oversight

FHFA's Practice for Rotation of its Examiners Is Inconsistent between its Two Supervisory Divisions

Published by the Federal Housing Finance Agency, Office of Inspector General on 2017-03-28.

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

           Federal Housing Finance Agency
               Office of Inspector General




         FHFA’s Practice for
     Rotation of its Examiners
     Is Inconsistent between its
     Two Supervisory Divisions




Evaluation Report • EVL-2017-004 • March 28, 2017
                 Executive Summary
                 Since 2008, FHFA has operated as both regulator and conservator of Fannie Mae
                 and Freddie Mac (collectively, 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 meets this responsibility, in part, through its
EVL-2017-004     supervision program. FHFA’s Division of Enterprise Regulation (DER)
                 supervises the Enterprises, conducting ongoing monitoring activities and targeted
March 28, 2017   examinations into strategically selected areas of high importance or risk at each
                 Enterprise. FHFA’s Division of Federal Home Loan Bank Regulation (DBR)
                 supervises the FHLBanks. DBR’s supervisory activities include annual on-site
                 examinations, periodic visits, special reviews, and off-site monitoring.

                 According to FHFA, its supervisory authority over its regulated entities “is
                 virtually identical to—and clearly modeled on—Federal bank regulators’
                 supervision of banks.” Federal bank regulators recognize that effective
                 supervision of a bank requires examiner independence. One control used by
                 federal financial regulators to achieve examiner independence is mandatory
                 rotation of certain examiners among supervised entities. Federal financial
                 regulators also recognize other benefits from examiner rotation, such as enhancing
                 examiners’ professional and leadership skills, and improving their ability to
                 conduct comparisons among institutions and apply regulatory standards
                 consistently.

                 In the current Audit and Evaluation Plan of FHFA Office of Inspector
                 General (OIG), we identified FHFA’s supervision of its regulated entities as
                 a significant risk area. Throughout 2016, we assessed the rigor of numerous
                 elements of DER’s supervision of the Enterprises and recommended a number of
                 measures to strengthen each of these elements. In this evaluation, we reviewed the
                 rotation policies and/or practices of 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), and compared them to the
                 rotation policies and practices of DBR and DER.

                 We found that the OCC, the Federal Reserve, and the FDIC have recognized the
                 benefits of examiner rotation and have adopted written policies and/or practices
                 requiring examiner rotation. Former FHFA leadership acknowledged the benefits
                 of examiner rotation but left implementation to DBR and DER.

                 DBR officials reported to us that, at least since January 2013, DBR has an
                 established practice of rotating all of its examination teams every four years
                 and communicates the reasons for its rotation practice and specific rotation
                 assignments annually. DBR has created and maintained records of examiner
                 assignments and reassignments during this period. Our testing of DBR’s records
                 found that, from January 2013 through December 2016 (review period), DBR
                 followed its examiner rotation practice. Based on our review of DBR records, we
                 determined that each of the 11 FHLBanks was assigned a different associate
                 director, a different examiner-in-charge (EIC), and different examination team at
                 least every four years.

EVL-2017-004     The Deputy Director of DER acknowledged to DER staff, in an email sent in
                 November 2015 that “[r]egular rotation of on-site examination staff is a best
March 28, 2017   practice of supervisory agencies.” In that same email, the Deputy Director
                 announced the rotation of the EICs of the examination teams for the Enterprises
                 and committed that DER intended to adopt “meaningful” examiner rotation.

                 A senior DER official recalled to us that DER has rotated staff on its examination
                 teams since the fall of 2012. In May 2016, the Deputy Director of DER reported
                 to us that DER has an informal rotation process.

                 To verify those recollections, we sought documentation from DER to show its
                 efforts to track examiner assignments over time or evidence of an examiner
                 rotation practice, informal or otherwise. DER provided no such materials, apart
                 from the November 2015 email from the Deputy Director, internal organization
                 charts, staffing spreadsheets, and a number of internal and public announcements
                 of organization changes. A DER official reported to us that DER maintained no
                 records of examiner assignments and reassignments, or the period of time
                 examiners have been assigned to a particular Enterprise or specific risk area, and
                 had not created or maintained records to track examiner assignments over time,
                 and no documentation was produced to us by DER showing that it systematically
                 tracked examiner assignments over the review period.

                 However, DER maintained to us that DER management was aware of its
                 movement of examiners through its review and approval of staffing assignments
                 and reassignments during the review period and that information about examiner
                 assignments could be found in the personnel records for each examiner and in
                 emails. No claim was made by DER that its management reviews the personnel
                 records for each examiner and associated emails when it considers assignments
                 and reassignments, and it did not produce such materials to us in response to our
                 request for materials evidencing examiner rotation. We found no evidence that
                 DER has systematically tracked the length of time each examiner has been
                 assigned to a particular Enterprise or risk area.

                 Because we were not able to readily verify statements from DER leadership that
                 informal examiner rotation had occurred within DER and in light of DBR’s
                 demonstrable practice of rotating its examiners every four years and DER’s
                 acknowledgement that regular rotation of examination staff is a “best practice,” we
                 sought to determine what practice, if any, had been followed within DER to rotate
                 examiners between the two Enterprises and risk areas during the review period
                 from the materials provided to us by DER.

                 From these materials, we traced examiner assignments to determine how many
                 DER examiners (1) had been assigned to a particular Enterprise or risk area for the
                 entire review period and (2) had been rotated between the Enterprises during the
EVL-2017-004     review period. Our review of these DER materials found that 28 employees were
                 assigned to DER throughout the review period, although not all served as
March 28, 2017   examiners throughout the entire period. We also found that 22 of the 28—79%—
                 examined only one Enterprise during the entire review period.

                 DER’s lack of easily accessible and reliable data on examiner assignments over
                 time limits its capacity to make reasoned and effective management decisions
                 about examination resources. Sixteen months after the Deputy Director of DER
                 announced the rotation of EICs and pledged to adopt “meaningful” examiner
                 rotation, we found no evidence, based on our review of DER documents and
                 communications with DER officials, that DER has implemented its pledge of
                 “meaningful” examiner rotation.

                 We make two recommendations to FHFA to address these shortcomings.
                 FHFA agreed with our recommendations.

                 This report was prepared by Adrienne Freeman, Investigative Counsel, and Moira
                 Roberts, Special Counsel. 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

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

BACKGROUND .............................................................................................................................7
      Independence ............................................................................................................................7
      Examiner Development ............................................................................................................8
      Consistent Application of Supervisory Policies and Practices .................................................8

FACTS ...........................................................................................................................................10
      Examiner Rotation Policies and Practices of Other Federal Financial Regulators ................11
              Office of the Comptroller of the Currency – Formal Policy on Rotation of Large
              Bank Examiners ..............................................................................................................11
              Board of Governors of the Federal Reserve System – Policy and Practice on
              Rotation of Examiners-in-Charge and, at Some Banks, All Examiners .........................11
              Federal Deposit Insurance Corporation – Practice of Rotating All Examiners-in-
              Charge and Other Senior Examination Staff ..................................................................11
      Former Leadership of FHFA Acknowledged the Benefits of Examiner Rotation and
      Left Implementation of an Examiner Rotation Practice to DBR and DER ............................12
      DBR Records Show that DBR Consistently Followed its Announced Practice of
      Examiner Rotation During the Review Period .......................................................................12
      DER, Like DBR, Recognizes the Benefits of Examiner Rotation and Pledged to
      Adopt a “Meaningful” Examiner Rotation Approach but its Records Reflect that
      Examiner Rotation Has Largely Not Occurred During the Review Period............................13

FINDINGS .....................................................................................................................................16

CONCLUSION ..............................................................................................................................18

RECOMMENDATIONS ...............................................................................................................19

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................20

APPENDIX: FHFA MANAGEMENT RESPONSE ....................................................................21

ADDITIONAL INFORMATION AND COPIES .........................................................................23


                                             OIG • EVL-2017-004 • March 28, 2017                                                                5
ABBREVIATIONS .......................................................................

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

FHLBanks              Federal Home Loan Banks

New York Fed          Federal Reserve Bank of New York

OCC                   Office of the Comptroller of the Currency

OIG                   Federal Housing Finance Agency Office of Inspector General




                          OIG • EVL-2017-004 • March 28, 2017                       6
BACKGROUND ..........................................................................

Since 2008, FHFA has supervised Fannie Mae, Freddie Mac, and the Federal Home Loan
Bank System to ensure that these regulated entities operate safely and soundly in order to
serve as reliable sources of liquidity and funding for housing finance and community
investment. FHFA, like other federal financial regulators, conducts examinations of the
financial institutions it supervises.

DBR is responsible for supervision of the 11 FHLBanks. DBR’s supervisory activities
include annual on-site safety and soundness examinations typically lasting several weeks,
supplemented by periodic visits, special reviews, and off-site monitoring of each FHLBank
and the Office of Finance. DER is responsible for supervision of both of the Enterprises.
DER has established two core teams of examiners, led by an EIC, each of which is assigned to
examine an Enterprise and works on-site at that Enterprise.

According to FHFA, its supervisory authority over its regulated entities “is virtually identical
to—and clearly modeled on—Federal bank regulators’ supervision of banks.” Federal bank
regulators recognize that effective supervision of a bank requires examiner independence.
One control used by regulators of financial institutions to achieve examiner independence is
mandatory rotation of certain examiners among supervised entities. As discussed below,
federal financial regulators also recognize other benefits that can arise from examiner rotation,
such as enhancing examiners’ professional and leadership skills, and improving examiners’
ability to conduct comparisons among institutions and to apply regulatory standards
consistently.

Independence

Examiner independence has been a concern of federal financial regulators, particularly since
the financial crisis of 2007 and 2008. Following a crisis stemming from misconduct at one of
its supervised banks, and suggestions in the news media that it was too cozy with banks, the
Comptroller of the Currency invited a group of regulators from three countries to conduct a
peer review of OCC’s supervision of large and midsize financial institutions in 2013. The
team of peer reviewers made recommendations across six topic areas that complemented the
OCC’s initiatives to change its supervisory approach in response to the financial crisis.

Among other things, the resulting peer review report, issued in December 2013, warned that
examiners assigned to the same bank and on-site at that bank for an extended time might “get




                              OIG • EVL-2017-004 • March 28, 2017                                   7
stale” and “become too familiar with the mid-management of the institution . . . .” 1 To
mitigate this risk, the peer review report recommended that the OCC relocate examiners to
OCC premises to “strengthen the external perception of OCC independence” and establish
formal rotation for examination staff to enhance consistency in their application of
supervisory standards.” 2 In its response to that recommendation, the OCC decided to increase
rotation of examiners, which, in turn, “will further strengthen the supervision of national
banks and federal savings associations by providing broader, fresh perspectives on a regular
basis.” The Comptroller of the Currency also stated that rotating examiners on a regular basis
“will enhance the agency’s expert supervision of the nation’s largest and most complex
financial institutions . . . [f]acilitat[e] the sharing of information and knowledge among
examiners across institutions and . . . provide a fresh and broader perspective to the
examination of each large institution.” 3

Other financial regulators also recognize examiner rotation as a means to foster examiner
independence. The president of the Federal Reserve Bank of New York (New York Fed),
testifying before a Senate committee in 2014, explained that the New York Fed required
examiner rotation every three to five years to allow enough time for an examiner to gain an
understanding of a regulated institution without sacrificing examiner independence.

Examiner Development

According to the OCC and the FDIC, an established policy and/or practice of examiner
rotation assists in efforts to retain expertise and impart knowledge to new examiners through
on-the-job training that facilitates communication and transfer of knowledge across risk areas.
In their view, examiner rotation assists in succession planning.

Consistent Application of Supervisory Policies and Practices

According to the 2013 OCC peer review report, examiner rotation also promotes the
consistent application of regulatory standards across multiple institutions. That report found
that periodic rotation of supervisors ensures that “experiences gained supervising one




1
  OCC, An International Review of OCC’s Supervision of Large and Midsize Institutions: Recommendations to
Improve Supervisory Effectiveness at 14 (Dec. 4, 2013) (online at www.occ.gov/news-issuances/news-
releases/2013/nr-occ-2013-184a.pdf).
2
    Id at 16.
3
  OCC, OCC Announces Actions to Respond to International Peer Review Recommendations (2014), (online at
http://occ.treas.gov/news-issuances/news-releases/2014/nr-occ-2014-75.html) (accessed Aug. 31, 2016).



                                  OIG • EVL-2017-004 • March 28, 2017                                       8
institution can be applied to another.” 4 It also observed that rotating exam supervisors among
regulated institutions and risk areas enhances consistent application of supervisory policies.

Other federal financial regulators have recognized that examiner rotation can enhance their
capacity to compare the performance of regulated institutions and improve the overall
operations of the supervised institutions.5 We learned, from the Federal Reserve and from the
OCC peer review, that experienced examiners who have examined only one institution for an
extended length of time may be more prone to conclude, based solely on their own past
experience, that they are fully knowledgeable of that institution’s risks. In their view,
examiner rotation among regulated institutions brings in fresh perspectives and new expertise
from other examiners with comparative experience, which mitigates assumptions of existing
examiners—due to either inexperience or familiarity—about the adequacy of an institution’s
internal controls.




4
  OCC, An International Review of OCC’s Supervision of Large and Midsize Institutions: Recommendations to
Improve Supervisory Effectiveness, at 15 (Dec. 4, 2013) (online at www.occ.gov/news-issuances/news-
releases/2013/nr-occ-2013-184a.pdf).
5
    Id.



                                  OIG • EVL-2017-004 • March 28, 2017                                       9
FACTS .......................................................................................

FHFA consistently maintains, based on the language of its authorizing statute, 6 that its
supervisory authority over its regulated entities “is virtually identical to—and clearly
modeled on—Federal bank regulators’ supervision of banks.” According to FHFA,
“Congress virtually duplicated the examination regime applicable to banks when it designed
the examination regime” for the Enterprises and FHLBanks. 7 Like the OCC, the Federal
Reserve, and the FDIC, FHFA conducts annual examinations of its regulated entities, reports
on examination findings in annual reports of examination, and, when necessary, issues
findings identifying deficiencies. 8 FHFA’s governing statute grants the Director authority to
use examiners from the OCC, the Federal Reserve, or the FDIC to conduct examinations, and
requires the Director to set compensation levels for FHFA staff that are comparable with other
federal financial regulators. 9 A federal court has observed that Congress granted FHFA the
same powers it granted bank regulators and that Congress intended FHFA’s regulatory
framework to mirror the banking regulatory framework. 10

For these reasons, we compared the policies and/or practices of the OCC, the Federal Reserve,
and the FDIC on examiner rotation to the policies and practices of FHFA.




6
  Federal Housing Enterprises Financial Safety and Soundness Act of 1992, 12 U.S.C. § 4501 et seq. and
§ 4513, as amended by Sections 1101 and 1102 of the Housing and Economic Recovery Act of 2008, and
§ 4517(c).
7
  By statute, FHFA must conduct annual examinations of the safety and soundness of the Enterprises and
FHLBanks; the FHFA Director has substantially the same authority as the bank regulators; and examiners have
the same authority as examiners employed by the Federal Reserve Banks. See 12 U.S.C. § 4517(a), (c), (e).
8
  The Federal Reserve establishes examination standards, and the Reserve Banks are responsible for
supervising bank holding companies, Federal Reserve System member banks, foreign branches of member
banks, and other related entities to ensure safe and sound banking practices and compliance with applicable
laws and regulations. See, e.g., Federal Reserve Bank of New York, Supervision (online at
www.newyorkfed.org/aboutthefed/org_banksup.html). The OCC is responsible for ensuring that national
banks and federal savings associations operate in a safe and sound manner, provide fair access to financial
services, treat customers fairly, and comply with applicable laws and regulations. See 12 U.S.C. § 1 et seq., 12
U.S.C. § 1461 et seq. See also OCC, What We Do (online at www.occ.gov/about/what-we-do/mission/index-
about.html). The FDIC examines its supervised financial institutions for safety and soundness and consumer
protection. See also FDIC, Mission, Vision, and Values (online at
www.fdic.gov/about/strategic/strategic/mission.html).
9
    See 12 U.S.C. §§ 4515(b), 4517(c).
10
     See Fed. Hous. Fin. Agency v. JPMorgan Chase & Co., 978 F. Supp. 2d 267 (S.D.N.Y. 2013).



                                     OIG • EVL-2017-004 • March 28, 2017                                           10
Examiner Rotation Policies and Practices of Other Federal Financial Regulators

The OCC, the FDIC, and the Federal Reserve use rotation to foster the supervisory goal
of examiner independence. They also recognize that rotation improves their supervisory
programs because it enhances the skills of their examiners and it promotes effective
comparisons between, and consistent treatment of, the supervised entities.

     Office of the Comptroller of the Currency – Formal Policy on Rotation of Large Bank
     Examiners

Following the peer review report discussed on page 7, the OCC established in 2015 a formal
rotation policy covering examiners for the largest and most complex financial institutions.
The policy, which may not be fully implemented, requires all examiners-in-charge and lead
experts at mid-size and large banks to rotate at least every five years. In addition, the policy
requires other examination positions, including certain large bank examiners and certain
Assistant Deputy Comptrollers, to follow a five-year rotation. The OCC uses a tracking tool
to monitor compliance with its rotation policy and requires documentation of any exceptions.

     Board of Governors of the Federal Reserve System – Policy and Practice on Rotation of
     Examiners-in-Charge and, at Some Banks, All Examiners

The Federal Reserve has had a national policy since 2002 that requires the EICs of large bank
supervisory teams and central points of contact for large complex banking organizations to
rotate every three to five years. The Federal Reserve applies this policy to foster examiner
independence and to give examiners more experience. Several Federal Reserve Banks,
including the New York Fed, augment the national policy by requiring staff-level examiners
to rotate. William C. Dudley, President and CEO of the New York Fed, testified in
November 2014 at a Senate hearing that rotation of examiners among supervised institutions
mitigates the tendency of examiners to adopt the perspective of a supervised entity. He
reported that the New York Fed required examiner rotation after three to five years to promote
unbiased analysis and professional objectivity. 11

     Federal Deposit Insurance Corporation – Practice of Rotating All Examiners-in-Charge
     and Other Senior Examination Staff

According to public statements from the FDIC, it values examiner skepticism and
independence, and has adopted a practice of examiner rotation to prevent examiners from

11
  Senate Committee on Banking, Housing, and Urban Affairs, Testimony of William Dudley, President of
Federal Reserve Bank of New York, Improving Financial Institution Supervision: Examining and Addressing
Regulatory Capture, at 9 (Nov. 14, 2014) (online at
www.banking.senate.gov/public/?a=Files.Serve&File_id=3401D43A-8E5D-4B83-9480-CE2C13389DB4).



                                 OIG • EVL-2017-004 • March 28, 2017                                      11
getting too close to supervised institutions. While the FDIC has not adopted a formal written
policy on examiner rotation, its unofficial policy is to rotate EICs for community banks at
least every three years, for large banks every five years. The FDIC has publicly described its
rotation practice for EICs as “providing a healthy outside perspective and better consistency
in addressing large bank issues.” In addition, the FDIC rotates other senior examination staff
among the banks it regulates to provide consistency and fresh perspectives.

Former Leadership of FHFA Acknowledged the Benefits of Examiner Rotation and Left
Implementation of an Examiner Rotation Practice to DBR and DER

In 2011, the former Acting Director of FHFA reported to us that he saw rotation as a tool to
avoid examiner staleness and reduce the risk that examiners would become too comfortable
with the management perspective of the institution that they were assigned to supervise.
FHFA’s Examination Manual, adopted in December 2013 during the tenure of the former
FHFA Acting Director, contains no requirement or guidance on examiner rotation and FHFA
currently has no agency-wide policy or guidance on examiner rotation. We found no
evidence that FHFA directed DBR or DER to adopt guidance on examiner rotation or to put
examiner rotation into practice. It appears that FHFA leadership left implementation of an
examiner rotation practice to DBR and DER. 12

DBR Records Show that DBR Consistently Followed its Announced Practice of
Examiner Rotation During the Review Period

DBR officials reported to us that DBR uses regular examiner rotation to preserve examiner
independence. One associate director told us that DBR uses rotation to reduce the risk that its
examiners, particularly the EICs, would begin “to see things the way the bank sees things.”
According to DBR officials, DBR’s rotation practice ensures fresh eyes are on each bank.

DBR officials also told us that rotation develops staff professional and leadership skills,
fosters fresh perspectives, fosters consistency in examination approaches and results, and
develops a common knowledge of all banks among the examination staff. According to these
officials, shared knowledge of all FHLBanks improves DBR’s ability to address systemic
issues and problems at the banks.

Although DBR has not adopted a formal written policy or guidance on examiner rotation,
annual emails from DBR management to its examiners explain DBR’s examiner rotation
practice, the reasons for that practice, and specific rotation assignments. The rotation email



12
   Recently, FHFA issued guidance to the Enterprises that recommended the Enterprises consider rotating the
internal audit staff in order to maintain objectivity and independence.



                                   OIG • EVL-2017-004 • March 28, 2017                                        12
for 2016, like the emails for three prior years, also contained a chart showing the rotation
assignments under each DBR associate director.

Three associate directors oversee the safety and soundness examinations of the FHLBanks.
Each of the three associate directors manages a staff of about 14 examiners and is responsible
for a portfolio of approximately four banks. DBR officials reported to us that DBR’s annual
rotation chart changes every associate director’s portfolio for that year by adding a new bank
and removing another, usually the bank that has been in that associate director’s portfolio for
the longest time. Our review of DBR records found that, from January 2013 through
December 2017, 13 each FHLBank was assigned a different associate director, a different EIC,
and different examination staff at least every four years. 14

Within DBR’s structured rotation practice, the associate directors have discretion to move
staff resources where needed. 15 For example, an associate director may, during the four years
that an FHLBank remains in his or her portfolio, rotate the assigned examination staff to
different roles, such as to a different risk area, or from an EIC of one bank examination to a
staff examiner on another, and to other FHLBanks in the portfolio. The associate directors
also have flexibility to borrow resources from each other and to draw on resources outside the
examination staff. For example, associate directors have borrowed staff from other offices
with specialized financial and modeling expertise to perform bank examination tasks.

DER, Like DBR, Recognizes the Benefits of Examiner Rotation and Pledged to Adopt a
“Meaningful” Examiner Rotation Approach but its Records Reflect that Examiner
Rotation Has Largely Not Occurred During the Review Period

DER, like DBR, lacks a written examiner rotation policy. In November 2015, the Deputy
Director of DER reported to all DER staff that “[r]egular rotation of on-site examination staff
is a best practice of supervisory agencies.” In that same email, the Deputy Director of DER
announced a new EIC for Fannie Mae, who had formerly been the EIC for Freddie Mac, and
a new EIC for Freddie Mac, who had previously been the head of DER’s Office of Modeling
and Capital. She further committed that DER would adopt “meaningful” examiner rotation
that would “improve coordination among offices.”




13
  DBR provided OIG its 2017 rotation schedule, which covers the entire examination cycle beginning January
2017.
14
   DBR’s rotation records are contained both in the annual rotation charts attached to emails and in worksheets
that trace associate director and EIC assignments among the FHLBanks.
15
     DBR does not track its temporary, ad hoc reassignments between associate directors.



                                     OIG • EVL-2017-004 • March 28, 2017                                          13
According to one senior DER official, DER has rotated staff on its examination teams since
the fall of 2012. In May 2016, the Deputy Director reported to us that DER has an informal
rotation process.

As we had done with DBR, we sought to verify those recollections. We sought
documentation from DER to show its efforts to track examiner assignments over time or
evidence of an examiner rotation practice, informal or otherwise. DER provided no such
materials, apart from the November 2015 email from the Deputy Director, internal
organization charts, staffing spreadsheets, and a number of internal and public announcements
of organization changes. A DER official reported to us that DER maintained no records of
examiner assignments and reassignments or the period of time examiners have been assigned
to a particular Enterprise or specific risk area and had not created or maintained records to
track examiner assignments over time, and no documentation was produced to us by DER
showing that it systematically tracked examiner assignments over time.

However, DER maintained to us that DER management was aware of its movement of
examiners through its review and approval of staffing assignments and reassignments during
the review period and that information about examiner assignments could be found in the
personnel records for each examiner and in emails. No claim was made by DER that its
management reviews personnel records for each examiner and associated emails when it
considered assignments and reassignments, and it did not produce such materials to us in
response to our request for materials evidencing examiner rotation. We found no evidence
that DER has systematically tracked the length of time each examiner has been assigned to a
particular Enterprise or risk area.

Because we were not able to readily verify statements from DER leadership that informal
examiner rotation had occurred within DER and in light of DBR’s demonstrable practice of
rotating its examiners every four years and DER’s acknowledgement that regular rotation of
examination staff is a “best practice,” we sought to determine what practice, if any, had been
followed within DER to rotate examiners between the two Enterprises and risk areas during
the review period, from the materials provided to us by DER. From these materials, we traced
examiner assignments to determine how many DER examiners (1) had been assigned to a
particular Enterprise or risk area for the entire review period and (2) had been rotated between
the Enterprises during the review period.

We found that DER’s organization chart for January 2017 reflected a total of 61 examiners.
Of those 61 examiners, DER’s organization charts showed that 28 had been in DER for the
four-year review period, the time period used by DBR to rotate all its examiners. Of those 28,
we found:




                              OIG • EVL-2017-004 • March 28, 2017                                  14
     •   14 were assigned to examine the same Enterprise and same risk area for the entire
         review period (50%). 16

     •   8 were assigned to examine the same Enterprise but not the same risk area for the
         entire review period (29%).

     •   4 were assigned to non-examination work for some parts of the review period but
         otherwise were assigned to examine the same Enterprise during the review period
         (14%).

     •   2 were rotated between the Enterprises as examiners during the review period (7%).

We did not test the accuracy of the information reported in the materials provided to us by
DER. We recognize that our tracing efforts were limited by the information available in the
documents provided by DER. For example, we learned from two DER examiners that their
examination duties remained unchanged, even though the title of the risk area to which they
were assigned was changed on the organization charts. Even with those caveats, our tracing
effort shows that 22 of the 28 staff who worked at DER during the four-year review period—
79%—performed examination work only at one Enterprise throughout the period, and an
additional 4—14%—only examined one Enterprise when they performed examination work.

Sixteen months after the Deputy Director of DER reported the reassignments of the Enterprise
EICs and pledged to adopt “meaningful” examiner rotation, our review of DER materials
found no evidence that DER has adopted any “meaningful” rotation. No DER official with
whom we spoke explained: the timeframe for the intended examiner rotation; whether
examiners would be rotated across or within Enterprises; or which types of examiners, in
addition to the EICs, would be subject to the announced “meaningful” rotation.




16
  We reviewed other DER documents, including examination work papers and examination plans and
schedules, to identify risk area assignments when that information was not available on DER organization
charts.



                                   OIG • EVL-2017-004 • March 28, 2017                                     15
FINDINGS .................................................................................

   •   The OCC, the Federal Reserve, and the FDIC have recognized the benefits of a formal
       policy and/or practice of examiner rotation and each of these regulators has implemented
       a policy or practice (or both) across its supervisory division.

   •   Former FHFA leadership acknowledged the benefits of established, systematic examiner
       rotation and left implementation of a rotation practice to DBR and DER.

   •   Prior to January 2013, DBR adopted a formal practice of rotation of all DBR examiners
       and maintained records of examiner assignments and reassignments for the period
       January 2013 through December 2016.

   •   OIG review of these records confirmed that DBR consistently followed its practice of
       examiner rotation, at all levels, from January 2013 to December 2016.

   •   In November 2015, the Deputy Director of DER reported to all DER staff that “[r]egular
       rotation of on-site examination staff is a best practice of supervisory agencies.” In that
       same email, the Deputy Director of DER announced new EICs for the Enterprises and
       committed that DER would adopt “meaningful” examiner rotation practices.

   •   A senior DER official reported to us that examiner rotation occurred within DER before
       and after that November 2015 commitment from the Deputy Director of DER. In May
       2016, the Deputy Director also told us that DER has an informal examiner rotation
       process.

   •   We found no evidence that DER has systematically tracked the length of time each
       examiner has been assigned to a particular Enterprise or risk area over the review period.

   •   DER’s lack of easily accessible and reliable data on examiner assignments over time
       limits its capacity to make reasoned and effective management decisions about
       examination resources.

   •   OIG review of the only DER records provided to us relating to examiner rotation,
       supplemented by Agency documents we obtained during prior audits and evaluations,
       found only 7% of the examiners working in DER during the review period were rotated
       between the Enterprises during this period.

   •   To the extent that DER has relied on occasional examiner reassignments and
       reorganizations to achieve examiner rotation, that haphazard approach has not been
       successful, according to our analysis of data contained in DER’s documents.



                             OIG • EVL-2017-004 • March 28, 2017                               16
•   OIG found no evidence that DER had developed a plan to implement a practice of
    “meaningful” examiner rotation over the 16 months since the Deputy Director of DER
    made that commitment.

•   We also found no evidence of any “meaningful” examiner rotation in DER, other than the
    rotation of EICs announced at that time by the Deputy Director, during these 16 months.




                         OIG • EVL-2017-004 • March 28, 2017                             17
CONCLUSION ............................................................................

According to FHFA, its supervisory authority over its regulated entities “is virtually identical
to—and clearly modeled on—Federal bank regulators’ supervision of banks.” Federal bank
regulators—the OCC, the Federal Reserve and the FDIC—have recognized the benefits of
examiner rotation and have adopted written policies and/or practices requiring examiner
rotation.

Former FHFA leadership acknowledged the benefits of examiner rotation and left
implementation to DBR and DER. While our testing of DBR records confirms that DBR has
an established practice of rotating all of its examination teams every four years, our review of
DER materials found that rotation of DER examiners has largely not occurred.

The Deputy Director of DER acknowledged to DER staff in November 2015 that “[r]egular
rotation of on-site examination staff is a best practice of supervisory agencies.” In that same
email, the Deputy Director announced the rotation of the EICs for the examination teams for
the Enterprises and committed that DER intended to adopt “meaningful” examiner rotation.

However, DER provided no documentation to us to show its efforts to track examiner
assignments over time, and we found no evidence that DER has systematically tracked the
length of time each examiner has been assigned to a particular Enterprise or risk area. DER’s
lack of easily accessible and reliable data on examiner assignments over time limits its
capacity to make reasoned and effective management decisions about examination resources.

Using DER materials, we found only 7% of the examiners working in DER during the review
period were rotated between the Enterprises. To the extent that DER has relied on occasional
examiner reassignments and reorganizations to achieve examiner rotation, that haphazard
approach has not been successful, according to our analysis of data contained in DER’s
documents.

Sixteen months after the Deputy Director of DER announced the rotation of EICs and pledged
to adopt “meaningful” examiner rotation, we found no evidence, based on our review of DER
documents and communications with DER officials, that DER has implemented its pledge of
“meaningful” examiner rotation.




                              OIG • EVL-2017-004 • March 28, 2017                                  18
RECOMMENDATIONS ...............................................................

OIG recommends that FHFA:

   1. Develop, communicate to DER examination staff, and implement an examiner
      rotation practice or policy that explains the timeframe for examiner rotation, whether
      examiners would be rotated across or within Enterprises, and which types of
      examiners, in addition to the EICs, would be subject to the rotation practice or policy;
      and

   2. Direct DER to implement a mechanism to track and document over time DER
      examiner assignments by Enterprise and risk area to facilitate implementation of the
      examiner rotation practice or policy.

OIG provided FHFA an opportunity to respond to a draft report of this evaluation. In its
management response, which is reprinted in its entirety in the appendix, FHFA agreed with
the recommendations. FHFA also provided technical comments that we incorporated into the
report, as appropriate.




                             OIG • EVL-2017-004 • March 28, 2017                                 19
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

We conducted this evaluation to identify and evaluate the policies and practices of DBR and
DER governing the rotation of examination staff for the Enterprises, the FHLBanks, and the
Office of Finance, and to compare those policies and practices with those of other federal
financial regulators.

To achieve these objectives, we met with FHFA officials, reviewed examination staff
assignments from 2013-2017 using materials provided by DBR and DER (we did not test the
accuracy of the information contained in these materials), and met with FHFA personnel
knowledgeable about the Agency’s rotation practices. We also reviewed policy and guidance
regarding examiner rotation issued by the OCC, the Federal Reserve, and the FDIC.

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 discussed in this
report meet those standards.




                             OIG • EVL-2017-004 • March 28, 2017                              20
APPENDIX: FHFA MANAGEMENT RESPONSE ............................

For help placing a file, see instructions on SharePoint

                         How to insert an Agency response letter.docx




                              OIG • EVL-2017-004 • March 28, 2017       21
OIG • EVL-2017-004 • March 28, 2017   22
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-2017-004 • March 28, 2017                         23