oversight

FHFA's Oversight of the Enterprises' Charitable Activities

Published by the Federal Housing Finance Agency, Office of Inspector General on 2012-03-22.

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

TO:                Jeffrey Spohn,
                   Senior Associate Director, Office of Conservatorship Operations




FROM:              George Grob,
                   Deputy Inspector General for Evaluations


SUBJECT:           Evaluation Survey Report 2012-003
                   FHFA’s Oversight of the Enterprises’ Charitable Activities


DATE:              March 22, 2012


This memorandum reports the results of FHFA-OIG’s survey of FHFA’s oversight of the
charitable activities of Fannie Mae and Freddie Mac (the Enterprises).

At the time the conservatorships were established, both Fannie Mae and Freddie Mac were
making substantial contributions to charitable organizations. In 2008, the Enterprises’ total
charitable giving and related expenses amounted to $73 million. Although funding charitable
activities may have been appropriate for the Enterprises acting as private businesses, questions
have arisen concerning whether it is still appropriate now that they rely on taxpayer funds to
cover their annual losses. Therefore, FHFA-OIG reviewed FHFA’s oversight of:

          Current and planned funding of Enterprise-sponsored charitable spending;
          The nature of the charities supported by such spending; and
          The policies and procedures established to control spending.

FHFA-OIG analyzed relevant documents and data, and spoke to FHFA and Enterprise staff
familiar with the charitable giving programs.

Charitable giving has continued since the conservatorships were established, totaling $147
million from 2009 through 2011. However, FHFA-OIG found that, in December 2008, FHFA
established controls to ensure charitable giving would be consistent with the Enterprises’ housing
missions, well managed and monitored, and not politically motivated. Additionally, in early
2010, FHFA issued a series of directives to phase out all of the Enterprises’ charitable giving and
established various target dates for doing so. By 2011, the Enterprises’ combined annual
donations have leveled-off at $50 million; corporate donations are scheduled to end in 2013; and
payments from the Freddie Mac Foundation are targeted to end in early 2015. In light of
FHFA’s controls over and planned phase out of the Enterprises’ charitable activities, FHFA-OIG
has decided that there is no need to conduct additional evaluative work in this area at this time.
However, FHFA-OIG will continue to monitor FHFA’s oversight of the Enterprises’ charitable
giving and will revisit this subject if necessary.

FHFA-OIG recommends that FHFA:

       (1) Continue to monitor the Enterprises’ progress; and
       (2) Continue to require the Enterprises to issue timely, quarterly reports on their
           charitable activities via their websites.

The details of FHFA-OIG’s analysis can be found in the Attachment to this memorandum
entitled, “Evaluation Survey Report: FHFA’s Oversight of the Enterprises’ Charitable
Activities.” FHFA agreed with FHFA-OIG’s recommendations, and its response can be found in
its entirety at Appendix C to the Attachment.

This survey was conducted by Investigative Evaluator Bruce McWilliams and Investigative
Counsel Christopher G. Poor. FHFA-OIG appreciates the cooperation of FHFA and Enterprise
staff, as well as the assistance of all those who contributed to the preparation of this report.

Attachment: Evaluation Survey Report: FHFA’s Oversight of the Enterprises’ Charitable
            Activities

cc: Mark Kinsey, Chief Financial Officer
    Bruce Crandlemire, Senior Advisor




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                                                 ATTACHMENT




           Evaluation Survey Report No. 2012-003




FHFA’s Oversight of the Enterprises’ Charitable Activities




                Federal Housing Finance Agency
                  Office of Inspector General
                        March 22, 2012




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          FHFA’s Oversight of the Enterprises’ Charitable Activities


Purpose
The purpose of this survey is to assess oversight by the Federal Housing Finance Agency (FHFA
or the Agency) of charitable spending by the Federal National Mortgage Association (Fannie
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Background
In 2008, the Housing and Economic and Recovery Act (HERA)1 established FHFA as the
regulator of two housing government-sponsored enterprises: Fannie Mae and Freddie Mac
(collectively, the Enterprises). In September 2008, the Enterprises entered conservatorships
overseen by FHFA due to concerns about their deteriorating financial condition. As conservator,
FHFA, among other things, may take such action as it deems “necessary to put the regulated
entity in a sound and solvent condition,” and “appropriate to carry on the business of the
regulated entity and preserve and conserve [its] assets and property.”2

           Charitable Giving Programs

At the time the conservatorships were established, both Fannie Mae and Freddie Mac were
making substantial contributions to charitable organizations through the following mechanisms:3

      Fannie Mae

              The Fannie Mae Foundation (dissolved in 2009);
              Direct corporate contributions; and
              Matching donations for employees’ personal charitable giving.

      Freddie Mac

              The Freddie Mac Foundation;

1
    Public Law No. 110-289.
2
    HERA at § 1145 (codified at 12 U.S.C. § 4617(b)(2)(D)).
3
 As private companies, unless restricted by applicable law or their bylaws and charters, Fannie Mae and Freddie
Mac are free to contribute to charities as their managers and boards of directors deem appropriate. With the advent
of the conservatorships, and FHFA’s assumption of all rights of officers, board members, and shareholders, the
Agency has authority to control the Enterprises’ charitable activities.


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            In-kind corporate support (e.g., employee salaries and office space) of the Freddie
             Mac Foundation;
            Contributions through the Freddie Mac Donor Advised Fund (DAF) program;
            Direct corporate contributions (ended after 2010); and
            Matching donations for employees’ personal charitable giving.

Since the conservatorship commenced in the third quarter of 2008, Fannie Mae’s charitable
giving has decreased each year at the corporate level, but the Freddie Mac Foundation’s giving
has increased. The majority of Freddie Mac’s charitable giving is not taxpayer subsidized, but
instead is derived from the pre-funded reserves of the Foundation. The surge in the Freddie Mac
Foundation’s charitable giving is intended to more rapidly empty the Foundation’s trust fund.

From 2008 through 2011, the Enterprises’ and Freddie Mac Foundation’s charitable giving and
related expenses totaled $219 million.

        Oversight of Charitable Giving Initially Continued After Conservatorship

Direct Control. On October 20 2008, FHFA’s then-Director issued his “Initial Conservator
Guidance,”4 which, among other things, allowed the Enterprises to continue charitable activities
because of the supporting role that such activities would play during the economic downturn.
However, FHFA subjected the Enterprises’ charitable activities to additional oversight.
Specifically, FHFA reviewed and approved each charitable funding proposal during the initial
months of the conservatorship.

Delegated Authority. On December 18, 2008, FHFA amended its October requirement that the
Agency must review individual requests. FHFA’s then-Director delegated to Fannie Mae and
Freddie Mac authority to approve charitable contributions, subject to FHFA guidance and to
board of directors and senior management oversight. FHFA’s new guidance, “controls and
process improvements,”5 included increasing focus on activities related to housing; preventing
foreclosures; working to reduce homelessness and stabilize neighborhoods; and prohibiting
contributions for political purposes. The new controls and process improvements also required
the Enterprises to report quarterly to FHFA about:

       All charitable activities and payments to charitable organizations;
       How each charitable recipient’s objectives corresponded to the objectives of the
        donation;
4
  “Fannie Mae and Freddie Mac Overview of Charitable Contributions under Conservatorship,” Director’s
Presentation, Office of Federal House Enterprise Oversight, October 20, 2008, p.8. (Although the presentation
slides include the Office of Federal Housing Enterprise Oversight (OFHEO) logo, FHFA had replaced OFHEO by
this point.)
5
 Descriptive terminology used to describe the steps in December 18, 2008, letters to Herbert M Allison, Jr., Chief
Executive Officer, Fannie Mae, and to David M. Moffett, Chief Executive Officer, Freddie Mac.


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      Whether the charitable recipients met their goals; and
      The adequacy and effectiveness of internal controls, as assessed by internal audits.

Fannie Mae and Freddie Mac were also required to post their reports on their websites, and to
develop a management process to certify compliance with their FHFA-approved housing mission
objectives; attest to the adequacy of their internal control environment; and certify to the
accuracy of their quarterly funding reports.

Oversight. FHFA’s Office of Conservatorship Operations (OCO) oversees the Enterprises’
charitable giving activities by reviewing their:

      Charitable giving budgets and processes;
      Quarterly charitable reports;
      Annual certifications; and
      Internal and external audit reports of their charitable activities.

OCO also requires both Enterprises to establish processes to ensure public speaking engagements
are vetted within their company to confirm strict avoidance of lobbying or political activities.
Additionally, OCO attends Freddie Mac Foundation board and committee meetings.

       Subsequent Plans to End Charitable Giving

On March 1, 2010, and May 7, 2010, FHFA’s Acting Director issued directives to curtail – and
eventually end – the Enterprises’ charitable giving. Regarding Fannie Mae, the Acting Director
ordered it to wind-down all charitable giving by the end of 2013. On January 31, 2012, FHFA
capped 2013 charitable giving and provided additional direction for matching employee
charitable contributions.

The legal structure of Freddie Mac’s charitable operations presented more of a challenge because
the Freddie Mac Foundation (unlike the Fannie Mae Foundation) continues to operate. In 2009,
the Freddie Mac Foundation submitted a plan to wind-down the Foundation in approximately
eight years. In 2010, the Foundation’s Board was asked to re-evaluate that plan and develop
alternative strategies for a faster wind-down. In 2011, Freddie Mac was directed to wind-down
the Foundation by 2014 or early 2015. To do so, the Foundation has accelerated the outlay of
funds from its trust, and this caused an increase in its giving in 2011.

According to Virginia law and the Internal Revenue Code, the Foundation cannot be shut down
until all funds in its trust are spent or transferred to another qualifying foundation. To the extent
that the Freddie Mac Foundation still has funds at the end of 2014, it will make lump sum
distributions to charities in the early part of 2015.




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During 2010 and 2011, the Acting Director also directed Freddie Mac to:

         Stop direct corporate charitable contributions in 2011 and beyond;
         Eliminate in-kind contributions related to personnel expenses of the Freddie Mac
          Foundation beginning in 2012;
         Eliminate two director vacancies at the Foundation; and
         Disburse funds within the Freddie Mac DAF by 2013.

In view of FHFA’s directives to wind-down charitable donations and non-profit support, the
Enterprises have reduced charitable spending as illustrated in the figure below.

     Fannie Mae & Freddie Mac Charitable Giving and Related Expenses6
        in $Millions
         $80
                        $73
         $70            $33
         $60
                                               $49                    $47                    $50
         $50
                                               $33                     $30                    $24
         $40
                        $39
         $30

         $20                                                                                  $26

                                               $17                     $17
         $10

          $0
                        2008                   2009                   2010                   2011

                                             Fannie Mae           Freddie Mac

          (All charitable grants, employee matching, and administrative expenses were $219 million for 2008-2011.)




6
 See Appendix A for additional information about Freddie Mac’s charitable giving and Appendix B for information
about Fannie Mae’s activities.


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Conclusion
FHFA has taken significant steps to implement its oversight of the Enterprises’ charitable
contributions programs, including the creation of detailed program controls. Further, the Agency
has established a policy of reducing the amount of the Enterprises’ charitable contributions over
an established timeframe.

Recommendations
FHFA-OIG recommends that FHFA:

       (1) Continue to monitor the Enterprises’ progress; and
       (2) Continue to require the Enterprises to issue timely, quarterly reports on their
           charitable activities via their websites.




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Appendix A – Freddie Mac Charitable Giving
Since 2008, Freddie Mac and the Freddie Mac Foundation have dedicated $99 million towards
charitable activities. Of this, $8 million has been spent on in-kind administrative support and
$24 million on corporate community investments, as shown in the table below.

                                          Freddie Mac Charities
                                               ($ millions)
                                                     2008        2009           2010        2011        Total
        Freddie Mac Foundation
        Grants & Contributions                         $15         $12            $12         $20         $59
        Matching Employee
        Personal Charitable Giving                      $1          $1             $1           $2          $6
        In-Kind Support: Payment of
        the Foundation’s
        Administrative Expenses                         $2          $2             $2           $2          $8

        Donor Advised Fund                              $0          $0             $0           $2          $2
        Corporate Community
        Investments                                    $21          $2             $1           $0        $24
        Total                                          $40         $17            $17         $26         $99
     Note: Numbers may not total due to rounding.

Freddie Mac Foundation

The Freddie Mac Foundation was incorporated in 1991 as a charitable nonprofit corporation.
Since 2003, it has been funded by an irrevocable trust, and it does not rely on Freddie Mac
operational funds or other corporate donations.

The Foundation1 invests primarily in programs that:

        Create stable homes and families, support emergency shelter, or provide transitional
         housing;
        Improve the lives of foster children by helping to place them in homes; and
        Help young people in low-income communities through academic and career success
         activities.

In addition, the Foundation matched charitable contributions – up to $10,000 annually – made by
Freddie Mac employees and Freddie Mac Foundation board members through 2010. In 2011,
the matching cap increased to $20,000.

1
 For a complete list of charitable and nonprofit organizations that received contributions or grants from the Freddie
Mac Foundation, see http://www.freddiemacfoundation.org.


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In-Kind Support for the Foundation
Before 2007, the Foundation reimbursed Freddie Mac for office space, employee salaries, and
other administrative expenses. In 2007, Freddie Mac decided to follow industry practice and pay
all of the Foundation’s employee salaries and other selected expenses. FHFA has directed
Freddie Mac to stop making in-kind personnel and related expense contributions, and so,
beginning in 2012, the Foundation will reimburse the Enterprise for salaries paid on its behalf.
However, the Foundation will not reimburse Freddie Mac for facilities and equipment costs.

Donor Advised Fund

In December 2002, Freddie Mac and the Community Foundation for the National Capital Area
established the DAF with a $20 million irrevocable gift from the Enterprise. According to the
Internal Revenue Code, generally, a donor advised fund is a separately identified fund or account
that is maintained and operated by a nonprofit organization, which is referred to as a sponsoring
organization. Each account is composed of contributions made by individual donors. Once the
donor makes the contribution, the sponsoring organization has legal control over it. However,
the donor, or the donor’s representative, retains advisory privileges with respect to distributing
funds and investing assets in the account.

No money was disbursed from the DAF between the commencement of the conservatorship and
December 31, 2009. In 2010, FHFA directed Freddie Mac to assert more control over the DAF,
and funds began to be disbursed. Freddie Mac intends for the DAF to exhaust its funding in
2013. As of December 31, 2011, the DAF’s account balance was approximately $5 million.

Freddie Mac Corporate Donations
Freddie Mac also made direct corporate donations to nonprofit organizations for charitable and
business purposes. The former contributions typically supported nonprofits that create and
preserve affordable housing, help prevent foreclosures, and strengthen communities.2

FHFA directed Freddie Mac to stop making corporate donations after 2010. And, in its
Enterprise Nonprofit Spending Plan for 2011, Freddie Mac pledged that the Freddie Mac
Foundation or the DAF would henceforth fund all of the Enterprise’s purely corporate charitable
donations.




2
 For a list of corporate community investment recipients, see http://www.freddiemac.com/
corporate/citizenship/pdf/2011_corp_comm_investments.pdf.


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Appendix B – Fannie Mae Charitable Giving
From 2008 through the fourth quarter of 2011, Fannie Mae spent $120 million on charitable
activities, as shown in the table below. This includes charitable grants, expenses for a “Help the
Homeless Walk-a-thon,” employee matching gifts, and $19 million in administrative expenses.

                                           Fannie Mae Charities
                                               ($ millions)
                                                   2008         2009         2010        2011          Total
           Fannie Mae Foundation                               Dissolved in 2009
           Direct Corporate
           Contributions to Charities               $261          $26          $24         $19          $96
           Matching Employee
           Personal Charitable Giving                 $1           $1           $2          $1           $5


           Administrative Expenses2                   $6           $5           $4          $3          $19
                          Total              $33      $33                      $30         $24         $120
         Note: Numbers may not total due to rounding.

Fannie Mae Foundation

In 2007, Fannie Mae began to wind-down the Fannie Mae Foundation. By 2009, the foundation
was dissolved.

Direct Corporate Contributions to Charities
Fannie Mae provides grants to nonprofit organizations to support:

              Foreclosure prevention and neighborhood stabilization initiatives;
              Efforts to prevent homelessness; and
              Affordable housing opportunities.3




1
    Includes charitable contributions administered by the Office of Community and Charitable Giving.
2
 Administrative expenses include $6 million in professional service fees incurred primarily for the Help the
Homeless Walk-a-thon on the National Mall.
3
 For a complete list of charitable and nonprofit organizations that received contributions or grants from Fannie Mae,
see http://www.fanniemae.com/portal/about-us/company-overview/charitable-giving.html.


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Matching Employees’ Personal Charitable Giving
From 2008 through 2010, Fannie Mae matched charitable contributions – up to $10,000 annually
– made by Enterprise employees. Further, the first $500 in employee donations was matched on
a 2-for-1 basis. Beginning in 2011, the annual matching cap was reduced to $5,000, and double
matching was eliminated. Total matching contributions are to be reduced to $0.8 million in
2012. On January 31, 2012, FHFA capped the 2013 charitable giving and provided additional
direction for matching employee charitable contributions.

Fannie Mae also sponsors an employee program called “Dollars for Doers.” Under the program,
the Enterprise contributes $100 to a charity for every 25 hours of community service performed
by its employees at the charity, and up to $500 for 100 hours of service.

Administrative Expenses

Fannie Mae’s Office of Community and Charitable Giving oversees selecting and funding
charitable recipients. The Office was created in July 2007, and is subject to oversight by the
Nominating and Corporate Governance Committee of the Board of Directors.

Each year, the Office of Community and Charitable Giving meets with business units to identify
nonprofit groups whose work and mission aligns with Fannie Mae’s grant-making objectives.
The Office does not accept unsolicited grant requests and has indicated that it will not provide
grants to lobbyists or politically affiliated groups.




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Appendix C – Response to Conclusion and Recommendations




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Appendix D – Objective, Scope, and Methodology
The purpose of this survey was to assess FHFA’s oversight of charitable spending by Fannie
Mae and Freddie Mac.

In light of the controls that FHFA has established over charitable activities and its plan to phase
out such activities, FHFA-OIG decided to limit its review.

To assess the appropriateness of FHFA’s oversight, FHFA-OIG analyzed:

      Information regarding the nature and structure of charitable giving programs of Fannie
       Mae and Freddie Mac, both before and after they entered conservatorships;
      Cost streams for each year beginning in 2008 (the first year of conservatorships) through
       2011;
      Guidance issued by FHFA concerning the purpose, scope, and funding goals for each line
       of charitable giving;
      Administrative procedures that govern the selection, funding, periodic reporting, and
       auditing of charities that were funded; and
      Plans for the phasing out of charitable activities.

FHFA-OIG did not independently audit charitable activities funded by the Enterprises or test
their compliance with FHFA’s guidance. However, FHFA-OIG will monitor FHFA’s oversight
of the Enterprises’ charitable giving during the phase out period and will revisit this subject if
necessary.




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Additional Information and Copies

For additional copies of this report:
       Call the Office of Inspector General (FHFA-OIG) at: 202-730-0880
       Fax your request to: 202-318-0239
       Visit the FHFA-OIG website at: www.fhfaoig.gov


To report alleged fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:
       Call our Hotline at: 1-800-793-7724
       Fax us the complaint directly to: 202-318-0358
       E-mail us at: oighotline@fhfa.gov
       Write to us at: FHFA Office of Inspector General
                       Attn: Office of Investigations – Hotline
                       400 Seventh Street, S.W.
                       Washington, DC 20024




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