After 5-Year Pause FHFA Issues Executive Compensation Rule

The Federal Housing Finance Agencyrn(FHFA) published an interim final rule in the Federal Register on Tuesday which may mean that the long drawn-outrnsaga over compensation for executives of the Federal Home Loan Banks (FHLBanks)rnand Freddie Mac and Fannie Mae (the GSEs) is drawing a close.  The interim rule, four years in the making,rnis set to go into effect in June and FHFA will accept public comments untilrnJuly 15.</p

As background, in June 2009 FHFArnpublished rulemaking with requests for comments on an executive compensationrnrule.  The comment period closed onrnAugust 4, 2009.   That rule basically set out the authority ofrnthe agency and its director to set compensation for executives of the regulatedrnentities that were reasonable and comparable and set out various ways in whichrnthat reasonableness and comparability would be determined.   </p

In the intervening years, executiverncompensation at the GSEs became a flash point with Congress.   Acting FHFA Director Edward J. DeMarco was calledrnon several occasions before congressional hearings specifically dealing withrnthat issue.   In 2011 HR1221 which would have reduced therncompensation of the CEOs of the two GSEs from an average of 5.5 million thatrnyear to $218,978 died in the House.</p

In 2012, both GSEs hired new CEOs under executiverncompensation packages approved by FHFA in March of thatrnyear.  The packages eliminated long term incentives and reducedrnexecutives’ annual compensation, other than that of the CEOs, by 10%.  Although FHFA initially targeted CEO total direct compensation at $500,000, Freddie Mac’s newly hired CEO was to earn $600,000.  Thisrnrepresents a reduction of cash compensation of 88%rnfromrnthe $5.1 millionrnthat the former CEO received in 2011.  </p

In December of 2012 the FHFA Office of Inspector General said that FHFArnshould establish three priorities for oversight of GSE senior compensation: general structures, processes,rnand cost controlsrnfor senior professional compensation; controls over compensation offers tornnew hires; enforcing GSEs’ compliance with the pay freeze with respect to the use of promotions andrnchanges in responsibility.</p

With the exception of consumer comments</strongthat compensation overall was too high, comments on the 2009 rulemaking wererncentered on compensation issues at the FHLBanks.   Inrngeneral the commentsrnrequested that FHFA acknowledge the difference between the FHLBanks member-controlled, cooperative structure and financialrnperformance and what may be justified for FHFA's review of executive compensationrnat the Enterprises in view of their conservatorship status.  That FHFA's compared the compensation ofrncomparable institutions to proscribe a set or specific level of compensation wasrnviewed as dictating an outcome to the FHLBanks boards of directors. </p