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Report to Congressional Requesters:



February 2003:



Financial Regulation:



Review of Selected Operations of the Federal Housing Finance Board:



GAO-03-364:



GAO Highlights: 



Highlights of GAO-03-364, a report to the Ranking Member, Senate 
Committee 

on Banking, Housing, and Urban Affairs; the Ranking Member, House 
Committee 

on Financial Services; and the Chairman, Subcommittee on Capital 
Markets: 



February 2003:



Financial Regulation:



Review of Selected Operations of the Federal Housing Finance Board:



Why GAO Did This Study: 



The Federal Home Loan Bank  System (System) faces additional risks due 
to the 

development of new products such as direct mortgage purchase programs. 

Responding to concern about the methods used for administrative 
decisionmaking, 

and the ability of the Federal Housing Finance Board (FHFB) to fulfill 
its 

critical mission to regulate the safety and soundness of the System, 
GAO was 

asked to (1) compare the FHFB chair’s administrative authorities with 
those of 

other financial regulators and discuss the basis for that authority, 
(2) assess 

FHFB’s compliance with selected statutes and regulations in connection 
with an 

August 2002 reduction-in-force (RIF) carried out as part of an agency 

reorganization, and (3) assess FHFB’s progress in enhancing its FHLBank 
safety 

and soundness examination program.



What GAO Found: 



FHFB’s chair has greater authority to make key administrative decisions 
than 

the chairs at five of the six other financial regulators GAO reviewed. 
FHFB’s 

chair has the authority to appoint and remove officials and reorganize 
the 

agency without a vote by the board.  In contrast, statutes, 
regulations, and 

practices limit the chairs’ authorities at most other regulators.  In 
particular, 

the boards or commissions at these agencies approve most senior-level 

appointments and several boards approve major reorganizations.  The 
basis for 

the FHFB chair’s comparatively broad administrative authority is a 
delegation 

of authority, which the board passed in 1990 and 1993 (see excerpt 
below). The 

delegation allows the chair to make and implement key decisions without 

obtaining or benefiting from the views of all board members and has 
contributed 

to sometimes bitter conflicts among board members over the past 8 
years.



Although FHFB provided significant financial compensation to staff 
subject to 

the RIF, its procedures were not fully consistent with all applicable 
federal 

age discrimination statutes and regulations.  For example, FHFB 
presented a 

settlement agreement to separated staff that offered 3 to 6  months 
salary in 

exchange for, among other things, the employees agreeing to waive their 
rights 

to file charges, complaints, or appeals with the Equal Employment 
Opportunity 

Commission (EEOC).  EEOC regulations implementing the Age 
Discrimination in 

Employment Act do not permit waivers of employees’ rights to file 
charges or 

complaints with EEOC.  In addition, FHFB did not advise the affected 
employees 

in writing to consult an attorney prior to signing the agreements as is 
required.



Although for several years FHFB did not take steps to correct 
weaknesses in 

its FHLBank examination program that GAO identified in a 1998 report, 
FHFB’s 

current Chair has recently undertaken several steps to improve its 
examinations. 

In 1998, and again in 2002, GAO found that FHFB performed limited 
reviews of 

FHLBank functions that are critical in managing the banks’ financial 
and 

operational risks.   Among other changes announced in 2002, FHFB plans 
to 

increase the number of examiners from 10 to 24 and revise its 
examination 

approach to focus on the major risks and quality of controls at each 
FHLBank. 

Although these changes have the potential to improve FHFB’s examination 
program, 

it is too soon to assess their effectiveness. 



Figure: 



[See PDF for image]



[End of figure]



What GAO Recommends: 



GAO recommends (1) that the FHFB board consider options that would help 
ensure 

full board participation in key administrative decisions, such as 
senior 

appointments and agency reorganizations and (2) FHFB comply with 
applicable 

federal age discrimination requirements in offering settlements during 
RIFs.



In written comments, FHFB said that the delegation of authority 
provides the 

best means to manage the agency.  FHFB agreed with one finding 
regarding the 

settlements but disagreed with two others.



www.gao.gov/cgi-bin/getrpt?GAO-03-364.



To view the full report, including the scope and methodology, click on 
the 

link above.For more information, contact Thomas J. McCool at (202) 512-
8678 or 

mcoolt@gao.gov



Contents:



Letter:



Results in Brief:



Background:



FHFB Chair Has Greater Authority to Make Key Administrative Decisions 

Than the Chairs of Most Other Financial 

Regulators:



Certain FHFB Reduction-in-Force Actions Were Not Fully Consistent with 

Applicable Federal Age Discrimination Statutes and Regulations:



FHFB Has Announced Plans to Improve Its FHLBank Examination Program:



Majority of FHLBank Public Interest Directors Made Political 

Contributions Prior to Their Initial Appointments:



FHFB’s Use of Schedule C Positions Sometimes Differs from the Practices 

of Other Financial Regulators:



Conclusions:



Recommendations:



Agency Comments and Our Evaluation:



Appendixes:



Appendix I: Objectives, Scope and Methodology:



Appendix II: Administrative Powers of Financial Regulatory Chairs:



Commodity Futures Trading Commission:



Farm Credit Administration:



Federal Deposit Insurance Corporation:



Federal Housing Finance Board:



Board of Governors of the Federal Reserve System:



National Credit Union Administration:



Securities and Exchange Commission:



Appendix III: Waivers of Rights Under the Age Discrimination in 
Employment 

Act:



OWBPA Compliance Requires Strict Adherence to Terms 

of Statute:



Waiver of the Right to File an EEOC Complaint:



Employee Must be Advised in Writing to Consult an Attorney:



OWBPA Informational Requirements:



Appendix IV: Comments from the Federal Housing Finance Board:



Appendix V: Comments from FHFB Board Members Franz S. Leichter and 
Allan L. 

Mendelowitz:



Appendix VI: Comments from the Farm Credit Administration:



Tables:



Table 1: Median Dollar Value of Total Preappointment Political 

Contributions made by each FHLBank Public Interest Director, by FHFB 

Chairman (appointed January 1, 1998 through May 8, 2002):



Table 2: Allocation of Newly Appointed FHLBank Public Interest Director 

Campaign Contributions, by Recipient and by FHFB Chairman (January 1, 

1998 through May 8, 2002):



Table 3: Allotment of Schedule C Positions at Financial Regulators:



Figures:



Figure 1: Authority of Financial Regulatory Agency Chairs to Make Key 

Administrative Decisions Without Board Approval:



Figure 2: Text of FHFB’s 1993 Delegation of Authority:



Figure 3: FHFB Organization Chart (Pre-Reorganization):



Figure 4: FHFB Organization Chart (Post-reorganization)	:



Figure 5: Number and Percentage of FHLBank Public Interest Directors 

That Reportedly Made Political Contributions during the 8-year Period 

Prior to Their Initial Appointment, by FHFB Chair (January 1, 1998 

through May 8, 2002):



Figure 6: Frequency of FHLBank Public Interest Director Political 

Contributions Prior to Initial Appointment, by FHFB Chair (January 1, 

1998 through May 8, 2002):



Abbreviations:



ADEA: Age Discrimination in Employment Act:



CEO: Chief Executive Officer:



CFTC: Commodity Futures Trading Commission:



CRP: Center for Responsive Politics:



EEOC: Equal Employment Opportunity Commission:



Fed Board: Board of Governors of the Federal Reserve System:



FHFB: Federal Housing Finance Board:



FCA: Farm Credit Administration:



FDIC: Federal Deposit Insurance Corporation:



FEC: Federal Election Commission:



FHLBank: Federal Home Loan Bank:



FHLBank System: Federal Home Loan Bank System:



FLSA: Fair Labor Standards Act:



HUD: Department of Housing and Urban Development:



NCUA: National Credit Union Administration:



OCC: Office of the Comptroller of the Currency:



OFHEO: Office of Federal Housing Enterprise Oversight:



OGC: Office of General Counsel:



OIG: Office of Inspector General:



OM: Office of Management:



OPM: Office of Personnel Management:



OPRA: Office of Policy, Research, and Analysis:



OS: Office of Supervision:



OTS: Office of Thrift Supervision:



OWBPA: Older Workers Benefit Protection Act:



RIF: Reduction-in-Force:



SEC: Securities and Exchange Commission:



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Letter:



February 28, 2003:



The Honorable Paul S. Sarbanes

Ranking Minority Member 

Committee on Banking, 

 Housing, and Urban Affairs

United States Senate:



The Honorable Barney Frank

Ranking Minority Member

Committee on Financial Services

House of Representatives:



The Honorable Richard H. Baker

Chairman, Subcommittee on Capital Markets, 

 Insurance, and Government Sponsored Enterprises 

Committee on Financial Services

House of Representatives:



This report responds to your request that we review selected operations 

of the Federal Housing Finance Board (FHFB) and its ability to fulfill 

its critical mission to regulate the Federal Home Loan Bank System 

(FHLBank System). The FHLBank System consists of 12 Federal Home Loan 

Banks (FHLBanks), whose mission is to promote housing and community 

finance. To do so, the FHLBank System issues debt in the financial 

markets; and each of FHLBanks makes loans, also known as advances, to 

member financial institutions, such as thrift institutions and 

commercial banks, that are located in its district.[Footnote 1] As of 

September 30, 2002, total FHLBank System outstanding debt obligations 

stood at $668 billion. Although due to conservative underwriting 

standards the FHLBank System has never experienced a loss on an 

advance, it faces additional risks due to the recent rapid growth of 

direct mortgage acquisition programs.[Footnote 2] The direct 

acquisition of mortgages adds to the FHLBanks’ interest rate and 

credit risks, and the banks have developed increasingly sophisticated 

systems to manage these risks.[Footnote 3]



FHFB has a five-member board, of which no more than three members can 

be from the same political party. FHFB’s primary mission is to help 

ensure that the FHLBanks operate in a safe and sound manner. FHFB is 

also responsible for ensuring that FHLBanks carry out their housing and 

community development mission and comply with applicable statutes and 

regulations. To fulfill its mission, FHFB conducts examinations of 

FHLBanks, and other supervisory activities. FHFB also appoints public 

interest directors to serve on the boards of each of the 

FHLBanks.[Footnote 4]



In the past year, FHFB board members have been involved in several 

publicized disputes.[Footnote 5] The current Chair (John T. Korsmo) has 

taken several key administrative initiatives, including reorganizing 

FHFB, which he believes are necessary to improve the agency’s 

oversight.[Footnote 6] However, FHFB’s Democratic board members, who 

are currently in the minority on the board, have stated that the Chair 

acted unilaterally and did not adequately consult them about these 

administrative initiatives. Board members have also stated that they 

were not adequately consulted about other issues that are the 

responsibility of the FHFB, such as the appointment of public interest 

directors. Similar disputes between the FHFB chair and other board 

members periodically took place when Democratic Chair Bruce Morrison 

served from 1995 through 2000.



As discussed with your staff, we assessed a range of issues relating to 

FHFB’s operations and its abilities to fulfill its critical regulatory 

mission. Specifically, our report objectives are as follow:



* compare the FHFB chair’s administrative authorities to those of the 

chairs of other financial regulators and discuss the basis for that 

authority;



* assess FHFB’s compliance with selected applicable statutes and 

procedural requirements in connection with a reduction-in-force (RIF) 

that was carried out as part of an agency reorganization announced on 

August 7, 2002;



* assess FHFB’s progress in enhancing its FHLBank safety and soundness 

examination program;



* provide historical data showing the political contributions of 

FHLBank public interest directors prior to their appointments; and:



* compare FHFB’s use of Schedule C appointments and the organization of 

its public and congressional affairs functions with the practices of 

other financial regulatory agencies.[Footnote 7]



To address these objectives, we analyzed applicable statutes, 

regulations, and practices that determine the scope of authority of the 

FHFB chair and the authorities of the heads of six other federal 

financial regulatory agencies. These agencies are the Farm Credit 

Administration (FCA), the Federal Deposit Insurance Corporation (FDIC), 

the Securities and Exchange Commission (SEC), the Commodity Futures 

Trading Commission (CFTC), the National Credit Union Administration 

(NCUA), and the Board of Governors of the Federal Reserve System (Fed 

Board). We also (1) analyzed FHFB’s RIF procedures, applicable 

statutes, Equal Employment Opportunity Commission (EEOC) and Office of 

Personnel Management (OPM) regulations, and applicable administrative 

decisions; (2) updated our 1998 report on FHFB’s FHLBank examination 

program;[Footnote 8] (3) analyzed information from the Center for 

Responsive Politics (CRP) that shows the political contributions of 

FHLBank public interest directors prior to their appointments; and (4) 

compared FHFB’s use of Schedule C positions to the practices of the 

other six agencies.



We conducted our review from April 2002 through February 2003 in 

Washington, D.C., San Francisco, and Seattle in accordance with 

generally accepted government auditing standards. Appendix I contains a 

detailed description of the scope and methodology of our work.



Results in Brief:



FHFB’s chair has more power to make key administrative decisions than 

the chairs at five of the six other financial regulatory agencies that 

we reviewed.[Footnote 9] Specifically, FHFB’s chair has the authority 

to appoint and remove officials and reorganize the agency without a 

vote by the board. FDIC’s chair has similar appointment and 

reorganization authority. In contrast, statutes, regulations, or 

practices limit the administrative authority of the chairs of the five 

other agencies. For example, the boards or commissions at these 

agencies either vote on or must give their approval for most senior-

level appointments.[Footnote 10] At three agencies, major 

reorganization proposals must be submitted to the board for a vote or 

approval, while at another agency, CFTC, chairs typically submit such 

proposals to a commission vote, as a matter of practice.[Footnote 11] 

The basis for the FHFB chair’s comparatively broad administrative 

authority is a delegation of authority that the board voted on in 1990 

and 1993.[Footnote 12] Under its terms, the delegation of authority 

remains in effect until revised or overturned by a majority board 

vote.[Footnote 13] Although FHFB’s delegation provides the chair with 

the authority to manage the agency, it allows the chair to make and 

implement key administrative decisions without obtaining or benefiting 

from the views of all board members, and it has contributed to the 

sometimes bitter conflicts that have periodically characterized 

relations among board members over the past 8 years.



During the August 2002 reorganization, FHFB took certain actions in 

conducting a RIF that were not fully consistent with federal age 

discrimination statutes and regulations. FHFB provided career 

transition assistance to the affected employees, paid required federal 

severance benefits, and presented a settlement agreement that offered 

up to an additional 6 months pay in exchange for the employees agreeing 

not to contest the RIF. Although the settlement agreements provided 

significant financial benefits to the affected employees, they include 

a provision that required employees who signed them to agree not to 

file a complaint, charge, or appeal with EEOC. This provision in the 

settlement agreement does not comply with EEOC regulations implementing 

the Age Discrimination in Employment Act (ADEA), which do not permit 

waivers of rights to file charges or complaints with EEOC. In addition, 

FHFB did not advise the employees in writing to consult an attorney 

prior to signing the agreements as is required by ADEA and EEOC 

regulations.



Although for several years FHFB had not taken actions to correct 

weaknesses in its FHLBank examination program that we identified in our 

1998 report, FHFB’s current Chair has recently undertaken several steps 

to improve the agency’s examinations. In 1998, we found that FHFB 

performed limited reviews of FHLBank functions--including internal 

controls and corporate governance--that are critical in managing the 

banks’ financial and operational risks. These functions continued to 

receive only limited reviews in examinations conducted from 1999 

through 2001. FHFB’s limited reviews of key functions raise questions 

about the agency’s fulfillment of its safety and soundness oversight 

mission, particularly as interest rate and credit risks potentially 

increased in that period through the rapid growth of direct mortgage 

acquisition programs. Although FHFB officials said in 1998 that a 

limited number of examiners (8 to 10) helped explain the agency’s 

inability to review these areas completely, FHFB did not increase or 

announce plans to increase the examination staff until August 2002. In 

late 2002, FHFB began planning to increase the number of examiners from 

10 to 24, base examiners in satellite locations to reduce examiner 

travel requirements, and revise the examination approach by focusing on 

the major risks facing each bank and the quality of systems and 

controls in place to manage those risks. FHFB’s plans have the 

potential to significantly improve the FHLBank examination program, but 

it is too soon to assess their effectiveness.



According to CRP data, 50 (or 67 percent) of the 75 public interest 

directors that the FHFB appointed from January 1, 1998, through May 8, 

2002, reported making one or more political donations prior to their 

initial appointments.[Footnote 14] During that period, three FHFB 

chairs were in office (Morrison, Apgar, and Korsmo) when public 

interest directors were appointed.[Footnote 15] The percentage of 

appointees who made political contributions prior to their initial 

appointments during the tenures of the three chairs ranged from 56 

percent (Morrison) to 76 percent (Korsmo). CRP data also indicate that 

the median value of each contribution that the directors made prior to 

their appointments ranged from $3,250 (Apgar) to $8,364 (Korsmo).



FHFB’s use of Schedule C positions is sometimes different from that of 

other financial regulators. FHFB and five of the six other financial 

regulatory agencies that we reviewed allot Schedule C positions to the 

chair and other board members.[Footnote 16] Unlike FHFB, four of these 

five agencies also allot Schedule C positions to head a limited number 

of staff offices. FHFB, alone among the regulators, uses the chair’s 

personal staff to head the agency’s public and congressional affairs 

functions. At the other six agencies, Schedule C appointees, career 

staff, or noncareer executives head separate public or congressional 

affairs offices that are typically staffed by career 

employees.[Footnote 17]



This report recommends that the FHFB board consider a range of options 

to ensure full board participation in key administrative decisions that 

have policy implications, such as senior appointments and major 

reorganizations. We also recommend that FHFB comply with all federal 

age discrimination requirements in offering settlement agreements to 

affected employees.



We provided a draft of this report to FHFB and individual board members 

for their review and comment. We also requested comments on relevant 

excerpts of the draft report from the six other regulatory agencies 

that we analyzed. We received official comments from FHFB and separate 

comments from FHFB’s two Democratic board members, which are described 

later in this report and reprinted in appendix IV and V.[Footnote 18] 

FCA’s Chair also provided written comments, which are provided in 

appendix VI. We also received oral comments from representatives of the 

six other regulatory agencies.



FHFB stated in its comments that a majority of the board believes that 

the current delegation is the best means of managing the agency’s 

operations and that board members can state their views under the 

delegation.[Footnote 19] FHFB also agreed with one of our findings 

regarding the settlement agreements offered to employees subject to the 

RIF but disagreed with two others. Among other statements, FHFB’s 

Democratic board members stated that the delegation of authority was 

contrary to the intent of Congress, which vested agency management in 

the board rather than the chair and expressed concern about how the RIF 

was carried out. The FCA Chairman commented on the agency’s Schedule C 

practices. In addition, representatives from all six regulatory 

agencies agreed with the draft report’s findings regarding their 

agencies.



Background:



Congress has authorized two different models for governing financial 

regulatory agencies: a single-director and board. Among financial 

regulators, single directors head the Office of Thrift Supervision 

(OTS), the Office of the Comptroller of the Currency (OCC), and the 

Office of Federal Housing Enterprise Oversight (OFHEO). In contrast, 

boards or commissions run FHFB, the Fed Board, NCUA, SEC, CFTC, FDIC, 

and FCA. Advantages and disadvantages exist for both models. In the 

single-director model, the director is responsible for making all the 

decisions at the agency, without the potential hindrance of having to 

consult or get the approval of board members. The primary advantage of 

the board model is that it provides the potential to benefit from the 

diverse perspectives and experiences of board members. However, one 

potential disadvantage of the board model is that consultation among 

board members could create inefficiencies in running the agency.



To overcome the potential inefficiencies associated with the board 

model, responsibilities for policy and day-to-day administration are 

divided between the board and chair at many regulatory agencies. Policy 

decisions include making rules and regulations or authorizing 

enforcement actions. Day-to-day administration might include directing 

staff, overseeing safety and soundness examinations, and expending 

funds as authorized by the board. Administrative responsibilities that 

are often considered to be more significant (that is, not day-to-day) 

include the hiring and removal of senior officials and restructuring 
the 

agency.[Footnote 20]



FHFB has a five-member board of directors. The Secretary of the 

Department of Housing and Urban Development (HUD) serves as an ex 

officio member, and the remaining four full-time directors are 

appointed by the President with the advice and consent of the Senate 

for 7-year terms. Each of the four appointed directors must have 

experience or training in housing finance or a commitment to providing 

specialized housing credit. Not more than three of the five members can 

be from the same political party. The President designates one of the 

four appointed members to serve as chair. As discussed in this report, 

since 1990 the board has operated under a resolution that delegated 

most administrative functions to the chair.



The FHFB board operated with all appointed members serving on a full-

time basis for the first time in December 2001.[Footnote 21] From 1990 

to 1993, the board operated with four appointed members who served on a 

part-time basis. Beginning in January 1994, FHFB board membership 

became full time. However, from 1994 through 2001, the board operated 

with at least one vacant seat and sometimes two or three. In December 

2001, the President appointed FHFB’s new chair, and the board operated 

with four full-time appointed members plus the HUD designee throughout 

2002.



As of September 2002, FHFB’s 104 staff members were organized into four 

program offices:



* Office of Supervision (OS) - The office is responsible for conducting 

on-site examinations of the FHLBanks and the FHLBank System’s Office of 

Finance and conducting off-site monitoring and analysis.[Footnote 22] 

OS is also responsible for overseeing the FHLBanks’ implementation of 

their risk-based capital plans.[Footnote 23] In addition, OS is 

responsible for providing expert policy advice and analyzing and 

reporting on the economic, housing finance, community investment, and 

competitive environments in which the FHLBank System and its members 

operate.



* Office of General Counsel (OGC) - The General Counsel is FHFB’s chief 

legal officer and is responsible for advising the board, the chair, and 

other officials on interpretations of law and regulation. OGC prepares 

all legal documents on behalf of FHFB and prepares opinions, 

regulations, and memorandums of law. The office represents FHFB in all 

administrative adjudicatory proceedings before the board and in all 

other administrative matters involving FHFB. Also, OGC represents FHFB 

in judicial proceedings in which the agency’s supervisory or regulatory 

authority over the FHLBanks is at issue.



* Office of Management (OM) - The OM director is the principal advisor 

to the FHFB chair on management and organizational policies and is 

responsible for the agency’s technology and information systems, 

finance and accounting, budget, personnel, payroll, contracting and 

procurement, and facilities and property management.



* Office of Inspector General (OIG) - OIG is responsible for conducting 

and supervising audits and investigations of FHFB’s programs and 

operations.



The costs of FHFB’s operations are financed through assessments on the 

FHLBanks. In fiscal year 2003, FHFB’s operating budget was about $27 

million.



FHFB Chair Has Greater Authority to Make Key Administrative Decisions 

Than the Chairs of Most Other Financial Regulators:



The FHFB chairs’ authority to administer the agency is broader than 

that of the chairs of the other financial regulators included in our 

review, with the exception of the FDIC. Under a delegation of 

authority, the chair can make important administrative decisions that 

may have policy implications (such as appointing senior officials) 

without obtaining the approval of other board members. Over the years, 

some FHFB board members have complained that the delegation of 

authority allows the chair to act unilaterally, and it has been the 

source of disputes among board members. On January 29, 2003, the FHFB 

board considered and rejected by a 3 to 2 vote a proposal to revise the 

delegation and limit the chair’s authority.



FHFB and FDIC Chairs Have Broad Administrative Powers:



The FHFB and FDIC chairs have broader authority to make key 

administrative decisions than the chairs of other financial regulators 

(see fig. 1). Specifically, at FHFB and FDIC, the chairs can appoint 

senior officials without a board vote or approval. At each of the other 

financial regulators we reviewed, appointments of most senior officials 

require a vote or the approval of a majority of the board. However, in 

some cases, agency chairs can appoint Schedule C officials to run 

certain staff offices, which is discussed in more detail later in this 

report and in appendix II. We also note that at some agencies, such as 

CFTC, the chair or other senior career agency officials appoint staff 

responsible for carrying out the agencies’ functions.



Figure 1: Authority of Financial Regulatory Agency Chairs to Make Key 

Administrative Decisions Without Board Approval:



[See PDF for image] 



Note: Analysis of FHFB, FDIC, SEC, FCA, Fed Board, CFTC, and NCUA.



[A] CFTC officials said that the agency’s practice is for the chair to 

submit reorganization proposals to the commission for a vote.



[End of figure]



As also shown in figure 1, at four of the regulators we reviewed, 

including FHFB, the chair can reorganize the agency without seeking 

board approval.[Footnote 24] While CFTC officials said that the chair 

has authority to reorganize the agency, the practice has been to submit 

such proposals to the commission for a vote. At three agencies, major 

reorganization proposals must be submitted to the board or commission 

for a vote or approval. For example, the Fed Board has a two-tier 

process by which reorganizations that meet specific criteria may 

require the approval of the entire board.[Footnote 25] At FCA, the 

board must approve major organizational changes, but the chair has the 

authority to make organizational changes within particular units.



Delegations of Authority Serve as Basis for FHFB and FDIC Chairs’ 

Powers:



The basis for the FHFB chair’s significant administrative power is a 

delegation of authority approved by the board in 1990 and 1993. 

According to former FHFB Chair, Dan Evans, the 1990 delegation of 

authority facilitated the administration of the agency due in part to 

the fact that board members served on a part-time basis. According to 

the FHFB former managing director who served under Evans, the agency’s 

part-time board members spent most of their time in geographic 

locations across the United States and came to Washington several days 

each month to conduct the agency’s business, particularly policy 

issues. According to Evans and the former managing director, the 1990 

delegation facilitated the administration of FHFB as convening the 

part-time board members for administrative decisions was challenging. 

The 1990 delegation of authority authorizes the chair to “. . . effect 

the overall management, functioning, and organization . . .” of the 

FHFB.[Footnote 26] Although FHFB’s statute authorizes the board to 

employ and set the compensation of agency staff, the delegation of 

authority ceded appointment, removal, and pay authorities to the chair. 

The delegation of authority included a provision that allowed board 

members to challenge decisions made under the delegation, obligating 

the chair to call a special session of the board to consider any matter 

or business at the request of any two or more board members.



In November 1993, FHFB’s part-time board made technical revisions to 

the 1990 delegation of authority that allowed the HUD secretary to 

serve as the chair in the absence of a chair or vice chair.[Footnote 

27] Otherwise, the terms of the 1993 delegation are substantially 

similar to the 1990 delegation and grant significant administrative 

authority to the FHFB chair (see fig. 2). According to a 1996 FHFB OGC 

memorandum that discusses the basis for the delegation and FHFB’s 

former managing director, some of the part-time board members did not 

continue on the board as full-time members. The FHFB memorandum states 

that the part-time board members were concerned that the agency would 

not be able to function in the absence of:



the chair and other board members.[Footnote 28] The 1993 delegation of 

authority has remained in effect because it has not been overturned by 

a majority vote of the board.



Figure 2: Text of FHFB’s 1993 Delegation of Authority:



[See PDF for image] 



[End of figure] 



The FDIC board has also voted to give significant administrative 

authority to its chair through its bylaws and a delegation of 

authority. Through its bylaws, the FDIC board delegated certain 

appointment authority as well as reorganization authority to the chair. 

On January 29, 2002, the board members voted unanimously to delegate 

additional authority to the chair. The delegation expanded the chairs’ 

authority to appoint senior officials without a board vote.[Footnote 

29] In contrast to FHFB’s delegation of authority, FDIC’s delegation 

expires when the current chair leaves office and the rules for 

administrative decision making revert to the rules in place prior to 

the revised delegation.



FHFB Chairs’ Exercise of Administrative Authority under Delegation Has 

Contributed to Conflicts among Board Members:



Disagreements among board members about the chair’s use of the 

delegation of authority to make unilateral administrative decisions 

have historically caused tensions between the chair and other board 

members. In a recent example of the disputes among FHFB board members, 

Democratic members stated that the current Chair did not consult them 

in any significant way prior to announcing a major agency 

reorganization on August 7, 2002 (the specifics of the reorganization 

are discussed later in this report). As done in 10 previous FHFB 

reorganizations under the delegation of authority, the Chair did not 

seek board approval.[Footnote 30] According to the Chair, he notified 

other board members about the key points of the reorganization several 

weeks prior to the announcement. However, other board members have 

stated that they were not involved in the planning of the 

reorganization and did not receive details about the reorganization 

until it was announced. For example, at the September 2002 board 

meeting, one member stated “. . . we’ve just had a major restructuring 

that wasn’t done by the board, that there wasn’t advance notice, which 

had a real impact on the office.”:



FHFB board members who served under former Chair Morrison also stated 

that he used the delegation of authority to exclude other board members 

from key administrative decisions. For example, one board member stated 

that Morrison appointed senior officials and reorganized the agency 

without any consultation. The board member stated that he disagreed 

with these decisions and believed that they undermined FHFB’s 

regulatory effectiveness. Morrison said that his actions were 

consistent with the administrative powers authorized to the chair under 

the delegation. Morrison also said that he met frequently with other 

board members to explain his actions and that other board members never 

called special board meetings to question his decisions, as permitted 

under the delegation.



FHFB board members have also complained that chairs have used their 

delegated authority as the basis for unilateral actions on policy, 

which is the responsibility of the board as a whole. For example, two 

board members said that the current Chair acted unilaterally in 

selecting FHLBank public interest director candidates in 2002 and had 

minimal consultation on these selections with other board members. In 

past years, FHFB approved public interest director candidates by 

notational vote.[Footnote 31] In 2002, these two board members 

requested that the vote on the candidates take place in an open 

meeting, and they expressed their concerns at this public meeting about 

not having been consulted. FHFB officials said that the current Chair 

has initiated actions to improve the selection of public interest 

directors. In particular, the Chair developed new criteria governing 

the appointment of public interest directors. The new criteria require 

public interest directors to have an understanding of such issues as 

finance, political awareness, and corporate governance. On January 29, 

2003, the FHFB board voted unanimously to approve the appointment of 28 

public interest directors.



Disputes about the FHFB’s powers under the delegation of authority also 

took place during Chair Morrison’s tenure, between 1995 and 2000. For 

example, in a letter sent to Members of Congress, a former board member 

alleged that “Mr. Morrison has used and expanded the delegation of 

authority to unilaterally implement his policy objectives by thwarting 

Board consideration of issues where there may be disagreement with the 

Chairman by the independent directors.”[Footnote 32] Morrison said that 

his decisions under the delegation were proper and did not stray into 

policy matters reserved for the board.



FHFB Board Considered and Rejected a Proposal to Revise the Delegation 

of Authority:



On January 29, 2003, while a draft copy of this report was with FHFB 

for official comment, the board debated and rejected by a 3 to 2 party-

line vote a proposal to revise the existing delegation of authority and 

limit the chair’s administrative authorities.[Footnote 33] FHFB’s Chair 

placed the proposal on the agenda for meeting at the request of the 

agency’s two Democratic board members. Although FHFB board members’ 

staff said that they exchanged proposed language to revise the 

delegation of authority prior to the board meeting, they did not engage 

in substantive discussions over the proposal during that period. The 

proposed revisions to the delegation discussed at the January 29 board 

meeting would have allowed the FHFB board to approve the appointment of 

the agency’s office directors and reorganizations down to the office 

level. A board member who proposed the revision said that the current 

delegation had been “misused” by FHFB chairs and used as a basis to 

usurp the policy-making responsibilities of the board. Among other 

statements, FHFB’s Chair denied that he had “misused” his authority 

under the delegation and stated that the delegation was appropriate, 

among other reasons, because organizations need a single individual to 

direct operations to ensure efficient administration.



Certain FHFB Reduction-in-Force Actions Were Not Fully Consistent with 

Applicable Federal Age Discrimination Statutes and Regulations:



On August 7, 2002, the FHFB Chair announced a major reorganization, and 

the agency sent RIF notices to nine staff members. Although FHFB 

provided significant financial compensation and career transition 

services to affected employees, certain FHFB actions in connection with 

the RIFs do not appear fully consistent with federal age discrimination 

statutes, regulations, or court decisions.[Footnote 34] We have 
informed 

EEOC of our findings in this area. In addition, FHFB placed each of the 

affected staff on administrative leave during the 60 day advance notice 

period (the period from the RIF notification on August 7 until actual 

separation from federal service). While OPM regulations require federal 

agencies to keep employees on active duty status during the advance 

notice period, FHFB officials said the agency had statutory authority 

to place the staff on administrative leave.



FHFB Reorganization Included a RIF:



According to the FHFB Chair and Director of Management, the August 2002 

reorganization was focused on improving supervision of the FHLBank 

System. Through a review of the organizational structure of FHFB, the 

Chair concluded that the agency dedicated too few resources to FHLBank 

supervision and too many resources to support functions and public and 

congressional relations. Accordingly, the Chair decided to eliminate 

the Office of Managing Director and the Office of Communications and 

merge OS with the Office of Policy, Research, and Analysis (OPRA) (see 

figs. 3 and 4). The Chair also decided to shift resources and positions 

from the eliminated offices to OS. In addition, FHFB changed the title 

of the Office of Resource Management to the Office of Management. The 

Chair and the Director of Management assumed responsibility for the 

day-to-day administrative duties formerly carried out by the Managing 

Director and, as is discussed later in this report, the Chair’s 

personal staff assumed responsibility for the Office of Communication’s 

public and congressional affairs functions.[Footnote 35]



Figure 3: FHFB Organization Chart (Pre-Reorganization):



[See PDF for image] 



[End of figure] 



Figure 4: FHFB Organization Chart (Post-reorganization):



[See PDF for image] 



[End of figure] 



As part of the reorganization, FHFB notified nine employees that they 

were subject to the RIF and that they would be separated from the 

federal service in 60 days (referred to as the advance notice period). 

To minimize the effect on the employees, FHFB hired an outplacement 

firm to help them prepare resumes and develop job search strategies. 

FHFB also notified each employee that he or she would receive federal 

severance and accrued annual leave benefits.[Footnote 36] Further, FHFB 

presented each of the affected employees with a “Negotiated Settlement 

Agreement” that offered 3 to 6 months salary (depending upon employment 

status) in exchange for agreement not to file any administrative 

actions or lawsuits against the FHFB, its chair, directors, or 

employees in connection with the employees’ employment with the agency 

or involuntary separation.[Footnote 37] According to documentation 

provided by FHFB, the agency gave the affected employees 47 days to 

decide whether to sign the settlement agreement.[Footnote 38] According 

to FHFB officials, eight of the nine affected employees signed the 

settlement agreements.



FHFB Settlement Agreement Waiver Provisions Not Fully Consistent with 

Age Discrimination Requirements:



FHFB’s settlement agreements included provisions that waived employees’ 

rights to file lawsuits based on the Age Discrimination in Employment 

Act (ADEA), as amended.[Footnote 39] Waivers of rights under ADEA are 

valid and enforceable only if the waiver is knowing and voluntary, and 

courts have generally required employers to strictly comply with ADEA 

standards regarding waivers. Although FHFB took steps to comply with 

ADEA and EEOC regulations, certain provisions in the settlement 

agreements are not consistent with requirements.[Footnote 40] First, 

the settlement agreements required that employees waive their rights to 

file complaints, charges, or appeals with EEOC, which is not consistent 

with statutory and regulatory requirements. Second, FHFB did not advise 

each affected employee in writing to consult an attorney prior to 

signing the agreements and waiving his or her ADEA rights. Third, FHFB 

did not provide required information to the affected employees to 

assist them in determining whether to waive their rights under ADEA.



The Older Workers Benefit Protection Act (OWBPA) includes detailed 

provisions that deal with the validity of releases and waivers under 

ADEA, and sets forth minimum requirements for a knowing and voluntary 

release of claims under the ADEA. EEOC regulations implementing OWBPA 

apply to waivers of rights and claims under ADEA, and the regulations 

provide specifically that they apply to all waivers of ADEA rights and 

claims, regardless of whether the employee is employed in the private 

sector or public sector, including federal employment. The statute and 

regulations require that the agreement be in writing, refer 

specifically to claims under ADEA, be given in exchange for 

consideration that is above and beyond any benefit to which the 

employee is already entitled, and give the employee adequate time to 

consider the waiver before signing it.



The settlement agreements appear designed to comply with several of 

these requirements. For example, employees were given 47 days to 

consider the waiver and the settlement agreement refers specifically to 

claims under ADEA.[Footnote 41] As required by ADEA, the settlement 

agreements also provided affected employees over 40 years of age 7 days 

after signing the agreement to revoke the agreement. In addition, the 

settlement agreements included payments above and beyond what the 

employees were entitled to receive by statute. That is, FHFB agreed to 

pay each affected employee 3 to 6 months salary in exchange for 

agreeing to sign the settlement agreement.



However, a provision in the settlement agreements requiring employees 

to waive their rights to file charges, complaints, or appeals with EEOC 

does not appear to be consistent with OWBPA requirements and EEOC 

regulations. OWBPA provides that “No waiver agreement may affect the 

Commission’s rights and responsibilities to enforce this chapter. No 

waiver may be used to justify interfering with the protected right of 

an employee to file a charge or participate in an investigation or 

proceeding conducted by the Commission.”[Footnote 42] The EEOC 

regulations provide that “no waiver agreement may include any provision 

prohibiting any individual from “. . . (i) Filing a charge or 

complaint, including a challenge to the validity of a waiver agreement, 

with EEOC, or (ii) Participating in any investigation or proceeding 

conducted by EEOC.”[Footnote 43]



The settlement agreements also do not appear consistent with OWBPA 

requirements and EEOC regulations that require employers to notify 

employees in writing to consult with an attorney prior to agreeing to 

waive their rights under ADEA. The courts have determined that 

employers must specifically advise employees to consult an attorney. In 

FHFB’s settlement agreements, the relevant provision states that the 

“employee understands that he has had the opportunity to contact a 

representative of his choice to discuss the terms and conditions of 

this Negotiated Settlement Agreement. . .” An FHFB attorney stated that 

agency officials pointed out this statement in the settlement 

agreements to the affected employees. However, the settlement agreement 

does not advise the employees in writing to consult an attorney before 

agreeing to waive their rights under ADEA, and FHFB did not provide any 

other written advice for employees to consult an attorney.



In addition, FHFB did not provide information to the affected employees 

as is required under OWBPA and EEOC regulations. Employers that offer 

additional benefits to a group of involuntarily terminated employees in 

exchange for a waiver of claims under ADEA must satisfy additional 

requirements. These employers must provide detailed written information 

to employees describing the group termination program, including a 

listing of the job titles and ages of the employees selected for the 

program, and similar information for individuals who were not selected. 

This information is designed to permit older workers to make more 

informed decisions concerning waiver of ADEA rights. FHFB’s settlement 

agreements were part of a group termination program (e.g., a RIF). 

However, FHFB officials said that while the names of the terminated 

employees were provided, written information on the job titles and ages 

of all employees who were offered the settlement agreement was not 

provided. According to FHFB, the EEOC regulations do not require that 

this information be provided if the employer decides to eliminate all 

of the positions in a particular unit, as FHFB did with respect to the 

Office of the Managing Director and the Office of Communications. 

However, OWBPA and EEOC regulations do not distinguish between 

situations where employers terminate selected positions in a particular 

unit and others where all positions are terminated. Employers are 

required to provide information on employee ages and job titles under 

either circumstance.



FHFB Placed Staff Subject to the RIF on 60 Days of Administrative 

Leave:



FHFB restricted the access of employees subject to the RIF to the 

agency’s headquarters during the 60-day advance notice period--the 

period from the RIF notification on August 7, 2002, until actual 

separation from federal service--and placed them on administrative 

leave.[Footnote 44] FHFB’s decision to restrict staff access during the 

advance notice period was not consistent with OPM regulations, but FHFB 

officials said that the agency had statutory authority to take this 

action.



OPM regulations that apply to RIFs state that, when possible, employees 

should remain in active-duty status during the advance notice period. 

When in an emergency the agency lacks work or funds for all or part of 

the notice period, it may place employees on annual leave with or 

without their consent, leave without pay without their consent, or 

nonpay status without consent. While no statute governs the use of 

administrative leave, OPM regulations and federal administrative 

decisions have established standards for its use. These regulations and 

decisions have permitted agencies, in certain situations, to excuse an 

employee for brief periods without a loss of pay. However, agencies 

generally may not place employees on administrative leave for long 

periods unless their absence furthers an agency’s mission.



FHFB officials said that the agency’s authorizing statute provides 

authority to place employees on administrative leave during the advance 

notice period. FHFB officials said that the statute allows the agency 

to set the compensation of its employees without regard to the statutes 

affecting other agencies. FHFB officials said that all forms of leave, 

including administrative leave, are forms of compensation, and 

therefore, the agency was authorized to place the affected staff on 

administrative leave. Further, FHFB officials said that (1) placing the 

staff on administrative leave allowed them to take full advantage of 

the job placement services that the agency offered and (2) requiring 

the employees to report to the agency during the advance notice period 

when there was insufficient work for them to do was not cost effective. 

Although FHFB’s statute provides broad authority to set compensation of 

its employees, we note that the scope of FHFB’s authority and whether 

it appropriately supercedes OPM’s RIF regulations has not been 

established.



FHFB Has Announced Plans to Improve Its FHLBank Examination Program:



Although we identified weaknesses in FHFB’s examination program in a 

1998 report, FHFB did not address these weaknesses, and they persisted 

for several years.[Footnote 45] In August 2002, FHFB announced plans 

that could significantly improve its examination program and more than 

double the number of examiners. However, because FHFB has just started 

to revise its examination program, it is too early to evaluate the 

effectiveness of these plans.



FHFB Did Not Fully Address Examination Program Weaknesses:



Our 1998 report identified limitations in FHFB’s examination program, 

which raised questions about the agency’s ability to help ensure that 

FHLBanks operate in a safe and sound manner.[Footnote 46] For example, 

the report found that FHFB examiners did not thoroughly review FHLBank 

internal control systems. Internal controls are defined as 

arrangements, such as procedures, organization structure, and technical 

methods, designed to provide reasonable assurance that (1) assets are 

protected from unauthorized use or disposition; (2) transactions are in 

compliance with law, regulation, FHFB policy, and the policy directives 

of the FHLBank’s director and management; and (3) financial reporting 

is accurate. According to our report, in September 1996, FHFB 

examinations stated that internal control reviews were “limited.” FHFB 

officials cited the limited number of examiners, 8 to 10 individuals, 

as one explanation for not conducting thorough internal control 

evaluations.



From 1998 through 2001, FHFB did not develop an examination program to 

ensure that each FHLBank has established an adequate internal control 

system. We reviewed all 36 FHFB bank examinations conducted in 1999 to

2001.[Footnote 47] Each of the 36 examinations stated that the review 

of internal controls was “limited in scope and did not involve a 

comprehensive review of the entire system of controls.” As of late July 

2002, FHFB had 10 examiners, or the same number as in 1998. Moreover, 

from 1998 through 2002, direct mortgage acquisition programs added 

risks to the FHLBank System and the FHLBanks developed increasingly 

complex approaches to manage these risks.



Further, our 1998 report[Footnote 48] noted that FHFB examination 

workpapers did not adequately document corporate governance reviews or 

indicate that such reviews were conducted. Board of director and 

management oversight are essential elements of the corporate governance 

of financial institutions and financial and other risk management. At 

the September 2002 FHFB board meeting, discussion among board members 

suggested a concern about the lack of emphasis on corporate governance 

in the examinations.[Footnote 49] One board member stated that he 

believes the FHLBanks’ corporate governance is “uneven” and that FHFB’s 

examinations have not devoted sufficient attention to this critical 

area. The Chair and the other board member discussed directing FHFB’s 

examination staff to conduct an audit of corporate governance in the 

FHLBank System. The next section discusses this audit.



Our 1998 report[Footnote 50] noted that off-site monitoring in the FHFB 

examination program was weak and conducted in an uncoordinated manner. 

Off-site monitoring involves the analysis of financial data to monitor 

bank financial performance and to identify risks. Off-site monitoring 

can serve as an effective means to supplement the work of examiners 

working on-site. Regular monitoring between examinations, which 

generally take place on an annual basis, is important because the 

FHLBanks’ financial conditions and risks can change significantly in a 

short period. The 1998 report noted that OS off-site monitoring 

consisted of four periodic reports as well as monthly reviews of 

various bank information. While these reports were potentially 

beneficial, FHFB suspended them in 1997 due to staff constraints in OS. 

The 1998 report also noted that coordination between OPRA and OS on 

off-site monitoring activities was lacking.



We found that FHFB’s off-site monitoring program is still limited. For 

example, FHFB’s OS director said that in July 2002 that only one 

individual performs off-site monitoring functions. Rather than assess 

the financial performance of the FHLBanks, the director said that the 

individual tracks FHLBank compliance with existing examination 

recommendations. Although this function is important, it does not 

provide FHFB with information about safety and soundness issues, such 

as changes in the FHLBanks’ financial condition. A more comprehensive 

off-site monitoring program could help alert FHFB officials to the need 

for an on-site examination.



FHFB Has Initiated Steps to Significantly Revise the FHLBank 

Examination Program:



In August 2002, FHFB’s Chair announced that FHFB would significantly 

increase the resources devoted to OS. FHFB set the fiscal year 2003 

budget for OS at $9.7 million, a $2.8 million increase from fiscal year 

2002 funding levels. FHFB also hired a new OS director and deputy 

director, both of whom have experience in examinations at other 

financial regulatory agencies. FHFB also plans to increase the number 

of examination staff from 10 to 24 by fiscal year 2004 and to open 

satellite locations in different parts of the country in which to base 

examiners. Under the previous examination approach, 8 to 10 examination 

staff spent 6 to 7 months on travel each year. FHFB officials said 

satellite locations would reduce travel demands on the examination 

staff and aid in hiring and retaining qualified staff. At the time of 

our review, OS was in transition; however, FHFB had increased the 

number of examiners. As of February 5, 2002, there were 14 examiners on 

staff at FHFB, an increase of 4.



According to the OS Director, FHFB also plans to significantly change 

its approach to conducting examinations to obtain a fuller 

understanding of FHLBank operations as FHLBank System business becomes 

more complex. Prior to September 2002, FHFB assigned its examiners to 

teams that included 4 to 5 members. In general, each examiner was 

responsible for conducting annual examinations at 6 of the 12 FHLBanks. 

According to FHFB officials, the examination teams reviewed different 

banks from year to year, and their membership was rotated as well. 

Therefore, an FHFB examiner might work on a particular bank’s 

examination one year but not the next. Moreover, FHFB examiners did not 

necessarily specialize in the areas (e.g., credit risk, interest rate 

risk, or affordable housing programs) that are examined on an annual 

basis.[Footnote 51] Instead, an examiner might review a bank’s interest 

rate risk operations at one examination and review another bank’s 

affordable housing program at the next examination.



The OS Director said that under the revised examination approach, by 

the fourth quarter of fiscal year 2003, FHFB plans to have three 

examination teams in place. Each team will consist of 8 members, with 

each team responsible for 4 of the 12 FHLBanks for 3 to 4 years. In 

addition, each examiner will focus on a particular area, such as 

interest rate risk or affordable housing compliance, at each of the 

four FHLBank examinations for which the individual is responsible 

annually. For example, the OS Director said that two recent hires on 

the examination staff have expertise in the area of corporate 

governance. According to FHFB, as of February 2003, OS had completed 

ten targeted corporate governance reviews at the FHLBanks, and expects 

to complete a final report on all 12 banks’ corporate governance by 

March 2003.



The OS Director also said that FHFB plans to develop a proactive and 

risk-based management approach to conducting FHLBank examinations. 

Prior to FHFB’s recently announced changes to its examination program, 

examiners might examine a particular FHLBank as of June 30 of a 

particular year. The examiners would then assess whether the bank was 

operated in a safe and sound manner and complied with all laws and 

regulations as of that date. Under the new risk management approach, 

the OS director said that the examination staff would try to identify 

the future risks facing each FHLBank and develop plans to help ensure 

that FHLBank management establish systems and controls to adequately 

manage those risks.



Overall, FHFB’s planned examination program is similar to the 

examination program of OFHEO, which regulates Fannie Mae and Freddie 

Mac. Fannie Mae and Freddie Mac are large government-sponsored, 

privately owned and operated corporations chartered by Congress to 

enhance the availability of mortgage credit across the nation during 

good and bad economic times. Similar to FHFB’s proposed examination 

program, OFHEO has established a risk-based examination program that 

assesses the controls Fannie Mae and Freddie Mac use to manage 

significant risks. In addition, OFHEO assigns staff with specialized 

skills, such as interest rate risk management, to its examination 

teams. OCC, FDIC, OTS and the Fed Board have also implemented similar 

risked-based examination programs.[Footnote 52]



FHFB has plans to expand off-site monitoring. Specifically, as of 

October 21, 2002, an FHLBank analyst was assigned to each FHLBank in an 

effort to enhance the OS off-site monitoring program. According to the 

OS Director, the recently announced merger between OS and OPRA (see 

figs. 3 and 4) provides opportunities for FHFB to enhance its off-site 

monitoring capability. In particular, examination and OPRA staff will 

now work in the same unit, which should allow better coordination of 

their activities.



Majority of FHLBank Public Interest Directors Made Political 

Contributions Prior to Their Initial Appointments:



Available data indicate that 50 (67 percent) of the 75 public interest 

directors that FHFB appointed for the first time from January 1, 1998, 

through May 8, 2002, made one or more political contributions in the 8-

year period prior to their initial appointments (see fig. 5). We 

obtained public interest director appointment data from FHFB and 

contribution data from CRP. CRP provided data that covers all federal 

election cycles from 1990 through 2002. We organized and presented the 

CRP contribution data to cover the tenures of the three FHFB chairs who 

were in office when FHFB made public interest director appointments 

during 1998 to 2002: Bruce Morrison, June 1995 to July 2000; William 

Apgar, July 2000 to December 2000; and John T. Korsmo, December 2001 to 

present. We focused our analysis on the 8-year period prior to each 

public interest director’s appointment to ensure a standard means of 

comparison between the three FHFB chairs.[Footnote 53]



Figure 5: Number and Percentage of FHLBank Public Interest Directors 

That Reportedly Made Political Contributions during the 8-year Period 

Prior to Their Initial Appointment, by FHFB Chair (January 1, 1998 

through May 8, 2002):



[See PDF for image] 



Note: Analyis of FHFB and CRP data.



[A] Of the 25 appointees, 11 had reported making contributions more 

than 8 years prior to their appointments. The remaining 14 directors do 

not appear in the CRP database, which according to CRP officials 

indicates that they had not previously made political contributions.



[End of figure] 



Figure 6 shows that 28 (or 56 percent) of the public interest directors 

who reported making contributions prior to their appointments had done 

so 1 to 10 times while 22 (44 percent) had done so 11 or more times. Of 

the 5 directors appointed during Apgar’s tenure, all reported making 1 

to 10 donations. The public interest directors appointed during the 

Morrison and Korsmo tenures were generally divided equally between 

those who reported 1 to 10 donations and those who reported giving 11 

or more contributions.



Figure 6: Frequency of FHLBank Public Interest Director Political 

Contributions Prior to Initial Appointment, by FHFB Chair (January 1, 

1998 through May 8, 2002):



[See PDF for image] 



[End of figure] 



Note: Analysis of FHFB and CRP data.



[A] Based on contributions made in the 8-year period prior to each 

director’s initial appointment.



Table 1 summarizes the number of contributions and the total amount of 

those contributions that each FHFB public interest director appointee 

made prior to his or her appointment. When we totaled each director’s 

contributions, we found the median value of those totals ranged from 

$3,250 for the 5 appointments made during Apgar’s tenure to $8,364 for 

the 26 appointments made during Korsmo’s tenure.



Table 1: Median Dollar Value of Total Preappointment Political 

Contributions made by each FHLBank Public Interest Director, by FHFB 

Chairman (appointed January 1, 1998 through May 8, 2002):



Tenure of chair: Morrison; Number of first time appointees: 19; Median: 

amount[A]: $4,500; Median number: of contributions: 7.



Tenure of chair: Apgar; Number of first time appointees: 5; Median: 

amount[A]: $3,250; Median number: of contributions: 4.



Tenure of chair: Korsmo; Number of first time appointees: 26; Median: 

amount[A]: $8,364; Median number: of contributions: 10.



Source: GAO.



Note: Analysis of FHFB and CRP data.



[A] Based on contributions made in the 8-year period prior to each 

director’s initial appointment.

Dollar amounts are not shown in constant dollars.



[End of table]



As shown in table 2, during the Morrison and Korsmo tenures, FHFB did 

not appoint public interest directors who give exclusively to the party 

that is not the party of the chair. That is, FHFB did not appoint any 

public interest directors who had made contributions exclusively to the 

Republican Party during Morrison’s tenure, nor did FHFB appoint any 

public interest directors who gave exclusively to the Democratic Party 

during Korsmo’s tenure. However, during the Morrison and Korsmo 

tenures, FHFB appointed public interest directors who gave to both 

parties. During Apgar’s tenure, FHFB appointed three individuals who 

gave exclusively to the Democratic Party, one who gave exclusively to 

the Republican Party, and one who gave to both parties.



Table 2: Allocation of Newly Appointed FHLBank Public Interest Director 

Campaign Contributions, by Recipient and by FHFB Chairman (January 1, 

1998 through May 8, 2002):



Tenure of chair: Morrison (Democrat); Democratic recipients[A]: 15; 

Republican recipients[A]: 0; Democratic and Republican recipients[A]: 

4; PAC/other recipients[A]: 0; Total: 19.



Tenure of chair: Apgar (Democrat); Democratic recipients[A]: 3; 

Republican recipients[A]: 1; Democratic and Republican recipients[A]: 

1; PAC/other recipients[A]: 0; Total: 5.



Tenure of chair: Korsmo (Republican); Democratic recipients[A]: 0; 

Republican recipients[A]: 16; Democratic and Republican recipients[A]: 

9; PAC/other recipients[A]: 1; Total: 26.



Source: GAO.



Note: Analysis of FHFB and CRP data.



[A] Based on contributions made in the 8-year period prior to each 

director’s initial appointment.



[End of table]



We also analyzed data obtained from Fannie Mae and Freddie Mac to 

determine the political contributions of members of their boards of 

directors who are appointed by the President.[Footnote 54] Using CRP 

data, we determined the political contributions of Fannie Mae and 

Freddie Mac directors appointed from January 1, 1998, through 2002. Our 

analysis shows that 18 of the 19 (95 percent) of the Fannie Mae and 

Freddie Mac directors appointed during that period had made political 

contributions in the 8-year period prior to their initial 

appointments.[Footnote 55] The median value of the total number of 

contributions for an individual was 11, and the median of the total 

preappointment donations was $7,000.



FHFB’s Use of Schedule C Positions Sometimes Differs from the Practices 

of Other Financial Regulators:



In some cases, FHFB’s use of Schedule C positions differs from the 

practices of other financial regulators. At FHFB and five of the six 

other financial regulatory agencies that we reviewed, the agencies 

allot Schedule C positions to the chair and other board 

members.[Footnote 56] Unlike FHFB, four of these five agencies appoint 

Schedule C officials to head certain staff offices, such as Office of 

Policy or the Office of General Counsel. The FHFB chair’s personal 

staff, including a Schedule C appointee, are responsible for the 

agency’s public and congressional affairs functions, a practice unique 

among the regulatory agencies that we reviewed.



FHFB Schedule C Positions Are Allotted to the Chair and Other Board 

Members:



Schedule C appointees at FHFB and five other agencies work directly for 

the agencies’ policymakers: the chair and other board members (see 

table 3). Unlike FHFB and CFTC, the other four agencies allot Schedule 

C positions to head some staff offices. For example, FCA has Schedule C 

appointees in positions such as Director of the Office of Congressional 

and Public Affairs, Director of the Office of Policy and Analysis, and 

Chief Operating Officer.[Footnote 57] SEC has Schedule C appointees for 

three director positions: Director of the Office of Communications, 

Director of the Office of Legislative Affairs, and the Director of 

Office of Public Affairs. SEC also allots Schedule C positions to 

several nondirector-level positions within the organization.



Table 3: Allotment of Schedule C Positions at Financial Regulators:



Financial regulatory agency: FHFB; Positions allocated to chair and 

board: Special advisors to the chair (3); 1 special assistant per board 

member (4); Positions allocated to program offices[A]: [Empty]; Total: 

7.



Financial regulatory agency: SEC; Positions allocated to chair and 

board: Confidential assistants to the chair (2); Senior advisor to the 

chair (1); 1 confidential assistant per; commissioner (4); Positions 

allocated to program offices[A]: Director, Office of Communications 

(1); Director and 1 advisor, Office of; Legislative Affairs (2); 

Director, Office of Public Affairs (1); Office of General Counsel (1); 

Office of Chief Accountant (1); Division of Corporate Finance (1); 

Division of Investment Management (1); Division of Enforcement (1); 

Division of Market Regulation (2); Total: 18.



Financial regulatory agency: FCA; Positions allocated to chair and 

board: Office of the chair (2); 2 special assistants per board member 

(4); Positions allocated to program offices[A]: Chief Operating Officer 

(1); Secretary to the board (1); Director, Office of Congressional; and 

Public Affairs and two specialists (3); Director, Office of Policy and 

Analysis (1); Total: 12.



Financial regulatory agency: CFTC; Positions allocated to chair and 

board: Office of the chair (2); 2 special assistants per commissioner 

(8); Positions allocated to program offices[A]: [Empty]; Total: 10.



Financial regulatory agency: NCUA; Positions allocated to chair and 

board: Chief of Staff and; Counsel to the chair (1); Special assistant 

to the chair (1); 1 executive assistant per board member (3); Positions 

allocated to program offices[A]: Director and 1 special assistant,; 

Office of Public and Congressional 

Affairs (2); Total: 7.



Financial regulatory agency: FDIC; Positions allocated to chair and 

board: Chief of Staff (1); Deputy to the chair (1); Special advisor to 

the chair (1); Secretary to the board (1); Positions allocated to 

program offices[A]: General Counsel,; Office of General Counsel (1); 

Total: 5.



Source: GAO.



Note: Analysis of FHFB, SEC, FCA, CFTC, NCUA, and FDIC data.



[A] Unless otherwise noted (i.e., Director, Chief Operating Officer, 

General Counsel), positions included in the table are staff-level 

positions within the program office listed.



[End of table]



FHFB Chair’s Staff is Responsible for Public and Congressional Affair 

Functions:



We compared FHFB’s approach to managing its public and congressional 

affairs functions to the approaches of the six other financial 

regulatory agencies. Unlike FHFB, each of these six agencies has a 

separate public and congressional affairs office, typically staffed by 

full-time career employees. At SEC, FCA, and NCUA, the chairs appoint 

Schedule C officials to run these offices; while career officials run 

the offices at the Fed Board and FDIC. At CFTC, a noncareer and non-

Schedule C executive heads the public and congressional affairs 

office.[Footnote 58]



Since FHFB’s August 7, 2002, reorganization, the Chair’s personal staff 

has been responsible for the agency’s public and congressional affairs 

functions. Specifically, FHFB officials said that a Schedule C 

appointee from the Chair’s staff has assumed responsibility for 

managing media relations and a career staff member who is also on the 

Chair’s staff is responsible for congressional relations. According to 

the FHFB officials, the Chair’s personal staff have been able to 

incorporate the public and congressional affairs functions into their 

normal duties. FHFB officials said that the Chair’s staff have been 

able to assume these responsibilities because, with about 100 

employees, FHFB is a comparatively small agency with limited 

congressional and public affairs responsibilities.



Conclusions:



Due to the delegation of authority, the FHFB chair has relatively broad 

administrative power, compared with most financial regulatory chairs, 

to appoint senior officials and reorganize the agency without obtaining 

a board vote or approval. The delegation prevents the full board from 

participating in key administrative decisions that have potential 

policy implications. At a January 29, 2003, FHFB board meeting, the 

board in a close 3 to 2 vote along party lines rejected a proposal to 

revise the delegation of authority that would have required board 

approval for senior appointments and major agency reorganizations. 

Although FHFB board member staff exchanged proposed language to revise 

the delegation of authority prior to the meeting, there was little 

collaboration among the staff. While the FHFB board has determined that 

the delegation remains the most efficient means to administer the 

agency, we continue to believe that the decision potentially frustrates 

one of Congress’ objectives in establishing a board to regulate the 

FHLBank System. That is, the board structure is designed to help ensure 

that key decisions benefit from the experiences and perspectives of all 

board members. In addition, the FHFB board’s decision will likely 

result in the continuation of the sometimes bitter conflicts that have 

periodically characterized the relationships among board members over 

the past 8 years.



Going forward, the FHFB board would benefit from considering a range of 

options that would involve all board members in key administrative 

decisions. Some of these options may not involve any changes to the 

current delegation of authority. For example, the chair could notify 

and brief other board members of key administrative decisions prior to 

their implementation and seek other board members’ advice and counsel 

on these decisions. Or, the FHFB board could consider practices at 

other financial regulatory agencies that provide for board or 

commission involvement in key administrative decisions. At CFTC, for 

instance, the chair’s authority to reorganize the agency is similar to 

that of the FHFB chair, but CFTC’s practice has been for the chair to 

submit major reorganization proposals to the commission for a vote. In 

addition, board members and their staffs could work together to 

determine if there are any areas of agreement on approaches--including 

revising the delegation of authority--that would increase board 

participation in key administrative decisions while preserving the 

chair’s authority to administer the agency on a day-to-day basis. While 

there is no requirement or guarantee that FHFB board members agree on 

all key administrative decisions, establishing processes and practices 

to ensure full board participation could enhance the quality of such 

decisions and improve relations among board members.



FHFB offered significant financial compensation to staff that received 

RIF notices during the August 2002 reorganization. However, provisions 

in the settlement agreements do not appear fully consistent with 

federal age discrimination statutes and regulations. For example, a 

provision in the settlement agreements that required employees to waive 

their rights to file charges, complaints, or appeals with EEOC is not 

consistent with ADEA’s prohibition against waivers of these rights. 

FHFB also (1) did not include required language in the settlement 

agreements advising employees in writing to consult with an attorney 

prior to signing the settlement agreements and waiving their ADEA 

rights and (2) failed to provide the affected staff with information on 

the job titles and ages of staff, as required under ADEA and EEOC 

regulations. We have informed the EEOC about our findings regarding the 

FHFB settlement agreement provisions pertaining to the waiver of ADEA 

rights.



FHFB did not take actions in a timely way to address FHLBank 

examination program weaknesses that we identified in a 1998 

report.[Footnote 59] However, in 2002, current FHFB Chair Korsmo 

announced plans and initiated actions, such as hiring more examiners 

that have the potential to improve the quality of the agency’s safety 

and soundness oversight. Continued FHFB management focus on the 

examination program is essential over the next several years to ensure 

that the reforms are fully implemented and their effectiveness 

evaluated.



We also note that FHFB’s Chair, initiated these changes to the 

examination program under the delegation of authority. While these 

changes hold out the potential for improving FHFB’s examination 

program, the unilateral manner in which they were carried out resulted 

in further disputes among board members. Permitting greater board 

involvement in such key decisions would provide greater opportunity for 

consensus without necessarily delaying any changes. Decisions that have 

the potential to affect the critical means by which FHFB ensures 

FHLBank safety and soundness merit the attention and consideration of 

the full board.



Recommendations:



To ensure full board participation in key administrative decisions that 

have policy implications, such as senior appointments and major 

reorganizations, we recommend that the FHFB board consider a range of 

options that could be implemented within the current delegation of 

authority. These options include the chair (1) notifying, briefing, 

and/or soliciting input from other board members on major 

administrative decisions prior to their implementation and (2) 

submitting key administrative decisions to the board for a vote or 

approval. We also recommend that board members and their staffs hold 

discussions on approaches--including potential revisions to the 

delegation of authority--that would ensure board participation in key 

administrative decisions while preserving the chair’s authority to 

administer the agency on a day-to-day basis.



We also recommend that FHFB fully comply with applicable federal age 

discrimination statutes and regulations in offering settlement 

agreements to employees subject to RIFs.



Agency Comments and Our Evaluation:



We received FHFB’s comments on a draft of this report from the Director 

of the Office of Management and written comments from FHFB board 

members Franz S. Leichter and Allan I. Mendelowitz, which are reprinted 

in appendix IV and V, respectively. We also provided relevant excerpts 

from a draft of this report to the six other financial regulatory 

agencies that we reviewed (SEC, FDIC, NCUA, Fed Board, CFTC, and FCA). 

FCA’s Chair provided written comments, which are reprinted in appendix 

VI. Representatives from all six regulatory agencies that we contacted 

provided oral comments and we received technical comments, which we 

have incorporated as appropriate.



FHFB disagreed that the board should revise the delegation of authority 

to allow for board participation in key administrative decisions. FHFB 

agreed with one of our findings regarding the settlement agreements 

offered to employees subject to the 2002 RIF but disagreed with two 

others. FHFB also commented on the draft report’s findings regarding 

the examination program, public interest director appointments, and 

Schedule C positions. Among other statements, Leichter and Mendelowitz 

agreed with our recommendation regarding the delegation of authority 

and expressed concern about how the agency conducted the RIF. The FCA 

Chairman’s comments related to the number of Schedule C positions that 

are filled at the agency. Representatives from each of the six agencies 

that we contacted agreed with the draft report’s findings regarding 

their agency’s operations. The following summarizes FHFB’s comments 

and, where appropriate, our evaluation for the five report sections: 

(1) the delegation of authority, (2) FHFB’s compliance with age 

discrimination requirements in connection with the RIF, (3) FHFB’s 

examination program, (4) public interest director appointments, and (5) 

Schedule C positions at financial regulatory agencies. We also 

summarize the comments of Leichter, Mendelowitz, and the FCA Chairman.



FHFB Comments and Our Evaluation:



Delegation of Authority:



FHFB noted that at the January 29, 2003, meeting the board had 

considered, as we recommended in the draft report, and rejected a 

proposal to revise the delegation of authority that would have required 

board approval for senior appointments and major reorganizations. FHFB 

stated that a majority of the board believes that vesting broad 

administrative responsibility in the chair is the best method to manage 

the agency’s day-to-day operations. However, we continue to believe 

that full board participation in key administrative decisions is 

essential.



FHFB also made several points to support its view that the board should 

not revise the delegation of authority. First, FHFB stated that the 

current delegation of authority allows individual board members to 

propose items to the board for action. Second, FHFB stated that we did 

not provide sufficient evidence to support the assertion that there was 

tension and conflict among board members regarding the delegation of 

authority. FHFB also stated that Congress intended for tension to exist 

in creating FHFB--due to the divided partisan composition of the board-

-and that such tension can serve a “constructive purpose.” Third, FHFB 

stated that we made an error in figure 1 of the draft report “ . . . in 

asserting that the appointment of senior officials and personnel 

decisions at the Securities and Exchange Commission must be made with 

board approval.” FHFB stated that reorganization and top-level 

appointments at SEC do not require a board vote. In addition, FHFB 

included a lengthy attachment to its official agency comments, which 

has not been included in this report. The attachment discussed a range 

of issues, including a history of the delegation of authority, theories 

on management and delegations of authority at other agencies, and 

information on FHFB’s examination and supervision program for the 

FHLBanks.



Regarding FHFB’s first point, we believe that the provision in the 

delegation allowing board members to call board meetings to challenge 

the chair’s key administrative decisions does not provide for enhanced 

board collegiality and consultation. Rather, the delegation of 

authority allows the chair to make and implement such decisions without 

consulting other board members and requires any board members who 

oppose these decisions to marshal a majority vote to overturn the 

decision. In our view, board member collaboration would be enhanced if 

consultations and votes or approvals took place before key 

administrative decisions were made and implemented. While there is no 

requirement or guarantee that all board members would agree to vote for 

or approve key administrative decisions, full board participation in 

the process could serve to improve the decisions and enhance 

collegiality.



We disagree with FHFB’s second point and believe that this report 

offers significant evidence of tensions and conflicts between board 

members resulting from the delegation. Such tension and conflicts have 

periodically characterized the board member relations over the past 8 

years. We acknowledge that tension and conflict are inevitable at any 

board with divided representation and that such tension can in some 

cases be beneficial. However, we note that at FHFB, unlike most other 

financial regulatory agencies, there is no appropriate process or forum 

for board members to consider key administrative decisions before they 

are made and implemented.



We also disagree with FHFB’s final assertion that our report 

incorrectly described the process for appointing senior officials at 

SEC. The report draft stated that at most other financial regulators 

boards either vote on or must give approval for senior appointments. 

The relevant authority regarding SEC--Reorganization Plan No. 10 of 

1950--states that the commission is responsible for approving senior 

appointments. The commission has established a practice to fulfill this 

responsibility whereby the chair obtains the approval of other 

commissioners prior to making senior appointments. SEC officials agreed 

with our report’s statements regarding the agency’s appointment 

process.



FHFB’s Compliance with Age Discrimination and Other Requirements in 

Connection with the RIF:



FHFB said it agreed with one of our findings regarding the settlement 

agreements but disagreed with two others. FHFB said it concurs that the 

settlement agreements should have advised employees to consult with an 

“attorney” rather than a “representative” prior to signing. However, 

FHFB also stated that the language in the settlement agreements was not 

intended to interfere with EEOC’s enforcement authority. FHFB stated 

that any employee was clearly free to challenge the settlement 

agreement at a later date. FHFB also stated that it disagreed with a 

statement in the draft report that it was required to provide the 

names, ages, and positions of employees who were not selected for 

separation from the agency. FHFB also stated that since it abolished 

all of the positions in the former Office of Communications and the 

Office of Managing Director, OWBPA and EEOC requirements on providing 

information to employees who were offered the settlement agreement did 

not apply. Additionally, FHFB disagreed with a statement in the draft 

report that FHFB’s decision to place staff subject to the RIF on 

administrative leave during the advance notice period was inconsistent 

with OPM regulations. FHFB said that its statute authorizes the agency 

to pay the compensation of its employees without regard to the laws 

affecting federal employees, and that administrative leave is a form of 

compensation.



While FHFB agreed with our findings regarding advising employees to 

consult with an attorney prior to signing the agreements, we need to 

clarify that the problem with the separation agreements was not 

confined to the use of the term “representative” rather than the term 

“attorney.” OWBPA and EEOC regulations require that the employer advise 

the employee in writing to consult an attorney prior to waiving their 

ADEA rights. FHFB’s settlement agreements were deficient in that they 

did not directly advise or recommend that employees consult with an 

attorney prior to signing them. Rather, the settlement agreements used 

more passive language stating that each employee had the opportunity to 

contact a representative to discuss the terms and conditions of the 

agreements, which the courts have held does not meet the statutory 

requirements. If FHFB had replaced the word “representative” in the 

settlement agreement with the word “attorney,” the agreements still 

would not have been consistent with OWBPA and EEOC requirements.



We disagree with FHFB that the settlement agreement provisions 

pertaining to EEOC and information requirements were consistent with 

applicable requirements. EEOC regulations clearly prohibit any 

agreement that interferes with an individual’s right to file a 

complaint with EEOC or affects the EEOC’s rights and responsibilities 

to enforce the ADEA. While FHFB asserts that employees were clearly 

free to challenge the agreements at a later date, the broad language of 

the settlement agreement states that employee agrees not to file a 

complaint or appeal with the EEOC. Such a broad prohibition could deter 

an individual from contesting the agreement and the validity of the 

waiver of ADEA rights. Additionally, the draft report stated that FHFB 

did not provide information on the job titles and ages of staff offered 

settlement agreements to all such staff. The draft report did not state 

that FHFB should have provided such information for staff who were not 

subject to separation. There is also no requirement that employers 

provide names of employees, and the draft report did not state that 

FHFB should have done so. Nonethless, FHFB’s failure to provide 

information on the job titles and ages of employees subject to the RIF 

to all such employees was inconsistent with EEOC regulations. While the 

EEOC regulations define the scope of the information requirement, the 

regulations do not suggest that when all of the positions in a 

particular office are eliminated, no information needs to be supplied. 

The purpose for providing the information is for employees to have the 

opportunity to assess the viability of an age discrimination claim and 

whether or not to waive their rights to pursue such a claim. FHFB 

employees were not provided with the information necessary to make such 

a decision.



Regarding FHFB’s comments on placing staff on administrative leave, we 

have added language to the report stating that FHFB believes it has 

statutory authority to disregard OPM regulations requiring staff to be 

kept on active status during the advance notice period. However, we 

note that the scope of FHFB’s authority and whether it appropriately 

supercedes OPM’s RIF regulations has not been established.



FHFB’s FHLBank Examination Program:



FHFB stated that Chair Korsmo initiated significant changes to enhance 

the capabilities of the agency’s FHLBank examination program and that 

the draft report did not sufficiently recognize that he was responsible 

for these initiatives. FHFB stated that at the start of Korsmo’s tenure 

in December 2001, the agency’s Office of Supervision was understaffed 

and insufficiently focused on the FHLBanks’ risk assessment processes, 

internal control systems, and systems of corporate governance. FHFB 

also listed the steps that the Chair initiated to improve supervision, 

including hiring experienced management for OS and increasing the 

number of examiners. FHFB also stated that while it agrees with our 

assertion that these changes have the potential to improve the agency’s 

examination program, it believes that the changes have already resulted 

in significant progress.



We agree that Chair Korsmo has initiated important steps to improve its 

examination program and have added language to the report describing 

these initiatives. However, we continue to believe that additional time 

and management oversight is needed to ensure that this critical FHLBank 

examination function is improved.



Public Interest Director Appointments:



FHFB stated that the draft report had a narrow focus on the political 

contributions of FHLBank public interest directors and that this narrow 

focus resulted in an incomplete portrayal of the selection process, 

recent improvements in that process, and the critical roles played by 

public interest directors. FHFB also stated that the draft report’s 

focus called into question the integrity of the appointment process and 

that political contributions are a determining factor in the 

appointment process. FHFB stated that public interest directors are now 

appointed in public votes and that the Chair instituted new criteria 

for the selection of public interest directors. FHFB also noted that 

the board voted unanimously to approve 28 public interest directors at 

the January 29, 2003, board meeting.



We were asked to provide an analysis of the political contributions of 

public interest directors prior to their initial appointments. We did 

not conduct a broader review of the appointment process or the 

qualifications and capabilities of public interest directors. Our 

review was not intended to call into question the appointment process 

or the integrity or qualifications of individual public interest 

directors. We have added language to this report discussing the Chair’s 

criteria for appointing public interest directors and the January 29, 

2003, board meeting.



Schedule C Positions:



FHFB noted that the report did not identify any Schedule C practices at 

FHFB that violated OPM rules and that Chair Korsmo has instituted 

changes to correct past practices that improperly categorized employees 

who should have had Schedule C appointments. FHFB stated that all of 

the agency’s Schedule C officials serve as confidential advisers to 

board members. FHFB also reiterated that the small size of the agency 

serves as an appropriate basis for assigning its public and 

congressional affairs functions to the Chair’s personal staff.



Comments of Board Members Leichter and Mendelowitz:



In their comments, Leichter and Mendelowitz said that because the FHFB 

board did not consider or vote on an agency response to our draft 

report, there is no official agency response to the report. We have not 

attempted to resolve this dispute among FHFB officials, and we treat 

the response from FHFB’s Director of Management as the agency’s 

official response.



Regarding the major issues discussed in the draft report, Leichter and 

Mendelowitz made the following comments:



* Delegation of Authority: Leichter and Mendelowitz stated that the 

delegation of authority (1) resulted in conflicts between board 

members; (2) was contrary to FHFB’s authorizing legislation, which 

vests agency management in the board rather than the chair; and (3) was 

“anachronistic” because it was enacted when the board had a part-time 

membership. In response to a comment from Leichter and Mendelowiz 

regarding changes that the FHFB board made to the delegation of 

authority in 1993, we have added language to the report.



* FHFB Actions in Connection with the RIF: Leichter and Mendelowitz 

said that they were “deeply concerned” about the way in which FHFB 

conducted the RIF and expressed concern about the elimination of the 

Office of Managing Director because the action impeded communication 

between board members and agency staff. They also raised concern that 

the draft report did not discuss other procedures that FHFB followed in 

conducting the RIF. Such an analysis was outside the scope of this 

review.



* Public Interest Director Appointments: Leichter and Mendelowitz said 

that the appointment of public interest directors has become 

increasingly “political,”and they expressed concerns that public 

interest directors lack expertise in the FHLBanks increasingly 

sophisticated financial practices. As discussed previously, our review 

was limited to an analysis of public interest director political 

contributions prior to their initial appointments.



* Schedule C Practices: Leichter and Mendelowitz questioned whether it 

was “appropriate” for one board member’s staff to perform functions 

that the former Office of Communications previously performed for the 

entire board. While the FHFB Chair’s staff currently performs these 

functions, we note that at other agencies (SEC, CFTC, NCUA) the chairs 

can appoint and remove the Schedule C officials who run public or 

congressional affairs offices. Therefore, it is not clear that the FHFB 

Chair exercises greater control over these functions than is the case 

at the other agencies.



Comments of the FCA Chairman:



The FCA Chairman stated that of the agencies’ 12 Schedule C positions, 

6 are currently held by career staff.



We will send copies of this report to Chairman of the Senate Committee 

on Banking, Housing and Urban Affairs; the Chairman of the House 

Financial Services Committee; and the Ranking Minority Member of the 

Subcommittee on Capital Markets, Insurance, and Government Sponsored 

Enterprises of the House Committee on Financial Services. We will also 

send copies to FHFB, NCUA, FCA, CFTC, SEC, FDIC, and the Fed Board. We 

will also make copies available to others upon request. In addition, 

this report will be available at no charge on the GAO Web site at 

http:// www.gao.gov.



Please contact Mathew J. Scire at (202) 512-6794 if you or your staff 

have any questions concerning this report. Key contributors to this 

report were Rachel M. DeMarcus, M’Baye Diagne, Nadine Garrick, Ayeke 

Messam, Marc W. Molino, Andy Pauline, Wesley M. Phillips, Mitchell B. 

Rachlis, and Barbara M. Roesmann.



Thomas J. McCool

Managing Director Financial Markets 

 and Community Investment:



Signed by Thomas J. McCool:



[End of section]



Appendixes:



Appendix I: Objectives, Scope, and Methodology:



As discussed with your staff, our report objectives are to (1) compare 

the Federal Housing Finance Board (FHFB) chair’s administrative 

authorities to those of the chairs of other financial regulators and 

discuss the basis for that authority; (2) assess FHFB’s compliance with 

selected applicable statutes and procedural requirements in connection 

with a reduction-in-force (RIF) that was carried out as part of an 

agency reorganization announced on August 7, 2002; (3) assess FHFB’s 

progress in enhancing its Federal Home Loan Bank (FHLBank) safety and 

soundness examination program; (4) provide data showing the political 

contributions of FHLBank public interest directors prior to their 

appointments; and (5) compare FHFB’s use of Schedule C appointments and 

the organization of its public and congressional affairs functions with 

the practices of other financial regulatory agencies.



To study the source of the FHFB chairs’ administrative authorities and 

how they compare to those of other financial regulators, we reviewed 

the Federal Home Loan Bank Act, the Financial Institutions Reform, 

Recovery, and Enforcement Act of 1989, and FHFB’s delegation of 

authority to its chair. We also reviewed the legislation, regulations, 

delegations of authority, and other legal documents that govern or 

describe the scope and limitations of each chair’s authority at six 

other selected financial regulators.[Footnote 60] We interviewed 

officials from each of the selected financial regulators, including 

former FHFB officials, to obtain their views on the authorities of 

chairs and board members at each of these entities. Using this 

information, we compared the FHFB chairs’ administrative authorities to 

those of the selected financial regulators.



To study FHFB’s compliance with required Reduction-in-Force (RIF) and 

other procedures, we reviewed the Age Discrimination in Employment Act, 

as amended, the Older Workers Benefits Protection Act, applicable Equal 

Employment Opportunity Commission (EEOC) and Office of Personnel 

Management (OPM) regulations, and case law. We also contacted senior 

FHFB officials regarding the RIF. Our review did not include an 

analysis of the “bumping rights” procedures that FHFB followed in 

carrying out the RIF.[Footnote 61]



To study FHFB’s progress in enhancing its FHLBank safety and soundness 

examination program, we assessed whether FHFB addressed recommendations 

about its examination program that we made in a 1998 report.[Footnote 

62] We reviewed 1999 to 2001 examination reports for the 12 FHLBanks. 

We also interviewed FHFB officials, as well as officials at OFHEO, to 

which we compared FHFB’s examination program.



To study the data showing the political contributions of FHLBank public 

interest directors prior to their appointments, we obtained public 

interest director appointment data from FHFB for 1998 to 2002 and 

contribution data from the Center for Responsive Politics (CRP) for 

1990 to 2002. CRP organizes and provides political contribution data 

that is initially reported to the Federal Election Commission (FEC). To 

ensure a standard comparison, we determined whether directors made a 

political contribution in the 8-year period prior to their appointment. 

[Footnote 63] We matched and merged the two data sets and analyzed the 

data to determine the number of public interest directors who made 

contributions prior to their initial appointments. We also collected 

data from Fannie Mae and Freddie Mac on the names and appointment dates 

of board members who received their initial presidential appointments 

from 1998 through 2002. We obtained data from CRP to determine the 

Fannie Mae and Freddie Mac directors’ political contributions in the 8-

year period prior to their appointments.



We took several steps to assess the reliability of the CRP data and 

concluded that the data were sufficiently reliable for our purposes. 

First, we interviewed CRP officials to determine their data management 

procedures and the approach that they followed to match the list of 

public interest directors that we provided to the CRP contribution 

database. Second, we reviewed the matched data set that CRP provided 

and corrected erroneous matches between directors and contributors. 

Third, in performing our analysis, we conducted basic tests on the data 

we used. In performing our analysis, however, we did not verify the 

accuracy of the FEC political contribution data on which CRP records 

are based. Our review did not include an analysis of FHFB’s appointment 

process or the integrity and qualifications of individual board 

members.



To study FHFB’s use of Schedule C appointments and organization of the 

public and congressional affairs functions and compare it with the 

other financial regulatory agencies, we interviewed agency officials at 

each of the selected financial regulators, and reviewed documents that 

described the allocation of Schedule C appointments, as well as the 

management and staffing structure of the agencies’ public and 

congressional functions.



We conducted our review in Washington, D.C., San Francisco, and Seattle 

from April 2002 through February 2003 in accordance with generally 

accepted government auditing standards.



[End of section]



Appendix II: Administrative Powers of Financial Regulatory Chairs:



We compared FHFB to six other regulatory boards and commissions. We 

reviewed each board or commission’s statute and policies relating to 

the administrative authority of the chair. We focused on two 

administrative areas: appointment of senior officials and 

reorganization decisions. In cases where the chair is authorized to 

make key administrative decisions without board approval, we also 

determined whether board members had authority to review decisions made 

by a chair in these circumstances.



We reviewed the following seven agencies:



* Commodity Futures Trading Commission (CFTC),



* Farm Credit Administration (FCA),



* Federal Deposit Insurance Corporation (FDIC),



* Federal Housing Finance Board (FHFB),



* Board of Governors of the Federal Reserve System (Fed Board),



* National Credit Union Administration (NCUA), and:



* Securities and Exchange Commission (SEC).



Commodity Futures Trading Commission:



The commission consists of five members, appointed by the President 

with the advice and consent of the Senate, and each serve staggered 5-

year terms.



General Administrative Powers of the Chair:



According to the statute that established CFTC, the chair is the chief 

administrative officer. Executive and administrative functions are 

generally exercised solely by the chair, according to budget 

categories, plans, programs, and priorities established and approved by 

the commission.



Key Administrative Powers of the Chair:



Appointment of Senior Officials: According to the statute establishing 

CFTC, the chair’s appointment of heads of major administrative units is 

subject to approval of the commission.



Reorganizations: While the chair is generally authorized to reorganize 

the staff of the agency pursuant to his or her power over executive and 

administrative functions, as a practice the commission votes on agency 

reorganizations.



Farm Credit Administration:



The board consists of three members, appointed by the President with 

the advice and consent of the Senate, and each serve staggered 6-year 

terms.



General Administrative Powers of the Chair:



The President designates one of the members as chairman, and the 

chairman serves as the agency’s chief executive officer (CEO). The 

powers of the chair as CEO that are necessary for day-to-day management 

may be exercised and performed by the chairman through such other 

officers and employees of the FCA as the chair shall designate. Policy 

Statement 64, originally adopted by the board of FCA in 1994 and 

revised as recently as September 24, 1999, provides rules for the 

transaction of business (Rules) and operational responsibilities of the 

board.[Footnote 64]



Key Administrative Powers of the Chair:



Appointment of Senior Officials: According to the statute that 

established the FCA, the appointment of the heads of major 

administrative divisions is subject to the board’s approval. Under 

Policy Statement 64, the board interprets “heads of major 

administrative divisions” to mean the chief operating officer and 

career office directors. However, in some cases, such as the Director 

of the Office of Congressional and Public Affairs, the chair can 

appoint Schedule C officials to run these offices.



Reorganizations: Under Policy Statement 64, the board approves the FCA 

organizational chart down to the office level along with relevant 

functional statements for each office. Under Policy Statement 64, the 

authority to make organizational changes within any division rests with 

the CEO.



Review of Decisions Made by Chair:



As noted in Article V and Article IX of Policy Statement 64, Special 

Meetings of the board may be called:



1.	 by the Chairman;



2.	 by any two members; or:



3.	 if there is at the time a vacancy on the board, by any member.



Any call for a Special Meeting shall set forth the business to be 

transacted and shall state the place and time of such a meeting. Except 

with the unanimous consent of all members, no business shall be brought 

before a Special Meeting that has not been specified in the notice of 

call of such a meeting.



Section 1. The business of the Board shall be transacted in accordance 

with these Rules (Policy Statement 64) as the same may be amended from 

time to time: Provided, however, that upon agreement of at least two 

members convened in a duly called meeting, the Rules may be waived in 

any particular instance, except that action may be taken on items at a 

Special Meeting only in accordance with Article V, Section (3) b, 

hereof.



Section 2. These Rules may be changed or amended by the concurring vote 

of at least two members upon notice of the proposed change or 

amendments having been given at least 30 days before such vote.



Federal Deposit Insurance Corporation:



The President with the advice and consent of the Senate appoints three 

members of the five-member board for a term of 6 years. In addition to 

the three appointive directors, there are two ex officio members of the 

FDIC board: the Comptroller of the Currency and the Director of the 

Office of Thrift Supervision.



General Administrative Powers of the Chair:



One of the appointive directors shall be designated by the President, 

with the advice and consent of the Senate, to serve as chair of the 

board for a term of 5 years. The chair serves as the CEO. The board has 

delegated to the chair the authority to manage the FDIC’s day-to-day 

operations and the general powers and duties usually vested in the 

office of the CEO of a corporation.



Key Administrative Powers of the Chair:



Appointment of Senior Officials: A delegation of authority to chair, 

approved on January 29, 2002, gave authority to the chair to appoint 

and remove senior officers.



Reorganizations: Under the delegation of authority, the chair has 

authority to reorganize the agency.



Challenging Administrative Decisions Made under Delegation:



Two or more board members may initiate a review of any decision made 

under the delegation of authority.



Federal Housing Finance Board:



The board consists of four members appointed by the President with the 

advice and consent of the Senate and each serve staggered 7-year terms, 

and the fifth member is an ex-officio member, the Secretary of Housing 

and Urban Development.



General Administrative Powers of the Chair:



The President designates an appointed director as chair. The board has 

adopted a delegation of authority that authorizes the chair to effect 

the overall management, functioning, and, organization of the board.



Key Administrative Powers of the Chair:



Appointment of Senior Officials: Under the delegation of authority, a 

chair can appoint agency personnel without a board vote or obtaining 

board approval.



Reorganizations: Under the delegation of authority, a chair can 

reorganize the agency without a board vote or consent.



Challenging Administrative Decisions Made under Delegation:



Under the delegation of authority, the chair must call a special 

session of the board to consider any matter of business on the request 

of any two or more board members.



Board of Governors of the Federal Reserve System:



The board consists of seven members appointed by the President with the 

advice and consent of the Senate. The full term of a board member is 14 

years, and the seven terms are staggered so that one expires in each 2-

year period.



General Administrative Powers of the Chair:



The chair, subject to board supervision, serves as its “active 

executive officer.”:



Key Administrative Powers of the Chair:



Appointment of Senior Officials: The board votes on the appointment of 

senior officials.



Reorganizations: The board votes on major administrative 

reorganizations, which are defined as those that involve changing 

officers (appointing or removing an officer).



National Credit Union Administration:



The NCUA has a full-time, three-member board, which is appointed by the 

President with the advise and consent of the Senate.



General Administrative Powers of the Chair:



The Federal Credit Union Act provides that the chair is the 

spokesperson for the board and implements policies and regulations 

adopted by the board.



Key Administrative Powers of the Chair:



Appointment of Senior Officials: The board votes on the appointment of 

senior officials. However, in some cases, such as the directors of the 

Office of Congressional and Public Affairs, the chairs can appoint 

Schedule C officials to run it.



Reorganizations: The board votes on reorganizations of the agency.



Securities and Exchange Commission:



Five members serve staggered 5-year terms, and are appointed by the 

President with the advice and consent of the Senate.



General Administrative Powers of the Chair:



There is no statutory reference to the selection of a chair. However, 

under section 3 of the Reorganization Plan No. 10 of 1950, the function 

of the commission, with respect to choosing a chair from among the 

members was transferred to the President. The Reorganization Plan also 

transferred to the chair from the commission the administrative and 

executive functions of the commission, including appointment and 

supervision of personnel, the distribution of business, and the use and 

expenditure of funds. Appointment by the chair of the heads of the 

major administrative units is subject to the approval of the 

commission. However, in some cases, such as the Director of the Office 

of Public Affairs, the chair can appoint Schedule C officials to run 

these offices.



Key Administrative Powers of the Chair:



Appointment of Senior Officials: Under Reorganization Plan No. 10 of 

1950, the board approves the appointment of senior officials.



Reorganizations: Under Reorganization Plan No. 10, the chair can 

reorganize the agency.



[End of section]



Appendix III: Waivers of Rights Under the Age Discrimination in 

Employment Act:



While employees generally may agree to waive rights to pursue 

employment related claims if the waiver is knowing and voluntary, 

special considerations apply to waivers of rights under the Age 

Discrimination in Employment Act (ADEA).[Footnote 65] Title VII of the 

Civil Rights Act of 1964 (Title VII)[Footnote 66] does not include age 

as a basis for illegal discrimination in the workplace. However, in 

1967, Congress enacted the ADEA to promote the employment of older 

persons based on their ability rather than age, to prohibit arbitrary 

age discrimination, and to help employers and employees find ways of 

meeting problems arising from the impact of age on employment. The ADEA 

forbids arbitrary discrimination against workers on the basis of age in 

hiring, promotion, terms of employment and discharge. The ADEA was 

enacted with characteristics of both Title VII and the Fair Labor 

Standards Act of 1928 (FLSA);[Footnote 67] while Title VII’s 

substantive prohibitions on discrimination were included, the 

enforcement mechanisms of FLSA were also incorporated.



This structure caused controversy over waivers of rights under ADEA 

because Title VII waivers are treated differently from FLSA waivers. 

Title VII rights may be waived without government supervision so long 

as the waiver is knowing and voluntary.[Footnote 68] In contrast, 

rights provided by the FLSA cannot be waived without government 

supervision. Waivers must be supervised by the Secretary of Labor or 

under a federal court-supervised settlement of a lawsuit filed pursuant 

to FLSA.



On August 27, 1987, EEOC issued a final rule that allowed unsupervised 

waivers if the waiver was knowing and voluntary and provided that a 

valid ADEA waiver may not release prospective claims and may not be in 

exchange for consideration that includes employee benefits to which the 

employee was already entitled.[Footnote 69] The EEOC rule also listed 

several factors as being relevant to determining whether a waiver is 

knowing and voluntary. These factors included whether the employee was 

encouraged to consult with an attorney. However, Congress suspended the 

rule, citing concerns that the rule was contrary to public policy and, 

in the spring of 1988, held hearings concerning waivers of ADEA rights 

and EEOC’s regulation.



In October 1990, the Older Workers Benefit Protection Act (OWBPA) 

amended ADEA to add specific requirements for releases of ADEA claims. 

The legislative history of OWBPA provides that the legislation is 

intended to protect individuals covered by ADEA, and it further 

provides that the legislation establishes minimum requirements that 

must be satisfied before a court can proceed to determine factually 

whether a waiver was knowing and voluntary. All of the requirements are 

necessary independent of the knowing and voluntary considerations. The 

informational requirements are designed to permit older workers to make 

more informed decisions and to determine whether an employment 

termination program gives rise to a valid claim under ADEA.



OWBPA requires that no individual may waive any right or claim under 

ADEA unless the waiver is knowing and voluntary. OWBPA specifies the 

minimum requirements for a knowing and voluntary release of claims 

under ADEA. The waiver must, at a minimum, comply with the following 

requirements:



1.	 Be written in a manner calculated to be understood by the average 

individual eligible to participate,



2.	 Specifically refer to rights and claims arising under ADEA,



3.	 Not waive rights and claims that may arise after the date the waiver 

is executed;



4.	 Provide for consideration in addition to anything of value to which 

the individual already is entitled,



5.	 Advise the individual in writing to consult with an attorney prior 

to executing the waiver,



6.	 Give an individual a period of at least 21 days within which to 

consider the agreement, and:



7.	 Provide that the individual may revoke the agreement for a period of 

at least 7 days following the agreement’s execution.[Footnote 70]



A waiver in settlement of a charge filed with EEOC or a court action 

must meet the first five factors listed above, and the individual must 

be given a reasonable period of time within which to consider the 

agreement. Additional informational requirements apply in the case of a 

waiver requested in connection with an exit incentive or other 

employment termination program offered to a group or class of 

employees. The employer must inform the individual in writing as to the 

following:



1.	 Any class or group of individuals covered by the program, and:



2.	 The job titles and ages of all individuals, eligible or selected for 

the program, and the ages of all individuals in the same job 

classification or organizational unit who are not eligible or selected 

for the program.



In addition, the individual must be given at least 45 days within which 

to consider the agreement. These additional requirements were added 

because, in the case of group termination programs, additional 

protections are required for individuals from whom a waiver is sought. 

More time is provided to weigh options, understand the program, and 

consult with an attorney. Employers are required to provide detailed, 

written information describing the group termination program.



The OWBPA also mandates that a waiver not affect EEOC’s rights and 

responsibilities to enforce ADEA and further states that “[no] waiver 

may be used to justify interfering with the protected right of an 

employee to file a charge or participate in an investigation or 

proceeding conducted by the Commission.” [Footnote 71]



In June 1998,[Footnote 72] EEOC published final regulations that 

provide guidance on all waivers of ADEA rights and claims, regardless 

of whether the employee is employed in the private or public sector, 

including employment by the United States.[Footnote 73]



OWBPA Compliance Requires Strict Adherence to Terms of Statute:



The requirements of the OWBPA were enacted to set out threshold 

standards for waivers of ADEA rights. Courts applying the requirements 

of OWBPA have found that strict adherence is necessary. The Supreme 

Court considered the operation of the ADEA requirements in Oubre v. 

Entergy Operations, Inc., 522 U.S. 422, 118 S.Ct. 838 (1998), where the 

Court determined that an employee who executed a waiver that failed to 

meet the requirements of OWBPA could bring an ADEA claim without first 

repaying the benefits she had received in exchange for the release. The 

Court described the purpose of the OWBPA as protecting the rights and 

benefits of older workers, and observed that:



“The OWBPA implements Congress’ policy via a strict, unqualified 

statutory stricture on waivers, and we are bound to take Congress at 

its word. Congress imposed specific duties on employers who seek 

releases of certain claims created by statute. Congress delineated 

these duties with precision and without qualification: An employee ‘may 

not waive’ an ADEA claim unless the employer complies with the statute 

. . . The OWBPA governs the effect under federal law of waivers or 

releases on ADEA claims and incorporates no exceptions or 

qualifications.”[Footnote 74]



Other courts have used similar language in describing the operation of 

OWBPA. “Since the OWBPA establishes minimum or threshold requirements, 

absolute technical compliance with its provisions is required. The 

absence of even one of the OWBPA’s requirements invalidates a waiver.” 

Butcher v. Gerber Products Company, 8 F. Supp. 2d 307, 314 (S.D.N.Y. 

1998). “Under the OWBPA, a release cannot be deemed knowing and 

voluntary unless all of the requirements of the OWBPA have first been 

satisfied.” Collins v. Outboard Marine Corp., 808 F.Supp. 590, 594 

(N.D. Ill. 1992). “When an employee signs a purported release of claims 

arising under the ADEA, that release will not bar an ADEA claim unless 

the release strictly complies with the statutory requirements of the 

OWBPA.” Thiessen v. General Electric Capital Corporation, 232 F.Supp.2d 

1230, 1233 (D. Kan. 2002).



Waiver of the Right to File an EEOC Complaint:



While an employee can waive the right to recover from an employer based 

on a claim of age discrimination under ADEA, OWBPA provides that a 

waiver may not affect the EEOC’s rights and responsibilities to enforce 

ADEA. In addition, no waiver may be used to justify interfering with 

the protected right of an employee to file a charge or participate in 

EEOC investigations or proceedings.[Footnote 75] EEOC regulations also 

provide that no waiver agreement may include any provision imposing any 

limitation adversely affecting any individual’s right to file a charge 

or complaint, including a challenge to the validity of the waiver, with 

the EEOC.[Footnote 76]



According to EEOC guidance, the OWBPA language is evidence that 

Congress reaffirmed the public policy against interference with EEOC 

enforcement efforts. EEOC’s guidance cites the legislative history of 

OWBPA, which states that the provision is intended as a clear statement 

of support for the principle that the elimination of age discrimination 

in the workplace is a matter of public as well as private interest, and 

that no waiver agreement may be permitted to interfere with the 

achievement of that goal.[Footnote 77]



In connection with the OWBPA’s statutory prohibition, the Senate 

Committee report expresses support for the holding and reasoning of the 

Fifth Circuit in EEOC v. Cosmair, Inc., 821 F. 2d 1085 (5TH Cir. 

1987).[Footnote 78] In Cosmair, the court found that a waiver of the 

right to file a charge with the EEOC is void as against public policy 

in part because the public interest in private dispute settlement is 

outweighed by the public interest in EEOC:



enforcement of ADEA. Allowing the filing of charges to be obstructed by 

enforcing a waiver of the right to file a charge could impede EEOC 

enforcement of the civil rights laws. The court found that the EEOC 

depends on the filing of charges to notify it of possible 

discrimination. The court determined that an employer and an employee 

cannot agree to deny to the EEOC the information it needs to advance 

the public interest in preventing employment discrimination. However, 

an employee can waive the underlying cause of action and the right to 

recover from the employer in a lawsuit.



Employee Must be Advised in Writing to Consult an Attorney:



Both the OWBPA and EEOC regulations provide that an employee must be 

advised in writing to consult an attorney. Courts analyzing waivers 

have applied the requirement strictly. In American Airlines v. Cardoza-

Rodriguez, 133 F. 3d 111 (1ST Cir. 1998), the court considered a waiver 

of rights offered to certain employees in connection with an early 

retirement program. The First Circuit found that language contained in 

the release that stated “I have had reasonable and sufficient time and 

opportunity to consult with an independent legal representative of my 

own choosing before signing this . . . [release]” was insufficient 

because employer did not advise employees to consult with counsel 

before executing the release.



In Thiessen, the court considered a release stating “the Company 

advised the employee in writing to consult with a lawyer before signing 

this Agreement.” The court found that this language suggests that the 

Company, at some previous time, advised the employee to consult with an 

attorney and determined that this language, standing alone, does not 

comply with OWBPA’s requirement that an employer advise the employee in 

writing to consult an attorney prior to executing the release. The 

court also said, however, that the employee could have complied with 

the statute by providing the employee with prior written advice so that 

the statement in the release was factually accurate.



In Cole v. Gaming Entertainment, L.L.C., 199 F. Supp. 2d 208 (D. Del. 

2002), the court considered a provision in a written release of 

employment claims that the “[e]mployee acknowledges that he/she has 

been advised to consult with an attorney prior to executing this 

Agreement.” The court found that the language was insufficient to 

satisfy the requirements of ADEA. Citing American Airlines, the court 

found that the passive language used by the release was insufficient 

under current case law. However, the court found that the release 

language might have met OWBPA standards if the employer’s 

representatives had advised the employee of his right to counsel as 

contemplated by the release language.



OWBPA Informational Requirements:



The OWBPA provides that a waiver cannot be considered knowing and 

voluntary unless, at a minimum, if the waiver is requested in 

connection with an exit incentive or other employment termination 

program offered to a group or class of employees, the employer informs 

the individuals in writing in a manner calculated to be understood by 

the average individual eligible to participate, as to (1) any class, 

unit, or group of individuals covered by the program; any eligibility 

factors for such program; and any time limits applicable to such 

program and (2) the job titles and ages of all individuals eligible or 

selected for the program and the ages of all individuals in the same 

job classification or organizational unit who are not eligible or 

selected for the program.[Footnote 79]



The EEOC regulations provide that “other employment termination 

program” as set out in OWBPA usually means a group or class of 

employees who were involuntarily terminated and who are offered 

additional consideration in return for their decision to sign a waiver. 

The regulations go on to state that the existence of a program will be 

determined based upon the facts and circumstances of each case. A 

“program” exists when an employer offers additional consideration for 

the signing of a waiver pursuant to an exit incentive or other 

employment termination (e.g., a reduction in force) to two or more 

employees. The regulations also state that typically, an involuntary 

termination program is a standardized formula or package of benefits 

that is available to two or more employees. The terms of the program 

are generally not subject to negotiation between the parties. The 

regulations make clear that the number and identity of employees who 

must be provided with the information will depend on how the employer 

chose persons who would be offered consideration for signing a waiver. 

In some cases, the information requirement extends to all employees 

within a certain job category; and in some cases, extends to all 

employees within a particular division or to all employees in the 

employer’s facility.



The legislative history of OWBPA indicates that group termination 

programs raise additional issues and require additional protection for 

individuals from whom a waiver is sought. These informational 

requirements are designed to permit older workers to make more informed 

decisions in group termination programs. The employees affected by 

these programs have little or no basis to suspect that action is being 

taken based on their individual characteristics. The Senate 

Report[Footnote 80] explains that the principal difficulty encountered 

by older workers in these circumstances is their inability to determine 

whether the program gives rise to a valid claim under ADEA and that the 

need for adequate information and access to advice before waivers are 

signed is especially acute.



[End of section]



Appendix IV: Comments from the Federal Housing Finance Board:



[See PDF for image]



[End of first page]



The following comments are made in response to particular questions 

raised in the draft report.



I. DELEGATION OF AUTHORITY TO THE CHAIRMAN:



The section of the draft report entitled “FHFB Chair Has Greater 

Authority to Make Key Administrative Decisions Than the Chairs of Most 

Other Financial Regulators” recommends that the Finance Board consider 

a revision to the current delegation. That consideration was given at 

the January 29, 2003, public meeting of the Board when two Directors 

proposed a new delegation placing some limitations on the 

administrative responsibility now granted the chair. The proposal was 

discussed at length and rejected by the Board.



As demonstrated by the Board’s January 29 discussion and vote, the 

current delegation of authority does not prevent any Director from 

proposing items to the Board for action. The Board’s ratification of 

the existing delegation reflects a belief on the part of the majority 

of the current Board that investing in the Chairman broad 

responsibility to administer the agency is the best method of managing 

the Finance Board’s day-to-day operations.



The GAO draft report asserts that the delegation of authority that has 

been in place at the Finance Board since 1990 causes “tension” and 

contributes to conflicts among Board members. It is not possible to 

constructively comment on GAO’s observation because no support is 

offered for the assertion. Neither is evidence offered that a different 

delegation would reduce “tension.” The GAO merely notes the existence 

of conflict and refers to individual Director disagreements with 

actions taken by the current chairman and previous chairmen.



It should be noted in this context that Congress created the Board in 

1989 as a five-member body with divided partisan representation. 

Clearly, Congress anticipated or even intended “tension” to exist 

within the Board and for that “tension” to serve a constructive 

purpose.



In addition, the GAO draft report makes a variety of comparisons of the 

FHFB’s delegation of authority to those of other financial regulatory 

agencies. In this discussion, the GAO makes an error of fact in Table 

l, asserting that the appointment of senior officials and personnel 

decisions at the Securities and Exchange Commission must be made with 

board approval. This is not the case. Current staff and former SEC 

Commissioner and Acting Chairman Laura:



Unger confirm that reorganization and top-level staffing decisions are 

made by the chairman, without a Commission vote. (See Appendix 1, which 

discusses in depth research on this issue conducted by FHFB staff.):



Finally, on page 46 of the draft report, the GAO mistakenly asserts 

that the FHFB’s delegation of authority defines the titles of senior 

officers.



II. PROGRESS MADE TO IMPROVE FHLBank SUPERVISION:



The section of the draft report entitled “FHFB Has Announced Plans to 

Improve Its FHLBank Examination Program” is correct in concluding that, 

prior to appointment of the current FHFB Chairman in December 2001, 

inadequate progress had been made in addressing the recommendations of 

GAO’s 1998 report. As of December 2001, the Office of Supervision was 

understaffed and insufficiently focused on the Banks’ risk assessment 

processes, internal control systems, and systems of corporate 

governance.



On assuming office, Chairman Korsmo immediately set out to rectify 

those problems by bringing new leadership to the Office of Supervision, 

allocating additional resources for the Office of Supervision, and 

making organizational changes designed to provide more streamlined and 

responsible management. These changes are already demonstrating real 

results and are outlined in Appendix 2.



The first priority in improving and enhancing the Finance Board’s 

examination and supervision functions was to bring experienced and 

accomplished leadership to the Office of Supervision. A national search 

was conducted which resulted in the selection of a new director and a 

new deputy director - who between them have more than 40 years of 

federal bank regulatory experience.



The second priority was to enhance the resources allocated to the 

supervision function. Since December 2001, the FHFB has hired five 

experienced examiners, increasing the examination staff to 14 full-time 

bank examiners. The increased staffing has already allowed the Office 

of Supervision to conduct more thorough examinations, establish 

standards for more timely communication of examination results to the 

Banks, and move away from “point-in-time” examinations and toward 

regular, ongoing safety and soundness supervision of the FHLBanks.



The third priority was to focus supervision efforts on the Banks’ risk 

management practices and controls. Examinations previously emphasized 

compliance with Finance Board regulations, rather than assessing a 

Bank’s risk and the quality of its risk management.



The fourth priority was to improve the coordination between bank 

supervision policy and bank supervision. The reorganization in 2002 

materially improved the coordination between policy formation and bank 

supervision and has had the collateral benefit of streamlining and 

flattening organizational structure.



The fifth priority was to improve assessments of board governance at 

the FHLBanks. To that end, an interdisciplinary team of an attorney, a 

financial analyst, and two experienced bank examiners was deployed to 

review the effectiveness of the program of board governance at each of 

the 12 FHLBanks. Those targeted reviews began in September 2002. To 

date, targeted board governance reviews have been completed at 10 of 

the 12 Banks. A final report on board governance in the FHLBanks should 

be available in March of this year. The board governance audit plan is 

attached as Appendix 3.



The sixth priority was to enhance off site analysis of the FHLBanks. 

The Office of Supervision hired a senior risk analyst and a senior 

mortgage analyst to oversee supervision of interest rate and credit 

risk of the Banks. OS also designated an analyst for each of the 12 

Banks. These analysts are responsible for maintaining a current record 

of that Bank’s financial results and trends and working with the 

Examiners in Charge (EIC) of the Bank to identify concerns that warrant 

attention at on-site examinations. The analysts also regularly update 

an internal profile analysis maintained on each of the 12 Banks.



Enhancing the program of bank supervision at the FHFB is the agency’s 

overriding objective. While the agency agrees with the GAO’s assertion 

that recent changes at the FHFB have the “potential” to improve the 

FHFB’s examination program, the FHFB also believes that the changes 

have already yielded results and significant progress has been made in 

addressing shortcomings in the Finance Board’s bank supervision 

program.



III. REORGANIZATION TO ENHANCE RESOURCES OF OFFICE OF SUPERVISION:



The portion of the draft report entitled “Certain FHFB Reduction-In-

Force Actions Were Not Fully Consistent with Applicable Federal 

Statutes and Regulations” implies a conclusion not supported by the 

text of the report.



The draft report does not identify any deficiencies in the planning or 

execution of a Reduction-In-Force undertaken by the Finance Board in 

August 2002. Furthermore, analysis included in the report does not take 

into account the compensation flexibilities provided by statute to the 

Federal Housing Finance Board.



The Reorganization:



In August 2002, the agency implemented a reorganization that 

accomplished two critical objectives. First, all professional and 

technical expertise required to carry out both examinations and ongoing 

supervision of the FHLBanks was consolidated under management of the 

Director of Supervision. Second, additional staffing was allocated to 
the 

Office of Supervision by shifting resources from low-priority and low-

workload support positions and eliminating a redundant executive layer. 

As a result, the number of bank examiners has grown from eight to 14 

and is slated to further increase to 24 by the end of the calendar 
year. 

The total number of examiners, accountants, analysts, economists, and 

other professionals assigned to the Office of Supervision (OS) has 

increased from 39 to 47, with a goal of 62 when the reorganized office 
is 

fully staffed.



Both critical objectives were in full accord with the recommendations 

found in GAO’s 1998 report.



Reduction-in-Force:



It became clear that the necessary reorganization would result in a 

number of Finance Board employees being separated from federal service. 

To minimize the effects of the reorganization on the affected 

employees, the Finance Board utilized its compensation flexibility to 

provide additional compensation incentives and private-sector 

outplacement services.



In criticizing the Finance Board’s use of administrative leave for 

employees to utilize the outplacement service, the draft report 

overlooks the fact the Finance Board has flexibility in compensating 

employees that most Federal agencies do not have. Specifically, the 

Finance Board has independent compensation-setting authority as set out 

in 12 U.S.C. § 1422b(b). This section of the Finance Board’s 

authorizing legislation states:



Subject to title IV of the Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989, the Board may employ, direct, and fix the 

compensation and number of employees, attorneys and agents of the 

Federal Housing Finance Board. .... Such compensation shall be paid 

without regard to the provisions of other laws applicable to officers 

or employees of the United States... (Emphasis supplied).



Because all forms of leave, including administrative leave, are 

elements of compensation, the Finance Board has the right to grant 

administrative leave to Finance Board employees to accomplish any 

legitimate purpose, including assisting employees who are scheduled for 

separation due to a RIF.



Within the context of a RIF premised, in part, on lack of work, a 

decision to require employees to continue to report to empty desks 

rather than allowing them to seek future employment was determined to 

be neither good personnel management nor cost-effective.



Compensation Offered to Separated Employees:



The draft report concludes that the settlement agreement the Finance 

Board offered to the employees scheduled for separation is deficient. 

The FHFB concurs that the settlement agreement should have advised the 

employees to consult with an “attorney” rather than a “representative” 

prior to signing the agreement.



The GAO claims that the Finance Board’s settlement agreement was also 

deficient, however, in that it interfered with the EEOC’s enforcement 

authority and did not provide the employees scheduled for separation 

with the names, ages, and positions of employees not scheduled for 

separation.



The language of the Finance Board’s settlement agreement does not, nor 

was it intended to, interfere with the EEOC’s enforcement authority. 

Any employee who signed a settlement agreement was clearly free to 

challenge the agreement at a later date.



The Finance Board disagrees that it was required to provide the 

employees scheduled for separation with the names, ages, and positions 

of those not selected for separation. Since the Finance Board abolished 

all the positions in the Office of Communications and the Office of the 

Managing Director, this regulatory requirement was not applicable to 

the Finance Board’s RIF.



IV. FHFB’S PROPER USE OF SCHEDULE C AUTHORITY:



The draft report section entitled “FHFB’s Use of Schedule C Positions 

Sometimes Differs From the Practices of Other Financial Regulators” 

observes that the FHFB and other financial regulators, while sharing 

some similarities in utilization of Schedule C hiring authority, also 

differ in how some Schedule Cs are used. Each of the agencies discussed 

are subject to Office of Personnel Management regulations governing use 

of Schedule C appointing authority. While the report notes differing 

practices from agency to agency, it does not suggest that any of the 

practices employed at the Finance Board violate OPM rules.



In the final report, GAO should note that the current Chairman 

corrected past practices that improperly categorized employees who 

should have been - and are now - placed in Schedule C positions. For 

the first time since creation of the Finance Board, Schedule C hiring 

authority is used by the FHFB for all confidential policy advisors to 

Board Directors.



The draft report’s second principal observation in this section, “FHFB 

Chair’s Staff Are Responsible for Public and Congressional Affairs 

Functions,” appears to focus on the Finance Board’s decision to 

eliminate the agency’s Office of Communications and divide public 

affairs and congressional affairs functions between one Schedule C 

employee and one career federal employee as ancillary responsibilities. 

It draws no conclusion and makes no recommendation. Given the size of 

the agency and the workload associated with those functions, the 

Finance Board believes the current assignment of responsibilities is 

appropriate and complies with OPM regulations.



V. REFORM OF PUBLIC INTEREST DIRECTOR SELECTION PROCESS:



The section of the draft report entitled “Majority of FHLBank Public 

Interest Directors Made Political Contributions Prior to Their Initial 

Appointments” narrowly focuses on the single issue of political 

contributions made by public interest director (PID) appointees to the 

boards of the Federal Home Loan Banks. This narrow focus results in an 

incomplete portrayal of the process used in selecting public interest 

directors, the recent and substantial improvements in that process, and 

the critical role that PIDs serve in the governance of the Federal Home 

Loan Bank System.



As written, the draft report may inadvertently call into question the 

integrity of the appointment process and create the false impression 

that contributions are a determining factor in the appointment process.



In the past, the selection of PIDs was conducted by notational vote: 

Names of candidates were circulated privately among the Directors and a 

slate was approved out of the public view. This practice may have led 

to political “horse-trading” of candidates, an activity not conducive 

to the selection of the best-qualified candidates as public interest 

directors.



The process was significantly improved in 2002 with the decision to 

conduct all votes on public interest directors at a public Board 

meeting with separate votes on each candidate.



At the January 29, 2003, meeting of the Finance Board, Chairman Korsmo 

recommended 28 nominees for appointment as public interest directors. 

No other Director offered nominees for consideration. Each of the 

Chairman’s nominees received unanimous support from the five members of 

the Finance Board.



Chairman Korsmo used the following criteria in selecting his nominees 

in 2002 and 2003, criteria that he again communicated to fellow Board 

directors during the most recent selection process. The factors were 

developed from recommendations contained in a governance study 

conducted by the FHLBank of Pittsburgh. These criteria were provided to 

GAO during its review.



1. An understanding of Finance. Directors should be financially 

literate. Directors should know how to read a financial statement and 

understand financial ratios. Directors should have a working 

familiarity with basic finance and accounting practices.



2. Political Awareness. Directors should possess an awareness of the 

importance of the political process to the FHLBank and the FHLBank 

System.



3. Experience in Corporate Governance. A Director needs to be able to 

monitor corporate management. Directors should understand general 

management best practices in the banking industry.



4.Diversit . Directors should represent many different aspects of their 

communities, bringing a variety of perspectives to the Boards on which 

they serve.



5. A demonstrated interest in the mission of the FHLBank. Directors 

should have in-depth industry-specific knowledge, including experience 

or background in housing, community/economic development, and/or 

banking. 6.Ability to work with other directors as a board.Directors 

need to possess empowerment skills and be able to motivate high-

performing talent.



7. Geographic balance. Candidates should be drawn from various regions 

within the Federal Home Loan Bank district. The Finance Board should 

strive for balance among states and between rural and urban areas.



In summary, the selection process for public interest directors has 

undergone significant improvement during the past two selection cycles, 

making it more transparent and responsive to the public and interested 

parties. Most importantly, the selection process now serves to identify 

and appoint well-qualified candidates to the boards of the 12 Federal 

Home Loan Banks. The final GAO report would be incomplete if it failed 

to note these improvements.



Finally, the Finance Board has been informed that the GAO staff is 

considering amending the title of the study for the final report. Given 

the narrow focus of the issues discussed in the report, the current 

title, “Financial Regulation: Operations of the Federal Housing Finance 

Board,” appears overly broad. The Finance Board believes the title 

“Review of Administrative Issues at the Federal Housing Finance Board” 

would more appropriately reflect the scope of the report.



The Federal Housing Finance Board, as well as the entire staff of the 

agency, welcomed this project and hoped it would help identify areas of 

FHFB management, regulation, and examination that require improvement. 

The Finance Board continues to believe GAO can be of assistance to the 

agency’s efforts to reform its operations and can make a positive 

contribution with this report if it is revised to reflect these 

comments.



Thank you very much for the extraordinary cooperation in dealing with 

the unauthorized distribution of the draft report, for the opportunity 

to help improve the:



draft, and for taking steps to convert this exercise into one which 

adds value to the work of enhancing the supervisory capabilities and 

independence of the Federal Housing Finance Board.



Respectfully,



Judith L. Hofmann, Director Office of Management:



Signed by Judith L. Hoffman: 



Enclosures: 3 Appendices:



CC: John T. Korsmo:



Chairman, Federal Housing Finance Board:



Franz S. Leichter:



Director, Federal Housing Finance Board:



Allan I. Mendelowitz:



Director, Federal Housing Finance Board:



J. Timothy O’Neill:



Director, Federal Housing Finance Board:



John C. Weicher:



Director, Federal Housing Finance Board:



[End of section]



Appendix V: Comments from FHFB Board Members Franz S. Leichter and 
Allan 

I. Mendelowitz:



Federal Housing Finance Board:



1777 F Street, N.W. Washington, D.C. 20006 Telephone: (202) 408-2500 

Facsimile: (202) 408-1435 www.fhfb.gov:



February 5, 2003:



Thomas J. McCool Managing Director Financial Markets and Community 

Investment U.S. General Accounting Office:



441 G Street, NW Washington, DC 20548:



Dear Mr. McCool:



As you are aware, the Standards of Conduct unanimously adopted by the 

Board of Directors of the Federal Housing Finance Board (FHFB) states 

that no individual member of the Board of Directors (including the 

Chairman) may speak for the Finance Board. Each Director may speak only 

for him or herself. Because the Finance Board has neither considered 

nor approved an agency response to your draft report, there is no 

agency response and each Board member must provide his or her own 

comments. To reduce the amount of paperwork that you have to handle, we 

have decided to consolidate our individual comments into a common set 

that we both support.



We address four issues raised in your report: the delegation of 

authority to the Chairman of the FHFB; the recent Reduction-in-Force; 

the use of Schedule C authority at the FHFB; and the 2002 class of 

Public Interest Directors to the Boards of the Federal Home Loan Banks.



DELEGATION OF AUTHORITY:



We agree with the GAO’s analysis of the inherent problems associated 

with the Federal Housing Finance Board’s current delegation of 

authority to the Chairman.



As the GAO notes, the Board of Directors of the FHFB is currently 

operating under a resolution adopted over nine years ago that delegates 

broad authority to the Chairman to carry out certain administrative 

functions for the ease of general agency operation. This resolution has 

been used by the current and past Chairmen to exercise control of the 

Board’s major management responsibilities.



The GAO rightly acknowledges that the “exercise of the FHFB chairs’ 

administrative authorities under a relatively broad delegation of 

authority has contributed to conflicts between board members who have 

not been permitted to vote or otherwise officially agree or disagree 

with key administrative decisions.” The GAO is also correct in noting 

that the delegation not only “has served to undermine collegiality and 

collaboration among FHFB board members,” but also “has meant that 

important FHFB decisions have not benefited from the views of all its 

members.”:



However, the GAO does not mention that the FHFB’s delegation 

significantly limits the role of the Board of Directors in the 

oversight and governance of the agency as specifically intended by 

Congress when it stated “the management of the Board shall be vested in 

a Board of Directors consisting of 5 directors” (12 U.S.C. 1422a 

(b)(1)). The FHFB’s delegation, therefore, is not just unwise. It is 

also overreaching and appears to be contrary to the intent of Congress.



As the GAO recognizes, the FHFB’s delegation is anachronistic. The 

November 1993 delegation under which the Finance Board is operating is 

based in large part on a broad 1990 delegation of authority to the 

Chairman that was adopted when the Board of Directors served only in a 

part-time capacity. In late 1993, when the Finance Board was 

transitioning from a part-time to a full-time Board of Directors, it 

was clear that the Chairman would, and the Directors might, resign 

rather than accept full-time status.



The ostensible purpose of the 1993 delegation was to ensure that the 

Finance Board would continue to function if the President did not 

immediately appoint a replacement Chairman by designating an Acting 

Chairman, or the HUD Secretary in the absence of an Acting Chairman, as 

Chairman.



The GAO analysis, however, fails to point out that the 1993 delegation 

also broadened the powers of the Chairman by deleting provisions from 

the 1990 delegation requiring the Chairman to consult “with other 

members of the Board as appropriate” before exercising delegated 

authorities. This was removed because it was not clear that there was 

or would be any Board for the Chairman to consult with during the 

transition period from a part-to a full-time Board.



Both the 1990 delegation, and the 1993 delegation under which the Board 

continues to operate, were enacted to allow the Finance Board to 

function during particularly unique historical circumstances. The GAO 

is correct in noting that the “circumstances under which the board 

originally deemed the delegation necessary no longer apply.”:



In addition, the GAO’s analysis of the more limited senior staff 

appointment and reorganization powers of the Chairmen at other federal 

financial regulatory agencies confirmed what our own research found. 

None of the agencies examined cedes to its Chairman “all authorities, 

powers and responsibilities of the Board necessary to effect the 

overall management, functioning and organization” of the agency, as the 

Finance Board’s current delegation does. The Finance Board is clearly 

out-of-step with its peers when it comes to delegation of key agency 

management and, by implication, policymaking authority.



In this time of increased focus on corporate responsibility and 

accountability in both the private and public sectors, it is 

appropriate that the full Board of Directors of the Finance Board 

governs the agency in the most democratic, transparent, and open manner 

possible. As the GAO highlights, “decisions that have the potential to 

affect the critical means by which FHFB ensures FHLBank safety and 

soundness” (and we would add, mission compliance) “merit the attention 

and consideration of the full board.”:



At the January 29TH meeting of the Board of Directors of the FHFB, we 

offered a resolution revising the Board’s delegation of authority to 

the Chairman (a copy of which follows). Having attempted to place this 

item on the Board’s agenda for several months, we were pleased to 

finally have the opportunity to debate this issue.



Our revised delegation included the following key provisions:



1) Clarification that “the Finance Board exercises its rulemaking and 

adjudicatory functions only through the Board,” and that “individual 

Board Directors shall neither represent nor give the appearance of 

speaking or acting on behalf of the Finance Board, absent specific 

direction from the Board.” This language was taken directly from the 

Finance Board’s recently adopted Standards of Conduct.



2) Affirmative statements that “the appointment of the Directors of 

Finance Board Offices shall be subject to the approval of the Board,” 

and that the Board “shall approve the Finance Board’s organizational 

chart down to the Office level along with relevant functional 

statements for each Office.” This would ensure consistency between the 

Finance Board and its peer agencies in the rightful role that Board 

Directors must play in the appointment of senior officials and agency 

reorganizations.



3) Clear language indicating that the Board’s delegation of authority 

to the Chairman “does not include the authority to establish policy and 

promulgate rules and regulations, or any delegation expressly 

prohibited by statute,” and that “except as otherwise expressly 

provided, the Board does not delegate its authority.”:



As the GAO report recommends, our revised delegation would have given 

individual Board members “the opportunity to vote on the appointment of 

senior agency officials and major reorganizations while preserving the 

Chair’s authority to manage the agency on a day-to-day basis.” 

Decisions in each of the aforementioned areas, as the GAO itself 

comments, “can have policy implications for how the agency carries out 

its key responsibilities”-responsibilities that are not delegable.



Unfortunately, our resolution was defeated in a 3-2 vote (a full 

transcript of the proceedings can be found at http://www, ov/

PressRoomfPressroom BDTrans.htm).



But, we hope that on reflection and based on a clear recommendation by 

the GAO, the Board will reconsider this action and will also, as stated 

in your draft report, “review the delegation of authority with some 

regularity to consider the appropriateness of the delegation to 

particular circumstances of the board.”:



REDUCTION-IN-FORCE (RIF) AND REORGANIZATION OF THE FHFB:



We are deeply concerned about the fact that you state the recent RIF 

conducted at the FHFB was not consistent with all federal statutes. We 

were neither consulted before nor briefed during or after this RIF. We 

were first notified that a RIF was being imposed after the action had 

been taken and after the Chairman had briefed Congressional committees 

about the RIF.



During our meetings with GAO staff, we expressed our concern about this 

lack of consultation. In fact, our concern over this unilateral 

reorganization contributed to our decision to offer a modified 

delegation of authority.



It is unfortunate that the scope of GAO’s review did not include a 

review of the retreat and bumping rights of the workers who were 

adversely affected by the RIF. This is an important element of the 

reorganization and RIF and we have no basis for knowing if it was done 

in a way that is consistent with law and regulation.



Some aspects of the reorganization and the reallocation of resources 

have our support and addressed concerns that we have raised over the 

past two years. Other aspects of the reorganization are troubling. For 

example, with the elimination of the Managing Director position, the 

Chairman has assumed more direct operational authority. There is no 

longer a senior career official to supervise the staff and serve as the 

interface between the staff and the Board of Directors. This has 

complicated prioritizing staff work.



USE OF SCHEDULE C AUTHORITY:



In addition, a by-product of the RIF we find alarming is the use of the 

Chairman’s personal staff, including Schedule C appointees, to perform 

certain Board functions. As you state in the draft report, “the FHFB 

chair’s personal staff, including a Schedule C appointee, are 

responsible for the agency’s public and congressional affairs 

functions, a practice unique among the regulatory agencies that we 

reviewed.” Not only do we find this practice “unique,” but it also 

raises concerns about the appropriateness of one board member’s staff 

performing duties that were once performed for the entire board.



SELECTION OF PUBLIC INTEREST DIRECTORS:



It is our opinion that the process of selecting Public Interest 

Directors (PIDs) to serve on the Boards of Directors of the Federal 

Home Loan Banks has become increasingly political. While there may be 

advantages to having PIDs with experience in partisan political 

activities, there is a concern that too many new PIDs lack the 

financial expertise to effectively oversee the complex balance sheets 

of their respective Federal Home Loan Banks. This is increasingly 

important in today’s environment.



The Federal Home Loan Banks are taking on more complex risks than ever 

before, and the boards of directors have now been given far greater 

corporate governance responsibilities to assure the safety and 

soundness of the FHLBanks. During the January 29, 2003 meeting of the 

Federal Housing Finance Board, Director Mendelowitz raised this issue 

with members of the Board of Directors. It was generally agreed that 

the Finance Board would undertake to amend existing regulations 

regarding PIDs to require that at least one PID at each FHLBank have 

sufficient expertise in financial markets, derivatives, and mortgage 

instruments to insure each Board would have the requisite expertise for 

competent corporate governance in the system.



Sincerely,



Allan I. Mendelowitz:



Director:



Signed by Allan I. Mendelowitz:



Franz S. Leichter:



Signed by Franz S. Leichter:



Director:



cc:John T. Korsmo, Chairman, FHFB John C. Weicher, Director, FHFB J. 

Timothy O’Neill, Director, FHFB:



FEDERAL HOUSING FINANCE BOARD:



No.: Date:



Delegation of Authority to Chairperson:



WHEREAS, the Federal Housing Finance Board (“Finance Board”) is the 

regulator of the Federal Home Loan Banks (“Banks”); and:



WHEREAS, section 2B of the Federal Home Loan Bank Act vests the 

management of the Finance Board in a five member Board of Directors 

(“Board”), but that, for ease of general operation, the Board desires 

to delegate to its Chairperson certain administrative authorities, 

powers and responsibilities of the Board; and:



WHEREAS, as stated in the Standards of Conduct adopted by the Board 

(Resolution 02-51, September 12, 2002), the Finance Board exercises its 

rulemaking and adjudicatory functions only through the Board, acting 

jointly; accordingly, individual Board Directors shall neither 

represent nor give the appearance of speaking or acting on behalf of 

the Finance Board, absent specific direction from the Board.



NOW THEREFORE, BE IT RESOLVED, that Resolution 93-92 (November 17,1993) 

is hereby rescinded.



RESOLVED FURTHER, that the Board hereby delegates to the Chairperson 

the authorities, powers and responsibilities of the Board necessary to 

effect the day-to-day management and logistical functioning of the 

Finance Board including the authority to execute documents on behalf of 

the Board, including regulations, resolutions and orders duly passed by 

the Board.



RESOLVED FURTHER, that the Board hereby delegates to the Chairperson 

authority to direct Finance Board personnel matters; Provided however: 

the appointment of the Directors of Finance Board Offices shall be 

subject to the approval of the Board.



RESOLVED FURTHER, that the Board, consistent with the authority to 

approve the appointments outlined above, shall approve the Finance 

Board’s organizational chart down to the Office level along with 

relevant functional statements for each Office.



RESOLVED FURTHER, this delegation of authority does not include the 

authority to establish policy and promulgate rules and regulations, or 

any delegation expressly prohibited by statute.



RESOLVED FURTHER, that except as otherwise expressly provided, the 

Board does not delegate its authority.



RESOLVED FURTHER, that the Chairperson may call the Board into regular 

or special session whenever any matter or business of the Finance Board 

so requires; Provided however: the Chairperson shall call a special 

session of the Board to consider any matter or business on the request 

of any two or more Board Directors if the Board contains four or more 

Directors. Should the Board be comprised of fewer than four Directors, 

the Chairperson shall call a special session of the Board to consider 

any matter or business on the request of any one or more Board 

Directors.



RESOLVED FURTHER, that the Chairperson may, from time to time, further 

delegate to any member, officer, employee or office of the Finance 

Board any function delegated to the Chairperson by this resolution or 

by law.



RESOLVED FURTHER, that in the event that there is no Chairperson or 

Acting Chairperson by virtue of absence, disability, or a vacancy, that 

all of the authority contained herein is delegated to the Secretary of 

Housing and Urban Development (“Secretary”).



RESOLVED FURTHER, that this delegation is not personal to any 

Chairperson or to any Secretary and will neither abate nor lapse on the 

expiration of the term of any Chairperson or Board Director, unless 

revoked by the Board by resolution.



By the Board of Directors of the Federal Housing Finance Board:



John T. Korsmo, Chairman:



[End of section]



Appendix VI: Comments from the Farm Credit Administration:



Farm Credit Administration:



1501 Farm Credit Drive McLean, Virginia 22102-5000 (703) 883-4000:



February 4, 2003:



Mr. Thomas J. McCool Managing Director Financial Markets and Community 

Investment General Accounting Office:



441 G. Street, NW Washington, DC 20548:



Dear Mr. McCool:



Thank you for the opportunity to review and comment on excerpts from 

the General Accounting Office’s (GAO) draft report entitled Financial 

Regulation: Operations of the Federal Housing Finance Board (Report). 

While the Report (Table 4) correctly reflects that six Schedule C 

positions are allotted to the Farm Credit Administration’s (FCA) Board 

members (one executive assistant and one special assistant for each of 

the three Board members), it should be noted that five of these six 

positions are currently filled by FCA career employees, not Schedule C 

appointees. These assistants are selected at each Board member’s 

discretion and may be either Schedule C appointees or career employees.



Additionally, the information in Table 4 does not reflect the 

following:



* The position of Secretary to the Board. While a Schedule C appointee 

has filled this position in the past, it has been converted to a career 

position.



* Two Schedule C appointees that are assigned to the Office of 

Congressional and Public Affairs. One of these appointees is a 

Congressional and Public Affairs Specialist and the other is a Public 

Affairs Specialist.



Consequently, although Table 4 may show 12 Schedule C positions, only 

six of these positions are filled by Schedule C appointees and the 

remaining six are filled by career employees.



Technical comments were provided to GAO separately. We hope these 

comments are helpful in GAO’s development of its final Report. If you 

have any questions, please do not hesitate to call me at 703-883-4005 

or James Ritter at 703-883-4252.



Sincerely,



Michael M. Reyna:



Signed by Michael M. Reyna:



Chairman and Chief Executive Officer:



[End of section]



FOOTNOTES



[1] As of September 2002, there were about 8,000 members of the FHLBank 

System.



[2] Historically, FHLBank advances have been overcollateralized by 

assets such as securities or mortgages. Beginning in 1997, FHLBanks 

began to purchase mortgages directly from their member institutions. 

Total FHLBank System whole mortgage assets nearly tripled from $16 

billion at the end of 2000 to $47 billion by September 30, 2002.



[3] Interest rate risk is the potential for loss due to fluctuations in 

interest rates while credit risk is the potential for loss from a 

borrower or counterparty failure to perform on an obligation. By 

holding mortgages on their books, FHLBanks increase both types of 

risks. FHLBank members retain the credit and interest rate risks for 

mortgage loans that they fund with FHLBank advances. 



[4] FHFB appoints at least 6 directors to serve on the boards of the 

FHLBanks, whose boards each consist of at least 14 members. These 

appointed directors are commonly referred to as public interest 

directors. At least two of the public interest directors are designated 

as community interest directors because of their strong ties to the 

local community. Members of each of the 12 FHLBank districts elect the 

remaining directors.  



[5] American Banker, March 15, 2002, American Banker, June 3, 2002, and 

Dow Jones Newswire Column, August 15, 2002.



[6] We define key administrative authorities as the appointment of 

senior agency officials and reorganizing an agency’s structure.



[7] Schedule C appointments are generally noncompetitive and noncareer 

appointments made without regard to the rules for competition that 

govern career appointments. Schedule C appointees receive 

noncompetitive appointments to positions graded GS-15 and below that 

involve determining policy or other key close, confidential 

relationship with the agency head or other key appointed officials of 

the agency. Agency heads or key appointed officials may dismiss 

Schedule C appointees at any time, and such appointees generally leave 

their positions at the end of an administration. OPM reviews and 

authorizes agency applications for use of Schedule C positions.



[8] Federal Housing Finance Board: Actions Needed to Improve Regulatory 

Oversight, GAO/GGD-98-203 (Washington, D.C.: September 18, 1998).



[9] See appendix II for a description of the seven regulatory agencies 

we reviewed. 



[10] Some agency chairs appoint Schedule C officials to run certain 

staff offices, which is discussed later in this report.



[11] CFTC officials said that the chair has the authority to reorganize 

the agency without a commission vote, but the practice has been for the 

commission to vote on such proposals.



[12] Delegation of Authority to Chairperson, November 17, 1993, 

Resolution No. 93-92, and Delegation of Authority to Chairperson, 

December 18, 1990, Resolution No. 90-143.



[13] The FDIC chair also operates under a delegation of authority. 



[14] CRP’s findings are reported in terms of “hard money” and “soft 

money.” This analysis focuses on “hard money,” which refers to 

contributions made for the purpose of influencing a federal election; 

these contributions are subject to the contribution limitations and 

prohibitions of the Federal Election Campaign Act. To ensure a standard 

comparison, we determined whether each director reported making a 

political contribution in the 8-year period prior to appointment. CRP 

officials said that their data are standardized from the 1990 election 

cycle to the present. Prior to the 1990 election cycle, it is difficult 

to extract data through automated procedures, so we analyzed 

appointments made in 1998 and after. Of the 25 directors listed as not 

having made contributions in the 8-year period prior to their 

appointments, 11 had reported making contributions more than 8 years 

prior to their initial appointment. The remaining 14 directors do not 

appear in the CRP database, which according to CRP officials indicates 

that they had not previously made political contributions. However, it 

is possible that these 14 individuals made contributions, but CRP was 

not able to match these individuals to its list of contributors. For 

example, one reason for this could be that contributors made political 

contributions under a different name. In addition, Federal Election 

Commission rules exempt contributions of less than $200 from reporting 

requirements. Thus, if these 14 individuals made contributions of less 

than $200, they would not appear on the CRP database.



[15] FHFB did not make public interest director appointments during the 

tenures of Chairs Allan I. Mendelowitz (December 29, 2000 to June 17, 

2001) and J. Timothy O’Neill (June 18, 2001 to December 21, 2001). 



[16] The Fed Board does not use Schedule C positions.



[17] SEC, FCA, and NCUA appoint Schedule C officials to head these 

offices while the Fed Board and FDIC use career officials. CFTC 

appoints a noncareer executive to head its public and congressional 

affairs office; this individual does not hold a Schedule C appointment, 

which was the focus of our analysis.



[18] According to FHFB board members Franz S. Leichter and Allan I. 

Mendelowitz, the comments we received from FHFB do not constitute the 

agency’s official comments because they were not voted on by the board. 

We did not attempt to resolve this difference between FHFB board 

members and staff and treated FHFB’s comments as the official response 

of the agency. See the report section entitled “Agency Comments and Our 

Evaluation.”



[19] The delegation of authority allows two or more board members to 

call a board vote on actions taken under the delegation.



[20] The distinction between more significant administrative decisions 

and policy decisions is not always clear. For example, personnel 

decisions can have significant implications for how an agency carries 

out key responsibilities. 



[21] This discussion excludes the HUD secretary or designee.



[22] The FHLBank System Office of Finance is responsible for borrowing 

funds in the capital markets--or issuing consolidated obligations on 

behalf of the system.



[23] Under the Gramm-Leach-Bliley Act of 1999, FHFB was required to 

establish capital standards for the FHLBanks that are based on the 

risks that they face, such as credit and interest rate risk. FHFB 

approved each of the 12 FHLBank plans in 2002 and is currently 

monitoring their implementation.



[24] Reorganizations entail shifting personnel, merging divisions, and, 

in some cases, creating or eliminating functions.



[25] Reorganizations that involve the appointing or removal of officers 

of the Fed Board require the approval of a majority of board members. 



[26] The delegation was enacted at the first FHFB board of director 

meeting on December 18, 1990.



[27] This provision has been invoked twice, by HUD designee Nicolas 

Retsinas (Nov. 23, 1993 - May 31, 1995) and by HUD designee William 

Apgar (July 5, 2000 - Dec. 28, 2000). The board also removed language 

from the 1990 delegation of authority that required the chair to 

“consult” with other board members prior to making decisions.



[28] Evans left the agency in November 1993 and two other board members 

resigned on January 1, 1994. FHFB operated with the HUD secretary or 

designee as the chair and one full-time board member throughout 1994 

and the first half of 1995. 



[29] Under the delegation passed on January 29, 2002, the FDIC chair 

can appoint senior officials (defined as corporate officers and 

Executive Schedule, level IV and above employees) without board 

approval. Under the previous delegation, these actions required board 

approval.  



[30] The 10 previous restructurings included such activities as 

establishing, eliminating, and combining offices. 



[31] In notational voting, board members voted on a list of candidates 

distributed to them rather than in a board meeting.



[32] Letter from Lawrence Costiglio to Senator Alfonse D’Amato and 

Senator Paul Sarbanes, March 12, 1998.



[33] We sent a draft of the report to FHFB for official comment on 

January 15, 2003. The draft report recommended that the FHFB board 

consider revising the delegation of authority to provide for board 

approval of senior agency officials and major reorganizations. 



[34] The law governing RIFs at federal agencies is grounded in the 

Veterans’ Preference Act of 1944, which states that “in any reduction 

in personnel in any civilian service of any Federal agency, competing 

employees shall be released in accordance with Civil Service Commission 

regulations which shall give due effect to tenure of employment, 

military preference, length of service, and efficiency ratings.” The 

current version of the Veterans’ Preference Act that pertains to RIFs 

is codified at 5 U.S.C. §3501-04. 5 U.S.C. §3502 sets forth the basic 

RIF principles and empowers OPM to promulgate regulations to carry them 

out. OPM’s governmentwide regulations in part 351 of title 5, Code of 

Federal Regulations require that an agency undertaking a RIF meet 

certain specific procedural requirements and provide that an employee 

who has been separated or demoted by a RIF action may appeal to the 

Merit Systems Protection Board.  



[35] Previously, the FHFB chair delegated day-to-day administrative 

authorities to the managing director.



[36] An employee of an executive agency who is involuntarily separated 

from service is entitled to severance pay calculated on the basis of 

the employee’s years of civilian service and an age adjustment 

allowance. 5 U.S.C. §5595 (c). An employee who is separated from 

service also is entitled to receive a lump-sum payment for accumulated 

and current accrued annual or vacation leave. 5 U.S.C. §5551(a).



[37] Specifically, the separation agreement provided that the employee 

agreed not to “file any charges, complaints, grievances or appeals or 

requests for hearings before any administrative tribunal, including the 

Equal Employment Opportunity Commission, the Merit Systems Protection 

Board, the Office of Special Counsel, or under the (FHFB’s) internal 

grievance procedures, relating to the facts and circumstances of the 

Employee’s employment with the (FHFB) and involuntary separation.” The 

separation agreement also provided that the employee agreed to “Not 

initiate a lawsuit or any other action against the (FHFB), the (FHFB) 

Chairman, its Directors, or any of the (FHFB’s) employees or former 

employees under the Civil Rights Act of 1964, 42 U.S.C. §2000-16e, et 

seq.; the Age Discrimination in Employment Act of 1967, as amended, 29 

U.S.C. §633a; the Civil Rights Acts of 1866 and 1871, 42 U.S.C. §§1981, 

1983, and 1985; the U.S. Constitution; or any other state, local, or 

federal law, based on the facts and circumstances surrounding the 

employee’s employment with the (FHFB) and involuntary separation.”



[38] According to FHFB officials, 8 of the 9 affected staff, including 

6 employees aged 40 or over, received notification on August 7, 2002. 

The standard settlement agreement provided by FHFB included a September 

23, 2002, deadline to sign it.



[39] Congress enacted ADEA to promote the employment of older persons, 

based on ability rather than age, to prohibit arbitrary age 

discrimination and to help employers and employees resolve problems 

arising from the impact of age on employment. ADEA forbids arbitrary 

discrimination against workers, on the basis of age in hiring, 

promotion, terms of employment, and discharge.  



[40] According to FHFB, six of the nine employees subject to the RIF 

were 40 years of age or older.



[41] Employers must provide at least 45 days to consider waivers.



[42] 29 U.S.C. §626(f)(4).



[43] 29 C.F.R. § 1625.22 (i).



[44] While the staff were not allowed to access their offices during 

the advance notice period, FHFB officials said that they could enter 

the building if they planned to enter a specific destination, checked 

in at the guard desk, and had the guard call the individuals that they 

planned to visit.



[45] GAO-98-203.



[46] GAO-98-203.



[47] Twelve FHLBank examinations over 3 years accounts for 36 

examinations.



[48] GAO-98-203.



[49] FHFB board meeting transcript, open meeting, Thursday, September 

12, 2002.



[50] GAO-98-203.



[51] Each of the 12 FHLBanks is required to contribute at least 10 

percent of its annual earnings to support the Affordable Housing 

Program. These funds may be in the form of a grant or a below-market 

interest rate on an advance to a member and subsidize the cost of 

owner-occupied or rental housing for very low-income, low-income, or 

moderate-income groups.



[52] Risk-Focused Examinations: Regulators of Large Banking 

Organizations Face Challenges, GAO/GGD-00-48 (Washington, D.C.: 

January 24, 2000).



[53] CRP data are not reliable prior to the 1990 election cycle. We 

chose the 8-year period to ensure that FHFB’s appointments during the 

tenures of each of the three chairs would be standardized. For example, 

since FHFB made appointments under Korsmo for the first time in 2002, 

available data cover seven federal election cycles (1990, 1992, 1994, 

1996, 1998, 2000, and 2002). In contrast, CRP could only provide 

reliable data for five election cycles for appointments made under 

Morrison in 1998 (1990, 1992, 1994, and 1996, and 1998). 



[54] As specified in their charters, Fannie Mae and Freddie Mac each 

have 18-member boards of directors. The President appoints 5 of the 

directors at each company while shareholders elect the other 13. The 

boards of directors shall at all times have members appointed by the 

President that fall into the following categories (1) at least one 

person from the home-building industry, (2) at least one from the 

mortgage lending industry, (3) at least one from the real estate 

industry, and (4) at least one from an organization that has 

represented consumer or community interests for not less than 2 years 

or one person who has demonstrated a career commitment to the provision 

of housing for low-income households.



[55] One board member did not appear in the CRP database, which 

according to CRP officials indicates that they had not previously made 

political contributions. However, it is possible that this individual 

made contributions, but CRP was not able to match the individual to its 

list of contributors. In addition, Federal Election Commission rules 

exempt contributions of less than $200 from reporting requirements. 

Thus, if the individual made contributions of less than $200, they 

would not appear on the CRP database.



[56] The Fed Board does not use Schedule C positions.



[57] While FCA’s Chief Operating Officer is a Schedule C appointee, FCA 

officials said that the board approved the appointment.



[58] The appointee holds a position higher than GS-15 grade, which is 

the highest grade for Schedule C appointees. 



[59] GAO-98-203.



[60] The Farm Credit Administration, Securities and Exchange 

Commission, Commodities Futures Trading Commission, Federal Deposit 

Insurance Corporation, National Credit Union Administration, and Board 

of Governors of the Federal Reserve System.



[61] Under federal statutes and OPM regulations, employees subject to 

RIFs may have the right to take (or “bump”) the positions of other 

employees who have less seniority.



[62] GAO-98-203.



[63] CRP officials said that data prior to the 1990 election cycle is 

not necessarily reliable, so we chose appointments starting in 1998 as 

the beginning point of our analysis.



[64] Rules for the Transaction of Business and Operational 

Responsibilities of the Farm Credit Administration Board, FCA-PS-64, 

revised September 24, 1999.



[65] 29 U.S.C. §§621-634. The ADEA was amended in 1974 to extend to 

federal employees the protection of older workers against 

discrimination in the workplace based on age. 29 U.S.C. §633a.



[66] 42 U.S.C. §2000e et seq.



[67] 29 U.S.C. §§201-219.



[68] Alexander v. Gardner-Denver Co., 415 U.S. 36 (1974). The Supreme 

Court found that an employee might waive his rights under Title VII as 

part of a voluntary settlement, so long as the employee’s consent to 

the waiver is knowing and voluntary. 



[69] Legislative Regulation and Administrative Exemption Allowing for 

Non-EEOC Supervised Waivers Under the ADEA, 29 C.F.R Pt. 1927, 52 

Fed.Reg. 32293 (August 27, 1987).



[70] 29 U.S.C. §626(f)(1)(A)-(G).



[71] 29 U.S.C. §626(f)(4).



[72] Waiver of Rights and Claims Under the Age Discrimination in 

Employment Act (ADEA), Equal Employment Opportunity Commission, 29 

C.F.R. Pt. 1625, 63 Fed. Reg. 30624 (June 5, 1998). In one case decided 

prior to the publication of the regulations, Juhola v. Secretary of the 

Army, 1994 WL 740459 (E.E.O.C.), EEOC applied OWBPA waiver requirements 

to a settlement agreement entered into by a federal agency and an 

individual employee.



[73] 29 C.F.R. §1625.22(a)(4). EEOC regulations apply OWBPA waiver 

requirements to employment by federal government. But cf. Lehman v. 

Nakshian, 453 U.S. 156 (1981) (interpreting 29 U.S.C. §633a(f), which 

provides that federal personnel actions covered by §633a are not 

subject to any other section of the ADEA, as evidence that Congress did 

not intend to grant the right to a jury trial to federal employees 

suing the government under ADEA.) 



[74] Oubre, 522 U.S. at 425.



[75] 29 U.S.C. §626(f)(4).



[76] 29 C.F.R. §1625.22(i)(2).



[77] Waivers Under the Civil Rights Laws, EEOC guidance effective April 

10, 1997. EEOC notes that although the guidance addresses the issues 

primarily in the context of the private sector, the principles and 

considerations discussed are equally applicable to the federal sector.



[78] S. Rep. 101-263 (1990), The Older Workers Benefit Protection Act, 

April 4, 1990, 1990 U.S.C.C.A.N. 1509,1532.



[79] 29 U.S.C. §626(f)(1)(H).



[80] S. Rep. No. 101-263, 1990 U.S.C.C.A.N. 1509, 1539.



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