Bank regulators grilled on climate efforts, ILCs, ‘true lenders’

WASHINGTON — House lawmakers peppered federal financial regulators with questions Wednesday on a host of issues, highlighting the lingering tensions tied to the transition from the Trump administration to the Biden administration.

Two Trump appointees, Federal Reserve Vice Chairman of Supervision Randal Quarles and Federal Deposit Insurance Corp. Chairman Jelena McWilliams, appeared before the House Financial Services Committee alongside National Credit Union Administration Chairman Todd Harper and acting Comptroller of the Currency Michael Hsu, both appointed to their posts by Democrats.

“I have long been critical of the long list of harmful deregulatory actions taken by the last administration’s appointees, and particularly their actions to roll back key Dodd-Frank reforms and other consumer protections,” said committee Chairwoman Maxine Waters, D-Calif. “I am … pleased that the Biden administration’s appointees are bringing a better approach to regulation that prioritizes consumers, and that regulators are starting to take steps to protect the financial stability of our system against climate risks and other threats.”

Democrats largely praised the new acting regulators’ policy decisions, while Republicans warned that moves to reverse Trump-appointee policies leave financial institutions without a clear road map.

“These positive steps forward are stuck in limbo, or worse, in danger of being scrapped altogether for political optics,” said Rep. Patrick McHenry, R-N.C., the top Republican on the panel. “This is not the right way to regulate. But I fear this is just the start of Democrats’ one-party-rule mentality in practice.”

The hearing highlighted partisan divisions over rulemakings leftover from the Trump administration, particularly policies that former Comptroller of the Currency Joseph Otting and former acting Comptroller Brian Brooks attempted to finalize. The event was also a display of Republicans efforts to push back against the Biden administration’s climate-risk mitigation efforts.

Lawmakers from both parties also raised concerns about how industrial loan company, or ILC, charters could risk mixing banking with commerce.

Here are three takeaways from regulators visit to Capitol Hill:

Lawmakers press OCC over rules in limbo

Lawmakers bemoaned the Biden administration’s failure to nominate a permanent comptroller of the currency. Earlier this month, Treasury Secretary Janet Yellen appointed Hsu as an acting head of the agency, as the Biden administration has stalled in naming a permanent comptroller. Hsu replaces Blake Paulson, who served in an acting capacity after Brian Brooks, another acting director, resigned in January.

“I think it’s safe to say that many of us expected to hear from the confirmed comptroller of the currency at this point,” said McHenry. “There’s been a lot of speculation about who President Biden’s nominee will be. He seems to be taking a Goldilocks approach here. First, Michael Barr was deemed too conservative, if you can call someone who helped write Dodd-Frank conservative. Then Mehrsa Baradaran, who advocates for socialized banking and opposes innovation. She seems to appease far-left progressives, but still, no formal nomination.”

Hsu faced a number of questions from lawmakers about the status of Trump administration rulemakings that the OCC is currently reviewing.

Republicans questioned Hsu about how the OCC under his leadership was going to address a rule that would make it easier for national banks to sell loans to third parties, known as the “true lender” rule. The Senate voted last week to reverse the OCC’s policy, after former acting Comptroller Blake Paulson urged Congress to keep the rule intact.

“The OCC finalized a rule, the true lender rule, and then a few weeks ago, your predecessor came out in support of that rule,” said Rep. Bill Huizenga, R-Mich. “And then shortly after your appointment, the Senate and White House opposed the rule. Is the change in position suggesting that this is a political decision or is the decision based on data and what’s right for consumers?”

Hsu admitted that he was planning to review the “true lender” rule, but that the agency is waiting to see how the House address the Senate-passed Congressional Review Act resolution to reverse the rule.

“We were going to review it, but once the Senate voted to repeal it under [the review act], we basically stepped back and said it is now under congressional deliberation, so we are just monitoring Congress’ deliberations on that matter,” Hsu said.

Republicans also hammered Hsu on the agency’s halt of a rule that would prohibit banks from discriminating against legal businesses that could be politically disfavored.

“It’s a philosophically inconsistent position to say that you are for equality in banking when you will not enforce a ‘fair access’ rule and you will not prevent discrimination against whole categories of customers for their politically incorrect status,” said Rep. Andy Barr, R-Ky.

Democrats, on the other hand, lauded the OCC’s announcement on Tuesday to halt its implementation of a revamp of the Community Reinvestment Act.

“It is good news yesterday the OCC announced it would reconsider the 2020 final rule, a rule that I believe would significantly weaken the CRA and leave our most vulnerable communities behind,” said Rep. Carolyn Maloney, D-N.Y.

The Federal Reserve, which also has oversight authority over the CRA, did not join the OCC and FDIC in finalizing the new CRA revamp. Hsu signaled that the OCC could propose a joint CRA revamp with the FDIC and Fed.

“When the agencies act together, the effects are stronger and more sustained,” Hsu said.

Republicans discourage climate risk mitigation efforts

As the members of the Biden administration attempt to use the nation’s regulatory apparatus to force corporations to take stock of activities that could be contributing to global warming, Republicans warned financial regulators that environmental policy is outside of their jurisdiction.

“How will an increased focus on climate change impact the Fed’s ability to fulfill its dual mandate, mandate of price stability and maximum employment,” Rep. Ann Wagner, R-Mo., asked Quarles.

Quarles said that financial regulators are still determining how to evaluate climate risk in financial supervision.

“I wouldn’t say there has been an increased focus on climate change,” Quarles said. “There has been an increased focus outside of the Fed on how we are looking at climate change as one of the many potential risks to the financial system that we evaluate.”

Rep. Barr criticized advocates who suggest using banking regulations to address climate change.

“Proponents suggest that regulators should use bank capital requirements to make the financial system more resilient and force the transition away from fossil energy,” Barr said. “The problem is that will do nothing to change the demand side of the equation. … It will just disrupt the supply side by shifting financing for those industries to less regulated nonbank lenders, drive up the price of capital and in turn raise the price for consumers.”

Quarles said that financial regulators should be focused on ensuring the financial system can handle risks.

“Our role is to ensure that the financial system is resilient to risks — those logically could include climate risks and so we need to analyze how that could happen,” Quarles said. “But it is not our job to use the financial system as a tool of broader climate policy.”

Bipartisan concerns emerge over ILC charters

Lawmakers from both parties raised concerns that the FDIC’s policy of granting industrial loan company charters is potential increasing the risk of mixing banking with commerce. The agency approved a final rule in December establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs.

“I think many member of this committee have concerns with the comingling of banking and commerce that ILCs represent,” said Rep. Blaine Luetkemeyer, R-Mo.

McWilliams defended the FDIC’s new rule, saying that it imposes tough requirements on parent companies of ILCs.

“We are confident that we can adequately supervise ILCs,” McWilliams said. “We have imposed heightened expectations. As warranted, we have higher capital levels than traditional banks on these ILCs. We have capital and liquidity maintenance agreements. And we have agreements that require the parent company to support the ILC in times of distress.”

Some lawmakers have suggested passing legislation to close a loophole that allows commercial firms to own ILCs. Rep. Brad Sherman, D-Calif., said that the FDIC “should be looking at a moratorium on new ILC charters to give Congress time to look more closely at the ILC issue.”

McWilliams said she would not oppose a moratorium on ILC charters from Congress.

“I am open to whatever Congress tells us to do,” McWilliams said. “I don’t have feelings about [ILCs]. I don’t think they’re great, I don’t think they’re bad. I just look at the statutory requirements. … Should you give us the mandate to put a moratorium in place, we will do so. Should you give us a mandate to do something different with the ILCs, we will absolutely do so.”

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