Federal Housing Finance Board

GAO reached four primary conclusions about the Federal Housing Finance Board's (FHFB) regulatory oversight of the nation's third-largest government-sponsored enterprise--the Federal Home Loan Bank System. First, FHFB did not ensure that all parts of the annual examinations GAO reviewed met FHFB's internal standards for assessing safety and soundness. Second, weaknesses exist in FHFB's off-site monitoring and supervisory enforcement programs. Third, FHFB lacks policies and procedures, outside of its reviews of the special affordable housing and community investment programs, to determine whether or the extent to which Federal Home Loan Banks are supporting their public mission of housing finance. Fourth, FHFB's involvement in promoting System programs and projects that it later evaluates for mission compliance and for safety could complicate its primary duty as a safety and soundness regulator and may prompt questions about FHFB's objectivity. This testimony summarizes the September 1998 report, GAO/GGD-98-203.

GAO noted that: (1) FHFB's examination function did not ensure that annual examinations met FHFB's internal examination standards, including adequate documentation for work performed; (2) the examinations included reviews of interest-rate and credit risk, two of the primary types of risk faced by the Banks; (3) however, the examinations did not fully assess other areas that FHFB and others have identified as vital in evaluating an institution's risk management capabilities, such as management and board of directors oversight, internal control systems, and internal audit function; (4) weaknesses existed in FHFB's off-site monitoring and supervisory enforcement programs; (5) FHFB lacks a coordinated off-site monitoring system, which is an important part of effective safety and soundness oversight, because it can provide an early warning of potential problems; (6) FHFB also lacks an enforcement program that clearly articulates policies and procedures for taking corrective action; (7) the situation is further aggravated because the statute grants only general authority to enforce the statute and make orders; (8) the only authority delineated in the statute is the authority to remove or suspend Bank employees, directors, officers, or agents for cause; (9) FHFB does not have policies or procedures, outside of its reviews of the special affordable housing and community investment programs, to determine whether or the extent to which Banks are supporting housing finance; (10) FHFB recognized this omission and has begun to take steps to establish such a program, but no final actions have been taken to establish a regulatory framework to ensure mission compliance; (11) FHFB continues to be involved in System business; (12) many of the authorities that involve FHFB in System business are specified in statute or are carryover regulations from its predecessor agency; (13) FHFB began to devolve many of the functions in 1994, but it still plays a role in coordination and promotion of Banks; (14) GAO continues to believe that such involvement in the System's business functions may undermine FHFB's independence and lead to questions about its objectivity; and (15) GAO supports its position that a single housing regulator be created to oversee the safety and soundness and mission compliance of the housing government-sponsored enterprises.