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OIG: FHFA not Consistently Involved in GSE Decisions

by devteam September 27th, 2012 | Share

The most recent evaluation of the FHFA by it’s Office of Inspector General (OIG), released on Thursday,rnfound that FHFA had perhaps delegated too much of its authority back to the FanniernMae and Freddie Mac (the GSEs), the entities for which it serves asrnconservator.  The report found that thernagency did not require the GSEs to seek approval for various major businessrndecisions and even when such approval was required, FHFA cannot be assured thatrnthe GSEs always request it.</p

By letters dated November 24, 2008, a little over two monthsrnfrom the start of the conservatorships, FHFA informed the GSEs that they mustrnseek approval for the following:</p<ul

  • Actions involving capital stock,rndividends, the Senior Preferred Stock Purchase Agreements with the Treasury,rnincreases in risk limits, material changes in accounting policy, and reasonablyrnforeseeable material increases in operational risk.</li
  • Creation of any subsidiary orrnaffiliate or any substantial or extraordinary transactions with subsidiaries orrnaffiliates.</li
  • Matters that relate tornconservatorship or conservatorship status.</li
  • Personnel actions involving boardsrnof directors or officers at the level of vice president or above.</li
  • Actions involving hiring or firingrnof external auditors and law firms serving as consultants to boards ofrndirectors.</li
  • Settlements of litigation, claims,rnregulatory proceedings or tax-related matters in excess of $50 million.</li
  •  Any merger with, purchase, orrnacquisition of a business involving over $50 million.</li</ul

    The boards of directors were made responsible for requestsrnfor approval and this authority was delegated downward and throughout seniorrnmanagement in the various business units who decide if a proposed action requiresrnFHFA approval.  Prior to May 2011 neitherrnGSE had implemented any formal policies or procedures for coordinating withrnFHFA on approval requests and not until December 2011 did FHFA institute arncentral point for submission of requests, delegating that authority to thernOffice of Conservatorship Operations (OCO).</p

    OIG made several findings about FHFA’s delegation ofrnauthorities to the GSEs.</p<ul

  • FHFA’srnnon-delegated authorities and proceeds are outdated and allow certain majorrnbusiness decisions to avoid conservatorship approval.  These have included decisions on singlernfamily underwriting standards and the High Touch Servicing Program.</li
  • Agencyrnprocedures governing the approval process are not sufficient detailed and dornnot require a single point of contact for approval requests.  FHFA did not establish controls to ensurernthat appropriate requests were made and consequently requests have been inconsistent.  For example Fannie Mae agreed to sevenrninsurance settlements in 2009 and 2010 (pool policy commutations) that resultedrnin settlement discounts totaling $306 million, exceeding the $50 limit butrnFreddie Mac settled similar claims only after seeking FHFA approval.</li
  • FHFArnhas not ensured rigorous review of GSE business decisions nor maintained arncentral repository for documentation supporting its own decisions.</li
  • FHFArnhas not established a formal process to follow up on significant conservatorrndecisions to ensure the GSEs comply with them.</li</ul

    OIG made a number of recommendations to FHFA regarding thernauthorities they have delegated to the GSEs and the Agency’s oversight ofrnthem.  OIG said FHFA should:</p<ul

  • Reassess the non-delegatedrnauthorities to ensure sufficient FHFA involvement with major businessrndecisions.</li
  • Evaluate the GSEs internal controlsrnto make sure they communicate all major business decisions involving FHFArnapproval to the Agency.</li
  • Evaluate the seven Fannie Mae’s poolrnpolicy commutations to determine whether they were appropriate and in the bestrninterests of the GSEs and the taxpayers and develop a methodology and processrnfor review of such transactions in the future.</li
  • Establish a clear timetable andrndeadlines for GSE submission of transactions to FHFA for conservatorshiprnapproval.</li
  • Issue a directive to the GSEsrnrequiring them to notify the Agency of any deviation to any previously reviewedrnactions so that FHFA may consider these changes and revisit its decisions.</li
  • Implement a risk-based examinationrnplan to review the GSEs execution of and adherence to conservatorshiprndecisions.</li

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    • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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