	Federal Housing Finance Board: Actions Needed to Improve Regulatory Oversight

Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the Federal Housing Finance Board’s (FHFB) regulatory oversight of the nation’s third largest government-sponsored enterprise (GSE), the Federal Home Loan Bank System (System). The specific objectives of our review were to evaluate (1) FHFB’s annual safety and soundness and mission compliance examinations of the Federal Home Loan Banks (Banks), (2) other aspects of FHFB’s oversight, and (3) the status of FHFB’s involvement in System business. First, FHFB did not ensure that all parts of the annual examinations we reviewed met their internal standards for assessing safety and soundness. Second, weaknesses exist in FHFB’s off-site monitoring and supervisory enforcement programs. Third, FHFB does not have policies or procedures, outside of its reviews of the special affordable housing and community investment programs, to determine whether or the extent to which Banks are supporting their public mission of housing finance. only regulator that remains involved in the business of the System it regulates. However, FHFB continues to function as a promoter and coordinator for the System. Most notably, examiners did not always fully assess critical elements of Bank operations—such as internal controls, board of director and management oversight, and the reliability of internal audits—that FHFB, other financial regulators, and we have identified as vital in evaluating an institution’s risk-management capabilities. While examiners generally assessed management of interest-rate and credit risk, the critical elements just mentioned should be reviewed during every on-site examination to ensure that operations risk is being adequately managed. We encourage FHFB to continue its efforts to develop a regulatory framework for a mission compliance oversight program. Weaknesses Exist in Other Areas of FHFB’s Regulatory Oversight Program

We found additional weaknesses in FHFB’s off-site monitoring and enforcement programs that raise concerns about its regulatory effectiveness. We remain concerned, as we have noted in the past, that combining the roles of oversight and involvement in System business may undermine the independence necessary for FHFB to be an effective safety and soundness and mission regulator. We recognize that the responsibility for FHFB’s involvement in System business is, in part, due to statutory authorities carried over from FHFB’s predecessor, the Bank Board. Thus, we continue to support our 1994 and 1997 positions that a single housing GSE regulator be created to oversee the safety and soundness and mission compliance oversight of the housing GSEs.
Why GAO Did This Study

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

What GAO Found

GAO noted that: (1) FHFB's examination function did not ensure that annual examinations met FHFB's internal examination standards, including adequate documentation for work performed; (2) the examinations included reviews of interest-rate and credit risk, two of the primary types of risk faced by the Banks; (3) however, the examinations did not fully assess other areas that FHFB and others have identified as vital in evaluating an institution's risk management capabilities, such as management and board of directors oversight, internal control systems, and internal audit function; (4) weaknesses existed in FHFB's off-site monitoring and supervisory enforcement programs; (5) FHFB lacks a coordinated off-site monitoring system, which is an important part of effective safety and soundness oversight, because it can provide an early warning of potential problems; (6) FHFB also lacks an enforcement program that clearly articulates policies and procedures for taking corrective action; (7) the situation is further aggravated because the statute grants only general authority to enforce the statute and make orders; (8) the only authority delineated in the statute is the authority to remove or suspend Bank employees, directors, officers, or agents for cause; (9) FHFB does not have policies or procedures, outside of its reviews of the special affordable housing and community investment programs, to determine whether or the extent to which Banks are supporting housing finance; (10) FHFB recognized this omission and has begun to take steps to establish such a program, but no final actions have been taken to establish a regulatory framework to ensure mission compliance; (11) FHFB continues to be involved in System business; (12) many of the authorities that involve FHFB in System business are specified in statute or are carryover regulations from its predecessor agency; (13) FHFB began to devolve many of the functions in 1994, but it still plays a role in coordination and promotion of Banks; (14) GAO continues to believe that such involvement in the System's business functions may undermine FHFB's independence and lead to questions about its objectivity; and (15) GAO supports its position that a single housing regulator be created to oversee the safety and soundness and mission compliance of the housing government-sponsored enterprises.