Federal Housing Finance Board:

Actions Needed to Improve Regulatory Oversight

GGD-98-203: Published: Sep 18, 1998. Publicly Released: Sep 18, 1998.

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Pursuant to a congressional request, GAO reviewed the Federal Housing Finance Board's (FHFB) safety and soundness and mission compliance oversight, focusing on evaluating: (1) FHFB's annual safety and soundness and mission compliance examinations of the Federal Home Loan Banks (FHLBanks); (2) other aspects of FHFB's oversight; and (3) the status of FHFB's involvement in the Federal Home Loan Bank System business.

GAO noted that: (1) FHFB did not ensure that the annual examinations GAO reviewed met internal FHFB standards for assessing the safety and soundness of FHLBanks; (2) while each of the 12 sampled examinations included reviews of FHLBanks policies and procedures to mitigate interest-rate and credit risk, the examinations did not include assessments of those areas that FHFB and others have identified as vital in evaluating an institution's risk-management capabilities; (3) further, after identification of deficiencies in consecutive examinations of one FHLBank, examinations were not expanded to investigate the extent of related potential problems, as required by FHFB standards; (4) with regard to examining for mission compliance, the agency acknowledges having no examination policies or procedures outside of its reviews of the special affordable housing and community investment programs, to determine whether or to what extent FHLBanks were supporting housing finance; (5) these special programs that were examined represented less than 1 percent of System assets at year-end 1997; (6) since 1997, FHFB has taken several steps to develop procedures and mechanisms to better ensure mission compliance; (7) additional weaknesses existed in off-site monitoring and supervisory enforcement guidance; (8) in 1997, the Office of Supervision (OS) suspended monthly off-site monitoring of FHLBank activities due to staffing constraints; (9) examiners primarily reviewed off-site information for each FHLBank's condition and activities during their annual preexamination planning, and, although OS and Office of Policy prepared several periodic reports that tracked specific bank activities, they did not coordinate their activities; (10) FHFB lacked clear policies and procedures regarding corrective actions for specific FHLBank conditions; (11) GAO found that FHFB has undertaken activities that further involve it in System business; (12) in GAO's view, some of FHFB's activities may undermine FHFB's independence as a regulator; (13) while FHFB began to devolve certain authorities, within limits, to FHLBanks in 1995, FHFB continues to promote and coordinate System activities; (14) FHFB's involvement in promoting System programs and projects that it subsequently evaluates for mission compliance and safety and soundness could complicate FHFB's primary duty as safety and soundness regulator and may prompt questions about its objectivity; and (15) FHFB views these activities as consistent with its primary duty of ensuring the System's safety and soundness.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) included provisions that addressed several of GAO's concerns with FHFB's involvement in System business.

    Matter: GAO continues to support its 1994 and 1997 positions that a single housing government-sponsored enterprise (GSE) regulator be created to oversee the safety and soundness and mission compliance oversight of the housing GSEs. While considering this action, at a minimum, Congress may want to consider taking interim action to redirect FHFB's attention to its primary role as the System's safety and soundness regulator by making FHFB an arm's-length regulator, as in the case of other GSE regulators. This could be achieved by ensuring that its statutory duties do not involve FHFB in any System business.

  2. Status: Closed - Implemented

    Comments: The Gramm-Leach-Bliley Act of 1999 (P.L. 106-102) provided FHFB with the same enforcement powers provided to the regulator of the other housing GSEs and the same authority to issue orders for corrective actions as provided to bank regulators.

    Matter: Congress may want to consider giving FHFB specific enforcement authorities it has provided to other GSE regulators.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In August 1999, FHFB revised its guidance to examiners and added new requirements for examination coverage and documentation.

    Recommendation: To strengthen FHFB in its primary oversight role as the safety and soundness supervisor of the System, FHFB should ensure that critical aspects of FHLBank operations are reviewed as part of every FHFB examination.

    Agency Affected: Federal Housing Finance Board

  2. Status: Closed - Implemented

    Comments: FHFB now requires examiners to attest in writing that all elements of an examination are completed as scoped and to submit for supervisory approval a memo explaining why any element should not be completed.

    Recommendation: To strengthen FHFB in its primary oversight role as the safety and soundness supervisor of the System, FHFB should ensure that examiners follow the guidance and complete the appropriate examination procedures described in the examination manual.

    Agency Affected: Federal Housing Finance Board

  3. Status: Closed - Implemented

    Comments: FHFB examiners are now required to include in their workpapers a summary document discussing each area of operations reviewed and conclusions reached.

    Recommendation: To strengthen FHFB in its primary oversight role as the safety and soundness supervisor of the System, FHFB should adequately document the work performed and conclusions drawn during examinations.

    Agency Affected: Federal Housing Finance Board

  4. Status: Closed - Implemented

    Comments: This recommendation has been closed because Congress provided (P.L. 106-102) FHFB with specific enforcement powers similar to those of other GSE and financial institution regulators, agency action, therefore, unnecessary.

    Recommendation: To strengthen FHFB in its primary oversight role as the safety and soundness supervisor of the System, FHFB should more clearly articulate and document its current enforcement mechanisms, policies, and procedures.

    Agency Affected: Federal Housing Finance Board

 

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