oversight

Update on FHFA's Efforts to Strengthen its Capacity to Examine the Enterprises

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-12-19.

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

            Federal Housing Finance Agency
                Office of Inspector General




    Update on FHFA’s Efforts to
 Strengthen its Capacity to Examine
          the Enterprises




Evaluation Report  EVL–2014–002  December 19, 2013
               Update on FHFA’s Efforts to Strengthen its Capacity to
               Examine the Enterprises
               Why OIG Did This Report
               The Federal Housing Finance Agency’s (FHFA or the Agency) examination program
               is a primary means by which it supervises and regulates the housing government-
               sponsored enterprises (GSEs). An effective examination program is essential for the
Synopsis       Agency to ensure that the GSEs operate in a safe and sound manner and serve as a
               reliable source of liquidity and funding for housing finance and community
  ———          investment.

December 19,   In a September 2011 evaluation report, we identified aspects of the Agency’s
               examination program that caused us to be concerned about its capacity to meet critical
    2013
               responsibilities. Specifically, we concluded that the Agency lacked a sufficient
               number of examiners and that many of its examiners had not been accredited through
               a professional commission program. Moreover, we observed that the Agency had
               recently reorganized its examination program to strengthen its oversight.
               In this evaluation report, we provide an update on FHFA’s efforts to address the issues
               raised in our 2011 report. We focus primarily on FHFA’s oversight of the Federal
               National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
               Corporation (Freddie Mac) (together, the Enterprises), rather than the Federal Home
               Loan Banks (FHLBanks), due to the scale of the Enterprises’ activities and the
               potential risks they pose to taxpayers.

               OIG’s Analysis and Findings
               FHFA Initiatives to Strengthen its Examination Capacity
               Since our 2011 report, FHFA has taken several steps to enhance its examination
               capacity. These include appointing a new team of examination executives, several
               of whom have prior experience in the Federal Reserve’s Division of Banking
               Supervision and Regulation.
               Additionally, FHFA:
                      Determined that its February 2011 reorganization of the GSE
                       examination program had some flaws and inefficiencies that affected
                       its operations. In 2012 and 2013, FHFA addressed these flaws and
                       inefficiencies by consolidating most examination responsibility and staff
                       in the Division of Enterprise Regulation’s (DER) core teams, and
                       relocating the core teams from the Agency’s headquarters to the
                       Enterprises’ facilities.
                      Increased the number of its GSE examiners by about 9%, from
                       approximately 131 in September 2011 to 143 in October 2013; and
                       emphasized hiring examiners with prior experience at other federal
                       financial regulators. FHFA said that as of October 1, 2013, the
                       Enterprise core teams were at their authorized levels of 32 for Fannie
                       Mae and 29 for Freddie Mac, including anticipated new hires (FHFA
                       later authorized several additional examiner positions for the Fannie Mae
                       core team).
                      Developed, and is in the early stages of implementing, an examiner
                       commission program. Initial enrollment data indicate that examiner
                       interest in the commission program is high.

               FHFA Has Not Yet Developed a Systematic Process to Determine the Appropriate
Synopsis       Size of its Enterprise Examination Core Teams
  ———          FHFA’s recent revisions to its examination program are based upon the examination
               approaches for large banks employed by other federal financial regulators, including
December 19,   the Office of the Comptroller of the Currency (OCC). Unlike the OCC, however,
    2013       FHFA does not employ a systematic and documented process to determine the
               appropriate size of its Enterprise core teams. Instead, FHFA sets the size of its core
               teams pursuant to an undocumented process that appears to be based largely upon its
               executives’ judgment and budgetary considerations.
               We conducted a limited assessment of FHFA’s implementation of its calendar year
               2013 examination plans for the Enterprises and determined that many planned
               activities were either completed or in-process. However, we noted that one of the two
               Enterprise core teams had rescheduled about 40% of its targeted examinations to the
               fourth quarter of 2013. As a result, some of the team’s exams may not be completed
               until 2014, although the team initially planned to complete most of them during 2013.
               FHFA officials said that the core teams’ annual examination plans are subject to
               revision based upon management’s assessment of changing priorities and resource
               requirements. However, without a systematic process by which to set the size of its
               core teams, FHFA cannot be assured that they are adequately staffed to conduct
               planned examination activities on a timely and thorough basis. Indeed, the
               Examiners-in-Charge of both core teams told us that limited examination resources
               and staff turnover adversely affected their operations during 2013.

               What OIG Recommends
               We recommend that, among other things, FHFA develop a systematic process by
               which to ensure that the Enterprise core teams have the staffing necessary to execute
               their annual examination plans. FHFA agreed with this recommendation.
TABLE OF CONTENTS ................................................................

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

PREFACE ........................................................................................................................................7

DISCUSSION AND ANALYSIS....................................................................................................9
      FHFA’s 2012 and 2013 Revisions to the 2011 Reorganization of its Housing GSE
      Examination Structure ..............................................................................................................9
              FHFA’s Initial Examination Structure and its 2011 Reorganization ................................9
              FHFA Executives Identified Weaknesses in Certain Aspects of the 2011
                 Reorganized Examination Structure ........................................................................11
              FHFA’s 2012 and 2013 Revisions to the Examination Structure ...................................11
              FHFA Officials Believe that the Revisions Strengthened the GSE Examination
                 Program, but they also May Have Resulted in some Short-Term
                 Disruptions ..............................................................................................................12
      FHFA Has Increased the Size of its Examination Corps Incrementally with a Focus
      on Recruiting Experienced Staff .............................................................................................13
              2011 OIG Examination Capacity Report Findings .........................................................13
              The Overall Number of FHFA Examiners Has Increased ..............................................14
              DER’s Enterprise Core Teams Were Fully Staffed as of October 2013 ........................15
      OIG’s Initial Assessment of FHFA’s Implementation of its Calendar Year 2013
      Examination Plans for the Enterprises ....................................................................................16
              FHFA’s 2013 Enterprise Examination Planning Process ...............................................17
              Enterprise Core Teams Provided Documentation to Varying Degrees for Nearly
                  All Ongoing Monitoring Activities in our Sample ..................................................18
              Majority of Targeted Examinations Were Ongoing or Yet To Be Started as of
                 September 2013 .......................................................................................................19
              FHFA Officials Said that Examination Schedules Are Intended To Be Flexible ..........20
      FHFA’s Development and Initial Implementation of its Examiner Commission
      Program...................................................................................................................................21

FINDING .......................................................................................................................................23




                                         OIG  EVL–2014–002  December 19, 2013                                                                 4
      FHFA Lacks a Systematic Process for Establishing the Appropriate Size of its
      Enterprise Examination Core Teams ......................................................................................23

CONCLUSIONS............................................................................................................................25

RECOMMENDATIONS ...............................................................................................................25

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................26

APPENDIX A ................................................................................................................................28
      FHFA’s Comments on OIG’s Finding and Recommendation ...............................................28

APPENDIX B ................................................................................................................................30
      OIG’s Response to FHFA’s Comments .................................................................................30

ADDITIONAL INFORMATION AND COPIES .........................................................................31




                                        OIG  EVL–2014–002  December 19, 2013                                                              5
ABBREVIATIONS .......................................................................

COO                Chief Operating Officer

DBR                Division of Federal Home Loan Bank Regulation

DEPS               Division of Examination Programs and Support

DER                Division of Enterprise Regulation

DHMG               Division of Housing Mission and Goals

DSPS               Division of Supervision Policy and Support

EIC                Examiner-In-Charge

Enterprises        Fannie Mae and Freddie Mac, collectively

Fannie Mae         Federal National Mortgage Association

FDIC               Federal Deposit Insurance Corporation

FHFA or Agency     Federal Housing Finance Agency

FHLBank            Federal Home Loan Bank

Freddie Mac        Federal Home Loan Mortgage Corporation

GSE                Government-Sponsored Enterprise

HERA               Housing and Economic Recovery Act of 2008

HFE                Housing Finance Examiner

OCC                Office of the Comptroller of the Currency

OIG                Federal Housing Finance Agency Office of Inspector General




                        OIG  EVL–2014–002  December 19, 2013                      6
PREFACE ...................................................................................

Since September 2008, FHFA has been the conservator of Fannie Mae and Freddie Mac,
which own or guarantee about $5 trillion in mortgage assets. As their conservator,1 FHFA
must ensure that the Enterprises carry out their primary mission to provide liquidity to the
housing finance system and do so in a safe and sound manner. At the same time, FHFA
oversees the 12 FHLBanks which have collectively had about $775 billion in assets. The
Agency must also ensure that they operate in a safe and sound manner consistent with their
housing and community development missions.

According to FHFA, on-site safety and soundness examination is the primary tool that it
employs to assess the financial condition, performance, and operations of its regulated
entities.2

In a September 2011 evaluation report, we noted that FHFA had recently reorganized its
examination program to address deficiencies in its prior organizational structure.3 We also
identified two concerns about the Agency’s examination program capacity. Specifically, we
reported that FHFA:

        Had examination staff shortages that adversely affected the quality of its GSE
         examinations; and
        Lacked an examiner commission program with only a relatively small percentage of
         its examiners having been commissioned elsewhere, and that these things impeded the
         efficiency of its examination program.4

We initiated this evaluation to provide an update on FHFA’s efforts to address the issues
identified in our 2011 report. Specifically, this evaluation report updates: (1) FHFA’s efforts
to ensure that an effective organizational structure for examinations is in place; (2) the level of
examiner staffing and its impact on FHFA’s ability to carry out established responsibilities;
1
 On September 6, 2008, FHFA, as authorized by the Housing and Economic Recovery Act of 2008 (HERA),
placed the Enterprises into conservatorships. See Public Law No. 110-289 § 1145.
2
 See FHFA, 2011 Performance and Accountability Report: Building a Financial Infrastructure for the
Future, at 17 (November 14, 2011) (online at http://www.fhfa.gov/webfiles/22756/FHFAPAR_2011.pdf).
3
 OIG, Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs (EVL-2011-005,
September 23, 2011) (online at: http://www.fhfaoig.gov/Content/Files/EVL-2011-005.pdf) (hereinafter cited as
“2011 OIG Examination Capacity Report”).
4
  As explained in this report, an examiner commission program involves structured classroom instruction and
on-the-job training that results in an individual receiving a commission or accreditation as an examiner. Other
federal financial regulators, such as the OCC and Federal Deposit Insurance Corporation, generally require
their examiners to be commissioned or enrolled in their in-house commission programs.




                                 OIG  EVL–2014–002  December 19, 2013                                           7
and (3) the Agency’s development and implementation of the examiner commission program.
The report focuses primarily upon FHFA’s examination oversight of the Enterprises given the
magnitude of their activities and the potential risks they pose to taxpayers.

This evaluation report was prepared by Wesley M. Phillips, Senior Policy Advisor; Beth
Preiss, Program Analyst; Jon Anders, Program Analyst; and Eric Nguyen, Senior Auditor.
We appreciate the cooperation of all those who contributed to this effort.

This evaluation report has been distributed to Congress, the Office of Management and
Budget, and others, and will be posted on OIG’s website, www.fhfaoig.gov.




Richard Parker
Deputy Inspector General for Evaluations




                           OIG  EVL–2014–002  December 19, 2013                             8
DISCUSSION AND ANALYSIS......................................................

FHFA’s 2012 and 2013 Revisions to the 2011 Reorganization of its Housing GSE
Examination Structure

As described in our 2011 report, FHFA reorganized its examination program in February of
that year in order to strengthen its oversight of the housing GSEs. During this evaluation,
however, senior FHFA officials told us that certain aspects of the 2011 reorganization resulted
in examination inefficiencies. Accordingly, in August 2012 and May 2013 FHFA made
further structural revisions to its examination program. Although FHFA officials believe
that an effective examination structure is now in place, the significant number of examiner
transfers associated with these revisions appears to have resulted in some short-term
disruptions in the program.

      FHFA’s Initial Examination Structure and its 2011 Reorganization

FHFA was initially organized with two                        FIGURE 1. FHFA’S EXAMINATION STRUCTURE
divisions responsible for conducting                                JULY 2008 – FEBRUARY 2011
examinations of the housing GSEs: the
Division of Enterprise Regulation (DER),
which was responsible for oversight of Fannie                                  Office of the
Mae and Freddie Mac, and the Division of                                         Director
Federal Home Loan Bank Regulation (DBR),
which was responsible for oversight of the
FHLBanks;5 see Figure 1. 6 FHFA officials                        Division of
                                                                                          Division of FHLBank
said that the two divisions employed                             Enterprise
                                                                                               Regulation
inconsistent approaches to examining the                         Regulation
housing GSEs.




5
 FHFA was created by combining the Office of Federal Housing Enterprise Oversight, the predecessor
organization of DER; the Federal Housing Finance Board, the predecessor organization of DBR; and the
government-sponsored enterprise mission office of the Department of Housing and Urban Development.
In 2011, FHFA officials told us that HERA requires FHFA to maintain separate divisions for Enterprise and
FHLBank System oversight.
6
    Source: FHFA. This is a simplified depiction of FHFA’s examination structure.




                                  OIG  EVL–2014–002  December 19, 2013                                        9
In February 2011, FHFA’s Acting                          FIGURE 2. FHFA’S EXAMINATION STRUCTURE
Director announced a reorganization                           FEBRUARY 2011 – AUGUST 2012
of the Agency’s examination structure
to address these deficiencies. Although
the reorganization kept DER and DBR                                    Office of the Director
intact, it created a new division, the
Division of Examination Programs
and Support (DEPS) (see Figure 2).7                    Division of           Division of          Division of
                                                       Enterprise           Examination            FHLBank
DEPS’s primary responsibilities were                                       Programs and
                                                       Regulation             Support             Regulation
to create common examination policies
and procedures; establish a corps of                                   Included specialized
                                                                      examination teams for:
examiners who would augment DER’s
                                                                         Credit risk
Enterprise examination core teams and                                    Operational risk
DBR’s FHLBank examination teams;8                                        Market risk
and build an examiner commission                                         Risk modeling
program. DEPS’s examiner corps
assessed credit risk, market risk, operational risk, and
modeling and reported to DEPS’s Deputy Director.                      Enterprise Examination Core
The Acting Director also established a supervision                    Teams: DER examiners are
committee, which was comprised of the Deputy                          divided into two core teams that
                                                                      reside on-site year-round at
Directors for DER, DEPS, DBR, and the Division of
                                                                      Fannie Mae and Freddie Mac.
Housing Mission and Goals (DHMG). The                                 Each team is further divided into
committee was charged with coordinating,                              sub-teams specializing in risk
approving, and monitoring the implementation of                       areas, such as market risk, or
FHFA’s examination programs and mission                               business lines, such as single-
oversight.9                                                           family and multifamily.




7
    Source: FHFA. This is a simplified depiction of FHFA’s examination structure.
8
 DBR’s FHLBank safety and soundness examination program is managed by three Associate Directors who
oversee 15-person examination core teams. DBR examination core teams are assigned to specific FHLBanks,
which they review annually through on-site examinations that typically last for six weeks.
9
 DHMG is primarily responsible for overseeing the housing mission of the Enterprises and the FHLBanks.
The Division also conducts policy development and analysis, and oversees GSE housing and regulatory policy.




                                  OIG  EVL–2014–002  December 19, 2013                                        10
       FHFA Executives Identified Weaknesses in Certain Aspects of the 2011 Reorganized
       Examination Structure

In November 2011, FHFA appointed two executives to serve as the Agency’s Chief Operating
Officer (COO) and Deputy Director for DER. Although these executives did not have direct
experience with FHFA’s predecessor agencies in conducting housing GSE oversight, they had
years of experience in the Federal Reserve’s Division of Banking Supervision and
Regulation.10

The Acting Director, as well as the COO and Deputy Director, told us that they identified
opportunities for improvement in certain aspects of the 2011 reorganization to the Agency’s
examination program during the calendar year 2012 Enterprise examination cycle.
Specifically, dividing Enterprise examination responsibilities between DER and DEPS
resulted in inefficiencies. While DER and DEPS sought to coordinate the examination teams,
the process was inefficient. For example, an FHFA official said in one case DEPS and DER
concurrently opened examinations of an Enterprise’s management of particular risks
associated with one of its business lines.

       FHFA’s 2012 and 2013 Revisions to the Examination Structure

Given these inefficiencies, FHFA’s Acting Director revised the examination program in
August 2012. DEPS was the focus of the revisions. It became the Division of Supervision
Policy and Support (DSPS),11 and its responsibility for conducting separate examinations was
largely removed.12 DSPS continues to be responsible for developing an examiner commission
program and developing unified examination policies and procedures.




10
  Large commercial banks tend to have more complex business structures than the Enterprises, which
generally focus on purchasing qualifying mortgages, packaging them into mortgage-backed securities or
holding the mortgages in their portfolios, and engaging in associated capital markets activities such as hedging
interest-rate risks.
11
  The Acting Director appointed the DSPS Deputy Director in January 2013. She had served previously as
Assistant Deputy Director for DER; before joining FHFA she was a Senior Vice President at a major bank and
held a variety of positions with the Federal Reserve.
12
     DSPS continues to conduct examinations involving the GSEs’ internal audit departments.




                                  OIG  EVL–2014–002  December 19, 2013                                           11
The Agency consolidated authority for           FIGURE 3. FHFA’S EXAMINATION STRUCTURE
Enterprise examinations in the DER core                  AUGUST 2012 – PRESENT
teams and many DSPS examiners
were transferred to either DER or
                                                           Office of the Director
DBR;13 see Figure 3.14 Examiners
transferred to DER were given the
option of choosing the core team
to which they would be assigned.            Division of          Division of         Division of
Moreover, (1) DER core team staff           Enterprise          Supervision           FHLBank
                                                                 Policy and
members were generally required to          Regulation            Support            Regulation
relocate from FHFA’s headquarters
to either Fannie Mae’s headquarters,         Received                                 Received
                                            specialized                              specialized
located elsewhere in Washington,           examination                              examination
D.C., or Freddie Mac’s headquarters      staff from DSPS                          staff from DSPS
in McLean, Virginia, and (2) FHFA
opened an examination office within a Fannie Mae operations center in Dallas, Texas.

In May 2013, FHFA further revised its examination program by reassigning DSPS risk
modeling staff to DER and DBR.

       FHFA Officials Believe that the Revisions Strengthened the GSE Examination Program,
       but they also May Have Resulted in some Short-Term Disruptions

FHFA officials said that the revisions to the structure
of its examination program will result in increased                    DER Examiners-in-Charge lead
efficiency, effectiveness, and accountability. In                      FHFA’s core teams for Fannie
particular, the Examiners-in-Charge (EIC) of the                       Mae and Freddie Mac and
Agency’s Fannie Mae and Freddie Mac core teams                         manage and coordinate all
                                                                       examination activities related
are now clearly responsible and accountable for all
                                                                       to the Enterprises.
aspects of the examination process.15 Moreover, each
EIC serves as the single point of supervisory contact


13
     The revisions also consolidated FHLBank examination oversight in DBR.
FHFA appointed a new Deputy Director for DBR in 2013. He had served previously as the Acting Deputy
Director for DSPS, managed the risk modeling units in DSPS and DEPS, and was employed by the Federal
Housing Finance Board prior to the establishment of FHFA in July 2008.
14
     Source: FHFA. This is a simplified depiction of FHFA’s examination structure.
15
  In 2012, DER appointed a new EIC of the Fannie Mae core team who comes with many years of experience
with the Federal Reserve System. DER also changed the leadership of the Freddie Mac core team in late 2011
when it appointed an EIC who has years of experience as an Associate Director in DBR.




                                  OIG  EVL–2014–002  December 19, 2013                                     12
for the Agency with the Enterprises. This helps ensure consistent communications. Further,
FHFA said the new structure is similar to that used by the Federal Reserve System and the
OCC for the large commercial banks they supervise.16

Although FHFA officials believe an effective examination structure is now in place, the fact
that the Agency revised its program three times over a three-year period appears to have
caused some short-term disruptions in the examinations process. In particular, the August
2012 revisions resulted in many examiner reassignments to new positions and locations.17 An
FHFA official told us that these transfers resulted in some attrition among examiner staff.

FHFA Has Increased the Size of its Examination Corps Incrementally with a Focus on
Recruiting Experienced Staff

Our 2011 examination capacity report concluded that examiner staffing shortages impeded the
efficiency and effectiveness of the Agency’s housing GSE examination program. Since 2011,
FHFA has increased its total number of examiners incrementally from approximately 131 to
143, an increase of about 9%. Senior FHFA officials said in mid-2013 that the number of
examiners assigned to Enterprise oversight was generally sufficient and further modest
increases might be appropriate. They also said that (1) FHFA has focused on hiring
experienced staff recently; and (2) the Agency’s broader supervision and oversight resources
and activities must also be considered in assessing its capacity to supervise the Enterprises.

     2011 OIG Examination Capacity Report Findings

Our 2011 report concluded that the Agency lacked a sufficient number of examiners to ensure
the safety and soundness of the housing GSEs. Due to limited examiner staffing, the Agency
had not examined higher risk areas such as the Enterprises’ management of real estate owned
properties.18 Further, the Agency had fallen behind in meeting certain examination schedules,
and it did not conduct sufficient transaction testing during examinations.19


16
  The Federal Reserve has jurisdiction over banks that are members of the Federal Reserve System as well as
most bank holding companies. OCC is an independent bureau of the Department of Treasury that charters,
regulates, and supervises national banks.
17
   According to OIG analysis of FHFA data, 102 of the 119 non-executive examiners employed by the Agency
in 2011 were still employed in examinations in March 2013. However, only 61 of these 102 examiners were
employed in the same division in which they served in 2011, including 40 examiners who remained in DBR.
Of the 41 examiners who switched divisions: 13 went from DEPS to the Fannie Mae core team; 12 went from
DEPS to the Freddie Mac core team; 9 went from DEPS to DBR; and the remaining 7 made various other
transfers. Fourteen risk modeling staff members who remained in DSPS were affected by a subsequent
organizational revision in May 2013.
18
  See 2011 OIG Examination Capacity Report, at 18, 19. Real estate owned properties are foreclosed
properties owned by government agencies or companies, such as the Enterprises. Such properties represent



                                OIG  EVL–2014–002  December 19, 2013                                        13
     The Overall Number of FHFA Examiners Has Increased

FHFA data indicate that since                           FIGURE 4. NUMBER OF FHFA EXAMINERS AND
September 2011 the number of                         EXAMINATION SUPPORT STAFF AS OF OCTOBER 1, 2013
executive and non-executive
examiners has increased by about                                                        Number of
9%, from approximately 131 to                                                          Examination         Total
143 in October 2013.20 The 143                          FHFA           Number of       Support and      Examination
                                                      Division         Examiners        Other Staff        Staff
examiners are primarily assigned
                                                    DER                        66                10               76
to DER and DBR, although 10
                                                    DBR                        67                52              119
examiners are assigned to DSPS                      DSPS                       10                68               78
(see Figure 4).21                                   Total                    143                130              273

FHFA officials emphasized that staff members within each of the three divisions support the
Agency’s examination program.22 In particular, DSPS staff members may conduct or support
GSE examinations in the following ways, among others:




collateral seized to satisfy unpaid mortgage loans. The Enterprises incur various expenses, such as
maintenance costs, on foreclosed properties. They also bear the risk of loss associated with a decline in the
value of such properties.
19
   Transaction testing is the method employed by examiners to arrive at independent judgments about the
financial condition of an Enterprise, as well as its compliance with applicable laws and regulations. An
example of transaction testing would be reviewing a regulated entity’s loan files to test the veracity of
statements made by its managers. Given FHFA’s examination shortages in 2011, FHFA officials said
that the Agency often accepted the assertions of Enterprise officials rather than validating them through
appropriate transaction testing. An FHFA official advised that transaction testing was deficient in areas such
as underwriting, quality control for new loans, and default asset management. See 2011 OIG Examination
Capacity Report, at 21.
We continued to detect independent testing limitations in subsequent reports on FHFA’s examination
programs. See OIG, Enhanced FHFA Oversight is Needed to Improve Mortgage Insurer Compliance with
Consumer Complaint Requirements (AUD-2013-007, March 21, 2013).
20
  Our 2011 report focused on the number of non-executive examiners, which in 2011 numbered approximately
120. FHFA data indicate that there were 130 non-executive examiners in early October 2013. The 2011
numbers are imprecise because, as we noted in the 2011 report, FHFA was unable to provide accurate data on
the number of examiners it then employed. The situation at present is also imprecise because within FHFA
different methodologies are used to calculate the number of examiners for different purposes. In Figure 4, we
use FHFA Human Resources’ calculations in which employees in the financial institution examining job series
are counted as examiners.
21
  Source: FHFA Human Resources. Note: One examiner transferred from DSPS to the DER Fannie Mae core
team in early October 2013. DER received approval to hire additional examiners in the following month.
22
 DBR’s examination support staff includes members of the Office of FHLBank Monitoring and Analysis,
which is comprised of policy staff, risk modelers, and risk analysts, among others.




                                 OIG  EVL–2014–002  December 19, 2013                                           14
        The Office of the Chief Accountant assesses the Enterprises’ and FHLBanks’
         compliance with Generally Accepted Accounting Principles and Agency guidance,
         and conducts examinations of their internal audit departments and internal controls for
         financial reporting;
        The Office of Risk Analysis and Office of Systemic Risk conduct market surveillance,
         emerging risk identification, and off-site risk analysis, as well as provide on-site
         assistance in particular risk areas on an ad hoc basis;
        The Office of Supervisory Policy develops and issues guidance that establishes
         the Agency’s standards for risk management in key areas, is finalizing a common
         examination manual for DER and DBR, and developed and implemented the examiner
         commission program discussed below; and
        The Office of Supervisory Information Systems develops and maintains data systems
         that are used by the GSE examination teams.

In addition, the Deputy Director for DER stressed that other groups within FHFA, such as
DHMG and the Office of Conservatorship Operations, play a key role in the Agency’s overall
supervisory processes.23 He and other FHFA officials said that these units and their staff
resources must also be considered when assessing the Agency’s capacity to ensure GSE
oversight.

     DER’s Enterprise Core Teams Were Fully Staffed as of October 2013

As of October 1, 2013, FHFA’s authorized staffing levels were at 32 for the Fannie Mae core
team and 29 for the Freddie Mac core team. According to FHFA, the core teams were at their
authorized levels by late October 2013, including anticipated new hires.

In mid-2013, FHFA’s COO and DER Deputy Director said that, as a general matter, the
Enterprise examination core teams were staffed sufficiently. However, the COO added that
FHFA would consider increasing the size of the core teams if DER made such a request.24
Some FHFA officials also stated that it was the Agency’s intention to increase the Enterprise
core teams to 35 members each.25

23
  FHFA’s Office of Conservatorship Operations is responsible for assisting the FHFA Director in preserving
and conserving the Enterprises’ assets and property. This includes monitoring the development of major
policy and business decisions within the Enterprises and highlighting reputational and other risks associated
with business decisions.
24
   As discussed below, FHFA has not established a systematic process by which to determine the appropriate
size of its Enterprise core teams.
25
 The Fannie Mae core team gained one examiner in October 2013 and planned to hire two more examiners in
November, which would bring the core team’s size to 35 members.




                                 OIG  EVL–2014–002  December 19, 2013                                         15
With respect to the size of the core teams, FHFA officials said that the Agency’s recent
structural revisions permitted it to conduct examinations more efficiently with current
examination staff than was possible for the Agency at the time of our 2011 evaluation report.
Further, the DER Deputy Director said that FHFA has sought to hire experienced examiners
in recent years and to increase the overall size of the core teams incrementally.

FHFA hiring data indicate that the Agency has recently recruited individuals with experience
with federal financial regulators. From September 2012 through October 2013, FHFA hired
15 outside examiners for DER (14 for the Fannie Mae core team and 1 for the Freddie Mac
core team) and 1 for DBR. Most of these examiners had experience that they gained at other
federal regulatory agencies. According to FHFA, six of these examiners were commissioned
previously by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), or
OCC.

OIG’s Initial Assessment of FHFA’s Implementation of its Calendar Year 2013
Examination Plans for the Enterprises

We agree that FHFA’s structural revisions of its examination program and the recent hiring of
experienced examiners have the potential to strengthen the efficiency and effectiveness of its
examination program. However, given the examination weaknesses we identified in 2011,
we conducted a limited assessment of the DER core teams’ implementation of their 2013
examination plans. We did so to gain perspective on FHFA’s current capacity to fulfill its
examination responsibilities.26

Our assessment indicates that, in some respects, both core teams were executing their plans in
line with their examination schedules. Nonetheless, one core team rescheduled the start of
38% of its scheduled examinations to the fourth quarter of 2013. According to FHFA
officials, our observations regarding the timing of the core team’s examinations are not
inconsistent with the Agency’s supervisory approach; that is, managers and EICs continually
evaluate emerging risks and adjust examination priorities and schedules to meet changing
circumstances. However, FHFA has not yet established a systematic process to determine
the appropriate size of its Enterprise core teams and, therefore, lacks assurance that the
rescheduling was not necessitated by limited examiner staffing.




26
   The assessment was limited to determining, based upon available documentation, whether or not planned
examination activities in the core teams’ calendar year 2013 annual examination plans were in process. We
did not assess the quality or thoroughness of FHFA’s targeted examinations or ongoing monitoring activities,
although we may do so in future audits and evaluations. See Objective, Scope, and Methodology for further
information.




                                 OIG  EVL–2014–002  December 19, 2013                                        16
       FHFA’s 2013 Enterprise Examination Planning Process

FHFA’s supervision handbook for the Enterprises notes that the Agency employs a risk-based
approach to supervising them.27 Under it, FHFA examines “how well the Enterprises
identify, measure, understand, and control risks.” The Agency has available to it a variety of
supervisory tools and enforcement authorities by which to compel the Enterprises to correct
risk management deficiencies.28 Alternatively, FHFA has the authority to direct the
Enterprises to take corrective actions via its extensive conservatorship powers.29

In planning its examinations of the Enterprises for calendar year 2013, DER officials
prioritized the greatest risks facing them that were identified in planning sessions held in
the fall of 2012. Agency officials told us that, following these sessions, the EICs crafted
examination plans specific to their Enterprises. While the examination plans document work
to be conducted in calendar year 2013, they have been revised over the course of the year in
response to changing circumstances and priorities.

As shown in Figure 5,30 the DER core team                              FIGURE 5. FHFA PLANNED ENTERPRISE
examination plans for the Enterprises included                        EXAMINATION ACTIVITIES FOR CALENDAR
approximately 144 discrete items that were to be                                   YEAR 2013
examined by way of ongoing monitoring activities,
targeted examinations, and special projects.31                                Activity Type                  Number
Ongoing monitoring, which as of August 2013                          Ongoing Monitoring                          115
represented 80% of the total number of all planned                   Targeted Examinations                        23
examination activities, generally involves broad                     Special Projects                               6
assessments of Enterprise business practice and                      Total                                       144




27
  See FHFA, Division of Enterprise Regulation Handbook (June 16, 2009) (online at
http://www.fhfa.gov/webfiles/2921/DERHandbook21.pdf). FHFA is in the process of developing new
combined examination modules for DER and DBR. The relevant overview module is not yet complete, but
FHFA’s risk-based approach to examinations remains consistent with the earlier handbook.
28
 For example, the Agency may issue a Matter Requiring Attention pursuant to which it may direct a housing
GSE to correct identified actions within specified timeframes. FHFA may also impose a consent order upon a
GSE. Such orders may be enforced by FHFA in a federal district court.
29
     HERA authorizes FHFA to direct and control the Enterprises’ activities during their conservatorships.
30
  Source: FHFA DER. Note: the core teams’ examination plans changed throughout the period of our
review. The counts presented here represent an approximation of the total examination activities initiated or
planned for calendar year 2013, as of the end of September 2013.
31
  Special projects include assignments related to membership in task forces, working groups, and study
committees, among other things.




                                   OIG  EVL–2014–002  December 19, 2013                                          17
risks. FHFA documents indicate that ongoing
monitoring activities can include periodic meetings     Ongoing Monitoring Activities include
with Enterprise officials, reviews of reports, and      a wide variety of processes that are
more in-depth analyses of specific risk management      designed to observe and analyze trends
                                                        or emerging risks in an Enterprise’s
practices. Targeted examinations typically involve
                                                        business profile.
in-depth transactional testing of a specific risk
area or program. In our work, we have stated that       Targeted Examinations are in-depth,
the transaction testing associated with targeted        focused evaluations of a specific risk or
                                                        risk management system.
examinations provides FHFA with a critical
independent basis for assessing the housing GSEs’
financial operations, performance, and risk management.32

       Enterprise Core Teams Provided Documentation to Varying Degrees for Nearly All
       Ongoing Monitoring Activities in our Sample

Our analysis of a sample of the Enterprise core teams’
                                                                                 FIGURE 6. STATUS OF A SAMPLE
documentation for calendar year 2013 indicates that nearly
                                                                                 OF FHFA’S ENTERPRISE ONGOING
all ongoing monitoring activities appear to have been in                          MONITORING ACTIVITIES AS OF
process as of late September 2013.33 Specifically, the core                             SEPTEMBER 2013
teams provided documentation that indicates that 17 of the
20 ongoing monitoring activities in our sample were in                                  Status                Number
process (see Figure 6). 34                                                      In Process                         17
                                                                                Other                                3
One core team provided procedures memoranda for each                            Total                              20
ongoing monitoring activity in our sample.35 However, the
other core team did not do so in a majority of the cases we reviewed.36 We observe that
FHFA is taking steps to standardize documentation requirements for its ongoing monitoring

32
     See 2011 OIG Examination Capacity Report at 21.
33
   We selected a proportional sample of nine ongoing monitoring activities from one FHFA core team and 11
from the other core team. This random sample was designed to be proportionally representative, but non-
statistical. Accordingly, we employ the results to speak generally about the population of ongoing monitoring
activities, but we do not project the results onto that population.
34
     Source: OIG analysis based on documentation provided by FHFA DER.
The categories for ongoing monitoring activities are defined as follows:
          “In Process” activities are those for which FHFA provided documentation of planning or
           conducting examination work; and
          “Other” activities consist of two activities that had been reclassified and one that was planned
           for a future date.
35
  A procedures memorandum is a document that sets forth the examination work to be conducted, such as
interviewing Enterprise officials or reviewing periodic reports.




                                    OIG  EVL–2014–002  December 19, 2013                                          18
activities. Specifically, in late September 2013, FHFA established guidance requiring
examiners to prepare procedures memoranda for all ongoing monitoring activities.37

       Majority of Targeted Examinations Were Ongoing or Yet To Be Started as of
       September 2013

Our review showed that, as of late September 2013, the                      FIGURE 7. STATUS OF FHFA’S
Enterprise core teams had completed seven targeted                      ENTERPRISE TARGETED EXAMINATIONS
exams out of 23 such examinations scheduled to begin                           AS OF SEPTEMBER 2013
in the calendar year;38 see Figure 7.39 Moreover, we
determined that 8 targeted examinations were in                                   Status                  Number
process to varying degrees and 8 (or 35%) were                         Planned                                  8
scheduled to begin in the fourth quarter of 2013.                      In Process                               8
                                                                       Completed                                7
Our analysis indicated that one core team accounted                    Total                                   23
for six of the eight planned targeted examinations.
Moreover, five of these six examinations had previously been scheduled to be initiated earlier
in 2013 but were rescheduled to start in the fourth quarter of the calendar year. According to
core team planning documentation, four of these examinations were initially expected to be
completed during calendar year 2013.40 Our analysis suggests that some of these rescheduled
examinations may not be completed until sometime in 2014.41


36
  According to FHFA officials, the core team did not require procedures memoranda for ongoing monitoring
activities in 2013.
37
     This guidance is effective January 1, 2014.
38
   We asked the core teams to provide documentation regarding the status of all 23 scheduled Enterprise
targeted examinations identified in their 2013 examination plans. The core teams provided this documentation
as of late September 2013.
39
     Source: OIG analysis based on documentation provided by FHFA DER.
The categories for targeted examination are defined as follows:
          “Planned” targeted examinations are those that Agency documents show examiners planned
           to initiate during calendar year 2013, but for which FHFA provided no further documentation;
          “In Process” targeted examinations are those for which FHFA provided documentation of
           planning or conducting examination work; and
          “Completed” targeted examinations are those for which FHFA provided a formal closure
           memorandum documenting the examination’s findings and conclusions.
40
  These four examinations accounted for 31% of the team’s 13 scheduled examinations in 2013. The other
team planned to conduct 10 examinations in 2013.
41
  We observe that the average length of FHFA’s seven completed targeted examinations was slightly longer
than four months.




                                    OIG  EVL–2014–002  December 19, 2013                                         19
     FHFA Officials Said that Examination Schedules Are Intended To Be Flexible

The DER Deputy Director said that our observations about examination timing were not
inconsistent with the Agency’s supervisory approach. He explained that the core team
examination plans established at the beginning of each calendar year are intended to be
flexible and adaptable to changing circumstances. FHFA managers and EICs use their
judgment to monitor examination priorities and assign examination resources to address them
as necessary. In some cases, unanticipated supervisory requirements may divert examiners
for a period of time from scheduled examinations. Moreover, DER has not set requirements
for completing examinations within a calendar year. Instead, DER generally wants to finish
examinations in time for the Agency’s annual report of examination for each Enterprise,
which is typically produced in March.42 The DER Deputy Director said that FHFA would
meet that target.

We recognize that examination plans must be flexible. However, as we discuss in the Finding
section of this report, the Agency has not yet established a systematic process by which to
determine the appropriate size of the Enterprise core teams. Therefore, FHFA cannot be
assured as to the reasons for the rescheduling of examinations, which may include the lack of
examination staffing resources necessary to execute the annual Enterprise examination plans
on a timely basis.43 We believe it is important that FHFA address this limitation in its current
examination program.




42
  By law, each year FHFA must report to Congress the findings of the Agency’s annual examinations of the
Enterprises and the FHLBanks. See, e.g., FHFA, 2012 Report to Congress, at 17, 23 (June 13, 2013) (online at
http://www.fhfa.gov/webfiles/25320/FHFA2012_AnnualReport-508.pdf).
43
  We also found documentation indicating that progress on at least two examination activities was hampered
by a lack of resources.




                                OIG  EVL–2014–002  December 19, 2013                                         20
FHFA’s Development and Initial Implementation of its Examiner Commission Program

Our 2011 report observed that only about one-
third of FHFA’s non-executive examiners were                      Commission Program: An examiner
commissioned examiners.44 Further, the Agency                     commissioning or accreditation
did not have an examiner commission program                       program is a structured program of
                                                                  classroom and on-the-job training
although it was in the early stages of developing one.
                                                                  that provides examiners with
By comparison, other federal financial regulators,
                                                                  technical competencies and
such as the FDIC, generally require examiners to be               practical examination experience.
commissioned or enrolled in a commission program.                 A commissioning program helps
We concluded in 2011 that FHFA’s limited number                   standardize examination processes
of commissioned examiners reduced the efficiency                  and ensure the efficiency and
of its examination program.                                       effectiveness of examinations.

Over the past two years, FHFA developed its Housing Finance Examiner (HFE) Commission
Program.45 To do so, an FHFA official said the Agency convened focus groups of its
employees and consulted with other financial regulatory agencies to learn about their
examiner commission programs.

In August 2013, FHFA opened its HFE Commission Program for enrollment. Classes were
expected to begin in November 2013, and on-the-job training was expected to start in 2014.
The program’s goal is to ensure that commissioned Agency examiners develop a uniform set
of skills, qualifying them to lead examinations of major risk areas at Fannie Mae, Freddie
Mac, and the FHLBanks.46

The HFE Commission Program consists of:

        Internal classes on FHFA examination practices, credit risk, market risk and capital
         markets, model risk, operational risk, governance risk, capital adequacy, and earnings
         and accounting, among others;
        External classes offered by the Global Association of Risk Professionals and the
         Mortgage Bankers Association, with associated tests;


44
  FHFA did not have a commission program at that time. These examiners received their commissions from
other federal or state agencies prior to joining FHFA.
45
  Initially, DEPS was responsible for establishing FHFA’s commission program. DSPS has been responsible
for it since the 2012 organizational revision.
46
  FHFA also employs examiners who limit their work to the FHLBank Affordable Housing Program. Since
they are not considered “safety and soundness” examiners, they are not required to participate in the
commission program. However, they may do so with appropriate supervisory approval.




                               OIG  EVL–2014–002  December 19, 2013                                     21
          On-the-job training during which candidates perform substantial examination work;
           and
          A mock board presentation test regarding examination findings.

According to FHFA:

          Employees who were previously commissioned by another federal or state financial
           institution regulatory agency automatically receive an HFE Commission.47
          Examiners hired on or before July 17, 2013, are not required to become
           commissioned. However, they can voluntarily enroll in the commission program
           with supervisor approval.48
          FHFA examiners hired after July 17, 2013, without a previous commission must
           participate in the commission program and are expected to complete it within four
           years.49
FHFA enrollment data for the HFE Commission Program suggests that initial examiner
interest is high. As of September 23, 2013, 51 FHFA staff had volunteered to enroll in the
program. Of these, 43 were examiners in DER or DBR, representing about one-third of
FHFA’s examiners in these divisions. In addition, 59 FHFA examiners will receive HFE
Commissions based on being commissioned previously. If many of the examiners who
enrolled complete the program, it appears that FHFA will achieve a much higher percentage
of commissioned examiners over the next several years than is the case today.50




47
  For employees hired before July 17, 2013, FHFA will automatically accept state commissions. After this
date, FHFA will decide whether to accept state commissions on a state-by-state basis.
48
  FHFA decided to make the program voluntary for examiners hired prior to July 17, 2013. An FHFA official
explained that its introduction of the commission program did not serve to render currently serving examiners
unqualified for their positions.
49
     FHFA may waive certain program requirements based upon an individual’s education and experience.
50
  Assuming all those enrolled complete the commission program, and FHFA’s 143 examiners remain in place
with no additions or further enrollments, roughly 71% of FHFA’s examiners would be commissioned at the
end of the four-year program.




                                  OIG  EVL–2014–002  December 19, 2013                                        22
FINDING ...................................................................................

FHFA Lacks a Systematic Process for Establishing the Appropriate Size of its Enterprise
Examination Core Teams

FHFA has taken a number of steps to strengthen its housing GSE examination program since
2011, but the Agency has not yet established a systematic process by which to ensure that its
DER Enterprise core teams are adequately staffed to execute their annual examination plans
in a timely and thorough manner. Consequently, FHFA cannot be assured that its core teams
have sufficient capacity to meet their critical Enterprise oversight responsibilities.

Given that FHFA is developing its Enterprise examination program based upon the structures
and practices of other federal financial regulators, we met with OCC officials and reviewed an
OCC publication to learn more about its approach to the supervision of large national banks.
As with FHFA, OCC co-locates its core teams on the premises of the large national banks that
it regulates. OCC core teams have primary responsibility for conducting ongoing monitoring,
targeted examinations, and other oversight activities for these banks.

OCC officials said that they have developed systematic processes for determining the
appropriate size of core teams that are assigned to large national banks.51 A Deputy
Comptroller for Large Bank Supervision told us that the individual in charge of examining
the institution is responsible for developing a supervisory strategy and a written plan for it.52
He also said that the plans are very detailed and that they are reviewed by senior OCC
officials to ensure that they adequately and appropriately cover each of nine identified risk
areas. Based upon this planning process, OCC determines the number of core team examiners
and other specialists required to conduct ongoing monitoring, transaction testing, and
administration at each financial institution.53

FHFA has not yet developed such a systematic process to determine the appropriate size of its
Enterprise core teams. We asked FHFA to provide documentation that demonstrates how it
determined the authorized sizes of the Enterprise core teams—32 for Fannie Mae and 29 for

51
     We did not verify the steps OCC takes to set the size of examination teams.
52
  The OCC’s Comptroller’s Handbook notes that one of the elements of a supervisory strategy is “[a]n
indication of the complexity, workdays, and expertise of staff needed to perform the bank supervisory activities
recommended for the year.” See OCC, Comptroller’s Handbook Large Bank Supervision, at 14 (January
2010) (online at http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/lbs.pdf).
53
  OCC officials also told us that their examination teams typically cancel a small portion of their planned
examination activities; such cancellations and postponements beyond their approved calendar quarter require
the approval of a Deputy Comptroller.




                                    OIG  EVL–2014–002  December 19, 2013                                         23
Freddie Mac—as of October 1, 2013, including anticipated new hires. However, Agency
officials said that such documentation was not available. Indeed, it appears that FHFA
officials determine the sizes of the Agency’s Enterprise core teams based largely upon their
judgment as to how many examiners are necessary and annual budget considerations. One
FHFA official described the current process as “not too scientific.”

We believe the fact that one core team rescheduled many examinations to the fourth quarter of
2013 illustrates the potential effects associated with FHFA’s lack of a systematic process for
determining the appropriate sizes of the teams. According to FHFA officials, rescheduling
these examinations was not inconsistent with the Agency’s supervisory approach because the
core teams’ plans are subject to revision based on changing circumstances. However, it is
also possible that the core team lacked the staffing necessary to conduct the examinations on
a timely basis while meeting other planned responsibilities. In fact, both EICs told us during
the course of our evaluation that limited examination resources and staff turnover had
adversely affected the operations of the core teams in 2013.54

The Deputy Director for DER said that the Agency is in the process of reviewing its resource
requirements for the Enterprise core teams. He agreed that other federal financial regulators
have systematic processes for linking examination plans to core team resources. Although
FHFA has been in the process of upgrading its organization and processes for Enterprise
oversight, he said that the Agency has not yet had time to develop such a systematic process
for determining the core teams’ resource requirements. However, the Deputy Director said
that FHFA recently initiated a review of examination resource requirements in preparation
for future examination cycles. We believe that such a review, if linked to the examination
planning processes, would be a positive step in ensuring that the Agency has the capacity to
fulfill its important Enterprise oversight examination responsibilities.




54
  For example, both EICs said that limited staffing in the core teams’ credit risk groups affected their capacity
to assess Enterprise credit risks.




                                  OIG  EVL–2014–002  December 19, 2013                                            24
CONCLUSIONS ..........................................................................

Since our 2011 report, FHFA has made a number of changes to its GSE examination
oversight program to strengthen its capacity. Specifically, FHFA has appointed a new
executive leadership team for GSE examination oversight as well as new EICs for the
Enterprise core teams. Further, FHFA has made several additional structural revisions to its
GSE examination program, hired staff with experience from other federal financial regulators,
largely completed a common examination manual, and developed and begun the
implementation of an examiner commission program. Although the structural and other
initiatives have the potential to enhance FHFA’s examination oversight, it is too early to
assess their effectiveness. We also believe that FHFA can take additional steps to ensure that
its Enterprise core teams are adequately staffed and thereby better positioned to fulfill their
critical examination oversight responsibilities.




RECOMMENDATIONS ...............................................................

We recommend that FHFA:

   1. Review its implementation of the 2013 Enterprise examination plans and document
      the extent to which resource limitations, among other things, may have impeded their
      timely and thorough execution;
   2. Develop a process that links annual Enterprise examination plans with core team
      resource requirements; and,
   3. Establish a strategy to ensure that the necessary resources are in place to ensure timely
      and effective Enterprise examination oversight.




                            OIG  EVL–2014–002  December 19, 2013                                25
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

The objective of this evaluation was to update the status of concerns identified in our 2011
report. Specifically, this evaluation report updates: (1) FHFA’s efforts to ensure that an
effective organizational structure for examinations is in place; (2) the level of examiner
staffing and its impact on FHFA’s ability to carry out established responsibilities; and (3) the
Agency’s implementation of the examiner commission program.

To address this objective, we interviewed FHFA’s Acting Director; COO; Deputy Directors
for DER, DSPS, and DBR; the Enterprise core team EICs; and others. We also interviewed
the OCC’s Deputy Comptroller for Large Bank Supervision and reviewed a relevant agency
publication to better understand the OCC’s examination planning processes.

In addition, we reviewed numerous FHFA documents on the number of examiners on board at
the Agency and the status of its HFE commission program, as well as documentation of its
examination plans for 2013 and status of selected examination activities.

As described in this report, we assessed FHFA’s implementation of its calendar year 2013
Enterprise examination plans as of September 2013. In doing so, we worked with the
Enterprise core teams to account for revisions in the plans since their establishment earlier in
the year. We requested that FHFA provide documentation of the status of all targeted
examinations as well as a proportional sample of scheduled ongoing monitoring activities.
Although we determined the status of targeted examinations and sampled ongoing monitoring
activities, a limitation of our work is that we did not assess their compliance with established
examination procedures or thoroughness.

Specifically, we selected a proportional sample of 9 ongoing monitoring activities from one
FHFA core team and 11 from the other core team. This random sample was designed to be
proportionally representative, but non-statistical. That is, we can use the results to speak
generally about the population of ongoing monitoring activities but cannot project the results
onto that population. The populations from which we selected our samples were less than the
total population, primarily because for one core team we removed certain remediation
activities for Matters Requiring Attention in which FHFA did not object to the Enterprise’s
remediation plan. Such activities did not appear on the other core team’s examination plan.

We did not independently test the reliability of FHFA’s data.

This study was conducted under the authority of the Inspector General Act and is in
accordance with the Quality Standards for Inspection and Evaluation (January 2012), which
were promulgated by the Council of the Inspectors General on Integrity and Efficiency.
These standards require us to plan and perform an evaluation that obtains evidence sufficient


                            OIG  EVL–2014–002  December 19, 2013                                 26
to provide reasonable bases to support its findings and recommendations. We believe that the
finding and recommendations discussed in this report meet these standards.

The performance period for this evaluation was March 2013 to October 2013.




                           OIG  EVL–2014–002  December 19, 2013                              27
APPENDIX A .............................................................................

FHFA’s Comments on OIG’s Finding and Recommendation




                         OIG  EVL–2014–002  December 19, 2013                        28
OIG  EVL–2014–002  December 19, 2013   29
APPENDIX B..............................................................................

OIG’s Response to FHFA’s Comments

We consider FHFA’s comments on our report to be consistent with our recommendations,
which will remain open until we are able to verify that they have been implemented.

FHFA continues to assert that readjustments to its examination schedules are driven largely
by emerging risks and unanticipated developments rather than a lack of examination
capacity. However, as detailed in our report, FHFA cannot be assured that lack of
examination capacity did not render one of its core teams unable to complete several
examinations in 2013 as originally planned. The actions that FHFA proposes to take in
implementing our recommendations are likely to place it in a better position to make such
determinations in future examination planning cycles.




                           OIG  EVL–2014–002  December 19, 2013                             30
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




                             OIG  EVL–2014–002  December 19, 2013                        31