Federal Housing Finance Agency Office of Inspector General Se m iann ual R ep ort to t he Cong r e ss October 1, 2015, through March 31, 2016 Federal Housing Finance Agency Office of Inspector General Semiannual Report to the Congress October 1, 2015, through March 31, 2016 Table of Contents Our Vision 1 Our Mission 1 Core Values 2 Snapshot of OIG Accomplishments October 1, 2015–March 31, 2016 4 Monetary Results October 1, 2015–March 31, 2016 5 A Message from the Inspector General 6 Executive Summary 8 Overview 8 This Report 9 OIG’s Oversight Strategy 10 Risk-Focused Strategy 10 OIG’s Organizational Structure 13 Leadership 13 OIG’s Accomplishments from 2010 to Present 17 OIG’s Audit, Evaluation, and Compliance Activities 18 Conservatorship Operations 18 Supervision of the Regulated Entities 24 Information Technology Security 29 Recommendations 31 OIG’s Investigations 32 Investigations: Civil Cases 33 Investigations: Criminal Cases 34 Outreach 43 Investigations: Administrative Actions 44 Suspended Counterparty Referrals 44 OIG’s Regulatory Activities and Outreach 45 Regulatory Activities 45 Public and Private Partnerships, Outreach, and Communications 46 Appendix A: Glossary and Acronyms 50 Appendix B: OIG Recommendations 58 Appendix C: Information Required by the Inspector General Act and Subpoenas Issued 82 Appendix D: OIG Reports 87 Appendix E: OI Publicly Reportable Investigative Outcomes Involving Condo Conversion and Builder Bailout Schemes 88 Federal Housing Finance Agency Office of Inspector General Appendix F: OI Publicly Reportable Investigative Outcomes Involving Fraud Committed Against the Enterprises, the FHLBanks, or FHLBank Member Institutions 92 Appendix G: OI Publicly Reportable Investigative Outcomes Involving Loan Origination Schemes 95 Appendix H: OI Publicly Reportable Investigative Outcomes Involving Short Sale Schemes 102 Appendix I: OI Publicly Reportable Investigative Outcomes Involving Loan Modification and Property Disposition Schemes 105 Appendix J: OI Publicly Reportable Investigative Outcomes Involving Property Management and REO Schemes 110 Appendix K: OI Publicly Reportable Investigative Outcomes Involving Adverse Possession Schemes 112 Appendix L: OI Publicly Reportable Investigative Outcomes Involving RMBS Schemes 115 Appendix M: Figure Sources 116 Appendix N: Endnotes 117 Semiannual Report to the Congress • October 1, 2015–March 31, 2016 Federal Housing Finance Agency Office of Inspector General Our Vision Our vision is to be an organization that promotes excellence and trust through exceptional service to the Federal Housing Finance Agency (FHFA or Agency), Congress, stakeholders, and the American people. The FHFA Office of Inspector General (OIG) achieves this vision by being a first-rate independent oversight organization in the federal government that acts as a catalyst for effective management, accountability, and positive change in FHFA and brings enforcement actions against those, whether inside or outside of the federal government, who waste, steal, or abuse government funds in connection with the Agency, Fannie Mae and Freddie Mac (the Enterprises), or any of the Federal Home Loan Banks (FHLBanks). Our Mission OIG promotes economy, efficiency, and effectiveness and protects FHFA and the entities it regulates against fraud, waste, and abuse, contributing to the liquidity and stability of the nation’s housing finance system. We accomplish this mission by providing independent, relevant, timely, and transparent oversight of the Agency in order to promote accountability, integrity, economy, and efficiency; advising the Director of the Agency and Congress; informing the public; and engaging in robust enforcement efforts to protect the interests of the American taxpayers. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 1 Core Values OIG’s core values are integrity, respect, professionalism, and results. Accordingly, we strive to maintain the highest level of integrity, professionalism, accountability, and transparency in our work. We follow the facts— wherever they go, without fear or favor; report findings that are supported by sufficient evidence in accordance with professional standards; and recommend actions tied to our findings. Our work is risk-based, credible, and timely. We play a vital role in promoting the economy and efficiency in the management of the Agency and view our oversight role both prospectively (advising the Agency on internal controls and oversight, for example) and retrospectively (by assessing the Agency’s oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks in its role as regulator, and its operation of Fannie Mae and Freddie Mac in its role as conservator). Because FHFA has been placed in the extraordinary role of regulator and conservator of two Enterprises, which support over $5 trillion in mortgage loans and guarantees, our oversight role reaches matters delegated by FHFA to the Enterprises to ensure that the Enterprises are satisfying their delegated responsibilities and that taxpayer monies are not wasted or misused. We emphasize transparency in our oversight work to the fullest reasonable extent to foster accountability in the use of taxpayer monies and program results. We seek to keep the Agency’s Director, members of Congress, and the American taxpayers fully and currently informed of our oversight activities, including problems and deficiencies in the Agency’s activities as regulator and conservator and the need for corrective action. Report fraud, waste, or abuse by visiting www.fhfaoig.gov/ReportFraud or calling (800) 793-7724. 2 Federal Housing Finance Agency Office of Inspector General Semiannual Report to the Congress • October 1, 2015–March 31, 2016 3 Snapshot of OIG Accomplishments October 1, 2015–March 31, 2016 OIG Investigations Monetary Results Restitution $174,169,402 Fines/Special Assessments/Seizures $306,267,255 Recoveries $549,400 Settlements $3,150,266,000 TOTAL $3,631,252,057 Judicial Actions Indictments/Charges 53 Arrests 47 Convictions/Pleas 73 Sentencings 75 Suspensions/Debarment Referrals 63 Hotline Contacts 1,125 Audit and Evaluation Reports Issued 8 White Papers Issued 2 Office of Compliance and Special Projects Reports Issued 2 Nonmonetary Recommendations Made 27 Regulations Reviewed 6 Responses to Requests Under the Freedom of Information Act 43 4 Federal Housing Finance Agency Office of Inspector General Monetary Results October 1, 2015–March 31, 2016 OIG’s fiscal year 2016 (FY16) budget is $49.9 million. During this reporting period the monetary results as an outcome of OIG criminal and civil investigations are 72 times greater than the fiscal year budget, as demonstrated in Figure 1 (see below). Figure 1. OIG Monetary Results October 1, 2015, to March 31, 2016, vs. FY16 OIG Budget Semiannual Report to the Congress • October 1, 2015–March 31, 2016 5 A Message from the Inspector General I am pleased to present OIG’s eleventh Semiannual Report to the Congress, which covers the period from October 1, 2015, to March 31, 2016. Our mission is to promote economy, efficiency, and effectiveness of FHFA and protect FHFA, the Enterprises in its conservatorship, and the entities it regulates against fraud, waste, and abuse, through independent, relevant, timely, and transparent oversight and robust law enforcement efforts. OIG seeks to be a voice for, and protect the interests of, those who have funded Treasury’s investment in the Enterprises—the American taxpayers. Created by statute in July 2008, FHFA is charged with serving as regulator of the Enterprises and the FHLBanks. Once the Enterprises were placed in conservatorship in September 2008 and FHFA was appointed conservator of them, it was placed in the extraordinary dual role of supervisor and conservator. Now in their eighth year, FHFA’s conservatorships of the Laura S. Wertheimer Enterprises are of unprecedented scope, scale, and complexity. FHFA currently Inspector General of the serves in a unique role: it is both conservator and regulator of the Enterprises Federal Housing Finance Agency and regulator of the FHLBanks. The scope, complexity, and duration of the Agency’s dual roles necessarily mean that OIG must structure its oversight program to examine FHFA’s exercise of its dual responsibilities, which differ significantly from the typical federal financial regulator. To best leverage our resources to strengthen OIG’s oversight, we focus our audit and evaluation efforts on assessing existing controls on those programs and operations that we have determined to pose the greatest financial, governance, and/or reputational risk to FHFA, the Enterprises in its conservatorship, and the entities it regulates, and we conduct verification testing of closed recommendations to independently verify whether the Agency has implemented in full the corrective actions it represented to OIG that it intended to take. In this Semiannual Report, we provide a snapshot of the 12 reports we published during this period, categorized by the risk to FHFA, the Enterprises in its conservatorship, and the entities it regulates. During this reporting period, OIG’s investigations resulted in significant criminal prosecutions and civil fraud enforcement, including: • 53 indictments; • 5 trials; • 73 convictions; • 75 sentencings; • More than $480 million in criminal fines, restitutions, forfeitures, and settlements; and • Over $3 billion in civil settlements. 6 Federal Housing Finance Agency Office of Inspector General Where our investigations develop sufficient evidence to prove the elements of a crime, we will refer it for criminal prosecution every time. We work closely with prosecutors to look for the evidence that they believe is sufficient to bring criminal charges. Where we do not find evidence sufficient to refer the matter for criminal charges, we seek to bring civil claims. In our written reports and our law enforcement efforts, both civilly and criminally, we hold institutions and their officials accountable for their actions or inactions. We continue to work diligently to act as a catalyst for effective management, accountability, and positive change within FHFA and the Enterprises in its conservatorship. Our achievements would not be possible without the dedication and hard work of the professionals at OIG, and I thank them for their service. Laura S. Wertheimer Inspector General April 29, 2016 Semiannual Report to the Congress • October 1, 2015–March 31, 2016 7 Executive Summary Overview Initially, conservatorship was intended to be a “time out” during a period of extreme stress to stabilize the The Federal Housing Finance Agency (FHFA mortgage markets and promote financial stability. or Agency) was created on July 30, 2008, when Now in their eighth year, FHFA’s conservatorships the President signed into law the Housing and of the Enterprises are of unprecedented scope, scale, Economic Recovery Act of 2008 (HERA).* and complexity. Since September 2008, FHFA HERA charged the newly created FHFA to serve has served in the unique role of conservator and as regulator of Fannie Mae and Freddie Mac (the regulator of the Enterprises and regulator of the Enterprises) and of the Federal Home Loan Bank FHLBank System. (FHLBank) System (collectively, the government- HERA also amended the Inspector General Act sponsored enterprises, or the GSEs) and enhanced of 1978 to establish an Office of Inspector General its resolution authority. (OIG) for FHFA. OIG began operations on In September 2008, FHFA exercised its authority October 12, 2010, when its first Inspector General under HERA to place Fannie Mae and Freddie Mac (IG) was sworn in. Because FHFA has acted as into conservatorship in an effort to stabilize the both regulator and conservator of the Enterprises residential mortgage finance market. Concurrently, since September 2008, OIG’s responsibilities are the Department of the Treasury (Treasury) correspondingly broader than those of an IG for entered into Senior Preferred Stock Purchase any other prudential federal financial regulator Agreements (PSPAs) with each Enterprise because they include oversight of FHFA’s actions as to ensure that each maintained a positive net conservator in order to protect the U.S. taxpayers’ worth going forward. Under these PSPAs, U.S. investment of $187.5 billion in the Enterprises. We taxpayers, through Treasury, have invested a total of accomplish this mission by providing independent, $187.5 billion into the Enterprises since 2008. As relevant, timely, and transparent oversight in order conservator of the Enterprises, FHFA is authorized to promote accountability, integrity, economy, and under HERA to: efficiency; advising the Director of the Agency and Congress; informing the public; and engaging in • Succeed to all rights and powers of any robust enforcement efforts to protect the interests of stockholder, officer, or director of the Enterprises; the American taxpayers. • Operate the Enterprises; and • Take such action as may be: *Terms and phrases in bold are defined in űű Necessary to put the Enterprises in a sound Appendix A, Glossary and Acronyms. If you and solvent condition; and are reading an electronic version of this űű Appropriate to carry on the Enterprises’ Semiannual Report, then simply move your business and preserve and conserve the cursor to the term or phrase and click for Enterprises’ assets and property.1 the definition. 8 Federal Housing Finance Agency Office of Inspector General This Report This Semiannual Report discusses OIG operations from October 1, 2015, to March 31, 2016. Among other things, it: • Explains our risk-based oversight strategy; • Describes our organizational structure; • Discusses the audits, evaluations, compliance tests, and white papers published during the period; • Summarizes the numerous OIG investigations that resulted in 53 indictments, 73 convictions, and 75 sentencings against individuals responsible for fraud, waste, or abuse in connection with programs and operations of FHFA and the Enterprises; more than $480 million in criminal fines, restitutions, forfeitures, and settlements; and over $3 billion in civil settlements; • Highlights our outreach during the period; • Provides comments to the Agency’s proposed “duty to serve” regulations; and • Reviews the status of OIG’s audit, evaluation, and compliance recommendations. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 9 OIG’s Oversight Strategy OIG began operations on October 12, 2010. It FHFA’s operations and the external environment; was established by HERA, which amended the discussions with FHFA and officials of the Inspector General Act. The primary mission of OIG regulated entities, the public, Congress, and other is to conduct independent audits, evaluations, and government officials; reviews of relevant reports and investigations to promote economy and efficiency documents prepared by FHFA and external parties; and to prevent and detect fraud, waste, abuse, and risk assessments performed in key areas related mismanagement in the programs and operations to FHFA’s mission; and matters referred to OIG of FHFA, including its conservatorships of the through its hotline. The four areas of significant risk Enterprises. are: • Conservatorship Operations. Since OIG’s operations are funded by annual assessments September 2008, FHFA has administered that FHFA levies on the Enterprises and the two conservatorships of unprecedented scope FHLBanks pursuant to 12 U.S.C. § 4516. For and undeterminable duration. Under HERA, FY16, OIG’s operating budget is $49.9 million. the Agency’s actions as conservator are not subject to judicial review or intervention, Risk-Focused Strategy nor are they subject to procedural safeguards that are ordinarily applicable to regulatory OIG’s broad oversight mission encompasses the activities such as rulemaking. As conservator full scope of the Agency’s programs and operations, of the Enterprises, FHFA exercises control including its conservatorship of the Enterprises. over trillions of dollars in assets and billions In February 2014, OIG issued a Strategic Plan of dollars in revenue, and makes business and for fiscal years 2015–2017 with four high-level policy decisions that influence and impact the goals that serve as a blueprint for OIG’s risk-based entire mortgage finance industry. For reasons of oversight of FHFA and independent reporting. efficiency, concordant goals with the Enterprises, To best leverage our resources to strengthen OIG’s and operational savings, FHFA has determined oversight, we determined to focus our resources to delegate revocable authority for general on programs and operations that pose the greatest corporate governance and day-to-day matters to financial, governance, and/or reputational risk to the Enterprises’ boards of directors and executive the Agency, the Enterprises, and the FHLBanks. management. Because our work plan is dynamic, it adjusts to a • Supervision of the Regulated Entities. As changing risk profile. discussed earlier, FHFA plays a unique role as Our current work plan, adopted in February 2016, both conservator and regulator for the Enterprises continues our focus on four areas of significant and as regulator for the FHLBank System. risk facing FHFA. This plan is based on: ongoing Effective supervision by FHFA is fundamental to OIG work; OIG published reports; other publicly ensuring the safety and soundness of its regulated available information; OIG’s general knowledge of entities. Within FHFA, the Division of Federal Home Loan Bank Regulation is responsible 10 Federal Housing Finance Agency Office of Inspector General for supervision of the FHLBank System, in fiscal year 2014, systems security continues and the Division of Enterprise Regulation is to be a preeminent issue for businesses and responsible for supervision of the Enterprises. individuals alike. The regulated entities, like most FHFA’s supervisory activities include designing modern institutions, rely on numerous, complex a comprehensive, risk-based supervisory strategy information technology (IT) systems to conduct (examination planning), conducting on-site almost every aspect of their work. These systems examinations (examination execution), and manage processes to guarantee and purchase monitoring remediation of deficiencies identified loans, supporting more than $5 trillion in Fannie during examinations (oversight). Mae and Freddie Mac mortgage assets. Both Enterprises and the FHLBanks have been the • Counterparties and Third Parties. The subject of cyber attacks, although none caused Enterprises rely heavily on counterparties and significant harm. All of the entities regulated third parties for a wide array of professional by FHFA acknowledge that the substantial services, including mortgage origination and precautions put into place to protect their servicing. That reliance exposes the Enterprises information systems may be vulnerable and to counterparty risk—that the counterparty will penetration of their systems poses a material not meet its contractual obligations. FHFA has risk to their business operations. Further, the delegated to the Enterprises the management Enterprises are increasingly relying on third- of their relationships with counterparties and party service providers, requiring the sharing reviews that management largely through its of sensitive information between Enterprise regulatory responsibilities. One of the most and third-party systems. Consequently, the significant counterparty risks is the risk posed Enterprises face an increased risk in that an by loan originators and servicers that are not operational failure by a third party will adversely depository institutions (also called nonbanks). affect them. As participants in the mortgage market change, counterparties can affect the risks to be managed Our revised Audit and Evaluation Plan is available at by the Enterprises. Nonbanks are lightly www.fhfaoig.gov/Reports/AuditAndEvaluationPlan. regulated by federal financial regulatory agencies The work plan for each identified risk has been and may not have the same financial strength, designed to produce reports that can be generated liquidity, or operational capacity needed to meet promptly both to increase transparency and to their obligations to the Enterprises as depository improve the programs and operations of the Agency institutions. As a result, there is a risk that a without compromising the rigor of the methodology. nonbank seller that failed to honor its contractual obligations, such as by selling to an Enterprise loans that did not comply with the Enterprise’s lending requirements, would not have sufficient capital or liquidity to honor repurchase demands by the Enterprises for noncompliant loans. • Information Technology Security. With over 67,000 cyber incidents reported to the United States Computer Emergency Readiness Team Semiannual Report to the Congress • October 1, 2015–March 31, 2016 11 12 Federal Housing Finance Agency Office of Inspector General OIG’s Organizational Structure OIG consists of the Inspector General, senior Inspector General and provides independent legal staff, and OIG offices, which principally are its advice, counseling, and opinions to OIG about its operational offices: the Office of Audits, Office of programs and operations. OC also reviews audit Evaluations, Office of Investigations, and the Office and evaluation reports for legal sufficiency and of Compliance and Special Projects. Additionally, compliance with OIG’s policies and priorities. OIG’s Executive Office includes the Office of Additionally, it reviews drafts of FHFA regulations Chief Counsel, the Office of External Affairs, the and policies and prepares comments as appropriate. Office of Communications, and OIG’s Equal OC also coordinates with FHFA’s Office of Employment Opportunity Program Office and General Counsel and manages OIG’s responses to provides organization-wide supervision; the Office requests and appeals made under the Freedom of of Risk Analysis, the Office of Administration, and Information Act and the Privacy Act. the Office of Internal Controls and Facilities provide The Office of External Affairs is also within EO, and organization-wide support. it responds to inquiries from members of Congress. Leadership The Office of Communications is also within EO, and it responds to inquiries from the press and On May 22, 2014, President Barack Obama public. nominated Laura S. Wertheimer to the position of Additionally, OIG’s Equal Employment Opportunity FHFA Inspector General; she was confirmed by the Program Office is within EO, and it oversees Senate on September 18, 2014, and sworn in shortly compliance with federal requirements for equal thereafter. Prior to becoming Inspector General, Ms. opportunities in the workplace. Wertheimer was a partner at a law firm where she led numerous independent internal investigations Office of Risk Analysis on behalf of audit, governance, and special board To exercise rigorous oversight, we must identify committees of publicly traded companies. She also emerging risks and revise our work plan as new represented public companies, professional service risks emerge and existing risks are well-controlled. partnerships, and corporate directors and officers Our Office of Risk Analysis uses data mining, in regulatory investigations and enforcement quantitative data, and analysis of data and relevant proceedings under the federal securities laws. information to identify and monitor emerging and ongoing areas of risk. The identification, analysis, Executive Office and prioritization of risk areas allow us to utilize The Executive Office (EO) provides leadership resources strategically and realign our Audit and and programmatic direction for OIG’s offices and Evaluation Plan, in real time, to address those risks. activities. EO includes the Office of Chief Counsel (OC), which serves as the chief legal advisor to the Semiannual Report to the Congress • October 1, 2015–March 31, 2016 13 Office of Audits outside of government, who waste, steal, or abuse government monies in connection with programs The Office of Audits (OA) is tasked with designing and operations of the Agency and the GSEs. OI and conducting independent performance pursues wrongdoers within the Agency and the audits with respect to the Agency’s programs and GSEs as well as individuals and entities that make operations. OA also undertakes projects to address misrepresentations to the Enterprises in connection statutory requirements and stakeholder requests. with loans that the Enterprises buy or guarantee. For example, the Improper Payments Information Act of 2002 (IPIA), as amended, requires OIG OI also takes the lead in responding to referrals annually to audit FHFA’s compliance with IPIA made to OIG’s hotline through telephone, email, during the prior fiscal year. Additionally, the Federal website, and in-person complaints, abiding by all Information Security Management Act of 2002 applicable whistleblower protections set forth in (FISMA) directs OIG annually to audit whether the Inspector General Act. Our hotline is staffed by FHFA’s and OIG’s information security programs a third-party vendor to protect the anonymity of and practices meet FISMA’s security requirements. the callers and provides easy access for individuals to report concerns, allegations, information, and Under the Inspector General Act, inspectors general evidence of violations of criminal and civil laws in are required to comply with the Government connection with programs and operations of the Accountability Office’s (GAO) Government Auditing Agency. During this reporting period, our hotline Standards (Yellow Book). OA performs its audits has received and analyzed 1,125 contacts. When OI and attestation engagements in accordance with the determines that a full investigation is not warranted, Yellow Book. it works closely with OA and OE to determine Office of Evaluations whether an audit or evaluation project is advisable. The Office of Evaluations (OE) conducts To maximize criminal and civil law enforcement, OI program and management reviews and makes works closely with other law enforcement agencies, recommendations for improvement where including the Department of Justice (DOJ), the applicable. OE provides independent and objective Office of the Special Inspector General for the reviews, studies, survey reports, and analyses of Troubled Asset Relief Program (SIGTARP), the FHFA’s programs and operations. The Inspector Postal Inspection Service, the Federal Bureau of General Reform Act of 2008 requires that Investigation (FBI), the Department of Housing inspectors general adhere to the Quality Standards and Urban Development Office of Inspector for Inspection and Evaluation (Blue Book), issued General (HUD-OIG), the Secret Service, IRS- by the Council of the Inspectors General on Criminal Investigation (IRS-CI), and state and local Integrity and Efficiency (CIGIE). OE performs its law enforcement entities nationwide. evaluations in accordance with the Blue Book. Office of Compliance and Special Projects Office of Investigations The Office of Compliance and Special Projects Staffed with special agents (SAs), investigators, (OCo), created in December 2014, addresses the analysts, prosecutors, and attorney advisors, the reputational risk arising from the practical necessity Office of Investigations (OI) conducts criminal and of closing OIG recommendations based largely civil investigations into those, whether inside or upon representations from the Agency. Pursuant 14 Federal Housing Finance Agency Office of Inspector General to the Inspector General Act, inspectors general testing. Third, it consults with each division, (IGs) recommend remedial actions to correct prior to closure of a recommendation, to facilitate shortcomings identified through reviews of agency application of a single standard across the office programs and operations. When an agency accepts for closing recommendations. Last, it conducts an IG recommendation and takes steps to begin verification testing on closed recommendations implementation of the corrective action, the agency to verify independently whether FHFA has reports on its efforts to the IG and the IG typically implemented in full the corrective actions it relies on materials and representations from the represented to OIG that it intended to take. agency to close the recommendation. Practices vary The results of OCo’s testing are published in across IG offices respecting responsibility to track “compliance reviews.” These compliance reviews outstanding recommendations, standards used to (three of which have been issued) permit FHFA, close open recommendations, and efforts to validate Congress, and the public to assess the impact of the efficacy of remedial agency actions in response OIG’s recommendations, as well as the efficacy of to IG recommendations. the Agency’s implementation of them. Historically, OIG reports were prepared by three To address OIG’s lack of a tool with which to track operating divisions within OIG—OA, OE, and all open recommendations across the office, OCo OI—and each division issued recommendations to designed and implemented a Recommendation the Agency. The status of open recommendations Tracking System (RTS), which is now accessible was tracked separately by each division in its own to every OIG employee. Each division issuing tracking system, and each division independently a report with trackable recommendations is determined whether the Agency’s representations responsible for entering them into RTS upon and corrective actions, if any, were sufficient issuance using established data fields and updating to close open recommendations. The lack of a each such entry with information from the Agency, comprehensive and standardized tracking system including timetables for remediation and relevant prevented OIG from efficiently determining implementation documents. RTS automatically the status of all recommendations across the notifies designated users when an Agency corrective office. Moreover, it led to different standards and action is due, thereby facilitating effective and practices within OIG for closing recommendations timely follow-up and review prior to closure. and for follow-up after closure to assess and By eliminating the legacy tracking systems used ensure the effectiveness and impact of both the by different OIG divisions and replacing them recommendations and the Agency’s corrective with a single, office-wide, comprehensive, and actions. current source of data on all recommendations OCo is charged with several critical responsibilities. to which an Agency response is required, RTS First, it consults with each division in the ensures consistency in the collection and storage development of recommendations to ensure of, and access to, information relating to tracked that such recommendations, if accepted and recommendations. It provides OIG and its implemented, will be susceptible to follow-up employees with accurate information as to the verification testing. Second, it tracks, in real time, real-time status of every recommendation, as well the status of all OIG recommendations, from as automatic notification on the date the Agency issuance to closure to subsequent follow-up and is expected to complete its implementation of a Semiannual Report to the Congress • October 1, 2015–March 31, 2016 15 corrective action. Because RTS data can be filtered Office of Administration or aggregated, RTS facilitates better reporting. The Office of Administration (OAd) manages and Consistent with the primary mission of OCo, oversees OIG administration, including budget, RTS assists in the planning and development of human resources, financial management, and IT. compliance reviews designed to test the Agency’s For human resources, OAd develops policies to diligence in following through on its corrective attract, develop, and retain exceptional people, actions and the longer-term impact of those actions. with an emphasis on linking performance planning Compliance reviews are important because the and evaluation to organizational and individual Inspector General Act does not provide an IG with accomplishment of goals and objectives. OAd authority to ensure that its recommendations are also coordinates budget planning and execution adopted, or that, once adopted, actions taken by and oversees all of OIG’s procedural guidance for an agency to correct shortcomings identified by an financial management and procurement integrity. IG are fully implemented and maintained. Once an IG closes a recommendation, the success or Office of Internal Controls and Facilities failure of an agency’s corrective action, or decision The Office of Internal Controls and Facilities to discontinue the corrective action, may not be manages and oversees OIG’s workplace safety, discovered by an IG without follow-up on closed facilities, and internal controls. recommendations. As OCo’s first three compliance reviews reflect,a OIG has found instances in which polices or programs offered as corrective actions by the Agency, and relied upon by OIG to close recommendations, were, in the wake of OIG’s closure, abandoned or not implemented in full by the Agency, nullifying the intended benefits of the recommendations. At the request of the IG, OCo also performs high- value, short-turnaround special projects. a Each of these reviews is accessible on our website: OIG’s Compliance Review of FHFA’s Implementation of Its Housing Finance Examiner Commission Program (COM-2015-001); Compliance Review of FHFA’s Implementation of Its Procedures for Overseeing the Enterprises’ Single-Family Mortgage Underwriting Standards and Variances (COM-2016-001); Compliance Review of FHFA’s Oversight of Enterprise Executive Compensation Based on Corporate Scorecard Performance (COM-2016-002). 16 Federal Housing Finance Agency Office of Inspector General OIG’s OIG’sAccomplishments Accomplishments from from 2010 to Present Present 141 Reports 54 43 Audits Evaluations 10 262 White Papers Recommendationsa 8 Evaluation Surveys 4 Compliance Reports 11 Semiannual Report to Congress 12 Systemic Implication Reports (SIRs)b 537 Investigations $4.712 billion $37.379 billion Criminal Monetary Resultsc Civil Monetary Resultsd 715 Indictments/ Chargese 458 Convictions/Pleas 56 Regulatory Activities a Public recommendations only b 12 SIRs have been produced, of which 5 have been published publicly and 7 remain privileged due to their investigative content c Includes Criminal Restitution and Forfeitures/Fines/Special Assessments and Seizures a d Includes Public recommendations only. Settlements/Recoveries/Fines b 12e SIRs have been Superseding produced, indictments areof which in included 5 have been published publicly and 7 remain privileged due to their investigative content. this total c Includes criminal restitution and forfeitures/fines/special assessments and seizures. d Includes settlements/recoveries/fines. e Superseding indictments are included in this total. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 17 OIG’s Audit, Evaluation, and Compliance Activities OIG actively strives to fulfill its mission through dividends on its investment. Despite their high audit, evaluation, and compliance projects and leverage, lack of capital, conservatorship status, reports and through investigations. Our Audit and and uncertain future, the Enterprises have grown Evaluation Plan identifies the four risk areas on which in size during conservatorship and, according to our audit and evaluation projects have been focused. FHFA, their combined market share of newly issued mortgage-backed securities is approximately We now discuss our oversight activities during the 70%.3 The Enterprises’ combined total assets are reporting period by risk area. approximately $5.2 trillion and their combined debt exceeds $5 trillion.4 Although market conditions Conservatorship Operations have improved and the Enterprises have returned to profitability, their ability to sustain profitability When then-Secretary of the Treasury Henry Paulson in the future cannot be assured for a number of announced the conservatorships in September reasons: the winding down of their investment 2008, he explained that they were meant to be a portfolios and reduction in net interest income; “time out” during which the Enterprises would be the level of guarantee fees they will be able to stabilized, enabling the “new Congress and the next charge; the future performance of their business Administration [to] decide what role government segments; the elimination by 2018 of a capital in general, and these entities in particular, should cushion to buffer against losses; and the significant play in the housing market.”2 The current FHFA uncertainties involving key market drivers such as Director has echoed that view, recognizing that mortgage rates, homes prices, and credit standards.5 conservatorship “cannot and should not be a Given the taxpayers’ enormous investment in permanent state” for the Enterprises. However, the Enterprises, the unknown duration of the putting the Enterprises into conservatorships has conservatorships, the Enterprises’ critical role in the proven to be far easier than taking them out, and secondary mortgage market, and their unknown the “time out” period for the conservatorships has ability to sustain future profitability, OIG determined now entered its eighth year. The lack of consensus in that FHFA’s administration of the conservatorships Congress about the nation’s future mortgage finance has been, and continues to be, a critical risk. system and the role, if any, for the Enterprises may mean that the Enterprises will continue to operate Oversight of Delegated Matters under FHFA’s conservatorship for a considerably longer period. As conservator of the Enterprises, FHFA owes duties to the U.S. taxpayers, the largest shareholders in While in conservatorship, the Enterprises have the Enterprises, and has statutory responsibilities to required $187.5 billion in financial investment ensure that the Enterprises achieve their statutory from Treasury to avert their insolvency, and, purpose. Pursuant to its powers under HERA to through December 2015, the Enterprises have take actions “necessary to put [Fannie Mae and paid to Treasury approximately $241 billion in Freddie Mac] in a sound and solvent condition” 18 Federal Housing Finance Agency Office of Inspector General and “appropriate to carry on the business of [Fannie OIG’s compliance review tested the Agency’s Mae and Freddie Mac]” and “preserve and conserve” implementation of this Process. (See OIG, their assets, 12 U.S.C. § 4617(b)(2)(D), FHFA has Compliance Review of FHFA’s Implementation of Its delegated authority for many matters, both large and Procedures for Overseeing the Enterprises’ Single-Family small, to the Enterprises and, since 2008, has issued Mortgage Underwriting Standards and Variances more than 230 conservatorship directives in which (COM-2016-001, December 17, 2015), online at it instructs the Enterprises to take certain actions, www.fhfaoig.gov/Reports/AuditsAndEvaluations.) most of which relate to delegated responsibilities. The Our verification testing found that the Agency had Enterprises acknowledge in their public securities never fully implemented this Process. Specifically, we filings that their directors serve on behalf of the found that the Agency did not implement two of the conservator and exercise their authority as directed Process’ three key requirements; the Agency advised by and with the approval, when required, of the us that, in late 2014, it had begun to “reevaluate and conservator. As conservator, FHFA is ultimately reengineer” those two requirements but, as of the responsible for all decisions made and actions taken date of our compliance review, the Agency had not by the Enterprises, pursuant to FHFA’s revocable established any timeline for completing its work on grant of delegated authority. the Process. Regarding the third requirement, we found that, while one Enterprise routinely submitted A key focus of OIG’s oversight of FHFA’s role as all proposed revisions to its single-family credit conservator is on its oversight of delegated matters policies for the Agency’s review, the other Enterprise to the Enterprises to protect the U.S. taxpayers’ submitted far fewer proposed revisions to its policies. substantial investment in the Enterprises. Four of As a result, the Agency had reduced “visibility” into our reports published during this semiannual period the latter Enterprise’s single-family credit policies and involved delegated matters. underwriting standards. One of these reports was a compliance review, As a result of our compliance review, OIG reopened following up on an audit recommendation issued the recommendation from AUD-2012-003, and by OIG in 2012 and closed by OIG in March will hold it open until FHFA fulfills its commitment 2013 on the basis of the Agency’s representations to establish and fully implement a formal process for and written policy document. In a 2012 audit reviewing the Enterprises’ underwriting standards report, FHFA’s Oversight of Fannie Mae’s Single- and variances to those standards. FHFA agreed with Family Underwriting Standards (AUD-2012-003), the recommendation. OIG found that the Agency lacked a formal process to review Fannie Mae’s and Freddie Mac’s In a report issued by OE, we looked at FHFA’s single-family mortgage purchase underwriting oversight of Enterprise implementation of standards and variances to those standards. We two conservatorship directives. FHFA issues recommended that FHFA establish a policy for conservatorship directives to set forth significant reviewing Enterprise underwriting standards and policy determinations and initiatives and provide variances, including escalation of unresolved issues specific directions to the Enterprises for which reflecting potential lack of agreement. The Agency compliance is required. As of October 2015, accepted the recommendation, and, in January 2013, FHFA had issued 231 conservatorship directives of implemented a process called the “Single-Family differing scope and purpose. Policy Review and Escalation Process” (the Process). Semiannual Report to the Congress • October 1, 2015–March 31, 2016 19 In December 2011 and in April 2013, then-FHFA of and compliance with conservatorship directives Inspector General testified before Congress that changed in 2014. We intend to monitor FHFA’s FHFA had not proactively overseen Enterprise oversight of Enterprise implementation of and compliance with its conservatorship directives compliance with conservatorship directives, and will to ensure that their purposes were achieved.6 We subsequently test whether additional reporting from conducted an evaluation survey to assess whether the Enterprises has enhanced FHFA’s oversight of FHFA had significantly enhanced its oversight conservatorship directives. of the Enterprises’ implementation of and In 2012, FHFA announced significant changes compliance with two conservatorship directives for to the Enterprises’ representation and warranty an 18-month period, from January 2013 through framework in a conservatorship directive. During June 2014 (the review period), and learned that this reporting period, we published an audit little had changed. (See OIG, FHFA’s Oversight of reporting on our efforts to examine FHFA’s the Enterprises’ Implementation of and Compliance process to assess Enterprise implementation of the with Conservatorship Directives during an 18-Month representation and warranty framework. Period (ESR-2016-002, March 28, 2016), online at www.fhfaoig.gov/Reports/AuditsAndEvaluations.) Historically, the Enterprises relied on the sellers’ representations and warranties when purchasing We found that, in large measure, FHFA exercised loans from sellers. In the event of default of a little oversight of the Enterprises’ compliance with purchased loan, the affected Enterprise reviewed these two conservatorship directives and relied on the loan file for possible breach by the seller of its the Enterprises to self-report concerns, questions, contractual representations and warranties. When and operational issues with implementation and a breach was identified, the affected Enterprise compliance. We found that one Enterprise provided could exercise its contractual rights to require the FHFA with compliance reports every quarter on seller to repurchase the loan, mitigating losses the implementation status of directives, but its caused by underwriting defects. After the housing reports were of very limited value because of their market collapsed and loan defaults skyrocketed, inaccuracies and incomplete information. The other the Enterprises were placed into conservatorship. Enterprise provided no written directive compliance At the direction of FHFA, the Enterprises reviewed reports to FHFA and, at the end of the review period, defaulted loans for evidence of breach of sellers’ had not completed its formal compliance program representations and warranties and the Enterprises and had not tested compliance with conservatorship demanded repurchase of many such loans from the directives. We found that FHFA’s heavy reliance on lenders. Sellers complained that the Enterprises’ the Enterprises to self-report compliance issues with open-ended ability to demand loan repurchases conservatorship directives during the review period was unfair and unpredictable, and caused them significantly limited FHFA’s ability, as conservator, to tighten lending standards beyond what the to determine whether the policies and initiatives Enterprises required to protect themselves from announced in its conservatorship directives had been future exposure from loan repurchases. Concerned fully implemented. by the limitations on the availability of mortgage During this evaluation survey, we were advised credit, FHFA directed the Enterprises in 2012 to that Enterprise reporting on the implementation develop and implement a new representations and 20 Federal Housing Finance Agency Office of Inspector General warranties framework (new Framework) to provide Reports/AuditsAndEvaluations.) With respect to sellers with greater certainty about their potential this one objective, OIG found that the rating for the future repurchase exposure. first target for an Enterprise was inconsistent with the underlying written assessment. We also found In February 2012, FHFA identified its strategic goals that the rating for the second target of this objective for the Enterprises in a strategic plan; in 2013 and in for both Enterprises, where each Enterprise was each subsequent year, FHFA has issued a Scorecard in found to have met the target, was inconsistent which it sets objectives for each of its three strategic with documentation created after the quarter goals and sets specific targets for each objective. reporting that the target had been suspended due FHFA tracks and rates Enterprise performance to insufficient data. While FHFA advised us that against the Scorecard on a quarterly basis and this second target was suspended near the end of awards an overall annual Scorecard performance for the fourth quarter in 2013, it did not revise its each Enterprise, which is factored into Enterprise 2013 Scorecard target. FHFA reported to us that executive compensation for the following year. it advised each Enterprise orally that the target had Tracking Enterprise performance against the annual been suspended during that quarter, but we were Scorecard is a valuable internal control to keep not able to confirm whether FHFA provided the Enterprise activities aligned with conservatorship same advice to both Enterprises. strategic goals and to keep Enterprise executives accountable for the Enterprises’ performance. We found that these inconsistencies and gaps, if not confined to this one instance, have the potential to FHFA’s 2013 Scorecard, issued on April 1, 2013, and create the misimpression that Scorecard objectives revised on May 1, 2013 (2013 Scorecard), identified have been met when, in fact, they were suspended 11 measurable objectives with specific targets for the or modified by FHFA employees. Because of the Enterprises to work toward meeting FHFA’s strategic importance of FHFA’s Scorecard tracking and goals. One of those 11 objectives was implementation rating process, we recommended that FHFA: of the new Framework. That objective contained two (1) establish standards requiring that modifications quarterly targets for both Enterprises. The first target or suspensions of Scorecard targets must be required development of a plan to conduct upfront documented in writing; (2) require that FHFA quality control reviews. The second target required an comments and ratings on quarterly rating sheets be assessment of the Enterprises’ execution of the new dated; and (3) establish standards to address missed model and use of tools to identify defective loans, or partially missed quarterly targets, including and an assessment of the effectiveness of the upfront requiring that every quarterly rating sheet record quality control reviews. when any target was missed and the reset target OIG audited the effectiveness of FHFA’s efforts date. FHFA agreed with all OIG recommendations to track and rate Enterprise performance on this and identified actions that it believed addressed objective regarding implementation of the new each recommendation. OIG has not yet assessed Framework. (See OIG, Review of FHFA’s Tracking the Agency’s actions and will hold open its and Rating of the 2013 Scorecard Objective for the recommendations until it determines that the New Representation and Warranty Framework Reveals corrective actions reported by FHFA are completed Opportunities to Strengthen the Process (AUD-2016- and responsive to the recommendations. 002, March 28, 2016), online at www.fhfaoig.gov/ Semiannual Report to the Congress • October 1, 2015–March 31, 2016 21 We also assessed FHFA’s oversight of the Fannie by, among other things, testing and verifying the Mae board of directors in connection with Fannie Enterprises’ proposals. FHFA agreed with this Mae’s cyber risk management program. A discussion recommendation. At year-end 2011, the Agency of that evaluation report appears below, under the provided us with its newly adopted testing and risk “Information Technology Security.” verification procedures. After review, OIG closed the recommendation on February 27, 2012. Non-delegated Matters OIG initiated a compliance review to test FHFA’s As conservator, FHFA can retain authority to implementation of these testing and verification decide specific issues and can, at any time, revoke procedures. (See OIG, Compliance Review of FHFA’s previously delegated authority. Because FHFA Oversight of Enterprise Executive Compensation Based typically asserts its authority to decide those issues on Corporate Scorecard Performance (COM-2016- of significant monetary or reputational value, it is 002, March 17, 2016), online at www.fhfaoig.gov/ critical for FHFA to develop and put into place Reports/AuditsAndEvaluations.) During the course strong internal processes for information sharing of our review, we learned that on March 9, 2012, and analysis to strengthen its decision-making FHFA discontinued the implementation of its testing processes. During this reporting period, we issued and verification procedures upon adoption of a new two reports relating to FHFA’s review and approval structure for Enterprise executive compensation that process as conservator of the Enterprises. reduced the percentage of at-risk compensation from A compliance review followed up on a 2011 roughly 70% to 30%. According to FHFA, its March recommendation addressing FHFA approval of 2012 compensation structure rendered its testing and at-risk executive compensation at the Enterprises. verification procedures obsolete. While FHFA acted In our 2011 evaluation report, Evaluation of Federal within its discretion in establishing the new executive Housing Finance Agency’s Oversight of Fannie Mae’s compensation structure, its decision to abandon any and Freddie Mac’s Executive Compensation Programs effort to test or verify the Enterprise proposals for (EVL-2011-002, March 31, 2011), online at www. at-risk executive compensation payments limited fhfaoig.gov/Reports/AuditsAndEvaluations, we its ability to review the Enterprises’ proposals found that the Enterprises had paid their top six before approving them. The total individual at-risk executives more than $35 million in compensation compensation payments amounted to $11.7 million in 2009 and 2010, of which a substantial portion for 85 executives in 2014. Our compliance review was “at risk” because it was tied to individual found several instances where the Enterprises performance and could be reduced if the proposed, and the Agency approved, payment of performance was inadequate. OIG found that the all at-risk compensation for executives even though Agency’s oversight of the Enterprises’ compensation the Enterprises were not on track to meet some of process was insufficiently robust: FHFA largely the performance goals for which the executives were accepted and approved the Enterprises’ annual responsible. In these cases, the Agency did not follow at-risk compensation proposals rather than verifying up with the Enterprises to gather basic information and testing the accuracy of the reported information about their compensation proposals, much less and conclusions. OIG recommended that the challenge any of them. Agency strengthen its process to review the at-risk In light of our findings, OIG recommended that: compensation proposals for Enterprise executives (1) the Agency develop controls to test and verify 22 Federal Housing Finance Agency Office of Inspector General Enterprise proposals for at-risk compensation based Figure 2. Enterprise Expenses 2012-2015, on executive performance prior to its approval of Actual and Projected ($ millions) them; and (2) FHFA notify OIG when it does not fully implement, substantially alters, or abandons controls or corrective actions implemented in response to OIG recommendations. The Agency rejected both recommendations. During the last semiannual reporting period, we assessed the effectiveness of FHFA’s existing budget review and approval process for the Enterprises’ annual operating budgets, which had increased roughly $1.2 billion, or 31%, between 2012 and 2015. We found budget submissions by the Enterprises after the fiscal year had begun, combined with cursory level analysis by FHFA’s Division of Conservatorship and inadequate resources within that Division to assess the reasonableness of the proposed budgets, prevented FHFA from exercising $2.366 billion in 2012 to a projected $3.092 billion effective control over Enterprise spending, both in 2015, a net increase of $726 million, or 30.68%, in amount and direction, and FHFA’s approval and Freddie Mac’s spending increases, from of the budgets created the risk that it endorsed $1.561 billion in 2012 to a projected $1.937 billion Enterprise spending that was not well understood in 2015, a net increase of $376 million, or 24.08%, by FHFA. (See OIG, FHFA’s Exercise of Its as shown in Figure 2 (see above). Conservatorship Powers to Review and Approve the Drivers for the net increases in Fannie Mae’s spending Enterprises’ Annual Operating Budgets Has Not during this period included implementation Achieved FHFA’s Stated Purpose (EVL-2015-006, of FHFA strategic goals and initiatives, such as September 30, 2015), online at www.fhfaoig.gov/ integration of the Common Securitization Platform Reports/AuditsAndEvaluations.) Given the size of (CSP; $145 million), reduction of its retained these spending increases, OIG committed in that portfolio ($16 million), and a one-time pension plan evaluation to trace the net spending increases. termination expense ($315 million). Fannie Mae also In a white paper published on March 9, 2016, reported increased spending for Enterprise-specific OIG reported the results of our efforts to trace strategic goals and initiatives, including critical safety the FHFA-approved net spending increases of and soundness projects ($267 million) and other more than $1 billion from 2012 through 2015 by modernization efforts ($102 million). Additional the Enterprises. (See OIG, $1.1 Billion Increase Fannie Mae net increases in spending resulted in Expenses for Fannie Mae and Freddie Mac from from consulting services ($25 million) and other 2012 through 2015: Where the Money Went (WPR- miscellaneous expenses ($35 million). 2016-001, March 9, 2016), online at www.fhfaoig. Fannie Mae reported net decreases in spending gov/Reports/AuditsAndEvaluations.) Specifically, in the following areas: credit and making home OIG traced Fannie Mae’s spending increases, from affordable ($41 million); underwriting, pricing, and Semiannual Report to the Congress • October 1, 2015–March 31, 2016 23 Figure 3. Fannie Mae Summary of Drivers in Net Increases of Expenses During Review Period ($ millions) capital markets ($62 million); and miscellaneous ($54 million), support staffing ($41 million), and categories ($76 million). This activity is summarized other miscellaneous expenses ($3 million). This in Figure 3 (see above). activity is summarized in Figure 4 (see page 25). Drivers for the net increases in Freddie Mac’s spending during the relevant period included Supervision of the Regulated implementation of FHFA strategic goals and Entities initiatives, such as integration of the CSP ($61 million) and a one-time pension plan As FHFA recognizes, effective supervision of the termination expense ($67 million). Freddie Mac entities it regulates is fundamental to ensuring their also reported increased spending for Enterprise- safety and soundness. Within FHFA, the Division specific strategic goals and initiatives, including of Federal Home Loan Bank Regulation (DBR) loan advisor suite ($58 million), enhanced and is responsible for supervision of the FHLBanks. new operations and technology capabilities Section 20 of the Federal Home Loan Bank Act ($35 million), and pricing execution ($12 million). (12 U.S.C. § 1440) requires each FHLBank to be Additional Freddie Mac net increases in spending examined at least annually. The exam function for resulted from its core business operations, such as the FHLBanks descends from the old Federal Home salaries and benefits, professional services, computer Loan Bank Board, through the Federal Housing data services, loan prospector, software lease and Finance Board, to FHFA. As a result, there is a long maintenance, travel, and other business expenses history of examination practice and examination ($233 million). Freddie Mac also reported increased standards for DBR to draw upon. expenses for private-label securities and other litigation ($8 million). Freddie Mac experienced net FHFA’s Division of Enterprise Regulation (DER) decreases in spending during the relevant period in is responsible for supervision of the Enterprises. single-family extraordinary credit and operations FHFA’s annual examination program assesses 24 Federal Housing Finance Agency Office of Inspector General Figure 4. Freddie Mac Summary of Drivers in Net Increases of Expenses During Review Period ($ millions) Fannie Mae’s and Freddie Mac’s financial safety risk assessments of each regulated entity. A risk and soundness and overall risk management assessment presents a comprehensive, risk-focused practices through ongoing monitoring, targeted view of the regulated entity so that examiners can examinations, and risk assessments. Prior to the focus their supervisory activities upon the risks that creation of FHFA, the Enterprises were regulated by present the highest supervisory concerns. the Office of Federal Housing Enterprise Oversight On January 4, 2016, OIG published a report in (OFHEO), and OFHEO’s first examination took which we assessed whether FHFA’s requirements for place in 1994. In its Fiscal Year 2014 Performance its risk assessments of the Enterprises are sufficiently and Accountability Report to Congress, FHFA stated, robust to produce risk assessments that achieve the “To ensure that the regulated entities are operating purpose for which they are intended. (See OIG, safely and soundly, FHFA identifies risks to the Utility of FHFA’s Semi-Annual Risk Assessments regulated entities and takes timely supervisory Would Be Enhanced Through Adoption of Clear actions to address risks and improve their condition.” Standards and Defined Measures of Risk Levels (EVL- During the reporting period, OIG focused 2016-001, January 4, 2016), online at www.fhfaoig. considerable attention on the robustness of FHFA’s gov/Reports/AuditsAndEvaluations.) OIG found supervision over the entities it regulates and that FHFA’s requirements for its risk assessments published five reports. of the Enterprises fall short of the requirements and guidance provided by other prudential federal Risk Assessments financial regulators that we reviewed. FHFA’s loosely FHFA and other federal financial regulators for defined parameters lack standardized measures of sophisticated financial institutions use a risk-based risks (such as credit risk, sensitivity to market risk, approach for their examination activities. Critical liquidity risk, and operational risk), do not define to the success of a risk-based approach are detailed the risk measures that examiners must use, or do Semiannual Report to the Congress • October 1, 2015–March 31, 2016 25 not require examiners to use a common format and remediate an MRA. According to FHFA, a key common, defined measures of risk. Additionally, component of effective supervision is close oversight over the past four years, DER has experienced high of an Enterprise’s efforts to timely and effectively turnover in examination staff, limiting common, remediate MRAs. stable practices over successive examination cycles to Because MRAs are only issued by DER for the most promote continuity in institutional knowledge. serious supervisory deficiency, OIG assessed whether FHFA’s flexible guidance on preparation of risk DER examiners followed FHFA’s requirements assessments, combined with significant changes in and supplemental guidance for supervision of an examiner staffing, has produced risk assessments that Enterprise’s efforts to remediate MRAs. (See OIG, are not readily susceptible to comparison year over FHFA’s Examiners Did Not Meet Requirements and year for one Enterprise. The lack of comparability Guidance for Oversight of an Enterprise’s Remediation limits the utility of risk assessments in planning risk- of Serious Deficiencies (EVL-2016-004, March based supervision activity for that Enterprise. 29, 2016), online at www.fhfaoig.gov/Reports/ AuditsAndEvaluations.) We first compared FHFA’s OIG recommended that FHFA implement requirements against the requirements imposed by detailed risk assessment guidance that provides: other prudential federal financial regulators and (1) minimum requirements for risk assessments found that, in certain instances, FHFA’s standards that facilitate comparable analyses for each fell short. We then reviewed whether DER examiners Enterprise’s risk positions, including common followed existing FHFA requirements and guidance criteria for determining whether risk levels are high, in their oversight of a previously issued MRA and medium, or low, year over year; and (2) standard found that they did not. requirements for format and the documentation necessary to support conclusions in order to facilitate Specifically, the evidence showed: DER accepted the comparisons between Enterprises and reduce Enterprise’s proposed remediation plan, even though variability among DER’s risk assessments for each the plan failed to address all of the deficiencies Enterprise and between the Enterprises. OIG also identified in the MRA, and DER examiners did not recommended that FHFA direct DER to train its assess the adequacy and timeliness of the Enterprise’s examiners-in-charge and exam managers in the efforts to remediate the MRA beyond attending preparation of semiannual risk assessments, using meetings with Enterprise personnel and receiving enhanced risk assessment guidance consistent with written presentations. the first two recommendations. FHFA agreed with OIG recommended that FHFA: (1) review its our recommendations. existing requirements, guidance, and processes regarding MRAs against those adopted by other Supervisory Standards and Practices for federal financial regulators; (2) assess whether MRA Issuance and Remediation any should be enhanced, and to make such On-site examinations of the Enterprises by DER enhancements; (3) compare the processes followed by are fundamental to FHFA’s supervisory mission. DER and DBR for the form, content, and issuance Through its supervisory activities, DER may identify of an MRA, approval authority for a proposed a concern or deficiency, the most significant of which remediation plan, and real-time assessments at regular is labeled by FHFA as a Matter Requiring Attention intervals of MRA remediation efforts; (4) assess (MRA). FHFA requires an Enterprise to promptly whether the guidance issued and processes followed 26 Federal Housing Finance Agency Office of Inspector General should be enhanced, and make such enhancements; • The OCC and Federal Reserve require a board of (5) provide mandatory training for all FHFA directors to be notified, in writing, by the exam examiners on MRA-related guidance; and (6) utilize team when an MRA issues and the reasons for the results of its quality control reviews to identify its issuance; FHFA examiners notify Enterprise MRA-related gaps and weaknesses. FHFA disagreed management, not Enterprise directors, that an with recommendations 1 and 2 and agreed with the MRA has issued. An Enterprise board receives remaining four recommendations. information that an MRA has issued and the basis for its issuance from management, even Supervisory Standards for though actions or inactions by management Communication of Serious Deficiencies typically give rise to the MRA. and Board Oversight of Management’s • The OCC and Federal Reserve require a board of Remediation Efforts directors to engage early in the MRA remediation Under FHFA’s supervisory guidance, an Enterprise process by reviewing or approving a written board is responsible for ensuring timely and effective remedial plan to correct the MRA deficiencies; correction of significant supervisory deficiencies. In FHFA places sole responsibility on Enterprise order to perform such oversight, an Enterprise board management to develop and submit a remedial must know that an MRA has issued, the practices plan to FHFA, without review by Enterprise giving rise to the MRA, and the remedial plan and directors, and there is no supervisory expectation timetables proposed by Enterprise management. The that an Enterprise board receive a copy of the board would also benefit from specific supervisory remediation plan, either before it is submitted for expectations on its oversight responsibilities for FHFA approval or after FHFA has approved it. MRA remediation. Because FHFA consistently maintains, based on the language of its authorizing • The OCC and Federal Reserve require a board statute, that its supervisory authority over the of directors to oversee management’s efforts to entities it regulates “is virtually identical to—and implement the proposed remedial measures on clearly modeled on—Federal bank regulators’ an ongoing basis and ensure that management’s supervision of banks,”7 we compared the stringent remediation is adequate and timely; FHFA requirements imposed on directors for oversight of does not. MRA remediation by the Office of the Comptroller • The OCC and Federal Reserve expect a board of of the Currency (OCC) and the Federal Reserve to directors to keep the regulator informed of the those imposed by FHFA on Enterprise directors. progress of the remediation; FHFA does not. (See OIG, FHFA’s Supervisory Standards for Communication of Serious Deficiencies to Enterprise We found that, under FHFA’s current supervisory Boards and for Board Oversight of Management’s practices, there is a risk that an Enterprise board could Remediation Efforts are Inadequate (EVL-2016- become no more than a bystander to management’s 005, March 31, 2016), online at www.fhfaoig.gov/ efforts to remediate MRAs, and FHFA risks prolonged Reports/AuditsAndEvaluations.) or inadequate resolution of the most serious threats to the Enterprises’ safety and soundness. OIG found that FHFA’s requirements, guidance, and practices fell far short of peer federal financial OIG recommended that FHFA: (1) revise its regulators. Specifically, we found that: supervision guidance to require DER to provide the Chair of the Audit Committee of an Enterprise Semiannual Report to the Congress • October 1, 2015–March 31, 2016 27 Board with each conclusion letter setting forth an FHLBanks MRA; (2) revise its supervision guidance to require The Agency’s responsibilities as regulator—and, DER to provide the Chair of the Audit Committee by extension, OIG’s oversight responsibilities—are of an Enterprise Board with each plan submitted broad in nature. Two of our reports issued during by Enterprise management to remediate an MRA this semiannual period involve FHFA’s supervision with associated timetables and the response by DER; of the FHLBanks. (3) revise its supervision guidance to require DER to identify all open MRAs in the annual, written The merger of the FHLBanks of Des Moines Report of Examination (ROE) and the expected and Seattle, effective May 31, 2015, was the first timetable to complete outstanding remediation voluntary merger of two FHLBanks. The merger activities; and (4) include in this year’s ROE, to was completed on schedule, with no interruption be issued to each Enterprise for 2015 supervisory in service to members. The continuing FHLBank, activities, all open MRAs and the expected timetable headquartered in Des Moines, is now the largest of to complete outstanding remediation activities for the 11 FHLBank regions in both geography and each open MRA. number of members. This merger was the subject of our recent white paper. (See OIG, Merger of FHFA agreed with recommendations (1), (3), and the Federal Home Loan Banks of Des Moines and (4). As demonstrated in our report, FHFA governance Seattle: FHFA’s Role and Approach for Overseeing principles require an Enterprise board to oversee the Continuing FHLBank (WPR-2016-002, management’s efforts to correct all supervisory March 16, 2016), online at www.fhfaoig.gov/ deficiencies identified by FHFA in a timely and Reports/AuditsAndEvaluations.) appropriate manner and to hold management accountable. No board can exercise its oversight Although the FHLBanks chose to merge with each responsibilities if it lacks the approved remediation other and negotiated the merger agreement, FHFA plans, which include the agreed upon deliverables played a decisive role in encouraging the FHLBank and timetables for completion of remediation, and, of Seattle to find a merger partner to address some of for that reason, we proffered recommendation (2). the Agency’s longstanding supervisory concerns with FHFA “partially agree[d]” with recommendation that FHLBank. In contrast, FHFA found the overall (2): it agreed to “send the chair of the board audit condition of the FHLBank of Des Moines to be committee a copy of DER’s written response to satisfactory, but raised questions about operational each MRA remediation plan” but refused to agree to risk, particularly with respect to the FHLBank of provide the MRA remediation plan, which provides Des Moines’ multiyear plan to upgrade its core the basis for DER’s written response, directly to banking system. Because the merger compounded the chair of the board audit committee. Instead, these operational risks and created new challenges, FHFA committed to communicate “to Enterprise our white paper identified this possible emerging risk management the supervisory expectation for clear, and signaled our intent to monitor the risk. timely, detailed reporting to the boards of directors During this semiannual reporting period, we on open remediation plans and associated timetables” published an audit to assess whether DBR’s and its “expectations about circumstances in which examination of the effectiveness of the FHLBanks’ remediation plans should be provided by management cyber risk management programs included review to the chair of the board audit committee.” of the design of their vulnerability scanning and penetration testing efforts. (See OIG, FHFA Should 28 Federal Housing Finance Agency Office of Inspector General Improve its Examinations of the Effectiveness of the management responsibilities delegated to it by Federal Home Loan Banks’ Cyber Risk Management FHFA. Oversight by a board of directors of a cyber Programs by Including an Assessment of the Design risk management program for a complex financial of Critical Internal Controls (AUD-2016-001, institution is difficult, and this task is made more February 29, 2016), online at www.fhfaoig.gov/ challenging by the numerous legacy IT systems used Reports/AuditsAndEvaluations.) This audit is by Fannie Mae. OIG found that the Board’s three discussed in “Information Technology Security,” foundational cyber risk management policies did not below. meet FHFA’s supervisory expectations announced in the Agency’s advisory bulletin. OIG also found Information Technology Security that Fannie Mae management presented to the Board plan after plan to enhance Fannie Mae’s cyber risk management program without explaining the Corporate Governance reasons for the numerous plans or the integration of FHFA has recognized that cyber risk is an increasing one plan with another, and offered timeline upon concern to the entities it supervises and regulates timeline, but provided little evidence of concrete and that disruptions to their businesses from cyber progress in remediating conditions that gave rise attacks could have widespread and harmful effects to FHFA’s supervisory concerns. The Board largely on the housing finance system, result in theft— received these presentations without challenging including confidential consumer data, and expose management’s changing timelines or multiple the regulated entities to reputational and legal plans, questioning the integration of one plan with risk. FHFA, as conservator, has delegated to the prior plans still in effect, or pressing management boards of directors of the Enterprises responsibility to provide a comprehensive master plan with for adopting cyber risk management policies that clear timelines and milestones to remediate legacy meet FHFA’s supervisory expectations, overseeing technology issues and implement current cyber the entity’s cyber risk management program to security initiatives. ensure that the program meets FHFA’s supervisory OIG recommended that FHFA direct the Fannie expectations, holding management accountable in Mae Board to enhance its cyber risk management its efforts to develop such a cyber risk management policies, establish and communicate a desired target program, and addressing FHFA’s supervisory state of cyber risk management for Fannie Mae that concerns in a timely and appropriate manner. identifies and prioritizes which risks to avoid, accept, In an evaluation, OIG assessed the execution of mitigate, or transfer through insurance, and oversee cyber risk management responsibilities by Fannie management’s efforts to leverage industry standards. Mae’s Board of Directors (Board). (See OIG, FHFA agreed with OIG’s recommendations, Corporate Governance: Cyber Risk Oversight by the but asserted that the report does not sufficiently Fannie Mae Board of Directors Highlights the Need for recognize the Board’s recent activities and offered FHFA’s Closer Attention to Governance Issues (EVL- work performed by three third-party experts who 2016-006, March 31, 2016), online at www.fhfaoig. evaluated Fannie Mae’s cyber risk management gov/Reports/AuditsAndEvaluations.) Although efforts. Two of the third-party reports were not we found that the Board has made progress, we completed until January and March 2016, after determined that much more remains to be done OIG’s field work concluded, and the findings of by the Board in order to satisfy the cyber risk those reports will not be shared with the Board until Semiannual Report to the Congress • October 1, 2015–March 31, 2016 29 its May 2016 meeting. The third report, issued in the conducted an evaluation to assess whether FHFA second half of 2015, recommended that the Board had mapped its regulatory guidance to the NIST place extremely high priority on implementation of Framework and whether its supervisory guidance the National Institute of Standards and Technology on the development of a cyber security framework Framework for Improving Critical Infrastructure is substantially similar to the guidance adopted by Cybersecurity (NIST Framework), a task that FFIEC (and its federal regulatory members). (See management reported to the Board had been OIG, FHFA Should Map Its Supervisory Standards completed in March 2015. for Cyber Risk Management to Appropriate Elements of the NIST Framework (EVL-2016-003, March NIST Framework 28, 2016), online at www.fhfaoig.gov/Reports/ FHFA is one of a number of federal agencies AuditsAndEvaluations.) involved in a national effort to protect the critical At the conclusion of OIG’s evaluation, OIG infrastructure of the U.S. financial services sector. found that FHFA had not mapped its supervisory In May 2014, FHFA issued an advisory bulletin guidance to appropriate elements of the NIST recognizing that cyber threats facing its regulated Framework. We also found that FHFA’s guidance entities are constantly evolving and growing more is far less prescriptive and far more flexible than sophisticated. The advisory bulletin described a the guidance adopted by FFIEC and its federal “cyber risk management program that the FHFA regulatory members. believes will enable the Regulated Entities and the Office of Finance to successfully perform their OIG recommended that FHFA implement responsibilities and protect their [information FSOC’s 2015 recommendations to map its existing security] environments.” regulatory guidance to appropriate elements of the NIST Framework, identify gaps, and The FHFA Director, along with the heads of other determine whether to revise its existing guidance federal financial regulators, is a voting member of to address those gaps. FHFA accepted OIG’s the Financial Stability Oversight Council (FSOC). recommendations. In 2015, FSOC recommended that federal financial institutions use the NIST Framework FHLBanks and that financial regulators map their existing Since 2008, FHFA has been the regulator for the regulatory guidance to appropriate elements of the FHLBanks and their Office of Finance. Each Bank, NIST Framework and encourage consistent cyber like other federally supervised financial institutions, security standards. Five of these federal financial relies heavily on its information systems and other regulators, exclusive of FHFA, are members of the technology to conduct and manage its business. The Federal Financial Institutions Examination Council Banks recognize that “a failure or breach, including (FFIEC), an organization that promotes uniformity as a result of cyber attacks, of the information in the supervision of financial institutions. FFIEC systems of the FHLBanks and the Office of Finance, has developed supervisory guidance on cyber and those of critical vendors and third parties, security risk management, which its five federal could disrupt the FHLBanks’ businesses or result regulators follow. Although FHFA is not a member in significant losses or reputational damage.”8 Each of FFIEC, FHFA has maintained that its respective FHLBank has a cyber risk management program regulatory responsibilities are similar. OIG 30 Federal Housing Finance Agency Office of Inspector General that includes vulnerability management. The testing can accomplish its intended purpose. OIG FHLBanks conduct, through contractors they retain, determined that failure to assess the design of key vulnerability scanning and/or penetration testing as IT internal controls, such as vulnerability scanning part of their vulnerability management efforts. and penetration tests, as part of FHFA’s examination of operational effectiveness of those controls, creates DBR is responsible for supervision of the significant risks to FHFA’s DBR examination FHLBanks, which include on-site annual program because vulnerabilities may not be detected examinations and off-site monitoring. Because and the findings may not be reliable or accurate. effective management of cyber risk is vital to the performance and success of the Banks’ operations, OIG recommended that FHFA: (1) update its DBR examinations include reviews of the Information Technology Risk Management Program FHLBanks’ IT risk management programs. Module to direct examiners to assess the design of the Banks’ vulnerability scans and penetration tests OIG conducted an audit to assess whether DBR’s when assessing the operational effectiveness of such examination of the effectiveness of the Banks’ controls; and (2) require examiners to document cyber risk management programs included review their assessment of the design of the Banks’ of the design of their vulnerability scanning and vulnerability scans and penetration tests as part of penetration testing efforts. (See OIG, FHFA Should their assessment of the operational effectiveness Improve its Examinations of the Effectiveness of the of such controls. The Agency agreed with OIG’s Federal Home Loan Banks’ Cyber Risk Management recommendations. Programs by Including an Assessment of the Design of Critical Internal Controls (AUD-2016-001, February 29, 2016), online at www.fhfaoig.gov/ Recommendations Reports/AuditsAndEvaluations.) A complete list of OIG’s audit and evaluation Applicable criteria recognize that review of the recommendations is provided in Appendix B. design of internal controls is an important element of an examination to assess the operational effectiveness of those controls and determine whether the controls will adequately mitigate the risks. OIG found that in 14 of 15 of DBR’s IT examinations performed between 2013 and 2014 that included vulnerability scanning and/ or penetration testing, DBR did not assess the design of those tests performed by contractors at the Banks’ direction. Some DBR examiners determined that such an assessment was outside of the scope of the examination plan, and all 14 of the work programs lacked steps to perform the assessment. Absent any examination of the design of vulnerability scans or penetration tests, we found that FHFA lacks reasonable assurance that such Semiannual Report to the Congress • October 1, 2015–March 31, 2016 31 OIG’s Investigations This OIG is vested with statutory law enforcement During the semiannual reporting period, authority, which is exercised by the Office of OI conducted numerous criminal, civil, and Investigations (OI). OI is staffed by highly trained administrative investigations, which resulted in the law enforcement officers, investigative counsels (ICs), filing of criminal charges against 53 individuals, the forensic auditors, and support staff who conduct conviction of 73 individuals, and 75 sentencings, as investigations related to programs overseen by FHFA. well as court-ordered fines and restitution awards. Depending on the type of misconduct uncovered Figure 5 (see below) summarizes the results obtained during OIG investigations, the investigations may during this reporting period from our investigative result in criminal charges, civil complaints, and/ efforts. or administrative sanctions and decisions. Criminal charges filed against individuals or entities may Figure 5. Prosecutions and Recoveries from result in plea agreements or trials, incarceration, October 1, 2015, Through March 31, 2016 restitution, fines, and penalties. Civil claims can Criminal Civil lead to settlements or verdicts with restitution, fines, Investigations Investigations penalties, forfeitures, assessments, and exclusion of Finesa $306,267,255 $- individuals or entities from participation in federal Settlements $- $3,150,266,000 programs. ICs in OI have been appointed as Special Restitutions $174,169,402 $- Assistant U.S. Attorneys (SAUSAs) in several Recoveries $549,400 judicial districts throughout the country. They have Total $480,436,657 $3,150,815,400 been assigned criminal matters arising from OI’s Charges 53 investigations in the districts where they have been Convictions 73 appointed and have pursued these investigations Sentencings 75 Trials 5 through to conviction and sentencing. (See discussion below on OIG ICs.) a Fines include criminal fines, seizures, forfeiture and special assessments, and civil fines imposed by federal court. The type of misconduct OI special agents (SAs) investigate varies, as does the complexity of the Figure 6 (see page 33) shows a comparison of the schemes involved. Various elements contribute criminal results achieved during this reporting period to determining the resources necessary for each against OIG’s FY16 budget. OIG’s FY16 budget investigation and the length of time necessary to see covers October 1, 2015, through September 30, each investigation through to the end. For example, 2016. loan or mortgage origination schemes, a common type of mortgage fraud, can be very labor intensive. Figure 7 (see page 33) shows a comparison of the Experienced SAs review and analyze mortgage civil settlements results achieved during this reporting loan files in order to detect red flags. Special agents period against OIG’s FY16 budget. understand how to identify the indicators of fraud, and just as importantly, how to gather necessary For ease of review of our OI activities, we group evidence and put together a case. our criminal investigations during this period into the categories described below. In each category, 32 Federal Housing Finance Agency Office of Inspector General Figure 6. OIG Criminal Monetary Results October 1, 2015, Through March 31, 2016, vs. FY16 OIG Budget Includes criminal fines, restitution, and forfeiture. a we describe the nature of the crime and include attorneys general to investigate allegations of fraud a few highlights of matters investigated by OIG. committed by financial institutions and individuals For a summary of publicly reportable investigative in connection with RMBS. OI has reviewed evidence outcomes for each category during this reporting produced by various parties for members of the period, see Appendices E-L. Working Group, assisted with witness interviews, provided strategic litigation advice, and briefed Investigations: Civil Cases other law enforcement agencies on the operations of the RMBS market. Since the inception of the RMBS Working Group, DOJ has negotiated civil During the semiannual reporting period, OI settlements worth over $34 billion. During this continued to actively participate in the Residential semiannual reporting period, a civil settlement was Mortgage-Backed Securities (RMBS) Working reached with Morgan Stanley. Group. Established by the President in 2012 to investigate individuals and entities responsible for Morgan Stanley Settles RMBS Claims by Agreeing misconduct involving the pooling of mortgage to Pay $2.6 Billion Penalty loans and sale of RMBS, the Working Group is a collaborative effort of dozens of federal and state law Morgan Stanley agreed to pay a $2.6 billion penalty enforcement agencies. OI SAs work closely with U.S. to resolve claims related to its marketing, sale, Attorneys’ offices around the country and with state and issuance of RMBS. In a detailed statement of Figure 7. OIG Civil Settlements Results October 1, 2015, Through March 31, 2016, vs. FY16 OIG Budget ($ millions) FY16 OIG Criminal Monetary Results Oct 1, 2015 to Mar 31, 2016 vs FY16 OIG Budget Semiannual Report to the Congress • October 1, 2015–March 31, 2016 33 facts that is part of the agreement, Morgan Stanley time-consuming investigations by OIG ICs and acknowledged that it failed to disclose critical SAs. Mortgage loan files containing many hundreds information to prospective investors about the of pages must be obtained via request or subpoena quality of the mortgage loans underlying its RMBS and analyzed for fraud indicators, including those and about its due diligence practices. Investors, that violate applicable underwriting guidelines. The including federally insured financial institutions, analysis requires collecting and reviewing, among suffered billions of dollars in losses from investing in other things, financial records, property history RMBS issued by the bank in 2006 and 2007. records, and working with others to identify and calculate loan losses. As a result of the analysis, Morgan Stanley made representations to investors further investigative leads may develop, resulting in that it did not securitize underwater loans (loans the decision to track down and interview borrowers, that exceeded the value of the property). The bank realtors, loan officers, title agents, and others. Once did not, however, disclose that in April 2006 it had a criminal case is brought, OIG ICs designated as expanded its “risk tolerance” in evaluating loans SAUSAs may try the case through verdict or may in order to purchase and securitize “everything obtain a guilty plea by the defendant. possible.” The expansion resulted in Morgan Stanley ignoring information indicating that thousands of OIG ICs provide additional valuable prosecutorial securitized loans were, in fact, underwater. As part resources to U.S. Attorneys’ offices in need of the agreement, the bank acknowledged that it of dedicated and experienced mortgage fraud did securitize nearly 9,000 underwater loans from prosecutors. Because OIG ICs investigate and January 2006 through mid-2007. Morgan Stanley prosecute criminal violations of law against those, also made representations to investors that it did not whether inside or outside of the federal government, securitize loans that failed to meet the originators’ who waste, steal, or abuse government funds in guidelines unless those loans had compensating connection with the Agency and the entities it factors. However, the bank acknowledged that it regulates, their activities significantly further our “did not disclose to securitization investors that mission. During this semiannual period, three OIG employees of Morgan Stanley received information ICs designated as SAUSAs successfully tried to that, in certain instances, loans that did not comply verdict cases in three different judicial districts. with underwriting guidelines and lacked adequate The following case is one of those matters. compensating factors . . . were included in the RMBS sold and marketed to investors.” Four Convicted at Trial for Mortgage Fraud, Virginia Investigations: Criminal Cases On February 3, 2016, a federal jury convicted Mohsin Raza, Humaira Iqbal, Farukh Iqbal, and Mohammad Haider on charges of conspiracy to OIG Investigative Counsels commit wire fraud affecting a financial institution ICs are appointed as SAUSAs in districts throughout and wire fraud affecting a financial institution. the country to help investigate and prosecute criminal cases involving fraud that adversely affects According to evidence presented in court, from May the Enterprises, the FHLBanks, and its members. 2006 through January 2007, the defendants, all These cases tend to be labor and document intensive former employees of SunTrust Mortgage, conspired and factually complex, typically requiring lengthy, to defraud SunTrust by preparing false mortgage 34 Federal Housing Finance Agency Office of Inspector General loan applications for prospective borrowers for property values from the lenders, defrauding them 13 properties. These fictitious loan applications into making loans that are much riskier than they contained false material information such as inflated appear. When the properties go into foreclosure, incomes, inflated assets, reduced liabilities, and lenders suffer large losses. statements that the borrowers intended to use the Below we summarize two OI investigations in this houses as their primary residences. To support category that resulted in criminal convictions during these false loan applications, defendants prepared this semiannual reporting period. (See Appendix E false documents, created fraudulent wage-and- for a summary of publicly reportable investigative earning statements for the prospective borrowers, outcomes in this category.) and generated false letters from certified public accountants. They submitted the fraudulent loan Conviction of Former CEO of Cay Clubs Resorts, applications and supporting documents to SunTrust Florida Mortgage offices to obtain approvals for the loans sought by the prospective borrowers and some of the On December 11, 2015, Fred Davis “Dave” Clark loans, in turn, were sold to Fannie Mae. Jr., former CEO of Cay Clubs Resorts and Marinas, was convicted after a five-week jury trial on charges In addition to criminal cases developed by OIG ICs of bank fraud, making false statements to a financial and SAs, OIG special agents review Treasury reports institution, and obstruction of the Securities and and other filings to proactively identify potential Exchange Commission (SEC). Approximately 1,400 matters for investigation, investigate complaints and investors, Federal Deposit Insurance Corporation tips of possible misconduct to develop sufficient (FDIC) -insured banks, and the Enterprises were evidence to prove the elements of a crime, and work defrauded in this $300 million Ponzi scheme closely with ICs and other federal prosecutors to involving the sale of Cay Clubs vacation rental units. look for the evidence that they believe is sufficient to bring criminal charges. Below, we set forth On February 22, 2016, Clark was sentenced to highlights of OIG criminal investigations during this 480 months (40 years) in federal prison, followed semiannual reporting period in a number of different by 5 years of supervised release, ordered forfeiture categories that resulted in criminal indictments, of $303.8 million, and ordered to pay $3.3 million convictions, plea agreements, sentencings, and court- ordered fines and restitution awards. Condo Conversion and Builder Bailout Schemes In these types of schemes, sellers or developers typically solicit investors with good credit who want low-risk investment opportunities by offering deals on properties with no money down and other lucrative incentives, such as cash back and guaranteed and immediate rent collection. The sellers fund these incentives with inflated sales prices. The fraudsters conceal the incentives and the true Exhibit for trial showing marketing materials used by Fred Davis Clark Jr. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 35 for obstructing an SEC investigation. Additionally, In related cases, on October 27, 2015, former Clark was ordered to forfeit $2.6 million in Cay Clubs executives Barry J. Graham and Ricky overseas assets. Lynn Stokes were ordered to pay restitution of $163,530,377. In a previous reporting period, Clark was the CEO of Cay Clubs, which operated Graham and Stokes, Director of Sales and Director of from 2004 through 2008 from offices in Florida. Investor Relations respectively, were each sentenced Cay Clubs marketed vacation rental units for 17 to 60 months of imprisonment. locations in Florida, Las Vegas, and the Caribbean and raised more than $300 million from investors Conviction in Builder Bailout Scheme, California by promising to develop dilapidated properties into luxury resorts. Evidence at trial showed that these On February 5, 2016, a federal jury found Momoud properties were never developed. Clark further Aref Abaji guilty of wire fraud, conspiracy to commit incentivized investors by promising an upfront bank and wire fraud, and tax evasion in connection “leaseback” payment of 15-20% of the unit sales with a builder bailout scheme involving more than price at the time of closing. Clark concealed these 100 condominium units across the country. incentives from lenders and the Enterprises. According to evidence presented in court, Abaji and Clark deceived lenders and the Enterprises by his co-conspirators targeted struggling condominium conducting insider sales transactions of the units, developments, negotiating with developers to buy artificially inflating values. Clark directed his units in return for hefty commissions that they often administrative assistant and his bookkeeper to misleadingly referred to as “marketing fees” and did forge signatures on loan documents and falsely not disclose to the lenders. The deals allowed the notarize mortgage paperwork to make it appear developers to show that the condominiums were that straw buyers, including family members, were selling and maintaining their market value. To pay executing the documents when in reality Clark was for the mortgages, Abaji and the other defendants providing the deposits and down payments and used straw buyers and false information—such using the proceeds of the transactions to fund Cay as fake employment and income—and fabricated Club’s operations and for his own personal benefit. documents, such as altered W-2 Wage and Tax Clark engaged in a series of fraudulent mortgage Statements, pay stubs, and bank statements. They transactions, which resulted in a total of more than ultimately received more than $21 million in loans, $20 million in bank loans. many of which went into default and resulted in foreclosure. After the collapse of Cay Clubs, the SEC began an investigation into alleged securities fraud at Cay Dozens of the loans were purchased on the secondary Clubs. In March 2013, after the SEC filed a civil mortgage market by the Enterprises, which lost at fraud action against him, Clark transferred more than least $2.37 million to delinquencies, defaults, and $2 million to a corporate account he controlled in foreclosures. Honduras. After this transfer, U.S. law enforcement and authorities in Honduras were able to obtain a Fraud Committed Against the Enterprises, court order freezing these funds. the FHLBanks, or FHLBank Member Institutions The fraud scheme caused losses to Fannie Mae and Investigations in this category involve a variety of Freddie Mac in excess of $11 million. schemes that target Fannie Mae, Freddie Mac, the 36 Federal Housing Finance Agency Office of Inspector General FHLBanks, or members of FHLBanks directly. by falsely representing that the sale was an arm’s Below we provide highlights of OIG investigations length transaction to someone with whom she had of two matters in this category that resulted in five no close personal relationship. Borzillo also falsely indictments, one conviction, and one sentencing certified that she was moving out of the property during this semiannual reporting period. (See and claimed she was suffering a financial hardship Appendix F for a summary of publicly reportable due to a federal pay freeze. In reality, despite her investigative outcomes in this category.) representation to her lender and her acceptance of $3,000 in relocation assistance in connection with Five Indicted on Money Laundering Charges at a a federal program designed to assist financially Member Bank of the FHLBank of Topeka distressed short sellers, Borzillo admitted that she On October 6, 2015, three former employees had no intention of moving out of the property. of the Plains State Bank (PSB), President J. Kirk As a senior FDIC employee, Borzillo had not been Friend, Matthew Thomas, loan officer, and Kathy subject to the federal pay freeze, and, at the time Shelman, bank cashier, were charged by a superseding of the short sale, her base annual salary steadily indictment along with business owners and PSB increased. As a result of her misrepresentations, customers George and Agatha Enns for an alleged the mortgage lender approved the short sale and conspiracy to launder money through PSB, a member Borzillo benefitted from a $290,000 reduction in bank with more than $76 million in advances from her mortgage while continuing to live in the home the FHLBank in Topeka, Kansas. From 2011 to after the sale. As a result of the fraudulent short sale 2014, deposits into a PSB bank account controlled transaction, Wells Fargo Bank was required to write by the two indicted business owners totaled more off nearly $300,000 in losses. than $6.8 million, which included more than On February 19, 2016, Borzillo was sentenced $1.6 million in cash. The PSB bank employees failed to 12 months and one day in prison, followed by to file Treasury reports, as required, based upon the 2 years of supervised release. She was also ordered amount and type of cash and monetary instruments to pay $288,497 in restitution and to forfeit the deposited into the PSB account. proceeds of her offense. Short Sale Fraud Conviction and Sentencing Involving an FHLBank Member Bank, Virginia On November 17, 2015, Michelle M. Borzillo, former senior attorney at the FDIC, pled guilty to bank fraud relating to a short sale of her home to her live-in boyfriend. According to court documents, Borzillo purchased a home for $850,000 with mortgages totaling $807,500 from Wells Fargo Bank, a member of an FHLBank. In 2013, she engineered the short sale of her home to her boyfriend, who had been living with her at the property for several years. Borzillo induced Wells Fargo Bank to approve the short sale Home purchased by Borzillo and then sold in a short sale transaction to her boyfriend. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 37 Loan Origination Schemes were sold, the mortgages went into default. The Loan or mortgage origination schemes are the most associated activities resulted in a combined Fannie common type of mortgage fraud. These schemes Mae and Freddie Mac loss of approximately typically involve falsifying borrowers’ income, assets, $800,000. employment, and credit profiles to make them Sentencing in Appraisal Fraud, Washington more attractive to lenders. These schemes often use bogus Social Security numbers and fake or altered On December 3, 2015, Douglas White and Diana documents, such as W-2 Wage and Tax Statements Merritt were sentenced to 60 months in prison and bank statements, to defraud lenders into making and 3 months in county jail, respectively, for their loans they would not otherwise make. Typically, roles in an appraisal fraud scheme. White stole the perpetrators pocket origination fees or inflate home identity of Tom Reed, a licensed real estate appraiser, prices and divert proceeds. and together with Merritt, White’s girlfriend and a loan officer, ran an appraisal fraud scheme that Below we provide highlights of OIG investigations continued for more than seven years. Using Reed’s resulting in convictions, sentencings, and court- stolen identity, White, who was not a licensed ordered restitution in this category during this real estate appraiser, prepared and submitted over semiannual reporting period. (See Appendix G 400 fake real estate appraisals that were used to for a summary of publicly reportable investigative obtain loans in real estate transactions. Lenders outcomes in this category.) approved mortgage applications that included these appraisals. Merritt participated in the scheme by Attorney and Loan Officer Convicted on Mail and steering appraisal business to White; Merritt was Wire Fraud Charges subsequently found guilty of mortgage fraud charges On October 8, 2015, a jury found Robert Lattas, related to these false appraisals. The Enterprises an attorney, and Nicholas Burge, a loan officer, bought at least 375 loans that include appraisals guilty on charges of mail and wire fraud. Lattas associated with the defendants. and Burge were alleged to have caused buyers to fraudulently obtain five mortgage loans valued at On February 11, 2016, White was ordered to pay approximately $1.49 million. Working with others, $20,250 in restitution. White and Merritt were Lattas and Burge caused false representations in loan referred for suspension by HUD. applications, real estate contracts, HUD-1 settlement Multiple Sentencings in Loan Origination Fraud statements, bank statements, W-2 Wage and Tax Scheme, California Statements, and pay stubs submitted to lenders. The documents included false statements on the source On January 28, 2016, Jose “Joe” Garcia was of the down payments. The lenders relied on the sentenced to 42 months in prison, followed by false documents in their underwriting decisions. 3 years of supervised release, and was ordered to pay $1,610,000 in restitution, jointly and severally. The properties involved in the scheme were knowingly sold to straw buyers at inflated prices. The From at least December 2004 to October 2008, buyers were recruited from the community and were Garcia, a co-owner of Jolu, Inc., a mortgage aware of the scheme. Shortly after the properties brokerage company, ran a loan origination fraud scheme in which Garcia and other co-conspirators 38 Federal Housing Finance Agency Office of Inspector General created fictitious self-employed borrowers, inflated According to the information, Elias executed a income and assets, and created fraudulent rental buy-and-bail scheme through Elias Realty. Through documentation. The conspirators purchased extensive advertising, Elias reached out and promised fraudulent tax letters that supported the fabricated homeowners whose homes were underwater that he self-employed borrowers and then submitted the could help them sell their existing homes, eliminate fraudulent documents to financial institutions their debt, and buy new homes. To accomplish to obtain mortgages. Many of these fraudulent this, Elias instructed his clients to apply for a mortgages were then sold to the Enterprises. The mortgage and buy a second home. Allegedly, the Enterprises suffered $1.5 million in losses due to mortgage applications falsely inflated the values subsequent defaults on those mortgages. of the first homes and misrepresented that the borrowers intended to keep their existing homes as On January 11, 2016, former Jolu Loan Officer rental properties. In reality the homes were worth Lidubina “Lido” Perez was sentenced for her role significantly less than stated, and the homeowners in the scheme to 7 months in prison, followed had no intention of renting their homes; rather, by 7 months of home detention and 3 years of they intended to sell them by short sale. In order to supervised release, and was ordered to pay $735,750 convince the second loan originator that the existing in restitution, jointly and severally, with two other home was being retained for a rental property, Elias defendants. Realty manipulated the Multiple Listing Service (MLS) to make it appear as though the existing Short Sale Schemes property was not being short sold. The false MLS Short sales occur when a lender allows a borrower information corroborated the false and fraudulent who is “underwater” on his/her loan—that is, the information on the loan applications. borrower owes more than the property securing the loan is worth—to sell his/her property for less than Once the second homes were purchased, Elias the debt owed. Short sale fraud usually involves purportedly instructed the homeowners to stop a borrower intentionally misrepresenting or not making mortgage payments on the first homes disclosing material facts to induce a lender to agree and to apply for approval with their lenders to to a short sale to which it would not otherwise conduct short sales on their original properties given agree. Below are highlights of OIG investigations the financial hardships due to having two active that resulted in criminal charges and sentencings mortgages. Many homeowners were permitted to in this category during this semiannual reporting conduct short sales and lenders forgave the difference period. (See Appendix H for a summary of publicly between the short sale prices and the outstanding reportable investigative outcomes in this category.) amount of the loans. In some instances, however, the financial institutions did not agree to the short sales Real Estate Broker and Investor Charged in a and the mortgages were foreclosed. Buy-and-Bail Scheme, Michigan In addition, according to the information, in On December 9, 2015, William Elias, owner and December 2013, Doren allegedly caused KLD a licensed real estate broker for Elias Realty, and Consulting to act as a straw buyer on behalf of Kimberly Doren, an Elias Realty employee and owner William Elias. Prior to the sale, Doren and the seller of KLD Consulting, were charged by information for allegedly signed an affidavit that falsely stated the their roles in a short sale fraud scheme. short sale was an arm’s length transaction between the parties. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 39 The Enterprises suffered losses in excess of Sentencing in Loan Modification Scheme, $5.1 million involving nearly 100 homes. California Najia Jalan ran several loan modification businesses Sentencings in Complex Short Sale Fraud and a not-for-profit organization that preyed on Scheme, California financially distressed homeowners. Jalan and other An OIG investigation found evidence of a wide- conspirators used these entities to extract hundreds of ranging conspiracy in which numerous conspirators thousands of dollars from homeowners on the basis engaged in several schemes to fraudulently obtain of false promises and misrepresentations. Many of the money, including: a “flopping” scheme where banks underlying loans were owned by the Enterprises. were convinced to accept short sale prices that were Typically, Jalan contacted struggling borrowers and lower than a legitimate buyer would be willing to convinced them to pay upfront fees in exchange pay, recording false second and third liens, tricking for mortgage relief services which, ultimately, were distressed homeowners into signing their properties never provided. To gain her victims’ trust, Jalan used over to the conspirators, and renting distressed the stolen identities of several unsuspecting lawyers properties while simultaneously stalling foreclosure to trick the homeowners into thinking she was a through the use of fraudulent documents. Mortgages lawyer. In some instances, Jalan falsely represented on at least eight of the properties were owned by the that she was affiliated with a government agency. In a Enterprises, causing losses to date of $300,000. previous reporting cycle, Jalan pled guilty to charges On December 3, 2015, the following individuals of mail fraud and aggravated identity theft for her received sentences ranging from 6 years in prison to role in the scheme. 80 days in custody with 5 years of probation: James On October 5, 2015, Jalan was sentenced to Styring, Joseph Jaime, Deanna Bashara, and Delia 70 months in prison, 3 years of supervised release, Wolfe. Varying amounts of restitution from $50,000 and ordered to pay restitution of $236,785. to $596,232 were also ordered. Sentencing in Loan Modification Scheme, Loan Modification and Property California Disposition Schemes Michael Nazarinia, in conjunction with the law These schemes prey on homeowners who are firm Haffar & Associates and other co-conspirators, in default or are at risk of imminent default on participated in a loan modification scheme that their home loans. Businesses advertise that they contacted distressed homeowners and promised to can secure loan modifications, provided that the facilitate loan modifications on the homeowners’ homeowners pay significant upfront fees. Typically, behalf in exchange for upfront payments. these businesses take little or no action, leaving Conspirators at Haffar & Associates made false homeowners in a worse position. Below are some representations to prospective clients, including that highlights of OIG investigations that resulted the firm had a 98% success rate in obtaining loan in criminal plea agreements and sentencings in modifications and that each case would be handled this category during this semiannual reporting by an attorney. More than 1,000 homeowners were period. (See Appendix I for a summary of publicly convinced to sign up for the loan modification reportable investigative outcomes in this category.) services and paid the upfront fee. In reality, however, the homeowners were provided with little to no 40 Federal Housing Finance Agency Office of Inspector General services at all and their homes went into foreclosure, $3.8 million, with approximately $1.1 million in eight of which were owned by Fannie Mae. As potential losses to the Enterprises. Seko did not a result of the foreclosures, Fannie Mae suffered plead guilty and is awaiting trial. more than $1.1 million in losses. Nazarinia’s role in Two other schemers, Joshua Sanchez and Kristen the scheme included supervising and training case Ayala, were sentenced on October 29, 2015, after managers, developing underwriting guidelines for pleading guilty to conspiracy to commit wire fraud. new clients, and devising the borrower’s checklist. Sanchez was sentenced to 151 months in prison and On October 26, 2015, Nazarinia pled guilty to mail 3 years of supervised release. Ayala was sentenced fraud and filing a false tax return, and on February 8, to 135 months in prison and 3 years of supervised 2016, he was sentenced to 9 months in prison and release. 3 years of supervised release. Stacy Tuers, another co-conspirator, was sentenced on March 10, 2016, Property Management and REO Schemes for his role in this modification scheme. The wave of foreclosures following the housing crisis left the Enterprises with an inventory of real estate Five Pled and Two Sentenced in Loan owned (REO) properties (i.e., properties that the Modification Scheme, California Enterprises took back in foreclosure, possess, and In November 2015, Roscoe Umali, Joshua Johnson, are responsible to maintain). This REO inventory Isaac Perez, Raymund Dacanay, Jefferson Maniscan, has sparked a number of different schemes to either and Hanh (Jennifer) Seko were arrested for allegedly defraud the Enterprises, which use contractors to participating in a nationwide loan modification secure, maintain and repair, price, and ultimately sell scheme. their properties, or defraud individuals seeking to purchase REO properties from the Enterprises. During March 2016, five of the co-defendants pled guilty to conspiracy to commit wire fraud. Below is an example of an OIG investigation that According to statements of facts filed with resulted in a sentencing in this category during their plea agreements, Umali, Johnson, Perez, this semiannual reporting period. (See Appendix J Dacanay, Mansican, and others made a series of for a summary of publicly reportable investigative misrepresentations to struggling homeowners in outcomes in this category.) order to induce the homeowners to make payments of thousands of dollars in exchange for supposed Real Estate Agent Sentenced to Prison, Illinois home loan modification assistance. The defendants On February 9, 2016, Harry Simons, owner of an allegedly convinced struggling homeowners to Illinois RE/MAX real estate office, was sentenced to make several “trial mortgage payments” directly to 120 days of incarceration, with credit for 33 days the conspirators rather than to the homeowners’ of time already served, 48 months of probation, mortgage lenders. The defendants then did nothing and ordered to pay restitution in the amount of to help modify any mortgages, no services were $140,300. Simons was convicted on November 23, provided, and the defendants allegedly used the 2015, for multiple counts of theft. money they received for their own benefit. The scheme victimized over 400 individuals and According to evidence presented in court, from late families and resulted in overall losses estimated at 2013 to early 2014, Simons stole escrow money provided by potential real estate buyers to use Semiannual Report to the Congress • October 1, 2015–March 31, 2016 41 for his business operating expenses and personal scheme involving hundreds of fraudulent transactions. The earnest money of at least 12 clients, bankruptcies and deeds of trust. valued at over $100,000, was stolen by Simons. RE/ The schemers worked for and operated Trustee Sale MAX County Line was an approved Fannie Mae Stoppers, Property Assistance, Asset Help, as well REO broker. At least five of the properties involved as other businesses out of Los Angeles, California. in the scheme were Fannie Mae REO properties. Surabi and Karikorian contacted homeowners who Simons’ broker license was revoked by the state of were in foreclosure and facing a trustee’s sale and Illinois in early 2014. Fannie Mae lost approximately promised that they would delay the trustee’s sale for $17,000 on the deals that were completed. up to 36 months for an initial payment of $750 to over $1,000, and a $750 per month fee thereafter. Adverse Possession Schemes To accomplish the delays, Karikorian and Surabi Adverse possession schemes use illegal adverse caused a series of fraudulent bankruptcies to be filed, possession (also known as “home squatting”) or mostly in the Northern and Central Judicial Districts fraudulent documentation to control distressed of California. They would also file backdated “short homes, foreclosed homes, and REO properties. form Deed of Trust and assignment of rent” forms Below are some highlights of OIG investigations that against the clients’ homes, which included several resulted in criminal charges, a plea agreement, and d/b/a companies as well as Velasquez and others sentencings in this category during this semiannual as beneficiaries. At least 60 fraudulent deeds of reporting period. (See Appendix K for a summary trust were recorded at the direction of Surabi and of publicly reportable investigative outcomes in this Karikorian. category.) At least 11 of the properties involved were Sentencings in Fraudulent Deed Scheme, Freddie Mac-owned, resulting in a credit loss of California approximately $817,955; the overall exposure on these properties is approximately $4.4 million. On February 11, 2016, Shara Surabi, Panik Karikorian, and Juan Velasquez were sentenced for Guilty Plea in REO/Deed Theft Scheme, California their roles in a foreclosure rescue scheme. All three defendants were sentenced to 4 months in prison, On January 5, 2016, former real estate agent Mazen followed by 5 years of probation. The sentencings Alzoubi pled guilty to conspiracy to commit mail occurred shortly after no contest pleas to conspiracy and wire fraud, mail fraud, aggravated identity theft, were entered by defendants Surabi and Velasquez in money laundering conspiracy, and criminal forfeiture late December 2015, along with Karikorian’s plea associated with his role in a REO/deed theft scheme. of no contest to being an accessory after the fact Alzoubi and his co-defendants, Daniel Deaibes during the same time period. On February 24, 2016, and Mohamad Daoud, operated a scheme to steal Eugene Fulmer, a fourth co-conspirator, pled guilty properties from the Enterprises and others by forging to his role in this foreclosure rescue scheme. grant deeds granting the underlying properties to shell According to court documents, from early 2011 companies they created and filing the deeds in the to early 2014, Surabi, Karikorian, Velasquez, and county recorder’s office. By recording these fraudulent co-conspirators collected more than $2 million in deeds, the defendants made the transfers appear proceeds from their foreclosure-delay/eviction-delay legitimate. The stolen properties were then marketed 42 Federal Housing Finance Agency Office of Inspector General and sold, using a legitimate title and escrow company, into an escrow account and that he would use the to unwitting investors. Once the sale proceeds were payments to negotiate their debt with credit card wired to the defendants’ bank accounts, the money companies. In reality, Longordo put the victims’ was either wired overseas or transferred numerous funds into a regular bank account and allegedly made times in an attempt to launder the money. withdrawals for personal use. Losses to the GSEs have not yet been determined in this case. As investigators closed in on the defendants and successfully stopped the sale of stolen properties, the defendants changed tactics and fraudulently Outreach assumed control over an LLC that owned many investment properties. The defendants, while acting OIG develops public-private partnerships where as owners of the stolen LLC, attempted to obtain appropriate. We delivered 22 fraud awareness hard money loans using the properties owned by the briefings to different audiences to raise awareness of LLC as collateral. OIG’s law enforcement mission and of fraud schemes targeting FHFA programs. By the time the defendants were indicted and arrested, they had either sold or attempted to sell 15 OIG has developed and intends to further strengthen properties worth more than $3.6 million. On at least ongoing close working relationships with other law 10 occasions, the defendants were successful and enforcement agencies, including DOJ and U.S. earned nearly $2.2 million in illicit proceeds. Attorneys’ offices; the FBI; HUD-OIG; the FDIC- OIG; IRS-CI; SIGTARP; the Financial Crimes At least 10 of the properties stolen by the Enforcement Network; state attorneys general; defendants were owned by the Enterprises, valued at mortgage fraud working groups; and other federal, over $2.5 million. state, and local law enforcement agencies nationwide. OI also works closely with Fannie Mae’s Mortgage Charges Filed in Foreclosure Rescue Scheme, Fraud Program and with Freddie Mac’s Financial Michigan Fraud Investigation Unit. On March 9, 2016, Pasquale Longordo and his During this reporting period OIG worked with company, Modify Loan Experts, LLC, were charged additional local and state partners, including the for allegedly stealing money from homeowners Ventura County California District Attorney’s facing mortgage foreclosures or who needed help Office, King County Washington District Attorney’s managing their credit card debt. Office, Wayne County Prosecutor’s Office, DuPage Longordo and Modify Loan Experts allegedly County State Attorney’s Office, Burr Ridge promised victims that an attorney would be assigned Police Department, California Department of to negotiate mortgage modifications with mortgage Justice, California Franchise Tax Board, New York companies on the homeowners’ behalf. However, this Department of Financial Services, Prince George’s did not happen and many victims lost their homes as County Police Department, Montgomery County a result. Police Department, and the Loudon County Sheriff’s Office. Additionally, Longordo, who also operated a credit card debt management service, allegedly told debt management victims he was putting their funds Semiannual Report to the Congress • October 1, 2015–March 31, 2016 43 Investigations: Administrative “engaged in covered misconduct.” Suspension of such Actions counterparties is warranted to protect the safety and soundness of the regulated entities. For purposes of the program, covered misconduct means “convictions In addition to the criminal cases brought as a result of or administrative sanctions within the past three years OIG investigations, OI’s investigative work regularly based on fraud or similar misconduct in connection results in administrative referrals to other entities with the mortgage business.”9 for action. For example, a criminal case of mortgage fraud that results in a guilty plea by a licensed real During this reporting period, OIG made 37 referrals estate agent, attorney, or certified public accountant of counterparties to FHFA for consideration for participation in a bank fraud scheme may result of potential suspension under its Suspended in a referral by OIG to a state licensing body for Counterparty Program. disciplinary actions. Where a real estate professional is prosecuted for mortgage fraud, that prosecution A summary of OIG’s referrals during the reporting may cause OIG to refer the matter to another federal period is captured in Figure 8 (see below). agency for possible suspension or debarment of that individual from participation in federal programs. Figure 8. Administrative Actions from October 1, During this reporting period, OIG made 63 referrals 2015, Through March 31, 2016 for suspension and debarment. Administrative Actions Suspension/Debarment Referrals 63 Suspended Counterparty Referral to FHFA Suspended Counterparty 37 Program Referrals FHFA has adopted a Suspended Counterparty Program under which it issues “suspension orders directing the regulated entities to cease or refrain” from doing business with counterparties (and their affiliates) who were previously found to have 44 Federal Housing Finance Agency Office of Inspector General OIG’s Regulatory Activities and Outreach Regulatory Activities The Proposed Rule provides that the Agency will use the Plans to create annual, Enterprise-specific Pursuant to the Inspector General Act, OIG assesses evaluation guides (Guides), which shall include whether proposed legislation and regulations the specific considerations that FHFA will use to related to FHFA are efficient, economical, legal, or evaluate whether, and the extent to which, the susceptible to fraud and abuse. During this reporting Enterprises have complied with their duty to serve period, OIG reviewed two proposed and four final the Underserved Markets.14 rules subsequently published by FHFA. One of The Proposed Rule does not specify what evaluation the Agency’s proposed rules is entitled “Enterprise factors the Guides will contain, other than they Duty to Serve Underserved Markets” (Duty to Serve will be based in part on each Enterprise’s Plan.15 Rule or Proposed Rule), which FHFA published on This approach could result in the Enterprises being December 18, 2015.10 evaluated based on disparate criteria rather than a The Proposed Rule relates to a requirement in The common standard. By publishing the Guides after Safety and Soundness Act (Act), which directs the the Enterprises have issued their Plans, FHFA may Enterprises to “provide leadership to the market in hinder the Enterprises’ ability to formulate and developing loan products and flexible underwriting implement compliant Plans. As the Proposed Rule guidelines to facilitate a secondary mortgage specifies that FHFA intends to establish specific market for mortgages for very low-, low-, and evaluation criteria in Guides that are not subject to moderate-income families” for three underserved statutory notice and comment requirements, OIG markets: manufactured housing, affordable housing has concerns that this proposed course of action preservation, and rural markets (Underserved will not satisfy the Act’s mandate that the Agency Markets).11 The Act also requires the Director, establish by regulation its manner for evaluating the effective in 2010, to promulgate a regulation that sets Enterprises’ compliance with their duty to serve. forth FHFA’s process to evaluate whether, and the The Proposed Rule also provides that the Agency will extent to which, the Enterprises have complied with use its Guide to award up to 100 “scoring points” their duty to serve the Underserved Markets and for to each Enterprise for each of three underserved rating the extent to which they did so. This is the markets.16 The proposed regulation provides that the Agency’s second attempt to implement this obligation scoring points will be awarded “based on FHFA’s under the Act. FHFA originally published a Notice of assessment of how well the Enterprise performed [its Proposed Rulemaking and Request for Comments on Underserved Markets Plan’s] activity and associated June 7, 2010, but never issued a final rule.12 objectives during the evaluation year[.]”17 However, FHFA’s Proposed Rule requires that each Enterprise the Proposed Rule does not explain the specific submit to FHFA an “Underserved Markets Plan” manner in which the Agency will assess performance (Plan) describing how it will satisfy their duty to or award points. For example, the Proposed Rule serve Underserved Markets13 and enumerating provides that FHFA intends to create four overall several assessment factors that FHFA will use to ratings by which it might label each Enterprise’s evaluate the Enterprise’s compliance with its Plan. compliance in a given year—“Exceeds,” “High Semiannual Report to the Congress • October 1, 2015–March 31, 2016 45 Satisfactory,” “Low Satisfactory,” and “Fails”—but to prevent fraud, encourage transparency, and ensure provides no guidance regarding the actual scores accountability, responsibility, and ethical leadership. that must be earned in order to receive a particular Highlights of our efforts during this reporting period rating.18 OIG has concerns that this lack of clarity include the following. regarding the manner in which FHFA will evaluate the Enterprises’ compliance creates an ambiguity Congress that could lead to Administrative Procedures Act challenges to any future compliance findings.19 To fulfill its mission, OIG works closely with Congress and is committed to keeping it fully In sum, the Proposed Rule reserves to FHFA the apprised of our oversight of FHFA. During this ability to rate the Enterprises based upon points for semiannual reporting period, OIG provided which no scoring rules are provided using a currently information and briefings to congressional nonexistent evaluation Guide, which FHFA will committees and offices. We also endeavor to inform create outside of the Proposed Rule based largely on Congress through responses to numerous technical each Enterprise’s Plan. assistance and information requests, as well as replies to formal written inquiries from members of Public and Private Partnerships, Congress on various topics. Outreach, and Communications Hotline The Enterprises and the FHLBanks play a critical role During this reporting period, the OIG hotline in the U.S. housing finance system, and the recent continued to serve as a vehicle through which financial crisis has shown that financial distress at Agency, Enterprise, and FHLBank employees and the Enterprises and deteriorating conditions in U.S. members of the public can report suspected fraud, housing and financial markets threaten the U.S. waste, abuse, mismanagement, or misconduct in economy. American taxpayers put their money and Agency programs and operations. The individuals confidence in the hands of regulators and lawmakers reporting can choose to remain anonymous or to restore stability to the economy and decisions were disclose their identity. OIG actively promotes its made to invest $187.5 billion in the Enterprises. The hotline in multiple ways, including its website, continuing significant role of the Enterprises and posters, and public reports. During this reporting FHLBanks in housing finance demands constant period, the hotline received 1,125 contacts, which supervision and monitoring. Fundamental to OIG’s included: reports of alleged misconduct that were mission is independent and transparent oversight referred to OI for potential investigation, reports of Agency programs and operations, and of the of matters related to other agencies, requests for Enterprises to the extent FHFA, as conservator, has assistance on housing-related issues, and complaints delegated responsibilities to them. related to the Enterprises, FHLBanks, member banks, and related entities and individuals. OIG prioritizes outreach and engagement to communicate its mission and work to members of Close Coordination with Other Oversight Congress and to the public and to actively participate Organizations in government-wide oversight community activities. We continue to forge public and private partnerships OIG shares oversight of federal housing program administration with other federal agencies, 46 Federal Housing Finance Agency Office of Inspector General including HUD, the Department of Veterans professional standards, developing protocols, Affairs, the Department of Agriculture, and promoting the use of advanced techniques, Treasury’s Office of Financial Stability (which and fostering awareness of best practices. manages the Troubled Asset Relief Program); their During this semiannual period, the committee IGs; and other law enforcement organizations. continued its work on a peer review program To further the oversight mission, we coordinate for inspection and evaluation units in the with these entities to exchange best practices, case IG community. The peer review is designed information, and professional expertise. During to assess organizations’ work under CIGIE’s the reporting period, OIG made numerous Blue Book (January 2012) and to promote presentations to state and local law enforcement credibility of such work by validating the agencies, prosecutors, mortgage fraud working organizations’ work processes and evaluating groups across the country, and individual federal their objectivity, independence, and rigorous agencies responsible for investigating mortgage adherence to applicable standards. The fraud, such as HUD-OIG, the FBI, U.S. Postal Committee’s training team, of which OIG is Inspection Service, IRS-CI, and DOJ. an active member, also planned and sponsored training and development sessions and We maintained active participation in coordinated learning forums for inspection and evaluation oversight activities during this reporting period: staff from across the IG community, including • RMBS Working Group. OIG continued its a weeklong course teaching the fundamentals significant role in the RMBS Working Group. of conducting and writing inspections and (See discussion at “Investigations: Civil Cases,” evaluations. pages 33-34.) ºº The Investigation Committee advises the • FBI Cybercrimes Task Force. The FBI’s IG community on issues involving criminal Washington, DC, field office spearheads a investigations, criminal investigations cybercrimes task force, and OIG has assigned personnel, and establishing criminal two special agents to it. This multi-agency task investigative guidelines. During this force focuses on investigating cybercrimes. OIG semiannual period, the Investigations made this assignment to help combat such Committee, in conjunction with the crimes and to work in partnership with multiple Legislation Committee, drafted a report federal agencies. This concerted effort will help on the history, requirements, and necessity prosecute cybercriminals and stop cyber attacks of law enforcement authority in the IG made against institutions maintaining personally community. Additionally, the committee identifiable information, trade secrets, and hosted a meeting for all federal IGs at the financial data. Federal Law Enforcement Training Center to discuss the future agent and training agent • CIGIE. OIG actively participates in several leaders. A committee working group, chaired CIGIE committees and working groups. by OIG, continued work on a project to ºº The Inspection and Evaluation Committee review and make recommendations regarding provides leadership for the CIGIE inspection the quality standards for investigations and the and evaluation community’s effort to improve investigations peer review process. Finally, OIG agency program effectiveness by maintaining chairs the Investigations Subcommittee (hosted Semiannual Report to the Congress • October 1, 2015–March 31, 2016 47 under CIGIE’s Information Technology Private-Public Partnerships Committee) that focuses on digital forensics Housing finance professionals are on the frontlines and computer crime investigations. and often have a real-time understanding of emerging • Council of Inspectors General on Financial threats and misconduct. We speak regularly with Oversight (CIGFO). CIGFO was created by the officials at the FHLBanks and the Enterprises to Dodd-Frank Wall Street Reform and Consumer benefit from their insights and make presentations Protection Act of 2010 to oversee FSOC, to industry groups. Recent presentations include which is charged with strengthening the nation’s Appraisal Expo attendees, International Association financial system. OIG is a permanent member of Financial Crimes Investigators, the Mortgage of CIGFO, along with the IGs of Treasury, the Bankers Association, financial institution FDIC, the SEC, and others. By statute, CIGFO investigators, and Fidelity National Title Group, audits FSOC each year. OIG participates in focusing on fraud trends and emerging schemes in a CIGFO working group that conducts those the mortgage industry. annual audits. This year CIGFO is coordinating a review of FSOC’s efforts to promote market discipline. Specifically, the working group will assess FSOC’s efforts to eliminate expectations by shareholders, creditors, and counterparties of large bank holding companies or nonbank financial companies that the government will shield them from losses in the event of failure. 48 Federal Housing Finance Agency Office of Inspector General Semiannual Report to the Congress • October 1, 2015–March 31, 2016 49 Appendices Appendix A: by improving accountability and transparency in the financial system, ending “too big to fail,” protecting Glossary and Acronyms the American taxpayer by ending bailouts, and protecting consumers from abusive financial services practices. Glossary of Terms Emergency Economic Stabilization Act of 2008: Bankruptcy: A legal procedure for resolving debt Legislation that authorizes Treasury to undertake problems of individuals and businesses; specifically, a specific measures to provide stability and prevent case filed under one of the chapters of Title 11 of the disruption in the financial system and the economy. U.S. Code. It also provides funds to preserve homeownership. Fannie Mae: A federally chartered corporation that Bonds: Obligations by a borrower to eventually repay money obtained from a lender. The buyer of purchases residential mortgages and pools them into the bond (or “bondholder”) is entitled to receive securities that are sold to investors. By purchasing payments from the borrower. mortgages, Fannie Mae supplies funds to lenders so they may make loans to home buyers. Conservatorship: Conservatorship is a legal Federal Home Loan Bank System: The FHLBanks procedure for the management of financial institutions for an interim period during which the are 11 regional cooperative banks that U.S. lending institution’s conservator assumes responsibility for institutions use to finance housing and economic operating the institution and conserving its assets. development in their communities. Created by Under the Housing and Economic Recovery Act of Congress, the FHLBanks have been the largest source 2008, the Enterprises entered into conservatorships of funding for community lending for eight decades. overseen by FHFA. As conservator, FHFA has The FHLBanks provide loans (or “advances”) to their undertaken to preserve and conserve the assets of the member banks but do not lend directly to individual Enterprises and restore them to safety and soundness. borrowers. FHFA also has assumed the powers of the boards of Foreclosure: A legal process used by a lender to directors, officers, and shareholders; however, the day- obtain possession of a mortgaged property in order to to-day operational decision making of each company repay part or all of the debt. is delegated by FHFA to the Enterprises’ existing management. Freddie Mac: A federally chartered corporation that purchases residential mortgages, pools them into Default: Occurs when a mortgagor misses one or securities, and sells them to investors. By purchasing more payments. mortgages, Freddie Mac supplies funds to lenders so Dodd-Frank Wall Street Reform and Consumer they may make loans to home buyers. Protection Act of 2010: Legislation that intends to Ginnie Mae: A government-owned corporation promote the financial stability of the United States within HUD. Ginnie Mae guarantees investors the 50 Federal Housing Finance Agency Office of Inspector General timely payment of principal and interest on privately Internal Controls: Internal controls are an integral issued mortgage-backed securities backed by pools of component of an organization’s management that government-insured and -guaranteed mortgages. provide reasonable assurance that the following objectives are achieved: (1) effectiveness and efficiency Government-Sponsored Enterprises: Business of operations, (2) reliability of financial reports, and organizations chartered and sponsored by the federal (3) compliance with applicable laws and regulations. government. Internal controls relate to management’s plans, Guarantee: A pledge to investors that the guarantor methods, and procedures used to meet its mission, will bear the default risk on a pool of loans or other goals, and objectives and include the processes and collateral. procedures for planning, organizing, directing, and controlling program operations as well as the systems Housing and Economic Recovery Act of 2008: for measuring, reporting, and monitoring program Legislation that establishes OIG and FHFA, which performance. oversee the GSEs’ operations. HERA also expanded Treasury’s authority to provide financial support to Mortgage-Backed Securities: Debt securities that the GSEs. represent interests in the cash flows—anticipated principal and interest payments—from pools of Inspector General Act of 1978: Legislation that mortgage loans, most commonly on residential authorizes establishment of offices of inspectors property. general, “independent and objective units” within federal agencies, that: (1) conduct and supervise OIG Fiscal Year 2016: OIG’s FY16 covers audits and investigations relating to the programs and October 1, 2015, through September 30, 2016. operations of their agencies; (2) provide leadership Real Estate Owned: Foreclosed homes owned by and coordination and recommend policies for government agencies or financial institutions, such as activities designed to promote economy, efficiency, the Enterprises or real estate investors. REO homes and effectiveness in the administration of agency represent collateral seized to satisfy unpaid mortgage programs and to prevent and detect fraud, waste, loans. The investor or its representative then must sell or abuse in such programs and operations; and the property on its own. (3) provide a means for keeping the head of the agency and Congress fully and currently informed Securitization: A process whereby a financial about problems and deficiencies relating to the institution assembles pools of income-producing administration of such programs and operations and assets (such as loans) and then sells securities the necessity for and progress of corrective action. representing an interest in the assets’ cash flows to investors. Inspector General Reform Act of 2008: Legislation that amends the Inspector General Act to Senior Preferred Stock Purchase Agreements: enhance the independence of inspectors general and Entered into at the time the conservatorships were to create the Council of the Inspectors General on created, the PSPAs authorize the Enterprises to Integrity and Efficiency. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 51 request and obtain funds from Treasury, among other Straw Buyer: A straw buyer is a person whose credit matters. Under the PSPAs, the Enterprises agreed profile is used to serve as a cover in a loan transaction. to consult with Treasury concerning a variety of Straw buyers are chosen for their ability to qualify for significant business activities, capital stock issuance, a mortgage loan, causing loans that would ordinarily dividend payments, ending the conservatorships, be declined to be approved. Straw buyers may be paid transferring assets, and awarding executive a fee for their involvement in purchasing a property compensation. and usually never intend to own or occupy the property. Servicers: Servicers act as intermediaries between mortgage borrowers and owners of the loans, such Underwater: Term used to describe situations in as the Enterprises or mortgage-backed securities which the homeowner’s equity is below zero (i.e., the investors. They collect the homeowners’ mortgage home is worth less than the balance of the loan(s) it payments, remit them to the owners of the secures). loans, maintain appropriate records, and address Underwriting: The process of analyzing a loan delinquencies or defaults on behalf of the owners application to determine the amount of risk of the loans. For their services, they typically involved in making the loan; it includes a review of receive a percentage of the unpaid principal balance the potential borrower’s credit worthiness and an of the mortgage loans they service. The recent assessment of the property value. financial crisis has put more emphasis on servicers’ handling of defaults, modifications, short sales, and Upfront Fees: One-time payments made by lenders foreclosures, in addition to their more traditional when a loan is acquired by an Enterprise. Fannie duty of collecting and distributing monthly mortgage Mae refers to upfront fees as “loan level pricing payments. adjustments” and Freddie Mac refers to them as “delivery fees.” Short Sale: The sale of a mortgaged property for less than what is owed on the mortgage. 52 Federal Housing Finance Agency Office of Inspector General References Federal Housing Finance Agency, “Introduction,” Federal Home Loan Bank Membership, at 1 (March United States Courts, Bankruptcy Basics: Glossary. 2013). Accessed: April 21, 2016, at www.fhfa. Accessed: April 21, 2016, at www.uscourts.gov/ gov/SupervisionRegulation/Documents/Federal_ FederalCourts/Bankruptcy/BankruptcyBasics/ Home_Loan_Bank_Membership_Module_Final_ Glossary.aspx. Version_1.0_508.pdf. Freddie Mac, Glossary of Finance and Economic Terms. Freddie Mac, About Freddie Mac. Accessed: April 21, Accessed: April 21, 2016, at www.freddiemac.com/ 2016, at www.freddiemac.com/corporate/about_ smm/a_f.htm. freddie.html. Federal Housing Finance Agency, FHFA as Ginnie Mae, Ginnie Mae & the GSEs. Accessed: Conservator of Fannie Mae and Freddie Mac. Accessed: April 21, 2016, at www.ginniemae.gov/consumer_ April 21, 2016, at www.fhfa.gov/Conservatorship/ education/Pages/ginnie_mae_and_the_gses.aspx. Pages/History-of-Fannie-Mae--Freddie- W. Scott Frame and Lawrence J. White, Regulating Conservatorships.aspx. Housing GSEs: Thoughts on Institutional Structure Federal Housing Finance Agency, FHFA Announces and Authorities, Federal Reserve Bank of Atlanta: Suspension of Capital Classifications During Economic Review, Vol. Q2 2004, at 87 (2004). Conservatorship: Discloses Minimum and Risk- Accessed: April 21, 2016, at www.frbatlanta.org/ Based Capital Classifications as Undercapitalized research/publications/economic-review/2004/q2/ for the Second Quarter 2008 for Fannie Mae and vol89no2_regulating-housing-gses.aspx (click on pdf Freddie Mac (October 9, 2008). Accessed: April “Download the full text of this article”). 21, 2016, at www.fhfa.gov/Media/PublicAffairs/ Freddie Mac, Glossary of Finance and Economic Terms. Pages/FHFA-Announces-Suspension-of-Capital- Accessed: April 21, 2016, at www.freddiemac.com/ Classifications-During-Conservatorship-and- smm/g_m.htm. Discloses-Minimum-and-RiskBased-Cap.aspx. Government Accountability Office, Management Office of the Special Inspector General for the Report: Opportunities for Improvements in FHFA’s Troubled Asset Relief Program, “Glossary of Terms,” Internal Controls and Accounting Procedures, GAO-10- “Genesis and Passage of EESA,” SIGTARP: Initial 587R, at 1 (June 3, 2010). Accessed: April 21, 2016, Report to the Congress, at 29, 111 (February 6, 2009). at www.gao.gov/assets/100/96782.pdf. Accessed: April 21, 2016, at www.sigtarp.gov/ Quarterly%20Reports/SIGTARP_Initial_Report_to_ Inspector General Act of 1978, Pub. L. No. 95-452. the_Congress.pdf. Inspector General Reform Act of 2008, Pub. L. No. Dodd-Frank Wall Street Reform and Consumer 110-409. Protection Act of 2010, Pub. L. No. 111-203. Government Accountability Office, “Introduction,” Emergency Economic Stabilization Act of 2008, Pub. “Internal Control Standards,” Internal Control: L. No. 110-343. Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1, at 4, 6, 8 Department of Housing and Urban Development, (November 1999). Accessed: April 21, 2016, at www. Glossary. Accessed: April 21, 2016, at www.huduser. gao.gov/special.pubs/ai00021p.pdf. org/portal/glossary/glossary_g.html#gse. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 53 Securities and Exchange Commission, Mortgage- Freddie Mac, “Straw Buyers,” Shut the Door on Backed Securities. Accessed: April 21, 2016, at www. Mortgage Fraud: Information on How to Avoid sec.gov/answers/mortgagesecurities.htm. Mortgage Fraud, at 13, 15. Accessed: April 21, 2016, at www.freddiemac.com/singlefamily/preventfraud/ Office of the Special Inspector General for toolkit.html (scroll to “Shut the Door on Mortgage the Troubled Asset Relief Program, “Recent Fraud,” then click “English [PPT]” under Developments,” SIGTARP: Quarterly Report to “Educational Presentation: Avoid Mortgage Fraud,” Congress, at 150 (October 26, 2010). Accessed: April then download the PowerPoint file). 21, 2016, at www.sigtarp.gov/Quarterly%20Reports/ October2010_Quarterly_Report_to_Congress.pdf. Office of the Special Inspector General for the Troubled Asset Relief Program, “Homeowner Freddie Mac, Our Business: Single-Family Credit Support Programs,” SIGTARP: Quarterly Report to Guarantee Business. Accessed: April 21, 2016, at Congress, at 65 (January 26, 2011). Accessed: April www.freddiemac.com/corporate/company_profile/ 21, 2016, at www.sigtarp.gov/Quarterly%20Reports/ our_business/index.html. January2011_Quarterly_Report_to_Congress.pdf. Federal Housing Finance Agency, Senior Indiana Secretary of State Securities Division, Preferred Stock Purchase Agreements. Investment Terms. Accessed: April 21, 2016, at www. Accessed: April 21, 2016, at www.fhfa.gov/ in.gov/sos/securities/2494.htm. senior-preferred-stock-purchase-agreements. Freddie Mac, “PCs,” Form 10-K for the Fiscal Year Federal Housing Finance Agency Office of Inspector Ended December 31, 2013, at 10. Accessed: April General, “Treasury Agreements,” White Paper: FHFA- 21, 2016, at www.freddiemac.com/investors/er/ OIG’s Current Assessment of FHFA’s Conservatorships of pdf/10k_022714.pdf. Fannie Mae and Freddie Mac, WPR-2012-001, at 19 (March 28, 2012). Accessed: April 21, 2016, at www. fhfaoig.gov/Content/Files/WPR-2012-001.pdf. Letter from David H. Stevens, Assistant Secretary for Housing, Department of Housing and Urban Development, to All Approved Mortgagees, FHA Refinance of Borrowers in Negative Equity Positions (August 6, 2010). Accessed: April 21, 2016, at www. hud.gov/offices/adm/hudclips/letters/mortgagee/ files/10-23ml.pdf. 54 Federal Housing Finance Agency Office of Inspector General Acronyms and Abbreviations HERA Housing and Economic Recovery Act of 2008 Agency Federal Housing Finance Agency HUD-OIG Department of Housing and Urban Blue Book Quality Standards for Inspection and Development Office of Inspector Evaluation General CIGFO Council of Inspectors General on IC Investigative Counsel Financial Oversight IG Inspector General CIGIE Council of the Inspectors General on IPIA Improper Payments Information Act of Integrity and Efficiency 2002 CSP Common Securitization Platform IRS-CI IRS-Criminal Investigation DBR Division of Federal Home Loan Bank IT Information Technology Regulation MLS Multiple Listing Service DER Division of Enterprise Regulation MRA Matter Requiring Attention DHMG Division of Housing Mission and Goals NIST National Institute of DOJ Department of Justice Framework Standards and Technology Framework ECB Executive Compensation Branch for Improving Critical Infrastructure Cybersecurity Enterprises Fannie Mae and Freddie Mac OA Office of Audits EO Executive Office OAd Office of Administration FBI Federal Bureau of Investigation OC Office of Chief Counsel FDIC Federal Deposit Insurance Corporation OCC Office of the Comptroller of the FFIEC Federal Financial Institutions Currency Examination Council OCo Office of Compliance and Special FHFA Federal Housing Finance Agency Projects FHLBanks Federal Home Loan Banks OE Office of Evaluations FISMA Federal Information Security OFHEO Office of Federal Housing Enterprise Management Act of 2002 Oversight FSOC Financial Stability Oversight Council OI Office of Investigations FY16 Fiscal Year 2016 OIG Federal Housing Finance Agency Office of Inspector General GAO Government Accountability Office PSB Plains State Bank GSEs Government-Sponsored Enterprises Semiannual Report to the Congress • October 1, 2015–March 31, 2016 55 PSPAs Senior Preferred Stock Purchase SAUSA Special Assistant U.S. Attorney Agreements SEC Securities and Exchange Commission REO Real Estate Owned SIGTARP Office of the Special Inspector General RMBS Residential Mortgage-Backed Securities for the Troubled Asset Relief Program ROE Report of Examination SIR Systemic Implication Report RTS Recommendation Tracking System Treasury Department of the Treasury SA Special Agent Yellow Government Auditing Standards Book SAI Servicing Alignment Initiative 56 Federal Housing Finance Agency Office of Inspector General Semiannual Report to the Congress • October 1, 2015–March 31, 2016 57 Appendix B: and detection of fraud, waste, or abuse. Figure 9 (see page 59) summarizes OIG’s formal public OIG Recommendations recommendations that were made, pending, or closed during the reporting period. A report with any public In accordance with the provisions of the Inspector recommendations still pending will remain in Figure General Act, one of the key duties of OIG is to 9 until all recommendations have been closed. Figure provide to FHFA recommendations that promote 10 (see page 77) lists OIG’s audit and evaluation the transparency, efficiency, and effectiveness of reports for which all of the public recommendations the Agency’s operations and aid in the prevention contained within have been closed. 58 Federal Housing Finance Agency Office of Inspector General Figure 9. Summary of OIG Public Recommendations No. Recommendation Report Status AUD-2016-002-1 FHFA should establish standards Review of FHFA’s Recommendation requiring that modifications or Tracking and agreed to by FHFA; suspensions of Scorecard targets must Rating of the implementation of be documented in writing. 2013 Scorecard recommendation Objective for the pending. New Representation and Warranty Framework Reveals Opportunities to Strengthen the Process AUD-2016-002-2 FHFA should require that FHFA Review of FHFA’s Recommendation comments and ratings on quarterly Tracking and agreed to by FHFA; rating sheets be dated. Rating of the implementation of 2013 Scorecard recommendation Objective for the pending. New Representation and Warranty Framework Reveals Opportunities to Strengthen the Process AUD-2016-002-3 FHFA should establish standards to Review of FHFA’s Recommendation address missed or partially missed Tracking and agreed to by FHFA; quarterly targets, including requiring Rating of the implementation of that every quarterly rating sheet record 2013 Scorecard recommendation when any target was missed and the Objective for the pending. reset target date. New Representation and Warranty Framework Reveals Opportunities to Strengthen the Process AUD-2016-001-1 FHFA should update its Information FHFA Should Recommendation Technology Risk Management Program Improve its agreed to by FHFA; Module to direct examiners to assess Examinations of implementation of the design of the Banks’ vulnerability the Effectiveness of recommendation scans and penetration tests when the Federal Home pending. assessing the operational effectiveness Loan Banks’ Cyber of such controls. Risk Management Programs by Including an Assessment of the Design of Critical Internal Controls Semiannual Report to the Congress • October 1, 2015–March 31, 2016 59 No. Recommendation Report Status AUD-2016-001-2 FHFA should require examiners to FHFA Should Recommendation document their assessment of the Improve its agreed to by FHFA; design of the Banks’ vulnerability Examinations of implementation of scans and penetration tests as part the Effectiveness of recommendation of their assessment of the operational the Federal Home pending. effectiveness of such controls. Loan Banks’ Cyber Risk Management Programs by Including an Assessment of the Design of Critical Internal Controls AUD-2014-016-1 FHFA should assess the current FHFA’s Recommendation state of the Enterprises’ critical risk Representation partially agreed to assessment tools, representations and Warranty by FHFA; however, and warranties tracking systems, and Framework OIG found FHFA’s any other systems, processes, or planned actions infrastructure to determine whether “potentially the Enterprises are in a position to responsive.” minimize financial risk that may result Recommendation from the new framework. The results remains open and of this assessment should document will continue to be any areas of identified risk, planned monitored. actions, and corresponding timelines to mitigate each area of identified risk. Further, this assessment should provide an estimate of when each Enterprise will be reasonably equipped to work safely and soundly within the new framework. AUD-2014-016-2 FHFA should perform a comprehensive FHFA’s Closed— analysis to assess whether financial Representation Recommendation risks associated with the new and Warranty rejected. representation and warranty framework, Framework including with regard to sunset periods, are appropriately balanced between the Enterprises and sellers. This analysis should be based on consistent transactional data across both Enterprises, identify potential costs and benefits to the Enterprises, and document consideration of the Agency’s objectives. 60 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status AUD-2014-015-1 FHFA should communicate a written FHFA Oversight Closed—Final supervisory expectation to Fannie of Fannie Mae’s action taken by Mae requiring that its business units Collection of Funds FHFA. perform a review of non-delegated from Servicers short sale transactions to identify that Closed Short any transactions where the servicer Sales Below the submitted net proceeds that were less Authorized Prices than the sale amount approved by Fannie Mae and draft a remediation plan, as appropriate. AUD-2014-015-2 FHFA should communicate a written FHFA Oversight Closed—Final supervisory expectation to Fannie of Fannie Mae’s action taken by Mae requiring its internal audit group Collection of Funds FHFA. to review Fannie Mae’s plan to collect from Servicers funds for delegated and non-delegated that Closed Short short sale transactions where the net Sales Below the proceeds received were less than the Authorized Prices amounts authorized by Fannie Mae. AUD-2014-015-3 FHFA should analyze Fannie Mae’s FHFA Oversight Recommendation actions and remediation plans in of Fannie Mae’s agreed to by FHFA; response to recommendations 1 and Collection of Funds implementation of 2 to determine whether Fannie Mae from Servicers recommendation has taken necessary steps to ensure that Closed Short pending. that servicers are held accountable for Sales Below the servicing violations and credit losses Authorized Prices are minimized. FHFA should also require modification by Fannie Mae of its remediation plans, as appropriate. AUD-2014-008-1 FHFA should perform supervisory FHFA’s Oversight Closed—Final review and follow-up to ensure that of the Enterprises’ action taken by Fannie Mae takes action to change the Use of Appraisal FHFA.b portal message type from automatic Data Before They override to manual override or fatal Buy Single-Family for the 25 proprietary messages Mortgages related to underwriting requirements, which will require lenders to take action to address the appraisal- related messages warning of potential underwriting violations prior to delivering the loans. b FHFA indicated that it had substantially complied with the recommendation by changing most of the portal messages, and indicated reasons for not changing the remaining proprietary messages related to underwriting requirements. OIG considered the actions taken and the Agency’s explanation, and determined to close the recommendation as final action taken. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 61 No. Recommendation Report Status AUD-2014-008-2 FHFA should perform supervisory FHFA’s Oversight Closed—Final review and follow-up to ensure that of the Enterprises’ action taken by Freddie Mac takes action to develop Use of Appraisal FHFA. and implement additional proprietary Data Before They messages related to its property Buy Single-Family underwriting requirements. Mortgages AUD-2014-008-3 FHFA should perform supervisory review FHFA’s Oversight Closed—Final and follow-up to ensure that Freddie of the Enterprises’ action taken by Mac takes action to establish the Use of Appraisal FHFA.c additional proprietary messages related Data Before They to property underwriting requirements Buy Single-Family as manual override or fatal, which Mortgages will require the lenders to take action to address the messages prior to delivering the loans. AUD-2014-008-4 FHFA should perform supervisory review FHFA’s Oversight Closed—Final and follow-up to ensure that Freddie of the Enterprises’ action taken by Mac takes action to review the type of Use of Appraisal FHFA. message related to the existing nine Data Before They proprietary messages for consideration Buy Single-Family of converting the type of message from Mortgages automatic override to manual override or fatal, which will require the lenders to take action to address the messages prior to delivering the loans. AUD-2014-008-5 FHFA should perform supervisory review FHFA’s Oversight Recommendation of both Enterprises to ensure the portal of the Enterprises’ agreed to by FHFA; warning messages distinguish between Use of Appraisal implementation of inactive appraisers and unverified Data Before They recommendation appraisers, as of the date the appraisal Buy Single-Family pending. is performed. Mortgages AUD-2014-008-6 FHFA should perform supervisory review FHFA’s Oversight Recommendation of both Enterprises to ensure that the of the Enterprises’ agreed to by FHFA; portal tests whether appraisers are Use of Appraisal implementation of licensed and active at the time the Data Before They recommendation appraisal is performed. Buy Single-Family pending. Mortgages c FHFA indicated that it substantially implemented the recommendation and provided additional explanation for maintaining specific messages as automatic override. OIG considered the actions taken and the updated information provided by the Agency, and determined to close the recommendation as final action taken. 62 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status AUD-2014-008-7 FHFA should perform supervisory review FHFA’s Oversight Recommendation of both Enterprises to change the of the Enterprises’ agreed to by FHFA; message type, for messages relating Use of Appraisal implementation of to appraiser license status, from Data Before They recommendation automatic override to manual override Buy Single-Family pending. or fatal, which will require lenders to Mortgages take action to address the message prior to delivering the loan. This action can be taken once the system logic is fixed and the historical records are available to determine the status of an appraiser’s license at the time the appraisal work is performed, and the states are updating in real time. AUD-2014-008-8 FHFA should perform supervisory review FHFA’s Oversight Closed—Final of both Enterprises to seek remedy for of the Enterprises’ action taken by the 23 loans, valued at $3.4 million, Use of Appraisal FHFA. delivered to the Enterprises by the two Data Before They suspended appraisers in violation of Buy Single-Family underwriting requirements. Mortgages AUD-2014-008-9 FHFA should perform supervisory FHFA’s Oversight Closed—Final review and follow-up to ensure that of the Enterprises’ action taken by Freddie Mac takes action to implement Use of Appraisal FHFA. an internal control policy and related Data Before They procedures to follow up on appraisal Buy Single-Family license status messages generated by Mortgages the portal. AUD-2014-008-10 FHFA should perform supervisory review FHFA’s Oversight Closed—Final and follow-up to ensure that Freddie of the Enterprises’ action taken by Mac takes action to review loans Use of Appraisal FHFA. purchased since the portal’s inception Data Before They that generated messages related to the Buy Single-Family appraiser’s license status. Mortgages AUD-2014-008-11 FHFA should perform supervisory review FHFA’s Oversight Closed—Final and follow-up to ensure that Freddie of the Enterprises’ action taken by Mac takes action to use the results Use of Appraisal FHFA. of the review to repurchase the loans Data Before They that contained appraisals that were Buy Single-Family performed by unlicensed appraisers, as Mortgages appropriate. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 63 No. Recommendation Report Status AUD-2014-008-12 FHFA should pursue retention of FHFA’s Oversight Closed—Final historical records of the status of of the Enterprises’ action taken by appraisers’ licenses in the National Use of Appraisal FHFA. Registry of Appraisers sufficient to Data Before They determine the status of appraisers’ Buy Single-Family licenses at the time the appraisal work Mortgages is performed. AUD-2014-008-13 FHFA should pursue having the National FHFA’s Oversight Closed—Final Registry of Appraisers updated to of the Enterprises’ action taken by reflect the status of state-certified and Use of Appraisal FHFA. -licensed appraisers on a real-time Data Before They basis. Buy Single-Family Mortgages AUD-2014-008-14 FHFA should perform supervisory FHFA’s Oversight Closed—Final review and follow-up to ensure that the of the Enterprises’ action taken by Enterprises develop and implement the Use of Appraisal FHFA. portal as intended by FHFA’s uniform Data Before They mortgage data program directive. Buy Single-Family Mortgages AUD-2012-003-1 FHFA’s Division of Housing Mission FHFA’s Oversight Based on COM- and Goals (DHMG) should formally of Fannie Mae’s 2016-001, this establish a policy for its review process Single-Family recommendation of underwriting standards and variance Underwriting was reopened. including escalation of unresolved Standards Recommendation issues reflecting potential lack of agreed to by FHFA; agreement. implementation of recommendation pending. AUD-2012-003-2 FHFA’s Division of Examination Program FHFA’s Oversight Closed—Final and Support should enhance existing of Fannie Mae’s action taken by examination guidance for assessing Single-Family FHFA. adherence to underwriting standards Underwriting and variances from them. Standards EVL-2016-006-1 FHFA should direct the Fannie Mae Corporate Recommendation Board to enhance Fannie Mae’s existing Governance: Cyber agreed to by FHFA; cyber risk management policies to: Risk Oversight by implementation of a. Require a baseline Enterprise- the Fannie Mae recommendation wide cyber risk assessment with Board of Directors pending. subsequent periodic updates; Highlights the Need for FHFA’s b. Describe information to be reported Closer Attention to to the Board and committees; Governance Issues c. Include a cyber risk framework and cyber risk appetite. 64 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2016-006-2 FHFA should instruct the Fannie Corporate Recommendation Board to establish and communicate Governance: Cyber agreed to by FHFA; a desired target state of cyber risk Risk Oversight by implementation of management for Fannie Mae that the Fannie Mae recommendation identifies and prioritizes which risks Board of Directors pending. to avoid, accept, mitigate, or transfer Highlights the through insurance. Need for FHFA’s Closer Attention to Governance Issues EVL-2016-006-3 FHFA should direct the Fannie Mae Corporate Recommendation Board to oversee the management’s Governance: Cyber agreed to by FHFA; efforts to leverage industry standards Risk Oversight by implementation of to: the Fannie Mae recommendation a. Protect against and detect existing Board of Directors pending. threats; Highlights the Need for FHFA’s b. Remain informed on emerging risks; Closer Attention to c. Enable timely response and recovery Governance Issues in the event of a breach; and d. Achieve the desired target state of cyber risk management identified in recommendation 2 above within a time period agreed upon by the Board. EVL-2016-005-1 FHFA should revise its supervision FHFA’s Supervisory Recommendation guidance to require DER to provide the Standards for agreed to by FHFA; Chair of the Audit Committee of an Communication of implementation of Enterprise Board with each conclusion Serious Deficiencies recommendation letter setting forth an MRA. to Enterprise pending. Boards and for Board Oversight of Management’s Remediation Efforts are Inadequate EVL-2016-005-2 FHFA should revise its supervision FHFA’s Supervisory Recommendation guidance to require DER to provide Standards for partially agreed the Chair of the Audit Committee of Communication of to by FHFA; an Enterprise Board with each plan Serious Deficiencies implementation of submitted by Enterprise management to Enterprise recommendation to remediate an MRA with associated Boards and for pending. timetables and the response by DER. Board Oversight of Management’s Remediation Efforts are Inadequate Semiannual Report to the Congress • October 1, 2015–March 31, 2016 65 No. Recommendation Report Status EVL-2016-005-3 FHFA should revise its supervision FHFA’s Supervisory Recommendation guidance to require DER to identify all Standards for agreed to by FHFA; open MRAs in the annual, written ROE Communication of implementation of and the expected timetable to complete Serious Deficiencies recommendation outstanding remediation activities. to Enterprise pending. Boards and for Board Oversight of Management’s Remediation Efforts are Inadequate EVL-2016-005-4 FHFA should include in the year’s ROE, FHFA’s Supervisory Recommendation to be issued to each Enterprise for Standards for agreed to by FHFA; 2015 supervisory activities, all open Communication of implementation of MRAs and the expected timetable to Serious Deficiencies recommendation complete outstanding remediation to Enterprise pending. activities for each open MRA. Boards and for Board Oversight of Management’s Remediation Efforts are Inadequate EVL-2016-004-1 FHFA should review FHFA’s existing FHFA’s Examiners Recommendation requirements, guidance, and Did Not Meet not accepted by processes regarding MRAs against Requirements FHFA. the requirements, guidance, and and Guidance processes adopted by the OCC, Federal for Oversight of Reserve, and other federal financial an Enterprise’s regulators including, but not limited Remediation of to, content of an MRA; standards for Serious Deficiencies proposed remediation plans; approval authority for proposed remediation plans; real-time assessments at regular intervals of the effectiveness and timeliness of an Enterprise’s MRA remediation efforts; final assessment of the effectiveness and timeliness of an Enterprise’s MRA remediation efforts; and required documentation for examiner oversight of MRA remediation. EVL-2016-004-2 Based on the results of the review FHFA’s Examiners Recommendation in recommendation 1, FHFA should Did Not Meet not accepted by assess whether any of the existing Requirements FHFA. requirements, guidance, and processes and Guidance adopted by FHFA should be enhanced, for Oversight of and make such enhancements. an Enterprise’s Remediation of Serious Deficiencies 66 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2016-004-3 Because DER and DBR examiners are FHFA’s Examiners Recommendation bound to follow FHFA’s requirements Did Not Meet agreed to by FHFA; and guidance, FHFA should compare Requirements implementation of the processes followed by DBR for the and Guidance recommendation form, content, and issuance of an MRA, for Oversight of pending. standards for a proposed remediation an Enterprise’s plan, approval authority for a proposed Remediation of remediation plan, and real-time Serious Deficiencies assessments at regular intervals of the effectiveness and timeliness of MRA remediation efforts to the processes followed by DER. EVL-2016-004-4 Based on the results of the review FHFA’s Examiners Recommendation in recommendation 3, FHFA should Did Not Meet agreed to by FHFA; assess whether guidance issued and Requirements implementation of processes followed by either DER or and Guidance recommendation DBR should be enhanced, and make for Oversight of pending. such enhancements. an Enterprise’s Remediation of Serious Deficiencies EVL-2016-004-5 FHFA should provide mandatory FHFA’s Examiners Recommendation training for all FHFA examiners on Did Not Meet agreed to by FHFA; FHFA requirements, guidance, and Requirements implementation of processes and DER and DBR guidance and Guidance recommendation for MRA issuance, review and approval for Oversight of pending. of proposed remediation plans, and an Enterprise’s oversight of MRA remediation. Remediation of Serious Deficiencies EVL-2016-004-6 FHFA should evaluate the results of FHFA’s Examiners Recommendation quality control reviews conducted by Did Not Meet agreed to by FHFA; DER and DBR to identify and address Requirements implementation of gaps and weaknesses involving MRA and Guidance recommendation issuance, review and approval of for Oversight of pending. proposed remediation plans, and an Enterprise’s oversight of MRA remediation. Remediation of Serious Deficiencies EVL-2016-003-1 FHFA should comply with FSOC FHFA Should Map Recommendation recommendations to take formal and Its Supervisory agreed to by FHFA; timely action to compare existing Standards for Cyber implementation of regulatory guidance to appropriate Risk Management recommendation elements of the NIST Framework and to Appropriate pending. identify the gaps between existing Elements of the regulatory guidance and appropriate NIST Framework elements of the NIST Framework. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 67 No. Recommendation Report Status EVL-2016-003-2 FHFA should comply with FSOC FHFA Should Map Recommendation recommendations to determine the Its Supervisory agreed to by FHFA; priority in which to address the gaps. Standards for Cyber implementation of Risk Management recommendation to Appropriate pending. Elements of the NIST Framework EVL-2016-003-3 FHFA should comply with FSOC FHFA Should Map Recommendation recommendations to address the gaps, Its Supervisory agreed to by FHFA; as prioritized, to reflect and incorporate Standards for Cyber implementation of appropriate elements of the NIST Risk Management recommendation Framework. to Appropriate pending. Elements of the NIST Framework EVL-2016-003-4 FHFA should comply with FSOC FHFA Should Map Recommendation recommendations to revise existing Its Supervisory agreed to by FHFA; regulatory guidance to reflect and Standards for Cyber implementation of incorporate appropriate elements of Risk Management recommendation the NIST Framework in a manner that to Appropriate pending. achieves consistency with other federal Elements of the financial regulators. NIST Framework EVL-2016-001-1 FHFA should implement detailed risk Utility of FHFA’s Recommendation assessment guidance that provides Semi-Annual Risk agreed to by FHFA; minimum requirements for risk Assessments Would implementation of assessments that facilitate comparable Be Enhanced recommendation analyses for each Enterprise’s risk Through Adoption pending. positions, including common criteria of Clear Standards for determining whether risk levels are and Defined high, medium, or low, year over year. Measures of Risk Levels EVL-2016-001-2 FHFA should implement detailed risk Utility of FHFA’s Recommendation assessment guidance that provides Semi-Annual Risk agreed to by FHFA; standard requirements for format Assessments Would implementation of and the documentation necessary Be Enhanced recommendation to support conclusions in order Through Adoption pending. to facilitate comparisons between of Clear Standards Enterprises and reduce variability and Defined among DER’s risk assessments for Measures of Risk each Enterprise and between the Levels Enterprises. 68 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2016-001-3 FHFA should direct DER to train Utility of FHFA’s Recommendation its examiners-in-charge and exam Semi-Annual Risk agreed to by FHFA; managers in the preparation of semi- Assessments Would implementation of annual risk assessments, using Be Enhanced recommendation enhanced risk assessment guidance Through Adoption pending. consistent with recommendations EVL- of Clear Standards 2016-001-1 and EVL-2016-001-2. and Defined Measures of Risk Levels EVL-2015-007-1 FHFA should ensure that DER’s recently Intermittent Efforts Recommendation adopted procedures for quality control Over Almost Four agreed to by FHFA; reviews meet the requirements of Years to Develop implementation of Supervision Directive 2013-01 and a Quality Control recommendation require DER to document in detail Review Process pending. the results and findings of each Deprived FHFA of quality control review in examination Assurance of the workpapers, including any shortcomings Adequacy and found during the quality control review. Quality of Enterprise Examinations EVL-2015-007-2 FHFA should evaluate the effectiveness Intermittent Efforts Recommendation of the new quality control procedures, Over Almost Four agreed to by FHFA; as implemented, one year after Years to Develop implementation of adoption. a Quality Control recommendation Review Process pending. Deprived FHFA of Assurance of the Adequacy and Quality of Enterprise Examinations EVL-2015-006-1 FHFA should direct each Enterprise to FHFA’s Exercise of Recommendation submit its proposed operating budget Its Conservatorship agreed to by FHFA; and supporting materials for the next Powers to Review implementation of fiscal year so that FHFA has sufficient and Approve the recommendation time before the fiscal year begins to Enterprises’ Annual pending. adequately analyze the proposals. Operating Budgets Has Not Achieved FHFA’s Stated Purpose Semiannual Report to the Congress • October 1, 2015–March 31, 2016 69 No. Recommendation Report Status EVL-2015-006-2 FHFA should revise the existing budget FHFA’s Exercise of Recommendation review process and staff the review Its Conservatorship agreed to by FHFA; process with employees who have the Powers to Review implementation of qualifications and experience needed and Approve the recommendation for critical financial assessments of Enterprises’ Annual pending. the proposed Enterprise budgets to Operating Budgets permit FHFA to determine whether each Has Not Achieved Enterprise’s budget aligns with FHFA’s FHFA’s Stated strategic direction and its safety and Purpose soundness priorities. EVL-2015-006-3 FHFA should set a date certain during FHFA’s Exercise of Recommendation the first quarter of 2016 by which FHFA Its Conservatorship agreed to by FHFA; will take final action on each proposed Powers to Review implementation of annual operating budget for 2016 and and Approve the recommendation approve the budget by that date. Enterprises’ Annual pending. Operating Budgets Has Not Achieved FHFA’s Stated Purpose EVL-2015-006-4 FHFA should set a date certain, prior to FHFA’s Exercise of Recommendation January 31 of each subsequent fiscal Its Conservatorship generally agreed year, by which FHFA will take final action Powers to Review to by FHFA; on each proposed annual operating and Approve the implementation of budget and approve the budget by that Enterprises’ Annual recommendation date. Operating Budgets pending. Has Not Achieved FHFA’s Stated Purpose EVL-2015-004-1 FHFA should implement a sufficiently FHFA’s Oversight Closed—Final robust internal communications of Governance action taken by process to ensure that the FHFA Risks Associated FHFA. Director is informed of significant with Fannie Mae’s issues and concerns by FHFA staff on Selection and all conservatorship and supervisory Appointment of a matters that require the Director’s New Chief Audit decision. Executive 70 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2015-004-2 Given the importance of the Audit FHFA’s Oversight Closed—Final Committee’s oversight over Fannie of Governance action taken by Mae’s financial reporting and risk Risks Associated FHFA. management and the breadth of its with Fannie Mae’s responsibilities, FHFA should require Selection and the Fannie Mae Audit Committee to Appointment of a hold meetings relating to its oversight New Chief Audit responsibilities and to fully document, Executive in meeting minutes, its discussions, deliberations, and actions at each meeting to ensure an effective flow of information among directors, senior management, and risk managers and to satisfy FHFA of the adequacy of the Committee’s risk oversight function. EVL-2015-004-3 FHFA should conduct a comprehensive FHFA’s Oversight Recommendation evaluation of the Audit Committee’s of Governance agreed to by FHFA; effectiveness, which should Risks Associated implementation of include: whether all members of the with Fannie Mae’s recommendation Committee are independent from Selection and pending. management; whether the Committee’s Appointment of a responsibilities are clearly articulated; New Chief Audit whether each Committee member Executive understands what is expected of him/ her under the Committee’s Charter and regulatory requirements; whether the Committee’s interactions with Fannie Mae’s financial executives, Internal Audit, and the external audit firm are robust and occur regularly; whether the Committee raises critical questions with management and the Chief Audit Executive, including questions that indicate the Committee’s understanding of key accounting policies and judgments and that challenge management’s judgments and conclusions; whether the Committee has been responsive to issues raised by the external auditor; and whether the Committee periodically assesses the list of top risks and determines responsibility for management of each risk. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 71 No. Recommendation Report Status EVL-2015-004-4 FHFA should direct the Audit Committee FHFA’s Oversight Closed—Final to align its meetings to address priority of Governance action taken by issues and risks so that standard Risks Associated FHFA. reports and informational materials are with Fannie Mae’s provided to the Committee in advance Selection and of the meetings and may not need to Appointment of a be included on the meeting agenda for New Chief Audit discussion and so that the Committee Executive has sufficient time at each meeting to enable it to focus on the most critical issues and risks. EVL-2015-004-5 FHFA should assess the adequacy of FHFA’s Oversight Closed—Final the criteria and processes used by of Governance action taken by the Enterprise’s Board of Directors to Risks Associated FHFA. populate each committee of the Board with Fannie Mae’s and to rotate committee membership Selection and to ensure that the members of each Appointment of a committee have the commitment to be New Chief Audit effective. Executive EVL-2015-003-1 FHFA should test the new human Women and Recommendation resource system to ensure that it will Minorities in FHFA’s agreed to by FHFA; provide data sufficient to enable the Workforce implementation of Agency to perform comprehensive recommendation analyses of workforce issues. pending. EVL-2015-003-2 FHFA should regularly analyze Agency Women and Recommendation workforce data and assess trends in Minorities in FHFA’s agreed to by FHFA; hiring, awards, and promotions. Workforce implementation of recommendation pending. EVL-2015-003-3 FHFA should adopt a diversity and Women and Closed—Final inclusion strategic plan. Minorities in FHFA’s action taken by Workforce FHFA. EVL-2015-003-4 FHFA should research opportunities to Women and Recommendation partner with inner-city and other high Minorities in FHFA’s agreed to by FHFA; schools, where feasible, to ensure Workforce implementation of compliance with HERA. recommendation pending. 72 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2014-008-1 To strengthen its management of the Status of the Recommendation CSP, FHFA should establish schedules Development agreed to by FHFA; and time frames for completing key of the Common implementation of components of the project, as well Securitization recommendation as an overall completion date as Platform pending. appropriate. EVL-2014-008-2 To strengthen its management of Status of the Recommendation the CSP, FHFA should establish cost Development agreed to by FHFA; estimates for varying stages of the of the Common implementation of initiative, as well as an overall cost Securitization recommendation estimate. Platform pending. EVL-2014-003-1 FHFA’s Deputy Director of DHMG FHFA’s Oversight Recommendation should establish an ongoing process to of the Servicing partially agreed evaluate servicers’ Servicing Alignment Alignment Initiative to by FHFA; Initiative (SAI) compliance and the recommendation effectiveness of the Enterprises’ remains open and remediation efforts. will continue to be monitored. EVL-2014-003-2 FHFA’s Deputy Director of DHMG FHFA’s Oversight Recommendation should direct the Enterprises to provide of the Servicing partially agreed routinely their internal reports and Alignment Initiative to by FHFA; reviews for DHMG’s assessment. recommendation remains open and will continue to be monitored. EVL-2014-003-3 FHFA’s Deputy Director of DHMG should FHFA’s Oversight Recommendation regularly review SAI-related guidelines of the Servicing partially agreed for enhancements or revisions, as Alignment Initiative to by FHFA; necessary, based on servicers’ actual recommendation versus expected performance. remains open and will continue to be monitored. EVL-2014-002-1 FHFA should review its implementation Update on Recommendation of the 2013 Enterprise examination FHFA’s Efforts to agreed to by FHFA; plans and document the extent to Strengthen its implementation of which resource limitations, among other Capacity to Examine recommendation things, may have impeded their timely the Enterprises pending. and thorough execution. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 73 No. Recommendation Report Status EVL-2014-002-2 FHFA should develop a process that Update on Recommendation links annual Enterprise examination FHFA’s Efforts to agreed to by FHFA; plans with core team resource Strengthen its implementation of requirements. Capacity to Examine recommendation the Enterprises pending. EVL-2014-002-3 FHFA should establish a strategy to Update on Recommendation ensure that the necessary resources FHFA’s Efforts to agreed to by FHFA; are in place to ensure timely and Strengthen its implementation of effective Enterprise examination Capacity to Examine recommendation oversight. the Enterprises pending. EVL-2013-012-1 FHFA should ensure Fannie Mae takes Evaluation of Closed—Final the actions necessary to reduce Fannie Mae’s action taken by servicer reimbursement processing Servicer FHFA. errors. These actions should include Reimbursement utilizing its process accuracy data Operations for in a more effective manner and Delinquency implementing a red flag system. Expenses EVL-2013-012-2 FHFA should require Fannie Mae to: Evaluation of Recommendation • quantify and aggregate its Fannie Mae’s agreed to by FHFA; overpayments to servicers regularly; Servicer implementation of Reimbursement recommendation • implement a plan to reduce these Operations for pending. overpayments by (1) identifying their Delinquency root causes, (2) creating reduction Expenses targets, and (3) holding managers accountable; and • report its findings and progress to FHFA periodically. EVL-2013-012-3 FHFA should publish Fannie Mae’s Evaluation of Closed— reduction targets and overpayment Fannie Mae’s Recommendation findings. Servicer rejected. Reimbursement Operations for Delinquency Expenses 74 Federal Housing Finance Agency Office of Inspector General No. Recommendation Report Status EVL-2012-005-1 FHFA should continue its ongoing FHFA’s Oversight Closed—Final horizontal review of unsecured credit of the Federal action taken by practices at the FHLBanks by: Home Loan Banks’ FHFA. • following up on any potential evidence Unsecured Credit of violations of the existing regulatory Risk Management limits and taking supervisory and Practices enforcement actions as warranted; and • determining the extent to which inadequate systems and controls may compromise the FHLBanks’ capacity to comply with regulatory limits and taking any supervisory actions necessary to correct such deficiencies as warranted. EVL-2012-005-2 To strengthen the regulatory framework FHFA’s Oversight Recommendation around the extension of unsecured of the Federal agreed to by FHFA; credit by the FHLBanks, as a Home Loan Banks’ implementation of component of future rulemakings, FHFA Unsecured Credit recommendation should consider the utility of: Risk Management pending. • establishing maximum overall Practices exposure limits; • lowering the existing individual counterparty limits; and • ensuring that the unsecured exposure limits are consistent with the FHLBank System’s housing mission. COM-2016-002-1 FHFA should develop a strategy to Compliance Review Recommendation enhance the Executive Compensation of FHFA’s Oversight not accepted by Branch’s (ECB) capacity to review the of Enterprise FHFA. reasonableness and justification of Executive the Enterprises’ annual proposals to Compensation compensate their executives based on Based on Corporate Corporate Scorecard performance. To Scorecard this end, FHFA should ensure that: Performance • the Enterprises submit proposals containing information sufficient to facilitate a comprehensive review by ECB; • ECB tests and verifies the information in the Enterprises’ proposals, perhaps on a randomized basis; and • ECB follows up with the Enterprises to resolve any proposals that do not appear to be reasonable and justified. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 75 No. Recommendation Report Status COM-2016-002-2 FHFA should develop a policy under Compliance Review Recommendation which it is required to notify OIG of FHFA’s Oversight not accepted by within 10 days of its decision not to of Enterprise FHFA. fully implement, substantially alter, or Executive abandon a corrective action that served Compensation as the basis for OIG’s decision to close Based on Corporate a recommendation. Scorecard Performance COM-2015-001-1 FHFA should determine the causes of OIG’s Compliance Recommendation the shortfalls in the Housing Finance Review of FHFA’s agreed to by FHFA; Examiner Commission Program that Implementation implementation of we have identified, and implement a of Its Housing recommendation strategy to ensure the program fulfills Finance Examiner pending. its central objective of producing Commission commissioned examiners who are Program qualified to lead major risk sections of GSE examinations. 76 Federal Housing Finance Agency Office of Inspector General Figure 10. Summary of OIG Reports Where All Public Recommendations Are Closed Report No. of Recommendations FHFA’s Oversight of Risks Associated with the Enterprises Relying on 1 Counterparties to Comply with Selling and Servicing Guidelines (AUD-2014-018) FHFA Oversight of Freddie Mac’s Information Technology Investments 3 (AUD-2014-017) FHFA Actions to Manage Enterprise Risks from Nonbank Servicers Specializing 2 in Troubled Mortgages (AUD-2014-014) CohnReznick LLP’s Independent Audit of FHFA’s Oversight of Enterprise 3 Monitoring of the Financial Condition of Mortgage Insurers (AUD-2014-013) FHFA Oversight of Enterprise Controls Over Pre-Foreclosure Property 2 Inspections (AUD-2014-012) FHFA’s Use of Government Travel Cards 4 (AUD-2014-010) FHFA Oversight of Enterprise Handling of Aged Repurchase Demands 3 (AUD-2014-009) FHFA’s Use of Government Purchase Cards 4 (AUD-2014-006) FHFA Oversight of Fannie Mae’s Reimbursement Process for Pre-Foreclosure 4 Property Inspections (AUD-2014-005) FHFA Oversight of Fannie Mae’s Remediation Plan to Refund Contributions to 3 Borrowers for the Short Sale of Properties (AUD-2014-004) Fannie Mae’s Controls Over Short Sale Eligibility Determinations Should be 6 Strengthened (AUD-2014-003) FHFA Can Strengthen Controls over Its Office of Quality Assurance 7 (AUD-2013-013) Additional FHFA Oversight Can Improve the Real Estate Owned Pilot Program 3 (AUD-2013-012) FHFA Can Improve Its Oversight of Fannie Mae’s Recoveries from Borrowers 1 Who Possess the Ability to Repay Deficiencies (AUD-2013-011) FHFA Can Improve Its Oversight of Freddie Mac’s Recoveries from Borrowers 4 Who Possess the Ability to Repay Deficiencies (AUD-2013-010) Action Needed to Strengthen FHFA Oversight of Enterprise Information Security 5 and Privacy Programs (AUD-2013-009) Semiannual Report to the Congress • October 1, 2015–March 31, 2016 77 Report No. of Recommendations FHFA Should Develop and Implement a Risk-Based Plan to Monitor the 1 Enterprises’ Oversight of Their Counterparties’ Compliance with Contractual Requirements Including Consumer Protection Laws (AUD-2013-008) Enhanced FHFA Oversight Is Needed to Improve Mortgage Servicer Compliance 9 with Consumer Complaint Requirements (AUD-2013-007) FHFA Can Enhance Its Oversight of FHLBank Advances to Insurance Companies 2 by Improving Communication with State Insurance Regulators and Standard- Setting Groups (AUD-2013-006) FHFA’s Oversight of the Asset Quality of Multi-family Housing Loans Financed by 2 Fannie Mae and Freddie Mac (AUD-2013-004) FHFA’s Oversight of Contract No. FHF-10-F-0007 with Advanced Technology 5 Systems, Inc. (AUD-2013-002) FHFA’s Oversight of the Enterprises’ Efforts to Recover Losses from Foreclosure 3 Sales (AUD-2013-001) FHFA’s Conservator Approval Process for Fannie Mae and Freddie Mac 9 Business Decisions (AUD-2012-008) FHFA’s Oversight of the Enterprises’ Management of High-Risk Seller/Servicers 2 (AUD-2012-007) FHFA’s Call Report System 3 (AUD-2012-006) FHFA’s Supervisory Risk Assessment for Single-Family Real Estate Owned 1 (AUD-2012-005) FHFA’s Supervisory Framework for Federal Home Loan Banks’ Advances and 7 Collateral Risk Management (AUD-2012-004) FHFA’s Supervision of Freddie Mac’s Controls over Mortgage Servicing 5 Contractors (AUD-2012-001) FHFA’s Oversight of Fannie Mae’s Default-Related Legal Services 3 (AUD-2011-004) Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance 9 Agency’s Privacy Program and Implementation - 2011 (AUD-2011-003) Clifton Gunderson LLP’s Independent Audit of the Federal Housing Finance 5 Agency’s Information Security Program - 2011 (AUD-2011-002) Audit of the Federal Housing Finance Agency’s Consumer Complaints Process 3 (AUD-2011-001) Evaluation of the Division of Enterprise Regulation’s 2013 Examination 1 Records: Successes and Opportunities (EVL-2015-001) 78 Federal Housing Finance Agency Office of Inspector General Report No. of Recommendations Freddie Mac Could Further Reduce Reimbursement Errors by Reviewing More 2 Servicer Claims (EVL-2014-011) FHFA’s Oversight of the Enterprises’ Lender-Placed Insurance Costs 1 (EVL-2014-009) Recent Trends in Federal Home Loan Bank Advances to JPMorgan Chase and 1 Other Large Banks (EVL-2014-006) FHFA’s Reporting of Federal Home Loan Bank Director Expenses 2 (EVL-2014-005) FHFA’s Oversight of Derivative Counterparty Risk 1 (ESR-2014-001) FHFA’s Oversight of Fannie Mae’s 2013 Settlement with Bank of America 1 (EVL-2013-009) FHFA’s Oversight of the Federal Home Loan Banks’ Compliance with Regulatory 2 Limits on Extensions of Unsecured Credit (EVL-2013-008) FHFA’s Initiative to Reduce the Enterprises’ Dominant Position in the Housing 2 Finance System by Raising Gradually Their Guarantee Fees (EVL-2013-005) FHFA’s Oversight of the Federal Home Loan Banks’ Affordable Housing 3 Programs (EVL-2013-04) Case Study: Freddie Mac’s Unsecured Lending to Lehman Brothers Prior to 3 Lehman Brothers’ Bankruptcy (EVL-2013-03) FHFA’s Oversight of the Enterprises’ Compensation of Their Executives and 1 Senior Professionals (EVL-2013-001) FHFA’s Oversight of Freddie Mac’s Investment in Inverse Floaters 4 (EVL-2012-009) Evaluation of FHFA’s Oversight of Fannie Mae’s Transfer of Mortgage Servicing 4 Rights from Bank of America to High Touch Servicers (EVL-2012-008) Follow-up on Freddie Mac’s Loan Repurchase Process 1 (EVL-2012-007) FHFA’s Certifications for the Preferred Stock Purchase Agreements 2 (EVL-2012-006) Fannie Mae’s and Freddie Mac’s Participation in the 2011 Mortgage Bankers 2 Association Convention and Exposition (ESR-2012-004) FHFA’s Oversight of the Enterprises’ Charitable Activities 2 (ESR-2012-003) Semiannual Report to the Congress • October 1, 2015–March 31, 2016 79 Report No. of Recommendations Evaluation of FHFA’s Management of Legal Fees for Indemnified Executives 2 (EVL-2012-002) FHFA’s Oversight of Troubled Federal Home Loan Banks 3 (EVL-2012-001) Evaluation of the Federal Housing Finance Agency’s Oversight of Freddie Mac’s 2 Repurchase Settlement with Bank of America (EVL-2011-006) Evaluation of Whether FHFA Has Sufficient Capacity to Examine the GSEs 4 (EVL-2011-005) Evaluation of FHFA’s Oversight of Fannie Mae’s Management of Operational 3 Risk (EVL-2011-004) Evaluation of FHFA’s Role in Negotiating Fannie Mae’s and Freddie Mac’s 1 Responsibilities in Treasury’s Making Home Affordable Program (EVL-2011- 003) Evaluation of Federal Housing Finance Agency’s Oversight of Fannie Mae’s and 8 Freddie Mac’s Executive Compensation Programs (EVL-2011-002) Federal Housing Finance Agency’s Exit Strategy and Planning Process for the 2 Enterprises’ Structural Reform (EVL-2011-001) 80 Federal Housing Finance Agency Office of Inspector General Semiannual Report to the Congress • October 1, 2015–March 31, 2016 81 Appendix C: dozen categories of information that we must include in our semiannual reports. Information Required Below, OIG presents a table that directs the reader by the Inspector General to the pages of this report where the information Act and Subpoenas Issued required by the Inspector General Act may be found. The text that follows further addresses the status Section 5(a) of the Inspector General Act provides of OIG’s compliance with sections 5(a)(6), (8), that OIG shall, not later than April 30 and (9), (10), (11), (12), (13), (14), (15), and (16) of October 31 of each year, prepare semiannual reports the Inspector General Act. Finally, OIG provides summarizing our activities during the immediately information concerning administrative subpoenas preceding six-month periods ending March 31 and that it issued during the semiannual period. September 30. Further, section 5(a) lists more than a Source/Requirement Pages Section 5(a)(1)- A description of significant problems, abuses, and deficiencies relating to the administration 19-31 of programs and operations of FHFA. Section 5(a)(2)- A description of the recommendations for corrective action made by OIG with respect to 19-31 significant problems, abuses, or deficiencies. 59-76 Section 5(a)(3)- An identification of each significant recommendation described in previous semiannual 59-76 reports on which corrective action has not been completed. Section 5(a)(4)- A summary of matters referred to prosecutive authorities and the prosecutions and 32-44 convictions that have resulted. 88-115 Section 5(a)(5)- A summary of each report made to the Director of FHFA. 19-31 Section 5(a)(6)- A listing, subdivided according to subject matter, of each audit and evaluation report issued 19-31 by OIG during the reporting period and for each report, where applicable, the total dollar value of questioned 83 costs (including a separate category for the dollar value of unsupported costs) and the dollar value of recommendations that funds be put to better use. Section 5(a)(7)- A summary of each particularly significant report. 19-31 Section 5(a)(8)- Statistical tables showing the total number of audit and evaluation reports and the total 19-31 dollar value of questioned and unsupported costs. 83 Section 5(a)(9)- Statistical tables showing the total number of audit and evaluation reports and the dollar 19-31 value of recommendations that funds be put to better use by management. 83 Section 5(a)(10)- A summary of each audit and evaluation report issued before the commencement of the 83 reporting period for which no management decision has been made by the end of the reporting period. Section 5(a)(11)- A description and explanation of the reasons for any significant revised management 83 decision made during the reporting period. Section 5(a)(12)- Information concerning any significant management decision with which the Inspector 83-84 General is in disagreement. Section 5(a)(13)- The information described under section (b) of the Federal Financial Management 84 Improvement Act of 1996. Section 5(a)(14)- An appendix containing the results of any peer review conducted by another IG; or the date 84-85 of the last peer review, if no peer review was conducted during the reporting period. Section 5(a)(15)- A list of any outstanding recommendations from any peer review conducted by another IG 84-85 that have not been fully implemented. Section 5(a)(16)- A list of any peer reviews of another IG during the reporting period. 84-85 82 Federal Housing Finance Agency Office of Inspector General Audit and Evaluation Reports decision has been made by the end of the reporting with Recommendations of period. There were no audit or evaluation reports issued before October 1, 2015, that await a Questioned Costs, Unsupported management decision. Costs, and Funds to Be Put to Better Use by Management Significantly Revised Management Decisions Section 5(a)(6) of the Inspector General Act, as amended, requires that OIG list its reports during Section 5(a)(11) of the Inspector General Act, as the semiannual period that include questioned costs, amended, requires that OIG report information unsupported costs, and funds to be put to better concerning the reasons for any significant revised use. Section 5(a)(8) and section 5(a)(9), respectively, management decision made during the reporting require OIG to publish statistical tables showing period. During the six-month reporting period ended the dollar value of questioned and unsupported March 31, 2016, there were no significantly revised costs, and of recommendations that funds be put to management decisions. better use by management. The reports that OIG issued during the reporting period did not include recommendations with dollar values of questioned Significant Management Decision costs, unsupported costs, or funds to be put to better with Which the Inspector General use by management. Disagrees Figure 11 (see below) discloses OIG’s questioned and unsupported cost findings, and recommendations Section 5(a)(12) of the Inspector General Act, as that funds be put to better use. amended, requires that OIG report information concerning any significant management decision with which the Inspector General is in disagreement. Audit and Evaluation Reports During the six-month reporting period ended with No Management Decision March 31, 2016, there are two management decisions with which the Inspector General disagreed. Section 5(a)(10) of the Inspector General Act, as amended, requires that OIG report on each audit and OIG disagrees with FHFA’s decision in response evaluation report issued before the commencement to the evaluation titled FHFA’s Examiners Did Not of the reporting period for which no management Figure 11. Funds to Be Put to Better Use by Management, Questioned Costs, and Unsupported Costs for the Period October 1, 2015, Through March 31, 2016 Potential Monetary Benefits Report Issued Recommendation No. Date Questioned Unsupported Funds Put to Costs Costs Better Use $- $- $- Total $- $- $- Semiannual Report to the Congress • October 1, 2015–March 31, 2016 83 Meet Requirements and Guidance for Oversight of the Agency did not fail to meet any intermediate an Enterprise’s Remediation of Serious Deficiencies target dates in any remediation plans relating to the (EVL-2016-004). FHFA did not agree with condition of its financial management system. OIG’s recommendations to: (1) review existing In its Financial Audit: Federal Housing Finance requirements, guidance, and processes regarding Agency’s Fiscal Years 2015 and 2014 Financial MRAs against requirements, guidance, and processes Statements report, GAO did not identify any adopted by the OCC, Federal Reserve, and other deficiencies in FHFA’s internal controls over financial financial regulators; and (2) based on the results of reporting that it considered to be a material weakness the review in recommendation 1, assess whether any or significant deficiency. Further, GAO issued FHFA’s of the existing requirements, guidance, and processes prior and current financial statements audit reports adopted by FHFA should be enhanced, and make as follows: fiscal year 2015 on November 16, 2015; such enhancements. fiscal year 2014 on November 17, 2014; fiscal year OIG also disagrees with FHFA’s decision in response 2013 on December 16, 2013; and fiscal year 2012 on to the compliance review titled Compliance Review of November 15, 2012. For all four audits, GAO found: FHFA’s Oversight of Enterprise Executive Compensation (1) FHFA’s financial statements were presented Based on Corporate Scorecard Performance (COM- fairly, in all material respects, in accordance with 2016-002). FHFA did not agree with OIG’s generally accepted accounting principles; (2) FHFA recommendations to: (1) develop a strategy to maintained, in all material respects, effective enhance ECB’s capacity to review the reasonableness internal controls over financial reporting as of the and justification of the Enterprises’ annual proposals last day of the audit period; and (3) no reportable to compensate their executives based on Corporate noncompliance for the fiscal year tested with Scorecard performance; and (2) develop a policy provisions of applicable laws, regulations, contracts, under which it is required to notify OIG within and grant agreements it tested. HERA requires GAO 10 days of its decision to not fully implement, to conduct this audit substantially alter, or abandon a corrective action that served as the basis for OIG’s decision to close a Peer Reviews recommendation. Sections 5(a)(14), (15), and (16) of the Inspector Federal Financial Management General Act, as amended, require that OIG provide Improvement Act of 1996 information—relevant to the semiannual period— on any peer reviews of OIG, unimplemented Section 5(a)(13) of the Inspector General Act, as recommendations from any peer reviews of OIG, amended, requires that OIG report information and any peer reviews conducted by OIG. During concerning instances of and reasons for failures to the reporting period, there were no peer reviews meet any intermediate target dates from remediation of OIG’s audit or investigative activities. The most plans designed to remedy findings that the Agency’s recent—and only—peer reviews of OIG’s audit and financial management systems do not comply with investigative activities were reported on March 20, federal financial management system requirements, 2014, and August 25, 2014, respectively. (For full applicable federal accounting standards, and the copies of these reports, see www.fhfaoig.gov/About/ United States Government Standard General Ledger PlanningAndPerformance.) Neither of these peer at the transaction level. During the reporting period, 84 Federal Housing Finance Agency Office of Inspector General review reports includes recommendations. However, in connection with the peer review of OIG’s audit activities, the reviewer issued a separate finding and recommendation “that was not considered to be of sufficient significance to affect” the reviewer’s opinion that OIG’s “system of quality control for the audit organization . . . has been suitably designed and complied with to provide FHFA OIG with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.” OIG has implemented the recommendation. OIG did not conduct any peer reviews during the six-month reporting period ended March 31, 2016. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 85 86 Federal Housing Finance Agency Office of Inspector General Appendix D: Audit Reports OIG Reports Review of FHFA’s Tracking and Rating of the 2013 Scorecard Objective for the New Representation See www.fhfaoig.gov for OIG’s reports. and Warranty Framework Reveals Opportunities to Strengthen the Process (AUD-2016-002, March 28, Evaluation Reports 2016). FHFA Should Improve its Examinations of the Corporate Governance: Cyber Risk Oversight by the Effectiveness of the Federal Home Loan Banks’ Cyber Fannie Mae Board of Directors Highlights the Need for Risk Management Programs by Including an Assessment FHFA’s Closer Attention to Governance Issues (EVL- of the Design of Critical Internal Controls (AUD-2016- 2016-006, March 31, 2016). 001, February 29, 2016). FHFA’s Supervisory Standards for Communication of Serious Deficiencies to Enterprise Boards and for Board Other Reports Oversight of Management’s Remediation Efforts are Inadequate (EVL-2016-005, March 31, 2016). Compliance Review of FHFA’s Oversight of Enterprise FHFA’s Examiners Did Not Meet Requirements and Executive Compensation Based on Corporate Scorecard Guidance for Oversight of an Enterprise’s Remediation Performance (COM-2016-002, March 17, 2016). of Serious Deficiencies (EVL-2016-004, March 29, Merger of the Federal Home Loan Banks of Des Moines 2016). and Seattle: FHFA’s Role and Approach for Overseeing FHFA Should Map Its Supervisory Standards for Cyber the Continuing FHLBank (WPR-2016-002, March Risk Management to Appropriate Elements of the NIST 16, 2016). Framework (EVL-2016-003, March 28, 2016). $1.1 Billion Increase in Expenses for Fannie Mae and FHFA’s Oversight of the Enterprises’ Implementation of Freddie Mac from 2012 through 2015: Where the and Compliance with Conservatorship Directives during Money Went (WPR-2016-001, March 9, 2016). an 18-Month Period (ESR-2016-002, March 28, Compliance Review of FHFA’s Implementation of Its 2016). Procedures for Overseeing the Enterprises’ Single-Family Utility of FHFA’s Semi-Annual Risk Assessments Would Mortgage Underwriting Standards and Variances Be Enhanced Through Adoption of Clear Standards (COM-2016-001, December 17, 2015). and Defined Measures of Risk Levels (EVL-2016-001, January 4, 2016). Semiannual Report to the Congress • October 1, 2015–March 31, 2016 87 Appendix E: In these types of schemes, sellers or developers typically solicit investors with good credit who want OI Publicly Reportable low-risk investment opportunities by offering deals on Investigative Outcomes properties with no money down and other lucrative incentives, such as cash back and guaranteed and Involving Condo immediate rent collection. The sellers fund these Conversion and Builder incentives with inflated sales prices. The fraudsters conceal the incentives and the true property values Bailout Schemes from the lenders, defrauding them into making loans that are much riskier than they appear. When the properties go into foreclosure, lenders suffer large losses. DEFENDANT ROLE MOST RECENT ACTION DATE Bank Fraud Schemes in West Palm Beach and Tampa Individuals were allegedly involved in marketing and selling condominiums at developments in both Palm Beach County and in the Tampa area. The schemes were similar and involved seller-provided incentive packages that included cash to close, cash rebates, and guaranteed rent, which were not disclosed to the lenders that funded the mortgages. Sentenced to 6 months in prison, Anabel Reiners (also 36 months of supervised release, and known as Anabel Straw Buyer ordered to pay $17,350 in restitution, March 9, 2016 Reiners Bonzon) joint and several, and a $100 special assessment. Contract Coordinator Sentenced to 5 years of probation and Mike Zaric Manager for Broadmor February 26, 2016 ordered to pay a $6,000 fine. Development, LLC Pled guilty to conspiracy to commit Real Estate Agent/ Gary Blankenship bank and wire fraud affecting a February 4, 2016 Co-Conspirator financial institution. Sentenced to 12 months in prison, 36 months of supervised release, and ordered to pay $17,350 in restitution, Eduardo Ortega Straw Buyer joint and several. As part of the January 29, 2016 sentencing a forfeiture judgment was entered against Ortega in the amount of $211,919.38. Convicted by a federal jury on five counts of a superseding indictment, Real Estate Broker/ Joseph L. Pasquale one count of conspiracy to commit January 8, 2016 Straw Buyer Recruiter bank fraud, and four counts of bank fraud and aiding and abetting. 88 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Pled guilty to making false statements Peter Mead Marketer to federal agents about his knowledge December 11, 2015 and role in the scheme. Charged with one count of conspiracy Jayson Martin Loan Officer to commit bank fraud and four counts September 23, 2015 of bank fraud. Charged with one count of conspiracy Gary Hughes Loan Officer to commit bank fraud and four counts September 23, 2015 of bank fraud. Sentenced to 24 months in prison, 60 months of supervised release, Brendan Bolger Marketer forfeiture of $4,322,264, and ordered September 18, 2015 to pay $13,641,197 in restitution, joint and several. Was involved in two cases, one in the U.S. District Court for the Middle District of Florida, Tampa, which was transferred to and combined with the case in the U.S. District Court for the Southern District of Florida. Concurrently sentenced to 6 months Jordana Ende-Tobel Real Estate Broker of home confinement, 36 months September 4, 2015 of supervised release, forfeiture of $106,217 in the Southern District case and $56,883 in the Tampa case, and ordered to pay $1,878,211 in restitution, joint and several, in the Southern District case and $499,500, joint and several, in the Tampa case. Sentenced to 36 months in prison, 36 months of supervised release, Eli Riesel Developer forfeiture of $506,651, and ordered to July 16, 2015 pay $12.5 million in restitution, joint and several. Was involved in two cases, one in the U.S. District Court for the Middle District of Florida, Tampa, which was transferred to and combined with the case in the U.S. District Court for the Southern District of Florida. She was Attorney and Escrow/ concurrently sentenced to 1 year, 1 day Rashmi Airan-Pace June 16, 2015 Title Agent in prison, 36 months of supervised release, forfeiture of $26,973 in the Tampa case, and ordered to pay $16,496,242 in restitution, joint and several, in the Southern District Case and $2,652,974 in restitution, joint and several, in the Tampa case. Sentenced to 6 months in prison, 24 months of supervised release, Joaquin Cossio Real Estate Broker April 24, 2015 and ordered to pay $1,215,729 in restitution, joint and several. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 89 DEFENDANT ROLE MOST RECENT ACTION DATE Former Home Sentenced to 18 months in prison and Florencio Luis Tezanos Mortgage Consultant February 18, 2015 36 months of supervised release. at Wells Fargo Bank Sentenced to 12 months, 1 day in prison, 24 months of supervised Jose Aller Marketer release, and ordered to pay August 29, 2014 $2,951,263 in restitution, joint and several. Sentenced to 12 months, 1 day in prison, later reduced to 6 months, Ernesto Rodriguez Recruiter 24 months of supervised release, August 29, 2014 and ordered to pay $2,951,263 in restitution, joint and several. Additional Indictment in Elaborate Condo Scheme The indictment alleged that Sanchez and Cevallos, acting in concert with others, bought or facilitated the sale of condominiums to straw buyers at inflated prices. The inflated prices allowed the sellers in the transactions, also co-conspirators, to sell the condominiums for more than their market value. Former Attorney and Charged with conspiracy to commit Angel Garcia Principal of Garcia- bank fraud and wire fraud affecting a March 8, 2016 Oliver & Mainieri, P.A. financial institution. Charged with conspiracy to commit David Cevallos Mortgage Broker bank fraud and wire fraud affecting a April 29, 2015 financial institution. Charged with conspiracy to commit Osbel Sanchez Sales Associate bank fraud and wire fraud affecting a April 29, 2015 financial institution. Condo Developer Ponzi Scheme Involving Enterprise Properties Cay Clubs Resorts, which operated resort-style hotels/condominiums throughout the U.S., operated as a massive Ponzi and securities fraud scheme. It defrauded 1,400 investors, FDIC-insured banks, and the Enterprises out of over $300 million. The scheme caused a loss to Freddie Mac of $8,390,663 and to Fannie Mae of $2,850,086. Sentenced to 480 months in prison, 5 years of supervised release, Fred Davis Clark Jr. forfeiture of $303,800,000 for the Cay Clubs Owner/ (also known as Dave bank fraud and $3,300,000 for the February 22, 2016 Scheme Leader Clark) SEC obstruction, and forfeiture of specific assets located overseas totaling approximately $2.6 million. Restitution ordered in the amount of $163,530,377, joint and several. Director of Sales for Barry J. Graham Previously sentenced to 60 months in October 27, 2015 Cay Clubs prison and 36 months of supervised release. 90 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Restitution ordered in the amount of $163,530,377, joint and several. Director of Investor Ricky L. Stokes Previously sentenced to 60 months in October 27, 2015 Relations/Sales Agent prison and 36 months of supervised release. Cristal Clark (also Cay Clubs Owner/ known as Cristal Acquitted. August 14, 2015 Executive Coleman) Multi-state Condo Conversion Scheme Burchell and others allegedly negotiated with the builders of new housing developments in California, Florida, and Arizona to sell the units in exchange for large commissions not disclosed to the lenders. The defendants recruited straw buyers and submitted false loan applications to sell more than 100 units, resulting in a loss to the Enterprises of at least $2.37 million. Obtained Straw Buyers Convicted by jury trial of wire fraud, and Negotiated Momoud Aref Abaji conspiracy to commit bank and wire February 5, 2016 Kickbacks with fraud, and tax evasion. Builders Prepared False Convicted by jury trial of a conspiracy Mohamed Salah March 27, 2015 Documents charge. Convicted by jury trial of conspiracy Maher Obagi Office Manager March 27, 2015 and three wire fraud charges. Pled guilty to conspiracy to commit Jacqueline Burchell Escrow Officer June 13, 2013 bank and wire fraud. Obtained Straw Buyers Charged with wire fraud, conspiracy and Taught Others Wajieh Tbakhi to commit bank and wire fraud, and January 4, 2013 How to Fabricate False aiding and abetting. Documents Ali Khatib Owner of Company Pled guilty to bank fraud. August 2, 2012 Semiannual Report to the Congress • October 1, 2015–March 31, 2016 91 Appendix F: Investigations in this category involve a variety of schemes that target Fannie Mae, Freddie Mac, the OI Publicly Reportable FHLBanks, or members of FHLBanks. Investigative Outcomes Involving Fraud Committed Against the Enterprises, the FHLBanks, or FHLBank Member Institutions DEFENDANT ROLE MOST RECENT ACTION DATE Attorney Involved in Short Sale Fraud A former senior attorney with the FDIC sold her home to her live-in boyfriend in a fraudulent short sale. Borzillo submitted hardship material to the lender stating she had suffered a loss of income associated with a federal pay freeze and that the short sale transaction would be at arm’s length. In fact, the individual was not subject to the pay freeze and the transaction was not at arm’s length. Sentenced to 12 months and 1 day in prison, 2 years of supervised release, and ordered to pay $288,497 Scheme Organizer/ Michelle Borzillo in restitution. In addition, $3,000 February 19, 2016 Attorney forfeited representing illegal proceeds from bank fraud affecting a financial institution. Missouri Loan Officer Charged with Theft and Embezzlement Cox, a loan officer at Focus Bank, an FHLBank member, allegedly embezzled approximately $170,000 in loan proceeds from Focus Bank. Cox had been entrusted with funds from multiple borrowers but converted the funds to his personal use and concealed his acts from his employer. Charged with theft, embezzlement, Brian Cox Loan Officer and misapplication by bank officer or January 21, 2016 employee. Executive at Now-Defunct Mirae Bank Indicted in Loan Fraud Case Aminpour worked at Mirae Bank as the Chief Marketing Officer. According to the indictment, Aminpour was allegedly responsible for the bank issuing tens of millions of dollars in fraudulent loans—loans that were a significant factor in Mirae Bank’s failure as a financial institution in 2009. At the time of Mirae’s failure, there were outstanding advances from the FHLBank of San Francisco in the amount of $51 million. Indicted on charges of bank fraud, Former Chief false statement to a financial Ataollah Aminpour January 7, 2016 Marketing Officer institution, and causing an act to be done. 92 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Civil Settlement in Michigan Reverse Mortgage Fraud Abbruzzese failed to properly originate a reverse mortgage loan that was sold to Fannie Mae. The loan went into foreclosure. Owner of Abbruzzese Mark Abbruzzese Settlement agreement for $266,000. December 22, 2015 Consulting Identity Theft Involving Fannie Mae Insider Thomas and others conspired to steal the PII of over 1,000 Fannie Mae customers, which also caused monetary damages to involved financial institutions, including JPMorgan Chase and Bank of America. Pled guilty to conspiracy to commit Karen Mendoza Runner November 17, 2015 bank fraud. Sentenced to 16 years in prison, 3 years of supervised release, and Anthony Minor Recruiter March 18, 2015 ordered to pay $88,131 in restitution, joint and several. Sentenced to 48 months in prison, Underwriting Support 24 months of supervised release, and Katrina Thomas November 13, 2014 Specialist ordered to pay $76,831 in restitution, joint and several. Sentenced to 48 months in prison, 24 months of supervised release, and Tilisha Morrison Recruiter November 12, 2014 ordered to pay $88,131 in restitution, joint and several. Sentenced to 1 day (time served), 2 years of supervised release, and Kario Butler Runner November 4, 2014 ordered to pay $8,970 in restitution, joint and several. Sentenced to 1 day (time served), 2 years of supervised release, Jamilah Karriem Runner November 2, 2014 80 hours of community service, and ordered to pay $1,000 in restitution. Sentenced to 4 months (time served), Cyrus Pritchett Runner 2 years of supervised release, and October 23, 2014 ordered to pay $9,800 in restitution. Former Title Company President Charged with Bank Fraud An indictment alleges that between 2010 and 2011 the defendant engaged in a scheme that caused approximately $1.3 million in losses to two financial institutions. Former Title Company Mark Andreotti Indicted for bank fraud. November 2, 2015 President Semiannual Report to the Congress • October 1, 2015–March 31, 2016 93 DEFENDANT ROLE MOST RECENT ACTION DATE Five Indicted on Money Laundering Charges at a Member Bank, FHLBank of Topeka Three former bank employees and two business owners allegedly conspired to launder money through Plains State Bank (PSB)—an FHLBank member bank that had more than $76 million in advances from the FHLBank in Topeka, Kansas. The PSB bank employees failed to file Treasury reports as required, based upon the amount and type of cash and monetary instruments deposited into the PSB account. Charged with money laundering and J. Kirk Friend Bank President failing to file Treasury reports as October 6, 2015 required. Charged with money laundering and Matthew Thomas Bank Loan Officer failing to file Treasury reports as October 6, 2015 required. Charged with money laundering and Business Owner/Bank George Enns failing to file Treasury reports as October 6, 2015 Customer required. Charged with money laundering and Business Owner/Bank Agatha Enns failing to file Treasury reports as October 6, 2015 Customer required. Charged with failing to file Treasury Kathy Shelman Bank Cashier October 6, 2015 reports as required. 94 Federal Housing Finance Agency Office of Inspector General Appendix G: Loan or mortgage origination schemes are the most common type of mortgage fraud. These schemes OI Publicly Reportable typically involve falsifying borrowers’ income, assets, Investigative Outcomes employment, and credit profiles to make them more attractive to lenders. These schemes often use Involving Loan bogus Social Security numbers and fake or altered Origination Schemes documents such as W-2 forms and bank statements to defraud lenders into making loans they would not otherwise make. Typically, perpetrators pocket origination fees or inflate home prices and divert proceeds. DEFENDANT ROLE MOST RECENT ACTION DATE Multi-defendant Origination Scheme Sentencings Subjects conspired to commit various types of financial fraud including mortgage fraud, federal student loan fraud, and small business loan fraud. The scheme involved submitting false documents and straw buyers. The loss exposure to the Enterprises is approximately $800,000. Sentenced to time served (1 day), 24 months of supervised release, and Noreen Mian Loan Officer March 4, 2016 ordered to pay $588,940 in restitution, joint and several. Sentenced to 36 months of probation Sirarthur McClelland Organizer and ordered to pay $49,267 in February 10, 2016 restitution, joint and several. Pled guilty to mail fraud and identity Warren Taylor Organizer February 3, 2016 theft. Sentenced to 36 months of probation David Edwards Organizer and ordered to pay $24,490 in November 24, 2015 restitution, joint and several. Sentenced to 6 months in prison, 24 months of supervised release with Derrek L. Campbell II Straw Buyer first 6 months under home detention, August 21, 2015 and ordered to pay $133,715 in restitution, joint and several. Owner Credit Repair Pled guilty to mail fraud and Anthony Trice July 14, 2015 Business aggravated identity theft. Owner Credit Repair Pled guilty to mail fraud and Jerrod Weathersby May 26, 2015 Business aggravated identity theft. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 95 DEFENDANT ROLE MOST RECENT ACTION DATE $3.8 Million Origination Scheme Campbell and Miles participated in a mortgage fraud scheme wherein false financial information was provided to secure home mortgage loans. Agodio subsequently participated in a variation of the scheme targeting unsuspecting immigrants, wherein he used false financial information to secure $3.8 million in loans through Miles to purchase approximately three dozen row houses. All of these properties are now in default or foreclosure. Sentenced to 61 months in prison, 5 years of supervised release, Alberic Okou Agodio Real Estate Broker February 26, 2016 and ordered to pay $3,356,581 in restitution. Sentenced to 19 months in prison, Property Investor/ 60 months of probation, and ordered Kevin Campbell September 11, 2015 Seller to pay $1,182,822 in restitution, joint and several. Sentenced to 18 months in prison, 60 months of probation, and ordered Jonathan Lee Miles Loan Officer September 10, 2015 to pay $1,182,822 in restitution, joint and several. Loan Origination Fraud Involving Kickbacks to Straw Buyers, Buyers, and Other Participants Conspirators participated in a mortgage fraud scheme in which they entered into agreements to purchase properties for amounts in excess of the original asking price. The loss exposure to the Enterprises is $1,192,125. Sentenced to 10 months in prison, 36 months of supervised release, and Loan Officer/Straw ordered to pay $549,100 in restitution, Enrique Hernandez February 18, 2016 Buyer Recruiter joint and several. Hernandez was previously ordered to pay forfeiture of $108,724. Sentenced to time served, 36 months of supervised release, and ordered to pay a $200 assessment and Carlos Morales Developer/Seller $230,121 in restitution, joint and December 18, 2015 several. An order of forfeiture in the amount of $40,000 was incorporated into the judgment. Sentenced to 18 months in prison, 36 months of supervised release, and Guillermo Rincon Straw Buyer May 5, 2015 ordered to pay $549,100 in restitution, joint and several. 96 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Unlicensed Appraiser/Identity Theft Scheme Subjects fraudulently obtained and used the identity of a licensed appraiser to prepare real estate appraisals, which were subsequently used to support mortgage loans sold to the Enterprises. White submitted over 400 appraisals for use in mortgage loans using the stolen identity. Ordered to pay restitution in the amount of $20,250. Previously sentenced to 60 months in prison Douglas White Unlicensed Appraiser February 11, 2016 followed by 12 months of supervised release, and ordered to pay a special assessment of $600. President/Loan Officer Sentenced to 90 days in jail, 6 months Diana Merritt at Merit Home Finance of supervised release, and ordered to December 3, 2015 Inc. pay a special assessment of $600. Sentencings in Builder Loan Origination Fraud Scheme According to an information, the builder, along with co-conspirators, participated in preparing a false HUD-1 form that falsely represented that the borrower provided over $1 million on the date of closing as “cash to close” when in fact he brought no monies to the closing. Sentenced to 5 months in prison, 6 months of home confinement, David B. Pick Mortgage Loan Officer February 10, 2016 3 years of supervised release, and ordered to pay $383,178 in restitution. Sentenced to 12 months, 1 day in prison, 12 months of home detention with an electronic monitoring system, Timothy Ritchie Builder/Investor January 14, 2016 3 years of supervised release, and ordered to pay $1,385,445 in restitution. Chicago Attorney and Chief Financial Officer Pled Guilty Carroll, the CFO of 13th & State, an LLC created to facilitate the development and sale of units at a high-rise condo building known as Vision on State, and Lattas, an attorney, worked with others to allegedly create a builder bailout scheme that used inflated sales prices to pay undisclosed incentives to recruiters and straw buyers. The scheme resulted in approximately $22.8 million in fraudulent mortgages and $13 million in losses to financial institutions. Robert Lattas Attorney Pled guilty to bank fraud. February 5, 2016 James Carroll Chief Financial Officer Pled guilty to bank fraud. February 3, 2016 Semiannual Report to the Congress • October 1, 2015–March 31, 2016 97 DEFENDANT ROLE MOST RECENT ACTION DATE Four Former Employees of SunTrust Mortgage Convicted at Trial SunTrust Mortgage employees conspired to commit wire fraud affecting a financial institution involving 13 properties. The employees prepared false mortgage loan applications for prospective borrowers knowing that the loan applications contained false material information, including statements that the borrowers intended to use the houses as their primary residences. As a result of their actions, there were total losses of $2,093,270 to SunTrust Mortgage, including a loss of $139,726 to Fannie Mae. Convicted by jury trial on charges of Loan Officer/Branch Mohsin Raza conspiracy to commit wire fraud and February 3, 2016 Manager wire fraud. Convicted by jury trial on charges of Farukh Iqbal Loan Officer conspiracy to commit wire fraud and February 3, 2016 wire fraud. Convicted by jury trial on charges of Humaira Iqbal Loan Officer Assistant conspiracy to commit wire fraud and February 3, 2016 wire fraud. Convicted by jury trial on charges of Mohammad Haider Loan Officer conspiracy to commit wire fraud and February 3, 2016 wire fraud. Loan Origination with Undisclosed Incentives and Misrepresentations King, Hearns, and others conspired to launder proceeds by means of committing wire fraud. King and Hearns had formed an agreement with others to assist in providing buyers of homes with the funds to close on real estate transactions, which they would falsely represent to lenders were provided by the buyers. The scheme caused a loss exposure of approximately $866,000 to the Enterprises, which bought or secured mortgages on 10 properties. Sentenced to 46 months in prison, 5 years of supervised release, and Euneisha Hearns Loan Officer February 2, 2016 ordered to pay $180,235 in restitution, joint and several. Sentenced to 33 months in prison, 36 months of supervised release, and Stephen King Real Estate Agent March 18, 2015 ordered to pay $685,704 in restitution, joint and several. $11 Million Fraudulent Loan Scheme Co-conspirators of the scheme prepared mortgage applications that contained false information about borrowers’ income, employment, and assets and generated dozens of mortgage loans for unqualified borrowers. The co- conspirators then allegedly took a commission or fee. The fraudulent loans were worth more than $11 million. Sentenced to 42 months in prison, Real Estate Broker/ 36 months of supervised release, Jose “Joe” Garcia Co-Owner of Mortgage and ordered to pay $1,610,000 in January 28, 2016 Brokerage restitution, joint and several, and a $100 special assessment. 98 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Sentenced to 7 months in prison, 7 months of home confinement, 36 months of supervised release, and Lidubina “Lido” Perez Loan Officer January 11, 2016 ordered to pay $735,750 in restitution, joint and several, and a $100 special assessment. Real Estate Broker/ Pled guilty to conspiracy to commit Lucy Garcia Co-Owner of Mortgage April 9, 2015 bank fraud. Brokerage Three Charged in Loan Origination Scheme, New York Co-conspirators allegedly recruited straw buyers to purchase properties using fraudulent mortgage loan applications in exchange for a fee. The loan applications misstated the borrowers’ incomes, employment histories, and amounts of money in their bank accounts. In addition, the co-conspirators allegedly provided fictitious documents and falsified bank statements to support the misrepresentations made on the loan applications. The loans on the properties defaulted, resulting in at least $240,000 in losses to Freddie Mac and another financial institution. Indicted for bank fraud, conspiracy Co-Conspirator, to commit bank fraud, and false Nimboko Miller Recruiter of Straw January 22, 2016 statements in connection with loan Buyers applications. Indicted for bank fraud, conspiracy Co-Conspirator, to commit bank fraud, and false Christopher Scott Sr. Recruiter of Straw January 22, 2016 statements in connection with loan Buyers applications. Indicted for bank fraud, conspiracy Co-Conspirator, to commit bank fraud, and false Christopher Scott Jr. Recruiter of Straw January 22, 2016 statements in connection with loan Buyers applications. Bank Examiner Pled Guilty In December 2014, an individual submitted a loan application with a false letter of employment. At the time, the individual was employed as a bank examiner for the OCC. Pled guilty to making false statements Borrower/Treasury of financial condition. Sentenced to Sophelia Alexander January 15, 2016 Employee 1 year of probation and assessed a fine of $2,728. Sentencing in Origination Scheme Several individuals conspired to defraud lending institutions by inducing them to fund mortgage loans by using material misrepresentations and omissions of material fact in HUD-1 forms, Settlement Statements, loan applications, and other loan documents. The scheme caused estimated losses of $967,989 to Fannie Mae and $130,265 to Freddie Mac. Sentenced to time served (7 months), 1 year of supervised release, ordered Home Builder/Straw Donald Mattox to pay $964,244 in restitution, January 5, 2016 Buyer joint and several, and forfeiture of $165,197. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 99 DEFENDANT ROLE MOST RECENT ACTION DATE A previous sentence was vacated and Edwards was resentenced to 46 months in prison, 12 months of Michael Edwards Loan Officer September 11, 2015 supervised release, and ordered to pay $1,300,402 in restitution, joint and several. Sentenced to 90 months in prison, 36 months of supervised release, Lawrence Day Recruiter forfeiture of $1,877,032, and ordered July 28, 2015 to pay $3,108,998 in restitution, joint and several. Sentenced to 20 months in prison, 12 months of supervised release, and Scott Sherman Builder November 13, 2014 ordered to pay $493,500 in restitution, joint and several, and a $7,500 fine. Sentenced to 21 months of incarceration, 36 months of Donna Cobb Escrow Officer supervised release, and ordered to pay May 28, 2014 $2,151,376 in restitution, joint and several. Sentencing in Property Flipping Scheme Co-conspirators engaged in a property flipping scheme wherein straw buyers were paid undisclosed incentives to purchase houses sold by Payne. Sentenced to 70 months of incarceration, 60 months of supervised Mortgage Broker/ Marcus Payne release, and ordered to pay a December 15, 2015 Company President $200 assessment fee and $753 in restitution. Straw Buyer Scheme Falls Flat Senior managers of Flatiron Development profited by selling homes to straw buyers at inflated prices. The homes fell into foreclosure, causing losses to the lending institutions, including Freddie Mac. Sentenced to 60 months in prison, 36 months of supervised release, and Theodoros Ezanidis Owner ordered to pay restitution, joint and October 20, 2015 several. The amount ordered to pay will be determined later. Sentenced to 12 months and 1 day in prison, 24 months of supervised Christopher Hopper Employee release, and ordered to pay restitution, October 20, 2015 joint and several. The amount ordered to pay will be determined later. Sentenced to 30 months in prison, 24 months of supervised release, and Robert Rendino Employee ordered to pay restitution, joint and October 20, 2015 several. The amount ordered to pay will be determined later. 100 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Sentenced to 36 months of probation Susan Rendino Co-Conspirator and ordered to pay $2,504 in May 19, 2015 restitution and a $2,000 fine. Attorney and Loan Officer Convicted at Trial in Chicago Lattas and Burge aided straw buyers to fraudulently obtain at least five mortgage loans valued at approximately $1.49 million by making materially false representations in documents submitted to lenders. Soon after the properties were sold to the straw buyers, the mortgages went into default. The fraud resulted in a combined Fannie Mae and Freddie Mac loss of approximately $800,000. Robert Lattas Attorney Convicted by a jury at trial. October 8, 2015 Nicholas Burge Loan Officer Convicted by a jury at trial. October 8, 2015 Semiannual Report to the Congress • October 1, 2015–March 31, 2016 101 Appendix H: Short sales occur when a lender allows a borrower who is “underwater” on his/her loan—that is, the OI Publicly Reportable borrower owes more than the property is worth—to Investigative Outcomes sell his/her property for less than the debt owed. Short sale fraud usually involves a borrower intentionally Involving Short Sale misrepresenting or not disclosing material facts to Schemes induce a lender to agree to a short sale to which it would not otherwise agree. DEFENDANT ROLE MOST RECENT ACTION DATE Short Sale Schemes in Michigan An indictment alleges that multiple individuals were involved in short sale schemes that involved finding a straw buyer for the purchase of homes that were not listed for sale at the time of purchase. According to the indictment, cash buyers allegedly conveyed the properties to relatives of the original homeowner, who then allegedly originated a loan for less than the original loan amount. Charged with false pretenses and Lina Nassif Short Seller January 11, 2016 conspiracy. Charged with false pretenses and Majid Krikor Straw Buyer January 11, 2016 conspiracy. Sentenced to 24 months of probation Short Seller/Straw Bassam Hamood and ordered to pay $10,000 in January 8, 2016 Buyer restitution and a fine of $1,558. Short Seller/Straw Mohamad Eddin Charged with false pretenses. October 1, 2015 Buyer Short Seller/Straw Charged with false pretenses and Mariam Dakroub August 13, 2015 Buyer conspiracy. Short Seller/Straw Charged with false pretenses and Chadi Rustom August 13, 2015 Buyer conspiracy. Short Seller/Straw Charged with false pretenses and Walid Fawaz Sr. August 13, 2015 Buyer conspiracy. Short Seller/Straw Charged with false pretenses and Zinab Allie August 13, 2015 Buyer conspiracy. Short Seller/Straw Charged with false pretenses and Bahij El-Fadl August 13, 2015 Buyer conspiracy. Short Seller/Straw Charged with false pretenses and Abbas Hamid August 13, 2015 Buyer conspiracy. 102 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Two Charged in Michigan Short Sale Fraud The owner of a real estate brokerage allegedly executed a short sale buy and bail scheme. He allegedly used extensive advertising to convince homeowners they could purchase new homes while he also assisted them with short selling their existing homes. His accomplice allegedly purchased one of the short sale homes through her company. Information filed charging bank fraud William Elias Real Estate Broker December 9, 2015 and money laundering. Realty Employee/KLD Kimberly Doren Information filed charging wire fraud. December 9, 2015 Owner Sentencings in Short Sale Scheme Conspirators allegedly engaged in several schemes to fraudulently obtain money, including: a “flopping” scheme where banks were convinced to accept short sale prices that were lower than a legitimate buyer would be willing to pay; recording false second and third liens; tricking distressed homeowners into signing their properties over to criminal actors; and renting distressed properties while simultaneously stalling foreclosure through the use of fraudulent documents. Sentenced to 3 years in prison (18 months suspended, 15 months electronic monitoring, and 3 months in Property Manager for Deanna Bashara a residential drug treatment program) December 3, 2015 Rent Scheme and ordered to pay $132,000 in restitution, fines of $300, and a special assessment of $350. Sentenced to 80 days in custody, Assisted with 200 hours of community service, Shell Companies 5 years of probation, and ordered to Delia Wolfe and Opened Bank December 3, 2015 pay $176,349 in restitution, fines of Accounts Used in the $600, and a special assessment Scheme of $350. Sentenced to 98 days in custody, Generated and 5 years of probation, and ordered to James Styring Filed False/Forged pay $50,000 in restitution, fines of December 3, 2015 Documents $600, and a special assessment of $110. Sentenced to 6 years in prison and Licensed Real ordered to pay $596,232 in restitution, Joseph Jaime Estate Salesperson/ December 3, 2015 fines of $600, and a special Facilitated Short Sales assessment of $1,110. Sentenced to 48 months in prison (20 months suspended) and ordered Generated False/ Lindsay Petty to pay $129,883 in restitution, $400 October 1, 2015 Forged Documents in fines, and a special assessment of $430. Scheme Leader and Sentenced to 128 months in prison Jackalyn Bashara Licensed Real Estate and ordered to pay $836,165 in June 29, 2015 Salesperson restitution and $600 in fines. Scheme Leader/ Pled guilty to conspiracy, grand theft, Eric Wolfe Licensed Real Estate preparing false documents, and June 25, 2015 Broker mortgage fraud. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 103 DEFENDANT ROLE MOST RECENT ACTION DATE Straw Buyer and Sentenced to 36 months of probation Opened Bank Billie Bryant and ordered to pay $300,000 in May 13, 2015 Accounts Used in the restitution and $300 in fines. Scheme Straw Buyer and Opened Bank Gerald Bryant Charges dropped. Accounts Used in the Scheme Intimidated Victims Sentenced to 36 months in prison and Collected Rent (18 months suspended), 18 months of Jered Bryant May 13, 2015 Generated by the supervised release, and ordered to pay Scheme $124,467 in restitution. Charged with conspiracy, grand theft, Notary/Licensed Real Brian Deden mortgage fraud, and procuring/offering June 25, 2014 Estate Broker false/forged instruments. 104 Federal Housing Finance Agency Office of Inspector General Appendix I: These schemes prey on homeowners. Businesses advertise that they can secure loan modifications, OI Publicly Reportable provided that the homeowners pay significant upfront Investigative fees. Typically, these businesses take little or no action, leaving homeowners in a worse position. Outcomes Involving Loan Modification and Property Disposition Schemes DEFENDANT ROLE MOST RECENT ACTION DATE Multiple Subject Indictment in California Loan Modification Scheme Defendants, along with others, allegedly devised a scheme to obtain upfront payments from victims who were trying to obtain a loan modification by leading them to believe they were receiving federally funded home loan modifications under the government’s Home Affordable Modification Program. Bookkeeper, Pled guilty to conspiracy to commit Isaac Perez Customer Service March 30, 2016 wire fraud. Representative Pled guilty to conspiracy to commit Joshua Johnson Sub-Leader, Closer March 29, 2016 wire fraud. Customer Service Pled guilty to conspiracy to commit Jefferson Maniscan March 29, 2016 Representative wire fraud. Facilitator, Opened Pled guilty to conspiracy to commit Raymund Dacanay March 29, 2016 Bank Accounts wire fraud. Pled guilty to conspiracy to commit Roscoe Umali Scheme Leader March 22, 2016 wire fraud. Sentenced to 151 months in prison Joshua Sanchez Scheme Leader October 29, 2015 and 3 years of supervised release. Sentenced to 135 months in prison Kristen Ayala Co-Conspirator October 29, 2015 and 3 years of supervised release. Facilitator, Direct Indicted on wire fraud and conspiracy Hanh “Jennifer” Seko October 22, 2015 Marketer/Mailer to commit wire fraud charges. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 105 DEFENDANT ROLE MOST RECENT ACTION DATE Loan Modification Scheme The co-conspirators allegedly engaged in a mortgage loan modification fraud; using various company names, they claimed to negotiate with lenders to lower mortgage payments on behalf of victims. Co-conspirators allegedly made numerous false statements to induce payment of advance fees. Once the fees were paid, however, victims have stated they were unable to contact anyone within the various business entities. Pled guilty to conspiracy to commit Aria Maleki Scheme Leader March 22, 2016 mail and wire fraud. Pled guilty to conspiracy to commit Serj Geutssoyan Closer February 25, 2016 mail and wire fraud. Pled guilty to conspiracy to commit Mehdi Moarefian Closer February 17, 2016 mail and wire fraud. Closer, Set Up Website Pled guilty to conspiracy to commit Daniel Shiau February 17, 2016 and Email Accounts mail and wire fraud. Indicted on wire fraud, mail fraud, conspiracy to commit wire and Cuong King Closer January 21, 2016 mail fraud, and telemarketing fraud charges. Indicted on wire fraud, mail fraud, Processing Team conspiracy to commit wire and Michelle Lefaoseu January 21, 2016 Leader mail fraud, and telemarketing fraud charges. Indicted on wire fraud, mail fraud, conspiracy to commit wire and Kowit Yuktanon Closer January 21, 2016 mail fraud, and telemarketing fraud charges. Loan Modification Scheme Defendants allegedly operated a loan modification scheme and allegedly made a number of false statements to clients in an effort to induce them to pay upfront fees, with little or no services rendered. Sentenced to 24 months of probation, Office Manager 100 hours of community service, and Stacy Tuers of Telemarketing March 10, 2016 ordered to pay a special assessment Company of $25. Sentenced to 9 months in prison, 3 years of supervised release, and Michael Nazarinia Supervisor and Trainer February 8, 2016 ordered to pay a special assessment of $100. Charged with mail fraud and Charlie Rose Trained Telemarketers July 8, 2015 subscribing to a false tax return. Residential Home Loan Modification Scam Targets Hispanic Homeowners in Hyattsville, Maryland Co-conspirators allegedly promoted a fraudulent loan modification scheme targeting Hispanic homeowners with limited English language who were unfamiliar with mortgage lending practices. Pedrina Rodriguez Co-Conspirator/ Charged with conspiracy to commit February 17, 2016 Bonilla Recruiter mail and wire fraud. Co-Conspirator/ Charged with conspiracy to commit Ana Gomez February 17, 2016 Scheme Organizer mail and wire fraud. 106 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Co-conspirator/ Charged with conspiracy to commit Rene de Leon February 17, 2016 Scheme Organizer mail and wire fraud. Sentencings in Loan Modification Scheme Defendants allegedly conspired to operate a loan modification scheme. Co-conspirators allegedly made false promises and guarantees to financially distressed homeowners regarding their company’s ability to negotiate loan modifications from the homeowners’ mortgage lenders, as well as false guarantees of specific interest rates and mortgage payments. Ordered to pay $6,420,052 in Crystal Buck Sales Employee restitution, joint and several. Previously February 3, 2016 sentenced to 60 months in prison. Ordered to pay $3,501,381 in Albert DiRoberto Sales Employee restitution, joint and several. Previously February 3, 2016 sentenced to 60 months in prison. Sentenced to 20 years in prison, 5 years of supervised release, February 3, 2016— Christopher George Co-Owner of Company and ordered to pay $6,656,099 in amended restitution restitution, joint and several. Handled Customer Ordered to pay $6,764,743 in Yadira Padilla Complaints and February 3, 2016 restitution, joint and several. Refund Requests Ordered to pay $1,142,603 in Iris Pelayo Appointment Setter February 3, 2016 restitution, joint and several. Ordered to pay $64,869 in restitution, Directed Distressed joint and several. Previously sentenced Homeowners to Sign to 3 months in prison, 12 months Hamid Shalviri a Fractional Interest in February 3, 2016 of home confinement, 36 months of Their Properties Over supervised release, and 200 hours of to Him community service. Received Customer Ordered to pay $6,420,052 in Complaints and restitution, joint and several. Previously Catalina Deleon February 3, 2016 Managed Processing sentenced to 30 months in prison, and Department 36 months of supervised released. Ordered to pay $6,764,743 in restitution, joint and several. Previously Andrea Ramirez Scheme Leader February 3, 2016 sentenced to 18 years in prison, and 36 months of supervised release, Ordered to pay $6,420,052 in restitution, joint and several. Previously Michael Parker Sales Employee February 3, 2016 sentenced to 72 months in prison, and 3 years of supervised release. Ordered to pay $6,223,723 in restitution, joint and several. Previously Michael Bates Sales Employee February 3, 2016 sentenced to 366 days in prison, and 3 years of supervised release. Ordered to pay $2,094,330 in Supervised Processing restitution, joint and several. Previously Mindy Holt February 3, 2016 Department sentenced to 18 months in prison, and 24 months of supervised release. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 107 DEFENDANT ROLE MOST RECENT ACTION DATE Ruby Encina Indicted for filing a false tax return. September 9, 2015 Quit Claim Bankruptcy Scheme A complaint alleges a company was quit claiming properties belonging to several individuals who were undergoing potential foreclosure, and that they filed bogus bankruptcy petitions in the names of the property owners to tie up the properties while they rented them out. The original owners never gave permission to the company to file bankruptcies on their behalf. Sentenced to 36 months of incarceration, 3 years of supervised Recruiter—Owner of release, 300 hours of community David Griffin December 14, 2015 Bay 2 Bay service, and ordered to pay a $200 assessment fee, $5,000 fine, and $25,125 in restitution. Sentencing and Plea in Short Sale Scheme Defendants conspired to cause lenders to release liens on encumbered properties via fraudulently arranged short sale transactions. To complete the transactions, they submitted false loan applications and documents and recruited straw buyers. The losses to financial institutions/lenders total approximately $2 million. Fannie Mae purchased or secured over 100 loans from the mortgage lenders. Sentenced to time served (1 day), 36 months of supervised release, Co-Owner of NJ 8 months of location monitoring, Yazmin Soto-Cruz December 8, 2015 Property Management 200 hours of community service, and ordered to pay a $100 special assessment. Recruiter of Straw Pled guilty to conspiracy to commit Miguel LaRosa December 2, 2015 Buyers wire fraud. Sentenced to 36 months in prison, 36 months of supervised release, Delio Coutinho Loan Officer August 11, 2015 and ordered to pay $1,312,334 in restitution, joint and several. Sentenced to 24 months in prison, 36 months of supervised release, Kenneth Sweetman Unlicensed Title Agent July 27, 2015 and ordered to pay $2,223,131 in restitution, joint and several. Sentenced to 27 months in prison, 36 months of supervised release, Carmine Fusco Unlicensed Title Agent forfeiture of $370,334, and ordered July 14, 2015 to pay $2,233,131 in restitution, joint and several. Sentenced to 24 months of supervised release, 4 months of Former Real Estate Christopher Ju home confinement, and ordered to June 8, 2015 Agent pay $256,511 in restitution, joint and several. Sentenced to 12 months in prison, 36 months of supervised release, Amedeo Gaglioti Closing Attorney forfeiture of $1 million, and ordered June 4, 2015 to pay $2,001,245 in restitution, joint and several. 108 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Pled guilty to conspiracy to commit Joseph DiValli Loan Officer May 28, 2015 wire fraud, wire fraud, and tax evasion. Pled guilty to a one-count information with conspiracy to commit wire fraud Paul Chemidlin Unlicensed Appraiser and one count of distribution and July 22, 2014 possession with intent to distribute Methylone. Loan Modification Scheme Jalan operated a scheme to defraud distressed homeowners by representing that she was an attorney offering loan modification services. Jalan failed to disclose that the Consumer Financial Protection Bureau had obtained a preliminary injunction that prohibited her from offering loan modification services. Sentenced to 70 months in prison, 3 years of supervised release, and Najia Jalan Scheme Leader October 5, 2015 ordered to pay $236,785 in restitution and a special assessment of $300. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 109 Appendix J: The wave of foreclosures following the housing crisis left the Enterprises with a large inventory of REO OI Publicly Reportable properties. This large REO inventory has sparked a Investigative Outcomes number of different schemes to either defraud the Enterprises, who use contractors to secure, maintain Involving Property and repair, price, and ultimately sell their properties, Management and or defraud individuals seeking to purchase REO properties from the Enterprises. REO Schemes DEFENDANT ROLE MOST RECENT ACTION DATE Flipping REO Scheme in Memphis, Tennessee This scheme involved investor flipping of foreclosure properties by offering financial incentives to the borrowers that were not disclosed to the lenders. Allegations also involve loan officers facilitating the sales by falsifying loan applications. Pled guilty to conspiracy to commit Nicholas Maxwell Recruiter February 24, 2016 mail, wire, and bank fraud. Sentenced to time served, 12 months in a halfway house, 36 months of Mortgage Company Charlie Paul supervised release, and ordered to pay January 7, 2016 President $463,372 in restitution and forfeiture of $455,252. Sentenced to 15 months in prison, Mortgage Broker/Loan 24 months of supervised release, and Cedric Scott October 16, 2015 Officer ordered to pay $104,237 in restitution and forfeiture of $301,794. Owner of RE/MAX Office in Illinois Found Guilty Simons stole escrow money provided by potential real estate buyers. The earnest money of at least 12 clients, valued at over $100,000, was identified as having been stolen by Simons. RE/MAX County Line was an approved Fannie Mae REO broker. Sentenced to 120 days in jail, Owner of RE/MAX Harry Simons 48 months of probation, and ordered February 9, 2016 County Line to pay $140,300 in restitution. 110 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE False REO Scheme In 2013, Moore filed documents with the Cook County Recorder’s Office obscuring title ownership of a property, which gave the appearance he had claim to ownership or possession of the property when in fact he did not. Moore also proceeded to collect rent from tenants. The scheme obstructed sale of the property by Fannie Mae, the true owner of the property. Sentenced to 66 months in prison, Anatoly Moore Owner/Landlord 24 months of supervised release, and November 19, 2015 ordered to pay a fine of $689. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 111 Appendix K: Adverse possession schemes use illegal adverse possession (also known as “home squatting”) or OI Publicly Reportable fraudulent documentation to control distressed Investigative Outcomes homes, foreclosed homes, and REO properties. Involving Adverse Possession Schemes DEFENDANT ROLE MOST RECENT ACTION DATE Sovereign Citizen Group Charged in REO Scheme Four individuals were allegedly commandeering vacant or recently foreclosed homes owned by Fannie Mae or other lenders. Those charged were part of a sovereign citizens group known as “Moors”; the group does not believe that they must comply with state or federal law. The individuals allegedly moved into the properties or rented them to family members. In some cases, the renters were unaware of the scheme. Pled guilty to three counts of burglary. Was sentenced to prison for Arshad Thomas Sovereign Citizen 45 months, 24 months of supervised March 15, 2016 release, and ordered to pay $469 in fees. Charged with theft, burglary, and David Farr Sovereign Citizen June 30, 2015 financial institution fraud. Charged with theft, burglary, and Torrez Moore Sovereign Citizen June 30, 2015 financial institution fraud. Charged with theft, burglary, and Raymond Trimble Sovereign Citizen June 30, 2015 financial institution fraud. Subject and Entity Charged in Debt Management and Loan Modification Scam Longordo and his company, Modify Loan Experts, LLC, allegedly engaged in fraud by collecting upfront payments for loan modifications never received by homeowners. Modify Loan Experts, LLC allegedly promised homeowners an attorney would work directly with their financial institutions to negotiate on their behalf when in fact no such negotiations occurred. Charged with false pretenses, larceny Pasquale Longordo Business Owner by conversion, and violating the Debt March 9, 2016 Management Act. Charged with false pretenses, larceny Modify Loan Experts, Business Entity by conversion, and violating the Debt March 9, 2016 LLC Management Act. 112 Federal Housing Finance Agency Office of Inspector General DEFENDANT ROLE MOST RECENT ACTION DATE Foreclosure Rescue and Bankruptcy Fraud Scheme From early 2011 to early 2014, defendants collected more than $2 million in proceeds from their foreclosure delay/eviction delay scheme involving hundreds of fraudulent bankruptcies and deeds of trust. At least 11 of the properties were owned by Freddie Mac, resulting in a loss of at least $800,000. Pled guilty to an advance fee felony Eugene Fulmer Salesman February 24, 2016 charge. Sentenced to 120 days in prison and Shara Surabi Salesman February 11, 2016 5 years of probation. Sentenced to 120 days in prison and Panik Karikorian Salesman February 11, 2016 5 years of probation. Beneficiary of False Sentenced to 120 days in prison and Juan Velasquez February 11, 2016 Deeds of Trust 5 years of probation. Deed Theft Scheme Subjects operated a scheme to steal Fannie Mae and Freddie Mac properties by filing forged grant deeds and then selling the stolen properties to unwitting investors. At least 10 of the properties stolen were owned by the Enterprises, valued at over $2.5 million. Pled guilty to conspiracy to commit mail and wire fraud, mail fraud, Mazen Alzoubi Scheme Leader aggravated identity theft, money January 5, 2016 laundering conspiracy, and criminal forfeiture. Allowed His Company Mohamad Daoud to be Used to Obscure Pled guilty to money laundering. July 6, 2015 Chain of Title Interacted with Escrow Companies During Daniel Deaibes Pled guilty to mail fraud. March 18, 2015 Sales of Stolen Properties Adverse Possession Involving Fraudulent Ownership of Enterprise Properties, Pennsylvania Subjects allegedly operated a scheme where properties were stolen, including properties owned by the Enterprises, by creating fraudulent deeds purporting to convey ownership of the properties. The subjects then allegedly occupied several of the properties or attempted to rent or sell the properties. Reported losses by the Enterprises totaled approximately $240,000. Charged with conspiracy to commit bank fraud, illegal conversion of government property, aiding and Steven Hameed Scheme Leader December 1, 2015 abetting, corrupt interference with Internal Revenue laws, and fictitious obligations violations. Charged with conspiracy to commit bank fraud, illegal conversion of government property, aiding and Darnel Young Scheme Leader December 1, 2015 abetting, corrupt interference with Internal Revenue laws, and fictitious obligations violations. Semiannual Report to the Congress • October 1, 2015–March 31, 2016 113 DEFENDANT ROLE MOST RECENT ACTION DATE Charged with conspiracy to commit bank fraud, illegal conversion of government property, aiding and Damond Palmer Scheme Participant December 1, 2015 abetting, corrupt interference with Internal Revenue laws, and fictitious obligations violations. Florida Sovereign Citizens Involved in Illegal Occupancy of Fannie Mae REO Paul and Baptiste (a married couple/sovereign citizens) were illegally occupying a Fannie Mae-owned single-family residence. Paul and Baptiste conspired to file a false deed on the property with the Broward County Recorder’s Office reflecting their ownership. Fannie Mae was notified and verified that the aforementioned single-family property was under Fannie Mae ownership as a REO property. Sovereign Citizen/ Sentenced to 2 years of house arrest Wonsik Paul November 24, 2015 Illegal Occupant and 8 years of probation. Sovereign Citizen/ Marlene Jean Baptiste Sentenced to 5 years in prison. November 24, 2015 Illegal Occupant 114 Federal Housing Finance Agency Office of Inspector General Appendix L: In this type of fraudulent conspiracy, traders fraudulently manipulate the buying and selling prices OI Publicly Reportable of RMBS bonds, causing customers to pay more Investigative Outcomes to purchase the RMBS securities and to receive less when they sell RMBS securities. Involving RMBS Schemes DEFENDANT ROLE MOST RECENT ACTION DATE Three Former Bond Traders Charged Three former bond traders were indicted in a 10-count indictment alleging they committed fraud in connection with sales of RMBS bonds. The indictment alleges that the three former supervisory traders, who sat on the RMBS desk at Nomura in New York, engaged in a conspiracy to defraud customers of Nomura. Managing Director of Ross Shapiro Indicted via superseding indictment. February 4, 2016 Nomura Executive Director of Michael Gramins the RMBS Desk at Indicted via superseding indictment. February 4, 2016 Nomura Senior Vice President Tyler Peter of the RMBS Desk at Indicted via superseding indictment. February 4, 2016 Nomura Semiannual Report to the Congress • October 1, 2015–March 31, 2016 115 Appendix M: Figure Sources Figure 2. Federal Housing Finance Agency Office of Inspector General, “Executive Summary,” $1.1 Billion Increase in Expenses for Fannie Mae and Freddie Mac from 2012 through 2015: Where the Money Went, WPR-2016-001, at 3 (March 9, 2016). Accessed: April 26, 2016, at www.fhfaoig.gov/Content/Files/v2%20WPR-2016-001.pdf. Figure 3. Federal Housing Finance Agency Office of Inspector General, “Fannie Mae,” $1.1 Billion Increase in Expenses for Fannie Mae and Freddie Mac from 2012 through 2015: Where the Money Went, WPR-2016-001, at 13 (March 9, 2016). Accessed: April 26, 2016, at www.fhfaoig.gov/Content/Files/v2%20WPR-2016-001.pdf. Figure 4. Federal Housing Finance Agency Office of Inspector General, “Freddie Mac,” $1.1 Billion Increase in Expenses for Fannie Mae and Freddie Mac from 2012 through 2015: Where the Money Went, WPR-2016-001, at 17 (March 9, 2016). Accessed: April 26, 2016, at www.fhfaoig.gov/Content/Files/v2%20WPR-2016-001.pdf. 116 Federal Housing Finance Agency Office of Inspector General Appendix N: Endnotes FHFA-Announces-Suspension-of-Capital- Classifications-During-Conservatorship-and- Discloses-Minimum-and-RiskBased-Cap.aspx. 1 1 2 U.S.C. § 4617(b)(2)(A), (B), (D) (2011). The Safety and Soundness Act does not expressly Accessed: April 25, 2016, at www.gpo.gov/fdsys/ permit the FHFA Director to suspend this pkg/USCODE-2011-title12/pdf/USCODE- requirement, but FHFA asserts that it suspended 2011-title12-chap46-subchapII-sec4617.pdf. the requirement using its incidental powers as conservator or receiver. See 12 C.F.R. § 1237.3(c) 2 Department of the Treasury, Statement by Secretary (2013). Accessed: April 25, 2016, at www.gpo. Henry M. Paulson, Jr. on Treasury and Federal gov/fdsys/pkg/CFR-2013-title12-vol9/pdf/CFR- Housing Finance Agency Action to Protect Financial 2013-title12-vol9-sec1237-3.pdf. FHFA currently Markets and Taxpayers (September 7, 2008). does not publish the data necessary for third Accessed: April 26, 2016, at www.treasury.gov/ parties to determine whether the Enterprises meet press-center/press-releases/Pages/hp1129.aspx. the definition of “critically undercapitalized.” 3 See Freddie Mac Update July 2015 and Fannie 4 ederal Housing Finance Agency, Division F Mae and Freddie Mac monthly volume of Housing Mission and Goals, Quarterly summaries for market share information. For Performance Report of the Housing GSEs: First a discussion of the Enterprises’ capital reserves Quarter 2015, at 14-17 (June 29, 2015). and under the PSPAs, see OIG white paper Accessed: April 25, 2016, at www.fhfa. FHFA’s Conservatorships of Fannie Mae and gov/AboutUs/Reports/ReportDocuments/ Freddie Mac: A Long and Complicated Journey, PerformanceReportofHousingGSEs-1Q2015.pdf. WPR-2015-002 (March 25, 2015). Accessed: April 25, 2016, at www.fhfaoig.gov/Content/ 5 or a detailed discussion of the uncertainty of F Files/WPR-2015-002_0.pdf. By operation of the Enterprises’ future profitability, see Federal the PSPAs, the Enterprises’ capital cushion will Housing Finance Agency Office of Inspector be eliminated over time. Given their paucity of General, The Continued Profitability of Fannie Mae capital, it is believed that the Enterprises may and Freddie Mac Is Not Assured, WPR-2015-001 meet the definition of “critically undercapitalized” (March 18, 2015). Accessed: April 25, 2016, at as set forth in the Federal Housing Enterprises www.fhfaoig.gov/Reports/AuditsAndEvaluations. Financial Safety and Soundness Act of 1992, as amended (the Safety and Soundness Act). 6 S ee Senate Committee on Banking, Housing, However, shortly after FHFA placed the and Urban Affairs, Testimony of Federal Housing Enterprises in conservatorship, it suspended Finance Agency Inspector General Steve A. the statutory requirement that the Agency Linick (December 13, 2011). Accessed: April issue quarterly capital classifications for the 25, 2016, at www.fhfaoig.gov/Content/Files/ duration of the conservatorships. See FHFA Senate-12-13-2011.pdf. (“FHFA was not press release FHFA Announces Suspension of proactive in oversight and enforcement, and Capital Classifications During Conservatorship accordingly, resource allocations may have (October 9, 2008). Accessed: April 25, 2016, affected its ability to oversee the GSEs and at www.fhfa.gov/Media/PublicAffairs/Pages/ enforce its directives. Both trends have emerged Semiannual Report to the Congress • October 1, 2015–March 31, 2016 117 in a number of our reports.”); see also Senate 11 1 2 U.S.C. § 4565(a)(1) (2014). Accessed: April Committee on Banking, Housing, and Urban 25, 2016, at www.gpo.gov/fdsys/pkg/USCODE- Affairs, Testimony of Steve A. Linick, Inspector 2014-title12/pdf/USCODE-2014-title12- General, Federal Housing Finance Agency (April 18, chap46-subchapI-partB-subpart2-sec4565.pdf. 2013). Accessed: April 25, 2016, at www.fhfaoig. gov/Content/Files/Linick testimony Senate 12 nterprise Duty To Serve Underserved Markets, E Banking.pdf. (“Even when FHFA has identified 75 Fed. Reg. 32,099 (proposed June 7, 2010) (to risks and taken steps to manage those risks, the be codified at 12 C.F.R. pt. 1282). Accessed: April Agency has not consistently enforced its directives 25, 2016, at www.gpo.gov/fdsys/pkg/FR-2010- to ensure that identified risks are adequately 06-07/pdf/2010-13411.pdf. addressed.”) 13 nterprise Duty To Serve Underserved Markets, E 7 Defendant’s Response in Opposition to 80 Fed. Reg. 79,181, at § 1282.32(a) (proposed Plaintiffs’ Motion to Compel Production of December 18, 2015) (to be codified at 12 C.F.R. Certain Documents Withheld for Privilege, at pt. 1282). Accessed: April 25, 2016, at www.gpo. 17, Fairholme Funds, Inc. v. United States, No. gov/fdsys/pkg/FR-2015-12-18/pdf/2015-31811. 13-465C (Fed. Cl. 2016). pdf. 8 Federal Home Loan Banks Office of Finance, 14 Id., at § 1282.36(a). Combined Financial Report for the Year Ended December 31, 2014 (March 27, 2015). Accessed: 15 Id., at § 1282.36(c)(1). April 25, 2016, at www.fhlb-of.com/ofweb_ userWeb/resources/2014Q4Document-web.pdf. 16 e three underserved markets are manufactured Th housing, affordable housing preservation, and 9 Suspended Counterparty Program, 80 Fed. Reg. rural housing. Id., at §§ 1282.33-35, per 12 79,675 (final rule December 23, 2015) (to be U.S.C. § 4565(a)(1). codified at 12 C.F.R. pt. 1227). Accessed: April 26, 2016, at www.gpo.gov/fdsys/pkg/FR-2015- 17 Id., at § 1282.36(c)(2). 12-23/pdf/2015-32183.pdf. 18 Id., at § 1282.36(c)(3). 10 Enterprise Duty To Serve Underserved Markets, 80 Fed. Reg. 79,181 (proposed December 18, 2015) (to be codified at 12 C.F.R. pt. 1282). Accessed: April 25, 2016, at www.gpo.gov/fdsys/ pkg/FR-2015-12-18/pdf/2015-31811.pdf. 118 Federal Housing Finance Agency Office of Inspector General 19 In its ruling on a challenge to an agency decision brought pursuant to the Administrative Procedure Act, 5 U.S.C. § 706, the U.S. District Court for the District of Columbia stated: In reviewing an administrative action, a district court must determine whether the administrative action was arbitrary and capricious, contrary to law, or unsupported by substantial evidence. § 706. To pass arbitrary and capricious review, the administrative body “must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)). If the administrative action is reasonable, the court must accept it. Roberts v. Harvey, 441 F. Supp. 2d 111, 118 (D.D.C. 2006). Jackson v. Mabus, 56 F. Supp. 3d 1, 12 (D.D.C. 2014). Semiannual Report to the Congress • October 1, 2015–March 31, 2016 119 Federal Housing Finance Agency Office of Inspector General Se m iann ual R e p ort to t h e Cong r e ss October 1, 2015, through March 31, 2016 Federal Housing Finance Agency Office of Inspector General 400 Seventh Street, SW Washington, DC 20024 Main (202) 730-0880 Hotline (800) 793-7724 www.fhfaoig.gov
Eleventh Semiannual Report to the Congress
Published by the Federal Housing Finance Agency, Office of Inspector General on 2016-03-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)