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FHFA OIG report reveals Federal Home Loan banks did not meet credit risk expectations
On September 21, FHFA Office of Inspector General (OIG) released a report on Federal Home Loan Bank Supervisory Activities in 2023 in Response to Market Disruptions (report), to evaluate the Division of Federal Home Loan Bank Regulation (DBR) risk assessment. DBR is responsible for supervising the Federal Home Loan (FHL) Bank System “to ensure the safe and sound operation of FHL banks.” The OIG addressed March bank failures and how the DBR scrutinized the FHL banks’ member credit risk management practices and, more broadly, into the system’s role in lending to troubled members. The report found that DBR examiners, in response to the increased risk environment, adjusted its supervisory activities and examination planning. Additionally, the OIG noted that DBR intends to conduct a comprehensive assessment of credit risk management across the entire FHL bank system to address concerns regarding systemic vulnerabilities. The report also revealed that in the review of examiner compliance, although DBR mostly followed procedure and requirements, “in certain instances, examiners did not describe primary worksteps in their pre-examination analysis memoranda, as required by DBR procedures.”
According to the report, FHFA also ordered an assessment of six FHL banks during or after the March market disruption, “in response to the abrupt increase in demand for FHLBank advances and the collapse of several member banks.” The report notably revealed that home loan banks’ credit risk management “fail[ed] to meet existing expectations.” As a result, DBR is preparing a supervisory letter for all the FHL banks and an advisory bulletin on member credit risk.
FHFA to review Federal Home Loan Banks system
On August 31, FHFA announced it plans to conduct a comprehensive review of the Federal Home Loan Banks (FHLBanks) starting this fall. “FHFA’s regulated entities function as a reliable source of liquidity and funding for housing finance and community investment,” FHFA Director Sandra L. Thompson said, noting that “[a]s the Federal Home Loan Banks approach their centennial, FHFA will conduct a comprehensive review to ensure they remain positioned to meet the needs of today and tomorrow.” FHFA will host two public listening sessions as well as a series of regional roundtable discussions to review the mission, membership eligibility requirements, and operational efficiencies of the FHLBanks, the statement said. Additionally, FHFA will receive input from stakeholders on the FHLBanks’ role or potential role in addressing housing finance, community and economic development, affordability, and other related issues.
The kick-off listening session will be held in Washington, D.C., on September 29. FHFA seeks feedback in six key areas: (i) FHLBanks’ general mission and purpose in a changing marketplace; (ii) the organization, operational efficiency, and effectiveness of FHLBanks; (iii) FHLBanks’ role in promoting affordable, sustainable, equitable, and resilient housing and community investment; (iv) ways to address the unique needs of rural and financially vulnerable communities; (v) member products, services and collateral requirements; and (vi) membership eligibility and requirements.
FHFA to establish advisory committee on affordable, equitable, and sustainable housing
On August 23, FHFA announced plans to establish a federal advisory committee on affordable, equitable and sustainable housing. The committee’s activities will focus on Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and “their respective roles in providing a reliable source of liquidity and funding to support housing finance in the single-family and multifamily housing markets.” The committee will provide advice and input regarding affordable, equitable, and sustainable housing needs, including barriers to accessing such housing and long-term sustainability, and will advise on any regulatory or policy changes necessary to address these matters. FHFA will solicit applications and nominations for memberships in an upcoming Federal Register notice and is seeking individuals engaged in the financing, development and/or administration of affordable, equitable, and sustainable housing and housing policy who have experience in areas such as fair housing, fair lending, civil rights, and single-family/multifamily lending and servicing.
FHFA launches Office of Financial Technology
On July 18, FHFA announced the establishment of the Office of Financial Technology to help address emerging fintech risks and priorities. The new office will support the agency in: (i) developing strategies for FHFA-regulated entities to advance safe, responsible, and equitable fintech innovation; (ii) sharing best practices related to fintech in housing finance; (iii) establishing outreach through regulated entities to promote awareness and understanding of fintech innovation; (iv) facilitating interagency collaboration and partnerships with other regulators; and (v) providing resources on innovation, general trends, and emerging risks in housing finance. The new office will also help develop strategies for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to advance fintech in a responsible manner.
The agency also issued a request for information (RFI) on the role of financial technology in housing finance and the risks and opportunities presented by technology throughout the mortgage lifecycle. Among other things, the RFI seeks feedback on ways the agency can “constructively interact with other stakeholders to facilitate responsible innovation, including the identification of any barriers to or challenges in implementing fintech in the housing finance ecosystem, while also focusing on supporting equity in the housing finance landscape for both homeowners and renters.” FHFA stated it also has an interest in understanding ways technology might automate and increase the effectiveness of compliance and regulatory processes (broadly referred to as “regtech”), commenting that “[r]egtech provides an opportunity to enhance transparency, consistency, and standardization of those processes, while reducing compliance costs.” Comments are due by October 16.