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FEDERAL DEPOSIT INSURANCE CORPORATION

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ADVISORY COMMITTEE ON COMMUNITY BANKING

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MEETING

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WEDNESDAY

JULY 20, 2015

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The Advisory Committee met in the Board 

Room of the FDIC Headquarters, 550 17th Street, 

N.W., Washington, D.C., at 9:05 a.m., Martin J. 

Gruenberg, Chairman, presiding.

PRESENT

MARTIN J. GRUENBERG, Chairman, FDIC

CYNTHIA L. BLANKENSHIP, Bank of the West

PEDRO A. BRYANT, Metro Bank

LEONEL CASTILLO, American Bank of Commerce

CHRISTOPHER W. EMMONS, Gorham Savings Bank

JANE HASKIN, First Bethany & Trust

JAMES LUNDY, Western Alliance Bank

MARY ANN SCULLY, Howard Bank

DAVID SELESKI, Stonegate Bank

GWEN M. THOMPSON, Clover Community Bank

JOHN M. TOLOMER, The Westchester Bank

DEREK B. WILLIAMS, Century Bank & Trust
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PANELISTS PRESENT

BARBARA RYAN, Chief of Staff, FDIC

RUTH R. AMBERG, Assistant General Counsel, Legal 

Division, FDIC

FRANK M. BLANCHARD, Economic Analyst, Division 

of Insurance and Research, FDIC

LUKE H. BROWN, Associate Director, Division of 

Depositor and Consumer Protection, FDIC

DOREEN R. EBERLEY, Director, Division of Risk 

Management Supervision, FDIC

KATIE L. KRAMER, Economic Assistant, Division of 

Insurance and Research, FDIC

GREG A. LYONS, Student Trainee, Division of 

Depositor and Consumer Protection, FDIC

ROBERTA K. McINERNEY, Deputy General Counsel, 

Legal Division, FDIC

JONATHAN N. MILLER, Deputy Director, Division of 

Depositor and Consumer Protection

RAE-ANN MILLER, Associate Director, Division of 

Risk Management Supervision

MICHAEL S. McCOY, Student Trainee, Division of 

Risk Management Supervision, FDIC

MARK S. MOYLAN, Deputy Director, Division of 

Risk Management Supervision, FDIC

FAYE MURPHY, Section Chief, Division of 

Depositor and Consumer Protection, FDIC

MARK PEARCE, Director, Division of Depositor and 

Consumer Protection, FDIC

STEPHEN H. SIMPSON, Senior Financial Analyst, 

Division of Insurance and Research, FDIC

ROBERT F. STORCH, Chief Accountant, Division of 

Risk Management Supervision, FDIC

JAMES C. WATKINS, Senior Deputy Director, 

Division of Risk Management Supervision, 

FDIC
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C-O-N-T-E-N-T-S

Introductory Remarks .......................... 4

CBI Update and Follow Up from Community ...... 10

Banking Conference

Millennials' Perspectives on Banking ......... 30

Update on the FDIC's Regulatory Review ....... 90

under the Economic Growth and Regulatory

Paperwork Reduction Act (EGRPRA)

Update on Consumer Compliance Issues ........ 103

Fintech Discussion .......................... 135

Recent Supervisory Developments ............. 181

Closing Remarks ............................. 222
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1 P-R-O-C-E-E-D-I-N-G-S

2 (9:05 a.m.)

3 CHAIRMAN GRUENBERG: Welcome, 

4 everybody. I'd like to welcome you all to this 

5 meeting of our advisory committee. 

6 Before I walk through the agenda, I 

7 wanted to start by acknowledging and thanking a 

8 number of our advisory committee members who, 

9 sadly, are here for their last meeting because 

10 their terms on the advisory committee are coming 

11 to an end.

12 We established two-year terms, but we 

13 really didn't want to let people go, if we could, 

14 so we actually extended them and each of the people 

15 who are now leaving actually had agreed to serve 

16 on extensions of their two-year terms. As a 

17 general rule, we try to rotate membership to give 

18 as many bankers as possible an opportunity to serve 

19 on the committee.

20 If I may, I'd like to just acknowledge 

21 at the outset, the following committee members for 

22 whom this will be their last meeting: Cynthia 
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1 Blankenship, Vice Chairman and CFO of Bank of the 

2 West, Grapevine, Texas; Pedro Bryant, President 

3 and CEO, Metro Bank of Louisville, Kentucky; Lionel 

4 Castillo, President and CEO of American Bank of 

5 Commerce, Provo, Utah; Jane Haskin, President and 

6 CEO, First Bethany Bank Corp, Bethany, Oklahoma; 

7 Mark Hesser, President, Pinnacle Bank, Lincoln --

8 excuse me -- Lincoln, Nebraska; James Lundy, Chief 

9 Executive Officer, Western Alliance Bank, Phoenix, 

10 Arizona; David Seleski, President, CEO, and 

11 Director of Stonegate Bank in Fort Lauderdale, 

12 Florida; and Derek Williams, President and CEO of 

13 First People's Bank, Pine Mountain, Georgia.

14 Let me just express my personal 

15 gratitude. It's been a pleasure getting to know 

16 each of you. I think each of you has really made 

17 terrific contributions to this committee and 

18 genuinely enhanced the FDIC's appreciation of 

19 the -- I guess of the challenges and opportunities 

20 facing community banks. 

21 We're grateful for the 

22 opportunity -- that we've had the opportunity of 
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1 getting to know you, and we thank you very much for 

2 your service to this agency.

3 PARTICIPANT: Thank you.

4 PARTICIPANT: It's been a great 

5 experience.

6 CHAIRMAN GRUENBERG: Let me, if I may, 

7 give you a brief overview of the agenda for today's 

8 meeting, which is pretty full, and I think will be 

9 of interest. 

10 The first session today will provide an 

11 update on the FDIC's Community Banking Initiative 

12 and a report on some follow-up items from our 

13 community banking conference, which took place in 

14 April of this year.

15 Second, you may recall that at our 

16 community banking conference in April, and also at 

17 the most recent meeting of this committee, there 

18 was some interest expressed in seeing if we could 

19 get a better understanding of the perspectives of 

20 millennials on banking. So we've tried to round 

21 up a few --

22 (Laughter.)
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1 CHAIRMAN GRUENBERG: -- and asking 

2 about their banking needs, communication styles, 

3 and expectations, as well as how they use 

4 technology to conduct banking transactions. In 

5 addition, there was some interest in discussing the 

6 best ways for banks to recruit and retain employees 

7 from the millennial generation. 

8 As I indicated, we've asked a few of our 

9 millennial employees to make a presentation to the 

10 committee today. That will begin at 9:30. I 

11 think you'll find them interesting. I actually 

12 had the chance to meet with them and some of our 

13 senior executives. They have interesting and, I 

14 think, somewhat insightful things to say, so I'm 

15 looking forward to it. 

16 Following the millennial panel, we'll 

17 take a brief break. After the break, we'll provide 

18 the committee with an update of the FDIC's 

19 regulatory review being conducted with the other 

20 federal banking agencies, in accordance with the 

21 EGRPRA -- the so-called EGRPRA regulatory review. 

22 This process is nearing the end, and our staff will 
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1 inform the committee about some of the initiatives 

2 that are underway as a result of the review process. 

3 Then just before lunch, we'll cover 

4 some consumer compliance issues, including an 

5 interagency proposal being developed under the 

6 FFIEC to revise the existing Consumer Compliance 

7 Rating System to better reflect the current 

8 consumer compliance supervisory approaches.

9 After lunch, we're going to discuss 

10 some issues relating to financial technology. 

11 Senior staff will brief the committee on our 

12 efforts to better understand the system monitor 

13 intake activities, risks, and trends. We will 

14 greatly appreciate your input to help us formulate 

15 an appropriate strategy -- seems to be the current 

16 phrase, to respond to the opportunities and 

17 challenges presented by Fintech going forward. 

18 Our last issue today, we'll cover some 

19 recent supervisory developments, including recent 

20 updates to our IT examination procedures to provide 

21 a more efficient, risk-focused IT examination 

22 approach. In addition, senior staff from our 
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1 Division of Risk Management Supervision will 

2 provide the committee with an update in some recent 

3 developments with the Financial Accounting 

4 Standards Board, or FASB, primarily related to 

5 FASB's model for current expected credit loss. It's 

6 this thing called CECL.

7 Finally, senior staff will provide the 

8 committee with some information about the 

9 interagency proposal that was put out for comment 

10 last month on incentivized compensation 

11 arrangements and some recently issued Q&As on 

12 brokered deposits. 

13 I think we've tried to touch every hot 

14 button that we could come up with. I think it'll 

15 be an interesting day, and I look forward to the 

16 presentations. I'll turn it over to Barbara Ryan.

17 MS. RYAN: Thank you, Chairman 

18 Gruenberg, and good morning, everyone. As the 

19 Chairman indicated, we thought we would start off 

20 this morning by providing the committee with a 

21 quick update on our Community Banking Initiative, 

22 as well as some follow-up items from our community 
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1 banking conference in April. 

2 To provide us with those updates, we're 

3 going to now hear from Doreen Eberley, Director of 

4 the Division of Risk Management Supervision, and 

5 Mark Pearce, Director of our Division of Depositor 

6 and Consumer Protection. 

7 Doreen's going to go first, so I'll turn 

8 the program over to her.

9 MS. EBERLEY: Okay, thanks, Barbara. 

10 Good morning, everybody. I'm happy to give you an 

11 update this morning on the Community Banking 

12 Initiative and then some follow up activities that 

13 are coming out of the community banking conference 

14 last April and our discussion that followed that 

15 the next day.

16 Starting with our ongoing initiatives, 

17 Technical Assistance Videos, we issued the video 

18 on corporate governance just this week. It went 

19 out on Monday. We're working on taking a look at 

20 the Directors' College portfolio of videos and 

21 updating those and maybe adding some additional 

22 videos to the Directors' College portfolio. 
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1 Working with each of the regions to do that, as 

2 they're planning their next round of in-person 

3 sessions, and making sure that we've got a good 

4 capturing of the messages that are going out in each 

5 of the regions in the Directors' Colleges. 

6 We did update the interest rate risk 

7 Directors' College video recently, but that's 

8 really the only one that's been updated since the

9 original group was released a couple of years ago. 

10 We do want to get those reviewed and updated and 

11 added to as appropriate. 

12 Following up on the conference, you all 

13 received the Community Bank Resource Kit during the 

14 conference and liked it very much. We finished the 

15 printing of those. We had done one initial 

16 printing for the conference to be able to 

17 distribute copies to everybody there. 

18 The copying is done. We have copies 

19 for every financial institution we supervise. 

20 Over the course of the next several weeks, copies 

21 will be mailed to all the institutions we supervise 

22 with a cover letter from me and Mark highlighting 
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1 the materials inside. 

2 A couple of the items that we 

3 highlighted were the Supervisory Insights Special 

4 Edition, a Community Bank Director's Guide to 

5 Corporate Governance. It's a little small version 

6 of our SIJ that fits in the kit that really walks 

7 through what are the expectations for a board of 

8 directors in the world of corporate governance, in 

9 terms of determining the institution's risk 

10 profile, having that conversation with the 

11 examination team, addressing strategic planning 

12 based on the business and the community that the 

13 institution is serving, and the risk profile and 

14 risk appetite of the board of directors that's been 

15 stated.

16 What's the difference between rules and 

17 regulations, guidance, and best practices? How do 

18 those affect how the institution operates and 

19 interacts with the examiners? What to expect 

20 during the examination process in terms of 

21 corporate governance, and just some ongoing 

22 considerations.
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1 It refers back to the Pocket Guide for 

2 Directors, which we did update. It's got a new 

3 cover and a new look and new colors, but the content 

4 is the same. One thing that we really felt 

5 strongly about was that this was timeless, and that 

6 the duties and responsibilities of directors 

7 really have not changed since we first issued this 

8 in the '80s. It's got a new look, but not new 

9 content. 

10 A couple of the other items that we 

11 highlighted in our letter that will go out are the 

12 technical assistance pamphlet for managing 

13 consumer compliance responsibilities, all sorts of 

14 pamphlets covering our Technical Assistance Video 

15 Program, the Directors' Resource Center, and the 

16 materials that are available on the Directors' 

17 Resource Center to help institutions, lots of 

18 material on cybersecurity, including some 

19 pamphlets that you can reprint and send to your 

20 customers. There's a pamphlet designed for 

21 consumer customers, and one for business 

22 customers, to help them increase their 
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1 cybersecurity savvy and help protect themselves 

2 and your institution. 

3 Of course, we've updated Cyber 

4 Challenge. The updated version has the flash 

5 cards for all seven video vignettes, plus a 

6 diskette with the video vignettes on it for those 

7 institutions that don't allow access to YouTube in 

8 the institution. They can also be downloaded off 

9 of FDICconnect. 

10 Then we've got a couple of other 

11 reprints of Supervisory Insights that we think are 

12 important and timely ones, even though they've been 

13 out for a while. One is Managing Interest Rate 

14 Risk, and the other is The Risk Management 

15 Examination in Your Community Bank. So what to 

16 expect through the examination process, how 

17 communication should work, and how we invite board 

18 and management to participate with the examiners 

19 through the examination and conversations.

20 Those will be -- you'll start seeing 

21 them over the course of the next few weeks. It will 

22 probably take three or four weeks to get all the 
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1 mailings out. We've got our Division of 

2 Administration handling that for us. You'll start 

3 to see those arriving in the mail soon. 

4 We talked a lot at the community banking 

5 conference about de novos and the steps that we want 

6 to take to be helpful and supportive of the 

7 formation of de novo institutions. One of the 

8 items we talked about was hosting some roundtable 

9 meetings with organizing groups that might be 

10 interested, the consultants that work with those 

11 groups in that area, and hosting a few of those 

12 around the country. 

13 We're starting this year with three 

14 regions: San Francisco, New York, and Atlanta. 

15 San Francisco will kick us off on September 28. 

16 We're deep in the planning for that session. I did 

17 want to recognize and thank John Tolomer for his 

18 idea that as part of these sessions, we have a 

19 panel. 

20 Rather than just having regulators 

21 talking about what's the process and what are the 

22 best ways to approach it, let's have a panel of 
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1 successful de novo bankers talk about their 

2 experiences; what worked, what are the lessons they 

3 learned along the way that they would like to share 

4 with others? John has graciously agreed to join 

5 us at the first session in San Francisco, as well 

6 as the session in New York. 

7 We're very much looking forward to 

8 that, think it's going to be a really good day. The 

9 agenda's shaping up nicely, and we'll be looking 

10 forward to reporting out on that at the next 

11 meeting. We'll probably have two under our belt 

12 by that time. We should have both San Francisco 

13 and New York completed by the next meeting. 

14 We're working on our handbook for 

15 deposit insurance, which will be available later 

16 this year. In the meantime, we may be having a 

17 shorter article in our next version of Supervisory 

18 Insights talking about the process and really 

19 outlining it. So kind of an outline of what to 

20 expect in the broader handbook. 

21 Then I'd like to mention, also, as a 

22 subset of community banks, mutual institutions. 
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1 We do maintain a special page on our webpage, 

2 fdic.gov, for mutual institutions. Every other 

3 year, we host a mutual bank conference jointly with 

4 the OCC and the Federal Reserve. The next 

5 conference is coming up week after next, August 

6 4th, and we look forward to having that event. 

7 The remaining items that really came 

8 out of our work streams coming out of the community 

9 bank conference related to looking at schools that 

10 are offering banking degrees and finding a way to 

11 facilitate conversation between those schools and 

12 bankers and state banking associations about how 

13 they could work together.

14 Just bringing together the parties, I 

15 think, will be our role. We've identified a number 

16 of institutions that actually do offer, at both an 

17 undergraduate and a graduate level -- some not 

18 both, but we've got lists of institutions that do 

19 both that we've been able to identify -- that we 

20 think we can bring together in a central location 

21 to have a conversation about what they're doing, 

22 how they interest folks in banking careers, and how 
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1 you may be able to partner with them to help find 

2 employees and look for the next generation of bank 

3 officers and employees. 

4 We're continuing to do work on 

5 technology service providers. We certainly heard 

6 the discussion loud and clear. That's something 

7 we've been working on the interagency basis. I 

8 don't have anything ready for prime time just yet, 

9 but do want to emphasize to you that we are actively 

10 working on ways that we can ensure that 

11 institutions are able to partner with their 

12 technology service providers in an equal way.

13 Our guidance applies already to both 

14 technology service providers and financial 

15 institutions that they service, or maybe vice 

16 versa, the institutions that they service and the 

17 technology service providers themselves that are 

18 providing the services. We are continuing to 

19 explore ways that we can help with that 

20 relationship and make sure that institutions are 

21 well positioned to do the due diligence that they 

22 need to do and to manage those relationships, and 
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1 particularly hearing the concerns that we heard on 

2 cybersecurity and liabilities and the issues that 

3 were raised during the conference. That work is 

4 ongoing. 

5 I would point out -- the Chairman 

6 already mentioned it -- but the new IT examination 

7 program, InTREx, our Information Technology Risk 

8 Examination Program is what InTREx stands for. We 

9 love our acronyms.

10 At any rate, that was one way that we 

11 tried to make -- as we worked through this process, 

12 how could we make the examination work program more 

13 transparent to institutions, and how could you 

14 better understand any concerns that we have 

15 relative to the rating system and relative to the 

16 components of that rating system. 

17 The work program has been completely 

18 redesigned. It aligns with the rating system. 

19 We're going to start disclosing ratings -- so not 

20 to steal a little bit of Mark's thunder, but 

21 disclosing the component ratings for the rating 

22 system, as opposed to just the composite, to help 
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1 with the awareness. It's very much like when we 

2 first started disclosing component ratings in the 

3 panels. Some of you will remember that. I do. 

4 Before that, you had to kind of guess 

5 where we were coming from. We want to be very 

6 clear, very transparent. We think that's helpful 

7 in any relationship, but certainly in 

8 understanding the risks that we're trying to talk 

9 about. That should be beneficial.

10 Then finally, we're conducting some 

11 research -- not too terribly sure that we'll have 

12 anything coming out of this, but it was a very 

13 interesting conversation at the conference about 

14 the pressure that institutions felt to provide 

15 liquidity to shareholders and to really be able to 

16 provide some liquidity in their share base and the 

17 different ways that we heard institutions going 

18 about that.

19 We've started some research in that 

20 regard, taking a look at that. At the very least, 

21 I think we'll be able to share our research. There 

22 may not be any answers or aha moments coming out 
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1 of it, but we can at least share what we're seeing. 

2 Thought that was a very interesting thread to kind 

3 of keep pulling on and taking a look at that came 

4 out of the conference. So that's the work from the 

5 RMS side of the house.

6 MR. PEARCE: Great, so thanks. I'll 

7 pick up with just a couple of things from the 

8 consumer protection/DCP side. One of the things 

9 you'll learn about putting up a series of Technical 

10 Assistance Videos is then you have to really pay 

11 attention when they need to be updated. 

12 Recently, we updated our Technical 

13 Assistance Video related to flood insurance. Later 

14 this summer, we're going to release an updated 

15 version of one of our mortgage videos, the ones 

16 related to the ability to repay rule and qualified 

17 mortgage. Folks may remember that in the last 

18 year, there's been a legislative change that 

19 affects the definition of what a rural institution 

20 may be, and so we're making sure we update that and 

21 any other changes that have been made since CFPB 

22 issued that rule a couple years ago. Those videos 
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1 will be refreshed and up to date. 

2 Speaking of the mortgage market, 

3 another way that we think we can help support 

4 community banks in the mortgage area is by 

5 providing some information about how community 

6 banks can access affordable mortgage programs. 

7 There's programs at the state level, through state 

8 housing finance agencies. Federal home loan banks 

9 have a series of programs that community banks can 

10 access, and there are also various federal 

11 programs, like USDA or FHA, et cetera. 

12 We've been working for some time now, 

13 first starting out by talking with community banks 

14 about how they've utilized those programs to really 

15 get a sense of how these are really playing out in 

16 the field and how banks are utilizing these 

17 programs to serve their customers, and then trying 

18 to do the research to put together a resource guide 

19 for community banks on affordable mortgage 

20 programs.

21 Hopefully, later this summer, we'll 

22 publish part one of that that will cover a whole 
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1 series of federal programs and have not only what 

2 are the opportunities for those programs, some 

3 potential risks or concerns for those programs, but 

4 also some stories from community bankers about how 

5 they've actually utilized these programs.

6 We really do think that will be helpful 

7 because a lot of community bankers, in particular, 

8 may just not understand the different programs out 

9 there. They all have their unique differences, so 

10 this provides sort of a basic, hopefully 

11 easy-to-understand guide to be a gateway into some 

12 of the program opportunities to serve customers. 

13 Then the last thing I wanted to mention 

14 is over the last couple years on the supervisory 

15 side, we have been looking at our examination 

16 process to try to improve the risk focusing. What 

17 that really has meant is looking, in particular, 

18 at the pre-exam planning process.

19 Over the last couple years, in 

20 particular, we have spent more time to make sure 

21 that by the time our examiners get on site at the 

22 bank, we have a good understanding of the bank, its 
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1 risk profile, complexity, its business model. 

2 That has made the on-site portion much more 

3 efficient. We've got a lot of positive feedback 

4 so far on that program. We decided this year to 

5 take another look at how well that's been working 

6 and ways that we can refine that. We've got a team 

7 of people internally that are taking a look at it. 

8 One of the areas that has come up from 

9 some community banks is the number of questions 

10 that we ask in the pre-exam planning process. That 

11 has been an issue of concern for some banks, just 

12 the amount of information and questions on the 

13 front end. It's really helpful when we get all 

14 that information on the front end because it makes 

15 the on-site exam go smoothly -- or more smoothly, 

16 but we want to take a look at the numbers of 

17 questions and are we asking for the information we 

18 really need to be effective in the examination 

19 program? Those are two or three things on the DCP 

20 side.

21 MS. RYAN: Thanks, Mark and Doreen. 

22 Any comments or questions?
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1 MEMBER TOLOMER: Yes, I had a chance to 

2 review or watch the video this morning on 

3 governance. I thought it was excellent. I think 

4 it would be helpful for de novos, but also, I think 

5 it would be a great reminder for current boards to 

6 look at goals and responsibilities. It was very 

7 well done.

8 MS. EBERLEY: Thank you.

9 MEMBER LUNDY: Just for a technical 

10 comment on the information updated on the flood 

11 insurance, and it might intersect with your key 

12 vendor relationships. 

13 We've had some issues with flood 

14 insurance violations, unintentionally most of them 

15 are, related to contents not being covered. 

16 Sometimes the contents -- we can all think of a 

17 situation where the contents of a building that you 

18 take a deed of trust on are perhaps critical to the 

19 underwriting. Many times they aren't. Almost 

20 all deeds of trust have boilerplate contents 

21 included. LaserPro, which I know does the long 

22 docs for many, many community banks, it would be 
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1 helpful if they had a module that you could click: 

2 we want contents, or we don't want contents.

3 Typically, contents are always 

4 included in the deed of trust. Often, they're 

5 totally unrelated to the safety and soundness of 

6 the loan. Often, flood insurance is taken on the 

7 building, but it's missed being taken on the 

8 contents. That's creating a situation of 

9 unintentional technical violations of the flood 

10 insurance policy. Sometimes you do need to cover 

11 the contents, and you ought to get flood insurance 

12 on it. But I think there's a little bit of a 

13 mismatch between practical reality with the 

14 complications of the flood maps, which change, and 

15 the documentation that many banks use. 

16 For larger transactions, where outside 

17 counsel prepare docs, very few transactional 

18 attorneys are aware of this kind of esoterica. The 

19 contents are always included in their documents. 

20 That, again, can give rise unintentionally. I 

21 don't know if you're aware of that, if it's come 

22 up through the process.
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1 MR. PEARCE: Certainly, contents 

2 coverage, I know, has been a pain point for a lot 

3 of bankers. The deeds of trust generally do 

4 include that. I think the suggestion you made is 

5 the first I've heard of a specific suggestion that 

6 might be helpful for bankers to navigate some of 

7 the challenges there. As Doreen mentioned in her 

8 comments, we are spending some time looking at 

9 technology service providers.

10 On the consumer compliance side, one of 

11 the recent rules that have come out related to the 

12 mortgage disclosure updates -- I know that a number 

13 of community banks have challenges with their 

14 vendors and being able to provide software to 

15 enable them to be effectively compliant with the 

16 law. That's an issue that we're working together 

17 on to try to make sure that technology service 

18 providers that are providing software or 

19 disclosure forms are doing so in a way that helps 

20 support community bank compliance, not just the 

21 technical compliance. Your point is really 

22 enabling a solution that would help them be able 
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1 to do that more effectively.

2 MEMBER BLANKENSHIP: I'd just like to 

3 say following our last meeting, I called and 

4 requested several of the Community Bank Resource 

5 Kits, which we received, and passed that out to our 

6 board of directors and told them that we would cover 

7 it probably in 60 days.

8 I had one of our directors call back and 

9 say this is great. This is really, really good 

10 because it was a summary, and they can understand 

11 it. So I applaud your idea. Honestly, I plan to 

12 pass more of the kits out to our branch presidents 

13 because it is just a good refresher. It puts in 

14 front of mind that risk factor. Every time they 

15 make a decision throughout the day, then it kind 

16 of brings it full circle, so thank you for that.

17 MEMBER BRYANT: I'd also like to 

18 comment. I'm on the Consumer Advisory Board. The 

19 topic of this came up at the last advisory board 

20 session as well.

21 MEMBER TOLOMER: Can I comment on the 

22 questionnaire? While it looks 
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1 intimidating -- because we're preparing for an 

2 audit exam in September -- we provided the 

3 information to the FDIC. We requested a phone 

4 conversation just to make sure there was clarity 

5 on all the points. 

6 It's comprehensive, but it's not 

7 anything that I shouldn't know. I think I wouldn't 

8 change very much of it. As long as you have the 

9 ability to talk to somebody to make sure there's 

10 clarity, I think it should be helpful.

11 MR. PEARCE: Thanks for the feedback on 

12 that. I do think the principle of trying to do the 

13 off-site work so that examiners are prepared when 

14 they get on site, I think, is something that we are 

15 committed to continuing. 

16 Looking at things like if you've been 

17 through one exam, is there a way on the second exam, 

18 so you don't have to ask them the same set of 

19 questions? There may be things that haven't 

20 changed and looking for opportunities to refine 

21 that process.

22 MS. RYAN: Thanks very much Mark and 
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1 Doreen. We're going to move now into our next 

2 panel discussion, which is on millennials' 

3 perspectives on banking. 

4 As Chairman Gruenberg mentioned, we've 

5 invited a group of millennials to spend some time 

6 with us, to talk about their attitudes toward 

7 banking, how they generally access and use 

8 financial services, and other interesting 

9 information. 

10 To address these, our group is led by 

11 Stephen Simpson. Stephen, to my right, is from our 

12 New York region, where he's a senior financial 

13 analyst in our Division of Insurance and Research. 

14 He's joined on the panel by Frank Blanchard, who's 

15 an economic assistant in our Division of Insurance 

16 and Research; Greg Lyons, a student trainee in our 

17 Division of Depositor and Consumer Protection; and 

18 Michael McCoy, a student trainee in our Division 

19 of Risk Management Supervision. I'm going to just 

20 turn the program over to Stephen now.

21 MR. SIMPSON: Thank you very much, 

22 Barbara. I don't know if everybody has a chance 
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1 to see it, but in your packets, there should be a 

2 handout that we've provided. The title slide 

3 says: Millennials Shaping the Future of Community 

4 Banks. We'll kind of follow along through that, 

5 so if you'd like to, you can start with that. 

6 First, I want to say thank you so much 

7 for having us here today. As Barbara noted, my 

8 name's Stephen Simpson. I'm a senior financial 

9 analyst in the New York Regional Office for the 

10 Division of Insurance and Research here at the 

11 FDIC. That means that under normal circumstances, 

12 I'm digging into the data and looking for financial 

13 trends and potential risks to the financial 

14 industry.

15 But today, I have a special task to come 

16 here, and I'm very excited to have some of my 

17 colleagues up here today, some of the bright young 

18 people from the FDIC, to talk about their attitudes 

19 toward banking and their thoughts and perceptions 

20 on the banking industry.

21 The idea behind this discussion came 

22 about from the April 2016 community banking 
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1 conference. There was quite a bit of interest at 

2 least discussed about how millennials think about 

3 banking and what kind of differences there are from 

4 prior generations. On the second page of the 

5 handout that you have, we put together the four 

6 major themes that came from that community banking 

7 conference. 

8 The first of which was the shift in 

9 focus on the generations and the differing banking 

10 needs, primarily the discussion was between baby 

11 boomers to millennials. The second theme was the 

12 differing styles of communication and related 

13 expectations of this particular age group. Third 

14 was the dynamic landscape of technology and its 

15 role in banking. Finally, we discussed 

16 millennials in the workforce, and there's a real 

17 focus on attracting and retaining that talent.

18 I've prepared a set of questions to lead 

19 us through this discussion, but I've also made sure 

20 to leave time at various points in the discussion 

21 for the advisory council to provide any input or 

22 questions or just general comments that you'd like 
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1 to add. I think I'll start out by introducing our 

2 panelists. Then, what we'll do is we'll give a 

3 little bit of background into the millennial 

4 generation, who that refers to, and what makes this 

5 group so different from our prior generations. 

6 If we could start, maybe we'll just go 

7 down the line. Frank, do you want to give us a 

8 little bit of background about you?

9 MR. BLANCHARD: Sure, thank you, 

10 Stephen. It's a pleasure to be here. My name is 

11 Frank Blanchard. I'm an economic analyst in the 

12 Division of Insurance and Research. I've been 

13 with the FDIC for approximately four years now. 

14 I'm originally from Virginia Beach, Virginia, and 

15 I went to school at James Madison University.

16 MS. KRAMER: Hi, my name is Katie 

17 Kramer. I'm originally from Naples, Florida, and 

18 then went to Marshall University and got my 

19 undergraduate degree in economics, and then an MBA. 

20 I am also in DIR working as an economic assistant. 

21 I've been here for about one year.

22 MR. LYONS: My name's Greg Lyons. I'm 
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1 a graduate research assistant within the Division 

2 of Consumer Protection. I've been here only about 

3 six months now. I got my undergraduate degree in 

4 policy analysis from Cornell University and am 

5 earning my master's in public policy from 

6 Georgetown. Student loans will obviously be a big 

7 part of the discussion for me. Happy to be here, 

8 thank you so much.

9 MR. MCCOY: Good morning. I'm Mike 

10 McCoy. I'm an intern with the Division of Risk 

11 Management Supervision. I'm a 28-year-old 

12 retired Army veteran, who's originally from 

13 Pittsburgh and is currently attending Robert 

14 Morris University for accounting.

15 MR. SIMPSON: Thank you. Before we 

16 shine the spotlight on my colleagues' opinions up 

17 here, I thought it would really be helpful to take 

18 a step back and look at the larger population of 

19 millennials and just sort of frame our thinking. 

20 If you would, you could take a look at the pie chart 

21 on the next page, on page 3, there, of the handout 

22 in front of you. We'll start by identifying who 
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1 the tagline millennials really refers to and what 

2 makes them such an omnipresent part of our 

3 conversation.

4 Putting an exact born on and expiration 

5 date on generations is a bit of a nebulous task 

6 because usually, when we talk about generations, 

7 we're talking about aggregated social trends and 

8 behavioral patterns. But as a fairly loose 

9 definition, when you hear the term millennial, it 

10 generally refers to the population born between 

11 1980 and 2000.

12 I'm going to take a little bit more of 

13 a refined look by including only the group of young 

14 adults that had reached the age of 18 to 34 as of 

15 the end of 2015. That's a very specific subset. 

16 It makes the oldest millennials born in 1982, and 

17 it makes the youngest millennials born in 1998. 

18 I'm going to do that for two reasons. 

19 First, it gives credence to me as an 

20 impartial moderator because I am well outside, 

21 unfortunately, of that demographic. Second, and 

22 probably more importantly, is that there's several 
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1 mainstream and comprehensive studies that have 

2 been provided, one of which I'll refer to a lot is 

3 from the Pew Research Institute, and another one's 

4 from Nielsen. It gives us a bit of a consensus to 

5 rely on, and I can steal some of those statistics. 

6 Using the definition born in 1982 to 

7 1998, the most recent full estimate available from 

8 the U.S. Census Bureau identifies the millennial 

9 population at a little over 74 million as of July 

10 2015. That's a full year ago, but that's the most 

11 recent data. If you look at the pie chart, you can 

12 see that's about 23 percent of the U.S. population, 

13 which puts them right in the same category as baby 

14 boomers, in terms of the overall size.

15 Now, there's more recent estimates that 

16 will come out, obviously, in July 2016. Some of 

17 those estimates have already trickled out. 

18 They're as high as about 84 million, which puts the 

19 millennial population at about 25 percent of our 

20 population, which makes the largest cohort of 

21 generations in the U.S. 

22 Now, not only is the sheer size 
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1 important, but also, this demographic is rapidly 

2 approaching its sort of critical stage in their 

3 lives. The youngest millennials are approaching 

4 their financial independence, and the older 

5 millennials are rapidly approaching their prime 

6 earning years. As a result of that, they quite 

7 literally become everybody's target market. 

8 They're getting a lot of discussion out there. 

9 In the next few slides, I'm going to 

10 refer to some of the other generations. Just for 

11 clarity, Generation Z generally refers to the 

12 youngest generation alive right now. That's from 

13 1999 through present. Millennials, of course, 

14 1982 to 1998. Then we'll talk about Gen X precedes 

15 them, so they were born 1966 to 1981, baby boomers, 

16 post-World War II to mid-1960s, and then silent 

17 generation. The greatest generation's still out 

18 there, but they represent a very small piece of the 

19 demographics, so we won't really refer to them 

20 much. 

21 If you follow me over to the next page 

22 in your handout, page 4, I'd like to talk about what 
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1 makes millennials so different from the prior 

2 generations. There's no shortage, unfortunately, 

3 of statistics out there on millennials. Believe 

4 me, I had to sift through quite a few. 

5 But one that I found particularly 

6 profound was that U.S. Census data shows that in 

7 1975, three out of every four 30 year olds held a 

8 job, owned a home, and had started a family. By 

9 2015, the share of 30 year olds that had tackled 

10 those same life events fell to just one in three. 

11 It's been a huge change. These life cycle changes 

12 can be further broken down by looking at several 

13 milestones. 

14 First, it's taking millennials a little 

15 bit longer to figure out a defined career path. 

16 The 2015 Pew Research study that I was referring 

17 to earlier noted that 30 percent of males age 18 

18 to 33 are either unemployed or not in the labor 

19 force. That's compared to about 20 percent for the 

20 prior generation, for Generation X, and 37 percent 

21 of females are either unemployed or not in the labor 

22 force, and that's compared to 31 percent. So quite 
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1 a bit higher unemployed or not in the labor force 

2 rates. 

3 Second, marriage is becoming more of a 

4 capstone type of event. It used to be that you 

5 would graduate college, partner up, and then sort 

6 of tackle life's challenges together. But today, 

7 that's becoming more of obtain financial 

8 independence, and then go down the marriage route. 

9 According to that Pew Research study, 28 percent 

10 of millennials are married, and that's compared to 

11 38 percent of Gen X, 49 percent baby boomers, and 

12 64 percent of silent at the same age. That's sort 

13 of a prolonged trend that's really getting a lot 

14 of play time. 

15 Millennials also have a tendency to 

16 choose to live in city centers. Similar to the 

17 trend before, it's a long-term trend, but 86 

18 percent of millennials live in a metropolitan area. 

19 That's compared to 83 percent of Generation X, just 

20 68 percent of baby boomers, and 64 percent of 

21 silents at that same age.

22 Millennials also have a tendency to be 
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1 more educated, or at least attain higher levels of 

2 education. Fifty-five percent of males age 18 to 

3 33, and 64 percent of females, have at least some 

4 college education. That's the highest among all 

5 those generational cohorts. 

6 They're also savers. They grew up with 

7 the great recession. It impacted their formative 

8 years, which affects how they think about money and 

9 personal finance. On average, millennials start 

10 saving at age 22. That's five years before Gen X 

11 and 13 years before baby boomers. They also 

12 proportionately save more. Millennials are 

13 saving around 8 percent. The long-term average 

14 for their predecessors was around 7 percent of 

15 their income.

16 Millennials have a tendency to be 

17 socially connected. This is the one that we always 

18 hear about in the mainstream media, but it's true. 

19 They grew up with social networks, and they care 

20 about social issues. I read that 84 percent had 

21 made a charitable donation in 2014, and 70 percent 

22 had volunteered at least one hour of their time, 
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1 which I think is very high.

2 As a corollary, they grew up in a golden 

3 age of information technology. That's kind of 

4 what we hear about so much is that they're very 

5 comfortable with trying out new technologies. 

6 They're early adopters of those technologies, and 

7 they're very comfortable with making decisions 

8 based solely off of online or web experiences. 

9 What do these demographic and social 

10 differences really imply? There's a few key 

11 trends that are noteworthy. First, housing 

12 formation had been affected due to the delay in 

13 marriage, which affects the timing of your initial 

14 home purchase. It also affects the timing of 

15 subsequent home purchases because you don't 

16 outgrow your first home and have the need to get 

17 a second home.

18 That second theme, in terms of 

19 urbanization, housing affordability and 

20 preference have pushed millennials into city 

21 centers. That's not only affecting the purchase 

22 of houses, as well, but it's also affecting auto 
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1 lending. If you live in the center of the city, 

2 you're less likely to need to buy a car, and even 

3 more or less likely to buy multiple cars. 

4 The more college education that we 

5 talked about, that's led to student loans. Greg 

6 already mentioned that a little bit, but two thirds 

7 of bachelor degree recipients have outstanding 

8 student loans with an average debt of about 

9 $27,000. It's a big number. Two decades ago, 

10 only half of recent graduates had college debt, and 

11 the average was down around $15,000. So that's 

12 quite a bit of growth, not only in the amount, but 

13 also the percentage of. That also affects 

14 affordability because that's part of their 

15 household debt. Being able to afford a home is 

16 impacted by that, as well. 

17 Lastly, they're more apt to research, 

18 identify, establish, and maintain relationships 

19 with businesses based solely off of their web or 

20 online experiences. That impacts the way that we 

21 do business with millennials.

22 All these trends add up to one thing 
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1 that we're getting at here. That is they have a 

2 very different banking relationship and a very 

3 different outlook on banking. 

4 Now that we've established a little bit 

5 of background about millennials, at least from a 

6 very high level, now we can focus in and shine the 

7 spotlight on our panelists here. I want to point 

8 out, though, that the views expressed today are 

9 their opinions. They don't necessarily represent 

10 the FDIC's opinions. 

11 With that, we'll talk a little bit about 

12 how millennials use financial services. I think 

13 we'd like to hear a little bit about how you came 

14 about to choose your bank, and maybe elaborate on 

15 the biggest factors that played a role in your 

16 choice of banks. Maybe we'll start the opposite. 

17 You want to start, Michael?

18 MR. MCCOY: Sure. I grew up in a very 

19 small town, about 3,200 people. Despite living in 

20 more than a dozen locations worldwide in the last 

21 decade, I've maintained my relationship with the 

22 local community bank, predominantly because the 
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1 branch manager was a baseball coach of mine for 

2 about a decade. The loan officer at that branch 

3 was in high school with me. Essentially, everyone 

4 in that building knows my name. I know their 

5 names. The reason that I've stayed with them, 

6 despite not having great access over the years, is 

7 because I know and trust the people at the 

8 institution.

9 MR. LYONS: Similarly, I grew up in a 

10 small town. When I was 10, I opened up an account 

11 with our local community bank. I really did enjoy 

12 the service there, but when I went off to college, 

13 there was no way I was going to be able to continue 

14 banking with them. They didn't have online or 

15 mobile services, and there were no locations near 

16 my college. 

17 I switched to another institution just 

18 simply because of the name. I just picked a big 

19 bank. I wasn't very savvy about it. I stayed with 

20 them up until in my final year at college -- it comes 

21 down to cost and convenience, at this point. 

22 At one point, I bought a $4 snack in the 
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1 middle of finals week. Unknown to me, I got 

2 charged with a $35 overdraft fee. As I was leaving 

3 from that purchase, I decided to get a drink, as 

4 well, got hit with another $35 overdraft fee. I 

5 left the bank a week after that. 

6 After that, it really was just about 

7 finding a bank that could offer me a convenience. 

8 That was exclusively online access. It was mobile 

9 access. I knew I was going to be traveling a lot 

10 for work. I've lived in five states over the last 

11 three years. Things like being able to deposit 

12 checks online were important, but it really just 

13 came down to that convenience factor.

14 MS. KRAMER: I also have a community 

15 bank located only in Florida. I first opened a, 

16 I think, joint checking account there when I was 

17 in high school and haven't really found a reason 

18 to leave because I pretty much bank just based off 

19 of the web and a mobile app on my phone. One thing 

20 that was also very helpful is refunded ATM fees, 

21 studying abroad, as well, those were all refunded, 

22 so I could get cash there. So yes, the president 
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1 is a family friend, so I haven't really found a 

2 reason to leave yet.

3 MR. BLANCHARD: My initial selection 

4 for my financial institution was done by my 

5 parents. They set up a savings account for me 

6 there at an early age. And I just maintained that 

7 relationship with them because they had a large 

8 footprint on the East Coast, and they do offer a 

9 lot of the online technologies that Greg was 

10 mentioning. They had mobile banking, good web 

11 applications, and also, they are part of a large 

12 ATM network, so whenever I do need to get cash, I 

13 can get that without the fees.

14 MR. SIMPSON: Clearly, the earlier you 

15 get reached, the better. I also hear a lot of the 

16 sort of like, the technology issue, in terms of 

17 convenience, the refunding of ATM fees. That 

18 helps you, obviously, if you're not able to reach 

19 a branch or able to reach an ATM. The web apps, 

20 certainly hear a lot of that, but really, the main 

21 theme is trust and establishing a relationship, 

22 right? Trust and establishing a relationship. I 
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1 know we're all very interested to hear about the 

2 technology aspect. Maybe we could start by 

3 talking about what products and services you 

4 currently use, and what touchpoints or technology 

5 you rely on to access your account. Greg, do you 

6 want to start?

7 MR. LYONS: Yes. My primary 

8 touchpoint with my bank is through the mobile 

9 applications they have. I don't do any 

10 transactions there, but I just review my finances, 

11 just to know what's going on. In order to shift 

12 funds, things of that nature, I do most of that 

13 through their online application.

14 I'm a little different than the 

15 panelists here. I have not been in a 

16 brick-and-mortar location for my bank since 2013, 

17 even though they have a location that's within two 

18 miles of my house. I do use third-party apps, in 

19 some instances, to also track. Being able to sync 

20 up with those is useful. Like I said before, being 

21 able to deposit checks through a mobile app is also 

22 helpful.
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1 MR. SIMPSON: How about you, Katie?

2 MS. KRAMER: I pretty much just use 

3 check cashing. That's a separate app for my bank. 

4 I can take a picture of it, and it's deposited. 

5 Then I do also transfer funds via an app and get 

6 a text message and an email sent when that happens, 

7 kind of a fraud alert message, and then bill pay 

8 services. I also do that online.

9 MR. SIMPSON: Frank?

10 MR. BLANCHARD: Additionally, I use 

11 the web and mobile applications. I use the mobile 

12 check deposits and the online balance transfers. 

13 Additionally, I use some third-party applications, 

14 such as Samsung Pay, which my financial institution 

15 has teamed up with. That helps add a layer of 

16 security.

17 MR. SIMPSON: Michael, how about you?

18 MR. MCCOY: My primary touchpoint is an 

19 actual brick-and-mortar location. I use online 

20 strictly to check and make sure that people have 

21 cashed checks that I've written. I don't use 

22 mobile. I'm way off from the rest of the panel on 
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1 that. In my town, banking is still a social 

2 experience. You go in, have a cup of coffee, sit 

3 down. You don't run in for five minutes. It's a 

4 good half an hour catching up with people and 

5 chatting.

6 MR. SIMPSON: So Greg, we heard from you 

7 it sounds like it's not important at all to have 

8 physical access to a branch, and then Michael, it 

9 sounds like it is very important to have physical 

10 access to a branch. How about for you, Katie, and 

11 for you, Frank? How likely are you to go into a 

12 branch? How important is it to you to be able to 

13 go into a branch?

14 MS. KRAMER: If I were to get a big 

15 loan, I would want to, I think, do that face to face. 

16 But with my bank being in another state, as long 

17 as I can pick up the phone and call someone that 

18 I know and my bank's helpful with that, I really 

19 don't need to physically go in.

20 MR. SIMPSON: All right. And Frank?

21 MR. BLANCHARD: It's not really that 

22 important, but I like to know that if I really need 
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1 to go in to the institution, I can go in to a branch 

2 that's nearby. Because I have branches, again, 

3 like I said, they're all over the East Coast, so 

4 I can access them whenever.

5 MR. SIMPSON: I know we talk about life 

6 events. You said if I needed to get a big loan. 

7 Does anyone on the panel see their banking service 

8 needs changing rapidly or in a major way? Greg, 

9 do you?

10 MR. LYONS: Absolutely. As I 

11 mentioned, student loans are definitely going to 

12 be part of my life for a long time. I already 

13 started getting mail from people about 

14 consolidation or other sorts of services they have. 

15 I haven't taken up anyone on that yet. I will have 

16 to consider that as those become more pressing. I 

17 will likely have to look to different institutions 

18 as I consider a mortgage or other things. I'm not 

19 necessarily tied to my primary institution. It's 

20 just where I am at this point.

21 MR. SIMPSON: Okay. Michael, how about 

22 you?
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1 MR. MCCOY: I've got pretty deep ties 

2 to my bank already. They hold one of my mortgages. 

3 They hold one of my car loans, my boat loan. I 

4 don't really see myself moving from them anytime.

5 MR. SIMPSON: Bucking the trend with 

6 the house and the boat. Greg, you kind of gave me 

7 a good segue into the communication styles, in 

8 terms of you've already been receiving information 

9 about your student loans. There's a lot of talk 

10 about how the style of communication is important 

11 in being able to reach millennials. What's the 

12 best or most memorable way that a financial 

13 institution has reached out to you, and what made 

14 that approach so effective for you guys? Katie, 

15 can we start with you?

16 MS. KRAMER: I do get lots of emails and 

17 mail from different financial institutions and, 

18 honestly, delete the emails or rarely open the 

19 mail. But the most memorable touchpoint, I think, 

20 from my own bank, has been that they send me 

21 hand-signed Christmas cards and birthday cards, I 

22 think. That is just kind of a nice way to, again, 
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1 to not see the people who work there, but to know 

2 that we have that relationship.

3 MR. SIMPSON: Right, to get touched by 

4 them twice a year. There's nothing wrong with 

5 that. How about for you, Frank?

6 MR. BLANCHARD: Same. Whenever I get 

7 an email, I'm pretty much deleting it or throwing 

8 the mail away. Basically, it's actually more me 

9 reaching out to them. I know that whenever I call 

10 my financial institution, I'm talking to someone, 

11 not a machine or anything like that. I'm talking 

12 to someone within under a minute, and it's good to 

13 know that someone's always there, ready to pick up 

14 the phone for me.

15 MR. SIMPSON: Greg?

16 MR. LYONS: This is the fact that most 

17 of us did start these relationships during the 

18 financial crisis. For me, the most effective 

19 marketing was always trust based. As I mentioned, 

20 that middle institution I had that charged me $70 

21 in overdraft fees made me feel kind of like I was 

22 a product, a line item. And so marketing that I 
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1 see that focuses on consumers, rather than 

2 services, tends to influence me more.

3 MR. SIMPSON: Michael?

4 MR. MCCOY: I tend to get a lot of paper 

5 mail, especially refinance your mortgage, 

6 refinance your car. I don't open it anymore. I 

7 just throw it away. What's important to me is the 

8 fact that I can pick up the phone any time that I 

9 need to and call and get somebody at my bank. They 

10 can explain whatever it is that I need explained. 

11 It's all about that personal contact for me.

12 MR. SIMPSON: Pretty easy to summarize 

13 that, right? It's maybe not as important the 

14 bank's reaching out to them, but important to be 

15 able to get a hold of somebody, and them being able 

16 to reach out to you. How about researching online? 

17 If you're looking for things, is that sort of your 

18 primary method? That would be where you would 

19 start, or would you have a different method? You 

20 would reach out, call them, go to a branch, 

21 something like that? Greg?

22 MR. LYONS: I've actually expanded 
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1 services through my banks a couple times after 

2 calling them. I will either have a question about 

3 something I saw on their site online, but I've 

4 opened two or three different products with them 

5 just based on being able to reach somebody 

6 immediately and have somebody come up with ideas 

7 for how we can rectify that.

8 MR. SIMPSON: Katie?

9 MS. KRAMER: I usually would go to the 

10 website.

11 MR. SIMPSON: You guys all indicated 

12 that you have fairly established banking 

13 relationships. I guess, Greg, yours maybe isn't 

14 quite as relational. Is there anything that a bank 

15 might offer you that could make you switch banks? 

16 Michael?

17 MR. MCCOY: I've got pretty deep ties. 

18 I feel like it would be very difficult to get me 

19 to move from my current institution. You would 

20 have to be offering something extremely 

21 comprehensive. The start of that is it better be 

22 somebody I know that's contacting me.
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1 MR. SIMPSON: Okay, and Greg, how about 

2 you?

3 MR. LYONS: I'll admit that yes, I'm 

4 relatively transactional. As I mentioned 

5 earlier, with student loans or mortgage products, 

6 there are absolutely things that could be pitched 

7 to me to get me to switch.

8 MR. SIMPSON: Katie?

9 MS. KRAMER: I think a similar answer 

10 to Greg. If I'm looking for a mortgage or looking 

11 at different rates or whatever, I would definitely, 

12 probably compare between banks, but at this point 

13 ---

14 MR. SIMPSON: Okay.

15 MS. KRAMER: I don't ---

16 MR. SIMPSON: A painful phone call to 

17 your family president. How about you, Frank?

18 MR. BLANCHARD: Similar. If I'm 

19 shopping for rates, like getting an auto loan or 

20 a mortgage, I would definitely check other 

21 financial institutions.

22 MR. SIMPSON: In shopping for that, 
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1 would you start at your bank? If, for example, 

2 you're going for a home loan, you would just start 

3 at your bank immediately?

4 MR. BLANCHARD: Sure. I would look at 

5 the rates in my bank, and then start to branch out 

6 from there and compare.

7 MR. SIMPSON: I think, again, I hear a 

8 lot of the relationship issue, but certainly 

9 there's the convenience factor plays a big role 

10 with at least this panel. Before I switch gears 

11 a little bit and really delve into millennials in 

12 the labor force, when you talk about some of that, 

13 I want to make sure I give you guys an opportunity 

14 to -- if there's anything that comes up that you'd

15 like to talk about. Yes, ma'am?

16 MEMBER BLANKENSHIP: I'd just like to 

17 ask Frank, so you said you would shop rates if you 

18 were looking for auto or mortgage. If you found 

19 a lower rate, would you go back to your bank and 

20 ask them to match it?

21 MR. BLANCHARD: Absolutely.

22 MEMBER WILLIAMS: One of the things I 
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1 think I keep coming back to -- and I have three 

2 millennial daughters. We were at my middle 

3 daughter's house and my wife was looking for an 

4 envelope. She said, Betsy, do you have an 

5 envelope? She said, no. She said, how do you mail 

6 your bills? She said, I don't mail bills. What 

7 are you talking about? But the thing I keep 

8 hearing, and the thing I think is community banks' 

9 ace in the hole, I hear you guys talking about

10 relationships and being able to talk with someone 

11 that you know or being able to talk to a human 

12 being -- Greg, even in your situation, a little more 

13 transactional. I keep looking at the fact that it 

14 appears to me that millennials are -- given the 

15 choice between a Home Depot or a Lowe's and a 

16 neighborhood hardware store, where you know 

17 people, the tendency is to go to that neighborhood 

18 hardware store.

19 I get that impression. Given the 

20 choice between a local coffee shop and a Starbucks, 

21 you might tend to go to that local coffee shop. Am 

22 I missing that, or are we on track? Because I think 
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1 that's our ace, as far as I'm concerned.

2 We're not going to be able to offer, 

3 probably, the entire plethora of products that are 

4 out there from some of the bigger banks, but we can 

5 offer that service and having a human being answer 

6 the phone, somebody that you know. That's got to 

7 be the ace for us is having, really, as I refer to 

8 it, the best of both worlds, the technology to get 

9 it done, but the back door of always knowing you 

10 can pick up that phone and call somebody. I keep 

11 hearing that theme. That's not just you four, 

12 right? That's the rest of --

13 (Laughter.)

14 MEMBER WILLIAMS: Am I missing the 

15 boat on that, or are we pretty much -- that's going 

16 to be key for us isn't it, is community banks?

17 MR. LYONS: I think you're absolutely 

18 right. There's a huge opportunity here because 

19 large institutions, for a while, were needed for 

20 transient millennials because that was just the 

21 only way to get money. Now, if you have good enough 

22 services online, you don't need somebody with 1,000 
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1 locations. You could use somebody with five.

2 MS. KRAMER: If information is readily 

3 available in the same way as a large bank, I think 

4 that would be the preference.

5 PARTICIPANT: You'll take that every 

6 time. Good.

7 MEMBER HASKIN: Let me ask you this 

8 question. If you can't contact someone on the 

9 weekend, does that pose a problem? Is having 

10 immediate access to a real live person a necessity?

11 MR. MCCOY: I don't know about anybody 

12 else, but my branch manager was a baseball coach 

13 of mine. I'll pick up the phone and call him on 

14 Sunday if I have to. When you've got their cell 

15 phone number, you're good forever.

16 MEMBER BRYANT: Michael and Katie, you 

17 appear to be very loyal and relations --- have 

18 strong relationships with the institutions. The 

19 one thing that I picked up from all four of you is 

20 that peddling products to you, whether it's online 

21 or through the mail, is not something that gets your 

22 attention.
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1 MR. MCCOY: No, even if it's something 

2 that I need, I don't like it when people ---

3 especially when we come to the idea of everything 

4 that you do online is tracked, and everything feels 

5 a little bit analyzed. I really don't like things 

6 that are specifically tailored to me popping up. 

7 I just feel like there's a degree of intrusion there 

8 that's a bit uncomfortable.

9 MEMBER THOMPSON: Even if it comes from 

10 your bank, that still is not interesting to you?

11 MR. MCCOY: Luckily, I don't have that 

12 experience with my bank. They don't send me 

13 advertisements. We're a generation of people who, 

14 the second we have a question, we're on our phones, 

15 and we're looking up the answer in 15 seconds. 

16 That means that products are -- it's almost better 

17 just to be known as a presence, to have a bank -- I 

18 don't mind banks reaching out at all just to 

19 effectively say we're here, just in case you have 

20 these issues, as I said, conveying that sort of 

21 trust message. I do feel that people my age, if 

22 we have a question about something, we'll do that. 
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1 We'll take out our phones, and we'll look it up.

2 MEMBER BRYANT: Here's a follow up 

3 experience my wife and I have had. We had a car 

4 salesman who's 18 years old. When you drive to the 

5 lot, he might come out to see you. And if you come 

6 in, he'll give you his card. He says, I'm not going 

7 to try to sell you something you don't want. 

8 You've done your research. You know what you want. 

9 Once you've decided, come see me and we'll make it 

10 happen. Is that the type of person that gets your 

11 attention?

12 MS. KRAMER: For me, absolutely.

13 MEMBER BRYANT: This guy is the No. 1 

14 salesman at his dealership in Louisville.

15 MR. MCCOY: I'm actually going to 

16 relate directly to that. My most recent vehicle 

17 purchase, I walked in, walked to the first 

18 salesman, told him, this is what I'm looking for. 

19 This is what I want. These are the options I want. 

20 I know what dealership invoice is. Set me up. He 

21 sold a car in 15 minutes, without having to do 

22 anything. I feel like that's big for our 
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1 generation because we have access to this volume 

2 of information. If it's something that we want, 

3 especially on these larger ticket items, we're 

4 really going to dig in ourselves. Because 

5 honestly, there's a bit of institutional mistrust 

6 after 2008.

7 MEMBER CASTILLO: Let me ask two or 

8 three questions. You talked a little bit about 

9 using a website to collect the information. How 

10 much information are you looking for? For 

11 example, if you're looking for a loan, are you 

12 looking for pricing, fees, all-in costs, 

13 application, being able to do that online, or are 

14 you looking for -- you've got a general idea of 

15 what's available, and then picking up the phone and 

16 talking to somebody?

17 That's one question. The second 

18 question is as you consider a financial 

19 institution, does the fact that we're FDIC insured, 

20 does that cross your minds at all? Is that 

21 something that you assume is there, or do you even 

22 care about whether that insurance is available?
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1 MR. MCCOY: I find seeing that little 

2 placard in the bank nice and comforting.

3 MS. KRAMER: We're FDIC employees, so 

4 yes.

5 (Laughter.)

6 MS. KRAMER: But having said that, I 

7 would say that most millennials probably don't look 

8 for that plaque, if I'm being honest. I think it's 

9 honestly assumed.

10 MEMBER LUNDY: Did any of you ever look 

11 for that before you came to work for the FDIC, if 

12 you can recall? Would that have been important to 

13 you before you ever had this job, or did you even 

14 think about it?

15 MR. LYONS: IndyMac wasn't that long 

16 ago, so I think the knowledge that there is a safety 

17 net is very important. I would be very -- I don't 

18 think I'm alone in my fears that I'd be very worried 

19 if I saw that an institution didn't have that.

20 MR. BLANCHARD: There is some lack of 

21 information out there. I have friends that when 

22 I've talked to them about institutions not being 
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1 FDIC insured, they go, what? That's possible to 

2 do that? And so I inform them now, that they become 

3 more aware of that. I would say the majority of 

4 people I know, they don't look for the plaque. 

5 They just assume that it's FDIC insured.

6 MEMBER BRYANT: Even with apps like 

7 online to non-traditional lending they're 

8 comfortable with it?

9 MR. BLANCHARD: I'm not too familiar 

10 with that. I don't know of a lot of people who have 

11 done that.

12 MR. SIMPSON: I have to say that the 

13 less known we are, the better off everybody is. 

14 It's not a bad thing when somebody has to ask you

15 what the FDIC is because that means we're not in 

16 the news about something about banks needing to 

17 access our funds. I just want to redirect into 

18 that sort of labor force issue. And that way, 

19 hopefully, we'll leave a little bit of time because 

20 I think we're having a very good discussion, but 

21 I want to make sure we cover everything. Switching 

22 gears a little bit, in terms of the labor force, 
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1 what are the most important factors that you guys 

2 considered in choosing your career path? Maybe 

3 Katie, we'll start with you.

4 MS. KRAMER: In my graduating MBA 

5 class, I think a lot of people went to go work for 

6 big companies. Not that there's anything wrong 

7 with that, but I knew that I did want to have 

8 meaningful work, and not necessarily purely work 

9 for the bottom line, kind of, with the main goal 

10 being profit. Not that there really is anything 

11 wrong with that, but the mission of the corporation 

12 here is very well known.

13 It's a very integral part of our work. 

14 Personally, I think that is a big reason why I do 

15 enjoy my job, because you can see the effects of 

16 what the FDIC does play out throughout the economy 

17 and financial system. That was important for me, 

18 as well as location and some work/life balance, 

19 just being able to maintain personal priorities, 

20 while still working hard.

21 MR. SIMPSON: Frank, how about you?

22 MR. BLANCHARD: The largest factor I 
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1 was looking for was where I was located. Growing 

2 up in Virginia Beach, it is a metropolitan area, 

3 but it's not a traditional one. It's based on the 

4 tourist industry. I was looking for something 

5 more city-like, so New York, Washington D.C., and 

6 also somewhere on the East Coast. D.C. definitely 

7 checked that box. Additionally, I was looking for 

8 a job that, because I'm going to be living in a 

9 metropolitan area, a job with a decent salary, so 

10 that I could actually live there, because that can 

11 be challenging now.

12 MR. SIMPSON: How about you, Greg?

13 MR. LYONS: So I might not be the target 

14 market because with a degree in political science, 

15 and then a Master's in political science, I have 

16 fairly limited options. 

17 (Simultaneous speaking.) 

18 MR. LYONS: For me, the place that I 

19 work, there's two things that really drive me to 

20 look for someplace. One is a sort of mission 

21 focus, but the other is that I really look for 

22 places that I believe are meritocratic, where if 
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1 I come in and I work very hard, I have the 

2 possibility of moving up the rank there. 

3 Immediate benefits, to me, are less important than 

4 the opportunities for mentorship and my overall 

5 trajectory within a company.

6 MR. SIMPSON: Thank you. Michael.

7 MR. MCCOY: Having completed one 

8 career already, I'm used to work that was extremely 

9 physically challenging. When I started looking 

10 around after that, I was looking for something that 

11 was equally challenging in the intellectual field. 

12 Doing something that's going to keep my mind 

13 stimulated was important to me. At the same time, 

14 I wanted to have a good degree of work/life 

15 flexibility. I feel like I've worked my share of 

16 14-16-hour days. Comp was slightly less 

17 important, and maybe a little bit more time off, 

18 a little bit more balance.

19 Unlike a lot of the other panelists, a 

20 metropolitan area was not important to me. I like 

21 to be convenient to the fishing and the boating and 

22 the camping. D.C.'s not exactly my ideal 
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1 location, but the work here is worth the trade-off.

2 MR. SIMPSON: Again, to relate back to 

3 the themes, I hear meaningful work and 

4 community-type involvement. That certainly 

5 relates to the theme. Then the obvious is the 

6 urbanization sort of deal. But again, these are 

7 not randomly selected.

8 These are all FDIC employees from here 

9 and Washington, D.C., so it makes sense that they 

10 have a stronger feeling about that. What do you 

11 perceive as the benefits of working in a smaller 

12 company versus working in a larger company, or if 

13 you have experience in each, then maybe talk about 

14 that. Frank, do you want to start?

15 MR. BLANCHARD: There's pluses and 

16 minuses to both. In a smaller company, it's more 

17 intimate setting. You can be closer to your 

18 co-workers and really operate more efficiently in 

19 a team environment. But also, there's those 

20 pressures to maintain contracts and other outside 

21 pressures such as that. In a larger company, 

22 there's a perception that you could just be another 
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1 cog in the system. I know especially millennials 

2 nowadays, they like to be more individualistic. 

3 That can be a big turnoff for working in a large 

4 company.

5 MR. SIMPSON: Katie, how about you, 

6 small versus big?

7 MS. KRAMER: Same kind of themes. 

8 There's definitely the perception that you can have 

9 a closer relationship, I think, in a smaller 

10 organization, maybe some more mobility upwards in 

11 a larger organization. But I think, at the same 

12 time, it depends. At a larger organization, you 

13 can be in a smaller group of people working day to 

14 day and form those relationships.

15 MR. SIMPSON: Greg?

16 MR. LYONS: I think one of the 

17 stereotypes of millennials is that we tend to be 

18 very impatient, that we expect things immediately. 

19 For many of us, I think that there's a preference 

20 to work in smaller institutions because, as I got 

21 back to that point about meritocracy, you feel that 

22 if you work very hard within a small institution, 
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1 that will be recognized.

2 You'll have more of an impact on the 

3 organization, and you will hopefully rise up 

4 faster. There are more mentorship opportunities 

5 within large institutions, in my experience, but 

6 I think that there's a preference for small.

7 MR. SIMPSON: Michael?

8 MR. MCCOY: I feel like I've run the 

9 gamut a little bit on this. I've worked for a 

10 company that was a grand total of eight people in 

11 my hometown when I was a teenager to the 415,000 

12 people that the Army employees. I've seen both 

13 sides of the coin.

14 I kind of have issues with both. With 

15 smaller institutions, it kind of feels like 

16 sometimes, regardless of how well you do, 

17 somebody's got to retire for you to move up. With 

18 a larger institution, sometimes it feels like you 

19 are a cog. To me, there's an important balance 

20 there. It needs to be easy to move forward in your 

21 career, but at the same time, you want to be doing 

22 work that makes you feel like you're accomplishing 
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1 something and contributing.

2 MR. SIMPSON: I want to make sure that 

3 I leave time. We have about 15 minutes, it looks 

4 like. I want to make sure I leave time because I 

5 know as presidents of banks, this is a very 

6 important topic to you, as well, staffing the 

7 appropriate levels at all levels of an institution. 

8 Then, of course, we hear from examiners about 

9 succession planning and things like that. If 

10 there's some more questions about that, then we can 

11 always go back, as well, to prior topics. Yes, 

12 ma'am?

13 MEMBER BLANKENSHIP: I'd like to just 

14 ask the question -- I think each and every one of 

15 you said something about work/life balance and how 

16 important that is. We're currently reviewing our 

17 employee handbook, which probably has -- most of 

18 the bankers here, we haven't really changed our PTO 

19 policy, the two-week vacation. We do now allow 

20 that to be split, but believe it or not, that went 

21 decades and decades. Was that a big factor, and 

22 do you look at flexible PTO? Is that pretty 
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1 important to you?

2 MR. MCCOY: For me, absolutely.

3 MR. LYONS: Flexible PTO is almost less 

4 important to me than telework opportunities, 

5 especially depending on where I live.

6 MS. KRAMER: It's important to me. I 

7 have friends where I went to school in different 

8 states and family at home. So to be able to take 

9 a Friday or a Monday off and have a long weekend 

10 is very nice for me.

11 MEMBER BLANKENSHIP: How about you, 

12 Frank?

13 MR. BLANCHARD: I would say it's very 

14 important to me. Initially, it wasn't so much 

15 because leaving college, I was finishing up summer 

16 break, and I still assumed that the rest of the 

17 world had summer breaks, but --- 

18 (Laughter.)

19 MR. BLANCHARD: Learned that lesson 

20 really quick. Understanding that the company I 

21 work for or will work for has a good PTO system, 

22 I think that's very important.
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1 MEMBER BLANKENSHIP: I think as 

2 community banks, particularly, we're kind of 

3 behind the eight ball. And the reason --- I have 

4 millennial daughters, as well. My middle daughter 

5 just went to work for an accounting firm. She got 

6 more vacation than I have. But that is a huge 

7 benefit and, I think, something that will snag 

8 millennials and keep them as part of your labor 

9 force. It's something that I think we're 

10 challenged with, taking a step back and seeing how 

11 we could be more flexible in that regard.

12 MEMBER WILLIAMS: I also heard a 

13 recurring theme of mission focus, that there's 

14 some -- you see the results of your work versus the 

15 factory mentality, put the bolt here and put the 

16 bolt here. That's something I keep hearing. I 

17 think that's probably something we need to do a 

18 better job of as leaders in community banks is 

19 making sure that we're spending time sharing the 

20 overall focus of what we're trying to accomplish 

21 in our communities and making sure people 

22 understand that they have a hand in making that 
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1 happen, so that's good to hear because that's 

2 another ace, I think --

3 (Simultaneous speaking.)

4 MEMBER BRYANT: When Stephen 

5 introduced each of you or you introduced 

6 yourselves, I don't think I -- normally you guys 

7 don't move into urban areas, but we have so much 

8 technology and you can communicate with people all 

9 over the world. From your conversations with 

10 friends and peers, what's driving the modulation 

11 from rural, small communities to larger urban 

12 areas?

13 MR. MCCOY: I think opportunity has a 

14 lot to do with it. Pittsburgh has kind of gone 

15 through a renaissance over the last few years and 

16 has recently been ranked as the No. 1 place for 

17 recent college graduates to move. I think a lot 

18 of that has to do with the vast array of 

19 opportunities that Pittsburgh offers, not just in 

20 financial services, but in tech and industry, as 

21 well.

22 MR. LYONS: For me, my hometown, over 
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1 the last, actually, two years, has lost about 1,000 

2 jobs, in a city of 17,000 people. Most people just 

3 recognize that they can't stay somewhere that's in 

4 decline. The feeling is that even they try to 

5 start their careers there, they would have to move 

6 at some point anyway. There's a feeling that 

7 there's more opportunity, especially at the start 

8 of your career, in a larger city.

9 MS. KRAMER: I think I agree. There 

10 are probably different events held in big cities. 

11 In D.C., for example, there's festivals on 

12 weekends. Of course, you have the political arena 

13 here, and things like concerts and that kind of 

14 thing, where it is an exciting place to be for young 

15 people. There's definitely a large proportion of 

16 young people here. But at the same time, I also 

17 like to go hike at the national park nearby and that 

18 kind of thing. I think people are interested, 

19 especially with technology, in different areas and 

20 different --- there are rural areas with other 

21 things that interest young people. But again, we 

22 are four people who live here, so a little partial.
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1 MR. BLANCHARD: Not just job 

2 opportunities, but overall convenience. I live 

3 within a 15-minute walk to work, so I can minimize

4 my commute by living in the city. Kind of what 

5 Katie was saying, there's a lot going on here. I 

6 can walk out of my apartment door and be anywhere 

7 within 20 minutes, just walking, so I also get my 

8 exercise, as well. I have a car, but I might drive 

9 it once every two weeks. That's just to make sure 

10 she still starts. It's a she.

11 MEMBER TOLOMER: First of all, 

12 Michael, thank you for your service, appreciate it. 

13 What would keep -- I don't want to make this an FDIC 

14 thing, make it uncomfortable, but what will keep 

15 a millennial in the job that they pick? Assuming 

16 all the things that we've talked about, and now 

17 you're working at an organization -- let's not make 

18 this an FDIC issue, but what will keep a millennial 

19 in the job?

20 MR. SIMPSON: That's an important 

21 question. Frank, do you want to start?

22 MR. BLANCHARD: Sure. I think we were 
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1 talking about earlier, being able to see that our 

2 work we're putting into it is showing results. Not 

3 that you need recognition, but you know that 

4 whatever you are doing, you're not just running a 

5 report just to run the report, for the sake of 

6 running a report. You know that it's going 

7 somewhere; it's actually being utilized. Also, 

8 just promotion potential, knowing that you know 

9 that you're not going to be pigeonholed in this 

10 position. You have that option -- not necessarily 

11 promotion, but there are training-based programs 

12 out there to help you learn more.

13 MS. KRAMER: Right. I would say, 

14 again, not necessarily a promotion by a new title 

15 or anything, but just the ability to not do the same 

16 thing every day, to grow in your job and have some 

17 new tasks, maybe feel -- for a small company, in 

18 my opinion, it would be to feel like you have some 

19 say in the long-term strategy of the corporation, 

20 or at least to just be informed and forward looking, 

21 and then, right, just receiving new challenges.

22 MR. LYONS: I don't think that if you 
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1 have any millennial employees that they're going 

2 to want to be the president of the bank in a year. 

3 There is the knowledge that you have to put in the 

4 hard work. Things that will keep them there, in 

5 my mind, are not even necessarily mentorship, but 

6 feeling that they have some knowledge of where the 

7 company's going, the feeling of they're learning 

8 about the industry, itself, the feeling that 

9 they're learning things that will help them if and 

10 when they're ready for a promotion down the line. 

11 I think that millennials are very quick to jump off 

12 of a job that they don't feel is going to help 

13 elevate their career.

14 MR. MCCOY: I tend to agree with a lot 

15 of what was already said, but I think one thing that 

16 we kind of missed focusing on is when I come to work, 

17 I like to come to work. It's important for me to 

18 come to work and know that I enjoy the people that 

19 I work with, and I enjoy the work that I do. Work 

20 dissatisfaction tends to bleed into personal 

21 dissatisfaction for millennials, so part of it is 

22 also the culture of the corporation. It should 
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1 feel like home.

2 MS. KRAMER: I think no matter what 

3 you're doing, if you're with people who are excited 

4 about it and passionate about it, it's definitely 

5 a place you want to be.

6 MR. MCCOY: Even if you get to the point 

7 where the work kind of gets tough or frustrating, 

8 you're not really sure why you're doing it, if 

9 you're doing it with people that you enjoy doing 

10 it with, a lot of millennials will ride that feeling 

11 out.

12 MEMBER LUNDY: You are obviously a 

13 small subset. You're all well-educated. You all 

14 work at the same place. Are the trends that were 

15 talked about here, in terms of saving loans or 

16 perhaps lower credit card debt -- you mentioned 

17 student loan debt. As you look at your peers, do 

18 you think that they are more debt averse than maybe 

19 Gen Xers? What's your attitude towards that 

20 issue?

21 MR. BLANCHARD: I would say they're 

22 probably more debt averse. That's why you do see 
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1 a lot of people waiting to get a mortgage. You just 

2 continually rent for a while. They don't want to 

3 have that big burden on the books.

4 MR. LYONS: I'd have to disagree. The 

5 millennials that I know, the reason they're not 

6 buying a home is because they can't put 20 percent 

7 down on a home in D.C. I'm not sure how many other 

8 people can, either.

9 PARTICIPANT: I'm not sure how many of 

10 us can.

11 MS. KRAMER: It's a little hard to 

12 compare because we run around and -- we didn't know 

13 the generation ahead of us at this age. I do know 

14 many people who are saving.

15 PARTICIPANT: Who are saving?

16 MS. KRAMER: Mm-hm.

17 MR. SIMPSON: If you don't mind me 

18 asking, do you guys all pay your credit card 

19 balances the second you get your bill, or do you 

20 keep a running --- yes.

21 MR. LYONS: The one thing I'll point 

22 out, though, is that I think people in our age 
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1 bracket are sensitized to debt early on because 

2 they are taking out a massive amount for student 

3 loans. They're not necessarily shy of tacking on 

4 debt. I think a lot of us have the feeling that 

5 because we're savers, we want to have homes, 

6 because then we feel like we're building equity, 

7 rather than just throwing away money at the end of 

8 every month. There is a desire to save, and debt 

9 is sometimes seen as an avenue to help us build 

10 assets.

11 MEMBER CASTILLO: Let me ask a 

12 question. You mentioned that you're not familiar 

13 with the prior generation, what that experience 

14 was. Do you experience, or do you sense 

15 inter-generational challenges as it comes to 

16 certain things? For example, you all grew up in 

17 the digital era. That's when you went to school, 

18 you were starting in your professions.

19 There's folks like me that sometimes we 

20 struggle with the technology that's available and 

21 getting used to texting your child because they're 

22 never going to answer your phone call, but they'll 
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1 respond immediately to the text. That's one 

2 question, if there are any challenges there. The 

3 other is I think some people of my generation 

4 believe you're not doing your job unless you're 

5 working 50-60 hours a week to get ahead. The 

6 work/life balance is something that, for some older 

7 folks, is a little bit foreign, if you will. I 

8 guess the question, in a long-winded sort of way, 

9 do you run into generational type of challenges, 

10 and how do you address those, and in what areas?

11 MR. LYONS: Getting to your last point 

12 about balance, I attend school in the evenings. 

13 I'm a part-time student there. Everyone in my 

14 program is working full time. They're attending 

15 classes at night. I felt that I had too much time, 

16 so I'm also assisting a professor for 10-15 hours 

17 a week on another research project. I think that's 

18 not uncommon. There's the feeling that we need to 

19 put in a lot of work to get where we want to be. 

20 I think that the assumption that millennials might 

21 be lazy or feel that they're entitled to a promotion 

22 just because they show up 9:00 to 5:00 every day 
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1 might be misguided.

2 MR. MCCOY: I agree with the assessment 

3 there. There tends to be this belief that 

4 millennials are sort of lazy, but as far as I'm 

5 concerned, the truth is when I leave here in August 

6 and go back to school, I go back to taking 18 credits 

7 while working 50 hours a week at a local accounting 

8 firm.

9 MEMBER WILLIAMS: To be clear, I wasn't 

10 suggesting that anybody ---

11 (Laughter.) 

12 MEMBER WILLIAMS: --- especially you 

13 folks, were lazy. I think, really, the point is 

14 there's 40 hours set aside for work. I've got to 

15 do my best there, give it my all, and then I'm going 

16 to move on to other parts of my life.

17 MS. KRAMER: I do think that work/life 

18 balance does not necessarily just mean 40 hours a 

19 week, and then I'm not at work. For example, here, 

20 there's a fitness center. We can go during our 

21 lunch break and run on the treadmill for 20 minutes 

22 and come right back up and go back to work, that 
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1 kind of thing, just to where it's almost like you 

2 can still maintain other priorities and not -- I 

3 love the idea of working hard. I want to work. I 

4 think it's almost more of a flexibility kind of 

5 deal, even if you are working more hours than 40, 

6 instead of just a certain number.

7 MR. SIMPSON: I'm going to try to keep 

8 us on task because I know you guys have a lot of 

9 important issues that are going to get put in front 

10 of you today. I think we're kind of running up 

11 against the end of our time. In an attempt to sort 

12 of summarize and relate back to those themes we 

13 talked about, in terms of choosing a bank, we heard 

14 a lot of trust and establishing relationships. If 

15 they can get you in there at three years old, then 

16 apparently that's the easiest way to ---

17 (Laughter.)

18 MR. SIMPSON: In terms of keeping that 

19 relationship, we've heard a lot about convenience. 

20 Cost is certainly a factor, sort of the traditional 

21 things that we'd hear from any generation.

22 Technology's obviously very 
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1 emphasized. Technology's very important, 

2 particularly since the mobility of where you are 

3 in your careers and moving around quite a bit, it's 

4 important to be able to reach your bank without 

5 having to change.

6 Communication, I heard a lot -- maybe 

7 we didn't actually say it, but it sounds like the 

8 social impact, your bank might be able to play a 

9 role in terms of how active they are in the 

10 community. That might be a better way to advertise 

11 to you than actually sending something directly to 

12 you. But in any event, everybody definitely said 

13 that they like being able to reach their bank. You 

14 like to be able to reach out to your bank and contact 

15 them when they need to. Then in terms of the labor 

16 themes, what I got out of it a lot was there's a 

17 lot of upward mobility. A lot of is there 

18 opportunity to grow in this career? You think 

19 that's important. Then, of course, those same 

20 themes, in terms of social impact. Everybody 

21 seems to like what they see in terms of that, not 

22 that it's completely altruistic, but certainly, 
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1 you have mission behind us, as well.

2 I think, again, that's all the time we 

3 really have, so I don't want to take up too much 

4 of you all's time, but I really appreciate you 

5 having us here and allowing us to be involved in 

6 this discussion, so thank you.

7 PARTICIPANT: Thank you guys very 

8 much.

9 CHAIRMAN GRUENBERG: I'd just like to 

10 say I have one observation that I found 

11 enlightening, which is that you all seem to value 

12 technology, the ability to engage with your 

13 institution on a remote basis, but at the same time, 

14 for most of you, it's also a value that you should 

15 have a scale that you can reach and relate to, you 

16 have people that you can actually necessarily call 

17 on. So to me, actually, I found that interesting 

18 and sort of encouraging. I sort of had an assumption 

19 that if you're focused on doing your banking 

20 online, I sort of had an assumption that the larger 

21 institutions could offer a wider array of things, 

22 it's almost the smaller institution offers the 
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1 basic services online that you need to do your 

2 business, they're adding value of also having 

3 somebody that you can contact, access, engage with, 

4 and that you know is a real value for you. It 

5 strikes me that's a combination where the smaller 

6 institution can use technology functions to 

7 advance its business and the two seem consistent.

8 MEMBER WILLIAMS: It's great news for 

9 us.

10 MR. SIMPSON: All right, thank you, 

11 guys.

12 (Simultaneous speaking.)

13 MS. RYAN: We're going to take a 

14 15-minute break now, and we'll regroup at 10:45.

15 (Whereupon, the above-entitled matter 

16 went off the record at 10:31 a.m. and resumed at 

17 10:49 a.m.)

18 MS. RYAN: Welcome back, everybody. 

19 We're now going to have senior staff provide the 

20 committee with a brief update on the FDIC's ongoing 

21 regulatory review being conducted with the other 

22 federal banking agencies, in accordance with the 
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1 Economic Growth and Regulatory Paperwork Reduction 

2 Act, or EGRPRA. To tell you about the latest 

3 developments in the EGRPRA review process, Roberta 

4 McInerney, deputy general counsel in our Legal 

5 Division, and Ruth Amberg, assistant general 

6 counsel in the Legal Division.

7 They will be joined by Jim Watkins, 

8 senior deputy director in the Division of Risk 

9 Management Supervision, and Bob Storch, who is our 

10 chief accountant. After Roberta and Ruth provide 

11 the committee with a general update on the EGRPRA, 

12 Jim and Bob are going to tell the committee about 

13 a number of related initiatives that are currently 

14 underway. So I'll turn it over to Roberta now.

15 MS. MCINERNEY: Thank you, Barbara. 

16 Good morning, everybody. It's great to see all of 

17 you here. It's always a really interesting event, 

18 and I always learn a lot, so thank you. As Barbara 

19 mentioned, I'm delighted to be here. I'm here 

20 along with my colleagues, Ruth Amberg, Bob Storch, 

21 and Jim Watkins, to provide you with a brief update 

22 on where we are in the EGRPRA process. As a very 
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1 quick reminder, the EGRPRA statute requires the 

2 FDIC, OCC, and Federal Reserve to review our 

3 regulations at least once every ten years.

4 The purpose of the review is to identify 

5 any outdated regulations or those that are 

6 unnecessary that affect insured depository 

7 institutions. We conducted our last EGRPRA review 

8 in 2006 and are on target to complete our current 

9 review by the end of this year. The agencies began 

10 the EGRPRA review in 2014, by publishing the first 

11 in a series of four Federal Register notices that 

12 requested comments from bankers and other 

13 interested parties on our regulations.

14 The comment period for the fourth and 

15 final notice ended this past March. The four 

16 notices covered all regulations issued by the 

17 agencies through December 31, 2015, so it did allow 

18 comment on a number of the Dodd-Frank regulations, 

19 as requested by bankers and others. As you know, 

20 we organized each regulation according to 12 

21 substantive categories, applications and 

22 reporting, powers and activities, international 
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1 operations, banking operations, capital, 

2 Community Reinvestment Act, consumer protection, 

3 directors, officers, and employees, money 

4 laundering, rules of procedure, safety and 

5 soundness, and securities.

6 In addition to the Federal Register 

7 notices, the agencies held six outreach sessions 

8 --- excuse me, six outreach events across the 

9 country in the West, the East, in the middle of the 

10 country, and with over 1,000 participants 

11 attending in person, by telephone, or via live 

12 stream. The Kansas City outreach meeting 

13 specifically focused on rural and community bank 

14 issues.

15 We heard directly from many individual 

16 bankers, as well as from consumer and community 

17 groups, regarding their concerns with our 

18 regulations. Agencies also received over 250 

19 written comment letters in response to the four 

20 federal register notices, and many of them are very 

21 detailed, and they're very thoughtful comments, I 

22 must say. We are now in the process of really 
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1 analyzing those comments, each one of the comments, 

2 to prioritize them, to make sure we address all the 

3 comment areas and consider all of them and 

4 prioritize recommendations and consider 

5 appropriate changes that we could make in our 

6 regulations. Agencies plan to complete our final 

7 EGRPRA report by the end of this year, and then 

8 submit it to Congress, as required under the 

9 statute. As you know, we haven't waited for the 

10 issuance of the final report to take action.

11 We certainly began to take action in 

12 response to some of the comments we received, 

13 including some of the discussions we've heard at 

14 this committee. For more information about the 

15 actions the FDIC has taken so far and is still in 

16 the process of taking, and also some of the things 

17 we've heard from commenters, I'll turn the session 

18 over to Jim Watkins. Jim.

19 MR. WATKINS: Thank you, Roberta, and 

20 good morning. Please allow me to take a moment and 

21 touch on a few of the regulatory burden reducing 

22 initiatives and actions taken or in the process of 
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1 being taken. The FDIC is acting on regulatory 

2 relief suggestions throughout the EGRPRA process, 

3 and we appreciate the comments that we have 

4 received at the outreach sessions and by this 

5 group, as well. As a reminder of some of the 

6 actions taken so far, we've issued several 

7 financial institution letters, for example, 

8 relating to the application process. In November 

9 of 2014, we released an initial set of questions 

10 and answers about the deposit insurance 

11 application process to aid applicants in 

12 developing proposals for federal deposit 

13 insurance, and to enhance transparency of the 

14 application process.

15 In April of this year, we issued an 

16 update to these frequently asked questions. The 

17 supplemental questions and answers addressed 

18 business plan content with respect to initial 

19 submissions, kind of addressing some weaknesses 

20 that we've identified in other plans, and addresses 

21 changes in business plans.

22 We also previously released a financial 
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1 institution letter relating to applications which 

2 have significantly streamlined the requirements 

3 for applications to conduct permissible activities 

4 for certain bank subsidiaries organized as limited 

5 liability companies or LLCs. These new procedures 

6 are streamlining the process for institutions by 

7 requiring far fewer applications, and in the cases 

8 where it's necessary to file an application, most 

9 of those decisions now are being made at our 

10 regional offices. In April of this year, the FDIC 

11 announced the rescission of a prior financial 

12 institution letter titled, "Enhanced Supervisory 

13 Procedures for Newly Insured FDIC Supervised 

14 Depository Institutions," which basically 

15 eliminated the enhanced supervision and reporting 

16 requirements for institutions in the years four 

17 through seven that were viewed as de novo 

18 institutions.

19 The de novo period, now, for 

20 institutions, is reverted back to the original and 

21 customary three-year term. In addition, the FDIC 

22 announced subject-matter experts that we have 
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1 placed and designated in each of our regional 

2 offices to serve as points of contact for deposit 

3 insurance application.

4 The FDIC remains committed to working 

5 with groups interested in organizing community 

6 banks. To that end, we are developing additional 

7 resource materials, as suggested by Director 

8 Doreen Eberley this morning, to guide applicants 

9 through the application process. We're also 

10 planning outreach meetings with the banking 

11 industry and participants, organizing groups and 

12 such, to ensure that industry participants are very 

13 well informed about the FDIC's application 

14 approval process, as well as available tools and 

15 resources that we have issued in this regard.

16 For example, such tools include a 

17 series of educational videos categorized often as 

18 technical assistance, new directors' education, 

19 and virtual directors' colleges produced by the 

20 FDIC and available on our website under the 

21 directors' resource center page.

22 These series are designed to provide 
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1 useful information to bank directors, officers, 

2 employees on regulatory issues and proposed 

3 regulatory changes and include over 25 available 

4 videos, with topics ranging from operational areas 

5 to cybersecurity and our examination process.

6 If you have previously reviewed the 

7 community bank corporate governance video, you may 

8 want to re-review it again because we've just come 

9 out with an update, as you suggested earlier this 

10 morning. One last change I wish to mention has to 

11 do with the examination cycle. Upon authorization 

12 provided under the FAST Act, the banking agencies 

13 moved quickly to make an 18-month examination cycle 

14 available to more community financial institutions 

15 by increasing the eligibility threshold for 

16 qualifying institutions from $500 million in total 

17 assets to $1 billion in total assets.

18 That's very positive news for many of 

19 you. Now, to continue our discussion on FDIC 

20 initiatives and the work that's being performed in 

21 that regard, let me turn the mic over to our chief 

22 accountant, Bob Storch, who will talk about call 
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1 report changes.

2 MR. STORCH: Thank you, Jim. Good 

3 morning. The FDIC and the other banking agencies 

4 are continuing to move forward with the FFIEC's 

5 Community Bank Call Report Burden Reduction 

6 Initiative. I spoke to this committee in July of 

7 last year about the five action areas that comprise 

8 this inter-agency initiative.

9 The areas that may be of most interest 

10 to you this morning are those where you can, or will 

11 soon, see some concrete steps being taken to reduce 

12 call report burden. One action area where the 

13 agencies are in the final stage is the 

14 implementation of an initial small number of 

15 burden-reducing changes to the call report. These 

16 burden-reducing changes were issued as part of a 

17 proposal in September of 2015 that also included 

18 some other revisions to the call report that 

19 generally should have a limited impact on community 

20 banks. After considering the comments and the 

21 proposal, the FFIEC and the banking agencies 

22 recently finalized these provisions.
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1 On July 1st, the FFIEC sent a financial 

2 institution letter to all institutions outlining 

3 these final call report changes and when they would 

4 take effect. Most of the burden-reducing changes 

5 and some other revisions take effect September 30th 

6 of this year, with the remaining changes taking 

7 effect in March of 2017.

8 Drafts of the revised reporting forms 

9 and instructions for these changes were posted on 

10 the FFIEC's website in early July. The July 1st 

11 financial institution letter also addressed 

12 another action item under the Burden Reduction 

13 Initiative, which is the agencies' consideration 

14 of the feasibility of introducing a streamlined 

15 call report for small institutions. At last 

16 December's examination council meeting, the 

17 FFIEC's task force on reports discussed several 

18 options for the possible design of a 

19 less-burdensome call report for small institutions 

20 and other call report streamlining methods.

21 The agencies gained insight on the 

22 burdensome aspects of the call report preparation 
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1 process from on-site visits to nine community 

2 institutions during the third quarter of 2015, and 

3 through a number of conference call meetings with 

4 small groups of community bankers earlier this year 

5 that were organized by the Independent Community 

6 Bankers of America and the American Bankers 

7 Association.

8 During the visits to banks and during 

9 these conference call meetings, community bankers 

10 explained how they prepared their call reports, 

11 identified which schedules or data items take a 

12 significant amount of time or manual processes to 

13 complete, and described the reasons for these 

14 challenges in call report preparation.

15 The bankers also offered suggestions 

16 for streamlining the call report. The 

17 constructive banker feedback about call report 

18 burden and these options from the task force's 

19 community banker outreach activities have helped 

20 the agencies develop a specific call report 

21 streamlining proposal for small institutions. 

22 The proposal is now being reviewed by senior 
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1 leadership of the FFIEC's member entities. The 

2 FFIEC and the agencies anticipate publishing this 

3 proposal within the coming months. We believe it 

4 should meaningfully expand the burden-reducing 

5 changes to the call report well beyond those 

6 included in the September 2015 proposal.

7 Once that proposal is published, we 

8 certainly encourage you and invite you to share 

9 your comments on the proposal and the industry's 

10 comments, as a whole. We'll look forward to 

11 receiving to try to move forward to implement a 

12 streamlined call report for smaller banks. Thank 

13 you. Roberta or Barbara, we can turn it back to 

14 you for questions and discussion.

15 MS. RYAN: Okay, any comments or 

16 questions from the committee, reactions?

17 MEMBER BLANKENSHIP: I just want to say 

18 thank you because for our shop, there is quite a 

19 bit of manual effort that goes into that. That 

20 would free up -- unfortunately, it's the key people 

21 in accounting and in the loan department that seem 

22 to be particularly burdened. It's always at 
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1 quarter end and a busy time for banks, so thank you 

2 for any relief that you could give us in that area.

3 MEMBER WILLIAMS: Overall, I think the 

4 effort in this process was very evident to the 

5 bankers, that you guys were very serious about 

6 actually taking a look at this and doing what you 

7 could to help streamline the process and help us 

8 in any way you can. That's appreciated.

9 MS. RYAN: Okay, great. Thank you, 

10 Roberta, Ruth, Jim, and Bob. Now, we're going to 

11 turn to our next panel. We thought we would 

12 provide the committee with an update on some 

13 consumer compliance issues, particularly recent 

14 proposed changes to the Consumer Compliance Rating 

15 System for banks.

16 To lead us in this discussion, we're 

17 going to have Jonathan Miller, deputy director in 

18 our Division of Depositor and Consumer Protection, 

19 and Luke Brown, associate director in our Division 

20 of Depositor and Consumer Protection, as well as 

21 Faye Murphy, who is a colleague of Jonathan and 

22 Luke's. At this point, I guess I'll turn it over 
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1 to Jonathan.

2 MR. MILLER: Thanks, Barbara. Good 

3 morning, everybody, although I'm mindful of the 

4 fact that we're the last panel before lunch. It's 

5 always a dangerous position to be in. I've asked 

6 Luke and Faye to prepare a presentation on the new 

7 compliance ratings proposal.

8 If we have some time after that, I may 

9 talk briefly, also, about the new CRA guidance that 

10 was just put out recently, and maybe a couple of 

11 other things, but this will probably be the focus 

12 most of the panel, so Luke, go ahead.

13 MR. BROWN: Good afternoon, everybody. 

14 Happy to be here. On May 3, 2016, the member 

15 agencies of the FFIEC released a proposal for 

16 updating the inter-agency Consumer Compliance 

17 Rating System. Just as a reminder, the FFIEC is 

18 made up of the Federal Reserve Board, the FDIC, 

19 CFPB, OCC, NCUA, as well as representatives from 

20 the state banking agencies. I just want to 

21 highlight that because this is something that we 

22 all collectively worked on, in terms of consistent 
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1 guidance across the agencies, which I think will 

2 be helpful to the institutions going forward. The 

3 rating system is used by examiners to evaluate 

4 financial institutions' adherence to consumer 

5 compliance laws and regulations. Based on the 

6 ratings framework, examiners assign a consumer 

7 compliance rating to each institution, as you're 

8 well aware. The main purpose of the rating system 

9 is to ensure that supervisory institutions are 

10 evaluated by the FFIEC agencies in a comprehensive 

11 and consistent manner.

12 The goal is also to ensure that 

13 supervisory resources are appropriately focused on 

14 areas exhibiting risk and on institutions that 

15 warrant elevated supervisory attention. The 

16 public comment period ended not too long ago in 

17 July, July 5th. We received 17 public comments, 

18 which we're looking at very closely. We look to 

19 hopefully receive some comments that will improve 

20 the guidance.

21 Today, Faye and I are going to briefly 

22 describe the proposal, as well as related 
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1 background information. But I do note that 

2 because this is a proposal, and the agencies are 

3 going through the public comments and looking for 

4 input through those comments, I think it's 

5 premature to have a conversation about what the 

6 final guidance might look like as we work through 

7 this. However, during this discussion, we welcome 

8 any feedback you might have, and we will certainly 

9 include that feedback in our process, going 

10 forward, as we work with the other agencies. In 

11 your packet, you might have a copy -- I shouldn't 

12 say might.

13 I'm sure you have a copy of the 

14 proposal, if you want to look at it. I think 

15 particularly during Faye's portion of the 

16 conversation, there's a table in the back that is 

17 essentially is the framework and the meat of the 

18 proposal. The existing rating system that's in 

19 place now has been in place for some years.

20 It was adopted by the FFIEC when 

21 examinations focused more on transactional 

22 testing, sort of the more rule-based approach for 
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1 regulatory compliance, rather than evaluating the 

2 sufficiency of an institution's management of 

3 risks generally to ensure compliance. In May, 

4 when the proposal was released, the proposal was 

5 released in recognition of all the significant 

6 changes that have taken place over the years. As 

7 you are well aware, regulatory changes, 

8 supervisory changes, market changes, there was no 

9 CFPB when these were issued. We thought it was 

10 important to revisit the guidance and take a look 

11 at it very closely. We also, over the years, have 

12 received requests from the industry to update the 

13 compliance rating, so that was also front of mind 

14 for us. The revisions are designed to more fully 

15 align the rating system with the FFIEC agencies' 

16 current risk-based approaches and our tailored 

17 examination approaches.

18 The proposed revisions were not 

19 developed to set new or higher supervisory 

20 expectations. Essentially, they're consistent 

21 with the way we've been examining for some time, 

22 so they should represent no additional regulatory 
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1 burden. Since the existing ratings were issued, 

2 each of the agencies has adopted a risk-based 

3 consumer compliance examination approach.

4 As you know, risk-based consumer 

5 compliance supervision evaluates whether an 

6 institution's compliance management system 

7 effectively manages the compliance risk at an 

8 institution. Under this supervisory approach, 

9 examiners tailor supervisory activities to each 

10 institution and adjust these activities over time. 

11 The revisions proposed in May would more fully 

12 align the ratings system with the FFIEC agencies' 

13 current examination approaches in a number of ways. 

14 For example, the proposed revisions emphasize the 

15 importance of institutions' compliance management 

16 systems, in particular, risk-controlled processes 

17 designed to manage risks in the products and 

18 services offered to bank customers.

19 Another objective is to develop a 

20 rating system appropriate for evaluating 

21 institutions of all size. This is a really 

22 important tenet for us, as we examine community 
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1 banks. Consequently, each oversight factor in the 

2 proposal places an emphasis on examiners 

3 evaluating the institution commensurate with its 

4 size, complexity, and risk profile. That's very 

5 important, and it's noted throughout, as you'll see 

6 when we look at the proposal.

7 Also, a new rating system would 

8 establish incentives for institutions to promote 

9 consumer compliance by creating a framework for 

10 recognizing when a bank is preventing or 

11 self-identifying or addressing compliance issues 

12 in a very proactive manner. We thought that was 

13 also an important priority. In addition, the 

14 proposal would promote coordination among the 

15 agencies. Each of the agencies would import and 

16 use the same rating system to apply to their 

17 institution, so it would be a consistent standard 

18 across all institutions, whether bank or non-bank. 

19 With that, that's my overview of the proposal. I'm 

20 going to ask Faye to go into a little more detail 

21 and talk about the components and the structure of 

22 the rating system.
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1 MS. MURPHY: Thanks, Luke. The 

2 proposal retains the current five-scale framework 

3 for the proposed Consumer Compliance Rating 

4 System. A one represents the highest rating and, 

5 consequently, the lowest degree of supervisory 

6 concern, while five represents the lowest rating 

7 and the most critically deficient level of 

8 performance and, therefore, the highest degree of 

9 supervisory concern.

10 As Luke mentioned, the proposed rating 

11 system reflects risk-based expectations 

12 commensurate with the size, complexity and risk 

13 profile of institutions and incents institutions 

14 to prevent, self-identify, and address compliance 

15 issues. Each institution would be assigned a 

16 consumer compliance rating based primarily on the 

17 adequacy of its CMS, which is designed to ensure 

18 compliance on a continuing basis. The agencies 

19 are proposing a rating system that includes three 

20 categories of assessment factors, board and 

21 management oversight, compliance program, and 

22 violations of laws and consumer harm.
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1 When assigning a rating under the 

2 proposed rating system, the examiners will 

3 consider each of the assessment factors in each 

4 category. There are a total of 12. The three 

5 categories allow examiners to distinguish between 

6 varying levels of supervisory concern when rating 

7 institutions for compliance with federal consumer 

8 protection laws. The consumer compliance rating 

9 should reflect a comprehensive evaluation of the 

10 institution's performance.

11 It is not based on a numeric average or 

12 any other quantitative calculation. Specific 

13 numeric ratings will not be assigned to any of the 

14 12 assessment factors. It is important to stress 

15 that all institutions, regardless of size, should 

16 maintain an effective CMS. The sophistication and 

17 formality of the CMS typically will increase, 

18 commensurate with the size, complexity, and risk 

19 profile of the institution. It is also important 

20 to note that the articulation of CMS assessment 

21 factors is not intended to create new expectations 

22 for lower-risk institutions. Now, I'll briefly 
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1 describe the rating system category and the 

2 assessment factors.

3 The first category of the proposed 

4 rating system, board and management oversight, 

5 will be used to analyze the institution's CMS and 

6 the role of its board and management officials. 

7 The four assessment factors in this category would 

8 be oversight and commitment, which would measure 

9 the overall institution's compliance risk 

10 management program.

11 There's change management. This is 

12 where we measure the effectiveness of the 

13 institution's change management processes, 

14 including responding timely and satisfactorily to 

15 any variety of change, internal or external, to the 

16 institution.

17 There's comprehension identification 

18 and management of risk, which would arise from the 

19 institution's product services or activities, and 

20 then also under this category, there's corrective 

21 action and self-identification, where you're 

22 looking at corrective action undertaken as 
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1 consumer compliance issues are identified. 

2 Compliance expectations contained within this 

3 category extends to third-party relationships, 

4 into which the financial institution has entered. 

5 Examiners should evaluate activities conducted 

6 through the third-party relationships as though 

7 the activities were performed by the institution, 

8 itself.

9 The agencies believe the above factors 

10 will provide examiners with an effective and 

11 consistent framework for evaluating whether or not 

12 board and management are engaged to a satisfactory 

13 degree at a particular institution. All 

14 institutions, regardless of size, should maintain 

15 an effective CMS.

16 However, each institution should be 

17 evaluated based on its size, complexity, and risk 

18 profile. You'll notice that we're going to keep 

19 mentioning that. The second category, compliance 

20 program, would be used to analyze other elements 

21 of an effective CMS. The assessment factors for 

22 a compliance program are policies and 
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1 procedures -- here's where we look at whether the 

2 institution's policies and procedures are 

3 appropriate to the risk in the products, services, 

4 and activities of the institution. The next 

5 assessment factor is training. Here's where we 

6 look at the degree to which compliance training is 

7 current and tailored to risk and staff 

8 responsibilities. Also, we'd look at monitoring 

9 and/or audit.

10 Here's where we look at the sufficiency 

11 of the monitoring and, if applicable, audit to 

12 encompass compliance risks throughout the 

13 institution. Finally, in this category, there's 

14 the consumer complaint response. Here's where we 

15 look at the responsiveness and effectiveness of the 

16 consumer complaint resolution process. Examiners 

17 should also review a financial institution's 

18 management of third-party relationships and 

19 services as part of its overall compliance program.

20 The agencies believe these factors, 

21 along with board and management oversight, will 

22 provide an effective and consistent framework to 
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1 evaluate an institution's CMS. Each of these 

2 assessment factors will be considered in 

3 evaluating risk and assigning a consumer 

4 compliance rating. As previously mentioned, each 

5 institution would be evaluated based on its size, 

6 complexity, or risk profile. Next time, I'll have 

7 you all say it with me. The third category, 

8 violations and consumer harm, will provide 

9 examiners with a framework for considering the 

10 broad range of violations of consumer protection 

11 laws and evidence of consumer harm. Consumer harm 

12 may occur as a result of a violation of law.

13 While many instances of consumer harm 

14 can be quantified as a dollar amount associated 

15 with financial loss, such as charging higher fees 

16 for a product than was initially disclosed, 

17 consumer harm may also result from a denial of an 

18 opportunity. In conjunction with assessing an 

19 institution's CMS, based on the first two 

20 categories, examiners will evaluate the consumer 

21 protection violations, if any, and related 

22 consumer harm, based on the following four 
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1 assessment factors.

2 The root cause assessment factor 

3 analyzes the degree to which weaknesses in the CMS 

4 gave rise to the violations. The severity 

5 assessment factor weighs the type of consumer harm, 

6 if any, that resulted from violations of law. The 

7 duration assessment factor describes the length of 

8 time over which violations occurred, and the 

9 pervasiveness assessment factor evaluates the 

10 extent of the violations and resulting consumer 

11 harm, if any. Examiners are directed to consider 

12 all violations of consumer law, based on the root 

13 cause severity, duration and pervasiveness of the 

14 violation.

15 This approach emphasizes the 

16 importance of a range of consumer protection laws 

17 and is intended to reflect a broad array of risks 

18 in the market and the potential harm caused by 

19 consumer protection-related violations. In 

20 conclusion, we want to emphasize that the agencies 

21 believe that self-identification and prompt 

22 correction of violation of law reflect strength in 
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1 an institution's CMS.

2 We want to emphasize that a robust CMS, 

3 appropriate for the size, complexity, and risk 

4 profile of an institution's business often will 

5 prevent violations or will facilitate early 

6 detection of potential violations. This early 

7 detection can limit the size and scope of consumer 

8 harm. We also want to emphasize that prompt 

9 self-reporting of serious violations represent 

10 concrete evidence of an institution's commitment 

11 to responsibly address underlying risks. In 

12 addition, appropriate corrective action, 

13 including both corrections of programmatic 

14 weaknesses and full redress for injured parties 

15 limits consumer harm and prevents violations from 

16 occurring in the future.

17 Finally, we want to emphasize that the 

18 intent of the proposed Consumer Compliance Rating 

19 System is to recognize institutions that 

20 consistently adopt the strategies that I just 

21 previously discussed. With that, I'm going to 

22 turn it over to Jonathan.
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1 MR. MILLER: I think maybe we can have 

2 a little bit of a discussion on this proposal since 

3 there's a lot to digest here. You may have a lot 

4 of questions. I do want to underscore, I think, 

5 the message that we're trying to give both 

6 externally, to the bankers -- and this is, again, 

7 on an inter-agency basis -- and internally, to our 

8 examiners is we believe that these changes make the 

9 ratings -- catch the rating system up with the 

10 process we actually use. We're not really 

11 expecting changes in our ratings, but the old 

12 ratings which, again, as Luke mentioned, were last 

13 done in 1980, just didn't really -- just were not 

14 really matching with the process we were using. 

15 That's our fundamental message point, but it's a 

16 significantly new system, so I know there may be 

17 a lot of questions. Let me open it up.

18 MEMBER BRYANT: I thought I needed to 

19 get this in. I think this is a great improvement. 

20 One of the items that I got a chance to read, looking 

21 at Pages 20-23, mentioned something about a 

22 violation of law or having major problems, not 
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1 necessarily keeping the institution from receiving 

2 a 1 or a 2 compliance. The area that I think is 

3 extremely helpful for institutions is the area of 

4 corrective action and self-identification.

5 Without having a chance to read through 

6 all of it, corrective action, self-identification, 

7 I would assume would also include having compliance 

8 committees comment on this include information 

9 that's shared with board members, so that when 

10 there's a Safety & Soundness examination, the 

11 examiners will be able to go and look at minutes 

12 to see that the board has seen that there have been 

13 compliance issues or it's a violation of law, and 

14 that it was properly identified and pointed to the 

15 board and corrective action taken, correct?

16 MR. BROWN: Obviously, there's a 

17 number of ways, whether it's through the monitoring 

18 or audit or reports. If an issue is identified and 

19 you resolve that issue, that's something that we 

20 like to see when we come in for a formal 

21 examination. There's no express mention of that 

22 in the current, existing rating system, so we 
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1 wanted to make sure we outlined that very 

2 specifically in the proposal, so that people could 

3 get credit when they self-identify appropriately.

4 MR. MILLER: There's a helpful -- I saw 

5 it on Page 24. There's a helpful chart. I think 

6 right in the very first box there, under the board 

7 and management oversight assessment factor, for a 

8 one rating, examiners will evaluate if board and 

9 management demonstrate strong commitment and 

10 oversight of the financial institution's 

11 compliance system, so exactly what you said, 

12 evidence of that active participation by the board 

13 is important.

14 MEMBER WILLIAMS: I know we talked 

15 about not getting into the details about what the 

16 final will look like, but as it's proposed, I'm 

17 assuming there's effectively three component 

18 ratings and an overall composite rating?

19 MR. BROWN: That is not correct. 

20 Every institution's business, essentially, is 

21 different, obviously. You could have a focus on 

22 mortgages or credit cards. Every time you go to 
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1 an examination, you're looking at it from a 

2 risk-based perspective.

3 As opposed to a component rating that 

4 would be stagnant and applied consistently every 

5 time, we think it's important for an examiner to 

6 use their judgment. So to the extent that board 

7 and management involvement, in terms of good things 

8 or negative things, is considered consistent with 

9 what's going on at that institution.

10 If you had a component rating and it 

11 equally was weighted across this whole area, that 

12 would not work for all institutions. We want to 

13 be able to give people credit for where they're 

14 doing well and emphasize that when we're doing an 

15 assessment.

16 MEMBER WILLIAMS: So no --

17 (Simultaneous speaking.)

18 MR. BROWN: It's just an overall.

19 MEMBER WILLIAMS: Just an overall, 

20 okay. I was under the impression there would not 

21 be individual ratings for -- I'm sure appreciative 

22 of that fact, that for rate 12 categories, so it 
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1 would just be the overall composite?

2 MR. BROWN: That's right, but all 

3 examiners will consistently think through those 12 

4 components. That's what's important.

5 MR. MILLER: Any other comments?

6 MEMBER HASKIN: I would just say that 

7 we have just had waves and waves of new consumer 

8 regulations put upon us, and some of those have not 

9 had very large windows to train and educate, and 

10 even to acquire software to be prepared. And so 

11 I would just say that we find ourselves constantly 

12 reviewing to make sure we're doing things right 

13 these days, and even though we think we're 

14 prepared, sometimes we don't know what we don't 

15 know until we actually do a loan. 

16 So I would hope that in this time of new 

17 regulations that the examiners would be mindful of 

18 that. That banks are really trying to do the right 

19 thing, but it's sometimes difficult to comply to 

20 the letter. Especially the mortgage rules. 

21 We're struggling. We keep sending people to 

22 schools and quite honestly, a lot of the training 
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1 we receive we're getting different messages, 

2 conflicting messages, as this process of actually 

3 preparing loans and using these new regulations as 

4 they're implemented, finding out those differences 

5 and what applies. So I would just pray that you 

6 be mindful of that.

7 I know that we spend a tremendous amount 

8 of time in our bank trying to be correct on 

9 compliance issues, but we have just really been 

10 struggling to make sure that we're doing everything 

11 correctly.

12 MEMBER WILLIAMS: I would just add, 

13 too, especially in light of -- when you start 

14 talking about time frames, that's probably been the 

15 biggest issue for us, as far as some of the mortgage 

16 regulations. While I understand that the FDIC is 

17 not writing this, you're regulating it.

18 There's that fine balance for us 

19 between taking care of our customers and doing it 

20 the right way. I'm sure some of the other bankers 

21 have seen this, but we've seen a great deal of 

22 customer response saying we trust you. We don't 
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1 need four days to look over this document.

2 Our response is don't care, you've got 

3 to take it. You can't have your money until 

4 this -- those are the kind of things -- the hoops 

5 that have been hardest for us to jump through. 

6 Again, I would just echo Jane's comments. Be 

7 patient with us as we try to get through this 

8 process.

9 MR. BROWN: I just want to mention 

10 we've been in touch with our examiners, and we stay 

11 in touch on what's happening on the ground, in terms 

12 of issues that you're seeing and challenges 

13 you're having. We did issue a financial 

14 institutions letter last fall, which says we're 

15 mindful of all the changes, and we're keeping that 

16 in mind as we examine.

17 MEMBER WILLIAMS: We saw that in the 

18 process of our exam. I agree. It's a slower 

19 process than we had hoped it would be trying to get 

20 on top of all this, and it keeps changing. That's 

21 the problem.

22 MEMBER BLANKENSHIP: Just to kind of 
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1 touch on that, as well, just with the new TRID 

2 disclosures and the title companies and everyone's 

3 interpretation being just a little bit different, 

4 we're seeing more than ever that the consumers are 

5 actually being harmed by this.

6 Because you have a closing set on 

7 Friday, movers lined up. They've brought the dog, 

8 the cat, kids, and then they can't close because 

9 it's one little line, and everyone is so paranoid 

10 about changing anything before they get 14 stamps 

11 of approval that it really is creating a lot of 

12 delays, at least in our experience, for that 

13 consumer.

14 MR. MILLER: When the first set of 

15 mortgage rules went into place in the run up to that 

16 in 2013, they went into place in 2014, we took the 

17 position that what we were -- we would not expect 

18 for our banks to have everything absolutely 

19 perfect. We were going to look for efforts by the 

20 bank to get in compliance, actively to get into 

21 compliance, an understanding of the requirements 

22 and so forth.
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1 That's the position we took with the 

2 first set of rules. We took exactly the same 

3 position with TRID, what the CFPB calls know before 

4 you owe, the combined TILA-RESPA disclosures, as 

5 Luke just outlined. We've actually pulled our 

6 examiners and have found that for the most part, 

7 the banks are doing that.

8 We're finding some violations, where 

9 we're noting the violations where we find them, 

10 just to have a record, but without really any 

11 consequence, as long as, again, the bank is 

12 pursuing the effort to get into compliance. Even 

13 the violations we saw were not particularly 

14 significant. From our experience, I think we're 

15 seeing a nice path towards compliance among our 

16 institutions.

17 MEMBER HASKIN: One other thing I'll 

18 mention is the reference material for lenders to 

19 use is very complicated. It refers to sections of 

20 the code. It's not user friendly. And a lot of 

21 our people have tried to research that to 

22 understand exactly how we need to disclose, and 
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1 it's very difficult to use the information that's 

2 out there as a user to know how to do the documents, 

3 because it refers a lot to the code. I believe 

4 that's the CFPB's code.

5 MR. MILLER: Right, they have --

6 MEMBER HASKIN: So I don't know if 

7 that's something that all the agencies can work on, 

8 but our people do try to research those things, and 

9 that's one of the things that my documentation 

10 preparers have told me, is that it's very, very hard 

11 to get any guidance from that documentation.

12 MR. MILLER: The CFPB has put out a lot 

13 of educational material 

14 (Simultaneous speaking.)

15 MEMBER HASKIN: There is material out 

16 there, pieces out there, but they all reference 

17 codes. It's so cryptic that we can't discern how 

18 we're supposed to use it. It's very cryptic 

19 referring to the code.

20 MR. MILLER: That's a helpful comment, 

21 and we can pass that along. Any other --

22 MEMBER LUNDY: Since this is my last 
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1 meeting on the committee, I'll throw something out 

2 that I threw out probably at my first meeting. I 

3 throw this out for a suggestion for the kind of 

4 research that I know you all committed to do. I'm 

5 from a western state -- there are nine community 

6 property states. Each one of them has a slightly 

7 different variance on it. Sometimes, those 

8 community property laws, which were forward 

9 looking at the time, in terms of equal ownership 

10 of property, and are generally forward looking, and 

11 in some ways, equal opportunity credit laws passed 

12 two generations later caught up with the same 

13 thing.

14 But for our frequent instances where 

15 the specifics of those community property laws were 

16 in variance with technical interpretations of 

17 equal opportunity, and there's some confusion 

18 about that. The thing that comes up most often is 

19 called the spousal joinder issue. It's whether 

20 and when a spouse, who may have separate property 

21 and may not be directly involved in a business, it's 

22 appropriate to either have that spouse join in the 
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1 guaranty, or whether and how the financial 

2 institution analyzes property.

3 This is not the appropriate time to get 

4 into all the nuances, but it is a nuance they 

5 complicated -- and different because California 

6 and Arizona and Nevada and Washington all have 

7 slightly different variations on the theme. So I 

8 would just suggest, as a future item, that jointly, 

9 you all could get on that and work on it and try 

10 to come up with a common roadmap, where there are 

11 differences in state law that has to -- that's, I 

12 think, probably the reason that it's been difficult 

13 to try to get a common roadmap because those 

14 differences make it difficult.

15 At any rate, I think that's an area that 

16 can cause some confusion. Ironically, the one 

17 area where all the potential violations of 

18 requiring a guaranty when you shouldn't have go out 

19 the window for SBA on this one. Small Business 

20 Administration absolutely requires both spouses to 

21 sign, no matter the source of their personal 

22 property, the ownership source.
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1 At any rate, I don't have a specific 

2 suggestion, other than it can be an ongoing 

3 irritant, and sometimes a major issue in a 

4 compliance exam. I just throw that out as a 

5 suggestion for future work.

6 MEMBER WILLIAMS: I'll make one last 

7 comment. It's one I probably made before. I 

8 think having just gone through a compliance exam, 

9 this rating system matches up much better to what 

10 the examiners did and how they looked at the bank. 

11 While somebody made reference earlier today to the 

12 fact that the pre-exam questionnaire is much 

13 lengthier than it was, in fact, I think our folks 

14 said, "I think we got more than one copy." I said, 

15 "No, I think this is it." It took quite a bit of 

16 time to get that information in, but it was 

17 done -- that information was used well up front.

18 The amount of time in the bank was 

19 limited. The results were great. It's the right 

20 path, at least all the folks that I've talked to 

21 that have been through exams, my counterparts, 

22 recently, that experience has been very positive. 
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1 That's very much a step in the right direction. 

2 Thank you.

3 MEMBER SCULLY: I just have a 

4 clarifying question, which is that presumably all 

5 harm is deemed a subset of a violation, just a claim 

6 of harm, but without it being a violation --

7 MR. MILLER: Right. You wouldn't just 

8 have a claim -- a claim of harm is not sufficient --

9 MEMBER SCULLY: We all know we get 

10 claims of harm --

11 (Simultaneous speaking.)

12 MR. MILLER: Right, and that may 

13 not -- we have a complaint line, a consumer response 

14 center. We get a lot of calls there. We track 

15 down those. If there is a problem -- it's actually 

16 a good source of intelligence for us. If there is 

17 a problem it's very helpful, but it often turns out 

18 not to be a problem at all.

19 MEMBER SCULLY: And specifically not 

20 to be a violation.

21 MR. MILLER: Well right. If it's not 

22 a violation then yes. Anything else?
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1 MEMBER BRYANT: You will be around for 

2 a few minutes, right?

3 MR. MILLER: We will.

4 MR. BROWN: Longer than that if you 

5 need it.

6 MR. MILLER: I'll just quickly 

7 cover -- just recently, we released a second set 

8 of Community Reinvestment Act questions and 

9 answers. These have been outstanding for quite a 

10 while. We've been working with the OCC and the fed 

11 to finalize them, to update some of the guides for 

12 the CRA. They were finalized just last week, as 

13 a matter of fact. Basically, they're additional 

14 guidance in a number of areas. Availability and 

15 effectiveness of retail banking services is one of 

16 the areas we put out some additional guidance, 

17 innovative and flexible lending practices.

18 Just as an aside, because of a meeting 

19 I had yesterday with Jim and a colleague that he 

20 brought in, one of the things that we look for in 

21 CRA as sort of a plus is if a bank does something 

22 innovative to serve the low and moderate income 
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1 community in its assessment area.

2 Jim brought in a person that's doing an 

3 IDA account. It's an individual development 

4 account to help low and moderate income people for 

5 college education. It's quite an intensive 

6 account management process. Even if other 

7 institutions in an area provide a service, if it's 

8 new to that institution, we will consider it 

9 innovative.

10 In fact, in that case, I don't think 

11 there are many other institutions -- of kinds we 

12 look for. It includes some community development 

13 related issues, including economic development, 

14 community development loans and activities, and 

15 revitalize or stabilize underserved non-metro 

16 middle income geographies and community 

17 development services. It's a nice set of helpful 

18 guidance that will help your institutions figure 

19 out better ways to serve your communities.

20 MEMBER SCULLY: It's a lengthy 

21 document, but I commend you for at least trying on 

22 the community development I think it's always 
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1 difficult to determine is this really needed 

2 development or not.

3 MR. MILLER: Two areas that might just 

4 be worth calling out is investment in broadband 

5 infrastructure, which is going to be increasingly 

6 important for community, as a whole, as long as it 

7 includes low and moderate income segments. 

8 That's, I think, going to be particularly important 

9 as we talk to the millennials and the importance 

10 of technology to them, so having community banks 

11 have access to high-speed Internet. Then energy 

12 efficiency, as well, is another area that we've 

13 sort of elevated for community development.

14 MEMBER SCULLY: But they both have to 

15 be directed at --

16 MR. MILLER: Include, yes, correct. 

17 If it's a small community and you're providing 

18 access to the whole community, you'd get credit for 

19 that. You couldn't cut out the low and moderate 

20 income. Thank you.

21 MS. RYAN: Okay, thanks, Jonathan, 

22 Luke, and Faye. Right now, we're going to take a 
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1 break for lunch. We'll reconvene at 1:00. So all 

2 of the committee members and senior FDIC staff are 

3 welcome to join us upstairs. Thanks.

4 (Whereupon, the above-entitled matter 

5 went off the record at 11:40 a.m. and resumed at 

6 1:09 p.m.)

7 MS. RYAN: Welcome back, everybody. 

8 We're now going to focus on financial technology, 

9 or what is called fintech issues. We have senior 

10 staff from our Division of Risk Management 

11 Supervision and Division of Depositor and Consumer 

12 Protection, I think most of whom you've already 

13 heard from today, except, I believe, Rae-Ann Miller 

14 is new with us today. She's associate director 

15 with the Division of Risk Management Supervision. 

16 With that, I'll turn it over to Doreen.

17 MS. EBERLEY: I'm going to quickly turn 

18 it over to Jim. Mark and I have strategically 

19 placed ourselves on the other end of the speakers. 

20 Jim, if you can kick us off.

21 MR. WATKINS: Thank you, Doreen, thank 

22 you, Mark, and good afternoon. The FDIC 
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1 continually monitors emerging issues, emerging 

2 trends for financial institutions and really, the 

3 financial industry as a whole. Financial 

4 technology or fintech is one of those emerging 

5 issues that we are exploring and looking at.

6 It is becoming a rather significant and 

7 important topic for the banking industry. It is 

8 also important for the FDIC and for community 

9 bankers. We'd like to spend some time with you 

10 this afternoon discussing this matter and solicit 

11 your feedback, your insights, your comments. We 

12 have a brief slide deck. We have eight slides that 

13 we'd like to walk through, and then kind of open 

14 it up for a broader discussion.

15 If I could turn your attention to the 

16 second slide, which is FDIC's fintech steering 

17 committee and the objectives of our steering 

18 committee. Let me begin by noting that the FDIC 

19 has formed a fintech steering committee, which is 

20 comprised of FDIC executives from supervision, 

21 from compliance and consumer protection, from our 

22 insurance and research areas. It also includes 
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1 representation from our Office of the Chief Risk 

2 Officer, and also our Legal Division, as well. The 

3 objectives of the steering committee are outlined 

4 here.

5 Basically, it's to gain an 

6 understanding and assess, monitor, if you will, 

7 fintech activities, developments, and trends, 

8 understand in greater detail what is occurring in 

9 the market and what may be occurring in the market, 

10 evaluate the impacts to our organization and our 

11 stakeholders, banking, especially community 

12 banking, the deposit insurance structure. 

13 Supervision and oversight would be included in 

14 that, as well as economic inclusion, and consumer 

15 protection.

16 Also, the steering committee objective 

17 would be to oversee our internal working groups 

18 that the FDIC has formed relating to fintech. We 

19 will talk a little bit more on that topic in the 

20 next couple of slides that follow. But 

21 essentially, we have a staff that is actively 

22 researching and gaining an understanding and 
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1 insights into the fintech area and its multiple 

2 aspects relating to banking. Then the steering 

3 committee may end up making recommendations for 

4 follow-up action and monitor any implementation of 

5 those recommendations.

6 Then finally, it is to help formulate 

7 potential strategies to respond to opportunities 

8 and challenges presented by fintech to ensure 

9 developments align with our regulatory objectives 

10 and goals. The idea here is that as this area 

11 evolves, we want to make sure that we understand 

12 it and are prepared for it and how it would affect 

13 our jobs. Now, I will turn the next slide over to 

14 Rae-Ann Miller.

15 MS. MILLER: Thanks, Jim. As we talk 

16 through fintech just amongst ourselves, with our 

17 colleagues at the other agencies and other 

18 stakeholders that come in and visit with us, we 

19 start with what is it. I think there's some debate 

20 there. This definition here -- I'm not going to 

21 read it; you can read it yourself -- it's from the 

22 Financial Stability Board. Broadly here, when we 
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1 talk about it, we look at fintech as the use of 

2 technology in an attempt to make financial services 

3 more efficient. In this regard, it's nothing new. 

4 You folks look for ways to improve efficiencies, 

5 I would assume, in your jobs. Under this 

6 definition, ATMs probably would have been fintech 

7 at one point, but I can't remember a time when we 

8 didn't have them.

9 In some respects, fintech is viewed as 

10 a potential to existing financial services, that's 

11 the whole disruption theory. That part is more of 

12 a customer service dimension, but there's a whole 

13 other area of fintech that has to do with trying 

14 to improve efficiencies in the back office space. 

15 Slide 4, I wanted to just expand a little bit more 

16 about what we look at, in terms of the dimensions 

17 of fintech.

18 Obviously, there are fintech companies 

19 and processes that develop credit products. We 

20 talked to this committee a few meetings ago about 

21 marketplace lending. It's probably the most 

22 visible example in the credit space, but we also 
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1 look at crowd funding in this group. There are 

2 other credit products in this segment that are 

3 emerging, as well. There's also companies that 

4 specialize in offering deposit accounts without 

5 brick and mortar. We heard the folks today. One 

6 guy didn't go into a bank for two years. There are 

7 companies, mostly partnering with banks, at this 

8 point, that just offer deposit-gathering services. 

9 Then within the payment sphere, there's a number 

10 of person-to-person payment systems, 

11 international payment transfer and currency 

12 exchanges. Some of our millennials that work 

13 here, not the ones that were up, but other ones, 

14 will Venmo you.

15 I'll Venmo you later, if you go out to 

16 lunch. That's paying each other. I had to be told 

17 what that was, but that's what that is. In terms 

18 of investment management and personal finance, 

19 there's companies and applications that aggregate 

20 accounts. People know those. I think, again, one 

21 of the millennials actually talked about using one 

22 of those.
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1 There's investment allocation 

2 packages, and even high-frequency trading we view 

3 as coming in this area. Then the back office 

4 processing covers things like distributed ledger 

5 technology that you may have heard about and smart 

6 contracts. Then under the capital markets, when 

7 we're talking about that, we look at companies and 

8 services that facilitate, basically, trading, 

9 settlement and even security valuation services. 

10 Moving to Slide 5, this is sort of a list of our 

11 views of benefits to fintech. Again, I'm not going 

12 to read them all. You can see them here. But at 

13 its core, the technological innovation tends to 

14 promise speed, cost reduction and a better customer 

15 experience.

16 With fintech, and especially with some 

17 of the companies that deal with deposit and credit 

18 products, they talk about increasing access to the 

19 banking system, as well. It may be in a different 

20 way, but a lot of the things that you folks do, as 

21 well.

22 From our perspective -- this might be 
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1 one you haven't thought about, but from our 

2 perspective, in supervising, insuring and 

3 resolving institutions, there might be certain 

4 fintech advancements that could allow quicker 

5 access to information we need to do our jobs. In 

6 that way, maybe we could do our jobs in a less 

7 intrusive way, as well. I'll turn it over to Jon.

8 MR. MILLER: If you look at Slide 6, of 

9 course, like anything new, there are also 

10 challenges and risks. For our banks, when they 

11 enter into any new product, service or third-party 

12 relationship, whether that's fintech or any other, 

13 they need to identify and understand the associated 

14 risks and then manage and mitigate those risks. 

15 Depending on the activities and business model of 

16 the fintech company, risks presented by fintech are 

17 similar to those faced by your banks and others, 

18 but there may be heightened risks.

19 For example, if it's a 

20 technology-focused service, then obviously cyber 

21 issues, IT area, because of the reliance on the 

22 technology may be a particular risk to be aware of. 
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1 Also, some of these firms rely very heavily on 

2 sophisticated models, underwriting models, and 

3 they so far have been untested under stress 

4 conditions, or may, if not properly monitored, pose 

5 fair lending risk.

6 Other challenges include 

7 disintermediation, or the so-called disruption of 

8 traditional banks Rae-Ann mentioned, and perhaps 

9 even disruption of their service providers. We 

10 added to the list, as a challenge, changes in 

11 capital markets processing, given the breadth of 

12 those markets and the size and number of the 

13 participants that could be affected by wholesale 

14 changes there. If you turn to Slide 7, I want to 

15 talk a little bit about our ongoing efforts. Jim 

16 mentioned that we've recently created a steering 

17 committee. This is how we're really addressing 

18 following the fintech trends here at the FDIC. 

19 We've put together two inter-divisional working 

20 groups, split between the wholesale and the retail 

21 aspects of fintech.

22 The wholesale focuses on repos, 
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1 derivatives, clearing, central counterparties and 

2 credit. The retail focuses on consumer and small 

3 business aspects of fintech. The retail group 

4 follows trends in marketplace lending -- Rae-Ann 

5 mentioned, we've talked about that -- alternative 

6 scoring systems which we are starting to hear more 

7 about, mobile and virtual deposit services, 

8 account aggregators and person-to-person 

9 payments.

10 The wholesale group monitors 

11 distributed ledger technology, smart contracts, as 

12 well as the development of virtual and alternative 

13 currencies. We also have frequent interactions 

14 with interested stakeholders. For example, we'll 

15 meet with companies that offer fintech products and 

16 services, and attend and participate in 

17 conferences. Those kinds of meetings are really 

18 an important source of information for us, and we 

19 learn a lot by those.

20 Our final slide, Slide 8. On an 

21 ongoing basis, we have a number of ways we monitor 

22 and respond to innovation, starting with the 
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1 committee here, the community bank advisory 

2 committee. We also do a lot of work around 

3 increasing access to mainstream financial 

4 services.

5 A lot of that has to do with innovation, 

6 and particularly technological innovation. For 

7 example, we have another advisory committee called 

8 the Advisory Committee on Economic Inclusion or 

9 ComE-IN, as we call it. We're spending a lot of 

10 time exploring the use of technological 

11 innovations to bring the un-banked and 

12 under-banked into the financial mainstream.

13 This work, right now, is focused on the 

14 use of mobile financial technology to achieve this 

15 goal. In fact, we had some of our research staff 

16 make a presentation to this committee at the last 

17 meeting on that work. There's also the Alliance 

18 for Economic Inclusion and Bank-On Movement, which 

19 are coalitions of financial institutions, 

20 community-based organizations, local governments 

21 and other partners that are really focusing on, 

22 really, a large number of communities around the 
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1 country. Again, their focus is to get people into 

2 mainstream financial services, again, thinking 

3 about the use of technology to achieve that goal. 

4 Just this May, we issued a request for comment. 

5 That's our Financial Institution Letter 32-2016, 

6 for those of you keeping score at home.

7 That request is on mobile financial 

8 service strategies and how they can be leveraged 

9 to improve economic inclusion. In fact, we're 

10 looking for bank partners who may want to work with 

11 us to demonstrate the effectiveness of mobile 

12 financial services in bringing and keeping the 

13 underserved in the banking system.

14 Every other year, we do a survey 

15 conducted with the U.S. Census to collect data on 

16 the number of U.S. households that are un-banked 

17 and under-banked, their demographic 

18 characteristics, and the reasons that they are 

19 un-banked and under-banked. We've learned an 

20 awful lot from that study. Each year, we get to 

21 change the questions a little bit and get a deeper 

22 and more nuanced understanding. That study will 
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1 be presented to ComeE-IN, the Advisory Committee 

2 on Economic Inclusion in October.

3 Finally, we monitor and address issues 

4 related to fintech through our regular examination 

5 process. That concludes our formal presentation, 

6 but we would really be interested in your views on 

7 the developments we're seeing in the marketplace 

8 and how the FDIC should be focusing its resources 

9 as we continue our efforts to monitor and stay on 

10 top of this issue.

11 MEMBER SELESKI: Have we thought about 

12 looking -- some of these things are very additive 

13 to what we do, in terms of banks and services we 

14 offer our clients, but there's also a threat from 

15 non-banks eating into our traditional profit 

16 areas. I'll give you a few examples. Obviously, 

17 consumer lending, now, that seems to -- community 

18 banks really aren't involved with that anymore.

19 It's pretty much of an online, shop for 

20 the best rate, whether it's Quicken Loans -- I 

21 heard, for instance, that Quicken Loans, I think, 

22 does one out of every four home mortgages online 
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1 now. Then on top of that, when you look at such 

2 things as -- you've got these same-day ACH for a 

3 dime. You can do it for ten cents versus sending 

4 a wire for $15. Our bank has grown a lot. Our wire 

5 volume has stayed consistent. I think it might be 

6 useful to see, also, how these non-bank -- or how 

7 some of these applications are actually going to 

8 hurt the earnings of banks, to some degree. I do 

9 think it's going to -- I believe it's probably the 

10 biggest threat.

11 We can talk about regulatory and all 

12 these other things. I think these non-banks, 

13 these fintech-type opportunities are going to be 

14 the biggest threat to especially community banks 

15 going forward. I think you mentioned it. I'm 

16 stealing your thunder. Three years ago, if you 

17 said that. I was half asleep up here. I thought, 

18 you're crazy, when you were talking about it, but 

19 now I agree 100 percent with you.

20 MR. PEARCE: Just one of the things 

21 that we have been monitoring and seeing is some of 

22 the non-bank fintech companies are really looking 
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1 for that opportunity where they see there's a 

2 particular aspect of a banking process that they

3 can try to disrupt, like remittance or wire 

4 transfers is an area where I think some of the 

5 non-bank technology companies have really said 

6 there's a different way to do that, which really, 

7 I think, does pose a risk of putting pressure on 

8 revenue at some institutions that are relying on 

9 those services.

10 MEMBER BLANKENSHIP: The other thing 

11 that we were discussing -- maybe I'll just steal 

12 some of your thunder, but we have to really be 

13 concerned about where the end liability lies. 

14 When you start looking at some of these ways to make 

15 these payments -- and I do think that is going 

16 forward because just the way you move money around 

17 is becoming such a hot technology commodity, but 

18 where is the end liability -- you still have to 

19 get -- that money has to end up at a bank somewhere.

20 I think we really need to look at are 

21 we going to be left holding the bag if there's an 

22 issue? You see all this, and my millennials use 
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1 these payments that I've never heard of. They 

2 don't really think about where that track goes, but 

3 what if it ends up at our bank and we never even 

4 knew -- it's so far removed, we never even knew it, 

5 but the end liability comes back to us. That's 

6 something that I think we really need to look at, 

7 as well. Maybe you need some regulation from CFPB 

8 or something. There's got to be a standard.

9 MEMBER SCULLY: I think Rae-Ann did a 

10 great job of explaining why this isn't going to go 

11 away: because it's relevant. It's relevant to 

12 consumers and small businesses. Probably like 

13 everybody else at this table, what I worry about 

14 is how do we participate in that.

15 I, personally, think we're, in the long 

16 run, less threatened by the lending models because 

17 I think ultimately, they're all funded by equity 

18 right now. You can't run a lending business 

19 without leverage. They're going to end up coming 

20 back to us, and some of them already are, either 

21 by trying to sell us what they've originated, or 

22 by borrowing directly from us.
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1 But it's the payment systems that I 

2 think are the scariest. The consumers are all 

3 obsessed with the front-end applications, and why 

4 wouldn't they be? They're neat front-end 

5 applications. But community banks aren't playing 

6 in that space at all. To the extent they have to 

7 use the payment system, they're doing it through 

8 money center banks. We're getting marginalized on 

9 the payment systems. If we get marginalized on the 

10 payment systems, then we've been cut out as an 

11 intermediary. Again, it's not going to go away. 

12 How do we deal with it? One of the things that I 

13 would say -- and this is a theme, I think, that we 

14 talk about a lot -- one of the reasons why it's 

15 difficult for us to participate on the payment 

16 system side with the companies that are developing 

17 these apps is because our core processors won't 

18 give us a window into it.

19 MEMBER HASKIN: One of the areas that 

20 we struggle with is online accounting. That's the 

21 struggle for banks that are regulated. If there 

22 could be some clear definitions on how you can go 
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1 about those processes within the regulations -- I 

2 know there are banks that do that.

3 We've looked at it, and we've looked at 

4 it. It's hard for us to make that final decision 

5 to do that because we just -- it's hard to analyze 

6 the risk in that. I have read that that's one of 

7 the ingredients that is holding back the 

8 under-served from banking and banks is because 

9 they're asked to go in and provide all this 

10 documentation to a physical location and sign up 

11 for an account. If they were able to do that online 

12 and take that friction. You know, it's all about 

13 friction in your account. If I have to make 

14 someone come into my bank, that's additional 

15 friction. If they can go elsewhere, that is where 

16 they're going to go. That's one of the great 

17 concerns that I have.

18 I think we can all work together and 

19 figure out some type of method that's clear 

20 because, thumbprints, our customers can sign on 

21 online with their thumbprint, so they're online 

22 banking at our bank and that's a secure type of 
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1 innovation. That would be an issue I would ask you 

2 to explore because we still feel uncomfortable 

3 making that final commitment as a community 

4 institution.

5 MEMBER CASTILLO: A couple of 

6 observations that I've noted the last couple of 

7 months. I think it really has to do more on the 

8 lending side. Our little bank has explored how we 

9 might be able to take advantage of some of the 

10 efficiencies that technology provides.

11 I believe it's a lot easier said than 

12 done. I think a statement that Luke made earlier 

13 today is something along the lines that examiners 

14 are going to evaluate third-party activities as if 

15 the financial institution was providing that 

16 service directly. We've looked at either 

17 partnering with a company or buying stock, or if 

18 it allows us to more efficiently and more 

19 effectively manage our smaller loan originations. 

20 One of the things, in partnering with 

21 someone -- there's all sorts of ways that you can 

22 partner, but one of the things that really got my 
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1 board's attention is that, regardless of how those 

2 originations happen, if those loans -- if you 

3 partner with someone, whether it's On Deck or 

4 whoever it is -- that ultimately, if there was a 

5 problem, you're the financial institution.

6 You're where the buck stops. I think 

7 that's -- trying to manage that liability is going 

8 to be a huge, huge challenge. I think, as you go 

9 through these steering committees, and as you go 

10 through this research, there's two or three 

11 questions that come to my mind.

12 At this point, I don't really know how 

13 these are solved, but I do think that there's some 

14 very distinct differences between having a company 

15 help you with process, where you do it all 

16 in-house -- and there's a lot of companies out there 

17 like that -- between that type of a company and a 

18 company where you are read out their model or their 

19 black-box technology. You tell them what your 

20 credit factors are going to be, and then they crank 

21 them through their machine and tell you so-and-so 

22 qualifies, so-and-so doesn't. The ones that 
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1 qualify, you can charge this rate and be within fair 

2 lending guidelines. I think there's some huge 

3 differences there.

4 The other thing that I'm curious 

5 about -- and this is something that we've looked 

6 at in passing -- is does it make sense for a 

7 community bank like us, a small company, to buy the 

8 expertise versus partnering with someone? 

9 Because that way, you can control everything that 

10 you're doing, but there's some trade-offs there. 

11 I think that as you go through this research, those 

12 are a couple of things to look at.

13 I think from a risk profile, the other 

14 thing that we've determined is that we're bankers, 

15 and we have a much different risk profile than 

16 someone that has started an online lending 

17 company -- I'm just focusing on that for right 

18 now -- because they believe we're going to look at 

19 these 500 different factors, including Yelp and 

20 longevity and all of these different things, and 

21 you end up with, potentially, some compliance 

22 issues, but you have a risk appetite from a 
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1 potential partner that potentially is much, much 

2 greater than what you, as a financial institution, 

3 are willing to take on. Those are all things that 

4 need to be evaluated within the decision-making 

5 process.

6 MR. PEARCE: Just to follow up on that 

7 a little bit, as we've looked at this space, one 

8 of the things that strikes me is we've had guidance 

9 outstanding on third-party relationship and the 

10 management factors there, since 2008. Although 

11 the technology is changing and there's lots of 

12 things that have been evolving, the principles in 

13 this guidance hold up well from, at least, my point 

14 of view.

15 Just as you were describing, that 

16 culture and the risk-appetite difference in having 

17 institutions consider their own risk appetite as 

18 they're thinking about what their strategy is going 

19 to be to deal with new technologies. Are they 

20 going to take a path where you hire internal 

21 expertise because you'll have more control and be 

22 able to monitor the implementation of that, and 
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1 then degrees to which you, then, are relying on 

2 outside firms. As you said, various and sundry 

3 partnership, there's lots of different ways to do 

4 that, but just being really intentional about what 

5 is your risk appetite, and then doing the due 

6 diligence of the firm and the monitoring of the firm 

7 and how you structure your contracts to be 

8 effective in managing that risk, it's really very 

9 consistent with our long-standing approaches.

10 MEMBER CASTILLO: Regarding the 

11 third-party risk guidance, we've used that -- we 

12 looked at a potential partnership. Our board read 

13 that, became familiar with it. We told this 

14 potential partner, here is this guidance. If you 

15 want to put a proposal together, address these 

16 issues here. The guidance really is excellent. 

17 This is where my culture comment comes from because 

18 when we got a proposal back, it was completely out 

19 of touch with what the guidance was suggesting. 

20 That's a culture type of thing.

21 CHAIRMAN GRUENBERG: Let me take the 

22 opportunity here, if you all don't mind, just to 
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1 go around the table and ask, I'd be interested if 

2 each of you could comment on acknowledging that 

3 you've actually committed your institution, and 

4 what is the spectrum, what worries you most about 

5 risk and issues both the positive and the negative.

6 MEMBER TOLOMER: We have a full array 

7 of electronic services, so online banking, 

8 business online banking, consumer online banking, 

9 mobile. The key for us is we're offering pretty 

10 much what all the banks are offering, large and 

11 small, to small and medium-sized businesses and the 

12 consumer.

13 We think we have a good product, and 

14 we're not concerned about that aspect. We also do 

15 the deposit and the like. I'm not at all concerned 

16 about the third-party lending. We talked about 

17 that, I think, two or three meetings ago. Some 

18 people were a little concerned about it.

19 You can see what's happened to Lending 

20 Club and management changes. I'll venture a guess 

21 that everybody here has been offered a portfolio 

22 to purchase or the loans that they've generated. 
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1 I'm sure we've all said no. So I'm not too worried 

2 about them. In terms of the payment systems, I 

3 think it's something you're going to have to look 

4 at. My sense is you'll get the more that happens, 

5 there'll be more regulatory oversight because it 

6 does affect -- I think Cynthia's right. It affects 

7 the banking system. I think from that standpoint, 

8 you've got to stick to your bank model and continue 

9 doing what you're doing and recognize that there's 

10 plenty of competition every which way, whether it's 

11 a traditional bank or it's one of these fintechs.

12 We'll have to see how it plays out, but 

13 I'm not too -- we watch it. We'll obviously have 

14 some level of concern, but I think we spend more 

15 time executing what we're supposed to be doing.

16 MEMBER SCULLY: I said just a few 

17 minutes ago, it's the payment system front end that 

18 worries me the most from a competitive standpoint. 

19 In terms of what we're doing now, we're 

20 participating on two fronts, one through our core 

21 processor, which is the consumer-to-consumer 

22 payments that can be made directly, so the standard 
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1 application, you can pick up with some of the core 

2 processors, but it lets them directly pay a 

3 consumer with an online application, and we're 

4 buying leads for one of our consumer businesses, 

5 but there's no requirement that we do anything with 

6 the leads. It's more of a marketing lead, so we're 

7 not obligated. We've rejected anybody that's 

8 offered to actually sell us portfolio loans to put 

9 in block portfolios. If we can't originate them, 

10 we won’t do that. The two things that we're 

11 investigating are online accounting. I think, 

12 like Jane, we feel like we should be able to do this, 

13 but every time we look at the rules, we say that 

14 we can't do this.

15 Those of us that have legalized 

16 marijuana in our states, it's exactly the same 

17 argument. You look at it and you inevitably 

18 conclude, I can't do this, but others are doing it. 

19 Then we're looking at some of the fintech 

20 applications to help us originate, on the small 

21 business side, and to link things to sales 

22 management systems.
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1 I think from an internal processing 

2 standpoint, we're very excited, see it as a 

3 win-win. In other areas, we're feeling 

4 threatened, in terms of can we compete with those 

5 who are starting to do this? But we actually have 

6 a permanent task force, obviously part time, of 

7 four officers in our company, all millennials from 

8 different disciplines, who are supposed to look at 

9 all of this and try to raise the flag for us.

10 MEMBER LUNDY: I don't have a lot to add 

11 to that. Probably the most effective tool that we 

12 use in our model is we brought deposit capture when 

13 we changed vendors about two years ago to upgrade 

14 that. We are going through a core process of 

15 conversion now. That process, which we decided on 

16 about a year ago, has delayed -- we're one of, 

17 probably, the largest banks -- and we also offer 

18 mobile applications.

19 With our business orientation, it just 

20 hasn't been -- it's a nice to have. We feel like 

21 we kind of need it just to say that we're a real 

22 bank, but the reality is most of our customers are 
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1 business people who don't really need to do 

2 business on their phone, but we will have that. To 

3 the risk point that we worry about, we have 

4 strategically gone after a number of large deposit 

5 pools of various kinds.

6 We call them channels. Some we've 

7 researched and successfully implemented, some 

8 we've gotten into the business and then abandoned 

9 it. But we're constantly looking at niches that 

10 we can basically attract deposit pools. 

11 Particularly in the current rate environment, 

12 large money center banks are awash in deposits and 

13 may not want them, so depositors can look for a 

14 regional bank like ours. It's big enough to 

15 provide the services, and yet, we're a rapidly 

16 growing loan portfolio, so we need the deposits.

17 We spend an awful lot of time trying to 

18 evaluate the BSA and the compliance risks and make 

19 sure that we don't get into some kind of inadvertent 

20 trouble for ourselves, for our depositors, from the 

21 regulators. I would say, in our particular 

22 institution, that's where we spend a lot of time. 
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1 We identify these large deposit pools, and we 

2 figure out is it really too good to be true, or can 

3 we bring these in and handle the risk elements of 

4 them?

5 MEMBER CASTILLO: I think that as far 

6 as technology, even for a small company, we have 

7 most, if not all of these services available. 

8 That's one thing that's been a huge benefit over 

9 the last ten years is that, regardless if you're 

10 a core processor, if the cost equation has changed 

11 so significantly that all of these things are 

12 available to us fairly quickly. On the concern 

13 side -- and listening to these young folks speak 

14 earlier today -- by the way, that was fascinating, 

15 some of their comments that they made -- I think 

16 the biggest challenge for us on the technology 

17 side, whether it's on the loan side or the deposit 

18 side, is trying to eliminate some of the friction 

19 points that Jane spoke about.

20 Because I think for us, it's still a 

21 very clunky experience for somebody that loves our 

22 bank, they have my cell phone, they can call me 
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1 Sunday anytime. But still, I can make them feel 

2 better, but my website or my application doesn't 

3 necessarily have all of those things available to 

4 them. One of them may be as simple as -- we have 

5 a PDF application for a loan on our website.

6 It's not interactive. They can't 

7 automatically send it to us. So the biggest 

8 challenge that we have is really making that 

9 experience online close to as good as it is when 

10 they talk to the person. Because there is that 

11 expectation that I can get on there 11:00 Friday 

12 night, and I can do all of this.

13 MEMBER WILLIAMS: Again, same 

14 situation with us. You pretty much have to have 

15 everything on the depository side, unless you're 

16 in the most remote of areas. We have had 

17 situations -- we only recently did, for example, 

18 instant issue debit cards. We've had customers 

19 walk out of the bank because they couldn't walk out 

20 with a debit card prior. You've got to have those 

21 things. P2P is going to get bigger. Venmo, I hear 

22 about it all the time.
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1 My daughters Venmo back and forth. We 

2 have systems in place, but you've got to get bank 

3 information, and you've got to send an email. This 

4 is immediate. Now, Venmo requires that they both 

5 be signed up with Venmo. How can my customer get 

6 money that quickly to someone who's not a customer 

7 of the bank? Those are the hurdles that we're 

8 trying to get by on that.

9 On the deposit side, we've got the 

10 technology. It's there. We can be competitive. 

11 I don't think that's going to be an issue. I do 

12 fear a little bit, though, on the online lending 

13 side, for some of the reasons that Leo was just 

14 talking about here. It's just these little 

15 breaches of the front gate, these little pecks. 

16 Because so much of what we do relies on the 

17 relationships that we've established with our 

18 customers. When we initially had conversations at 

19 the national association/state association 

20 levels, FDIC level about these lenders, the 

21 old-line banker response was these guys are going 

22 after loans we don't want. They're making $50,000 
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1 unsecured loans with very little information. 

2 They're charging really, really high rates, big 

3 default rates.

4 Those are not the loans we want anyway. 

5 I fear that these guys are going to get better and 

6 better at it. There's issues with the model. 

7 Obviously, we've seen it. But I think they'll 

8 continue to. At the point, for my good customer, 

9 that a $10,000 unsecured loan gets to 21/2 percent 

10 online, and he says, Derek, I can't pay you 5; I'm 

11 sorry. I'm just not going be able to. I love you 

12 to death, but -- that's when they begin to breach 

13 the gate a little bit. That concerns me, that 

14 they're going to get better at what they do. The 

15 models are going to improve, and we're going to lose 

16 some business on that end. That's the concern.

17 (Off microphone comment.)

18 MEMBER WILLIAMS: Well, I suppose we 

19 could. The problem is overall, and they're using 

20 equity. It's the age-old problem of our situation 

21 versus some of the big banks. It's a cost of funds 

22 issue in the long run, the ability to have the 
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1 access -- when we're using local deposits, we've 

2 got a pretty fixed cost of funds. We don't have 

3 the access to some of the markets that the big guys 

4 have.

5 That's what concerns me is they're 

6 going find pools of money that are willing to take 

7 much less return on their money, pools of equity 

8 money, and cause us some problems. I think we may 

9 have that ability, but I'm worried about, from a 

10 technology standpoint, whether we'll take 

11 advantage of it or not.

12 MEMBER HASKIN: Several years ago, we 

13 made a decision that there were too many things that 

14 we wanted to keep in mind when we did our technology 

15 framework. One is mobile, and the other is 

16 real-time payments. Every decision that we make, 

17 we try to keep those two in the forefront of our 

18 decision-making process. We have a wide array now 

19 looking at the P2P. We've got all these new 

20 deposit transfer options. Many of the things that 

21 we're finding is that these are basically 

22 commodities. They're very difficult to charge 
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1 for, so you have to save your money on the back side, 

2 and then personnel expenses and things off to

3 really see the benefits of this. Our bank, when 

4 it was half the size it is now, had over 100 

5 employees. Twice the size, and we have 37 

6 full-time employees. That just shows the impact 

7 of technology in banking.

8 We're struggling with some of these 

9 friction points, but we're only as good as our core 

10 processor and their technology. Because what's 

11 happening, especially in the real-time space, is 

12 these -- when we had ATMs, we'd go out and find the 

13 best vendor to deliver the ATM service. Now, to 

14 get that real-time, that immediate transaction, 

15 you basically have to rely on your core processor 

16 and follow all of their products.

17 That's a process because you have these 

18 four and five-year contracts that you've signed up 

19 for. You have to really plan ahead four and five 

20 years into the future to know exactly how we're 

21 going to get to the end goal. That's been a 

22 challenge for us, but we've done a pretty good job 
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1 focusing on that and getting to those products. I 

2 still don't feel my experiences has a lot of the 

3 online competitors, the depository banks, but 

4 we're working on that. I think real time is going 

5 to be important to millennials. I think that 

6 everything is real time for them, and I think 

7 they're going to expect a lot of their banking. 

8 Right now, our P2P is the next day. It's not same 

9 day.

10 We have a lot of community banks that 

11 don't want to settle more than one time a day, so 

12 you're going to have to figure out some way to push 

13 those credit transactions through, so that they can 

14 do one-time settle. It's an interesting 

15 environment. We feel good about where we are. 

16 We'd like to do the online deposit opening, but we 

17 have to figure out how to get there.

18 MEMBER WILLIAMS: I agree with pretty 

19 much everything you were saying. I think one of 

20 our bigger concerns was just a general lessening 

21 of the amount of non-interest income you could get. 

22 We were secondary market in mortgage loans, for 
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1 instance. People are going online to get those. 

2 Cash management, you mentioned wires earlier. 

3 About a year ago, senior management and our board 

4 sat down. We took a different tack. We all follow 

5 the same products, and we all have the same major 

6 core processors and everything. We actually got 

7 into a new line of business, figuring that we needed 

8 that line of business to offset the revenue loss 

9 that we're going to have in the future. We got into 

10 credit cards. Nine months, we decided to become 

11 a credit card issuer.

12 Benefits of that, obviously, with 

13 Dodd-Frank, is we get the full interchange, versus 

14 the larger banks. On top of that, you have a 

15 MasterCard or a Visa that is basically updating 

16 their technology and carrying you along with them, 

17 so you're not actually having to go out 

18 there -- it's a canned product. You don't have to 

19 go out there and do it.

20 It fit very well with our commercial 

21 strategy, in terms of cash management for our 

22 corporate customers. So we kind of took a little 
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1 bit different tack, in terms of not trying to fight 

2 the battle of staying ahead of it, but just trying 

3 to find another source of revenue, and that was the 

4 credit card side.

5 MEMBER BRYANT: Our situation is 

6 completely different, in that we don't offer 

7 transaction accounts. We have, in the last couple 

8 years, started offering online banking. We have 

9 also looked at acquiring institutions that will 

10 give us access to transaction accounts. But one 

11 of the things this meeting has confirmed for me is 

12 that I'll probably attend a technology conference 

13 to explore ways that we can grow our institution, 

14 by looking at non-traditional sources for 

15 financial institutions.

16 MEMBER BLANKENSHIP: Well, in our 

17 bank, we offer just most of the services that are 

18 readily available, but we're in a metropolitan 

19 area. To stay competitive, we're more or less 

20 forced to do that. We have found that there's not 

21 any one sector that's more accepting of new 

22 technology. Where you would think maybe the Baby 
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1 Boomers or some of the older generation would be 

2 more hesitant to use those products, we really 

3 found that they embrace that.

4 The P2P, I think, is still based largely 

5 on a next-day ACH transaction, but there, again, 

6 it goes between two banks, so if something goes 

7 wrong, what's going to happen there, when you have 

8 no control over who's initiating that? That 

9 remains a concern. I think generally, with 

10 technology, the biggest question is just risk 

11 versus reward. Where is our risk tolerance, and 

12 how much of that are we going to be forced into 

13 taking to stay relevant in the market? Then you 

14 have to decide if you want to stay relevant, 

15 particularly in the payments area.

16 I do think relief for online opening of 

17 accounts -- and I understand that there's just 

18 inherent risk in not seeing that customer face to 

19 face, but maybe there could be other criteria that 

20 you could get around that.

21 Because my millennials, my daughters, 

22 I think that's what that generation and, I think, 
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1 honestly, our generation will come to expect 

2 because it's all about accessibility and 

3 convenience.

4 If you can't deliver that, whether it's 

5 in person, because you're always available and you 

6 always answer the phone, or if someone can't open 

7 an account, or at least apply for a loan over the 

8 weekend, when they found a new travel trailer or 

9 something, people, they expect it now. They 

10 expect an answer now. They think that we have the 

11 technology to look at them and say, yes, you've got 

12 a great credit score. There are technologies out 

13 there for community banks. Sometimes the cost is

14 the inhibitor. That would be an issue. One of the 

15 other things that I think, as we talk about 

16 technology, is we're really looking hard at social 

17 media and the roles on social media and what impact 

18 that will have on payment systems and deliveries. 

19 How is that promoting customers away from us, or 

20 can we use that to our benefit?

21 That's something that's going to fall 

22 largely under consumer compliance. Look at what 
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1 a gigantic role Facebook and Twitter -- somebody 

2 tweets out, there's a better way to make your 

3 payment. We're at a competitive disadvantage. 

4 That's real, at least in my mind.

5 MEMBER SCULLY: Or if we do try to put 

6 it out there, it can't be done in a tweet because 

7 we have to do so much disclosure around the product 

8 every time we talk about it.

9 MEMBER BLANKENSHIP: Yes. Other than 

10 that we offer --

11 MEMBER SCULLY: It's true. We tried 

12 to do it, and you have a heart attack. We can't 

13 do that.

14 MEMBER BLANKENSHIP: That is true. 

15 We're a major sponsor of two festivals in our 

16 community. I meet with the CVB board. Every time 

17 they put our logo up -- now they tease me. I mean, 

18 that's an educational process for that.

19 MEMBER THOMPSON: The thing about 

20 being the last is it's hard to sound a whole lot 

21 different. At our size bank, we offer -- at 125 

22 million, we pretty much offer all the same products 
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1 as everybody else does, just like everybody said. 

2 You have to, if you want to keep the doors open.

3 The big challenge for us is are we -- we 

4 put in a lot of new technology in the last year, 

5 year and a half. Part of the thing for us, are we 

6 monitoring enough? Are we monitoring all the 

7 right things? You want to continue to add the 

8 technology, but then you have to do all those things 

9 behind the scenes.

10 Jane, you can cut down on those 

11 employees, but you've still got to monitor and 

12 measure whatever it is that you're putting out 

13 there, not just for regulatory purpose, for our own 

14 purpose. Did you spend the money on the right 

15 things? Are you getting any return? The board 

16 wants to know every time you put in a new product 

17 what's it doing for you? I think for us, at our 

18 size and number of employees, it's trying to keep 

19 up, but also trying to be sure that you're 

20 monitoring everything that you've got out there in 

21 the right way. 

22 MEMBER EMMONS: Could you repeat the 
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1 question, please? I would echo a lot of what has 

2 been said. I don't know that there's any 

3 technology that we've actually developed, you 

4 know, it's -- we are so dependent on our core 

5 provider and vendors.

6 To me, we've spent a lot of time talking 

7 about the person to person, kind of that retail side 

8 of the business, which -- we've been listening to 

9 the folks earlier, the young folks earlier today 

10 -- really kind of starts with the definition of 

11 commoditization that's taking place.

12 I think to our world, commoditization 

13 is not a pleasant thought. I think what's 

14 particularly concerning about it for us is the pace 

15 of change and the fact that it's coming so quickly 

16 that it constantly feels like we're addressing 

17 another payment system, another model that's in the 

18 market that our customers, our consumers are 

19 interested in, and that obligation of feeling like 

20 you have to get it. You've got to provide it. And 

21 so there are all of these options. We're early 

22 adopters, but at some point, there's just going to 
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1 be a plethora of payments that are in that P2P 

2 space, and that concerns me a lot.

3 The kind of a holdout, I think, in this 

4 conversation, is really the business to business 

5 or the commercial side of our business, where our 

6 deposits have not -- we're not seeing the kind of 

7 changes that we're seeing on the retail side.

8 Cash management systems and the way 

9 that we deliver services and the treasury functions 

10 with the businesses still can be customized, still 

11 can be priced, and still makes a difference. You 

12 can build relationships on that side of the 

13 business.

14 I think our sitting here today and 

15 saying what would be the greatest risk is that a 

16 similar kind of wave of technology passes through 

17 the business to business side of payments, and it 

18 becomes very similar to what we're experiencing on 

19 the retail side. All of those deposits, all of 

20 those transactions bypass the banking system, and 

21 we're left with a real strategic challenge. I 

22 think in the current environment, I think our job 
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1 is to make sure that we're on top of all of the 

2 changes that are coming and prepare ourselves to 

3 be able to afford that technology and work.

4 MEMBER WILLIAMS: Chris, you make a 

5 valid point. That whole idea of there's so much 

6 stuff coming, and you don't want to miss the one 

7 that is going to be the death knell to the banking 

8 industry. You're afraid that that one will slip 

9 by, so you're looking at so many of which will be 

10 gone in six months as a fad. It's hard to keep up 

11 with it all.

12 CHAIRMAN GRUENBERG: Thank you. I 

13 noticed our staff feverishly taking notes through 

14 all of this process. I think this has been -- Ms. 

15 Eberley.

16 MS. EBERLEY: It's very helpful, thank 

17 you. I think you've given us some things to work 

18 on and some things to think about and see if we can't 

19 maybe deliver on some of the things you've asked 

20 for.

21 MS. RYAN: Okay, well thanks, Doreen, 

22 Jim, Rae-Ann, Jonathan, and Mark. We're going to 
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1 move into our last panel right now. Doreen and 

2 Rae-Ann are going to stay with us, and we're going 

3 to be joined by Mark Moylan, Deputy Director of our 

4 Division of Risk Management Supervision, and Bob 

5 Storch, who you saw earlier, as well. The focus 

6 is going to be on recent supervisory developments, 

7 including a new work program for examiners called 

8 InTREx, and FASB's new CECL accounting standard. 

9 I'll let the group here explain those acronyms. 

10 I'll turn it over now, again, to Doreen.

11 MS. EBERLEY: Okay. I think, again, 

12 we'll just kind of go down the line. We're going 

13 to talk about the new IT examination program, 

14 broker deposit FAQs, and our -- an incentive comp, 

15 and our guidance on the private sector loss model.

16 MR. MOYLAN: Good afternoon. I'd like 

17 to speak to you today about InTREx. I've kind of 

18 hinted around of what we've been doing with InTREx 

19 and really, the revisions to our prior examination 

20 program. Really, InTREx -- or the Information 

21 Technology Risk Examination Program -- is really 

22 an enhancement of our IT examination work program 
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1 that we've historically worked through. The 

2 regulatory requirements surrounding a bank 

3 establishing an appropriate information security 

4 program is really nothing new. However, the 

5 parameters set forth really have lacked the 

6 recognition of cybersecurity, cyber risk. 

7 Certainly, our enhancement was in recognition of 

8 that new risk component.

9 InTREx now specifically recognizes the 

10 emergence of the cyber risk element and better 

11 aligns and defines regulatory expectations in the 

12 assessment of a bank's information security 

13 program and the identification and mitigation of 

14 this new risk.

15 Really, InTREx introduces three areas 

16 of change, pre-examination procedures, changes to 

17 the format and structure of the examination work 

18 program, and new examination findings procedures. 

19 All of these changes are made to affect better risk 

20 scoping, enhance the examination process, and 

21 increase transparency, as well as board awareness.

22 Let's talk a little bit about the 
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1 pre-exam procedural changes. If you remember, we 

2 had the IT questionnaire. It's been replaced by 

3 what we call the IT profile document. The IT 

4 profile document has 65 percent fewer questions for 

5 bank officials to answer -- so I'm sure you applaud 

6 that -- is better focused, in my opinion, and bank 

7 officials will now receive the document and have 

8 approximately two weeks to complete and submit to 

9 the FDIC. It's going to allow you time to talk to 

10 your staff and not have to do it so quickly. I 

11 think the thoughtful preparation is a benefit to 

12 us all.

13 The two-week preparation time, along 

14 with more effective questions, will provide the 

15 examiners with better information to risk focus the 

16 examination and appropriately staff the 

17 examination commensurate with the risk profile of 

18 the institution. I want to talk a little bit about 

19 the actual work program, itself. In your package, 

20 you're going to have one of our modules, which is 

21 the audit module.

22 This is the actual work program that we 
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1 have developed, and it is really the framework 

2 which the examiners will go through. The work 

3 program modules now directly correspond to each of 

4 the uniform rating systems for information 

5 technology, or as we call it, URSIT ratings. If 

6 you look at the audit modules, the work program 

7 provides examination staff with specific decision 

8 factors and analysis procedures, including basic 

9 and expanded procedures. It also creates an 

10 opportunity for those that may have a more complex 

11 environment to incorporate the FFIEC handbook work 

12 programs. Our examiners now, for our smaller 

13 institutions, will use this program, and this will 

14 be the framework for all of it, but if we do have 

15 some areas that are more complex, then they will 

16 scope in and use the entire FFIEC handbook work 

17 programs, take those findings, and then flow them 

18 up consistently with the URSIT ratings.

19 As you will note in the program, it also 

20 highlights the various components and direct 

21 relationships within a bank's information security 

22 program that relate to cybersecurity, as well as 
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1 the information security standard, pursuant to the 

2 Gramm-Leach-Bliley Act. If you turn to page 5 of 

3 the audit program, you will see a private approach.

4 As you can see there on the left, you 

5 will see, in this case, a cyber flag. That element 

6 relates to cyber. Again, understanding that 

7 cyber's really through all of these components, 

8 this highlights for our exam staff that this is one 

9 of the main elements associated with cyber. I 

10 didn't give you a module that had 

11 Gramm-Leach-Bliley, but you will see a similar flag 

12 for Gramm-Leach-Bliley. Those specific elements 

13 and decision factors that they're looking at as it 

14 corresponds -- even though we're looking at your 

15 entire information security program, these are 

16 elements that are particularly specific to cyber 

17 in the Gramm-Leach-Bliley Act.

18 We believe this new program will 

19 provide better examiner guidance, a more 

20 consistent examination approach, and better 

21 support of the conclusions drawn. If you also 

22 notice, on the first page of the audit -- and this 
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1 is something that has been something we've been 

2 really working on, and we will continue to work on 

3 as we move forward -- on the decision factors, you 

4 will see, at the bottom, a category from strong to 

5 critically deficient.

6 As the examiners draw their conclusions 

7 in those areas, in the work programs, what this is 

8 going to allow us to do is to perform horizontal 

9 analysis. We will be able to take all of these work 

10 papers of all the examinations that are conducted 

11 around the country and then be able to sort and pull 

12 together maybe areas that we're seeing a higher 

13 level of less than satisfactory, satisfactory, see 

14 the specific comments, and then draw some 

15 conclusions on areas that will give us an 

16 opportunity for better training, maybe more 

17 guidance, and have that horizontal capacity. 

18 Every one of these that's performed at all of your 

19 institutions, they will be checking these boxes.

20 At some point in time, we will start 

21 drawing that information out, so again, more of a 

22 horizontal perspective and analysis on that. One 
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1 of the things I do want to mention, I think, again, 

2 with support from Doreen, is that if you go to the 

3 financial institution that was issued, these 

4 components and these modules for audit management, 

5 all of the URSIT ratings, as well as the IT profile 

6 program, are now available to the banks.

7 They are available by clicking the link 

8 in the financial institution, so your staff and 

9 yourselves have these modules available. You'll 

10 be able to preview them, understand some of the 

11 elements we're looking at, again, the cyber flags, 

12 the Gramm-Leach-Bliley flags. These are all 

13 available to all of you through our fdic.gov 

14 website. That's, I think, something, again, on 

15 the form of transparency. This is what the 

16 examination staff is looking for, and this is 

17 available to you folks. Lastly, which certainly 

18 we've been a strong advocate for, we worked with 

19 the Federal Reserve, and also CSBS, on this 

20 program.

21 They were partnering in this program. 

22 One of the things was we wanted to move, also, in 
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1 the transparency, to now disclosing the entire 

2 URSIT rating. Historically, we've only been 

3 disclosing IT composite rating. We will now be 

4 disclosing all of the components. I know all of 

5 the bankers I have ever -- they know what No. 1 

6 means; they know what No. 5, they know what No. 3 

7 means.

8 Certainly, I think it will create much 

9 better of a discussion. You may have been a 

10 composite 2 in the past. In fact, you may have had 

11 recommendations regarding audits. But now, if you 

12 know we have rated the audit a 3, that will probably 

13 perk up everybody's ears. I think that will allow 

14 the board to understand, ask more questions, be 

15 attuned to those recommendations, so all of the 

16 composite and component ratings will now be 

17 disclosed in the examination reports. The ECC 

18 page will still give a summary comment regarding 

19 the IT overall examination findings. It will 

20 disclose the comment pages. But there will now 

21 be -- what used to be an optional page, called our 

22 information technology assessment page, is now 
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1 mandatory.

2 On that page will be a discussion of 

3 each of those components and the rating. Also on 

4 that page will be a summary comment on your 

5 cybersecurity preparedness. It's basically 

6 taking those components, with those flags, and 

7 bringing them into a context specifically rated to 

8 cybersecurity, very similar to what we've done 

9 historically in the reports regarding 

10 Gramm-Leach-Bliley.

11 Now, you will have the transparency of 

12 not only seeing the components, you will have an 

13 examiner opinion of your cyber preparedness. 

14 Obviously, if there's elements in recommendations, 

15 you will see that in the context of your cyber 

16 preparedness, just as you've seen on your 

17 Gramm-Leach-Bliley. Really, our goal is, again, 

18 to not only give our staff a better program 

19 recognition of the emerging risk of cybersecurity,

20 increased transparency through the component 

21 ratings, hold better discussions with management 

22 and the board regarding all of these areas, and 
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1 certainly, last, but not least, I think this is a 

2 major benefit that these work programs are now 

3 available to you folks on our webpage, to where you 

4 can understand the thought process, the areas that 

5 are available, and what the examiners will be 

6 looking at through this process. Any questions?

7 A memo went out June 30th. There'll be 

8 some pre-exam time, so no later than -- you should 

9 start seeing the use of the new program no later 

10 than October. If you have an examination 

11 scheduled, 1st of October. There may be some 

12 that'll be done a little bit earlier if the bank 

13 is open to it and we're able to pre-plan.

14 You may or may not be getting the full 

15 package, but I certainly would be very interested 

16 in how you feel that exam goes.

17 MS. MILLER: Also on June 30th, my 

18 group issued an FIL on an updated set of broker 

19 deposit frequently asked questions. We call them 

20 FAQs. We originally issued the broker deposit 

21 FAQs in January of 2015. We did that basically to 

22 provide plain language information about 
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1 categorizing broker deposits all in one place.

2 We talked in that FIL back in January 

3 of 2015 that we would update it periodically. 

4 Section 29 of the FDI Act and Part 337 of our rules 

5 and regulations define the term deposit broker. 

6 It restricts the acceptance of broker deposits by 

7 insured institutions that are not well 

8 capitalized.

9 The FAQs are based on the statute and 

10 on a regulation, but also on explanations of the 

11 requirements that we have provided to the industry 

12 through what we call our advisory opinions from 

13 time to time. We also published a study on core 

14 deposits and broker deposits back in 2011, as part 

15 of the Dodd-Frank Act. There's a lot of 

16 information in there about categorizing deposits. 

17 After that initial release in January of 2015, we 

18 conducted a banker call-in. We had visits with a 

19 number of trade associations and other 

20 institutions. In the spirit of updating them 

21 periodically, we issued a revised set of FAQs in 

22 November. We addressed many of the points that 
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1 people came in and chatted with us about in those 

2 outreach sessions.

3 We got nine comments on that November 

4 release and updated the FAQs accordingly, where 

5 appropriate. The updates since January, we have 

6 new questions on government pre-paid cards. We've 

7 got new questions on deposits gathered through dual 

8 homed and call center employees, and then we 

9 clarified a number of other questions. We also 

10 added footnote citations to those advisory 

11 opinions, where appropriate.

12 I think that was a real helpful additive 

13 when we went out for comment in November. We also 

14 emphasized that the FDIC takes a case-by-case 

15 approach. A lot of these products are very 

16 idiosyncratic. You could change one little 

17 factor, and it would change the determination, so 

18 we want to make that clear. In that regard, we 

19 continue to get inquiries. I'm working on several 

20 right now. As we get through those, we'll update 

21 our advisory opinions. Then once we get enough of 

22 those, our intention is to update the FAQs, as well.
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1 MS. EBERLEY: Maybe just one point. 

2 The footnotes that we added throughout point 

3 directly to existing advisory opinions that are 

4 outstanding that relate to issues, so you can see 

5 how the question relates to something that's 

6 already been evaluated or to the broker deposit 

7 study.

8 MS. MILLER: Then with regard to 

9 incentive compensation, we issued an NPR, notice 

10 of proposed rulemaking, on April 26th, regarding 

11 incentive compensation. This is per Section 956 

12 of the Dodd-Frank Act.

13 That section requires six 

14 agencies -- us, the OCC, the Fed, the NCUA, the SEC, 

15 and the FHFA -- to jointly prescribe either 

16 guidance or rules that prohibit any type of 

17 incentive-based compensation arrangements or any 

18 feature of those arrangements of the agencies 

19 determined to encourage inappropriate risks by a 

20 covered financial institution. 956 also requires 

21 that financial institutions disclose to the 

22 appropriate federal regulator the structure of 
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1 incentive-based compensation arrangements 

2 sufficient to determine whether that structure 

3 provides excessive compensation that could lead to 

4 material loss to the institution.

5 956 applies to incentive-based 

6 compensation arrangements offered by what's called 

7 covered financial institutions, and that's insured 

8 depository institutions, depository institution 

9 holding companies, credit unions, broker dealers, 

10 investment advisors, Fannie Mae, Freddie Mac, and 

11 other institutions that the agencies jointly 

12 determine should be covered by the rule.

13 Within those covered companies, those 

14 over $1 billion are covered. Any of you that are 

15 under that, institutions that are less than $1 

16 billion, are exempt from the rule. The NPR uses 

17 a tiered approach with respect to its requirements, 

18 so there's a Level 1, and that goes from 1 to 50.

19 I assume you would all be in the 

20 Level -- excuse me, Level 1 are $250 billion or 

21 more; Level 2 is $50 to $250, and Level 3 is $1 to 

22 $50 billion. That's where I assume you guys are. 
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1 All covered institutions would be subject to a set 

2 of basically programmatic elements, policies, 

3 procedures, and recordkeeping type of 

4 requirements. Then as the institutions get 

5 larger, it would be subject to more stringent 

6 provisions.

7 Importantly, for those larger 

8 institutions, the Category 1s and 2s, the proposal 

9 would require minimal deferral amounts and time 

10 periods for incentive-based compensation for the 

11 senior executive officers and those employees that 

12 could expose the institution to material levels of 

13 risks.

14 In the proposal, we call them 

15 significant risk takers. The proposal requires 

16 those amounts to be subject to forfeiture and 

17 downward adjustment in the event of certain things 

18 that would happen. The proposal also has other 

19 prohibitions for those larger institutions.

20 Those include prohibitions on 

21 purchasing personal hedging instruments, clawback 

22 provisions for already vested amounts, and there 
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1 are also requirements on enhanced governance, risk 

2 management, and recordkeeping for those larger 

3 institutions. Any questions on my two items?

4 MEMBER SCULLY: I have one question. 

5 I obviously only looked at it so long. This is on 

6 the incentive-based --

7 (Simultaneous speaking.)

8 MS. MILLER: You didn't read the whole 

9 thing, the 600 pages?

10 MEMBER SCULLY: No; I'm sorry; I 

11 didn't. Is there a way to more -- I think almost 

12 everybody in this room, at best, is going to be a 

13 Level 3, maybe not even a Level 3. Much of the 

14 documentation seems to refer to Level 1 and Level 

15 2. I understand that because of the concern. Is 

16 there a way to just restructure it in a way that 

17 it's easier for those of us that are Level 3 to find 

18 what applies to us, as opposed to what doesn't apply 

19 to us? I understand why all the emphasis on 1 and 

20 2, but my first attempt to read, I could hardly find 

21 references to Level 3.

22 MS. MILLER: Yes, we will certainly 
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1 take that into consideration. The early comments 

2 are this is an extremely complicated --

3 (Simultaneous speaking.)

4 MEMBER SCULLY: -- more prescriptive 

5 than it's been in the past.

6 MS. MILLER: It's open for comment. 

7 We're taking all comments, that's for sure. When 

8 you move to a final rule, your comments are very 

9 helpful. We try, when we issue financial 

10 institution letters and press releases and things, 

11 to communicate what's important, especially for 

12 community bankers, so certainly, we'll do, 

13 hopefully, a better job of pulling that out and 

14 communicating that.

15 (Simultaneous speaking.)

16 MEMBER SELESKI: I think it would be 

17 difficult to -- this is like War and Peace -- to --

18 MS. MILLER: It's better, though.

19 (Laughter.)

20 MEMBER SELESKI: Everyone wants to 

21 comply with the rules and regs. I think we need 

22 our five millennials here to interpret this. I 
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1 think for the examiners coming in, I just think 

2 everyone needs to be on the same page. Because we 

3 all want to comply, but I almost have to hire a 

4 consultant to look at all the compensation plans 

5 of the people that would be involved to make sure 

6 they comply because you don't want to be written 

7 up. The board's going to be looking at this and 

8 saying, "Why?" I agree. It needs to be 

9 simplified, a chart, examples, and that type of 

10 thing --

11 (Simultaneous speaking.)

12 MEMBER SCULLY: There's a reference 

13 somewhere in here, I saw, to the Level 3 -- the basic 

14 blah, blah, blah applies.

15 MS. MILLER: Programmatically, yes.

16 MEMBER SCULLY: I couldn't find -- I'm 

17 sure it's in here, but I couldn't find what is the 

18 basic?

19 MS. MILLER: That's really helpful.

20 MEMBER SCULLY: I don't think 

21 anybody's trying to be lazy or critical because I 

22 understand the need to focus on those 1s and 2s, 
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1 but it's going to be really tough to get through 

2 this. As David said, your boards and your comp 

3 committees are going to be all over this.

4 MS. MILLER: Yes. Certain things 

5 we've done with other rules are user guides. This, 

6 of course, is still in the comment phase, but videos 

7 and training and things like that. We can 

8 certainly consider those issues.

9 MR. STORCH: Shall we move on? Good 

10 afternoon. You have to suffer through me a second 

11 time today, but we'll see which topic is 

12 preferable. A little more than one month ago, on 

13 June 16th, the Financial Accounting Standards 

14 Board -- I'm sure you know the acronym FASB.

15 Anyway, the FASB issued what's known in 

16 accounting parlance as Accounting Standards 

17 Update, or ASU 2016-13, on the measurement of 

18 credit losses on financial instruments. The new 

19 standard was the culmination of several years' work 

20 by the FASB to improve the accounting for credit 

21 losses.

22 The ASU formally introduces what has 
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1 come to become known as the current expected credit 

2 losses, or CECL methodology for estimating 

3 allowances for credit losses. This will replace 

4 today's incurred loss methodology when the new 

5 standard takes effect. The move to the CECL 

6 methodology represents a significant change to 

7 current allowance practices both for the agencies 

8 and for your institutions and the industry, as a 

9 whole. The new standard can be downloaded from the 

10 FASB's website if you do want -- members of your 

11 staff need to obtain a copy. On June 17th, the day 

12 after the release of the new accounting standard, 

13 the FDIC and the other federal financial 

14 institution regulatory agencies issued a joint 

15 statement on FASB's new credit losses standard to 

16 provide initial information directly to all 

17 institutions about the new standard, including 

18 initial supervisory views regarding the 

19 implementation of the CECL methodology by 

20 financial institutions, and a copy of the joint 

21 statement is attached to the FDIC's Financial 

22 Institution Letter 39-2016 in your handout 
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1 materials.

2 In its simplest terms, the allowance 

3 for credit losses under CECL is a valuation account 

4 measured as the difference between the amortized 

5 cost basis of financial assets and the net amount 

6 you actually expect to collect on those assets.

7 In other words, the allowance is an 

8 estimate of lifetime credit losses for however long 

9 those assets will remain on your balance sheet. 

10 The CECL methodology applies to all financial 

11 assets carried at amortized cost, including loans 

12 or investment, your traditional loan portfolio, 

13 and to your held in maturity securities, as well 

14 as off balance sheet exposure, such as loan 

15 commitments and standby letters of credit. The 

16 new standard also updates the measurement of credit 

17 losses for available for sale debt securities.

18 To estimate expected credit losses 

19 under the CECL methodology, institutions will use 

20 a broader range of data than other existing 

21 generally accepted accounting principles, or GAAP 

22 accounting. These data include information about 
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1 past events, current conditions, and reasonable 

2 and supportable forecasts relevant to assessing 

3 collectability of cash flows on financial assets.

4 In contrast, under today's incurred 

5 loss methodology, only past events and current 

6 conditions can be considered when estimating 

7 credit losses. What are differences between 

8 today's incurred loss methodology and the CECL 

9 methodology, the FASB strived to ensure that the 

10 new accounting standard will be scalable to 

11 institutions of all sizes, and the agencies expect 

12 that to be the case. We also do not expect smaller 

13 and less complex institutions will need to 

14 implement costly and complex modeling techniques. 

15 Institutions should be able to modify their 

16 existing allowance methodologies to meet the newer 

17 accounting standards. In so doing, institutions 

18 will, however, need to change certain of the inputs 

19 and assumptions they use to achieve an estimate of 

20 lifetime credit losses.

21 Acceptable estimation methods under 

22 the CECL methodology that are identified in the 
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1 standard include loss rate methods, world rate and 

2 migration methods, discounting cash flows, 

3 probability of default and loss given default 

4 methods. The new standard explicitly states that 

5 institutions are not required to use a discounted 

6 cash flow methodology to estimate expected credit 

7 losses.

8 Because the ASU doesn't specify a 

9 single method for measuring expected credit 

10 losses, the standard allows institutions to use 

11 judgment to determine the relevant information and 

12 estimation methods that are appropriate in their 

13 individual circumstances. In addition, an 

14 institution may apply different estimation methods 

15 to different groups of financial assets. 

16 Estimating allowance levels under the CECL 

17 methodology, including assessing qualitative 

18 adjustments to historical lifetime loss estimates, 

19 will involve a high degree of management judgment. 

20 You're already employing considerable judgment on 

21 today's model, and that will be increased under the 

22 new model.
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1 Therefore, consistent with our 

2 existing accounting and supervisory guidance, 

3 allowance estimates under the CECL methodology 

4 should continue to be based on the comprehensive, 

5 well-documented, and consistently applied 

6 analysis, as appropriate to the size of each 

7 institution and the nature, scope, and risk of its 

8 lending and other credit risk-taking activities.

9 The FASB has provided significant lead 

10 time for institutions to prepare for their 

11 implementation in the CECL methodology until the 

12 new accounting standard takes effect. At the same 

13 time they provided the agencies with significant 

14 lead time, as well, for us to prepare.

15 In fact, since our discussion about the 

16 CECL methodology at the advisory committee meeting 

17 in early April, the FASB moved the effective date 

18 of the standard out one more year from where it had 

19 originally been set by the FASB in November of last 

20 year. As a result, for those institutions that, 

21 for accounting purposes, are deemed SEC filers, the 

22 new standard will take effect in 2020. All other 
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1 institutions will begin reporting under the CECL 

2 methodology either in their first quarter of 2021, 

3 or as they end the fiscal '21, depending on an 

4 institution's characteristics.

5 In the joint statement, the agencies 

6 encouraged institutions to start their planning 

7 and preparation for the new accounting standard 

8 now, including becoming familiar with the new 

9 standard.

10 I would include in that ensuring that 

11 your directors begin to get a basic understanding 

12 of the new standard, since it will change the 

13 metrics that you look at, in terms of allowances 

14 versus loans, identify the data needs and necessary 

15 systems changes to implement the new accounting 

16 standard consistent with its requirements, the 

17 allowance estimation method or methods you expect 

18 to be using, and our supervisory expectations. 

19 Then determine how and when to begin collecting 

20 additional data that you may need, and then 

21 finally, assess the potential impact on the new 

22 accounting standard on capital. Both during and
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1 after the transition to the CECL methodology, the 

2 agency's goal is to ensure consistent and timely 

3 communication to institutions about the new 

4 standard and to develop and issue updated 

5 supervisory guidance pertaining to the standard, 

6 particularly with respect to smaller and less 

7 complex institutions.

8 I might just add, before we turn it over 

9 to questions, tomorrow afternoon, in fact, the FASB 

10 has scheduled a webcast for 1:00 to 2:00 p.m. You 

11 can register at 4:00 through the FASB website, or 

12 if you have staff that you would like to have hear 

13 about it, you can register through the FASB's 

14 website.

15 If they can't listen tomorrow, it's 

16 going to be archived and available for three months 

17 on the FASB's website. There's other materials 

18 that FASB has issued, as well, to help support the 

19 understanding of the new standard. With that, we 

20 can turn it for questions.

21 MEMBER HASKIN: I commend you for 

22 repeatedly, it emphasizes the complexity for small 
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1 banks, that it should be matched with the 

2 complexity of loans. I do appreciate that. I 

3 think that's something unusual. I commend you for 

4 it.

5 MR. STORCH: The industry, as a whole, 

6 also was very forceful, I would say, communicating 

7 that need to the FASB. I think they heard that loud 

8 and clear, especially over the last six to nine 

9 months.

10 MEMBER WILLIAMS: I'm not sure this is 

11 a proper question to ask, but I'm not back after 

12 today anyway. What do you foresee as the FDIC's 

13 role for the FDIC-regulated banks as we move toward 

14 implementation? Do you see beginning to help us 

15 start looking at our models a couple years out that 

16 we're putting in place?

17 MR. STORCH: That's one subject that 

18 the accounting policy staff at the agency have been 

19 talking about is what sort of expectations we 

20 should have for our examiners to be looking at where 

21 you are in the process. Staggered effective dates 

22 is not like one size fits all, so certainly, 
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1 institutions can't wait until the last minute. 

2 Those sorts of questions are on the list of what 

3 we would expect to be communicating. Thinking now 

4 about what the timeline ought to be, when you may 

5 want to have whatever system changes in place, so 

6 you could perhaps do some dry runs in advance of 

7 when it actually takes effect with major reporting, 

8 involving -- it's not just an accounting exercise 

9 involving whoever you're using for IT, obviously, 

10 but your credit risk management staff, whoever's 

11 providing support from an internal audit/internal 

12 control standpoint, so making sure that those types 

13 of functions throughout the bank that are impacted 

14 are involved and how soon they should be involved 

15 and so forth.

16 There's not a single good answer, at 

17 this point, but that's one issue that the agencies 

18 will continue to talk about, so that we don't have 

19 examiners going to one bank, having one very 

20 high-level set of expectations, which is outside 

21 what would be acceptable, and other examiners 

22 ignoring the issue entirely.
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1 We're going to have a good level of 

2 examiner preparation and some teaching for them, 

3 so they understand, as well. At the same time, 

4 they have to remember what the current accounting 

5 standards are. I'm sure you and all the banks are 

6 applying the current standards until the effective 

7 date.

8 MEMBER WILLIAMS: It's probably on the 

9 radar. I think that's the main concern. I 

10 wouldn't expect there to be a one-day switch foot, 

11 although there will be, as far as what we're 

12 required to do. It's going to be a great deal of 

13 preparation still. I certainly foresee periods of 

14 running the systems parallel to see what we're 

15 doing.

16 MR. STORCH: I think it would be fair 

17 to say that none of us should expect that everyone's 

18 going to get it perfect on the first day. I think 

19 even in talking to the FASB, they recognize that 

20 there'll be some gaps in the data on day one, which 

21 you'll have to factor in qualitatively to adjust 

22 for that.
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1 Over time, as you build up more data, 

2 you'll be in a better position to achieve what the 

3 ultimate objective of the standard was. That will 

4 be something -- not expecting perfecting on day 

5 one, I think, is a message we really need. Our 

6 management's agreement is to give out to our 

7 examiners, as well.

8 MEMBER HUDSON: That's such a big source 

9 for community management.

10 MR. STORCH: That's an issue we've 

11 heard repeatedly. In our joint statement, we've 

12 tried to signal that if you're appropriately 

13 segmenting the portfolio today, under the current 

14 loss model, then maybe based on the call-in work 

15 categories, the standard, in and of itself, doesn't

16 require you to change that. Certainly, for 

17 community banks, you want to get that message out 

18 there. Because we were hearing from sources that 

19 we'd have to implement dozens of new categories. 

20 We didn't see the need for that.

21 MEMBER CASTILLO: I have an 

22 observation. I just got an examination report, 
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1 and in the examination part of the discussion was, 

2 have you heard of CECL? And I read the report on 

3 Monday, but in the examination, itself, it says, 

4 "CECL is coming, and we expect management to start 

5 advocating itself."

6 I'm curious as to whether FASB or the 

7 FDIC has modeled what they think an allowance might 

8 look like under the CECL method? The reason that 

9 I ask that -- and this is a sentence that just jumped 

10 out at me, and this is on Page 6 -- it says, 

11 "Institutions should not begin increasing their 

12 allowance levels beyond those appropriate under 

13 existing U.S. GAAP in advance of the new standard's 

14 effective date." As I read that sentence, it 

15 implies the reserves are going to go up. Any 

16 thoughts on what's been modeled or what --

17 MR. STORCH: The FASB, in some other 

18 materials, they may even be included in what they 

19 do tomorrow; I don't know -- sort of tried to look 

20 at different segments, particularly the loan 

21 portfolio, to see what the potential impact would 

22 be. For your shorter-term loans, where maybe 
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1 there's an average of a one-year life, that's what 

2 you're pretty much doing today under incurred 

3 losses.

4 What losses do you expect to realize 

5 over the next year or over, let's call it a loss 

6 emergency, some loans can go over. In that case, 

7 there's probably not much of an impact at all. For 

8 your existing loans that are impaired loans, the 

9 methodology really will still be the same, even 

10 though the term impaired loans isn't in the new 

11 standard. When you get to more medium-term loans, 

12 then there could be some modest increase because 

13 you'll be looking at two to five years for the 

14 longest term loans. Think of residential 

15 mortgages with a seven year average life. That may 

16 have the greatest impact. It's going to depend on 

17 the portfolio mix as one factor, also on economic 

18 conditions when we get to '20 or '21 because you 

19 have to have forward looking information for this 

20 reasonable and supportable forecast period.

21 In most cases, it'll be one, two, three 

22 years. In the worst economic times, you may only 
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1 be able to get forecasts in a very short run. The 

2 bank's still expected to provide, based on loss 

3 experience, for the entire life of the loan and not 

4 ignore credit losses that might occur beyond the 

5 period for which you can forecast. So there's a 

6 lot of uncertainty.

7 There's been some press coverage, over 

8 time, that the OCC have done some studies in 2013, 

9 which is shortly after the proposal was first 

10 proposed. Of course, that was based on 2012 data. 

11 Allowances and portfolios are different now than 

12 they were then. They had to make a lot of 

13 assumptions. At that point, they came up with sort 

14 of a general range of a 30 to 50 percent increase

15 in allowance levels, with lots of caveats attached 

16 to that because their range is much wider. But 

17 part of the exercise of going through that was 

18 because when the proposal was issued, some banks 

19 and some commentators were suggesting allowance 

20 levels would increase 300 and 500 percent.

21 There was a concern if that was actually 

22 going to happen, would banks be prepared for it, 
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1 and is that improving an accounting or not, bottom 

2 line? Part of the SEC's exercise was to see, on 

3 a general scale level, what type of increase might 

4 be expected. It's really going to vary, depending 

5 on the characteristics of your portfolio, where the 

6 economy is, and where your allowance level is under 

7 the current standards going into the change.

8 MEMBER BRYANT: Let me ask this 

9 question, and it's tied to the question he just 

10 raised. I think the model would be extremely 

11 valuable because my initial reaction would be to 

12 shorten the loans in the portfolio. Then if you 

13 are expecting rising interest rates, and then 

14 certain economic future, what's that going to do 

15 to the model? Because you can manage the 

16 portfolio, you may have short-term, maybe 12 months 

17 -- this gets larger when you go out 24, 36, 60 

18 months, and 84 months. Sitting here today, still 

19 here tomorrow.

20 MR. STORCH: A starting point always is 

21 what your historical, now lifetime, loss 

22 experience has been. To the extent you have loans 
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1 today for which you had similar types of loans in 

2 the past, most banks typically have annualized loss 

3 rates.

4 They don't normally have constructed, 

5 unless they're perhaps doing the probability of 

6 default loss given the default that the largest 

7 banks do, they haven't constructed loss curves to 

8 see how losses occur over the lives of loans. For 

9 most loans, from what I've seen, the losses occur 

10 out two to three years, and then they taper off.

11 That two to three-year time horizon we 

12 keep talking about probably is where the peak of 

13 any losses would occur. There'd be some 

14 thereafter, but the performance would likely 

15 revert back more to what your lifetime experience 

16 is for those outer meters of the life of the loan. 

17 In theory -- and I can't say whether this is a 

18 working practice -- FASB's trying to say how do 

19 banks manage the credit risk today? Presumably, 

20 as good credit risk management, you are looking at 

21 what you expect to happen in the future, both when 

22 you grant the loan, and as you work with the 
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1 borrower to collect the loan. This proposal, and 

2 the standard, now it's out, is intended to better 

3 align sound credit risk management practices with 

4 the accounting.

5 If your credit risk management people 

6 are factoring in likely future events or expected 

7 future events into their assessment of how we're 

8 going to manage the portfolio, they'll now bring 

9 that thought process into the estimation and 

10 re-allowance going forward, at least starting in 

11 2020 or '21.

12 MEMBER BRYANT: We had losses the last 

13 two years, so if we can keep that to 2018-2019, I 

14 think we'll be in pretty good shape.

15 MR. STORCH: You still have to look at 

16 lifetime loss experience as kind of a baseline, and 

17 then say given what our baseline experience is, how 

18 do we expect conditions over the forecast period 

19 in the life of these loans to be different than 

20 those good years, where we haven't had any 

21 charge-offs? It's not likely that a zero 

22 allowance or some very tiny allowance would be 
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1 acceptable, but it's going to depend on your facts 

2 and circumstances. One of the messages is should 

3 it always have been under the existing rules the 

4 allowance is an institution-specific number? 

5 There's no one right number that's right for all 

6 institutions, although sometimes you hear people 

7 arguing that.

8 MEMBER LUNDY: I do think, just from an 

9 observational standpoint, there's already been a 

10 lot of margin pressure the last five years. 

11 Bankers and our regulators, based on our historical 

12 experience, have been rightly concerned about 

13 interest rate risk.

14 Of course, if we could all look 

15 backwards, we realize that we've left a lot of money 

16 on the table, as an industry, trying to guard 

17 against that interest rate risk. I don't know 

18 what's going to go on in the future, but I do think 

19 that Pedro's on to something. I think that this 

20 will tend to compress duration, and I think that 

21 will put more pressure on margin for community 

22 banks who have less ability to lay off that interest 
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1 rate risk and are more dependent on spread income. 

2 I can't quantify that, but one way to guard against 

3 either an imposed or too difficult to figure out 

4 expected risk loss in years three, four and five 

5 is to, as a protective measure against criticism, 

6 shorten that duration, which may make you less 

7 competitive from a pricing standpoint. I think, 

8 in particular, the smaller banks' segment, which 

9 is so dependent on spread income, has to worry about 

10 that and how this impacts our earnings.

11 MEMBER WILLIAMS: I just think you guys 

12 just keep your eyes and ears open for it. I 

13 understand the concept that every bank is 

14 different, every bank has different risk profiles. 

15 I understand all that, but this will come down to 

16 some kind of a fairly simple model, with tweaks 

17 related to the riskiness of the classification of 

18 loans within the bank and that sort of thing, the 

19 individual data that we have.

20 But there will be some standard for how 

21 we track this information -- akin to the idea of 

22 historical losses, where you say did you use a 
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1 rolling 24 months, did you use 36 months? There's 

2 all kind of tweaks, but there's some history period 

3 that you -- I think it's going to come down to some 

4 model. I know you guys have to be very careful that 

5 you don't manage our banks. I understand that 

6 concept. But I think any help, as that model 

7 begins to fall into place, to make it easier for 

8 us. Does that make sense?

9 MEMBER SCULLY: I'm sure you've 

10 already done this, but I think, also, staying in 

11 touch with not just FASB, but individual accounting 

12 firms. I know our accountants have said that 

13 because of the vintage approach, no matter what 

14 anybody tells us, there's no way we can keep doing 

15 this on a spreadsheet, no way. That involves some 

16 level of complexity.

17 (Simultaneous speaking.)

18 MR. STORCH: I think the FASB has tried 

19 to dissuade people of that. There's some vintage 

20 disclosures for banks that are -- for accounting 

21 purposes are called public that has to be provided. 

22 That's disclosure, not measurement. FASB's tried 
215

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 to distinguish vintage measurement from vintage 

2 disclosure. If you look at the standard -- or the 

3 people that deal with accounting look at the 

4 standard, there are examples that the FASB has 

5 included of loss rate methods and so forth, to make 

6 it clear that from a community institution 

7 perspective particularly, those methods are 

8 acceptable. There is also a vintage example, but 

9 it's clearly not the only example of how to apply 

10 the methodology. The agencies do have some 

11 meetings with accounting policy staffs and 

12 accounting firms that we are scheduling now, just 

13 to find out what issues they're hearing from their 

14 clients and so forth.

15 We've also indicated to the trade 

16 groups that we're more than willing to work with 

17 them on issues that they're hearing from their 

18 members. I think we all want to get this as right 

19 as we can, acknowledging that it's an evolutionary 

20 process before takes effect, and even after it 

21 takes effect.

22 MEMBER WILLIAMS: We can all dream that 
216

NEAL R. GROSS

COURT REPORTERS AND TRANSCRIBERS

1323 RHODE ISLAND AVE., N.W.

(202) 234-4433 WASHINGTON, D.C. 20005-3701 www.nealrgross.com

1 you guys will come out and say just do 50 percent.

2 CHAIRMAN GRUENBERG: That sounds 

3 familiar. Anything else? We focused on this and 

4 be as helpful as we can. Thank you all very much. 

5 To those of you who this is your last day, we'll 

6 miss you, and please stay in touch. The rest of 

7 you, we'll see you the next time. Thank you.

8 (Whereupon, the above-entitled matter 

9 went off the record at 2:49 p.m.)

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