oversight

Intermittent Efforts Over Almost Four Years to Develop a Quality Control Review Process Deprived FHFA of Assurance of the Adequacy and Quality of Enterprise Examinations

Published by the Federal Housing Finance Agency, Office of Inspector General on 2015-09-30.

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

             Federal Housing Finance Agency
                 Office of Inspector General




 Intermittent Efforts Over Almost
  Four Years to Develop a Quality
 Control Review Process Deprived
FHFA of Assurance of the Adequacy
     and Quality of Enterprise
           Examinations




Evaluation Report  EVL-2015-007  September 30, 2015
                Executive Summary
                The Federal Housing Finance Agency (FHFA or the Agency) acts as both the
                conservator for and regulator of Fannie Mae and Freddie Mac (collectively, the
                Enterprises). The Enterprises are the two largest institutions issuing mortgage-
                related securities in the secondary mortage market in support of the nation’s
                housing industry. As regulator of the Enterprises, FHFA issues rules and
EVL-2015-007    conducts examinations to protect the safety and soundness of the Enterprises.
                As part of its examination activities, FHFA conducts targeted examinations of
September 30,   the Enterprises that probe deeply into strategically selected areas of high
    2015        importance or risk. FHFA has long recognized that targeted examinations are
                vital to its effectiveness as a safety and soundness regulator.

                FHFA’s Office of Quality Assurance (OQA) is tasked with conducting internal
                reviews of the divisions that perform the Agency’s statutory examination
                and regulatory functions. FHFA uses the OQA reviews to enhance the
                effectiveness of its supervision of the Enterprises. In 2011, OQA recognized
                the value of a quality control review process for FHFA examinations and
                recommended that FHFA establish such a process. Thus began a multi-year
                journey to develop a comprehensive quality control review process:

                      October 2011: OQA published a report that reviewed FHFA’s 2010
                       Reports of Examination of the Enterprises and found five weaknesses
                       with FHFA’s examination processes. One of the findings was the
                       lack of a comprehensive quality control review process. OQA
                       recommended that FHFA establish such a process for examination
                       reports and associated workpapers to ensure adequacy and quality of its
                       examinations. Almost one year later, FHFA’s Division of Enterprise
                       Regulation (DER), the office responsible for conducting targeted
                       examinations, committed to remediate this deficiency and reported that
                       a quality control program would be developed by December 31, 2012.

                      March 2013: FHFA issued Supervision Directive (Directive) 2013-01,
                       requiring that examination findings, conclusions, ratings, supporting
                       workpapers, and related documents be subject to a formal quality
                       control review process with defined standards. In this Directive, FHFA
                       underscored the OQA finding that formal quality control reviews
                       are a critical internal control for the Agency’s examinations of the
                       Enterprises because they “ensure examination quality, consistency and
                       reliability.”

                      July 2013: OQA completed its review of DER’s process to resolve
                       Matters Requiring Attention (MRAs) and made a number of findings.
                       Among other things, OQA again underscored the need for DER to
                       implement a comprehensive quality control review process to ensure
                       the accuracy, completeness, and quality of examinations. FHFA’s
                       attempts to develop and implement such a process stalled in 2013 and
                       into 2014 after strong staff resistance.

                      December 2014: OQA closed the recommendation regarding quality
                       control from its 2013 report, based on representations from DER that it
EVL-2015-007           assigned responsibility for quality control to a dedicated employee and
                       drafted (but did not finalize) a procedures document addressing quality
September 30,          control.
    2015
                OIG conducted this evaluation to determine whether FHFA has now
                established a formal quality control review process for its targeted
                examinations of the Enterprises, as recommended by OQA in 2011, agreed to
                by DER in 2012, and required by Agency Directive in 2013. Without a formal
                internal quality control review process, FHFA lacks adequate assurance that its
                targeted examinations or other examination work are accurate, complete, and
                of uniform high quality, which puts the credibility of its examination program
                at risk. Almost four years after OQA issued its recommendation and more
                than two years after FHFA issued its Directive, OIG found that FHFA had not
                established such a process. After OIG completed its work on this evaluation,
                FHFA advised us that DER finalized its quality control review process on July
                28, 2015. OIG has not assessed whether the new procedures, as drafted, satisfy
                the requirements in the Directive. We make two recommendations to enhance
                the efficacy of the newly adopted quality control program. FHFA agreed with
                our recommendations.

                This report was prepared by Nicole Mathers, Management Analyst, and Philip
                Noyovitz, Senior Auditor, with assistance from Adrienne Freeman,
                Investigative Counsel, Minh-Tu Greenberg, Investigative Counsel, and Jacob
                Kennedy, Investigative Evaluator. We appreciate the cooperation of FHFA
                staff, as well as the assistance of all those who contributed to the preparation of
                this report.

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




                Angela Choy
                Assistant Inspector General for Evaluations
TABLE OF CONTENTS ................................................................

EXECUTIVE SUMMARY .............................................................................................................2

TABLE OF CONTENTS .................................................................................................................4

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

BACKGROUND .............................................................................................................................7

FACTS .............................................................................................................................................9
      October 2011: OQA Recommends that FHFA Establish a Comprehensive Internal
      Quality Control Review Process ...............................................................................................9
      September 2012: DER Agrees to Establish a Quality Control Review Process ......................9
      March 2013: FHFA Issues a Supervision Directive Announcing a Quality Control
      Review Program for all FHFA Examinations ........................................................................10
      July 2013: OQA Again Recommends that DER Establish and Implement a
      Comprehensive Quality Control Review Process...................................................................10
      October 2013 to December 2014: DER’s Efforts to Develop a Comprehensive
      Quality Control Review Process Stalled Following Strong Staff Resistance.........................11
      Notwithstanding the Lack of a Comprehensive Quality Control Review Process for
      DER Examinations, Public Disclosures by FHFA in 2013, 2014, and 2015
      Affirmatively Represented that Such a Process Had Been Implemented Across the
      Agency ....................................................................................................................................12

FINDINGS .....................................................................................................................................13
      1. For almost four years, FHFA did not adopt a comprehensive internal quality
      control review process for its targeted examinations of the Enterprises. ...............................13
      2. FHFA’s public disclosures erroneously represented that it had established and
      implemented a comprehensive internal quality control review process across the
      Agency. ...................................................................................................................................13

CONCLUSION ..............................................................................................................................14

RECOMMENDATIONS ...............................................................................................................15

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




                                          OIG  EVL-2015-007  September 30, 2015                                                                4
APPENDIX A ................................................................................................................................17
      FHFA’s Comments on OIG’s Findings and Recommendations ............................................17

APPENDIX B ................................................................................................................................19
      Table of References to FHFA’s Quality Control Review Process .........................................19

APPENDIX C ................................................................................................................................20
      Analysis and Summary of Four Financial Regulators’ Quality Control Review
      Processes .................................................................................................................................20

ADDITIONAL INFORMATION AND COPIES .........................................................................21




                                         OIG  EVL-2015-007  September 30, 2015                                                                5
ABBREVIATIONS .......................................................................

DBR                Division of Federal Home Loan Bank Regulation

DER                Division of Enterprise Regulation

Fannie Mae         Federal National Mortgage Association

FHFA or Agency     Federal Housing Finance Agency

FHLBanks           Federal Home Loan Banks

Freddie Mac        Federal Home Loan Mortgage Corporation

HERA               Housing and Economic Recovery Act of 2008

MRA                Matter Requiring Attention

OIG                Federal Housing Finance Agency Office of Inspector General

OPB                Operating Procedures Bulletin

OQA                Office of Quality Assurance

Directive          Supervision Directive




                        OIG  EVL-2015-007  September 30, 2015                     6
BACKGROUND ..........................................................................

The Enterprises are the two largest institutions issuing mortgage-related securities in the
secondary mortgage market, providing more than $5 trillion in funding for the U.S. mortgage
markets and financial institutions. In September 2008, FHFA placed Fannie Mae and Freddie
Mac into conservatorships pursuant to its authority under the Housing and Economic
Recovery Act of 2008 (HERA). HERA vested FHFA with sweeping powers as conservator.
HERA also granted FHFA supervisory authorities comparable to those of other federal
financial safety and soundness regulators and enhanced resolution authority. FHFA serves a
unique role as both conservator and regulator of the Enterprises.

Four federal financial regulators with examination programs have disclosed in publicly
available information or have confirmed to OIG that they rely on formal internal quality
control reviews as an important internal control. Such reviews assess whether the
examinations: meet the regulator’s established standards for quality and procedures; are being
performed with consistency; include workpapers that support the findings and conclusions;
and undergo quality control reviews before reports are issued in final form to the examined
entity. When properly conducted, such reviews provide the regulator with assurance that its
examinations, which are critical to its supervisory mission, are accurate, complete, and of
uniform high quality.1 Most of these regulators require that internal quality control reviews
be completed prior to issuance of a report of examination to ensure that the conclusions,
findings, and recommendations in the report are supported by adequate and sufficient
documentation. Most of these federal financial regulators also require the quality control
reviewer to be independent. Appendix C summarizes aspects of these quality control
programs.

Like its fellow federal financial regulators, FHFA issues rules and conducts examinations to
protect the safety and soundness of the Enterprises. Indeed, FHFA maintains that its authority
over the Enterprises pursuant to HERA includes the powers of federal bank examiners, and
has successfully asserted the bank examination privilege to shield from discovery materials
relating to its regulation of the Enterprises.2 DER is responsible for ensuring that the targeted
examinations it conducts comply with FHFA standards and policies, including supervision
directives. In March 2013, FHFA issued a Supervision Directive announcing that its




1
 The four financial regulators are the Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, National Credit Union Administration, and the Consumer Financial Protection Bureau.
2
 See Federal Housing Finance Agency v. J.P. Morgan Chase & Co., 978 F.Supp.2d 267 (S.D.N.Y Oct. 16,
2013).



                                 OIG  EVL-2015-007  September 30, 2015                                          7
examinations of its regulated entities—the Enterprises and the Federal Home Loan Banks
(FHLBanks)—were subject to a quality control program.

HERA also amended the Inspector General Act of 1978 to establish an Office of Inspector
General for FHFA. OIG began operations on October 12, 2010, when its first Inspector
General was sworn in. OIG is dedicated to promoting the economy, efficiency, and
effectiveness of the programs and operations of FHFA; preventing and detecting fraud, waste,
and abuse in FHFA’s programs and operations; reviewing and commenting on pending
legislation and regulations; and bringing civil, criminal, and administrative actions against
those, whether inside or outside of the government, who commit fraud, waste, or abuse in
connection with the programs and operations of FHFA. OIG strengthened its oversight by
leveraging resources and focusing on programs and operations that pose the greatest financial,
governance, and/or reputational risk to the Agency, the Enterprises, and the FHLBanks. One
of the areas of greatest risks identified by OIG in its 2015 Annual Audit and Evaluations Plan
was FHFA’s rigor in examinations of the Enterprises. OIG conducted this evaluation to
determine whether FHFA has now established a formal quality control review process for its
examinations of the Enterprises. Subsequent audits and evaluations will assess other aspects
of FHFA’s effectiveness as regulator of the Enterprises.




                           OIG  EVL-2015-007  September 30, 2015                               8
FACTS .......................................................................................

Nearly four years have passed since the need for a comprehensive quality control review
process for examinations was recognized at FHFA. No comprehensive quality control review
process was in place for FHFA’s examinations of the Enterprises until July 28, 2015—after
work on this evaluation was completed. We summarize below the lengthy history of FHFA’s
unsuccessful efforts to implement a quality control program.

October 2011: OQA Recommends that FHFA Establish a Comprehensive Internal
Quality Control Review Process

As a federal agency, FHFA is required to implement internal controls that help it meet its
mission, goals, and objectives and to minimize risks associated with its programs and
operations. One such control established by FHFA is its internal OQA. OQA is charged with
reviewing the work of FHFA divisions responsible for supervision of the Enterprises.3

OQA issued its first quality assurance report of DER on October 7, 2011, in which it reviewed
the 2010 Reports of Examinations of the Enterprises. OQA identified five deficiencies with
the existing Report of Examination process, including the lack of a comprehensive internal
quality control review process. OQA recommended that DER establish a comprehensive
quality control review process to “help ensure the adequacy of the examination reports and
supporting work papers.”

September 2012: DER Agrees to Establish a Quality Control Review Process

The former Deputy Director of DER submitted a written response to OQA in September 2012
in which he committed that DER would develop an internal quality control program by
December 31, 2012, and represented that a draft document developing that program was
circulating for management review.

OIG also learned that OQA was pressured by FHFA officials to close the recommendations
in its October 2011 report. Although OQA recognized that DER had made little progress in
implementing OQA’s recommendation to establish a comprehensive quality control review,
OQA closed that recommendation in October 2012.




3
  Pursuant to its charter, OQA is primarily responsible for evaluating the quality of work performed by DER,
the Division of Federal Home Loan Bank Regulation, and the Division of Housing Mission and Goals.



                                 OIG  EVL-2015-007  September 30, 2015                                       9
March 2013: FHFA Issues a Supervision Directive Announcing a Quality Control Review
Program for all FHFA Examinations

On March 25, 2013, FHFA issued Supervision Directive
2013-01 (Directive) titled “Quality Control Program for             Supervision Directive: FHFA
Examinations Conducted by the Division of Bank Regulation           internal guidance that notifies
                                                                    supervision staff of supervisory
and Division of Enterprise Regulation” for all examinations.
                                                                    policy positions or internal
In the Directive, FHFA announced that, as a matter of FHFA          process.
policy, it is “particularly important that final examination
findings and conclusions are subject to a quality control
review before a report of examination or supervisory correspondence is communicated to the
regulated entity….” Pursuant to this newly adopted policy, the Directive required DER and
the Division of Federal Home Loan Bank Regulation (DBR), which examines the FHLBanks,
to establish a quality control review program to “assess examination findings, conclusions,
ratings, supporting workpapers, and related documents” and required that the quality control
reviews:

        Be performed by qualified reviewers who did not participate in the examination;

        Be documented in the examination workpapers; and

        Occur before examination results are communicated to the Enterprises.

According to a July 2013 OQA report, DBR had adopted and was using a quality control
review process for its examination work.

July 2013: OQA Again Recommends that DER Establish and Implement a
Comprehensive Quality Control Review Process

In July 2013, OQA issued a report in which it reviewed DER’s follow-up processes for
Matters Requiring Attention (MRAs), which are serious issues identified during an
examination that require remediation by the Enterprises.4 OQA identified a number of
weaknesses in DER’s follow-up processes, including that DER had not established and

4
  MRAs are issued by DER when it identifies practices during the course of an examination that deviate
from sound governance, internal control, and risk management principles, which may adversely impact an
Enterprise’s earnings, risk profile, or reputation if not addressed, or which result in substantive noncompliance
with laws and regulations, internal policies or processes, FHFA’s supervisory guidance, or conditions imposed
in writing in connection with FHFA approval of a proposed activity. FHFA, Categories for Examination
Findings, AB-2012-01 (April 2, 2012) (online at
www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/Pages/AB-2012-01-CATEGORIES-FOR-
EXAMINATION-FINDINGS.aspx).




                                  OIG  EVL-2015-007  September 30, 2015                                           10
implemented a comprehensive quality control program for examinations, notwithstanding
DER’s commitment in September 2012 to develop such a program by December 31, 2012.5
OQA again emphasized that “[m]any other examination programs have a process in which
peers review each other’s work or have a dedicated quality control staff to review exam
products.” Accordingly, OQA reissued its previously closed recommendation that the
Agency “establish a comprehensive quality control process.”

OIG learned that FHFA senior management directed OQA to refrain from further reviews of
DER’s work after its July 2013 report was issued because DER was subjected to scrutiny by
OIG. It was reported to OIG that, as a result of this directive from senior FHFA management,
OQA has conducted no further reviews of DER’s work since its July 2013 report.

October 2013 to December 2014: DER’s Efforts to Develop a Comprehensive Quality
Control Review Process Stalled Following Strong Staff Resistance

After FHFA issued the Directive in March 2013,
DER made several attempts to develop a                     Operating Procedures Bulletin:
comprehensive quality control review process.              FHFA internal guidance that
While DER drafted a number of Operating                    provides detailed division-level
Procedures Bulletins (OPBs) in 2013 and 2014 in            procedures to examiners.
an effort to jump-start a comprehensive internal
quality control program, DER’s examination staff vigorously resisted the effort. That
resistance is reflected in contemporaneous written comments by DER staff, meeting minutes,
internal documents, and DER emails reviewed by OIG, and was confirmed in OIG interviews
with DER staff. Some DER staff contended in emails that the proposed quality control
review was redundant and contradicted FHFA policies and procedures. One staff member
contended that the proposed program imposed controls more onerous than those imposed on
banks in the former Soviet Union. Others questioned the scope of the proposed quality
control review process and claimed that it would impede the examination program. DER
never finalized an OPB for quality control reviews, even though multiple versions were
drafted between 2013 and 2015.

Minutes of a February 2014 FHFA senior staff meeting reported that the attendees raised
the “concern that we have asserted to OIG and in A123 [internal control assessment]
documentation that quality control procedures are in place.” A former senior DER official
urged at this meeting that DER begin comprehensive quality control reviews for examinations
commencing after January 1, 2014. Notwithstanding the recommendations of OQA, the

5
  The 2013 OQA report noted that soon after completing the fieldwork for its 2013 report, DER announced that
it was establishing a quality control program to assess examination activities and workpapers. Because the
announcement occurred after OQA fieldwork had completed, OQA noted that it had not reviewed or evaluated
the program.


                                OIG  EVL-2015-007  September 30, 2015                                        11
requirements of the Directive, and the concerns voiced by FHFA senior staff during a senior
staff meeting in February 2014, DER did not establish or implement a quality control review
process. In June 2014, a DER employee conducted “pilot” quality control reviews, which
reviewed at least eight Freddie Mac and Fannie Mae targeted examinations to get a sense of
how the quality control review process reports might work. The same employee reviewed an
additional targeted examination in September 2014. Documents provided by DER to OIG
show that no quality control reviews were conducted between October 2, 2014, and July 28,
2015.

OQA closed its July 2013 quality control finding and recommendation in December 2014
based on a draft OPB received from DER in December 2014, and on DER’s representations in
September 2014 that its comprehensive quality control review process would follow FHFA’s
Directive and that DER’s Deputy Director would sign off on the draft OPB in the near future.

In June 2015, DER officials advised OIG that they no longer planned to issue a procedures
bulletin to bring DER into compliance with FHFA’s Directive. Instead, DER reported that it
elected to draft quality control procedures and designated an office to oversee the quality
control reviews. After work on this evaluation was completed, DER officials reported to OIG
that they adopted quality control procedures on July 28, 2015—more than three and a half
years after OQA initially recommended a quality control program—and that DER had begun
conducting quality control reviews pursuant to those procedures. OIG has not assessed
whether the new procedures, as drafted, satisfy the requirements in the Directive.

Notwithstanding the Lack of a Comprehensive Quality Control Review Process for DER
Examinations, Public Disclosures by FHFA in 2013, 2014, and 2015 Affirmatively
Represented that Such a Process Had Been Implemented Across the Agency

DER had not implemented a comprehensive quality control review process satisfying the
criteria in FHFA’s 2013 Directive. However, FHFA’s public website reported in at least three
places that FHFA had adopted a quality control review process for all of FHFA’s examination
work.

      FHFA published its examination manual on its website. That manual describes in
       detail a purported quality control review of examination work consistent with the
       Directive. See Appendix B. While an internal quality control review process is in
       place for DBR examinations of the FHLBanks, no equivalent quality control review
       process existed for DER examinations.

      FHFA’s Annual Performance Plans for both 2014 and 2015, also published on
       FHFA’s website, represent that FHFA will perform quality control on examination
       work, “consistent with internal Agency procedures.” DER never performed quality


                           OIG  EVL-2015-007  September 30, 2015                             12
       control reviews, consistent with FHFA’s Directive, on its examinations conducted in
       2014 and before August 2015.


FINDINGS .................................................................................

1. For almost four years, FHFA did not adopt a comprehensive internal quality control
   review process for its targeted examinations of the Enterprises.

In October 2011, OQA recommended that DER establish and implement a process for such
reviews and DER agreed to that recommendation in September 2012. FHFA required formal
internal quality control reviews to be conducted for its examinations of the entities it regulates
in its March 2013 Directive.

Notwithstanding DER’s commitment in September 2012 to establish and implement formal
quality control reviews for its examinations of the Enterprises and FHFA’s March 2013
requirement that such reviews be conducted for examinations, OIG’s evaluation found that
DER had not established and implemented a comprehensive internal quality control review
process for its targeted examinations of the Enterprises. After completion of this evaluation,
FHFA advised us that DER finalized a quality control review process on July 28, 2015.

2. FHFA’s public disclosures erroneously represented that it had established and
   implemented a comprehensive internal quality control review process across the
   Agency.

On its website, FHFA made multiple representations that the Agency had adopted an internal
quality control review process for all of its examination work. However, OIG found no
evidence that such a process had been established and implemented by DER for its
examinations of the Enterprises. DER officials confirmed to OIG that no such process existed
for DER’s examinations until July 28, 2015.




                             OIG  EVL-2015-007  September 30, 2015                                 13
CONCLUSION ............................................................................

Federal financial regulators, including FHFA, have long recognized that comprehensive
internal quality control reviews of examinations are a critical internal control to ensure that
examination findings and conclusions are adequately supported and to assure the regulator
that its examinations are accurate, complete, and of uniform high quality. FHFA has required
formal internal quality control reviews for examinations of its regulated entities since March
2013. DBR, which is charged with supervision of the FHLBanks, established the procedures
for formal internal quality control reviews and conducts such reviews. Notwithstanding
multiple representations by DER since September 2012 that it would establish and implement
a quality control review process for its examinations in the near future, DER had not
established or implemented this critical internal control at the time of this evaluation. Absent
such a control, FHFA lacks adequate assurance that DER’s targeted examinations are
accurate, complete, and of uniform high quality, which puts the credibility of its examination
program at risk. FHFA advised OIG after completion of this evaluation that DER finalized a
quality control review process on July 28, 2015, and has begun conducting quality control
reviews. OIG has not evaluated the new process.




                            OIG  EVL-2015-007  September 30, 2015                                14
RECOMMENDATIONS ...............................................................

We recommend FHFA:

   1. Ensure that DER’s recently adopted procedures for quality control reviews meet the
      requirements of Supervision Directive 2013-01 and require DER to document in detail
      the results and findings of each quality control review in examination workpapers,
      including any shortcomings found during the quality control review.

   2. Evaluate the effectiveness of the new quality control procedures, as implemented, one
      year after adoption.



OIG provided FHFA an opportunity to respond to a draft report of this evaluation. In its
comments, which are reprinted in their entirety in Appendix A, FHFA agreed with the
recommendations. FHFA also provided technical comments on the draft report, which were
incorporated as appropriate.




                          OIG  EVL-2015-007  September 30, 2015                             15
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

The objective of this evaluation was to determine whether FHFA established a formal quality
control review process for its targeted examinations of the Enterprises. To achieve the
objective, OIG interviewed FHFA officials and reviewed documents provided by FHFA.
These documents included targeted examinations workpapers, examination manuals and
guides, supervision directives, DER’s processes and procedures, and other guidance in effect
from 2013 to present. Additionally, we reviewed related reports from OQA and OIG from
2011 through 2014.

This evaluation 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
to provide reasonable bases to support its findings and recommendations. We believe that the
findings and recommendations discussed in this report meet these standards.

Fieldwork for this evaluation was conducted from February to June 2015.




                           OIG  EVL-2015-007  September 30, 2015                              16
APPENDIX A .............................................................................

FHFA’s Comments on OIG’s Findings and Recommendations




                         OIG  EVL-2015-007  September 30, 2015                     17
OIG  EVL-2015-007  September 30, 2015   18
APPENDIX B..............................................................................

Table of References to FHFA’s Quality Control Review Process

    Public Document on
         FHFA.gov                          Reference of Quality Control Review Process
 Annual Performance Plan   “During FY 2014, FHFA will use the following means and strategies in
 FY 14                     support of Performance Goal 1.2:
                           > Perform Quality Control of examination work, consistent with internal
                             Agency procedures.”
 Annual Performance Plan   “During FY 2015, FHFA will use the following means and strategies in
 FY 15                     support of Performance Goal 1.1:
                           > Perform quality control of examination work, consistent with internal
                             Agency procedures.”
 Examination Manual        “Quality control ensures that examination activities comply with FHFA
                           examination standards and procedural requirements, which are included
                           in the FHFA examination manual, supplemental modules, supervision
                           directives, and division operating procedures bulletins. Effective quality
                           control ensures that examination conclusions, findings, and ratings are
                           adequately supported and documented in accordance with FHFA
                           standards and any significant deficiencies are identified and resolved
                           prior to their communication to the regulated entities. FHFA’s quality
                           control program is described in a supervisory directive (Supervision
                           Directive 2013-01 (Quality Control Program for Examinations Conducted
                           by the Division of Bank Regulation and the Division of Enterprise
                           Regulation)) and is designed to provide the EIC with actionable
                           information regarding significant deviations from FHFA policy/procedure
                           in a manner that allows the EIC to take appropriate corrective action.
                           Generally, quality control reviews should evaluate whether:
                           (1) workpapers support examination findings, conclusions, and ratings;
                           (2) examination work products are consistent with FHFA examination
                           standards and supervision policy; and (3) examination procedures were
                           consistent with the examination scope. Quality control reviews will be
                           conducted by FHFA personnel who have experience with, and are
                           knowledgeable of, FHFA examination requirements, but have not
                           participated in the examination activity under review.”




                           OIG  EVL-2015-007  September 30, 2015                                  19
APPENDIX C ..............................................................................

Analysis and Summary of Four Financial Regulators’ Quality Control Review Processes

OIG staff obtained publicly available information on examination programs of four federal
financial regulators that employ a form of quality control to ensure their examinations and
processes are conducted with reasonable efficiency and effectiveness, and according to
applicable standards. The four federal financial regulators include the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, National Credit
Union Administration, and the Consumer Financial Protection Bureau. An analysis of the
information shows the following:

      All four of the federal financial regulators have some form of quality control review
       process for their examination programs;

      Three of the four regulators have an independent internal reviewer perform a quality
       control review;

      Three of the four regulators conduct the quality control review before a final report is
       issued to the examined entity;

       o All three regulators state that the quality control review process ensures that
         findings, conclusions, and recommendations described in their respective final
         examination reports are supported by sufficient and adequate documentation;

       o The fourth regulator conducts a quality control review after submitting its final
         report to the examined entity, however, it is substantial in that it reviews findings,
         conclusions and recommendations for supporting documentation, and procedures
         for efficiency and effectiveness;

       o In addition, the same regulator explained that its supervisory review process is
         directly tied to the examination staff’s individual annual performance appraisals,
         which places greater significance on the quality of work being conducted;

      Three of the four financial regulators also have post-examination quality assurance
       processes that include reviews of their examination processes to identify patterns
       indicative of errors or flaws in order to improve their process.




                            OIG  EVL-2015-007  September 30, 2015                               20
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-2015-007  September 30, 2015                       21