A pair of watchdog reports are critical of quality control and budget approval processes at the regulator of Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency, which acts as both the regulator and conservator of Fannie and Freddie, has an Office of Quality Assurance.
The office is responsible for conducting internal reviews of FHFA divisions that perform its statutory examination and regulatory functions.
In October 2011, a report from the office identified five weaknesses with FHFA’s examination processes including a
lack of a comprehensive quality-control review process. It recommended that FHFA establish a process for examination reports and associated work papers to ensure adequacy and quality of its examinations.
A year later, FHFA’s Division of Enterprise Regulation committed to remediate the deficiency and said a program would be developed by the end of 2012.
But almost four years later, FHFA still has not established a process
to resolve matters requiring attention, according to a report from FHFA’s Office of Inspector General, Intermittent Efforts Over Almost Four Years to Develop a Quality Control Review Process Deprived FHFA of Assurance of the Adequacy and Quality of Enterprise Examinations.
FHFA has since advised the inspector general that the
Division of Enterprise Regulation finalized its quality control review process on July 28, though the inspector general has not yet assessed whether the new procedures, as drafted, satisfy requirements in a directive issued by FHFA in March 2013.
The inspector general recommends that FHFA’s Division of Enterprise Regulation fulfill the directive and provide detailed results from each quality control review.
FHFA agreed with the recommendations.
A second FHFA OIG report, FHFA’s Exercise of Its Conservatorship Powers to Review and Approve the Enterprises’ Annual Operating Budgets Has Not Achieved FHFA’s Stated Purpose, found that the regulator’s budget approval process has been inadequate.
Problems with the process include
late timing, cursory-level analysis and inadequate resources.
“These shortcomings prevent FHFA from exercising effective control over enterprise spending, both in amount and direction,” the OIG said. “As a consequence, FHFA’s budget review and approval process has imposed virtually no budget control on the enterprises, and FHFA’s approval of the budgets creates the risk that it has endorsed enterprise spending that has not been well understood by FHFA.”
After the inspector general finished its evaluation in June, FHFA decided in late July to enhance its budget review-and-approval process.
The inspector general recommends that
FHFA direct Fannie and Freddie to provide proposed budgets early enough so that the regulator has sufficient time to analyze the proposals prior to the beginning of the fiscal year. The government-sponsored enterprises’ fiscal years are the same as calendar years.
The OIG also recommends revising the existing budget-review process and staffing the process with qualified and experienced employees who can assess the budgets and enable FHFA to determine whether they align with FHFA’s strategic direction and its safety-and-soundness priorities.
A third recommendation from the inspector general is to set a date in the first quarter of 2016 at which point FHFA will take final action on proposed budgets for that year and approve the budget by that date.
FHFA generally agreed with the three recommendations.
A fourth recommendation was to set a date by Jan. 31 of each subsequent fiscal year when FHFA
will take final action on proposed budgets for that year and approve the budget by that date.
While FHFA generally agreed with the fourth recommendation, it noted that it might need more time for final approval when additional supplemental information and board approvals are needed.
