Report: FHFA Lacks Plan to Ensure Compliance for GSEs’ Counterparties

A new report from the watchdog for the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) charges that the department isn't doing enough to make sure companies doing business with the GSEs are adhering to consumer protection laws.

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The ""Office of the Inspector General for FHFA"":http://www.fhfaoig.gov/ (FHFA-OIG) released an ""audit report"":http://origin.www.fhfaoig.gov/Content/Files/AUD-2013-008_0.pdf Tuesday examining the agency's oversight of Fannie Mae and Freddie Mac's monitoring of businesses that sell and service loans. While FHFA maintains the review and enforcement of consumer laws falls under the responsibilities of the Consumer Financial Protection Bureau (CFPB) and related federal agencies, the inspector general argues that FHFA ""has a statutory responsibility--under the Housing and Economic Recovery Act of 2008 (HERA)--to protect the public interest, which in this instance is at least partially defined by federal and state consumer protection laws.""

FHFA, in coordination with the GSEs, released last September a new framework for representations and warranties, which states that mortgages that were not originated in accordance with applicable laws are indefinitely subject to repurchase, even if they have acceptable payment histories and meet other criteria. However, the inspector general found that Fannie Mae and Freddie Mac tend to only focus on cases where they themselves may be held liable for a lender or servicer's noncompliance.

Furthermore, like FHFA, the two enterprises ""have indicated that it is not their duty to monitor and enforce compliance with federal consumer protection laws because there are regulatory agencies with these responsibilities.""

For its part, OIG says the agency has not performed any reviews specific to how Fannie Mae and Freddie Mac monitor counterparty compliance, and its new supervisory examination guidance (under development) does not explain how such a review should be conducted.

""FHFA is thus vulnerable to questions about why it does not have a strategy to monitor the Enterprises' activities to assess whether they are aligned with the public interest as reflect in federal and state laws and regulations (e.g., consumer protection laws),"" the report says. ""FHFA and the Enterprises recognized their shared responsibility for protecting the public interest when they explicitly excluded violations of federal state laws and regulations from the universe of representation and warranty violations that may be forgiven after 36 months of on-time mortgage payments.""

To address the problem, OIG recommends FHFA ""develop a risk-based plan to monitor the Enterprises' oversight of their counterparties' compliance with contractual representations and warranties, including those related to federal consumer protection laws.""

In a response issued along with OIG's report, FHFA reiterates its stance that it is not the primary regulatory agency for the review and enforcement of consumer protection laws and notes that there are mechanisms in place to the appropriate regulator when issues arise. However, the agency agreed to ""develop a specific plan focused on the effectiveness of the Enterprises' monitoring of seller and servicers' compliance with consumer protection laws under the existing contractual terms.""

FHFA's Division of Enterprise Regulation intends to develop such a plan by the end of June 2013.