Minutes of the Financial Stability Oversight Council

September 4, 2019

PRESENT: 

Steven T. Mnuchin, Secretary of the Treasury and Chairperson of the Financial Stability 

Oversight Council (Council)

Jerome H. Powell, Chairman, Board of Governors of the Federal Reserve System (Federal 

Reserve) 

Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation (FDIC) 

Jay Clayton, Chairman, Securities and Exchange Commission (SEC) (by telephone)

Heath P. Tarbert, Chairman, Commodity Futures Trading Commission (CFTC)

Kathleen Kraninger, Director, Consumer Financial Protection Bureau (CFPB)

Mark Calabria, Director, Federal Housing Finance Agency (FHFA) (by telephone)

Joseph Otting, Comptroller of the Currency, Office of the Comptroller of the Currency (OCC)

Rodney Hood, Chairman, National Credit Union Administration (NCUA)

Thomas E. Workman, Independent Member with Insurance Expertise 

Dino Falaschetti, Director, Office of Financial Research (OFR), Department of the Treasury

(non-voting member)

Steven Seitz, Director, Federal Insurance Office (FIO), Department of the Treasury (non-voting 

member) (by telephone)

Charles G. Cooper, Commissioner, Texas Department of Banking (non-voting member)

Eric Cioppa, Superintendent, Maine Bureau of Insurance (non-voting member)

Melanie Lubin, Securities Commissioner, Maryland Office of the Attorney General, Securities 

Division (non-voting member)

GUESTS: 

Department of the Treasury (Treasury)

Justin Muzinich, Deputy Secretary of the Treasury

Brent McIntosh, General Counsel

Bimal Patel, Assistant Secretary for Financial Institutions

Eric Froman, Assistant General Counsel (Banking and Finance) 

Kipp Kranbuhl, Principal Deputy Assistant Secretary for Financial Markets 

Howard Adler, Deputy Assistant Secretary for the Council

Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight Council

Board of Governors of the Federal Reserve System

Randal Quarles, Vice Chairman for Supervision (by telephone)

Andreas Lehnert, Director, Division of Financial Stability

Federal Deposit Insurance Corporation

Travis Hill, Senior Advisor to the Chairman
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Securities and Exchange Commission

Jeffrey Dinwoodie, Senior Counsel and Policy Advisor for Market and Activities-Based Risk

Commodity Futures Trading Commission

Jaime Klima, Chief of Staff

Consumer Financial Protection Bureau

Christopher Mufarrige, Senior Advisor

Federal Housing Finance Agency

Sandra Thompson, Deputy Director, Division of Housing Mission and Goals

Comptroller of the Currency

Morris Morgan, Senior Deputy Comptroller and Chief Operating Officer

National Credit Union Administration

Andrew Leventis, Chief Economist

Federal Reserve Bank of New York

John Williams, President and Chief Executive Officer (by telephone)

Office of Financial Research

Stacey Schreft, Deputy Director for Research and Analysis 

Federal Insurance Office

Kevin Meehan, Senior Insurance Regulatory Policy Analyst (by telephone)

Texas Department of Banking

Michael Townsley, Policy Counsel, Conference of State Bank Supervisors (CSBS)

Maine Bureau of Insurance

Mark Sagat, Assistant Director, Financial Policy and Legislation, National Association of 

Insurance Commissioners

Maryland Office of the Attorney General, Securities Division

Christopher Staley, Counsel, North American Securities Administrators Association

PRESENTERS:

Proposed Interpretive Guidance on Nonbank Financial Company Designations

• Howard Adler, Deputy Assistant Secretary for the Council, Treasury

• Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight 

Council, Treasury (available for questions) 

• Mark Schlegel, Attorney-Advisor, Treasury (available for questions)
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2019 Annual Report

• Stephen Ledbetter, Director of Policy, Office of the Financial Stability Oversight 

Council, Treasury

• James Bohn, Senior Professional, Federal Reserve Bank of Boston

Nonbank Mortgage Origination and Servicing

• Chuck Cross, Senior Vice President, Nonbank Supervision and Enforcement, CSBS

• Karen Pence, Deputy Associate Director, Division of Research and Statistics, Federal 

Reserve 

• Kevin Silva, Manager, Enterprise Risk Metrics, FHFA

• Kevin Byers, Senior Director, Nonbank Supervision and Enforcement, CSBS (available 

for questions)

• Margaret Cai, Senior Financial Analyst, Office of Financial Analysis, Modeling, and 

Simulations, Division of Housing Mission and Goals, FHFA (available for questions)

LIBOR and Alternative Reference Rates

• David Bowman, Senior Associate Director, Division of Monetary Affairs, Federal 

Reserve 

• Peter Phelan, Deputy Assistant Secretary for Capital Markets, Treasury

• Sayee Srinivasan, Deputy Director, Risk Surveillance, Division of Clearing and Risk, 

CFTC

• Chloe Cabot, Policy Advisor, Office of Financial Markets, Treasury (available for 

questions)

Fiscal Year 2020 Council Budget

• Samantha MacInnis, Director of Operations, Office of the Financial Stability Oversight 

Council, Treasury (available for questions)

Executive Session

The Chairperson called the executive session of the meeting of the Council to order at 

approximately 3:32 P.M.

The Chairperson began by welcoming Howard Adler to his first meeting as Deputy Assistant 

Secretary for the Council at Treasury. The Chairperson then outlined the meeting agenda, which 

had previously been distributed to the members together with other materials. The agenda for 

the executive session of the meeting included (1) the Council’s proposed interpretive guidance 

on nonbank financial company designations; (2) the Council’s 2019 annual report; (3) nonbank 

mortgage origination and servicing; (4) the London Interbank Offered Rate (LIBOR) and 

alternative reference rates; (5) a vote on the Council’s fiscal year 2020 budget; and (6) a vote on 

the minutes of the Council’s meeting on May 30, 2019.

1. Proposed Interpretive Guidance on Nonbank Financial Company Designations

The Chairperson then introduced the first agenda item, a presentation on the Council’s proposed 

interpretive guidance on nonbank financial company designations under section 113 of the 
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Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Council 

approved the proposed interpretive guidance on March 6, 2019. The Chairperson turned to 

Howard Adler, Deputy Assistant Secretary for the Council at Treasury, for the presentation.

Mr. Adler noted that the public comment period for the proposed interpretive guidance had 

closed on May 13, 2019. He briefly summarized the public comment letters received in response

to the proposal. Mr. Adler noted that commenters expressed views on how to implement the 

activities-based approach set forth in the proposed interpretive guidance, the Council’s proposed 

procedures related to transparency and engagement, the appropriate role of primary regulators in 

Council analyses, and other topics. Mr. Adler highlighted potential changes to the proposed 

interpretive guidance in response to the public comments, and provided an update on the 

anticipated timing for completing and issuing the final interpretive guidance.

2. 2019 Annual Report

The Chairperson then introduced the next agenda item, the Council’s 2019 annual report. He 

introduced Stephen Ledbetter, Director of Policy in the Office of the Financial Stability 

Oversight Council at Treasury, and James Bohn, Senior Professional at the Federal Reserve 

Bank of Boston.

Mr. Ledbetter provided an overview of the organization of the annual report. He also described 

the process for developing the report, including discussions and collaboration among Council 

members and member agencies. Mr. Bohn then highlighted certain topics that the report may 

address. Mr. Ledbetter provided an update regarding interagency staff deliberations about the 

report.

Council members then asked questions and had a discussion about certain topics that may be 

included in the report.

3. Nonbank Mortgage Origination and Servicing

The Chairperson then introduced the next agenda item, nonbank mortgage origination and 

servicing. The Chairperson noted that nonbanks have significantly increased their market share 

in mortgage originations and servicing since the financial crisis, and that they generally originate 

mortgages with higher-risk characteristics than banks. He then introduced Kevin Silva, Manager 

of Enterprise Risk Metrics at the FHFA; Karen Pence, Deputy Associate Director of the Division 

of Research and Statistics at the Federal Reserve; and Chuck Cross, Senior Vice President for

Nonbank Supervision and Enforcement at the CSBS, for the presentation.

Mr. Silva stated that the presentation would address nonbank mortgage company business 

models, industry trends, fragilities, and regulatory frameworks. He described business models of 

nonbank mortgage originators and servicers. He noted that nonbank business models can vary 

significantly, including originator/servicers (which originate mortgages and retain servicing), 

originators (which originate mortgages but do not retain the servicing), mortgage servicing right 

(MSR) investors (which purchase MSRs but outsource the servicing to a subservicer), and 

subservicers (which perform servicing as third-party vendors). He then described the growth of 
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nonbanks’ market share in mortgage origination and servicing since the financial crisis. He 

stated that nonbanks originated approximately half of all mortgages in 2019, and that 

approximately 45 percent of outstanding mortgages are serviced by nonbanks. He also described 

the proportion of mortgages originated or serviced by nonbanks that are held by Fannie Mae or 

Freddie Mac or that collateralize mortgage-backed securities guaranteed by Ginnie Mae. He also 

described several trends in the nonbank mortgage origination and servicing industry, and noted 

that nonbanks generally originate riskier mortgages than banks, as measured by borrowers’ debtto-income ratios, loan-to-value ratios, and credit scores. 

Ms. Pence then described certain reasons for the increase in nonbank mortgage origination and 

servicing. She explained banks’ apparent reluctance to extend mortgage credit to riskier 

borrowers, for reasons including the expense of servicing loans in default, and legal and 

reputational risks of delinquencies and foreclosures. Ms. Pence also identified other potential 

reasons for the increased nonbank market share, including differences in overhead costs of 

mortgage origination; capital treatment of MSRs; and the deployment by nonbanks of financial 

technology. Ms. Pence then highlighted potential risks related to nonbank mortgage originators 

and servicers, including through exposures of counterparties (including Fannie Mae, Freddie 

Mac, Ginnie Mae, and banks) and contagion risk from many nonbanks and the resulting potential 

for dislocation in the housing and mortgage market during periods of stress. She then described 

fragilities in nonbank business models, including a reliance on short-term funding and an 

obligation to continue to make payments to holders of a mortgage-backed security when a 

borrower does not make a payment on a mortgage underlying the security. 

Mr. Cross then explained additional fragilities of nonbanks, stating that these firms generally 

have few resources to absorb shocks. He cited nonbanks’ debt-to-equity ratios and liquidity. He 

then described the regulatory framework applicable to nonbank mortgage originators and 

servicers. He noted that the regulatory framework for these nonbanks is fragmented among 

federal and state regulators. He also noted questions regarding the adequacy of existing 

requirements for addressing potential risks. He explained that policymakers have taken steps to 

begin to address these concerns, and he highlighted actions taken by the FHFA, Ginnie Mae, and 

the CSBS to evaluate or enhance existing requirements related to capital, liquidity, and 

counterparty risk.

Council members asked questions and had a discussion, including regarding the reasons banks 

do not more extensively underwrite mortgages to borrowers with lower credit scores; mortgage 

servicing requirements imposed by Fannie Mae, Freddie Mac, and Ginnie Mae; default levels 

experienced during the financial crisis; nonbank mortgage servicers’ levels of capital and 

liquidity; risks to banks from their exposures to nonbank mortgage originators and servicers; 

potential regulatory enhancements; challenges in the bankruptcy of a failed nonbank mortgage 

servicer; potential market impacts from the failure of multiple nonbank mortgage servicers; and 

regulators’ data-sharing efforts.

4. LIBOR and Alternative Reference Rates

The Chairperson then introduced the next agenda item, LIBOR and alternative reference rates. 

He introduced Peter Phelan, Deputy Assistant Secretary for Capital Markets at Treasury; David 
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Bowman, Senior Associate Director of the Division of Monetary Affairs at the Federal Reserve;

and Sayee Srinivasan, Deputy Director of Risk Surveillance in the Division of Clearing and Risk 

at the CFTC.

Mr. Phelan stated that the presentation would address the progress that the Alternative Reference 

Rates Committee (ARRC), the official sector, and markets have made in the transition from 

LIBOR to alternative reference rates. He then described progress in implementing this 

transition, including the identification of the Secured Overnight Financing Rate (SOFR) as the 

ARRC’s preferred alternative reference rate; the publication of contractual fallback language for 

certain types of financial instruments; the publication of an ARRC white paper on SOFR-linked 

adjustable-rate mortgages in July 2019; and the publication in August 2019 by the International 

Swaps and Derivatives Association (ISDA) of preliminary results of its consultation related to 

pre-cessation issues for LIBOR.

Mr. Phelan then described aggregate exposures to U.S. dollar LIBOR by asset class. The 

exposures included $190 trillion notional amount of derivatives, $3.4 trillion of business loans, 

$1.8 trillion of bonds, $1.8 trillion of securitizations, and $1.3 trillion of consumer loans. Mr. 

Phelan stated that while the largest exposure is in derivatives, their transition to an alternative 

rate would be facilitated by changes to ISDA protocols. He noted that the ISDA protocol would 

allow for the replacement of LIBOR in uncleared derivatives when both parties sign the new 

protocol and that adoption of this protocol would be vital to the transition. He stated that while 

the notional amount outstanding of cash products appears small in comparison to that of 

derivatives, they pose a greater challenge for the transition, for example due to weak contractual

fallback provisions that do not provide a feasible path to an alternative rate. He also noted that 

consumer products entail unique challenges in the transition, due to legal and practical 

difficulties.

Mr. Bowman then described market activity. He stated that activity in SOFR futures markets has 

grown and that SOFR swaps activity has also begun to increase, but that SOFR derivatives 

volumes were still small compared to derivatives linked to the federal funds rate or LIBOR. He 

noted that the ISDA protocol allowing for the replacement of LIBOR should encourage SOFR 

liquidity by linking longer-dated LIBOR swaps and SOFR swaps. He cited issuances of SOFRlinked debt, including by the Federal Home Loan Banks, and stated that Fannie Mae and Freddie 

Mac were developing the capacity to accept SOFR adjustable-rate mortgages. He noted, 

however, that many nonfinancial companies were not yet paying attention to the transition. He 

also noted that most cash products continue to use LIBOR and stated that finding a solution for 

legacy debt and securitization products will be difficult. He stated that the ARRC is considering 

potential legislative solutions.

Mr. Phelan then described government agencies’ areas of focus and progress. He noted that in 

April 2019, the ARRC had submitted a request to Treasury and the Internal Revenue Service 

(IRS) for guidance on topics related to the transition of LIBOR-linked contracts to SOFR. Mr. 

Phelan stated that guidance from Treasury and the IRS on this issue would be forthcoming. He 

also noted that Treasury was evaluating the possibility of issuing a Treasury floating-rate note 

linked to SOFR. He then stated that Treasury was engaging in outreach with stakeholders as 

attention to the LIBOR transition increases.
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Mr. Srinivasan explained that authorities have been working with the ARRC on various rules 

under Title VII of the Dodd-Frank Act to facilitate the transition away from LIBOR. He stated 

that there is a coordinated effort with the Federal Reserve, the FDIC, and the OCC to address 

issues related to margin for uncleared swaps. He noted that the CFTC was also coordinating 

internationally, including at the Financial Stability Board. He stated that certain derivatives 

clearinghouses were important to the ARRC’s transition plans and that the CFTC was working to 

support their efforts. He noted that the CFTC was continuing to work with the ARRC on 

providing market participants with regulatory relief related to other derivatives-related 

requirements. 

Mr. Bowman then stated that the Federal Reserve had been discussing potential developments 

related to LIBOR with the U.K. Financial Conduct Authority (FCA) and the CFTC. He noted 

the potential that the FCA might judge LIBOR to be non-representative soon after year-end 2021 

and that LIBOR would then become unavailable for certain new financial products for European 

Union–supervised entities. He stated that the Federal Reserve was working with its supervised 

entities and was monitoring their preparations for the transition. He explained that the Federal 

Reserve would increase its supervisory expectations over time. He stated that the Federal 

Reserve was focused on ensuring a smooth transition away from LIBOR. He noted that a 

number of Council member agencies would be issuing proposed guidance regarding margin 

relief for legacy swaps, which would remove impediments to signing the ISDA protocol or 

moving away from LIBOR. Finally, he stated that authorities must continue to encourage 

supervised entities to take action sooner rather than later. 

Mr. Phelan concluded by identifying certain issues for the Council’s consideration, including 

potential additional steps for coordination of regulatory and supervisory actions to encourage a 

timely transition away from LIBOR, and potential further engagement among Council members 

and member agencies on this issue.

Members of the Council then asked questions and had a discussion, including regarding the 

potential implications if the FCA finds that LIBOR is non-representative in 2022; the transition 

away from LIBOR products in the cash market; and the importance of consumer education on 

this topic.

5. Fiscal Year 2020 Council Budget

The Chairperson then introduced the next agenda item, the Council’s fiscal year 2020 budget. 

The Chairperson presented to the Council the following resolution approving the Council’s 

budget for fiscal year 2020.

BE IT RESOLVED, by the Financial Stability Oversight Council (the “Council”), that the 

Council’s budget for fiscal year 2020 attached hereto is hereby approved.

The Chairperson asked for a motion to approve the resolution, which was made and seconded. 

The Council approved the resolution by unanimous vote.
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6. Other Business

The Chairperson then noted recent developments related to the end of the membership of the 

United Kingdom (U.K.) in the European Union (Brexit). He described European governments’ 

preparations and ongoing discussions regarding Brexit.

7. Resolution Approving the Minutes of the Meeting Held on May 30, 2019

BE IT RESOLVED, by the Financial Stability Oversight Council (the “Council”), that the 

minutes attached hereto of the meeting held on May 30, 2019 of the Council are hereby 

approved.

The Chairperson asked for a motion to approve the resolution, which was made and seconded. 

The Council approved the resolution by unanimous vote.

The Chairperson adjourned the meeting at approximately 4:45 P.M.