Transcript for Event: Pandemic Response: Perspectives from the Banking Industry

Mark Bialek: I'm Mark Bialek, Inspector General for the Board of Governors of the Federal Reserve System, and the Bureau of Consumer Financial Protection. With me today is Jay Lerner, Jay is the Inspector General for the Federal Deposit Insurance Corporation, and together, Jay and I are going to be moderating this first in a series of Pandemic Response Accountability Committee listening events. And we're going to be exclusively focusing upon the financial sector, stakeholder perspectives, all concerning the operation, the efficiency, effectiveness, as well as some areas for potentially enhanced oversight by the IG community, all related to CARES Act programs and the pandemic response efforts of the Federal government and the Federal Reserve. 

Mark Bialek: The PRAC is comprised of 21 Inspectors General from across the Federal government that are leading the effort to promote transparency, and to support and conduct oversight of the Federal government's pandemic response, which as we know, we've added it all up-to-date, is more than $3 trillion in economic relief. This total includes funding from the initial CARES Act and subsequent legislation enacted in the spring of last year, as well as the December 27th enactment of $900 billion in supplemental pandemic relief. 

Mark Bialek: Jay and I are members of the PRAC's Financial Sector Oversight workgroup, which is comprised of the Inspectors General with oversight responsibilities in the area of banking, lending, and housing. I want to vociferously welcome our panelists, and thank them for their participation. We very much look forward to hearing your insights and suggestions. And I'm going to now hand things off to Jay for any opening remarks he'd like to make, as well as the introduction of our panelists. Jay. 

Jay Lerner: Thank you, Mark. And as Mark said, I am Jay Lerner, I'm the Inspector General for the Federal Deposit Insurance Corporation. I'd like to welcome our esteemed panelists today who represent various perspectives from the banking sector. Throughout the pandemic, our nation's financial institutions have played a critical role in ensuring that loans supported by the CARES Act reach the borrowers and businesses affected by the pandemic. 

Jay Lerner: This listening forum is a unique opportunity for the IGs to hear from our financial sector stakeholders. We're interested in gaining the benefits of your insights and perspectives about these programs in which your constituencies are involved, as well as about the areas on which financial sector IGs should focus oversight attention in order to enhance the efficiency and integrity of pandemic relief efforts. In addition, we're interested in ways to promote accountability and deter, detect, and minimize fraud, waste and abuse in these programs. 

Jay Lerner: Today, we are fortunate to have with us, our knowledgeable panelists, Naomi Camper and Paul Benda from the American Bankers Association, Karen Thomas and Ron Haney from the Independent Community Bankers of America, and Robert James of the National Bankers Association. We thank you all for being here and participating in this important event. First, let's have the panelists introduce themselves. We'll start with the ABA, the American Bankers Association. Ms. Camper, can you please introduce yourself and Mr. Benda, and please tell us about your constituency that you represent, the ABA. 

Naomi Camper: Thank you very much. My name is Naomi Camper. I'm the Chief Policy Officer at the American Bankers Association. I'm joined by my colleague, Paul Benda, who is ABA Senior Vice President for Risk and Cybersecurity Policy. The ABA is the voice of the nations $21.2 trillion banking industry, which is composed of small, medium, and large banks that together employ more than two million people, safeguard $17 trillion in deposits, and extend nearly $11 trillion in loans. We're very pleased to present our observations today and appreciate being included with colleagues from the National Bankers Association and the Independent Community Bankers of America. 

Naomi Camper: As we join together to confront the unprecedented effects of the COVID-19 pandemic across our nation and the globe, we have welcomed the collaborative efforts of the government, community groups, and private sector players. In addition to the wide array of relief banks have provided their customers since the start of this health crisis, such as loan modifications, fee waivers, and forbearance, banks have also been pleased to help distribute aid to struggling individuals and businesses through a variety of important Federal pandemic relief programs. We appreciate the opportunity to present some summary observations here. While many of the relief efforts have been effective, they were also implemented, understandably, with great haste. As a result, we will spotlight areas where improvements could help to deliver aid more effectively to struggling communities. We also highlight some future risks in the event relief and regulatory flexibility ends prematurely. We look forward to a constructive conversation. 

Jay Lerner: Thank you very much. Ms. Thomas, can you please tell us about yourself, Mr. Haynie, and the Independent Community Bankers of America? 

Karen Thomas: Thank you, Jay, and it's great to be with all of you. ICBA greatly appreciates the opportunity to appear before panel this morning. My name is Karen Thomas, I'm the Senior Executive Vice President for Government Relations and Public Policy at ICBA. And I'm joined by my colleague, Ron Haynie, who's our Senior Vice President for Mortgage Finance Policy. 

Karen Thomas: ICBA is the only trade association exclusively representing community banks. There are about 5,000 community banks across the country, we have 52,000 locations, and represent about 99% of all bank charters, comprising about $4.9 trillion in assets. Community banks channel their local deposits into local loans to households and small businesses in the communities and neighborhoods that they serve, they spur job creation, and support locally economies. Of particular interest for this session today, they've played an out-sized role in supporting small businesses through the pandemic and the accompanying economic shock, and that's really not surprising given their out-sized role in supporting small business lending, about 60% of all small business loans made by banks are made by community banks. 

Karen Thomas: In the face of many challenges during the pandemic, community banks have dedicated their strength, ability and resourcefulness into making the Paycheck Protection Program work for small businesses in need. And the data really tells the story here, the lion's share of PPP loans were made by community banks. They made 2.8 million PPP loans, or about 60% of the total, and that supported retention of 33.7 million employees at small businesses. Community banks made more than 70% of PPP loans to minority-owned or women-owned businesses, and more than 60% of PPP loans to veteran-owned businesses. 

Karen Thomas: ICBA is very proud that community banks have stepped up to support the survival of these diverse businesses in a time of crisis. Community banks have also worked with their customers and borrowers to provide forbearance on loans, and flexibility that allows the borrower to kind of regain their feet, if you will. In turn, the flexibility that the CARES Act and the regulators have provided to community banks make these accommodations without being subject to regulatory criticism has been very critical, we appreciate that. Finally, community banks have played a role in helping to forte fraud and abuse attendant to the various pandemic response programs, and we're pleased to participate in today's panel to offer the perspective of community banks on these various programs. Thank you. 

Jay Lerner: Thank you very much and welcome. Mr. James, we also welcome you here today. Please introduce yourself and tell us about the National Bankers Association. 

Robert James: Good morning, Jay and Mark, and to my esteemed colleagues. I'm very honored to join you all on this panel to have this important conversation. My name is Robert James II, and I'm with Carver State Bank in Savannah, Georgia, and I also am honored to serve as the Chairman of the National Bankers Association. 

Robert James: The National Bankers Association was founded in 1927, originally called the Negro Bankers Association, representing, at that time, Black-owned banks across the country, and now the NBA is an advocate and voice for all minority depository institutions. The NBA's mission is to create an inclusive financial services industry and a vibrant business environment for minority depository institutions, their customers, and the communities we serve. 

Robert James: In this era of COVID-19, the pandemic, our bankers have been frontline responders. We've been first responders in our communities, making sure that we've been able to get very desperately needed resources out to the small businesses that need them the most. Our institutions have really stepped up and made thousands of loans in minority communities across the country. Our institutions are in 23 states and represent an enormous amount of real commitment, in some cases going back over a century to serving those communities that have been historically, systemically underserved in America's economy. 

Robert James: It's important to note that, in spite of our efforts with the Paycheck Protection Program and other pandemic relief programs, in the Black community, for example, nearly 40% of businesses have failed in the wake of the pandemic. And so as we look to implement pandemic relief programs to sort of staunch bleeding, we also have to look to rebuilding and allowing our communities, many of which, we're still struggling to recover from the recession in 2008, to help them get back on their feet and rebuild, and hopefully, build back stronger and improve their conditions and improve the conditions of the communities that we serve. Our institutions are mission-oriented, and we're very focused on providing pandemic related relief, as well as the normal service that we provide to our communities. We're really pleased to join you here today for this important conversation. Thank you. 

Mark Bialek: Thank you very much for those introductions, panelists. We are really looking forward to hearing your specific perspectives on a variety of questions that can inform our work and can also provide invaluable information to us as IG's, and to the American public, about what's working well, where there may be some efficiencies and effectiveness that are currently lacking, and potential areas for some greater oversight by the IG community or by others. 

Mark Bialek: So let's get started with our first area of questioning. Can you explain your members' experiences interacting with the Federal relief programs under the CARES Act or with the Federal Reserve lending facilities? In effect, how transparent were the programs, participation, processes and criteria? Are there any adjustments that you believe the Federal government can make to increase the effectiveness and efficiency of these programs? Ms. Camper, your thoughts on behalf of the ABA? 

Naomi Camper: Great, thank you very much. I'll run through several of the programs and provide specific recommendations and observations. I'll start with Economic Impact Payments, which provide struggling customers with critical liquidity that has really reduced further economic pain across the country during the pandemic. I'll observe first, the direct electronic payments to consumers is the safest and most effective means of transmission. We believe that the EIP process can be improved with additional operational clarity. We recommend that Treasury enhanced transparency in the following very specific ways. First, utilize a private sector validation service to confirm the recipient bank routing information with the recipient to mitigate the risk of misdirected payments. Second, release more detailed forecasts of check and ACH payment volume, timing, and locations to help banks prepare. Third, provide the projected dates for when the check and ACH EIPs will be concluding. 

Naomi Camper:  Fourth, provide a check validation system to private sector providers, to act as a backup to the TCIS program, and to add recipient data to the file and/or to the API. Fifth, provide guidance on the treatment of payments with unclear guidelines, such as those that are later determined to have been misdirected or overpaid, in quotes, since federal benefit reclamation rules do not apply. Sixth, leverage existing prepaid programs to enroll new card holders to increase the number of electronic payments. And seventh, provide greater clarity on a number of check processing, electronic payment, and payment portal issues.  

Naomi Camper:  In round one, distribution of EIPs was an important opportunity to encourage un-banked consumers to become part of the mainstream financial system to get their payments quickly and safely. The ABA has encouraged its members to promote bank on certified accounts to un-banked consumers during this time. We believe the IRS has missed an important opportunity during the second round of EIPs, to reopen its portal that allows consumers to input their direct deposit information. For any future rounds, we strongly urge that government banks and consumer advocacy groups work together to encourage un-banked consumers to find a financial mainstream.  

Naomi Camper:  And briefly, the EIP to IRS error related to tax preparer clients, and subsequent policy reversals, have made managing this process and communicating with its customers difficult. We would be happy to follow up with additional detail at a later date.  

Naomi Camper:  Turning to the Paycheck Protection Program, I'll address my comments to round one, since round two has just launched. While there were significant technical and logistical problems with the SBAs early program launch, banks of all sizes worked collaboratively with the government to make it a success. Technical and logistical problems include 25 interim final rules and counting, 75 plus frequently asked questions and counting, multiple procedural notices, access issues for banks to upload applications to ETRAN, and the initial servicing of loans via Form 1502.  

Naomi Camper:  To date, banks continue to struggle with the lack of guidance around loan forgiveness, bankruptcy proceedings, and how the SBA will honor the 100% guarantee. As the SBA continues to roll out the reopening of PPP in phases, they must continue their efforts to provide clear, bright line guidance before they launch. A consistent and committed effort to transparency and communication of program changes will address many of the issues that plague earlier iterations  of PPP.  

Naomi Camper:  Even with all of these issues, our members and their dedicated employees worked incredibly hard, as did SBA and government officials, to make the program a success. We believe those efforts have helped keep millions of small businesses up and running, and we greatly appreciate the opportunity to work collaboratively on this.  

Naomi Camper:  Main Street Lending Program, although details were somewhat slow to emerge at the beginning, there was ultimately sufficient transparency in the participation process and criteria for the Main Street Lending Program. Despite some early concerns about portal functionality, overall, ABA did not learn of any ongoing major challenges to the lender registration portal, term sheets, or FAQ.  

Naomi Camper:  ABA did receive feedback that the program's extensive documentation and complexity, while understandable, deterred participation from both lenders and borrowers. While the program was slower to launch than other Federal Reserve emergency lending initiatives and required recalibration as it went forward, the Treasury and Federal Reserve demonstrated a willingness to provide clarifications and to adjust program terms to make them more attractive to our nation's struggling businesses.  

Naomi Camper:  I'll close with a few quick points related to mortgage forbearance programs, which I know my colleague will also address. Mortgage servicing operations faced immediate and intense challenges at the start of the pandemic due to overwhelming demand for payment deferral. Multiple issues had to be addressed simultaneously, laws and regulations that constrained services ability to offer efficient and immediate relief to borrowers, secondary market players that opposed conditions and demands on possible relief arrangements, concern about the sufficiency of capital and liquidity to handle the stressed environment, and state level actions that complicated servicer efforts to provide relief to borrowers.  

Naomi Camper:  Following intense communications with a wide variety of stakeholders, bank servicers obtained reasonable flexibilities and accommodations, including official interpretive guidance, interim final rules, agency FAQ's, changes to Federal program guidelines, and inter-agency policy statements. Overall, ABA interactions with regulators and Federal program administrators did prove effective and productive. However, without established processes to address emergency crisis situations, discussions often relied on informal and ad hoc meetings and communications. While we achieved good outcomes, the process could be improved. We believe there would be value in exploring the creation of a crisis communication plan among critical stakeholders with well-defined lines established ahead of time so we're able to respond quickly to the urgent needs of our communities.  

Mark Bialek:  Thank you very much, Ms. Camper, for those remarks. Ms. Thomas, your insights into this question from the perspective of the ICBA?  

Karen Thomas:  Thank you, Mark. I'd also like to briefly address three programs, the PPP, the Economic Impact Payments, and the Main Street Lending Program. I noted in my opening about the out-sized role that community banks played in the PPP, but as Naomi mentioned, it was not without its challenges. And at the outset, I'd like to acknowledge the Herculean task that faced SBA and Treasury, they were kind of building the plane while flying it. And obviously there was a great  importance and need for the program. So the themes I think that are important to remember are, where the areas for improvement are, are transparency, clarity, consistency, and communication.  

Karen Thomas:  I mean, some of the challenges, the launch of the program was very rushed. Community banks received the rules about the program the night before it went live. It was late on a Thursday evening, we went live on a Friday morning. There were challenges in getting approved to be a lender. There were challenges in accessing the system itself to input loan applications. All the interim final rules and guidance, already mentioned, meant there was a lot of complexity. It was a challenge to get questions answered or get information in advance so bankers could plan.  

Karen Thomas:  And then there was some misinformation, I'm particularly thinking about things like how the Economic Impact Disaster loan advances intersected with the PPP. That was not just a problem for bankers and lenders, but for the borrowers themselves. And then we had challenges with conflicting information from SBA in Washington versus the field offices.  

Karen Thomas:  Many program adjustments were made as part of the Economic Aid Act, and we were very pleased with those. We made quite a few recommendations and advocated for some of those changes, like a simplified forgiveness process, the idle fix, and more. I think the newly launched program is a little bit better. We did have a stakeholders briefing from SBA on the Friday before it opened, this past Monday, which was very helpful. But again, I think there's really transparency, clarity, consistency, communication, recognizing the challenges of such a vast and complex program.  

Karen Thomas:  On the Main Street Lending Program, there was very little uptake by community banks and their customers. They viewed it really as a big bank program. The minimum loan amounts were very high for community bank customers, too high. The Fed did ratchet those down, but probably still a little high. The complexity of the program, the reams of legal and other documents associated with it, and community documents associated with it, and community banks would need outside legal help to close one of these loans. I think the need for the bank to hold 5% of the loan was also something, an obstacle if you will. So we think there's room for improvement there if the program is meant to be usable by community banks and the smallest, or smaller, small businesses.  

Karen Thomas:  On the EIP, we would concur with the observations that the ABA made about this. We do want to recognize the monumental effort that was needed to distribute 147 million payments out to the public, and also took a lot of effort by industry partners as well. We think there were quality control challenges and that the IRS should look at ways to increase the number of electronic payments that can be made as part of the EIP. Accuracy of information to create payment files was an issue in this second go-around for the EIP. There was information that the agency had, but wasn't using. 

Karen Thomas: Communication with the industry partners is important. There has been a lot of communication, but in some cases we were told not to pass that on to bankers. And so there needs to be a little more transparency out into the people that are part of the distribution, but also to the taxpayers themselves so they know what's going on. There was confusion among the taxpayers, as well, as to whether they should have gotten a payment, their bank should have the payment, they're going to get a check instead. We do think there's a lot of room for improvement. And if we have a next round, EIP3 if you will, hopefully some of these lessons can be brought to bear for that. And so I do want to turn to my colleague, [Ron Haynie 00:25:15], to talk very briefly about mortgage forbearance. 

Ron Haynie: Thank you, Karen. The whole story, I think with the mortgage servicing and the mortgage forbearance provisions, is almost it becomes down to like A Tale of Two Cities. Here you have in the midst of the largest mortgage origination market, probably in history, you also have mortgage servicers having to deal with the Congressionally-mandated, and in some cases, state-mandated forbearance for mortgage borrowers. And while covering obligations that they need make that they have with Fannie Mae and Freddie Mac, the GSEs, as well as with Ginnie Mae. The bright spot in many cases for community banks is that most community banks do not service for Ginnie Mae. That servicing is concentrated with the large non-bank servicers or with the large national bank servicers. 

Ron Haynie: But there is an impact, or could be an impact down the road, for all servicers and all participants in the housing market if the recovery is not consistent and there is additional lockdowns, things of that nature, a rise in interest rates that could jeopardize the mortgage origination volume, those things will have a direct impact on mortgage servicers being able to handle these obligations. And so, clearly, there is some need or could be some need down the road for some type of liquidity facility for mortgage services. And while that hasn't occurred yet, clearly there's a risk there to the economy that mortgage servicers may not be able to completely fulfill their obligations to bond holders, to paying the escrows for people's property taxes and insurance if the pandemic is extended, if the recovery takes longer, if interest rates rise. 

Ron Haynie: So those things I think need to be on somebody's radar screen. Overall, community banks have done an outstanding job in managing this. Thankfully, their experience with mortgage forbearance has not been... There has not been high levels of mortgage forbearance with community banks, and many of their borrowers have transitioned out of forbearance back to regular payments, but again, a lot of this depends on the length and the severity of the pandemic and the length of the recovery. Thank you.  

Mark Bialek:  Well, thanks so very much for those insights, Ms. Thomas and Mr. Haynie. Mr. James, your perspectives on behalf of the National Bankers Association?  

Robert James:  Sure. Thank you. So first I'd like to just echo and thank Karen for her comments particularly regarding the implementation of the PPP and the challenges that a lot of our banks experienced with implementing that in each round. In the first round, many of our institutions, again minority depository institutions and various very small institutions, were quite frankly muscled out of the PPP because we just did not have the same kinds of technology or personnel that some of the large banks had. And that ended up meaning that many, many minority borrowers, even those that were customers of many of the large national banks, or even larger community banks, were left underserved or un­served by the PPP.  

Robert James:  And so in the second round, it was a little better. We were able to get a little bit more forewarning and set up systems so that we could accommodate more customers, and the SBA seemed to work out some of the technology challenges that were preventing smaller institutions from being able to even get into the system in order to get their loans authorized.  

Robert James:  And so now in the third round of the PPP, we're definitely experiencing some challenges, and I'll get back to that in a moment. With regard to Naomi's comments, I really want to echo her comments regarding the economic assistance payments, especially regarding the un-banked, and just say that going forward, we certainly encourage every effort to get folks into the banking system, particularly in minority communities. And MDIs really want to be at the forefront of leadership on that issue, and that's important because there's a lot of distrust in minority communities of the banking system. Some of that distrust in the black community lingers from the rollout of the Freedman's Bank after Reconstruction, and really what essentially was a federally sponsored defrauding of people who were just recently out of slavery and losing their savings. And so a lot of that still runs through black communities.  

Robert James:  You have immigrant communities that are more recent immigrants to the United States that may have cultural issues with banking that they're bringing from their own home countries. And so we think that MDIs have an important role to play in communicating with those communities about the safety and soundness of the banking system.  

Robert James:  Now, returning back to the PPP program, our banks primarily use this program to make loans to very small businesses, and we're very focused on the minority communities that we serve. In the first two rounds, for example, and I have the distinction of being a practitioner so I've actually had to personally roll up my sleeves and upload applications to E-Tran. So I felt the pain of having to do this late into the night and early in the morning, but our institution, Carver State Bank, over 80% of our PPP loans went to minority owned businesses. The vast majority of the other 20% went to nonprofits that serve minority communities, so we were very targeted and very specific about what we did in terms of rolling those loans out. 

Robert James: The other program that was really important to a lot of our institutions were the federal reserve banks liquidity facilities, where the federal reserve bank made liquidity available to us so that we could continue to make PPP loans without worrying about taxing our, and stressing our, liquidity facilities inside of the bank. And so we definitely want those programs to remain in place so that we can continue to have access to liquidity so that we continue to get those loans out to those small businesses. 

Robert James: In terms of the Main Street Lending Program, many of our banks did sign up for it, but there was very little uptake in our communities. Those loans were a little larger and more complex than most of our banks would tend to make. We did have a handful of loans in the Main Street Lending Program that were made through our banks, but that was not a really popular program in terms of lending in the neighborhoods and communities that we serve. 

Robert James: On the question of transparency, the program participation I think was very transparent. The issues that we faced were really about constantly shifting rules and guidelines, it created a lot of challenges for our banks and the customers that we serve. And a little bit later on, I'll give a little bit more specific example about this at a later point in the panel. And we recognize that the SBA, the Treasury, the IRS, all of these agencies were really building something from scratch at a scale that was an unprecedented in the history of the SBA, certainly with the PPP program. And so we understand and appreciate the effort that they put in to build this program, but we would love for there to be more clarity on the front end, again, to help our bankers deliver this service as well as our customers as they try to sift through all of the guidance. 

Robert James: Other issues that we had around technology and support in the first round, I think, have been covered. The technology situation seems to be a little bit better, as well as the customer support from SBA. And so now with the third-round rollout, we've been a little bit disappointed with the way that the third round has been rolled out. There's been an emphasis on community financial institutions, which includes MDIs and certified Community Development Financial Institutions, CDFIs. And due to the fact that many minority businesses and businesses in low-income communities were not really reached in the first two rounds, Congress intended for community financial institutions to have a $15 billion set-aside, that's in the new statute, but instead of giving us a dedicated portal to access, and when I say "us" I'm talking about these community financial institutions, the choice the Treasury has made is to implement an exclusive early-access process. 

Robert James: And so Friday night they sent out over a hundred pages of new guidance, new application forms, and new rules. And then on Sunday, they sent us links and information about a brand new loan submission platform and evaluation process with the program set to open on Monday morning at 9:00 AM. And so that's created a lot of internal management challenges at our institutions, resource challenges, but also a lot of issues with our customers. So at Carver, our phones start ringing off the hook on Monday morning, overwhelmed with calls, a lot of emails from customers, and quite frankly, we just weren't set up yet. And so today is Wednesday, and I think we're just finally getting set up. 

Robert James: Some of our other institutions have been able to accept and process some applications here on the first two days, and we're hoping that we'll have a lot more uptake here towards the end of the week. But many of our customers are very small businesses who don't have a CPA on speed dial. They don't have their payroll data sitting in a cloud-based system where they can just press a button and access it. And so a lot of them need time, need time to understand the program, need time to gather their information so that they don't make an honest mistake going forward. 
Robert James: And so those are the areas where we continue to work with and communicate with SBA and Treasury, looking to continue to improve these programs and continue to have some just increased partnership between all of our institutions and the government agencies, so that we can, again, get these resources out to the communities that need them the most. Thank you. 

Jay Lerner: Thank you very much. That's very helpful. We're also interested in your perspectives concerning the impact of federal forbearance efforts. Specifically, how effective have the federal financial agencies been in terms of their regulatory and supervisory efforts in addressing market changes arising from the pandemic? let's start with you, Mr. James, if you could give your response, please. 

Robert James: Sure. Thank you so much, Jay. So overall, we've been very pleased with the efforts of the regulators, not just the Federal Reserve, but also the OCC and the FDIC in terms of really partnering with our institutions. I think there's a lot of lessons that were learned from the financial crisis of 2008 and 2009 with regard to forbearance. And so our regulatory partners have been very, very cooperative with our institutions in terms of staving off collection efforts, allowing our customers to have breathing room, and also allowing our banks to remain sound by not having to classify assets and do things to risk our capital. 

Robert James: Our members are very hopeful that that kind of leniency and understanding will continue, especially from minority borrowers and in minority communities where we often struggle to recover from economic downturns. Our institutions are going to continue to need regulatory relief with regard to classified assets and really have that time to work things out. Again, just by way of example, at our institution down in Savannah, we had loans that we had to classify back in the financial crisis of 2008 and 2009 that took us nearly a decade to work out, but they did finally work out and work out to the benefit of the borrower as well as to the institution. 
But in some of those hard-hit communities, it just takes a long time for folks to get back on their feet and to recover values, to recover the ability to cash flow so that they can get back into good standing with the institution. And so we really are going to need to hopefully be able to get away from the emergency situation relatively soon and start focusing on helping our customers rebuild, and those forbearance programs are going to be very, very critical to that. 

Jay Lerner: Thank you very much. Ms. Thomas, can you and Mr. Haynie please share any insights with regard to this question? 

Karen Thomas: Thank you. Yes, I would echo the comments that Robert made. Our community bankers have been very pleased with the bank regulatory response to the pandemic. The regulators have been very proactive. They've shown flexibility which in turn allows community banks to modify loans and show flexibility to their borrowers. That ability to work with borrowers without regulatory criticism is very critical to their ability to help their customers. In particular I mean there's a little, if I can be geeky on accounting for a second, troubled debt restructurings as an accounting concept, which makes it more difficult for bankers to work with their borrowers, and that has been suspended to allow that flexibility. The regulators have tried to avoid artificial increases in assets on account of PPP lending to impact, for example, deposit insurance premiums that community banks pay, or that all banks pay. 

Karen Thomas: They've shown flexibility in computing asset thresholds that impact regulations. In other words, PPP lending had the potential to kick banks into a higher asset category, which meant more regulation or more intensive regulation on a number of different fronts. And the regulators have shown flexibility there. There's also flexibility on capital ratios to allow community banks to make sure they can continue to have their money deployed out into the community in the form of loans to borrowers. 

Karen Thomas: So generally, it's been very good and I would echo something else Robert said, which we want to make sure that this continues going forward. We don't know how long the dislocation is going to last, the economic shock from the pandemic, how quickly can the economy recover, and so forth. And so it's important that, as time goes on, this flexibility be maintained because that's going to give community banks the ability to maintain flexibility for their customers as well. So I think the general watch-word is very good so far, and we hope it keeps up. 

Jay Lerner: Thank you very much. 

Karen Thomas: Ron Haynie: 

Karen Thomas: With that, I'll turn to Ron for some further thoughts. Ron, did you have anything to add? 

Ron Haynie: No, I mean, certainly echo everything has been said so far. In the housing space, the housing regulators, the HFA, certainly HUD, FHA, VA, Rural Housing, all of those entities have been extremely helpful and supportive as, again, mortgage servicers deal with forbearance, requests for forbearance. FHFA was extremely, I think, proactive in, even before the CARES Act was done, was that providing for forbearance, and then subsequent to the CARES Act, providing a path out of forbearance, which is critical. Somebody who has been unable to make payments for six months, for their ability to have to come up with a lump sum of cash to get out of forbearance is pretty impossible. And so providing a path out I think is critical. And I think that's a big, huge success story. 

Ron Haynie: There's been other types of forbearance and other types of flexibility. All the banking agencies as far as appraisals, property appraisals. The pandemic, again, you've got a strong mortgage origination market. You have borrowers trying to refinance, to lower their payments, or even buying a home. But you had to get an appraisal done. And this is especially acute in rural and outlying areas. And so the ability for the waiver of appraisals in some certain situations has been very helpful. So I'll just echo what everyone else has said that we just need to see a continuance of that and that it needs to continue beyond sort of the official end of the pandemic, and that's certainly a key concern. Otherwise, no, it's been very positive. 

Jay Lerner: Thank you very much. I personally appreciate the geeky accounting. So thank you for that insight, Ms. Thomas, and Mr. Haynie. Next, we're also interested in Ms. Camper's perspective from the ABA on this question. 

Naomi Camper: Great. Thank you. And in the era of Zoom, you couldn't see me nodding vigorously through all those presentations. But I think it really reinforces the general theme here, which is that this has been the pandemic response, a remarkable display of collaboration, and everybody really rowing in the same direction to help all of the communities across the country recover as quickly as possible and mitigate the damage and especially avoiding some of the unevenness that I know we all fear in terms of exacerbating economic inequality and making sure that we do as much as we can to prevent growing inequality. So with that, I will get very geeky on some of these things to make sure that [PRAC 00:45:42] has a record that they can refer back to. 
So, first of all, the legislative efforts that we already talked about were really important in injecting capital into the economy, combined with flexibility in regulatory safety and soundness expectations, which were provided in April, June, and August on these expectations, which we provided in April, June, and August statements. Those have been very effective in limiting the adverse impact of COVID. The legislative stimulus have provided needed temporary fiscal relief to consumer and commercial borrowers, and has injected really important liquidity across the banking industry. Loan payment relief provided via short-term deferrals to commercial real estate industry sectors hardest hit by the pandemic, such as hospitality, retail, restaurant, and recreation industries, it's been important. And most borrowers who initially requested deferrals have resumed the payment under original contractual terms with the exception of specific industry sectors that need long-term workouts, such as hospitality, and in some markets retail. 

Naomi Camper: As my colleagues mentioned, the accounting relief and flexibility from TBR accounting designations provided both by CARES Act and by inter-agency guidance has allowed banks to serve borrowers without the onerous accounting process that also has potentially severe impacts on capital and regulatory expectations. Really had to overemphasize how important this relief continues to be. These regulatory statements provide flexibility and workout and appraisal expectations as well as capital management and examination expectations. 

Naomi Camper: As a result of this flexibility, while credit loss provisions have been significant across the industry, charge-offs on loans have been relatively stable through the end of 2020. In addition, banks have been able to avoid foreclosures, which we all agree is incredibly important right now, mid-pandemic. As a result, collateral values in most markets have not significantly declined, which has provided additional stability. With respect to mortgage lenders and mortgage servicers, federal agencies, including CFPB, FHA, and FHFA acted reasonably promptly and effectively to implement CARES Act mortgage forbearance provisions to support borrowers negatively affected by the pandemic. 
Naomi Camper: As with other conversations here, we appreciate the enormity of the task that was before government actors, and we greatly appreciate their efforts in this regard. Their quick action also enabled financial institutions to assist almost more than 8.55% of servicers portfolio volume into forbearance in March, 2020 and later offered to offer streamlined and consumer-friendly post-forbearance workout options. Regulators acted via guidance and interpretive and interim final rules to provide flexibility for mortgage originators and servicers, to work with affected consumers. They clarified very helpfully that they would not penalize servicers for failing to provide certain notices and would not penalize servicers that demonstrated good faith efforts to comply within a reasonable timeframe. 

Naomi Camper: The CFPB offered further clarification in a set of FAQs about compliance with the servicing rules during the COVID-19 emergency and for purposes of impacted origination functions, CFPB offered helpful interpretive rules to alleviate appraisal difficulties and disclosure timing issues, and we thank them for that. Bankers expressed particular appreciation for CFPB's interim final rule under Regulation X, which enables servicers to streamline processes, offer COVID-19 related loss mitigation offer options based on limited information collected from borrowers. I promised you I would speak out, the list will continue. 
Naomi Camper: Institutions have opined, however, that the relief and guidance could have been timelier. For example, in the early spring, servicing regulations prevented streamlined processes regarding the provision of loss of mitigation options to borrowers. Our members also note that the effects of the pandemic are not over, and my colleagues have referred to this as well. There's a continued need for ongoing coordination among all agencies regarding CARES Act and other provisions, to support needed mortgage relief. If well coordinated, uniform and consistent approaches will promote fairness in treatment of all borrowers seeking forgiveness and forbearance. 

Naomi Camper: There is a need for consistent interpretation on the date that CARES Act forbearance mandates end. Banks would benefit from consistent guidance on how to respond to a COVID second wave, should that happen, which may make some consumers need to reenter forbearance even after they've exited on a first time, and there's need for clear and consistent approach regarding post-COVID government support program. For instance, the new GSE Deferral Programs may not be available for borrowers that have to reenter forbearance, and it's unclear what options they may have. 

Naomi Camper: Let me speak to other type of bank forbearance. Payment flexibility we believe has dramatically reduced economic fallout, banks have stepped up to provide flexibility to customers experiencing hardship, and in the spring when unemployment rates spiked to nearly 50%, banks moved quickly to provide relief and support for affected card customers, waiving their proof of hardship requirements during this unusual recession. Banks increased availability of fee waivers, payment deferrals, interest rate reductions, and debt forbearance on a proactive rather than by request basis in many cases. 

Naomi Camper: Regulatory flexibility was key to address forbearance on this scale, so thank you and we really want to emphasize that. These measures were possible in part because CFPB and other prudential regulators offered flexibility to financial institutions around reporting requirements. For example, CFPB postponed multiple data collections and worked with institutions to schedule exams in a way that reduced disruption and burden. Additionally, the CFPB and others provided flexibility to allow the issuance of EIPs via new prepaid cards, we discussed that in prior discussions, a boom to those who needed spendable funds fast but lacked a bank account, reiterating both mine and Mr. James' remarks about the critical importance on an ongoing basis of encouraging consumers to regain their trust and participation in the mainstream banking system so that they can have access to safe and quick payments in the future. 

Naomi Camper: Almost done. Further regulatory changes would help. Banks encountered some regulatory obstacles when faced with rent closures and concern about mail delivery. Outdated regulations, such as eSign and Regulation Z continue to hamper their ability to send consumers important information and options for their accounts via common electronic channels. The impact of these efforts, however, are diminishing and will generally expire in 2020 if effective relief measures are not extended. Depending on the trajectory of vaccine delivery and the pandemic, we strongly urge continued flexibility, which has been extremely effective today. 

Mark Bialek: Thank you very much panelists for those insights. As the pandemic has persisted, the financial sector has undoubtedly identified many evolving needs to address these resulting unprecedented circumstances. As the pandemic has worn on, what would you say are the biggest needs that your constituents have identified in their communities? What have they done about those needs? What tools would be most useful for them to address those needs? I encourage you to get as geeky as you would like. Mr. Haynie, your perspectives, please. 

Ron Haynie: Sure. Thank you. I'm Ron Haynie, senior vice president of mortgage finance policy at ICBA. I think the key here, and you've heard it quite a bit already from the other panelists, is just maintaining flexibility from the regulatory perspective. I think also another one is improved communication from government agencies, from the SBA in particular and Treasury, clear communication on these various programs so banks can implement them and implement them as effectively as possible. Government programs, things of this nature are typically not the most flexible. Here you have banks that are trying to implement this, you've got the public, these small businesses are coming to them and have lots of needs and they're trying to survive, and the banks are trying to find a way to make these things work and sometimes it's trying to put a square peg into a round hole. It's very challenging. 

Ron Haynie: The more flexibility that can be provided to lending institutions as we implement these programs the better. The continued regulatory support for bankers being able to work out situations with mortgage forbearance, restructuring of loans, whether it's on the commercial side, the consumer side, things of those nature, those are key, I think, to be able to move through this pandemic and move through the recovery. The recovery is not going to be even in all areas, it's never has been, and clearly communities differ as far as the impact of the pandemic at this point. Whether you're in a community that's 100% locked down again for the second time, or you're in one that's not as locked down and you have some businesses that have reduced capacity, but then you also have other businesses that seem to be open for business as usual. 
Ron Haynie: It's a variety of things that the financial industry is trying to deal with and to help their clients get through this and minimize the damage that's been done. I think that's the key; flexibility, clear communication from all the agencies and including any of these major programs, EIP, PPP Programs, you name it. Those items are critical, I think, to helping us get through hopefully this last hump of the pandemic and onto the recovery. Karen, I don't know, anything that you would want to add to that? 

Karen Thomas: I'd like to emphasize ... Ron talked about the unevenness of recovery, but there's also unevenness attendant to the various types of businesses that are impacted. There's recognition of this in the second draw PPP loans where businesses and the NAICS Code 72, which are food and accommodation businesses, are given a higher maximum loan amount than other types of businesses. It's clear those certain types of businesses where people normally gather and are not able to gather during the pandemic, restaurants, obviously travel has been impacted greatly, so hotels and inns, entertainment venues which have in the Economic Aid Act the ability to get grants from SBA, Shuttered Venue Grants, and so forth. 

Karen Thomas: I think there needs to be, going forward, that focus on where are the needs the greatest, and what is the best way to serve those particular needs. Our community banks will be eyes and ears of that because they're going to be intimately involved in what's going on in their local communities. They can serve as the canary in the coal miner, or at least the feet on the ground to make sure that we know where the needs are the greatest and that going forward, both the government programs and the ability of individual institutions to help their customers is going to be directed at those with the most need. 

Mark Bialek: Thank you both. Ms. Camper, your insights concerning your constituents' needs and any useful tools you can articulate to address any of those needs. 

Naomi Camper: Yes. Thank you very much. I want to address how the pandemic is affecting communities and how banks are responding. I'll preface by saying it is really reassuring to hear this conversation and to be together with my colleagues from the NBA and ICBA because it really ... The pandemic is hitting communities differently and one of the keys to economic recovery is going to be community trust in both government and financial institutions, as we come forward with various economic relief measures, whether that's forbearance or otherwise, and the community trust in those institutions is paramount. I know that National Bankers Association and MDIs play a really important role. Community banks, which are also part of ABA membership are incredibly important, as are banks of all sizes. 

Naomi Camper: Let me start first to talk about non-profit organizations, which of course play a very important role in supporting communities. Some banks have reported a decrease in community development lending, others report that while community development loan volume remains on pace with historic norms, the mix of loans is different than in the past. So, nonprofits are restructuring and refinancing existing loans rather than seeking new ones, we see school districts taking on loans for laptop purchases and internet capability for all the remote learning and there's ... By one example, there's interest in new markets tax credits for health services and equipment purchases. 

Naomi Camper: Some banks are actively looking for community development investment opportunities, but most nonprofits we're hearing are seeking grants rather than investments at this time. A quick note on PPP, and I know Karen mentioned a number of statistics at the top of the conversation, today banks are responsible for 89% of PPP loans, 95% of PPP dollars and 94% of jobs supported in the initial rounds. A number of small banks have announced that in addition to doing the PPP lending, they're donating their fees from the PPP to support small businesses and underserved geographies. Some funds are being used to engage nonprofit organizations to provide capital, technical support and long-term resiliency programs to minority-owned small businesses. 

Naomi Camper: Banks are also deploying PPP proceeds to help CDFIs support their own origination of PPP loans to minority-owned businesses and underserved geographies. PPP profits are being routed to community relief efforts more broadly and this capacity building comes at a very important time. In addition to the suggestions we made for PPP in question one, we do encourage the SBA to build out technical assistance plans to help small business owners enhance their strategy management, business planning and accounting skills and we would be pleased to partner with them in those efforts. A note on low-income housing tax credits and policy-related tax credit deals at this point are a really important source of support in communities. 

Naomi Camper: There's been a marked decrease in public financing components of LAE tax and other policy-related projects due to the significant budget shortfalls facing states and cities. Projects, for example in New York city, have been particularly impacted. Banks are restructuring deals and seeking alternative sources of capital in the absence of public support. To date, these conditions have mostly resulted in delays rather than the inability to close a transaction, but the situation remains very fragile and worth watching. We're monitoring banks' ability and willingness to invest in LAE tax and other tax credit deals in light of potential decreases in taxable income and related tax liability caused by the pandemic. 

Naomi Camper: A note on healthcare. The Critical Access Hospital, or CAH designation, is designed to reduce the financial vulnerability of rural hospitals and improve access to healthcare by keeping essential services in rural communities. More important than ever, to state the obvious. To accomplish this goal, CAHs receive certain benefits such as cost-based reimbursement for Medicare services. Banks are noticing the need for and providing gap financing to CAH hospitals when there are lags in Medicare reimbursements. As noted earlier, mortgage and rental relief has been critical to health of communities. Banks are deploying the modification and forbearance programs we discussed and portfolio lenders not covered under CARES Act mandates are meeting or exceeding the relief mandated under the legislation. 

Naomi Camper: Much of the data indicates that the impact of the pandemic, including job loss, are being felt most acutely in LMI communities, low-and moderate-income communities. Banks are monitoring the extent to which the pandemic will impact the demand in these communities on new mortgages and their ability to qualify for mortgage credit. Mr. James noted that some of the communities his constituency serves are still working their way out of the spiraling impacts of the 2008 events and we want to make sure that we don't see a repeat of those cumulative impacts in the most vulnerable communities. 

Naomi Camper: Banks have been assisting borrowers to refinance, those who are in a position to refinance, to take advantage of these property lower rates, providing an important source of liquidity to many borrowers who are able to pay less for their mortgage and have more money for other needs. Landlords and commercial real estate lenders remain supportive of the eviction moratorium, recognizing that relief will need to continue until vaccines can be widely deployed. Very briefly, I know I'm at the end of my time, the pandemic has accelerated economic inequality and acutely the racial wealth gap. 

Naomi Camper: Banks are providing community supports to help communities address these issues in a variety of ways, including making investments in minority depository institutions, and thank you to the NBA for their work representing those groups of banks, expanding lending programs and financial counseling to increase home ownership in LMI communities, contributions to support virus testing, telemedicine, vaccination clinics, and other health services with an emphasis on communities of color, partnering with historically black colleges and universities and other institutions in the United States for hiring research programs and other areas of mutual opportunity, donating to educational and workforce development, including career re-skilling and up-skilling, partnerships with high schools and community colleges, making internal efforts to enhance workforce diversity and supplier diversity. Finally, partnering with the very important work that so many social justice organizations do to remind us every day of the challenges that confront us as an industry and as a nation. Thank you. 

Mark Bialek: Thanks very much for those suggestions, Ms. Camper. Let's move on to Mr. James. Mr. James, can you please provide some insight into this question and these issues as it relates to the constituents of the National Bankers Association? 

Robert James: Sure, Mark. Thank you so much. I do want to just echo and support the comments of Ron, Karen, and Naomi, and really support all of what they said. The pandemic really was an electron microscope on America and it continues to be, and it has really pointed out a lot of systemic issues that many were trying to call attention to before the pandemic, but it really pointed them out in no uncertain terms. Then of course, the events of last year in terms of the Movement For Black Lives, just further illustrated some of the systemic issues in our community in terms of systemic racism and inequality, which really pulls down the entire economy. 

Robert James: Citigroup did a study last year and said that if we did certain things to address the racial wealth gap between black America and white America, that in the next ... within the next decade, we'd add $5 trillion to our GDP and that would help all of America, not just black America. It's really important as we address the issues related to the pandemic that we really do things that are systemic and long-term, to address some of the systemic inequality that has resulted in very unequal impacts in minority communities and low income communities across the country. 
Robert James: Getting a little bit more granular, we certainly need continued flexibility and partnership from our regulatory partners at the bank regulatory agencies as we again, look at ways that we can safely manage our institutions so that we can help our customers safely recover from the economic impacts around the pandemic. Then, a very more specific proposal that I'd like to raise and I'm sure the NBA and hope to raise, and I'm sure the MBA, and hopefully, our colleagues in the banking trades will join us. But it would be great if we could have a specialized desk at the SBA that would specifically address the concerns of minority depository institutions and CDFI institutions as we look to, again, bring those critical SBA programs to these communities, not just the emergency relief programs, but also the long-term programs that will help small businesses recover. I do want to also suggest that we need to have increased and continued support for the CDFI fund of the US Treasury Department. The CDFI fund is the Community Development Financial Institutions fund. Many of our MDI institutions are also certified CDFIs and that fund helps us support mission-driven banks and other financial institutions that do the hardest work in banking, that do that work that other institutions don't necessarily want to do. 

Robert James: And the CDFI fund needs continued support, and we've seen increased support to the CDFI fund most recently in the new stimulus package that was just signed roughly 10 days ago. Once we get past the short-term issues, our institutions fundamentally and our communities fundamentally need capital to stabilize and capital to rebuild. And so we were extremely pleased that Congress included in the last stimulus funding for an Emergency Capital Investment Program that's intended to provide long-term capital for minority depository institutions, CDFI, banks, and others that have been doing this work, again, I mentioned at the top, in some cases for over a century, doing the work in the hardest places to serve and doing the work for the people that are the most in need and the most subject to inequality and victims of systemic challenges in the way that our economy works. 

Robert James: And so we are really hopeful that the Treasury Department will implement the Emergency Capital Investment Program in ways that don't make this capital too difficult for us to access, allow us to match that capital with the private capital that is flowing into MDIs in particular that Naomi mentioned that's coming from a lot of the large financial institutions, and not constrain our ability to grow our institutions. The MDI sector is too small and we need to grow. We need to get scale so that we can serve these communities, so that we can exponentially increase the amount of lending that we can do in these communities so that folks can build homes, build small businesses, build up their wealth, and that we can do more of that community development lending that again, we've been doing it for decades. And so we really look forward to partnering with our friends at the federal regulatory agencies, the SBA, as well as in other parts of the federal government to again drive capital into institutions that really need it so that they can, in turn, drive that capital back into the communities at greatest need. Thank you. 

Jay Lerner: Thank you very much. We really appreciate those insights and concrete proposals, and frankly, the granularity that you provided. It's a really valuable opportunity for us to hear your suggested actions and to address the needs that have arisen during the pandemic. We'd like to turn our attention to the risks of fraud, waste, and abuse in pandemic response programs. Specifically, have your members encountered instances of fraud, waste, and abuse in a pandemic response program? And are your banks monitoring for these risks? Are there ones that are particularly concerned about by your constituents? Mr. Benda, can you please provide your thoughts on behalf of the ABA? 

Paul Benda: Thank you. And hello. My name is Paul Benda, and I'm the senior vice president for risk and cybersecurity policy at the American Bankers Association. I appreciate the opportunity to address the panel regarding our concerns surrounding the potential for fraud in the pandemic relief programs. The rise of the COVID-19 pandemic in the United States caused the almost immediate collapse of revenue for millions of businesses across the US and engendered a sense of urgency to disperse relief funds as quickly as possible. The Paycheck Protection Program was a key method to get the funds out in over 5,400 vendors, made nearly 5 million loans totaling $521 billion. 

Paul Benda: However, implementation of this program was extremely challenging due to the urgency and accelerated rollout of the program further complicated by banks trying to implement it without clear and consistent guidance from SBA on several issues, such as there was confusion about the information required on applications that delayed processing, obtaining clarification from SBA on questions running processes and applications with slow incoming and frequent changes through the posted FAQ process complicated things. Many banks initially limited loans to establish customers due to challenges and resources needed to conduct the customer due diligence required to comply with anti-money laundering rules among other regulations. 

Paul Benda: One of the central tenants of the program was the expedition of the application process and the direction to banks to rely on the customer attestations versus the traditional underwriting process. This reliance on customer information created an environment with the potential for significant fraud, especially if the SBA did not put in place additional controls and validation step. SBA has stated that they intend to implement a compliance check in the beginning of the PPE application process, which combined with borrower certification eligibility and banks' continued due diligence to combat fraud should hopefully lead to these much-needed funds continuing to go to local communities and small businesses. 

Paul Benda: Another key relief program is the Economic Injury Disaster Loans or EIDLs. While these loans are administered by the US Small Business Administration, banks ended up interacting with these loans in several capacities. Of note, borrowers were able to receive an EIDL advance of up to 10,000 even if they ultimately did not receive an EIDL. 

Paul Benda: These advances, given the ease of application, we're very susceptible to fraud. Banks noticed unauthorized and even unwanted advances appearing in customer accounts and followed regulatory steps to report this fraud. Initially, banks were not provided the procedures to report these fraudulent advances, but after much industry lobbying and prodding, the SBA created a procedural notice and set up a website with instructions on how to report EIDL fraud. Moving forward, these types of resources should be made available at the beginning of any program that is likely these programs are viewed by fraudsters as a target-rich environment. 

Paul Benda: Lastly, and perhaps most troubling is the Pandemic Unemployment Assistance program. As you are aware, the Office of the Inspector General of the Department of Labor has publicly stated that a minimum of 36 billion was siphoned due to fraudulent payments. This unprecedented and unbelievable amount of fraud has this genesis due to multiple reasons, ranging from completely new eligibility criteria to claim unemployment assistance, to antiquated IT systems and overwhelmed state unemployment offices, to the lack of a federally coordinated capability to respond to potential fraud. 

Paul Benda: Banks suspected an unprecedented level of fraud occurring in real-time, but had not been provided any additional resources or any additional guidance on ways that they could help mitigate it or respond. Without direct guidance or information from the states or the federal government, banks were limited in the actions they could take as the fraud they were witnessing was only suspected and not proven. And many times they could only temporarily slow the disbursement of funds or report the suspicious activity to overwhelmed investigators. 

Paul Benda: The legal and regulatory limits on their mitigation actions were further compounded by the lack of a central resources that banks could go to with questions or concern. In the end, banks had to work with states one at a time or try and leverage existing relationships with law enforcement investigators, their trades, or the National Association of State Workforce Agencies to find points of contacts who could answer their questions. Recognizing the challenge, the ABA and other trades, including NACHA, developed an ad hoc working group with the National Association of State Workforce Agencies, regulators, and law enforcement to try and improve coordination and help stem the tide. 

Paul Benda: This group worked to share contact information and best practices surrounding account validation procedures and education surrounding the strict rules and laws that banks must follow regarding freezing accounts and returning funds. Through the significant work of NASBA, states now have access to new tools such as account validation services and new knowledge that can significantly help in stopping fraudulent fronts from ever leaving the states. While banks' role in this program is limited, the magnitude of the previous level of fraud and the potential for more with new relief programs being put in place are still greatly concerning to banks who hope that additional controls and capabilities are being put in place to mitigate these future losses. Thank you. 

Jay Lerner: Thank you very much. Very helpful. Ms. Thomas, can you provide insight into this question from the perspective of the ICBA? 

Karen Thomas: Thank you, Jay. Yes. ICBA was instrumental in creating a sector fraud working group to address a lot of these issues. The FDIC and the Federal Reserve are participating in that endeavor. We have trade associations, law enforcement, federal and state government agencies. The fraud sector group meets every two weeks. There are 60 people that are part of the working group representing 20 different organizations. ICBA has also provided resources to our members about who to contact when they encounter suspected frauds. Also what types of PPP red flags to look for that might indicate a fraudulent transaction. In some respects, the types of fraud, it's kind of like old fraud, but we just have new opportunities for the fraudsters to engage in it. Regarding the PPP fraud, I think it's been mentioned that banks have obligations under the Bank Secrecy Act to report anytime they suspect suspicious activity. 

Karen Thomas: They have been acquitting those obligations, contacting FinCEN, Financial Crimes Enforcement Network, as well as contacting law enforcement. And as Paul mentioned, there's a SBA avenues as well to contact. The unemployment insurance fraud is something that has been rampant. And we've heard coming sort of up from our membership, if you will, about that. Very common frauds. And the fraudsters, maybe not being too smart, where the banks would see unemployment benefits coming into the same account from say five different states. Okay? Well, maybe you don't scratch your head. You go, "Oh, that's fraud." You don't have to wonder what's going on. You can see it right there. And so they report that. They'd been working with the state unemployment offices and so forth. And I think on the unemployment fraud, a lot of the fraud has to be caught at the state level. 

Karen Thomas: And as Paul mentioned, a number of different challenges for that to happen. But I think that the states are doing a better job of some identity checking and identity validation and so forth to try to stem some of this fraud. Obviously when banks catch it, they return funds and inform all the authorities that it's appropriate to inform. On the PPP, well, this is sort of a hybrid of fraud between PPP and unemployment. Banks have seen some businesses or sole proprietors who pay them [inaudible 01:21:45] PPP proceeds, but they've also applied for unemployment. And again, whenever they see these instances, they are reporting them to the appropriate authorities. So I think a lot of the challenge, as been mentioned, is coordination. Obviously it's important for information to come from the field and from the ground in terms of what's being seen out there and then the measures to be taken to combat it do require cooperation, collaboration, but [inaudible 01:22:20] that community banks stand ready to do their part to try to ferret out any fraud and report it and then hopefully prevent it too as well. Thank you. 

Jay Lerner: Thank you. Very interesting. Mr. James, I think you're up next. We're interested in your perspectives from the National Bankers Association. 

Robert James: Sure. And before I begin this response, I just want to thank you, Jay, and thank you, Mark, and the Pandemic Response Accountability Committee for asking us to participate in this very important forum. We're all in this together. And as we look to help our country recover from this event, it's really important that we continue to have fora like this one that allow for communication between the public sector and the private sector so that we can not only recover but help our fellow countrymen thrive. Now, getting to your specific question, I was able to do a quick survey of the members of our Bankers Association board today to ask them, "Have you seen a lot of fraud and abuse in the programs that we've been implementing, particularly around the PPP?" 

Robert James: And the good news is that very, very low. Our institutions across the country have done thousands of loans, and in the PPP program in particular, have seen almost no instances of fraud. I think a lot of our institutions really know our customers. And so we're very comfortable with the information that we've been provided and that there's not a lot of intentional fraud going on in that particular program, at least that we've seen in our institutions. As Karen mentioned, all of our banks are very, very focused on and highly attuned to detecting and rooting out fraud. And so fortunately, like I said, we've seen very little fraud in the PPP program. When we have seen instances of potential fraud around unemployment insurance or other payment programs, we certainly are flagging those and reporting them to the authorities. 

Robert James: I do want to say that in many instances, it's obvious fraud. In many instances, there are honest mistakes that folks are making, particularly for a lot of those small businesses and sole proprietors. There was an article that I read in... I believe it was in the New York Times on Monday, and it pointed out issues around sole proprietors ending up after they did their calculations on the first round of PPP, getting a loan for $1 or $3 or $13 because of the way that that program is administered. And I just want to make a kind of geeky comment around that. When the PPP program first rolled out, the purpose of it was to 
Pandemic Response Perspectives from the Banking Industry replace income to allow working people to get about two and a half months of their income replaced. 

Robert James: And if you're a W2 employee, that money needs to go to the business so the business can keep paying you. If you're a sole proprietor, though, that income is really the gross income that you bring in. And at the very beginning of the PPP program, sole proprietors were allowed to use their 1099s or bank statements to demonstrate their income. And then as the rules sort of rolled out and kept changing, it became a question of whether you had a net income. And so very specifically, if you're a sole proprietor, you had to show that you had a Schedule C on your 1040 form, and that you had a positive net income on line 31 of Schedule C. Then you were to divide that number by 12, multiply it by 2.5, and that was the amount that you were eligible for. 

Robert James: So imagine you're an Uber driver or other gig economy worker, or maybe even a self-employed physician or a self-employed professional of another kind, but you're really living off of cashflow and you're not really making a profit at end of the year after you make your deductions or take your deductions. Those folks were left out in the cold and unable to apply for a PPP. And I specifically work with several customers at Carver state bank who had that situation, who thought that they were going to be eligible for PPP based on their gross income, and then came to find out that because of this change in the rule, they were ineligible. And so those folks were unable to be served by that program. And so one of the things that we want to make sure is that as we certainly want to avoid and police fraud or abuse of these programs, which certainly exists and certainly is possible given the volume of these programs and the nature of the speed at which they're being rolled out, we also want to give time for folks and understanding for folks who may be making honest mistakes. 

Robert James: And so we want to be able to work with individuals because the rules are kind of changing. The ground is shifting under them. And in some instances, people are trying to defraud the government. But in other instances, they might just be making an honest mistake in terms of understanding the program. And so our institutions... I think I can speak certainly for the MBA, but I believe this to be the case for the banks that are part of the ABA and the ICBA are certainly not looking to be punitive. We're looking to work with our customers and work with the communities we serve to ensure that they get access to the resources they need in a fair and responsible way. Thank you very much. 

Jay Lerner: Thank you all. Thank you very much. It's been a very interesting discussion. I'd like to once again extend my sincere appreciation on behalf of the PRAC and CIGIE, the Council of Inspectors General, to all of our panelists today, Naomi Kemper, Paul Benda, Karen Thomas, Ron Haynie, and Robert James for providing us with your valuable insights and perspectives and thoughts. We in the inspector general community understand the important mission with which we are charged in providing robust oversight of the Cares Act programs and the government's response to the pandemic. To be successful in this endeavor, it's critically important that we understand what is happening on the ground and that we hear input from stakeholders like you. After all, as was said earlier, we are here to serve the American public. Thank you very much. Turn it over to Mark. 

Mark Bialek: Thanks, Jay. Let me echo my thanks to all of you. You have certainly provided a wealth of important insight into our oversight areas within the financial sector. It is absolutely critical that we hear and continue to consider all of your specialized kind of on the ground expertise and experiences concerning how the pandemic relief programs have operated in general and how the federal government specifically is trying to meet the challenges that it has been called upon to address these unimaginable times that we're in. 

Mark Bialek: We have greatly benefited from your views today and are going to carefully consider all of these recommendations and your thoughts as we continue to plan our work and conduct our oversight activities, especially as we anticipate some additional pandemic response funding and programs under President elect Biden's administration. So again, on behalf of the Pandemic Response Accountability Committee, I thank you for carving out some time to be with us today and for the insights that you have so generously shared with us. Please take great care and continue to stay safe, everyone. And on one last programming note, we will also be making this entire video available to the public via the PRAC's website.