The Senate Committee on Banking, Housing, and Urban Affairs held a hearing today to address the use of funding under the Capital Purchase Program (CPP). Chairman Dodd’s opening statement expressed his view that banking organizations accepting public funds have an obligation to use those funds in manner that benefits the citizens of the United States, and that this obligation has three components. First, Chairman Dodd stated that banking organizations should “preserve homeownership” and that financial institutions should recognize that “[n]ow is the time to utilize HOPE for Homeowners and other initiatives designed to truly preserve homeownership and stabilize the economy.” Second, he said that “lenders who receive public funds should use the funds to lend.” This echoes statements made Congressmen Frank and Boehner last month. Finally, the Chairman stated that all financial institutions, not just those accepting CPP funds or other funding under the Emergency Economic Stabilization Act of 2008 (EESA), should examine their executive compensation policies.

Seven witnesses provided testimony at the hearing:

  • Anne Finucane, Global Corporate Affairs Executive, Bank of America
  • Mr. Barry L. Zubrow, Executive Vice President, Chief Risk Officer, JPMorgan Chase
  • Jon Campbell, Executive Vice President, CEO of the Minnesota Region, Wells Fargo Bank
  • Gregory Palm, Executive Vice President and General Counsel, The Goldman Sachs Group, Inc.
  • Martin Eakes, CEO, Self-Help Credit Union and the Center for Responsible Lending
  • Nancy M. Zirkin, Director of Public Policy, Leadership Conference on Civil Rights
  • Dr. Susan M. Wachter, Worley Professor of Financial Management, Wharton School of Business

Today’s hearing came on the heels of an Interagency Statement issued yesterday by the federal banking agencies addressing the agencies’ joint concern that financial institutions use the proceeds of the CPP and other EESA funding to meet the needs of creditworthy borrowers. In the press release accompanying the FDIC’s release of the Interagency Statement, FDIC Chairman, Sheila Bair, stated that the “statement offers guidance on the expectations of regulators on many key issues, including prudent lending practices, executive compensation and the treatment of dividends.” Addressing the need for banking organizations to also adopt “proactive, systematic and streamlined loan modifications designed to achieve sustainable and performing loans,” Chairman Bair continued, “[a]chieving wide scale modifications of distressed mortgages, particularly those held in private securitization trusts, will address our underlying economic problem: too many unaffordable home loans.” This statement was made as HOPE NOW, the Treasury Department and the Federal Housing Finance Agency were announcing their Streamlined Mortgage Modification Plan.

The Interagency Statement noted that “it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met.” In order to accomplish this objective, the statement contained four policy considerations financial institutions should be mindful of, in a manner consistent with safety and soundness principles and existing supervisory standards. The statement also included a note that all financial institutions, regardless of their participation in EESA or other federal programs, are expected to adhere to the principles laid out in the statement.

First, the agencies expect all banking organizations to provide credit to businesses, consumers, and other creditworthy borrowers, including credit that was formerly provided or facilitated by purchasers of securities. Consistent with prudent lending practices, banking organizations must ensure that new lending opportunities be reviewed with an eye toward realistic asset valuations and a balanced assessment of borrower repayment capacities.

Second, banking organizations are advised to maintain a strong capital position. This policy is intended to facilitate the banking organizations willingness and ability to lend. With respect to this policy consideration, the statement addresses dividend levels, and provides that “a banking organization should consider its ongoing earnings capacity, the adequacy of its loan loss allowance, and the overall effect that a dividend payout would have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs of creditworthy borrowers.” Examiners will review an institution’s stated dividend policies and will take action when the dividend policy is found to be “inconsistent with sound capital and lending policies.”

Third, the agencies expect banking organizations to work with existing borrowers to avoid preventable foreclosures by determining whether a loan modification would enhance the net present value of the loan before proceeding to foreclosure. Such modifications should be made in a manner that results in a mortgage the borrower will be able to sustain over the remaining maturity of the modified loan.

Finally, the statement noted that management compensation plans should be aligned with the long-term interests of the banking organization, should provide incentives for safe and sound behavior, and should prevent short-term payments for transactions with long-term implications.