oversight

OIG's Compliance Review of FHFA's Implementation of Its Housing Finance Examiner Commission Program

Published by the Federal Housing Finance Agency, Office of Inspector General on 2015-07-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

           Federal Housing Finance Agency
               Office of Inspector General




   OIG’s Compliance Review of
   FHFA’s Implementation of Its
    Housing Finance Examiner
      Commission Program




Compliance Review  COM-2015-001  July 29, 2015
                Executive Summary
                The Federal Housing Finance Agency Office of Inspector General (OIG) was
                established by the Housing and Economic Recovery Act, which amended the
                Inspector General Act of 1978. OIG conducts independent performance
                audits, program and management evaluations, and investigations of Federal
                Housing Finance Agency (FHFA/Agency) programs and operations, which
COM-2015-001    include the conservatorships of Fannie Mae and Freddie Mac (together, the
                Enterprises), and works to prevent and detect fraud, waste, and abuse in them.
July 29, 2015
                Based on the findings in its audits and evaluations, OIG may make
                recommendations to FHFA to promote economy and efficiency in its
                administration of such programs and operations, and prevent fraud, waste,
                and abuse. In response to each OIG recommendation, FHFA can accept it in
                full; reject it; or accept it partially and offer alternative corrective actions to
                remediate the shortfall identified by OIG, such as adopting other controls or
                enhancing existing controls. OIG closes an accepted or partially accepted
                recommendation when it makes an independent determination that the
                Agency’s corrective actions have remediated the shortfall, or that corrective
                actions designed to do so are underway, or will be shortly. In determining
                whether to close such recommendations, OIG independently assesses
                representations by the Agency and documents provided by it.

                In December 2014, OIG established the Office of Compliance and Special
                Projects (OCom) to conduct risk-based follow-up assessments (referred to
                as “Compliance Reviews”) that test FHFA’s ongoing implementation of
                corrective actions that served as the basis for OIG’s decision to close the
                associated recommendations. For example, if OIG closed a recommendation
                based upon FHFA’s representation that it was developing enhanced Enterprise
                examination procedures, an OCom Compliance Review might test FHFA’s
                implementation of the enhanced procedures to determine if it had remediated
                the shortfalls identified in the OIG report. OIG believes that OCom will
                enhance OIG’s ability to stimulate positive change in critical areas and
                promote economy, efficiency, and effectiveness at the Agency.

                Why OIG Did This Report
                This Compliance Review reports on the Agency’s actions subsequent to OIG’s
                2012 closure of a recommendation in a 2011 OIG evaluation report about the
                Agency’s capacity to examine the Government Sponsored Enterprises (GSEs)
                it regulates (Fannie Mae, Freddie Mac, and the Federal Home Loan Banks
                (FHLBanks)). The 2011 report was Evaluation Report EVL-2011-005,
                Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs
                (Sept. 23, 2011). In that report, we explained that the Agency’s examination
                program consisted of targeted examinations, continuous supervision,
                supervisory analyses, and remediation activities. OIG found that FHFA lacked
                a sufficient number of examiners and that two-thirds of its examiners were not
                commissioned. This means that the examiners had not completed a structured
                process of classroom and on the job training (OJT) that would provide them
                with technical competencies and practical examination experience.

COM-2015-001    To address its lack of a sufficient number of examiners, the Agency reported
                that it was implementing a plan to add examiners. To address the lack of
July 29, 2015   commissioned examiners, the Agency reported that it was developing an
                examiner commission program. Among OIG’s recommendations in the
                2011 report, we recommended that the Agency “[m]onitor the development
                and implementation of the examiner [commission] program and take needed
                actions to address any shortfalls.” The Agency agreed with that
                recommendation and OIG closed it in 2012, based upon progress the Agency
                made in developing the program. This Compliance Review was conducted to
                assess the Agency’s implementation of the examiner commissioner program it
                developed.

                What OIG Found
                In 2011, OIG and the Agency agreed that the efficiency and effectiveness of
                FHFA’s oversight of the GSEs would be strengthened by a sufficient corps
                of commissioned examiners. In 2013, the Agency inaugurated its Housing
                Finance Examiner (HFE) commission program. At that time, FHFA explained
                that the central objective of its HFE program was to produce commissioned
                examiners who were qualified to lead major risk sections of GSE examinations.
                FHFA employees who enroll in the program (enrolled examiners) and
                complete its 16 OJT assignments, 16 courses on financial risks and housing
                finance, and pass a final examination, are eligible to receive HFE commissions.
                When it rolled out its HFE program, the Agency explained that it was “an
                approximately four year commitment,” and that this timeframe “may be
                shortened for participants with prior classroom training and work experience.”

                We conducted this Compliance Review of the Agency’s implementation of the
                HFE program with a specific focus on the 19-month period from August 2013
                to March 2015. We found evidence indicating that the HFE program was not
                on track to meet its central objective—to produce commissioned examiners
                who were qualified to lead major risk sections of GSE examinations. Only one
                of the 66 enrolled examiners had submitted to the Agency office responsible
                for administering the HFE program records reflecting completion of any of
                the 16 required OJT assignments during 2014 and early 2015. OIG interviews
                with Agency examination officials also did not identify records indicating that
                enrolled examiners were progressing in meeting their OJT requirements.
                Further, FHFA records indicated that a considerable minority of enrolled
                examiners—over 20%—completed no more than one of the required 16
                courses. OIG concludes that since many of the enrolled examiners failed to
                progress in meeting the HFE program requirements during its first 19 months
                of operation, their ability to earn HFE commissions within the projected time
                frame of four years or less is at risk.

COM-2015-001    What OIG Recommends
July 29, 2015   OIG recommends that the Agency determine the causes of the shortfalls
                identified in this report and implement a strategy to ensure that the HFE
                program fulfills its central objective. Otherwise, FHFA’s examination
                program will continue to lack a sufficient number of commissioned examiners,
                whom the Agency acknowledges are needed to lead major risk sections of GSE
                examinations. FHFA agreed with this recommendation and described steps it
                plans to take to strengthen the administration of the HFE program (see
                Appendix A to this report).

                The report was prepared by Wesley M. Phillips, Senior Policy Advisor, and
                Karen E. Briscoe, Senior Investigative Counsel, and has been distributed to
                Congress, the Office of Management and Budget, and others and will be
                posted on our website, www.fhfaoig.gov. We appreciate the assistance of the
                officials from FHFA in completing this Compliance Review.




                Richard Parker
                Deputy Inspector General, Compliance & Special Projects
TABLE OF CONTENTS ................................................................
EXECUTIVE SUMMARY .............................................................................................................2

ABBREVIATIONS .........................................................................................................................6

BACKGROUND .............................................................................................................................7
      Findings and Recommendation from OIG’s 2011 Evaluation Report on FHFA’s
      Lack of an Examiner Commission Program .............................................................................7
      FHFA’s Roll-Out of the HFE Program in 2013 .......................................................................8
      A Significant Percentage of Front-Line Enterprise Examiners Are Enrolled in the
      HFE Program ............................................................................................................................9
      Half of the 66 Examiners Enrolled in the HFE Program Have Been Granted Waivers
      for OJT and/or Course Requirements .....................................................................................10

COMPLIANCE REVIEW RESULTS ...........................................................................................10
      FHFA Did Not Possess Records Indicating that Enrolled Examiners Were Fulfilling
      Their OJT Requirements.........................................................................................................11
      More Than 20% of Enrolled Examiners in the HFE Program Had Completed No
      More than One of the Required Courses as of March 2015 ...................................................13
      FHFA Did Not Fully Comply with Its Controls for Approving Waivers of OJT and
      Course Requirements in Three of Five Tested Cases .............................................................13

RECOMMENDATION .................................................................................................................15

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................16

APPENDIX A ................................................................................................................................17
      FHFA’s Comments on FHFA-OIG’s Findings and Recommendation ..................................17

APPENDIX B ................................................................................................................................19
      FHFA-OIG’s Response to FHFA’s Comments ......................................................................19

ADDITIONAL INFORMATION AND COPIES .........................................................................20




                                            OIG  COM-2015-001  July 29, 2015                                                              5
ABBREVIATIONS .......................................................................

Agency or FHFA     Federal Housing Finance Agency

DBR                Division of Bank Regulation

DER                Division of Enterprise Regulation

DHMG               Division of Housing Mission and Goals

EDB                Examiner Development Branch

EIC                Examiners-in-Charge

Enterprises        Fannie Mae and Freddie Mac

Fannie Mae         Federal National Mortgage Association

FHLBanks           Federal Home Loan Banks

Freddie Mac        Federal Home Loan Mortgage Corporation

GARP               Global Association of Risk Professionals

GSE                Government Sponsored Enterprises, which includes Fannie Mae, Freddie
                   Mac, and the FHLBanks

HFE                Housing Finance Examiner

MBA                Mortgage Bankers Association

OCom               Office of Compliance and Special Projects

OIG                Federal Housing Finance Agency Office of Inspector General

OJT                On the Job Training

OPM                Office of Personnel Management




                          OIG  COM-2015-001  July 29, 2015                              6
BACKGROUND ..........................................................................

Findings and Recommendation from OIG’s 2011 Evaluation Report on FHFA’s Lack of
an Examiner Commission Program

In our September 2011 evaluation report on the
Agency’s capacity to examine the GSEs, we found                        Commission Program: A structured
that only about one-third of FHFA’s examiners were                     curriculum of classroom instruction
                                                                       and on-the-job training that
commissioned, and the Agency lacked a commission
                                                                       provides examiners with technical
program. Agency officials reported to OIG at that
                                                                       competencies and practical
time that the efficiency and effectiveness of the                      examination experience. A
Agency’s examination program was impeded by an                         commissioning program helps
insufficient number of commissioned examiners.1                        standardize examination processes
                                                                       and ensure the efficiency and
When OIG issued the 2011 report, FHFA was in the                       effectiveness of examinations.
early stages of developing an examiner commission
program2 patterned after programs at other federal financial regulatory agencies. We
recommended that FHFA management “[m]onitor the development and implementation of the
examiner [commission] program, and take needed actions to address any shortfalls.”

FHFA agreed with our recommendation; in October 2012, we closed it based upon the
Agency’s development of the program to date. At that time, the Agency had hired examiner
training specialists to assist in developing the program, contracted with the Office of
Personnel Management (OPM) to conduct assessments to define examiner competencies and
conduct skills assessments regarding their programs, and developed a proposed examiner
commission program for senior management review.




1
  During the 2011 evaluation, Agency officials said that even though only one-third of its examiners were
commissioned, taken as a whole the examination staff possessed significant professional diversity and expertise
in critical areas such as financial analysis, accounting, and the mortgage industry. During this Compliance
Review, the Deputy Director of the Division of Enterprise Regulation (DER) reiterated that many non-
commissioned examiners have advanced degrees and professional certificates as well as considerable mortgage
industry experience.
2
 FHFA used interchangeably the following terms: accreditation/commissioning and accredited/commissioned.
Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs, EVL-2011-005, at 23, 31 (Sept.
23, 2011).



                                    OIG  COM-2015-001  July 29, 2015                                            7
FHFA’s Roll-Out of the HFE Program in 2013

FHFA completed the development of the HFE program in 2013 and opened enrollment to
Agency employees in August of that year.3 In announcing the HFE program internally in
June 2013, the Agency explained that the program is intended to produce commissioned
examiners who meet high professional standards of training and experience, and are qualified
to lead the examination of major risk areas at any of the entities that the FHFA supervises.4
The Agency’s acknowledgement of the importance of commissioned examiners is further
underscored by its requirement that all non-commissioned examiners hired after July 17,
2013, are required to enroll in the program and to obtain their commissions.5

In its 2013 Performance and Accountability Report, FHFA stated:

          The main objective of the [HFE] program is to provide examiners with broad
          knowledge to conduct successful risk-based examinations. A Housing
          Finance Examiner Commission will indicate whether an examiner is
          qualified to lead the examination of a major risk area at Fannie Mae,
          Freddie Mac, and the Federal Home Loan Banks. The program…ensure[s]
          an examiner has the skills and technical knowledge necessary to evaluate the
          conditions and practices of the entities that FHFA supervises.6 (emphasis
          added)

As implemented, FHFA’s HFE program consists of:

         A total of 13 in-division and 3 cross-division OJT assignments (total of 16) during
          which enrolled examiners take part in examinations of the Enterprises and the
          FHLBanks. In-division OJT began in 2014, and cross-division OJT began in 2015;7

3
 FHFA opened enrollment in the HFE program to its employees in August 2013 and offered the first required
course in November 2013.
4
    FHFA internal HFE program guidance.
5
  FHFA initially considered making enrollment in the HFE Program mandatory for all examiners. However,
it ultimately decided otherwise because a considerable number of FHFA’s non-commissioned examiners
on board as of June 2013 had conducted examinations for many years. In 2014, FHFA awarded HFE
commissions to 65 examiners previously commissioned by other federal financial regulatory agencies.
6
    FHFA, 2013 Performance and Accountability Report, Planning for the Future.
7
 In-division OJT takes place wholly within FHFA’s two examination divisions, DER, which examines Fannie
Mae and Freddie Mac, and the Division of Bank Regulation (DBR), which examines the 11 FHLBanks and the
Office of Finance. In-division OJT assignments include all key risk areas.
Cross-division OJT assignments require examiners assigned to DER to work on DBR examinations of
FHLBanks, and examiners assigned to DBR to work on DER examinations of the Enterprises. Cross-division
OJT assignments are limited to the areas of credit risk, market risk, and capital risk.



                                     OIG  COM-2015-001  July 29, 2015                                     8
          12 internal courses on FHFA’s examination practices, credit risk, market risk, model
           risk, operational risk, governance risk, capital, and earnings, among others;

          Four external courses, with one offered by the Global Association of Risk
           Professionals (GARP) and three offered by the Mortgage Bankers Association (MBA),
           with associated tests or other requirements;8 and

          A final examination, including a mock presentation of examination findings.9

When it announced the HFE program internally, the Agency advised that, “[a] newly hired
examiner has four years to complete the program”10 and stated that “the program length may
be shortened for participants with prior classroom training and work experience.”11 During
our field work, FHFA officials provided us with different scenarios of the completion timeline
for the HFE program for the enrolled examiners, depending on the number of OJT and/or
course waivers (waivers are discussed in more detail below) granted to them. Under each
scenario, the completion time was projected at less than four years.

The HFE program is administered by the Agency’s Examiner Development Branch (EDB).
Among other things, the EDB coordinates OJT for enrolled examiners, administers courses
(e.g., identifies course instructors, reviews course content, and schedules course dates and
locations), reviews and approves waiver requests, and maintains records of enrolled
examiners’ progress in the HFE program and their completion of it.

A Significant Percentage of Front-Line Enterprise Examiners Are Enrolled in the HFE
Program

As of March 2015, there were 66 FHFA enrolled examiners in the HFE program.12 Of these
66,13 33 were examiners on the Fannie Mae and Freddie Mac Core Teams, which the Agency



8
  Enrolled examiners must earn GARP’s International Certificate in Banking Risk and Regulation by taking
the self-study course and passing an examination administered at the end of it. Additionally, enrolled
examiners must attend and successfully complete the MBA’s School of Mortgage Banking (I, II, and III).
9
    FHFA is working with OPM to develop the final exam. It is expected to be completed by late 2015.
10
     FHFA internal HFE program guidance.
11
     FHFA internal HFE program guidance.
12
  In this review, we refer to FHFA employees enrolled in the HFE program as “enrolled examiners” or
“examiners,” but we recognize that FHFA permits non-examiners to enroll in it and some are currently so
enrolled.
13
   Of the 66 enrolled examiners in the HFE program as of March 2015, 12 enrolled on a mandatory basis
(because they were hired on or after July 17, 2013), and 54 enrolled voluntarily.



                                     OIG  COM-2015-001  July 29, 2015                                    9
refers to as its front-line Enterprise examination units.14 Agency data indicate that 15 of 31
examiners (48%) on the Fannie Mae Core Team, and 18 of 25 examiners (72%) on the
Freddie Mac Core Team were enrolled in the HFE program.15

Half of the 66 Examiners Enrolled in the HFE Program Have Been Granted Waivers for
OJT and/or Course Requirements

In 2013, FHFA established a process to waive OJT and course requirements for examiners
with previous experience.16 By March 2015, FHFA had waived OJT and/or course
requirements for 33—or 50%—of the 66 enrolled examiners. See Figure 1, below. In
some cases, the waivers amounted to a majority of the HFE program’s total of 32 OJT and
course requirements. Specifically, FHFA waived approximately two-thirds of all program
requirements (21 or more waivers) for two examiners and half or more of all requirements
(16 or more waivers) for nine other examiners.

      FIGURE 1. NUMBER OF THE 66 ENROLLED EXAMINERS IN THE HFE PROGRAM WHO RECEIVED
                       OJT AND/OR COURSE WAIVERS AS OF MARCH 2015

      Enrolled         Enrolled           Enrolled           Enrolled           Enrolled
     Examiners        Examiners          Examiners          Examiners          Examiners
     Receiving        Receiving          Receiving          Receiving           Receiving            Total
       1 to 5           6 to 10           11 to 15           16 to 20          21 or More          Receiving
      Waivers          Waivers            Waivers            Waivers             Waivers            Waivers
          6                8                  8                  9                  2                 33
Source: FHFA records.


COMPLIANCE REVIEW RESULTS ................................................

The Agency has publicly announced the central goal of the HFE program: to produce
commissioned examiners who are qualified to lead major risk sections of GSE examinations.
Our Compliance Review found that, as of March 2015, the HFE program was not on track to




14
  The core teams, which are stationed on-site at Fannie Mae and Freddie Mac, are primarily responsible for
conducting examinations of the Enterprises.
15
  The remaining 33 examiners then enrolled in the program included 11 members of the DER staff who were
not core team members, 19 members of the DBR staff, and 3 members of the staff of the Division of Housing
Mission and Goals (DHMG).
16
   As discussed later in this report, enrolled examiners may submit forms requesting waivers based on their
previous OJT and course experiences. Newly hired examiners have three months from the date of their
enrollment in the HFE program to submit waiver requests.



                                    OIG  COM-2015-001  July 29, 2015                                         10
meet this goal, and the ability of many enrolled examiners to earn their commissions within
four years or less is at risk.

According to available Agency records, only one of the 66 examiners enrolled in the HFE
program had submitted to EDB official forms reflecting completion of any required OJT
assignments in 2014 and early 2015. OIG interviews with Agency officials did not identify
records indicating that enrolled examiners were progressing in meeting any of their non-
waived OJT requirements; and a considerable minority of enrolled examiners (23%) had
taken none or only one of their non-waived required courses on financial risks and housing
finance. Of the recorded progress made by the 33 enrolled examiners who had received
waivers in the HFE program as of March 2015, Agency records show that waivers accounted
for more than 72% of that progress. For 11 enrolled examiners, the waivers amounted to a
majority of the HFE program’s total of 32 OJT and course requirements. Our analysis of a
sample of approved waivers found that FHFA does not always follow its internal controls for
granting them.

FHFA Did Not Possess Records Indicating that Enrolled Examiners Were Fulfilling Their
OJT Requirements

FHFA requires enrolled examiners to record their completed OJT assignments on a form that
they submit to EDB. FHFA officials advised us that enrolled examiners may submit this
documentation to EDB as each OJT assignment is completed, or may wait until they have
completed all of their non-waived OJT activities to do so. As of March 2015, only one of the
66 enrolled examiners had submitted a form to EDB demonstrating completion of any of the
16 OJT requirements that had not been waived.17

Recognizing that this recordkeeping process might not fairly reflect whether enrolled
examiners were making progress in meeting the OJT requirements not already waived,
we sought to gather evidence from the Examiners-in-Charge (EIC) of the Fannie Mae and
Freddie Mac Core Teams, a DBR official, and the cross-divisional OJT coordinators for DER
and DBR regarding the progress made by enrolled examiners under their supervision.18 As
of March 2015, 48% of the 31 members of the Fannie Mae Core Team and 72% of the 25
members of the Freddie Mac Core Team were enrolled examiners in the HFE program;
FHFA projected that a typical OJT assignment would last 12 weeks. Given the logistics,
coordination, and personnel reassignments necessary to support completion of OJT
requirements as of March 2015, and considering the relatively small size of each core team,

17
   At the time of our Compliance Review, FHFA had not yet verified that the OJT assignments completed by
this enrolled examiner will qualify for credit toward an HFE commission.
18
  These FHFA officials were unable to provide records indicating that enrolled examiners were assigned to
and completing OJT requirements for the HFE program as of March 2015.



                                   OIG  COM-2015-001  July 29, 2015                                       11
we expected that the EIC for each core team would have some understanding about OJT
assignments for enrolled examiners on their respective teams. However, both EICs advised
us that they generally lacked information about OJT assignments because OJT was the
responsibility of their subordinate managers, and neither could provide us with records of
in-division OJT assignments being planned or undertaken by core team members who were
enrolled in the program.19 We inferred from the EICs’ general lack of knowledge and the
absence of records that enrolled examiners on those core teams were not progressing in
meeting their OJT requirements. We also spoke with two enrollees, both of whom enrolled in
the HFE program in 2013, one from DER and one from DBR. Both told us that, to date, they
had not been assigned to, or completed, any OJT tasks.

As our field work was ongoing, the Agency official responsible for administering the HFE
program sent an email to enrolled examiners from DER and DHMG asking them to document
the status of their OJT assignments to date while their memories were “still fresh.”20
Thereafter, the official reported to us that approximately 10 or 11 examiners responded to the
request, but neither the executive nor EDB officials had yet undertaken a substantive review
of the responses. Even if EDB determines the reported information represents valid OJT, it
indicates only about 23% of the DER and DHMG examiners enrolled in the HFE program
have reported being assigned to, or completing, any non-waived OJT during 2014 and early
2015.

We were also advised by Agency officials in March 2015 that cross-divisional OJT had been
suspended through the end of the second quarter of 2015 for logistical reasons. The officials
reported that, as currently structured, the cross-divisional curriculum could impede DER’s
ability to examine the Enterprises given the large number (44) of total DER staff (core team
and other staff) enrolled in the program that, at some point, would have to be assigned to DBR
to fulfill their cross-divisional OJT requirements. The officials said that they are considering
alternative approaches to cross-divisional OJT and expect it to resume in the second half of
2015.




19
   One EIC said that an enrolled examiner from DBR had completed a cross-division OJT assignment with
his core team. This individual is the only enrolled examiner who submitted forms to EDB reflecting any
OJT assignments. The other EIC said that one member of his core team had been assigned to DBR for
cross-division OJT and that he had hosted an enrolled examiner from DBR on his core team. At the time
of this Compliance Review, neither of these enrolled examiners had submitted forms to EDB reflecting
completion of any OJT assignments.
20
  As of March 2015, 47 of the 66 examiners enrolled in the HFE program were assigned to DER and DHMG.
The executive said she did not send the email to DBR examiners, of which there were 19 in March 2015,
because DBR officials said they were collecting OJT information separately.



                                   OIG  COM-2015-001  July 29, 2015                                    12
More Than 20% of Enrolled Examiners in the HFE Program Had Completed No More
than One of the Required Courses as of March 2015

In addition to OJT requirements, the HFE program requires enrolled examiners to complete
16 courses on financial risks and housing finance (minus any courses that have been properly
waived). As of March 2015, 46 of the 60 enrolled examiners (or 77%) who began the HFE
program prior to October 2014 had completed two or more non-waived courses.21 Among
these 46 examiners, 28 had completed five or more courses. As of that time, however, the
remaining 14 examiners (23%) had completed none or only one of their required courses.22
See Figure 2, below.

             FIGURE 2. COURSE COMPLETION AS OF MARCH 2015 BY ENROLLED EXAMINERS

     Completed Two or
       More Courses           Completed One Course         Completed No Courses                   Total
           46                          7                            7                              60*
*Excludes six examiners who enrolled after October 2014 since they may not have had the opportunity to
complete required courses yet. Source: FHFA records.

The Agency official in charge of the HFE program said she was concerned that some of the
enrolled examiners had taken none or only one of the required courses since the program’s
inception in 2013. That official noted that participation in the two HFE courses offered thus
far in 2015 had declined in comparison to earlier periods.

FHFA Did Not Fully Comply with Its Controls for Approving Waivers of OJT and Course
Requirements in Three of Five Tested Cases

As we reported earlier, FHFA waived OJT and course requirements for 33, or one-half, of the
66 examiners enrolled in the HFE program as of March 2015. FHFA waived two-thirds of the
requirements for two examiners, and more than half of them for nine other examiners.

FHFA established two levels of controls to help ensure that waiver requests from enrolled
examiners had merit. First, the enrolled examiner must complete and sign separate waiver
request forms, which summarize his or her previous OJT assignments or courses. Second, his



21
   FHFA records indicate that, thus far, enrolled examiners who have completed the internal courses have rated
them as either “good” or “excellent.”
22
   Of the 224 courses these 14 examiners had to complete to satisfy their HFE requirements (14 x 16 = 224),
FHFA waived 49 (or 22%) as of March 2015. That left the examiners with a total of 175 non-waived courses
(or 78%) to complete in order to finish the program (224 – 49 = 175). However, by March 2015, the 14
examiners together had completed only 7 non-waived courses (or 3%) of the 224 total.



                                    OIG  COM-2015-001  July 29, 2015                                           13
or her direct supervisor, the first executive in the chain of supervision, and an official in EDB
must review the forms and separately approve the waiver requests in writing.

As part of our verification testing of whether waivers were properly granted, we selected a
random sample of 15 examiners enrolled in the HFE program as of early March 2015 and
reviewed Agency documentation associated with them. Of the 15 examiners sampled, FHFA
approved waiver applications submitted by five of them, denied a waiver request in one case,
and the remaining nine did not request waivers.

For three of the five enrolled examiners, FHFA granted waivers even though not all of the
required signatures were on the associated forms. According to EDB’s records, one enrolled
examiner sought, and received, a waiver for 15 OJT and course requirements, nearly half of
the 32 OJT and course requirements in the HFE program. When we reviewed the OJT and
course waiver applications, we found that they contained written approvals from the direct
supervisor and first executive but not from the EDB official. The OJT and course waiver
documentation for a second enrolled examiner were approved, even though the required
signature from the executive was missing. The documentation for a third enrolled examiner
in our sample was missing an EDB signature for one requested OJT waiver.23 In the other
two instances in which a waiver was granted, we found that FHFA approved them in
accordance with its controls.

We asked the Agency official responsible for the HFE program and several members of the
EDB staff to explain why waivers of program requirements were granted for three enrolled
examiners, notwithstanding FHFA’s failure to follow its own internal controls. The official
explained that, for two of the waiver applications, she provided written approval in late April
2015, after the waivers were granted. Even though this post-hoc approval cures the defects
in two enrolled examiners’ waiver applications, the documentation for the other enrolled
examiner was still missing an executive’s signature as of late April 2015.

FHFA records demonstrate that the Agency has waived OJT and course requirements for 33,
or one-half, of the 66 enrolled examiners in the HFE program as of March 2015. In light of
the findings in our sample, we believe that FHFA lacks reasonable assurance that all of the
waivers satisfied the criteria that it established for granting them.




23
  We also found that EDB had not updated its HFE tracking spreadsheet to reflect one enrolled examiner’s
waivers for two courses.



                                   OIG  COM-2015-001  July 29, 2015                                      14
RECOMMENDATION .................................................................

FHFA should determine the causes of the shortfalls in the HFE program that we have
identified, and implement a strategy to ensure the program fulfills its central objective of
producing commissioned examiners who are qualified to lead major risk sections of GSE
examinations.




                               OIG  COM-2015-001  July 29, 2015                              15
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

Our overall objective for this Compliance Review was to determine whether FHFA
management ensured the effective implementation of the HFE program from August 2013 to
March 2015. Our sub-verification objectives were as follows:

        Verify that enrolled examiners are completing required OJT activities,

        Verify that enrolled examiners are completing course requirements, and

        Verify FHFA’s compliance with waiver process controls.

To address these objectives, we reviewed key HFE documents, such as program requirement
documentation, HFE’s tracking spreadsheet, and HFE waiver forms and guidance.

Additionally, we interviewed the Deputy Directors for DER and DBR, the EICs for the
Enterprise core teams, a DBR Associate Director, the cross-divisional OJT coordinators for
DER and DBR, two HFE enrollees, the Senior Associate Director of the Office of Supervision
Policy, the former Acting Director of EDB, and members of the EDB staff.

We tested FHFA’s compliance with various controls for the HFE program. Specifically, we
reviewed a randomly selected sample of 15 files from the 66 enrollees in the program as of
March 6, 2015. The results of our testing on the files in the sample cannot be projected to the
population of 66 (such a sample would need to be nearly as large as the population itself given
its small size). However, the sample size of 23% of the population is consistent with audit
guidance on the selection of samples for small populations. The guidance is to select a
sample equal to 10% or more of a population comprised of 52 to 250 items.24

We conducted our Compliance Review during the period February to May 2015 under the
authority of the Inspector General Act and in accordance with the Quality Standards for
Inspection and Evaluation (January 2012), which were promulgated by the Council for the
Inspectors General on Integrity and Efficiency.




24
  American Institute of Certified Public Accountants, Audit Sampling Considerations of Circular A-133
Compliance Audits (2009).



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APPENDIX A .............................................................................

FHFA’s Comments on FHFA-OIG’s Findings and Recommendation




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OIG  COM-2015-001  July 29, 2015   18
APPENDIX B..............................................................................

FHFA-OIG’s Response to FHFA’s Comments

On July 22, 2015, FHFA provided comments to a draft of this report. See Appendix A.
FHFA agreed with the recommendation. FHFA described a variety of actions it plans to
strengthen the administration of the HFE program. These include in summary:

      Enhancing recordkeeping and communication mechanisms so that EDB periodically
       communicates to enrolled examiners and their managers EDB’s record of the
       remaining program requirements for each examiner (these procedures will be
       established by December 15, 2015);

      Requiring enrolled examiners to prepare plans for completing HFE program
       requirements within reasonable timeframes, requiring managers to review and approve
       these plans, and incorporating HFE commission requirements into performance
       management discussions (these procedures will be issued by December 15, 2015);

      Establishing by December 15, 2015, enhanced information reporting processes to
       ensure that DER and DBR senior managers receive periodic updates on enrolled
       examiners’ progress in meeting HFE program requirements;

      Reviewing by October 8, 2015, all waivers issued through June 30, 2015, to ensure
       the documentation is complete, and determining by December 15, 2015, whether
       additional waiver guidance is necessary; and

      Determining by November 5, 2015, whether and how to continue the requirement for
       cross-division OJT.

OIG considered FHFA’s full response in finalizing this report. We consider the planned
actions sufficient to resolve the recommendation, which will remain open until OIG
determines that the agreed upon corrective actions are completed.

FHFA also provided technical comments on the draft report that have been incorporated into
the final report as appropriate.




                             OIG  COM-2015-001  July 29, 2015                              19
ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202-730-0880

      Fax: 202-318-0239

      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call: 1-800-793-7724

      Fax: 202-318-0358

      Visit: www.fhfaoig.gov/ReportFraud

      Write:

                FHFA Office of Inspector General
                Attn: Office of Investigation – Hotline
                400 Seventh Street, S.W.
                Washington, DC 20024




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