oversight

FHFA Failed to Consistently Deliver Timely Reports of Examination to the Enterprise Boards and Obtain Written Responses from the Boards Regarding Remediation of Supervisory Concerns Identified in those Reports

Published by the Federal Housing Finance Agency, Office of Inspector General on 2016-07-14.

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

                   REDACTED




            Federal Housing Finance Agency
                Office of Inspector General




 FHFA Failed to Consistently Deliver
Timely Reports of Examination to the
Enterprise Boards and Obtain Written
Responses from the Boards Regarding
Remediation of Supervisory Concerns
     Identified in those Reports




  Evaluation Report  EVL-2016-009  July 14, 2016
                Executive Summary
                Since 2008, FHFA has operated as both regulator and conservator of Fannie
                Mae and Freddie Mac (the Enterprises) and regulator of the Federal Home
                Loan Banks (FHLBanks) to ensure that they operate safely and soundly so that
                they serve as a reliable source of liquidity and funding for housing finance and
                community investment. FHFA’s Division of Enterprise Regulation (DER)
EVL-2016-009    conducts supervision activities for the Enterprises. DER conducts ongoing
                monitoring and targeted examinations into strategically selected areas of high
July 14, 2016   importance or risk at each Enterprise pursuant to a supervisory plan that is
                prepared annually and revised at mid-year. Supervision of the Federal Home
                Loan Bank System is the responsibility of FHFA’s Division of Federal Home
                Loan Bank Regulation (DBR). DBR’s supervisory activities include annual
                on-site examinations, periodic visits, special reviews, and off-site monitoring.

                Like other federal financial regulators, FHFA produces written reports of
                examination (ROEs) in conjunction with each annual supervisory cycle. The
                purpose of an ROE is to communicate the examination results and conclusions,
                findings, supervisory concerns, and the composite and component ratings
                assigned in accordance with FHFA’s rating system to the board of directors of
                each regulated entity.

                It is axiomatic that the board of an entity regulated by FHFA must receive
                from FHFA a clear articulation of examination findings and other supervisory
                concerns, such as deficient or unsafe and unsound practices and violations of
                laws or regulations, in order to satisfy its oversight responsibilities under
                FHFA’s regulations and guidance. Without that clear articulation from FHFA,
                a board will be challenged to satisfy FHFA’s expectation that the board submit
                a written response to the ROE and affirm that corrective action is being taken,
                or will be taken, to resolve supervisory concerns. To ensure that the board of
                directors of a regulated entity reviews the ROE and affirms its commitment to
                ensure that corrective action has been or will be taken to resolve deficiencies
                in risk management and supervisory concerns, FHFA guidance in place since
                December 2013 requires the boards to provide a written response to each ROE.

                Given the central role the ROE serves in communicating FHFA’s supervisory
                concerns, examination findings, and ratings to the board of directors of each
                of its regulated entities, and the importance of diligent board oversight of
                corrective action by management, we conducted this evaluation to compare
                FHFA’s ROE requirements and applicable requirements established by other
                federal financial regulators. We assessed whether DER and DBR followed
                FHFA requirements when issuing the ROEs, and whether they obtained written
                responses to the ROEs as required by FHFA policy. The scope of our
                evaluation for DER covered the five examination cycles from 2011 to 2015
                and, for DBR, we reviewed the 2013-2015 cycles.

                Based on the information learned during this evaluation, we are issuing today
                two reports. In a companion report (FHFA’s Failure to Consistently Identify
                Specific Deficiencies and Their Root Causes in Its Reports of Examination
                Constrains the Ability of the Enterprise Boards to Exercise Effective Oversight
EVL-2016-009    of Management’s Remediation of Supervisory Concerns), we compare the
                requirements and guidance issued by other federal financial regulators
July 14, 2016   regarding the minimum standard of information to be provided in each ROE
                to FHFA’s requirements and guidance; we discuss the supplemental guidance
                issued by DBR for content of ROEs issued to FHLBanks and show that DER
                has issued no similar guidance; and we evaluate whether DER examiners have
                complied with DER requirements for the preparation of the ROEs over the past
                five examination cycles.

                In this report, we compare FHFA’s requirements and guidance for the issuance
                of an ROE and response to it by the board of directors of the regulated entity to
                the requirements and guidance of other federal financial regulators. We found
                that FHFA’s requirements and guidance are more limited than other federal
                financial regulators. We also assess whether DER and DBR examiners have
                followed FHFA’s limited requirements and guidance. We found that DBR
                examiners have met these standards but DER examiners largely have not.

                FHFA regulations and guidance establish that every board of directors of
                an entity regulated by FHFA is ultimately responsible for the safety and
                soundness of the entities. For a board to exercise its oversight responsibilities
                and ensure that management corrects all deficient, unsafe, or unsound practices
                giving rise to supervisory concerns and findings, it must, in the first instance,
                have notice from FHFA of all such practices. In our companion report issued
                today, we identified the shortcomings in ROEs issued by DER over the past
                five years that necessarily constrain the ability of the Enterprise boards to
                exercise effective oversight. For FHFA to obtain assurance that a board of
                directors is committed to ensure that all deficiencies are corrected in a timely
                manner, its examiners must issue the ROE to the board of directors, not to
                management, and must require a written response from the board that sets forth
                the corrective actions that have been or will be taken. In this report, we show
                that the practice by DER examiners for the past five years has fallen far short
                of the few requirements imposed by FHFA.

                We make three recommendations to remedy the shortcomings we found.
                FHFA has partially agreed with the first two recommendations and disagreed
                with the third.
                This report was prepared by Jon Anders, Program Analyst, and Timothy
                Callahan, Attorney Advisor. We appreciate the cooperation of FHFA staff, as
                well as the assistance of all those who contributed to the preparation of it.

                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.

EVL-2016-009

July 14, 2016
                Kyle D. Roberts
                Deputy Inspector General for Evaluations
TABLE OF CONTENTS ................................................................
EXECUTIVE SUMMARY .............................................................................................................2

ABBREVIATIONS .........................................................................................................................7

BACKGROUND .............................................................................................................................8
      Reports of Examination: Communicating Examination Findings, Supervisory
      Concerns, and Ratings ..............................................................................................................8
      Boards of Directors of Entities Regulated by FHFA are Charged by FHFA with
      Responsibility for Overseeing Management’s Resolution of Examination Findings
      and Supervisory Concerns ........................................................................................................9

FACTS AND ANALYSIS.............................................................................................................10
      Requirements of Other Federal Financial Regulators for Issuance of Reports of
      Examination, Response by Regulated Entity, and Follow-Up ...............................................10
             Issuance of the ROE and Required Meeting(s) with the Board of Directors .................11
             Board Acknowledgement of and Written Response to the ROE ....................................12
      FHFA Requirements and Guidance and DER Practice Regarding Issuance of Reports
      of Examination, Presentation of Findings, and Written Response .........................................13
             Issuance of the ROE and Presentation of Examination Findings to Boards of
                  Directors ..................................................................................................................13
             Contrary to FHFA’s Clear Requirements, DER Has Not Required the
                 Enterprises’ Boards of Directors to Provide a Written Response to the
                 ROEs .......................................................................................................................17
      DBR Guidance and Practice Governing ROEs Issued to FHLBanks .....................................18

FINDINGS .....................................................................................................................................20
      1. FHFA’s current requirements and guidance on communication of the annual
      ROE are more limited than the requirements of other federal financial regulators and
      have led to divergent and inefficient practices among DER’s examination teams. ...............20
      2. DER examiners failed to meet FHFA’s prior and current requirements for
      communication of the annual ROE.........................................................................................20
      3. DBR examiners have met FHFA’s current requirements for communication of
      the annual ROE. ......................................................................................................................21




                                              OIG  EVL-2016-009  July 14, 2016                                                             5
CONCLUSION ..............................................................................................................................21

RECOMMENDATIONS ...............................................................................................................22

FHFA COMMENTS AND OIG RESPONSE ...............................................................................23

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................25

APPENDIX A ................................................................................................................................26
      Examination Manuals and ROE Templates and Instructions of the OCC,
      Federal Reserve, and FDIC.....................................................................................................26
             OCC ................................................................................................................................26
             Federal Reserve...............................................................................................................26
             FDIC ...............................................................................................................................26

APPENDIX B ................................................................................................................................27
      FHFA’s Comments on OIG’s Findings and Recommendations ............................................27

ADDITIONAL INFORMATION AND COPIES .........................................................................32




                                              OIG  EVL-2016-009  July 14, 2016                                                                6
ABBREVIATIONS .......................................................................

Board                     Board of Directors

CCO                       Chief Compliance Officer

DBR                       Division of Federal Home Loan Bank Regulation

DER                       Division of Enterprise Regulation

EIC                       Examiner-in-Charge

Enterprises               Fannie Mae and Freddie Mac, collectively

FDIC                      Federal Deposit Insurance Corporation

Federal Reserve           Board of Governors of the Federal Reserve System

FHFA or Agency            Federal Housing Finance Agency

FHLBank                   Federal Home Loan Bank

MRA                       Matter Requiring Attention

OCC                       Office of the Comptroller of the Currency

OIG                       Federal Housing Finance Agency Office of Inspector General

ROE                       Report of Examination




                           OIG  EVL-2016-009  July 14, 2016                          7
BACKGROUND ..........................................................................

Since 2008, FHFA has operated as both regulator and conservator of the Enterprises and
regulator of the Federal Home Loan Bank system to ensure that these entities operate safely
and soundly so that they serve as a reliable source of liquidity and funding for housing finance
and community investment.

FHFA’s DER is responsible for supervision of the Enterprises. DER conducts both ongoing
monitoring and targeted examinations based on its risk-based supervisory strategy and plan.1
FHFA’s DBR is responsible for supervision of the FHLBanks and the Office of Finance.
DBR’s supervisory activities include annual on-site examinations typically lasting several
weeks, supplemented by periodic visits, special reviews, and off-site monitoring.

Reports of Examination: Communicating Examination Findings, Supervisory Concerns,
and Ratings

Like other federal financial regulators, FHFA produces an ROE in conjunction with its
supervision of each regulated entity. DER issues an ROE to each Enterprise at the end of
each annual supervisory cycle and DBR issues an ROE to each FHLBank after completing
that bank’s annual on-site examination. According to FHFA, the purpose of the ROE is to
communicate to the board of directors of a regulated entity the substantive examination
results and conclusions, examination findings, supervisory concerns, and the composite and
component examination ratings assigned in accordance with FHFA’s examination rating




1
 Through ongoing monitoring, DER examiners evaluate the Enterprises’ operations and risk management
by meeting with Enterprise management and reviewing management and board reports. Examiners may also
conduct ongoing monitoring to determine the status of the Enterprises’ compliance with supervisory guidance
and conservatorship directives and remediation of Matters Requiring Attention (MRAs). Targeted
examinations enable examiners to conduct a deep or comprehensive assessment of selected areas of high
importance or risk. DER examiners conduct targeted examinations on an as needed basis, determined by risk.



                                    OIG  EVL-2016-009  July 14, 2016                                        8
system.2 The phrase “supervisory concern” is a
term of art commonly used among federal financial                        FHFA’s Examination Findings
regulators to describe a practice or condition that,                     Matter Requiring Attention: The
on its own, may not qualify as a Matter Requiring                        most serious examination finding,
Attention (MRA) but nevertheless requires                                issued for non-compliance with
remediation and resolution.3 FHFA defines                                laws or regulations, repeat
examination findings as deficiencies related to: risk                    deficiencies, unsafe or unsound
                                                                         practices, significant control
management; risk exposure; or violations of laws,
                                                                         weaknesses, and inappropriate
regulations, or orders affecting the performance or                      risk-taking.
condition of a regulated entity. The most serious
examination finding is an MRA.4                                          Violation: A matter as to which
                                                                         there is reason to suspect non-
                                                                         compliance with laws, regulations,
Boards of Directors of Entities Regulated by
                                                                         or orders. A violation with serious
FHFA are Charged by FHFA with Responsibility                             implications also may be classified
for Overseeing Management’s Resolution of                                as an MRA.
Examination Findings and Supervisory Concerns                            Recommendation: An advisory
                                                                         finding representing a suggested
FHFA regulations and guidance establish that boards                      change to a policy, procedure,
of directors of entities regulated by FHFA are                           practice, or control to improve,
ultimately responsible for the safety and soundness                      or prevent deterioration in,
                                                                         condition, operations, or
                                                                         performance.




2
 FHFA published its examination findings categories and supervisory guidance in Advisory Bulletin 2012-01,
which established a hierarchy of three findings categorized by the seriousness of the deficiency. See FHFA,
Advisory Bulletin 2012-01, Categories for Examination Findings, at 2 (Apr. 2, 2012) (online at
www.fhfa.gov/SupervisionRegulation/AdvisoryBulletins/AdvisoryBulletinDocuments/2012_AB_2012-
01_Categories_for_Examination_Findings_508.pdf). An FHFA Advisory Bulletin may be directed to FHFA
employees, to the entities FHFA regulates, or to both. Advisory Bulletin 2012-01 is addressed to both.
3
  FHFA’s corporate governance regulation does not define the term “supervisory concerns,” but imposes
duties on the boards of regulated entities to ensure that all supervisory concerns are addressed. See 12 C.F.R.
§ 1239.4(c)(3) (Duties and Responsibilities of Directors).
4
  Through discussions with management and formal correspondence such as “conclusion letters,” DER
communicates examination findings to Enterprise management as they are identified during the course of the
examination cycle. Historically, DER has addressed conclusion letters to Enterprise management, not to the
board of directors or a board committee. In response to a recent OIG recommendation, FHFA will now require
that any conclusion letter that includes an MRA be sent to the chair of the board Audit Committee of the
affected Enterprise. See OIG, FHFA’s Supervisory Standards for Communication of Serious Deficiencies to
Enterprise Boards and for Board Oversight of Management’s Remediation Efforts are Inadequate, at 20 (Mar.
31, 2016) (EVL-2016-005) (online at www.fhfaoig.gov/Content/Files/EVL-2016-005.pdf).




                                      OIG  EVL-2016-009  July 14, 2016                                          9
of those entities.5 This responsibility includes ensuring that (1) the conditions and practices
that gave rise to any supervisory concerns and examination findings raised in the ROE are
corrected in a timely manner and (2) executive officers are “responsive[ ] in addressing all
supervisory concerns of FHFA in a timely and appropriate manner.”6 Further, FHFA’s
prudential management and operations standards reinforce that the board of directors of
a regulated entity is responsible for that entity’s compliance with all applicable laws,
regulations, and FHFA’s supervisory guidance.7


FACTS AND ANALYSIS ...............................................................

Requirements of Other Federal Financial Regulators for Issuance of Reports of
Examination, Response by Regulated Entity, and Follow-Up

As we explained in our companion report issued from this evaluation (FHFA’s Failure to
Consistently Identify Specific Deficiencies and Their Root Causes in Its Reports of
Examination Constrains the Ability of the Enterprise Boards to Exercise Effective Oversight
of Management’s Remediation of Supervisory Concerns), FHFA, like other federal financial
regulators such as the Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Federal Reserve), and the Federal Deposit
Insurance Corporation (FDIC), conducts safety and soundness examinations of, and issues
periodic ROEs to, the financial institutions it supervises.8




5
 See 12 C.F.R. § 1239.4(a) and the prior Office of Federal Housing Enterprise Oversight regulation at
12 C.F.R. § 1710.15(b). The Enterprises have been in conservatorships since September 2008; FHFA has
delegated to the boards of directors responsibility for oversight of general corporate matters.
6
 12 C.F.R. § 1239.4(c)(3). See also FHFA, Examination Manual, Examination Program Overview, at 23
(Dec. 19, 2013) (online at
www.fhfa.gov/SupervisionRegulation/Documents/ExaminationProgramOverview.pdf); see also
12 C.F.R. § 1239.4(c)(1), (3) (Duties and Responsibilities of Directors).
7
 See FHFA Prudential Management and Operations Standards, Standard 1, Principle 16; 12 C.F.R. Part 1236,
Appendix to Part 1236.
8
  FHFA maintains, based on the language of its authorizing statute, that its supervisory authority “is virtually
identical to—and clearly modeled on—Federal bank regulators’ supervision of banks.” See Defs. Resp. in
Opp. to Pls’ Mot. to Compel Prod. of Certain Documents Withheld for Privilege, at 17, Fairholme Funds, Inc.
v. United States, No. 13-465C (Fed. Cl. Feb. 19, 2016).




                                      OIG  EVL-2016-009  July 14, 2016                                           10
       Issuance of the ROE and Required Meeting(s) with the Board of Directors

The OCC, Federal Reserve, and FDIC require that the ROE be issued to the board of directors
of the regulated entity at least once during each supervisory cycle.9 Implicit in this
requirement is the recognition that the board of directors of the regulated entity is ultimately
accountable for the safety and soundness of that entity.10

The OCC, Federal Reserve, and FDIC also expect that the examination team will meet with
the board of directors of regulated entities to discuss the ROE. The OCC instructs that the
examiner-in-charge (EIC) “will meet with the board of directors or an authorized committee
that includes outside directors after the board or committee has reviewed the report of
examination findings.”11 As needed, the OCC examiners are expected to use such meetings
“to discuss how the board should respond to supervisory concerns and issues.”12

When Federal Reserve examiners issue a composite “CAMELS” rating of 3 for an
examination and determine that the bank’s “condition appears to be deteriorating or has
shown little improvement since a previous examination in which it received a 3 rating,”13

9
  The OCC, in its Comptroller’s Handbook, directs that “the OCC must provide a bank’s board of directors a
report of examination at least once each supervisory cycle (12 or 18 months).” See OCC, Bank Supervision
Process, Comptroller’s Handbook, at 36 (Dec. 2015) (online at www.occ.gov/publications/publications-by-
type/comptrollers-handbook/pub-ch-ep-bsp.pdf).
10
     As the Commercial Bank Examination Manual for the Federal Reserve provides:
           While the board itself may not directly undertake the work to remediate supervisory findings
           as senior management is responsible for the organization’s day-to-day operations, it is
           nevertheless important that the board be made aware of significant supervisory issues and
           ultimately be accountable for the safety and soundness and assurance of compliance with
           applicable laws and regulations of the organization.
The Federal Reserve requires that an ROE be sent “to the board of directors, or an executive-level committee
of the board, as appropriate.” Federal Reserve, Commercial Bank Examination Manual, Section 6000.1, at 1
(Oct. 2013) (online at www.federalreserve.gov/Boarddocs/SupManual/cbem/6000.pdf).
For its part, the FDIC requires that the boards of most large or lower rated banks regulated by it receive an
ROE at least once during each 12-month period. See FDIC, Basic Examination Concepts and Guidelines, at
1.1-4, 1.1-6, and 1.1-16 (Feb. 2016) (online at www.fdic.gov/regulations/safety/manual/section1-1.pdf) and
FDIC, Report of Examination Instructions, at 16.1-50 (Apr. 2015) (online at
www.fdic.gov/regulations/safety/manual/section16-1.pdf).
11
     OCC, Bank Supervision Process, Comptroller’s Handbook, supra note 9, at 37.
12
     Id.
13
   Federal Reserve, Commercial Bank Examination Manual, supra note 10, Section 5030.1, at 3. The Federal
Reserve and other banking regulators employ “CAMELS” ratings to evaluate the soundness of financial
institutions and identify those that require special attention or concerns. The ratings system is comprised of
six component ratings (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Sensitivity
to Market Risk) and a composite rating. Examiners assign CAMELS ratings on a numerical scale of 1 to 5,
where a 1 rating represents the least degree of supervisory concern and a 5 rating represents the highest degree



                                       OIG  EVL-2016-009  July 14, 2016                                          11
they are required to meet with the board of directors after the ROE has been transmitted to
the board. The purpose of such meetings is to explain the significant problems found during
the examination and obtain a commitment to initiate and oversee appropriate corrective
action.14

Like the Federal Reserve, FDIC guidance ties an annual meeting between FDIC examiners
and a bank’s board of directors to the bank’s CAMELS rating. When a bank receives a
composite CAMELS rating of 3, 4, or 5, the FDIC expects that the EIC will meet with the
board of that bank to discuss the examination findings, enhance director awareness of FDIC
supervision, and encourage director oversight of correction of deficiencies.15

      Board Acknowledgement of and Written Response to the ROE

The OCC, Federal Reserve, and FDIC require each member of the board of the regulated
entity to sign the ROE.16 The signature serves to acknowledge that the director has read the
entire ROE.17

In addition, guidance issued by the OCC, Federal Reserve, and FDIC contemplates that each
board of directors will respond in writing to the ROE or that the ROE will reflect the board’s
commitment to corrective action. For example, the OCC’s Comptroller’s Handbook instructs
that an ROE should include a summary of actions the institution should take in response to
the OCC’s supervisory findings and the commitment to those actions made by the board and
management during the examination. OCC ROEs also should include a discussion of follow-
up work, such as any request for a written board response and the timing and content of
progress reports.18 The Federal Reserve requires the board of directors of a regulated entity to

of supervisory concern. FHFA has adopted a similar examination rating system, known as “CAMELSO,” that
incorporates a seventh component rating: Operational Risk.
14
   See Federal Reserve, Commercial Bank Examination Manual, Section 5030.1, supra note 10, at 1.
Examiners are required to meet with the board of any bank that receives a composite CAMELS rating of 4 or 5
or if certain conditions, such as noncompliance with significant provisions of a supervisory action, are found
during the examination. Id., Section 5030.1, at 2-3.
15
   See FDIC, Basic Examination Concepts and Guidelines, supra note 10, at 1.1-15, -16. For any bank that
receives a composite CAMELS ratings of 1 or 2, FDIC guidance recommends a meeting between FDIC
examiners and the bank’s board of directors every three years, unless the bank’s management component
rating, or a combination of component ratings, falls below 2 or any component rating falls below 3.
16
   The OCC, Federal Reserve, and FDIC allow members of a committee to sign the ROE, in lieu of the full
board, if the committee includes outside directors and the full board has passed a resolution delegating review
of the ROE to that committee.
17
  The directors must either return a copy of the signature page to the regulator (OCC) or retain it and make it
available to the regulator upon request during subsequent examinations (Federal Reserve and FDIC).
18
     See OCC, Bank Supervision Process, Comptroller’s Handbook, supra note 9, at 104.




                                      OIG  EVL-2016-009  July 14, 2016                                          12
provide a written response to each ROE with its plan, progress, and resolution of all MRAs
identified in the ROE.19 While the FDIC’s Report of Examination Instructions does not
expressly require a board response to the ROE, as noted above, the FDIC requires each
director to sign the ROE acknowledging his or her review of the entire report, including any
discussion of deficiencies. An FDIC supervision journal sheds light on examiners’ practices;
it counsels that examiners should request a response from a board of directors identifying
corrective actions for an ROE that reports serious supervisory findings.20

FHFA Requirements and Guidance and DER Practice Regarding Issuance of Reports of
Examination, Presentation of Findings, and Written Response

      Issuance of the ROE and Presentation of Examination Findings to Boards of Directors

Current FHFA policy requires an ROE to be issued to the board of directors of each regulated
entity for each annual examination. Notably, DER changed its guidance governing ROEs
during the review period; as a consequence, the ROEs issued for the 2011-2012 examination
cycles were subject to different requirements than the ROEs issued for the 2013-2015
examination cycles. DER guidance governing the 2011-2012 examination cycles (set forth in
DER Supervisory Guide 2.0) directed each EIC to provide the board of directors with a final
version of the ROE in advance of the meeting at which DER officials would discuss the
examination findings and conclusions with the board. Specifically, DER guidance for these
examinations required:

         Submission of the executed ROE to an Enterprise’s board of directors at the end of the
          first week of March; and

         Presentation of the ROE results, conclusions, and supervisory concerns to an
          Enterprise board by the FHFA Director and DER Deputy Director during a subsequent
          board meeting in March or April to provide board members with the opportunity to
          ask questions and discuss examination conclusions and supervisory concerns.21

We assessed whether DER’s practice for the 2012 and 2013 ROEs (for the 2011 and 2012
supervisory cycles) met the requirements of its Supervisory Guide and found that DER largely


19
     See Federal Reserve, Commercial Bank Examination Manual, Section 6000.1, supra note 10, at 3.
20
  See Catherine H. Goñi et al., Supervisory Trends: “Matters Requiring Board Attention” Highlight Evolving
Risks in Banking, Supervisory Insights, Vol. 11, Issue 1, at 8 (Summer 2014) (online at
www.fdic.gov/regulations/examinations/supervisory/insights/sisum14/SIsummer2014.pdf).
21
   A concurrently applicable set of DER guidance (DER Supervision Handbook 2.1) provided for only the
presence of the Deputy Director of DER (and not the FHFA Director) at these meetings.




                                      OIG  EVL-2016-009  July 14, 2016                                     13
failed to meet its own requirements for these two cycles.22 Our review of DER materials
showed that DER issued none of the final 2012 and 2013 ROEs to the board in advance of its
annual presentations at Enterprise board meetings. Three of the four final ROEs were issued
to Enterprise boards after DER’s annual presentations. One of the final ROEs was provided
by DER to the Enterprise board at the very board meeting at which DER presented the
supervisory findings, conclusions, and concerns, providing those directors with no time to
review the ROE in advance of DER’s presentation.

More specifically, with respect to Freddie Mac, our review of documents provided to us by
FHFA and Freddie Mac found that DER completed the 2012 ROE (for the 2011 supervisory
cycle) after its March 2012 ROE presentation to the Freddie Mac board and addressed the
cover letter to the Freddie Mac board but sent that final ROE by email to Freddie Mac
management, which subsequently forwarded it to the board.23 The following year, DER sent
the final 2013 ROE (for the 2012 supervisory cycle) to Freddie Mac management by email
two days prior to its March 2013 presentation to the board and distributed the final ROE to
board members at the meeting.24 At each presentation, DER provided board members with
PowerPoint presentation slides and DER senior officials summarized examination ratings and
examination conclusions.

With respect to Fannie Mae, DER did not meet the requirements in its Supervisory Guide for
the 2012 and 2013 ROEs (for the 2011 and 2012 supervisory cycles), because DER did not
complete the final ROEs in advance of its presentations.25 Instead, DER senior officials
provided Fannie Mae directors with PowerPoint presentation slides that contained provisional
examination ratings and orally summarized DER’s supervisory findings, conclusions, and

22
   DER’s Supervisory Guide mandated delivery of the final ROE to an Enterprise board of directors by the end
of the first week of March, with a DER presentation of examination results at a subsequent board meeting. For
purposes of our review, we treat delivery of the final ROE to an Enterprise board prior to DER’s presentation
to it as sufficient to satisfy the spirit of the Supervisory Guide requirements, even if that practice did not
comply with the requirements. In contrast, we treat delivery of the final ROE to an Enterprise board at the
meeting where DER presented the supervisory findings, conclusions, and concerns as falling far short of the
spirit and meaning of the Supervisory Guide requirements as that Enterprise board would have no ability to
review the ROE prior to the DER presentation.
23
   DER provided a draft 2012 ROE for the 2011 supervisory cycle to Freddie Mac management before its
presentation to the board.
24
   The subject line of the March 2013 email from DER to Freddie Mac management included the phrase
“Submission to the Board.” In a prior email in that email chain, Freddie Mac management advised that it
would distribute the final 2013 ROE to the Freddie Mac board with the board materials if DER transmitted that
final ROE two days prior to the board meeting. Freddie Mac advised us that its directors received the 2013
ROE (for the 2012 supervisory cycle) at the meeting.
25
   In both years, DER sent a draft ROE by email to Fannie Mae regulatory affairs personnel two days before
the DER board presentation. From the materials provided to us by FHFA and Fannie Mae, it does not appear
that the Fannie Mae board received the draft ROEs for its review.




                                     OIG  EVL-2016-009  July 14, 2016                                          14
concerns during their presentation to directors. Several weeks after each DER presentation to
Fannie Mae directors, DER completed the final 2012 and 2013 ROEs (for the 2011 and 2012
supervisory cycles) and sent the final ROEs to Fannie Mae management.26

FHFA adopted new rules in December 2013 (set forth in the FHFA Examination Manual)
that applied to the ROEs finalized in 2014, 2015, and 2016 (for the 2013, 2014, and 2015
supervisory cycles). Those new rules eliminated the requirement to submit executed ROEs
to the boards in advance of the presentations to the boards. The only requirement in the
December 2013 Examination Manual is that DER “issue” the ROE, signed by the EIC, to
the board of directors of the affected regulated entity. DER has not promulgated detailed
guidance that defines the term “issue,” governs ROE delivery to a board, or governs DER’s
presentation of ROE findings to a board.27 As a result, all decisions on communications with
a board of directors of a regulated entity about the ROE results, conclusions, and supervisory
concerns are left to the discretion of DER, DBR, and the individual examination teams. For
example, FHFA has no requirements or guidance respecting:

        Whether DER must transmit the final ROE directly to an Enterprise board of directors
         rather than to Enterprise management;

        Whether DER must or should present the ROE results, conclusions, and supervisory
         concerns to an Enterprise board;

        Whether the presentation of examination findings must or should occur before or after
         the final ROE is issued to the board of directors; and

        Which FHFA officials must or should participate in the meeting of the board of
         directors of the regulated entity when ROE conclusions, findings, and ratings are
         presented orally and discussed.

Our review of DER’s practices for ROE issuance in 2014, 2015, and 2016 found that they
were inconsistent from year to year. We observed divergence in practice between the Fannie
Mae and Freddie Mac examination teams, and within the same examination team. Because

26
   For the 2011 supervisory cycle, DER transmitted the final 2012 ROE to Fannie Mae management after the
DER presentation to the board, even though DER’s cover letter for that ROE was addressed to the Fannie Mae
board. Fannie Mae management then distributed that final ROE to the board within days. For the 2012
supervisory cycle, DER finalized the 2013 ROE and transmitted it to Fannie Mae management after the DER
presentation to the board, without any instructions regarding further distribution. Fannie Mae management, in
turn, did not share the final 2013 ROE with the Fannie Mae board until more than a month after its receipt
from DER.
27
  After the issuance of the 2016 ROEs, DER finalized internal procedures for performing risk assessments.
These new procedures note that transmittal of the ROE to the Enterprise’s board of directors occurs “in the first
quarter following the calendar year [in which examination activities take place].” See DER, Operating
Procedures Bulletin 2016-DER-OPB-01, Enterprise Supervision: Mid-Year Risk Assessments (May 25, 2016).



                                      OIG  EVL-2016-009  July 14, 2016                                            15
neither FHFA nor DER requires the EIC to submit or transmit the final ROE directly to an
Enterprise board of directors (or to a committee of the board with delegated responsibility to
review and respond to the ROE), we found that DER’s practice, in general, was to send by
email the final ROE to Enterprise management and leave to each Enterprise’s management
the decision of whether and when to provide the final ROEs to the Enterprise board.

With regard to Freddie Mac, DER sent by email the final 2014, 2015, and 2016 ROEs (for
the 2013, 2014, and 2015 supervisory cycles) to Freddie Mac management, in advance of
each of DER’s annual presentations to the Freddie Mac, without instructions to provide the
final ROEs to the Freddie Mac board. We found that in each of these three years, Freddie
Mac management sent the final ROEs to the board, through a secure web portal, less than a
week in advance of DER’s presentation.28 For each of these three years, DER appears to have
followed its practice from the 2012 and 2013 ROE presentations: at each of its annual board
presentations in 2014, 2015, and 2016, DER provided the board with a PowerPoint
presentation that summarized examination findings, conclusions, and ratings.

With regard to Fannie Mae, DER did not deliver the final 2014 or 2015 ROEs (for the 2013
and 2014 supervisory cycles) in advance of, or at, the board presentation by DER officials of
findings and conclusions of the examinations for each supervisory cycle. DER provided no
written summary of examination results and conclusions to directors prior to or at its board
presentations in 2014 and 2015. In advance of each of these DER presentations, Fannie Mae
management prepared a summary of management’s view of DER’s expected examination
conclusions, which it provided to the Fannie Mae board.29 Several days after its board
presentation in 2014 and several weeks afterwards in 2015, DER finalized the ROE. It
sent the final 2014 and 2015 ROEs by email to Fannie Mae management and Fannie Mae
management distributed both ROEs to the board. For the 2015 supervisory cycle, DER
transmitted the final 2016 ROE to Fannie Mae management a week in advance of its
presentation to the Fannie Mae board, and Fannie Mae management included the ROE in the
board’s materials for that meeting. It also provided directors with a copy of a PowerPoint
presentation that summarized examination findings, conclusions, and ratings, apparently at its
presentation.




28
   For the 2013 examination cycle, DER provided a hard copy of the final 2014 ROE to Freddie Mac directors
the day before its presentation of findings, conclusions, and ratings to the Freddie Mac board. That same day,
Freddie Mac management distributed the 2014 ROE to the board electronically.
29
   DER provided management with a draft ROE prior to the board meeting to discuss results from the 2013
examination. Management’s expectations of examination results also appear to be based on discussions with
the examination team.




                                     OIG  EVL-2016-009  July 14, 2016                                          16
      Contrary to FHFA’s Clear Requirements, DER Has Not Required the Enterprises’ Boards
      of Directors to Provide a Written Response to the ROEs

FHFA’s Examination Manual, adopted in December 2013, requires the board of a regulated
entity to provide FHFA “a written response to the ROE acknowledging [the board’s] review
of the ROE and affirming that corrective action is being taken, or will be taken, to resolve
supervisory concerns.”30 In its comments to a prior OIG report, FHFA maintained that its
Examination Manual provides supervisory guidance to the entities it regulates and expects
that each entity will follow such guidance. Subsequently, DER issued internal guidance
underscoring the requirement of a written response by each Enterprise board to each ROE.
Notwithstanding this clear requirement, DER has not taken effective action to communicate
this requirement to the boards of directors or to enforce the boards’ compliance with it. We
found the Enterprises’ boards of directors have not complied with this requirement and one
Enterprise board is not aware of it.

DER’s Examiner-in-Charge (EIC) requested written responses from Fannie Mae
management, not from the Fannie Mae board or the board’s Audit Committee,31 to the 2014
and 2015 ROEs (for the 2013 and 2014 supervisory cycles).32 In response to the EIC’s
requests, a member of Fannie Mae senior management—its Chief Compliance Officer
(CCO)—submitted brief memoranda in 2014 and 2015. These memoranda demonstrate little
more than that the board of directors and management reviewed the ROE. As such, they lack
any detail regarding the specific corrective actions being taken, or to be taken, to resolve the
supervisory concerns described in the ROE.

Because these memoranda purport to reflect the directors’ review of each ROE, we reviewed
board minutes in 2014 and 2015 for evidence of any discussion among directors about
framing a response to the ROE, demonstration of director review of the CCO’s draft
memoranda, approval of the submission of the memoranda to FHFA, or authorizing the CCO
to respond on the board’s behalf. We found no such evidence in the board minutes in either
year. We asked FHFA and Fannie Mae for documents evidencing review or approval by the
Fannie Mae board of the CCO’s draft responses or authorizing the CCO to submit a response
on behalf of the board; we received none. We found no evidence that the Fannie Mae board
was even made aware of the CCO’s response to FHFA on its behalf.



30
     FHFA, Examination Manual, supra note 6, at 16, 23.
31
  Fannie Mae’s Audit Committee is responsible for “overseeing the corporation’s response to any regulatory
examination.” Fannie Mae, Audit Committee Charter, section 4.xxix, at 5 (amended as of Nov. 20, 2014).
32
   In 2012, DER examiners requested a response from Fannie Mae’s board to the ROE. We found no evidence
that the Fannie Mae board responded to DER in 2012 or that DER followed up with the board for a response.



                                     OIG  EVL-2016-009  July 14, 2016                                      17
In March 2016, the EIC transmitted the final ROE to Fannie Mae’s CCO, without requesting
a response from the Fannie Mae board of directors or management. In early April 2016, two
days after we sought all ROE-related communications between DER and the Enterprises’
boards, the EIC for the Fannie Mae core team asked Fannie Mae’s CCO to obtain a response
to the ROE from the chair of the board’s Audit Committee. Later that month, the Fannie Mae
board chair provided a response to the ROE that was in line with the CCO’s responses to prior
ROEs.

With regard to Freddie Mac, DER’s EIC did not request a response from Freddie Mac’s board
or management to the ROEs issued in 2014, 2015, or 2016.33 Based on the materials received
from Freddie Mac and FHFA, we found no evidence that the Freddie Mac board submitted
any written response to any of these ROEs. It appears that Freddie Mac management is not
aware of FHFA’s requirement; in response to our request to Freddie Mac for board responses
to DER’s ROEs, a lawyer in its Office of General Counsel responded, “FHFA does not
require a response, acknowledgement, or receipt from the Board that it has received and
reviewed the ROE.” While FHFA reported to us that the EIC for the Freddie Mac
examination team never requested a response to any of the ROEs, the lack of such a request
should not excuse the wholesale lack of response in light of the clear supervisory guidance in
FHFA’s Examination Manual discussed earlier.

DBR Guidance and Practice Governing ROEs Issued to FHLBanks

Unlike DER, DBR examiners follow FHFA’s requirements, based on guidance in place since
December 2013, for issuance of an ROE to the board of a regulated entity. We reviewed all
ROEs prepared for FHLBanks for the review period and found that DBR examiners issued
each final ROE to the FHLBank board chair. Similarly, we found that DBR examiners
always sought a written response from each FHLBank to the ROE. In addition, DBR requires
each FHLBank board to reflect its review and approval of its written response to the ROE in
its meeting minutes. Our review of relevant documents for the ROEs issued for the 2014
supervisory cycle found that all FHLBank boards complied with the requirement that they
provide a response.

For those FHLBanks with a composite rating of          or worse, DBR generally required, as a
term in the ROE transmittal letter or through discussion in the ROE, that the FHLBank board
adopt a board resolution or board commitment letter stating the planned remedial measures to



33
  In 2012, DER requested a response from the Freddie Mac board for the ROE, but FHFA produced no
evidence to us that the Freddie Mac board provided the requested response or that DER followed up with the
board when no response was received.




                                    OIG  EVL-2016-009  July 14, 2016                                       18
correct deficiencies identified in the ROE.34 Our review found that the affected FHLBanks
adopted board resolutions setting forth the board’s commitment to oversee management’s
efforts to address specific supervisory concerns and management commitments to take
specific remedial actions. In the following annual examination, DBR documented in the
ROE that it evaluated whether the FHLBank fulfilled the terms of the resolution or letter.

DBR’s practice is to meet with each FHLBank board at least twice each year concerning
examination findings. Typically, DBR meets with each FHLBank board when the ROE is in
draft form and meets again after the ROE is finalized and issued. Based on our review, we
found that DBR consistently sent the final ROE to each FHLBank board in advance of its
second presentation, often at least two weeks prior to the presentation.




34
  According to FHFA guidance, a request for a board resolution or commitment letter is a type of informal
enforcement action.



                                    OIG  EVL-2016-009  July 14, 2016                                      19
FINDINGS .................................................................................

1. FHFA’s current requirements and guidance on communication of the annual ROE
   are more limited than the requirements of other federal financial regulators and
   have led to divergent and inefficient practices among DER’s examination teams.

FHFA and DER provide examiners with very limited guidance for communicating the ROE’s
findings, conclusions, and ratings to the board of directors of a regulated entity. In contrast,
other federal financial regulators have issued detailed guidance on the timing and purpose
of examiners’ meetings with the board of directors and they establish the expectation for
examiners to encourage board oversight of corrective actions.

During the review period, FHFA relaxed DER’s prior guidance governing ROE delivery
and the presentation of ROE findings to boards of directors. As a result, all decisions on
communications with a board of directors of a regulated entity about the ROE are essentially
left to the discretion of the EIC for each examination team. Our review of the 2014-2016
ROEs revealed that DER examiners did not finalize the Fannie Mae ROEs, or provide the
board with presentation materials, in advance of their presentation to the Fannie Mae board
in two of the three years, which necessarily affected directors’ ability to prepare for the
discussion. In contrast, examiners issued the final Freddie Mac ROE in advance of each
of the three annual board presentations. We also found that DER’s typical practice was to
send by email the final ROE to Enterprise management and leave to management of each
Enterprise the decision of whether and when to provide the final ROEs to the Enterprise
board, in contravention of the FHFA requirement that ROEs must be issued to the board of
directors of a regulated entity.

2. DER examiners failed to meet FHFA’s prior and current requirements for
   communication of the annual ROE.

In December 2013, FHFA replaced DER’s prior guidance on ROE issuance and presentations
with the more limited guidance found in its Examination Manual. We found that DER
examiners consistently failed to meet DER and FHFA requirements.

Under internal DER guidance in place at the time, DER examiners were required to issue the
2012 and 2013 ROEs at the end of the first week of March and present their findings to the
board at a March or April board meeting. Examiners failed to adhere to the letter or spirit of
this requirement as they did not issue any of the final 2012 and 2013 ROEs to the Enterprises’
boards in advance of their board presentations.




                                OIG  EVL-2016-009  July 14, 2016                                 20
FHFA, in its Examination Manual, established supervisory guidance that a board of directors
of a regulated entity respond in writing to the ROE, which DER codified as a requirement.
We found that DER has not effectively communicated this requirement to the boards of
directors or enforced the boards’ compliance with it. FHFA provided us with only a single
response from an Enterprise board to 1 of the 10 ROEs issued during the review period. We
also found no evidence of board approval of the three ROE responses DER received from
Fannie Mae management, and the responses submitted by Fannie Mae management lacked
detail regarding the specific corrective actions being taken, or to be taken, to resolve the
supervisory concerns described in the ROE.

3. DBR examiners have met FHFA’s current requirements for communication of the
   annual ROE.

In contrast to DER, we found that DBR examiners issued each final ROE to the FHLBank
board chair and sought a written response from each FHLBank to the ROEs for the 2013-2015
review cycles. We also found that DBR requires, in its communications with FHLBank
boards, that each FHLBank board reflect its review and approval of its written response to the
ROE in its meeting minutes.


CONCLUSION ............................................................................

The annual ROE has been the primary means by which FHFA communicates its supervisory
findings—including serious deficiencies and violations of laws and regulations—and its
examination ratings. Consistent with the importance of these findings and ratings, FHFA
directs that examiners issue the ROE to the board of directors of each entity it regulates
because the board is ultimately responsible for ensuring the safety and soundness of the
entity and management’s correction of deficiencies. To ensure that the board of directors
of a regulated entity reviews the ROE and affirms its commitment to ensure that corrective
action has been or will be taken to resolve deficiencies in risk management and supervisory
concerns, FHFA guidance in place since December 2013 requires the boards to provide a
written response to each ROE.

Other federal financial regulators have adopted comprehensive standards and guidance for
communicating the ROE to a regulated institution’s board of directors and insisting that the
board acknowledge and commit to addressing concerns identified in the ROE. FHFA’s
standards are weak in comparison. In addition, based on our review of DER’s practices
during the past five supervisory cycles, we found that DER examiners have fallen far short
of the few requirements imposed by FHFA. For FHFA to obtain assurance that a board of
directors is committed to ensure that all deficiencies are corrected in a timely manner, its


                               OIG  EVL-2016-009  July 14, 2016                                21
examiners must issue the ROE directly to the board of directors and must require a detailed
response from the board regarding corrective actions that have been or will be taken.


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

OIG recommends that FHFA:

   1. Revise its Examination Manual to:

              Require that each final ROE be addressed and delivered to the board of
               directors of an Enterprise by DER examiners to eliminate any confusion
               over the meaning of the term “issue;”

              Establish a timetable for submission of the final ROE to each Enterprise’s
               board of directors and for DER’s presentation of the ROE results, conclusions,
               and supervisory concerns to each Enterprise board;

              Require each Enterprise board to reflect its review of each annual ROE in
               meeting minutes; and

              Require each Enterprise board to reflect its review and approval of its written
               response to the ROE in its meeting minutes.

   2. Direct DER to develop detailed guidance and promulgate that guidance to each
      Enterprise’s board of directors that explains:

              The purpose for DER’s annual presentation to each Enterprise board of
               directors on the ROE results, conclusions, and supervisory concerns and
               the opportunity for directors to ask questions and discuss ROE examination
               conclusions and supervisory concerns at that presentation; and

              The requirement that each Enterprise board of directors submit a written
               response to the annual ROE to DER and the expected level of detail regarding
               ongoing and contemplated remediation in that written response.

   3. Direct the Enterprises’ boards to amend their charters to require review by each
      director of each annual ROE and review and approval of the written response to DER
      in response to each annual ROE.




                               OIG  EVL-2016-009  July 14, 2016                                22
FHFA COMMENTS AND OIG RESPONSE .....................................

We provided FHFA an opportunity to respond to a draft report of this evaluation. FHFA
provided technical comments on the draft report, which we incorporated as appropriate. In its
management response, which is reprinted in its entirety in Appendix B, FHFA partially agreed
with recommendations 1 and 2 and disagreed with recommendation 3.

FHFA “partially” agreed with recommendation 1. In response to recommendation 1, FHFA
stated that DER will amend its internal guidance to: (1) provide that the ROE should be
addressed to the board of directors; (2) reflect its existing timeframes for issuance and
presentation of the ROE; (3) require the board, or a committee, to confirm its review of the
ROE on a signature page; and (4) clarify that EICs should request responses to the ROEs
from the Enterprise board, with documentation of board approval of the responses. FHFA
disagreed with our recommendation that examiners should deliver the ROE directly to the
board and it stated that Enterprise management can effectuate the delivery. Pursuant to
FHFA’s delegations of authority and corporate governance rule, each Enterprise board is
responsible for day-to-day operations of that Enterprise and is charged with ensuring that
management promptly addresses all supervisory concerns. FHFA’s Examination Manual
requires that each ROE “issue” to a board of directors of a regulated entity.

As informed by the guidance of the OCC and Federal Reserve, delivery of an ROE to the
board of directors of a regulated entity is the best practice. FHFA offers no reasonable basis
on which to reject our recommendation that it ensure that every ROE be delivered directly to
Enterprise board members, rather than through Enterprise management, which typically is
responsible for the actions or inactions criticized in the ROE.

Our recommendation sought to ensure that, going forward, FHFA delivers the ROE to
every Enterprise director in a timely manner. FHFA’s agreement to issue guidance on the
timeframes for issuance and presentation of the ROE and to require Enterprise directors, or
members of an appropriate board committee, to confirm review of the ROE on a signature
page, if enforced, should achieve a satisfactory result.

FHFA has agreed to amend its guidance by July 1, 2017. Because time is of the essence, we
encourage the Agency to amend its guidance prior to the issuance of its ROEs in March 2017
for the 2016 supervisory cycle.

FHFA “partially” agreed with recommendation 2. The Agency agreed to amend DER’s
internal guidance to “clarify that EICs should request responses to ROEs from Enterprise
boards of directors and the expected level of detail required.” FHFA declined to promulgate
guidance to each Enterprise’s board of directors explaining the requirement for each



                               OIG  EVL-2016-009  July 14, 2016                                23
Enterprise board to respond to each ROE and the expected level of detail. We found no
definitive evidence that the board of directors of either Enterprise was aware of their
obligation to respond in writing to the ROE. The record also shows that the EIC’s have
not enforced DER’s requirement. There is no indication that FHFA has held Enterprise
directors or the EICs accountable. In light of FHFA’s refusal to issue supervisory guidance
to Enterprise directors about their obligations, we intend to monitor closely those responses
and assess whether they meet requirements imposed by FHFA and DER.

FHFA disagreed that the Enterprise boards needed “additional” guidance on the purpose of
examiners’ presentations of ROE results, conclusions, and supervisory concerns. As our
report found, Enterprise directors often received the final ROEs either at the meeting with
DER examiners or subsequently, and, as a consequence, lacked full opportunity to ask
informed questions about the ROE findings. We hope that FHFA’s agreement to require
directors to confirm, in writing, their review of each ROE will encourage Enterprise directors
to actively engage with DER examiners during the ROE presentations. We intend to closely
monitor whether the shortcomings we have identified in this report are remediated in the next
cycle.

Finally, FHFA rejected our recommendation 3 directing Enterprise boards to amend their
charters to require review by each director of each annual ROE and review and approval of
the written response to DER in response to each annual ROE. FHFA maintained that its
agreement to require directors to confirm, in writing, their review of each ROE obviates the
need for Enterprise boards to amend their charters. As this report found, the few requirements
that FHFA has adopted with respect to ROEs have not been followed, either by the EICs or
by Enterprise directors. One of the two Enterprise boards was not aware of its obligation to
review each ROE and respond in writing to it. For those reasons, our recommendation sought
to clarify, in the respective board of directors’ charters, director responsibilities with respect
to ROEs. FHFA, however, appears to be fully comfortable with the status quo.

We urge FHFA to reconsider its decision not to accept all of our recommendations.




                                OIG  EVL-2016-009  July 14, 2016                                   24
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

We conducted this evaluation to compare ROEs issued by DER to the Enterprises between
2012 and 2016 to FHFA’s established requirements and guidance, and to the ROE practices
used by DBR. We also looked to the ROE requirements established by other federal financial
regulators.

To achieve these objectives, we met with FHFA personnel involved with the creation and
transmission of the ROEs. We conducted both an entrance conference and a follow-up
document production clarification meeting with FHFA to better understand their processes
and to obtain relevant documents. We also reviewed publicly available documents, internal
DER and DBR documents, and non-public information provided by FHFA that included
official minutes and materials of the boards of directors from both Enterprises.

This evaluation was conducted under the authority of the Inspector General Act and in
accordance with the Council of the Inspectors General on Integrity and Efficiency’s Quality
Standards for Inspection and Evaluation (January 2012). These standards require us to plan
and perform an evaluation based upon evidence sufficient to provide a reasonable basis to
support its findings and recommendations. We believe that the findings and
recommendations discussed in this report meet those standards.

The fieldwork for this report was completed between November 2015 and May 2016. The
review period for this evaluation was between January 1, 2012, and March 31, 2016.




                              OIG  EVL-2016-009  July 14, 2016                              25
APPENDIX A .............................................................................

Examination Manuals and ROE Templates and Instructions of the OCC,
Federal Reserve, and FDIC

   OCC

Comptroller’s Handbook (Dec. 2015)

      Safety and Soundness Booklets: Bank Supervision Process (last updated Sept. 2007)
       (online at www.occ.gov/publications/publications-by-type/comptrollers-
       handbook/pub-ch-ep-bsp.pdf)

   Federal Reserve

Commercial Bank Examination Manual (Apr. 2016)

      Section 1000: Examination Strategy and Risk-Focused Examinations (online at
       www.federalreserve.gov/Boarddocs/SupManual/cbem/1000.pdf)

      Section 5000: Assessment of the Bank (last updated Apr. 2013) (online at
       www.federalreserve.gov/Boarddocs/SupManual/cbem/5000.pdf)

      Section 6000: Federal Reserve Examinations (last updated Oct. 2013) (online at
       www.federalreserve.gov/Boarddocs/SupManual/cbem/6000.pdf)

   FDIC

Risk Management Manual of Examination Policies (Feb. 2016)

      Section 1.1: Basic Examination Concepts and Guidelines (online at
       www.fdic.gov/regulations/safety/manual/section1-1.pdf)

      Section 16.1: Report of Examination Instructions (last updated Apr. 2015) (online at
       www.fdic.gov/regulations/safety/manual/section16-1.pdf)

      Section 17.1: Bank of Anytown – Report of Examinations (last updated Apr. 2015)
       (online at www.fdic.gov/regulations/safety/manual/section17-1.pdf)




                              OIG  EVL-2016-009  July 14, 2016                              26
APPENDIX B..............................................................................

FHFA’s Comments on OIG’s Findings and Recommendations




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OIG  EVL-2016-009  July 14, 2016   31
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 Investigations – Hotline
                400 Seventh Street SW
                Washington, DC 20219




                                OIG  EVL-2016-009  July 14, 2016                         32