you can easilyaccess and reference it.
RESPONSIBILITIES OF FINRA GOVERNORS AND DIRECTORS
AU Governors and Directors have a responsibility to:
• Be familiar with, understand and comply wirl1 the expectations of all laws and regulations
relevant to your duties as FINRA Governors and Directors.
• Be &maiar with, understand and comply with the e'-pectations of this Code, as well as
\\~th those expectations of FINRA's Employee Code of Conduct that are relevant to
your ability to fulf~l your obligations to FINRA.
• Seek guidance before taking action that you are uncertain about. Feel free to consult
\\~th FINRA's Office of General Counsel about any questions or concems.
• Promptly notiljr FINRA's OffiCe of General Counsel if you become aware of unethical
conduct or violations of the law, FINRA's employee Code of Conduct, or this Code.
• Promote and encourage ethical leadership and a culture of integrity throughout FINRA.
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• Embrnce and advocate FINRA's mission of "Investor Protection, Market Integrity"
when making decisions or acting on behalf of rlte organization - as a Governor or
Director, your fiduciary duty runs to !he corporation and all of its constituents, not to
the members or parties responsible of your election or appointment to the Board.
102
CODE OF CONDUCT
A. Avoiding Confiicts of Interest
A conflict of interest exists when our private interests intecfere, could intecfere, or even apptorto
tntecfere with the interests of PINR.il. We must act honestly and ethically in the handling of
actual or apparent conflicts between our personal and/ or professional interests and those of
FINRA.
Broadly speaking, this means we may not have direct or indirect interests in, or relationships
with, any o<g~~nizacion where these interests or relationships could conceivably: (a) hinder our
objectivity, independence of judgment or conduct in carrying out our responsibilities as FINR.>\
Governors and Directors, or (b) ernbarnss FINRA because of the opptrm~ll(t of a conflict of
interest.
Indeed, the appeamnce of a confltCt can be as hannful as an actual conflict. Therefore, while we
discuss below severn! specific siruacions that you may fAce as Governors or Directors, the goal of
this policy is to avoid the oppeomll« of impropriety, as \Vtllas siruations where independence is
acrually unpaired.
Some Helpful Definitions
''Immediate family" (hereafter "f2111ily') includes a Governor's or Director's spouse,
parent, stepparent, child. or stepchad; a member of a person's household; an individual to
whom a person provides financial support of more than SO percent of his or her annual
income; or a person who is claimed as a dependent for federal income tJL~ purposes.
You are considered "affiliated" with a <egulated entity if you:
• Currendyact as an officer, director or employee of the entity; or
• Have been an officer, director or employee of the entity within the last year; or
• Have a "family" member or close business associate, i.e. a partner, who is currently
an officer or director of the entity.
"Substantial fi.nancial interest" includes:
• Being employed by or holding stock or another ownership interest io a regulated
enriry or vendor which is equal to one percent or more of the outstanding stock of
a publicly traded company or one pettent or mo<e of the total value of assets of the
entity or which is equal to or greater than five percent of your total net worth. Qn
determining your ownership inte<est, you should consider not only your own
holdings, but also the holdings of any afftliate and any famtly member.)
• A loan by you or a fAmily member, equal to or greater than five percent of your
total net worth, to a regulated entity or vendor.
• Accepcing or allowmg a f2111ily member or affiliate to accept a loan or other fonn
of indebtedness equal to or greater than fn'e percent of your total net worth from a
regulated entity or vendor.
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Code of EthiCS and 8USllle$S Conduct
103
1.
Examples of Potential Connicts
a.
CorJiJicrs or Perceil'ed ConBicrs bwo}vjng Rules or Orber Marrers
Presenred ro rlle Board
If you or a family member has a "subslllntial financial interest" in a FlNRA
member oare "aff~iattd" with a regulated enricy, you may not panicipate in:
• Any regulatory matter, disciplinary action or investigorion which involves
the regulated entity, or
• Any decision regording an applic•non by that entily for an exemption or
other special dispensation.
Participation by Governors or Directors who are affiliated with regulated
entities is an inherent and valuable incident of FlNRA's sllltus as an SRO.
The compositional requirements of the Boards of FlNRA and its subsidiaries
have been careful~ developed to ensure that a broad spe<:trum of industry
and public views are represented.
When you participate in the discussion related to and/ or vote on a rule or a
matter, which you believe may significantly and disproponionately impact an
entily in which you or • family member has a "substantial financial interest''
or wid> which you or a family member are affiliated, you should always reveal
the nature of your interest to the members of the Board prior to the
discussion or vote. Under such circumstances, you also should consider
recusing yourself from the discussion and the vote. Such situations can give
rise to concerns about fairness and objectivity, and can create a pmtption of a
conflict of interes~ even if there is no actual conflict.
b.
Vendors, Poremial Vendors and Orber BusiJJess Partntts
If you or a family member have a substantial financial interest in or are
affiliated with a FlNRA vendor or a potential vendor, you may not
participate in the consideration of a contract or other agreement that would
be material to the oper:t~ting revenues of d>at vendor (frve percent of more of
the vendor's gross revenues). Similarly you should not encour:t~ge member
fiiDls or companies that do business with FINRA to buy supplies or services
from fAmily members or entities ""th which you or a family member have a
substantial financial interest or are afliliated
c.
Ourside AcrMries
You should be sensitive to other commi1ments or activities (I.e., your duties
to anodler Board) that may interfere with your ability to act in tile best
interest of FINRA. If a situation arises where your commitments or other
activities may conAict wirh your duties as a F!NRA Governor or Director,
you should consult with the Office of General Counsel
d.
Corporate Opportuniries
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Code of Ethics and Business Conduct
104
You may not use FINRA property, infonnation or position for personAl gain
unrelated to the perfonnance of your duties as a FINRA Governor or
Director. Prohibited activities include, for elW!lple, profiting from business
opporiUnities that you learn about through your service as a FINRA
Governor or Director.
Compensation
e.
You may not accept compensation in any fonn for services perfonned for
FINRA from any source od1er thllll f11NRA. f1or example, you may nor
accept from others a finder's fee, commission or other remuneration for any
business transaction in which f11NRA is involved or for services rendered to
FINRA.
2.
Relationships with the SEC
Employees of the SEC are prohibited from soliciting or w:eiving gifts that have
more than an incidenllll value from any entity rl1ey regulate, including FINRA and
its member finns. With limited exceptions, SEC employees may not accept gifts
from f11NRA Governors or Directors. The exceptions include: (I) reasonable
food or refreshments offered at a meeting; (2) gifts given as a result of personal
relationships (I.e., family members or close persoMI friends); (3) advertising
materi•ls of incidental value; and (4) rea.sonable meals provided as part of an
educatioMI program. You should be fiuniliar with, understand and comply with
these restrictions.
3.
Change or Prospective Change in Employment
If at any time during your tenure as a FINRA Governor or Director, you are
changing or in the process of changing your place of emplo}menr, you should treat
yourself as though the event has already occurred (..e., consider yourself to be
"affdiated" with that entity), and should comport yourself in accordance with the
app~cable provisions of this Code.
4.
Participation in FINRA Adjudicatory Proceedings
f11NRA has long-established policies goveming participation by FINRA
Govemors and Directors in adjudicatory proceedings. (Rtftr to FINRA's Po~cy on
Participation in Adjudicatory Proceedings, adopted on January 28, 1997, and
NASD Regulation's Policy on P•rticipation in Proceedings, adopted on January 27,
1997, and modified on March 21, 2000.) Pursuant to these policies, you may not
appear as an expert or consultant in any FINRA hearing or arbitration proceeding
on behalf of any party, other than yourself or the member finn with which you are
currently associated. Under certain circumstances, fonner Governors and
Directors may participate as panelists in FINRA discipliMry proceedings or
FINRA arbitration proceedings. If you appear as a wi1ness, expert or consultant in
any FINRA hearing, any arbitration, any civil litigation, or any other adjudicative
proceeding in connection with FINRA matters, you should make it clear to all
parties, including rhe court or adjudicative panel, that you are not appearing on
behalf of FINRA.
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Code of Ethics and Business Conduct
105
As a sitting Governor, Director, or member of the National Adjudicatory Council
("NAC"), you may not appear as a leg,.l representative before any FINR.!\
Adjudicator on behalf of any parry other than yourself or the member firm with
which you currently are associated. You may counsel clients up to the point at
which you are required to file a Notice of Appearance, but may not file a Notice of
Appearance to act in a representative capacity before an Adjudicator in any
FINRA proceeding on behalf of any parry other than yourself or dte member firm
with which you currently are associated. In addition, once you are elected or
appointed Governor, Director or NAC member, and throughout your term, you
may not appear before an officer or employee of FINRA in a representative
capacity during on-the-record testimony, in negotiating any aspect of on-therecord testimony or in any subsequent s~ of a FINRA examination,
investig:ltion or disciplutary action on behalf of any individual or finn, other than
yourself or the member fum(s) with which you are currently associated and were
associated before the firm was aware of the examination, investig,.tion or
disciplinary action.' This proscription does not apply to former Governors,
Directors or NAC members, and also does not apply to another member of the
law ftnn wirlt which the Governor, Director or NAC member is associated.
5.
Participation in Educational Programs or Speaking Engagements
FINRA recognizes that you may be invited to participate in educational programs.
These activities are beneficial to investors, member fums and the general public.
Such activities, however, may create real or apparent risks. In order to avoid this
risk, FINRA expects you to follow these guidelines:
• Take core that the speech or materials used do not include confidential or
non-public infonnation or remarks concerning pending FINRA litig:ltion
or disciplinary proceedings.
• When you participate in educational programs or speaking eng,.gements as
a representative of FINRA's Board, FINRA's Offtee of Corporate
Communications is available to assist you in preparing your remarks or
speech.
• Except where rou are stating a policy, position or rule that has been finallr
approved by FINRA, all speeches should contain a disclaimer indicating
that you are expressing your own views and do not necessarily speak for
FINRA. The General Counsel's office is available to review advance texts,
riders, slides and other materials used for speaking eng,.gements.
• If you are authorized by FINRA to appear as its representative at a public
event or speaking eng,.gement, FINRA will pay your expenses, as provided
in !he applicable FINRA travel policy.
'This provision applies to any governor starting a new tenn after September 19, 2013.
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Code of Ethics and Business Conduct
106
B. Business Gifts, Entertainment and Courtesies
Gifts, entert2inment and hospitlllity (colle<:tively referred to as business courtesies) can help
build goodwill and working relationships. But while business courtesies are &idy common, they
can also create serious ethical risks. For FINRA, this is particularly true of business courtesies
from entities or individuals we regulate, and from current or potential vendocs (though all
business courtesies can give rise to ethical risks). Be aware, as well, that even if ethical concerns
are not well founded, business courtesies can create the approrontt of misconduct. Such
perceptions alone, even if mistaken, can undermine your integrity and that ofFINRA.
For this reason, FINRA has adopted the following limits on business courtesies for Governors
and Dire<:tors. In order to avoid the appearance of any impropriety, you should be careful not
to accept business courtesies from regulated entities or vendors if, in your best judgment, the gift
is being offered to influence your actions as a FINRA Govemor or Director.
We e'pe<:t you to report to the Office of the Secretllry the acceptllnce of any and all gifts,
gratuities or other remuneration re<:eived in excess of$500 from a single regulated entity, vendor
or potential vendor during any calendar year.
C. Safeguarding Confidential Information
FINRA Governors and Directors have access to a broad amy of sensitive, confidential or
proprietllry information, including information about the firms FlNRA regulates, investigates or
othero.~se has dealings u~th (as well as the 6rm's employees and customers), information about
FINRA employees, and information about FINRA itself. Unless required by law or instructed
by an appropriate member of FINRA's Board of Governors, you should maintain dte
conf.dentiality of any and all such information. You may never use such information for
pecsonal gain.
D. Protecting FINRA Assets
You may not use or seek to use FINRA's employees, supplies, equipmen~ buildings or other
assets for your personal benefit except for legitimate business purposes or as part of an adopted
or approved FINRA program or policy that is available to all Governors and Directors.
E. Honest and Fair Dealing
You should at all timts deal fairly with investors, FINRA member firms, suppliecs, employw
and others with whom FINRA interacts. You should never tllke advantage of anyone through
manipullltion, concealment, abuse of privileged information, misrepresentlltion of material facts,
or any other unfair practices.
F. Insider Trading
As FINRA Govemocs and Directors, you may have access from time to time to non-public,
conf.dential or proprielllry information about publicly traded companies. It is against FINRA
policy for you to trade in the stock of any public company based on DI!J' non-public information
obtllined through your service as a FINRA Governor or Director. Moreover, much of this nonpublic information is maltrial, meaning that a reasoMble investor would consider it imporlllnt in
deciding to buy, sell, or hold onto a company's stock. It is against the law (as well as FINRA
policy) for anyone to buy or sell the stock of any publicly rraded compony while in possession
of materi.l, non-public information about that compony. This means you, but it also means
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6
Code of Ethics and Business Conduct
107
your spouse, your best friend, and anyone else you might intentionally or inadvertently tip off
about material non-public information relating to a publicly traded company.
WAIVERS
Any waiver from any part of this Code requires the express approval of the Board following
disclosure of all relevant information.
ANNUAL REVIEW
FINRA's Board of Governors, or a committee of that Board or its designee, will review and
reassess the adequacy of this Cede annuaUy, and lhe Board may make any amendments that it
deems appropriate.
CER11FICA110N
Each Governor and Director is required to certify annually, as long as he or she serves in such
capacity, that he or she has received, read and understands the Code, and agrees to comply with
its expectations, as follows:
[
J hereby certify and
acknowledge that (i) I am a member in good standing of the Board of Governors
of FINRA and/or the Board of Directors of FINRA Regulation or FINRA
Dispute Regulation; (l~ l have received, read and understood the Code of Ethics
and Business Conduct for the Board of Governors of FINRA and the Board of
Directors of its Subsidiaries; (li~ such Code has been and is applicable to my
activities as a member of such lhe Board of Governors of FINRA or the Board
of Directors of FINRA Regulation or FINRA Dispute Regulation; (IV) I have
complied and am in compliance with such Cede; and (v) I am not aware of any
non-compliance with such Code by others.
Signed;
Name Printed:
Date:
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Code of Ethics and Business Conduct
108
Corporate Governance Guidelines
Prepared for the FINRA Board of Governors
Updated August 22, 2016
The JWssion of the FINRA Board of Governors
The FINRA Board is vested v.ith all powers necessary for the management and administration
of FINRA and the promotion of its welfare. The Board has a function independent of
management and is not responsible for the day-to-<lay affairs of the Corporation. It, homver,
does have the responsibility to oversee management and be informed, investigate and act as
necessary to promote FINRA's welfare, objectives and purposes.
Board members need to have an understanding of the issues facing the organization and an
abilfty to apply their knowledge and expertise to those issues. They must represent the best
interests of FINRAand further FINRA's rrission and stated positions, consistent >Mth the
Board's Code of Ethics and Business Conduct, and Board members need to have a full
understanding of, and comply with, the FINRA's Restated CertWicate of Incorporation and Bylaws that form the governance base of FINRA. Board members must have adequate working
knov.ledge of FINRA. as well as its members and services. Board members must regularly
attend Board and committee meetings; participate effectively and in a collegial manner, in all
deliberations, and gel enough information to make a reasonably informed decision. Board
members must observe strict confidentiafity of all matters presented to the Board or their
appropriate committees. Any possible conmct-of-interesl issues must be raised with the
appropriate staff or the Chairman of the Board for prompt resolution.
Guidelines on Significant Corporate Governance Issues
Selection and Composition of the Board
Board Membership Criteria
II is the duty of the Governor to communicate and work professionally and effectively >Mth all
members of the Board. Board members are expected to be unbiased and objective, voting on
matters for the good of investors, industry and marketplace, regardless of the interest of their
spec~ic organization, affiliation or ctassiftcation, as required by applicable law.
The Board includes both lndusby and Public Governors. The Corporate Secrelllry of FINRA
collects from each nominee for Governor such information as is reasonably necessary to serve
as the basis for a determination of the nominee's qualification as an Industry or Public
Governor. Board members have a continuing obligation to not~ the Corporate Secretary
should such information change in any manner.
The exact size of the FINRA Board is determined by the Board within a range set forth in the
By-Laws. There are 10 required Industry Governor seats on the Board comprising:
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• three Small FirmGovernors,
• one Mid-Size Firm Governor,
109
•
•
•
•
three Large Firm Governors,
a Floor Member Governor,
an Independent Dealer/Insurance Affiliate Governor; and
an Investment Company Affiliate Governor.
In addition, the By-Laws provide that the number of Public Governors on the board must exceed
the number of Industry Governors on the board, which resuHs in a minimum of eleven Public
Governors. One seat on the Board is also reserved for FINRA's Chief Executive OffiCer.
Because of these restrictions the practical minimum number of Board members is 22. In April
2013, the Board authorized three add~ional Public Governor seats to increase the Board's size
to the maximum number of 25 governors.
Selection and Orientation of New Governors
The Nominating and Governance Committee identifies and norrinates candidates to run for
election or be appointed to seats on the Board. Interested persons may subrrit a letter of
interest and brief biography to the Corporate Secretary who -Mil forward the infonnation to the
Committee.
Governors who are required to be elected by the members 1 must be elected by a plurality of the
votes of the members of FINRA present in person or represented by proxy at the annual
meeting of members of the Corporation and entitled to vote for such category of Governors.
Quorum, as established in the CerWcation of lnoorporation, is one-third of the members ent~led
to vote at the meeting of members of the Corporation (i.e., Annual or Special Meetings) and,
like-Mse, with respect to elections for elected Governors, one-third of the members of the class
or group entitled to vote.
Orientation of New Governors
As soon as practicable after being elected or appointed to the Board, new Governors receive a
new board member orientation, at I'Alich they meet with senior management and receive an
overview of FINRA's primary programs, departments and operations. New board members are
also provided a FINRA Board Member Reference Manuai, I'Alich sununarizes Board member
duties and responsibil~ies.
Board Composition
Definitions of Industry and Public Board Members
The defin~ions of Industry and Public are set forth in the FI NRA By-Laws and provide:
• "lnduslfY Governor" or "Industry oommittee member" means the Floor Member Governor,
the Independent Dealerltnsurance Affiliate Governor and the Investment Company Affiliate
Governor and any other Governor (excluding the CEO of the Corporation) or oomrriHee
member v.ilo: (1) is or has served in the prior year as an officer, director (other than as an
independent director), employee or oontrolling person of a broker or dealer, or (2) has a
The Small Firm ~rnors, Mid-Size Firm Governor and Lar~ Firm Governors are elected by members in
the same firm-size category. However, vacancies with less than 12 months on the term may be filled by
appointment
Corporate Governance Gtidelines
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consutting or employment relationship v.ith or provides professional services to a sdregulatory organization registered under lhe Ad, or has had any such relationship or
provided any such services at any time v.ilhin the prior year.
• "Public Governor" or "Public conmittee member' means any Governor or committee
member I'Alo is not lhe CEO of the Corporation or who is not an Industry Governor and who
otherwise has no material business relationship with a broker or dealer or a seW-regulatory
organization registered under the Act (other than serving as a public director of such a seHregulatory organization).
Governors Who Change Their Professional Affiliations
Changes to a Governor's professional affiliation may affect his or her eligibility to serve in the
Board classification for which he or she was elected or appointed. A Governor I'Alo changes his
or her job responsibil~ies must notify the Corporate Secretary and provide an update to his or
her Board questionnaire. The Governor's eligibil~y to remain on the Board in his or her current
seat will be determined follov.ing a thorough analysis of the new information.
Term Limits
FINRA Governors, other than the CEO who serves by virtue of his or her posrtion, hold offiCe for
a term of not more than three years, or until a suocessor is elected or qualifted, or until death,
disqualifiCation, resignation or removal. A Governor generally may not serve more than two
consecutive terms on the FINRA Board.
Board Compensation Review
FINRA staff reports periodically to lhe Management Compensation Conmittee on lhe status of
FINRA Board compensation in relation to other se~-regulatory organizations and large U.S.
companies. Additionally, lhe Board directed the Management Compensation Committee toreevaluate the Board Compensation Schedule every five years taking into account appropriate
cost of living adjustments and board pay comparators. Changes in Board compensation, if any,
v.iDbe recommended first by the Management Compensation Committee to the Nominating and
Governance Committee, and then by the Nominating and Governanoe Committee to lhe full
Board for discussion and approval.
Board Operations and Conduct
Attendance and Participation
Board members are expected to attend and participate regularly in Board and Corrmitlee
meetings consistent v.ith lhe general fiduciary standards and govemanoe needs of FINRA.
Members should participate professionally and effectively, in a collegial manner, in all Board
and conmittee deliberations and observe strict confidentiality of all matters presented to lhe
Board or their appropriate committees.
Standard of Conduct
As a protector of investors and a guardian of market integrity, FINRA's Governors have a
heightened duty to make certain that they act in the best interest of the company and that their
conduct is beyond reproach. Pursuant to FINRA's By-Laws, the standard lhe Board uses to
Corporate Governanoe Guidelines
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determine 'htlether cause exists to remove a Board member is 'htlether continued seJVice
affects the best interests of the corporation.
Under this standard, actions by a Governor in his or her individual capacity that may cast doubt
upon his or her honesty, integrity, fairness and excellence and/or attract adverse publicity may
undermine FINRA's stakeholders' confidence in the organization and may ifllllicate this
provision of the By-Law.;. In order to maintain the respect and confidence of investors, member
firms, business partners, regulators, employees and lhe public, ~ is Board policy that any
Governor 'htlo finds him/herseW facing personal, regulatory or legal issues that might implicate
this standard must consuft 11-ith the Chairman of lhe Board, lead Director and/or CEO lo discuss
'htlether resigning from the Board is in the best interest of the organization.
Assessing Individual Governor's Performance
The effectiveness and credibility of the Board depends on an evaluation of the Board as a 'htlole
and of ~s individual members by lhe Nominating and Governance Committee. W'hen evaluating
Governors up for renomination, the Nominating and Governance Committee considers, among
other things, adherence to the Board's mission, guidelines and policies, active engagement and
effective interaction among Board members.
Review of Allocation of Powers
The Board periodically review.; the allocation of powers between management and the Board as
delineated in the Certiftcate of Incorporation and the By-laws, and determines 'htlether these
grants of authority are consistent ~h the changing needs of lhe business.
Board's Interaction with Interested Groups and the Media
The Board believes thai Senior Management speaks for FI NRA. If public comment from the
Board is appropriate, these commenls should, in most circumstances, come fromthe Chairman
or lhe CEO.Individual Board Members may, from lime to time, meet or otheMise communicate
11-ith members and various other constituencies thai are involved \'~th FINRA allheir discretion,
but in such circumstances they do so at their O'M'l expense and should make clear they do not
formally represent FINRA or the FINRA Board.
Board members must not disclose Board information lo the pubfic and must obseJVe the
confidentiality guidelines. Sens~ive, non-public policy and proprietary information should not be
disclosed lo anyone, including the media. This information may include FINRA internal
personnel matters, investigations/examinations in progress, enforcement actions against
members, detiberalions and contemplated actions of the Board, and information on systems
developments.
ff a Board member is contacted by the media, the Board member should comport him/herseW in
a manner consistent ~h the preceding paragraphs. As a general matter, Board members
should inform the FINRA Corporate Communications Department of any media inquiry or refer
the inquiry to the FINRA Corporate Communications Department.
Travel Policy
Board members should ensure FINRA business travel conforms to the policy as outlined in the
FINRA Board Travel Policy.
Corporate Governance Guidelines
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Interaction Among Board Members
Effective interaction among Board members ensures a v.llll-functioning Board. Board members
should exercise judgment when communicating with fellow Board members. Board members
are asked to be respectful of business and other professional comnitmenls of fellow Board
members, and refrain from excessive and unnecessary electronic and hard-copy
communications.
Board Relationship to Senior Management
Board Access to Senior Management
Board members have complete access to FINRA's Senior Management. Board members are
requested to direct questions and issues to these individuals andlor the Corporate Secretary.
Individual Board members should not become involved in operational management, including
regulatory matters and responsibilities of FINRA, except as requested by the CEO. The Board
must focus on ils role as a policy-maker >Mthin FIN RA.
Board members are requested to use good judgment to ensure that contact is appropriate and
non-disruptive to the business operation of FINRA.In order to ensure appropriate follow-up
action, the Corporate Secretary should be copied on written communications. Board members
should be conscious of the might of their position and understand that contacls with staff
members below the most senior level might be intimidating to such staff and might be
interpreted as an attempt to unduly or improperly influence them.
Governors regularly meet in executive session outside the presence of the CEO and other
FINRA offteers or employees. The Chairman of the Board convenes and presides over these
executive sessions and is responsible for communicating to the CEO issues discussed during
such executive sessions.
Meeting Procedures
Selection of Agenda Items for Board Meetings
The Chairman and the CEO establish the agenda for each Board meeting. With respect to
matters from which the Chairman and the CEO recuse themselves, the Lead Governor may
include matters on the agenda of a meeting of the Board.
Each Board member is free to suggest the inclusion of item(s) on the agenda. Board members
are requested to provide suggested agenda items to the Corporate Secretary at least three
weeks in advance of the Board meeting.
Board Materials Distributed in Advance
lnformatiion and data that are important to the Board's understanding of operations >Mil be
distributed in writing to the Board sufficiently in advance of Board meetings to pernit full review
and consideration. FINRA management will make every effort to see that this material is as
concise as possible while still providing the necessary information.
Corporate Governance Guidelines
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113
Providing materials to the Board in advance v,;11 generally conserve meeting time and focus
discussion. On those occasions in v.llich the subject matter is too sens~ive to be presented in
writing, the issue \'~II be presented and discussed in person.
Board Meeting Order
The Chairman establishes the rules of order and procedure of the meeting to ensure the
meeting is conducted in an orderly fashion. The Chairman retains the right,~ necessary, to rule
out of order any remarks or discussion. The Chairman may make add~ional meeting rules as
appropriate or advisable.
The Lead Governor shall convene and preside at all meetings of the Board at v.llich the
Chairman is not present and all executive sessions~ the Chairman is recused.2
Special Meetings
Special meetings of the Board may be called by the Board, the Chairman, the CEO, or the Lead
Governor.
Committee Matters
Number, Structure, and Independence of Committees
The Board is authorized to appoint committees to facilitate and assist in the execution of the
Board's responsibilities. At present, the committees of the Board include the:
•
•
•
•
•
•
•
•
Audft Comrrittee;
Executive Committee;
Finance, Operations & TechnologyComrrittee;
Management Compensation Committee;
Nominating & Governance Committee;
Regulatory Policy Comrrittee;
Small Firm Governor Committee; and
Large Firm Governor Comrrittee.
The Management Compensation Committee exclusively comprises Public Governors. The
Small Firm Governor Committee and the Large Firm Governor Comrrittee comprise the
Governors filling those respective seats on the Board.3 For each of the other committee's listed
The 'lead Govern()(' is a member of the Board elected as such by the Board.
The large firm G011ernor Commi~ and the Small firm G011ernor Committees are convened in the event
of a vacancy among the Large firmGoverno" or the Small firm G011ernors in which the term of office
remaining Is less than 12months. Such vacancy is only filled by the large firm GOYemor Committee in
the case of a largefirmGOYernorvacancy, or the Small firm Governor Committee in thecaseofa Small
firm G011ernor vacancy. Any such vacancy of the Mid-Size Governor is filled by the Board. In the event
the remaining term of office of any Large firm, Mid-Size firmor Small firm Governor position that
becomes vacant~ for more than 12 months, sud> vacancy is filled by the fiNRA membe" entided to vote
for that category of Governorship. In all such insta~s. nominations are made by the Nominating
Committee.
Corporate Governance Guidelines
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above, the number of Public Governors who serve on the COITITlittee must exceed the number
of Industry Governors on the commttee.
The Nominating &Governance Commttee is responsible for recommending the creation and/or
elimination of Board Committees, and periodically reviev~ng and recommending changes to
committee charters.
Assignment and Rotation of Committee Members
Board members may indicate their preferred committee assignmenls. The selection process,
however, is subject to various compos~ional requirements set forth in the FINRA By-Lam, the
SEC-approved Plan of Allocation and Delegation of Functions by FINRA to FINRA Regulation,
Inc., and the Board-approved committee charters. In nominating individuals to serve on Board
Committees, consideration is given to each Governors' backgrounds, experience, and existing
responsibilities as members of the FINRA Board.
Committee Meeting Order
The Chairman of the committee establishes the rules of order and procedure of the meeting to
ensure the meeting is conducted in an orderly fashion. The Chairman of the comnittee controls
the meeting agenda and the order of issues to be presented to the Board. The Chainnan
retains the right, ~ necessary, to rule out of order any remarks or discussion that does not
comply with committee procedures. The Chainnan may make additional meeting rules as
appropriate or advisable.
Committee Agenda and Materials
The Chairman of the committee, in conjunction v~th the Chairman and the CEO, 'hill establish a
meeting agenda for each COITITlittee. Each COITITlittee member is free to suggest the inctusion of
item(s) on the agenda. Committee members are requested to provide suggested agenda items
to the Corporate Secretary at least three weeks in advance of the coiTITlittee meeting.
Committee materials will be distributed in writing before the committee meeting.
Leadership Development
Formal Evaluation of the Chief Executive Officer
Annually the Board, through the Management Compensation Committee, evaluates the CEO.
This evaluation is communicated to the CEO by the Chairman of the Management
Compensation CoiTITlittee. The evaluation should be based on objective crfteria including
performance of the corporation, accomplishment of long-term strategic objectives and
development of senior management. The evaluation ...nn be used by the Management
Compensation CoiTITlittee when considering the compensation of the CEO.
Succession Planning
The Management Compensation CoiTITlittee and the Nominating and Governance Committee
are jointly responsible for developing and updating a plan of succession for the CEO.
Corporate Governance Guidelines
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115
ADDITIONAL MATERIAL SUPPLIED
FOR THE
RECORD
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LETTERS SUBMITTED IN SUPPORT OF THE NOMINATION OF JOSEPH
OTTING
116
sought to avoid compliance with state Jaw, arguing that state consumer protection Jaws did not
apply to them.'
These questions regarding Mr. Otting's record are especially important given the critical
decisions before the ne~1 Comptroller, including:
• how to implement and enforce the crucial public protections in the Dodd-Frank Act;
• whether to resist bank pressure to unravel the OCC's guidance to banks regarding
abusive payday loans;
• whether to oppose efforts by national banks to usc preemption to ignore stale constuuer
protection Jaws;
• whether to abandon the OCC's plans to unlawfully charter nondepository institutions
without Congressional authorization;
• whether to disavow the Acting ComptroUer's radical proposals to obstruct other
regulators authority to protect the financial system; and
• whether to reject the Acting Comptroller's outlandish attempt to overtum the Consumer
Financial Protection Bureau's arbitration mle based on unsupported assertions about the
effect ofboldi11g banks accowJiable on their safety and soundness.
We tl1ank you for yotlf allention, and urge you to oppose Mr. Otting's nomination.
Sincerely,
Americans for Financial Refonn
4
Boyle 1'. Vesuv1o Hold~ B256055, 2016 WL 595675, at 7 (Cal. /lpp. 2 Dist Ocl 14, 2016), available at
hllp:'l"ww.couns.ca.~v/opimons'nonpub!B~560S5.PDF- Darn•in Bondgraham, Sm;ng the Homea.ntr BiU of
Righ/s, East Bay E><prtss, Nov. 26, 2014, available at https:llwww.eastbivtx!Jf<':;s.COmlooklandlsavino-the-
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homeownor-bill-<lf-riohtsiContcnt?oid~~t32390
117
MBCA
MID-SIZE BANK COAL I TION OF AM ER I CA
Sen. Mike Crapo
Chainnan, Senate Banking
Committee
239 Dirksen Senate Building
Washington, DC 20510
Sen. Sherrod Brown
Ranking Member, Senate Banking
Committee
713 Hart Senate Building
Washington, DC20510
Re: Support for Joseph Otti11g- Comptroller ofthe Curreucy
Dear Chainnan Crapo and Ranking Member Brown,
Joseph Otting's nomination to lead the Office of the Comptroller of the Currency has the full
support of the Mid-Size Bank Coalitionof America (MBCA) and its 80 member banks. We
encourage the United States Senate to act quickly on Otting's nomination.
Founded in 2010, the MBCA is the only financial services industry group whose sole purpose it
is to singularly and effectively represent mid-size banks within the overall banking industry, and
to educate lawmakers about the financial regulatoryissues and policies affecting the ability of
mid-size banks to more fully support and contribute to the growth ofthe U.S. economy. The
MBCA's effectiveness is rooted in the direct engagement of its member CEOs and their senior
executives, who present policymakers with facts, with reasoned alternatives and with positive
policy suggestions, reflecting the unique point-of-view of mid-size banks. MBCA-mernber banks
average less than $19 billion in size and collectively serve customers and communities in all 50
states, Washington D.C., and 3 U.S. territories.
Mid-size banks have the best features of both big and small banks. Much like community banks,
we are deeplyinvested inour local communities, maintaining a tried and true customer-focused
business model through which we offer a high level of service and flexibility to our customers.
Our business is straightforward: we take deposits, make loans, pro\~de payments seMces, and
offer modest wealth management capabilities to our customers. Because we're bigger and have
more capital than community banks, we offer more product depth, technology, loan capacity, and
increased stability.
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Because he led a mid-size bank, Joseph has an uncommon appreciation for these distinctions and
he understands how complex, still-evolving regulatory requirements confront and challenge the
mid-size bank business model by necessitating substantial investments in compliance, risk and
capital management infrastructure.
118
While the MBCA and its members support regulation that is necessary for national economic
stability and holds bad actors to account, we think policymakers should focus attention,
resources, and time on where risk lies and so as to not burden banks that are not systemically
significant. The cost of regulating mid-size banks should not exceed its benefits. This is
especially important during a slow and uneven economic recovery, concerns abroad and rising
competition from outside the regulated banking industry.
Mid-size banks strongly desire to do even more to support our communities and improve
prospects for economic and jobgro111h in them. Joseph shares this desire.
Thank you very much for the opportunity to provide this input and thank you also for
considering it. Please let me know if the MBCA can be of any assistance to the Committee on
this or any other matter.
&f)-/
Chainnan and CEO, Old National
Chainnan, Mid-Size Bank Coalition of America
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119
OPERATION
JOHN HOPE BRYANT
Founder, Chairman and
Chief Executive Officer
HOPE
HOPE WOII:I Headquarters
191 Poacl>tree Sir~ liE.
July 25. 2017
Sw.e3840
Atlanta, Georgia 30303
40<·941·2919 Ole
HOPE Regional Olfu
707 Wilshire Boule'iacd.
Honorable Michael (Mike) Crapo
Chairman
United States Senate
239 Dirksen Senate Building
Washington, D.C. 20510
'!if' Floor
Los At>gtiet Cattomia 90017
Dear Senator Crapo:
en -592-HOPE (4673)
21J.439.7272Fax
On July 27, 2017 the U.S. Senate Banking Committee will hold a nomination
hearing for the U.S. OCC Comptroller Nominee Mr. Joseph Otting. I respectfully
submit a letter of support on the integr~y and community reinvestment work of Mr.
Offing. As Founder Chairman and CEO of Operation HOPE, I have witnessed
firsthand through our economic empowerment work the executive leadership by
Mr. Otting and know him, personally, tobe a good man.
l et me share with you how we've worked with Mr. Offing and how his executive
leadership has made a pos~ive impact with our HOPE clients. As an executive of
One West Bank and a HOPE Board member, he has remained a committed and
engaged impact leader which brokered a commitment of numerous HOPE Inside
locations throughout the West Coast.
Our HOPE Inside programs provides financial literacy, credit management, home
ownership counseling, small business and entrepreneurship training, and assists
Americans with a financial crisis as a result of disasters. The end result are
economi(ally stabilized 700 credit score communities.
Our HOPE Inside programs build upon the legacy of President Abraham lincoln
and the Freedman's Bank of 1865, a landmark institution designed to teach freed
slaves about money. As you know, the Freedman's Bank headquarters is located
across from the White House, and I am proud to have played a role in the
renaming of the Treasury Annex Building to the Freedman's Bank Building under
the leadership of the U.S. Department of the Treasury and Secretary lew in
January, 2017.
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Operation HOPE has a 25-year history leading and shaping commun~y
reinvestment. On the public policy front our efforts include: working with President
Bush through executive order to establish financial literacy as public policy of the
U.S. government: partnering with the U.S. Department of Homeland Security and
FEMA to pioneer the new public policy space of emergency financial disaster,
preparedness, response and recovery; becoming the first non-profit entity allowed
to operate within a bank branch; and encouraging Treasury to form a coal~ion to
coordinate federal efforts on financial literacy, which resulted in the creation of the
Financial Literacy and Education Commission (FlEC). President Bush actually
featured an Operation HOPE success story during the ceremony held to create
FLEC. I, and we, were able to work w~h President Obama on his President's
Advisory Council on Financial Capacity and the Presidenfs Advisory Council on
Financial Capacity of Young Americans, and with President Clinton as a founding
member of Clinton Global Initiatives.
120
Operation HOPE has transformed the lives of 2.9 million adults and 1.0 million
youth. With the help of 28,000 volunteers, HOPE has uplifted communities through
economic empowerment programs, directing more than $2.4 billion economic
activity into underserved communrties, including $1 B in mortgages for 11,000 new
homeowners. Operation HOPE provides financial inclusion at scale, and we are
the only non-profit national financial services delivery model (urban and rural) for
low wealth and struggling middle class communities domestically and
internationally, including South Africa, United Arab Emirates, Morocoo and Saudi
Arabia, empowering woman and youth.
Our innovative HOPE 700 Credrt Score Community Program, bolstered by the
HOPE National Credit Score Index, is tackling the consumer credit challenge and
poverty through a holistic lens, including environmental, conlexlual, and behavioral
factors. In partnership with FICO, HOPE examines and targets 500 credit score
communrties for economic interventions and HOPE programs. Using credit score
as a driver, the HOPE Credrt Score Index becomes a predictive index for poverty,
crime, poor education, food deserts, low homeownership, GOP, as well as future
aspiration. Best of all this approach is non-racial, non·polrtical, urban and rural,
and inclusive. I would like to work with you and your team around this Credit
Score Index as I believe it has significant public policy implications. I would also
like to work with you and your team to build upon the policy created by President
Bush, to expand this to be the policy of our nation; financial literacy education for
every child at birth.
The Credit Score Index is but one example of our progressive, outcome-based
approach to CRA reform, focused on achieving key community-based objectives.
After 40 years, the policy is in need of an overhaul. We believe that data and
program impacts should guide the targets and assess the sucoess of CRA
inmatives and organizations, creating a win for all stakeholders involved. We call
this body of work the Silver Rights Movement.
I stand ready to work with the Congressionally Confirmed OCC Comptroller around
progressive, outcome·based, CRA reform. Thank you for your congressional
efforts towards community reinvestment.
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Acting U.S. Comptroller of the Currency, Keith A Noreika
HOPE Global Spokesperson Ambassador Andrew J. Young
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121
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LETTER SUBMITTED IN SUPPORT OF THE NOMINATIONS OF JOSEPH
OTTING AND RANDAL QUARLES
122
I endorse both nominees v.1thout reservation and look forward to wo~ing v.1th them once
they are confinned. I urge the sv.ift approval of their oominations by the committee and
the Senate.
Thank you for your consideration.
CC: Member of the Senate Committee on Banking, Housing, & Urban Affairs
The Nation~ VoiceJ&r Community Banks.'
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