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at Appalachian concealed past due loans from bank regulators by using Appalachian funds to purchase the related properties through a shell company. In another scheme, the senior managers used shell companies to buy condos in Florida, which they then refinanced through Appalachian at inflated values for their personal enrichment. The FHLBank failed to recognize obvious fraud indicators associated with the pledged collateral. We recommended that FHFA assess FHLBank reviews of assets pledged as collateral and that FHLBank credit and collateralization departments be notified when fraud indicators are found. Investigations Strategy OIG has developed and intends to further develop close working relationships with other law enforcement agencies, including DOJ and the U.S. Attorneys’ Offices; state attorneys general; mortgage fraud working groups; the Secret Service; the FBI; HUD-OIG; FDIC-OIG; IRS-CI; SIGTARP; FinCEN; and other federal, state, and local agencies. During this reporting period, OI provided 48 Fraud Awareness Briefings to various audiences. Regulatory Activities Consistent with the Inspector General Act, OIG considers whether proposed legislation, regulations, and policies related to FHFA are efficient, economical, legal, and susceptible to fraud and abuse. During the semiannual period, OIG made substantive remarks on a final rule and a proposed rule. Additionally, two rules that OIG previously commented on were finalized and published. 4 1. FHFA Final Rule: Stress Testing of Regulated Entities (RIN 2590-AA47, OIG Comments Submitted on July 15, 2013) FHFA forwarded to OIG a draft of a final rule adopted to implement section 165(i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). This section requires primary financial regulators for certain nonbank financial institutions to conduct annual stress tests under at least three different sets of conditions, including baseline, adverse, and severely adverse, and to publish a summary of the results of the required tests. See 12 U.S.C. § 5365(i)(2)(C)(ii) and 5365(i)(2)(C)(iv). The statute does not vest regulators with the authority to allow institutions to publish a summary of some, but not all, of the required stress tests. To the contrary, the statute makes clear that the summary shall include the results of all the tests. Notwithstanding the statute’s plain language, FHFA’s draft final rule proposed to require the GSEs to publish summaries of the results of stress tests only under severely adverse conditions. OIG recommended that FHFA conform the final rule to the plain language of Dodd-Frank. FHFA published the final rule on September 26, 2013, see 78 Fed. Reg. 58,219, which requires the GSEs to publish summaries of the results of stress tests only under severely adverse conditions. 2. FHFA Proposed Rule: Removal of References to Credit Ratings in Certain FHLBank Regulations (RIN 2590-AA40, OIG Comments Submitted on April 5, 2013) FHFA has adopted a proposed rule to implement section 939A of Dodd-Frank, which requires federal agencies to review regulations that require the use of an assessment of the creditworthiness Semiannual Report to the Congress • April 1, 2013–September 30, 2013 33
of a security or money market instrument, to remove any references or requirements regarding credit ratings in them, and to adopt appropriate alternative standards for determining creditworthiness. Although OIG neither concurred nor nonconcurred with the draft proposed rule, it noted that the rule lacked sufficient discussion about what factors the FHLBanks should consider (and how) when assessing investment quality. OIG urged FHFA to address how the FHLBanks are expected to assess investment quality and to emphasize the importance of independence. FHFA did not address these concerns or implement OIG’s suggestions in the published version of the proposed rule. 3. FHFA Interim Final Rule: Executive Compensation (RIN 2590-AA12, OIG Comments Submitted on February 28, 2011) FHFA drafted a proposed final rule to implement its responsibility to prohibit and withhold unreasonable and incomparable compensation for executives of the GSEs pursuant to HERA. The draft final rule was based upon a proposed rule, which was published more than a year prior to the commencement of OIG’s operations. See 74 Fed. Reg. 26,989 (June 5, 2009). OIG made three comments on the proposed final rule. First, the draft final rule erred by discarding the previously published proposed rule’s provision authorizing enforcement actions against noncompliant entities. FHFA published an interim final rule on May 15, 2013, see 78 Fed. Reg. 28,442, and FHFA neither reinstated the enforcement provision of the proposed rule nor included any comparable regulatory language that allows FHFA to take supervisory action. Instead, FHFA modified the preamble to explain that there is statutory enforcement authority that allows FHFA to obtain restitution or reimbursement from entity-affiliated parties who have been unjustly enriched. Second, the draft final rule could lead to a violation of the Administrative Procedures Act (APA). The earlier proposed rule set specific requirements for the entities when submitting to FHFA executive compensation information (e.g., concrete time frames for submission). The draft final rule, however, excised these requirements in exchange for issuing informal guidance later. In OIG’s view, these information submission requirements qualify as a “legislative rule” for APA purposes and, therefore, notice-and-comment rulemaking is required for their adoption. See 5 U.S.C. § 553(a). Thus, issuing requirements later as informal guidance without notice-and-comment threatens to violate APA. Instead of reinstating the proposed rule’s information submission requirements, FHFA modified the language in the interim final rule to indicate that the GSEs are not required to submit particular information. Third, the draft final rule should be revised to clarify how FHFA will review compensation arrangements put into place many years before the enactment of HERA. Because HERA does not appear to prohibit FHFA from evaluating pre-HERA compensation arrangements, OIG believes that FHFA should specify the criteria that it will apply to such reviews to ensure that they are conducted in a consistent, equitable, and auditable manner. FHFA made no revisions to the interim final rule in this regard. 4. FHFA Proposed Rule: Golden Parachute and Indemnification Payments (RIN 2590-AA08, OIG Comments Submitted on February 28, 2011) During this reporting cycle, FHFA published a proposed rule concerning golden parachute and 34 Federal Housing Finance Agency Office of Inspector General
Page 2 and 3: Federal Housing Finance Agency Offi
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Page 8 and 9: A Message from the Acting Inspector
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Page 52 and 53: educe the principal balance of Trea
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Semiannual Report to the Congress
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Figure 29. Summary of OIG Recommend
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No. Recommendation Report Status AU
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Audit and Evaluation Reports with R
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Appendix D: OIG Reports See www.fhf
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Appendix F: Description of OIG Offi
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Strategic Goal 2—Operating with I
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Figure 17. Federal Home Loan Banks
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15 Federal Housing Finance Agency,
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33 Fannie Mae, “Multifamily Busin
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to FHFA Scorecard Directive, at 48,
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it is preferable to limit our discu
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Position in the Housing Finance Sys
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144 Fannie Mae, “Comparison of Mu
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157 Id., “Mortgage Servicing,”
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Transparency and Certainty for Lend
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