Federal Housing Finance Agency MEMORANDUM TO: Peter C. Emerzian Deputy Inspector General Office of Investigations FROM: Fred Graham Deputy Director Division of FHLBank Regulation SUBJECT: “FHLBank Collateral and Credit Reviews,” SIR-2013-4, OIG Case No. I-11-0011 DATE: June 28, 2013 This memorandum responds to the memorandum dated June 17, 2013 from Inspector General Linick to Acting Director DeMarco. That memorandum cited your Systemic Implication Report dated June 13, 2013, which describes an investigation related to fraudulent collateral pledged by a former member of the FHLBank of Atlanta. The memorandum also offered several recommendations: 1) that FHFA further assess whether the FHLBanks are adequately reviewing the assets pledged as collateral and independently test those reviews, and 2) that if indicators of alleged fraud are detected during the course of review that both the credit and collateral departments within the appropriate FHLBank are notified and that a Financial Instrument Fraud Report is promptly filed. In addition, both your report and the memorandum from Inspector General Linick stated that FHFA-OIG is available for fraud training of FHFA examiners responsible for examining the FHLBanks. In response to the first recommendation from your office, we reinforced to our examination staff the importance of remaining aware of loan fraud related to FHLBank collateral; assessing collateral reviews (including independent reviews) by the FHLBank and by examiners; and compliance by the FHLBanks with FHFA regulation for collateral verification. We used your Systemic Implication Report for this purpose, which provided an example of insider fraud at the member level. In response to the second recommendation, we will continue to apply 12 CFR 1233, Reporting of Fraudulent Financial Instruments, toward the FHLBanks. This FHFA regulation requires each FHLBank to report to FHFA in a timely manner the discovery that it has purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud relating to the purchase or sale of any loan or financial instrument. Notably, the regulation applies to fraudulent assets that are pledged to the FHLBanks for the purpose of securing an advance. The regulation also requires each FHLBank to have internal controls, policies, procedures, and operational training to discover such transactions. FHFA’s Regulatory Policy Guidance, issued March 2011, provides specific reporting guidance and describes the types of reports that a regulated entity should submit to the Director’s designee when it discovers fraud or possible fraud. Reporting June 28, 2013 Page 2 related to 12 CFR 1233 is typically done by way of a Financial Instrument Fraud Report within 30 days of discovery, or an Immediate Notification within one calendar day, when a fraud or possible fraud may involve a significant fiscal, financial or reputational impact or when a fraud or possible fraud involves insiders. Lastly, with respect to your offer of assistance with fraud training, we would like to extend to your Office an invitation to participate in the December all-hands meeting of the Division of FHLBank Regulation. While we have not yet worked out the structure of that meeting, I believe we could create an opportunity for a representative of the Office of Investigations to address indicators, risks, and other features of fraud to the entire Division. We appreciate FHFA-OIG bringing this case to our attention, and we would be happy to discuss further the report or its implications. CC: Bruce Crandlemire John Major
Federal Home Loan Bank Collateral Verification Reviews
Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-06-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)