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  • FHFA’s OIG issues report on FHFA supervision of FHLBanks

    On August 19, the OIG for the FHFA released a report evaluating the agency’s supervision of FHLBanks following the issue of four member banks during spring 2023. The report summarized four findings: (i) the FHFA has not issued written guidance for FHLBanks on subordinating members’ collateral when members seek discount window funding; (ii) the FHFA did not have internal guidance on cross-regulator coordination; (iii) the FHFA has not revised certain examination guidance since 2014; and (iv) the FHFA management lacks an approach to ensure examiners review all topics covered by examination guidance. The evaluation covered examination activities from January 1, 2021, to September 30, 2023, and noted weaknesses in the FHLBanks’ lending philosophies, credit policies, risk assessments and modeling.

    To remedy these findings, the report made four recommendations. First, the report recommended that the Division of Federal Home Loan Bank Regulation (DBR) issue written guidance on FHLBanks’ collateral subordination practices. Second, the report urged the DBR to develop and implement protocols for DBR personnel to follow in times of member bank distress and failure. The protocols should include heightened oversight of FHLBanks and coordination with federal and state regulators.

    Third, the report called for the FHFA to update the Examination Manual’s Credit Risk Management module and the Advances and Collateral module to incorporate lessons learned from the spring 2023 bank issues. Fourth, the report recommended DBR adopt a process to ensure appropriate examination coverage of all topics within its Examination Manual guidance. The FHFA agreed to all recommendations and committed to implementing corrective actions by 2025.

    Bank Regulatory Federal Issues FHFA OIG FHLB

  • OIG makes recommendations for CFPB’s examiner commissioning program

    Federal Issues

    On May 15, the Office of Inspector General (OIG) for the Fed and CFPB published a report entitled “The CFPB Can Enhance Certain Aspects of Its Examiner Commissioning Program.” The report assessed the CFPB’s examiner commissioning program (ECP) and included recommendations to enhance the program. The OIG made three high-level recommendations in the report:

    1. Create clear guidelines delineating the duties and expectations for those servicing in ECP support roles, including (i) mentorship during acting EIC assignments, (ii) provide regional training leads support during rotations, and (iii) field manager assistance in selecting suitable examinations and identifying acting examiner in charge (EIC) tasks for commissioning candidates.
    2. Establish a uniform method for supervision learning and development and regional offices to jointly offer additional support to examiners during their ECP preparation.
    3. Review and improve the feedback parameters for the EIC case study assessment, ensuring examiners receive detailed, constructive feedback while maintaining the integrity of the EIC case study assessment. Update the feedback guidelines accordingly and provide training on these new standards.

    Federal Issues OIG CFPB

  • FDIC OIG confirms board oversight and liquidity issues led to a bank’s failure

    On March 25, the Office for the Inspector General (OIG) for the FDIC issued a report on a 2023 bank failure, finding that the bank’s failure netted a $14.8 million estimated loss to the Deposit Insurance Fund (“DIF”), but that the failure did not warrant a formal evaluation of the FDIC’s supervision of the failed bank in the form of an In-Depth Review. As defined by the FDIC, the DIF was created to ensure deposits, protect depositors, and resolve failed banks. Any DIF loss incurred under $50 million would require the OIG to review and determine if any unusual circumstances exist that may warrant an In-Depth Review; the OIG did not find any unusual circumstances here.

    In November 2023, the FDIC was appointed as a receiver of a bank after its closure by the Iowa Division of Banking. The OIG noted that the bank failed after “significant deterioration” of the bank’s loan portfolio and operating losses stressed its liquidity as a result of bank board issues and management lax lending practices, as well as the failure to properly administer large commercial trucking relationships.

    While conducting the bank review, the OIG considered four factors. First, the OIG considered the magnitude of the DIF loss in relation to the total assets of the failed bank. The OIG found the relative loss was 23 percent (noted as consistent in the last five years). Second, the OIG reviewed how effective the FDIC’s supervision addressed the issues. The OIG found the FDIC’s supervision “identified and effectively addressed” the issues that led to the bank’s failure. Third, the OIG considered any indicators of fraudulent activities that contributed to the DIF loss. The OIG found that while the examiners identified conflicts of interest in bank loans, they did not “significantly contribute” to the DIF loss. Last and fourth, the OIG reviewed any other relevant conditions contributing to the bank’s failure and found none. 

    Bank Regulatory OIG FDIC Iowa Liquidity

  • HUD sued for allegedly failing to refund mortgage insurance premiums for early-terminated FHA-insured mortgages

    Courts

    On March 12, a putative class action complaint was filed against the Department of Housing and Urban Development (HUD) for allegedly denying homeowners their Mortgage Insurance Premium (MIP) refunds upon the early termination of their FHA-insured mortgages. According to the complaint, HUD must refund unearned MIPs, but has refused to refund homeowners by creating “unnecessary bureaucratic hurdles.” The plaintiffs alleged that the OIG had confirmed “the validity of complaints regarding HUD’s handling of MIP refunds.”

    Citing HUD regulations, the plaintiffs alleged that when an FHA mortgage is terminated early, within seven years of the purchase of the refinancing of the property, there is an overpayment of the MIP which should be refunded by HUD. According to the plaintiffs it is a “widespread practice” for HUD not to automatically refund MIPs, but instead require a burdensome, lengthy process which hindered the prompt refund of fees in multiple ways. The 2022 OIG report cited by plaintiffs allegedly found, among other things, that HUD did not have adequate controls in place to ensure that refunds were appropriately tracked, monitored, and issued. The plaintiffs alleged that Floridians are owed over $21.7 million in refunds.

    The plaintiffs are seeking injunctive and declaratory relief and a return of all unfairly retained refunds “together with damages in the amount of the total earned interest and other investment monies accrued by Defendant with Plaintiff’s and Class Members’ monies.” 

    Courts Federal Issues HUD Class Action OIG FHA

  • CFPB limits examiner term limits to five years after concurring with OIG recommendations

    On February 26, the Office of Inspector General for the CFPB (OIG) released a report entitled, “The CFPB Can Enhance Certain Practices to Mitigate the Risk of Conflicts of Interest for Division of Supervision, Enforcement and Fair Lending Employees.” The report found that the CFPB’s Office of Supervision Examinations (OSE) does not have a formal policy that requires bank examiners to rotate assignments in a specified time frame, which increases potential conflicts of interest. The OSE examines banks to check for compliance failures in federal consumer financial law and is based out of four regional offices: New York (Northeast), Atlanta (Southeast), Chicago (Midwest), and San Francisco (West). The OIG argued that a formal policy adopted by the OSE would more effectively monitor examiner rotations, promoting “objectivity, cross-training, and broader expertise” and reducing the risk of regulatory capture – or subjecting the same regulated entity to the same examiner and subsequently risking independence and objectivity of exams. The OIG’s report posited two recommendations: (i) that the CFPB implement a formal examiner rotation policy; and (ii) that the CFPB track and document assignments for examiners and its members.

    The OIG found that while some OSE offices have informal examiner rotation policies in place, there is no global system in place to track examiner assignments to ensure regular rotation. For example, OSE’s Northeast and West regional offices have written policies that require certain staff members to rotate every five years. However, the Southeast and Midwest offices do not have any written policies in place and stated having a “natural” turnover process based on needs and availability, among others.

    The CFPB concurred with both OIG recommendations, stating that it will limit the time for lead examiners and field managers to five years and develop a tool for tracking these assignments.

    Bank Regulatory CFPB OIG Enforcement Examination

  • Fed’s OIG report on CFPB says training improvements needed to meet enforcement goals

    Federal Issues

    Recently, the Office of Inspector General of the Federal Reserve Board released a report assessing the CFPB’s process for conducting enforcement investigations.  The report makes two key recommendations.  First, noting that the CFPB has not met its stated goal to file or settle 65 percent of its enforcement actions within two years, the OIG recommended that the CFPB Office of Enforcement incorporates the timing expectations for key steps in the enforcement process into the tracking and monitoring of matters. In addition, the Office of the Inspector General also recommended improvements to enforcement staff training on document maintenance and retention requirements for the CFPB’s matter management system. The report states that the recommendations were accepted by the CFPB, with a follow-up to ensure full implementation.

    Federal Issues OIG CFPB Enforcement

  • FDIC OIG makes recommendations based on material loss report

    On November 28, the OIG for the FDIC delivered a material loss review report. The report’s objectives were twofold: first, to determine why a bank’s issues led to a material loss to the deposit insurance fund; and second, to review the FDIC’s supervision of the bank and make recommendations to prevent similar losses in the future.

    The report outlined 11 recommendations for the FDIC to implement so it can improve its supervision process over the banking sector. The recommendations include: (i) to evaluate if and why banks may wait to issue CAMELS ratings downgrades until they issue a Report of Examination; (ii) to identify whether the training curriculum should be adjusted to emphasize why timely ratings changes are important; (iii) to review FDIC examination guidance to determine if enhancements are necessary to highlight when a bank’s practices do not align with its policies, and make recommendations; (iv) to evaluate and update examination guidance to require supervisory actions when it violates its risk-appetite statement metrics; (v) to comprehensively review the FDIC manual for any updates to the examination guidance pertinent to evaluating the stability of uninsured deposits; (vi) to comprehensively review the FDIC manual to determine if any updates are required to the examination guidance pertinent to banks’ deposit outflow assumptions for liquidity stress testing; (vii) to revisit examination guidance to determine if any updates are required for monitoring other banks, horizontally, for similar risk characteristics; (viii) to revisit examination guidance to determine if any updates are required regarding incorporating shared risk characteristics that lead to risk in the FDIC’s supervisory approach; (ix) to explore research methods to monitor large bank reputational risk; (x) to evaluate if Chief Risk Officers should place more consideration on unrealized losses and declines in fair value; and (xi) to work with other federal regulators on evaluating necessary rule changes, such as the adoption of noncapital triggers.

    Bank Regulatory Federal Issues OIG FDIC

  • FHFA OIG report reveals Federal Home Loan banks did not meet credit risk expectations

    Agency Rule-Making & Guidance

    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.

    Agency Rule-Making & Guidance FHFA Credit Risk Consumer Finance OIG Federal Home Loan Banks

  • HUD OIG: FHA mortgage servicers’ Covid-19 information still misleading

    Federal Issues

    On September 30, the HUD, Office of the Inspector General (HUD OIG) issued a follow-up study examining the information on mortgage loan servicers’ websites about the CARES Act loan forbearance provisions. As previously covered by InfoBytes, in April, HUD OIG issued consumer guidance noting that among the top 30 FHA mortgage servicers, information on forbearance options under the CARES Act was found to be incomplete, outdated, inconsistent, or unclear. On August 11, HUD OIG reviewed the “readily available” Covid-19 pandemic information on the websites of the same top 30 FHA mortgage servicers, noting that some of the servicers still provided misleading forbearance information. Among other things, HUD OIG found that certain mortgage servicers (i) did not offer clear information on the length of the initial forbearance period; (ii) did not make it clear that borrowers could qualify for forbearance extensions after the initial 180 day period; and (iii) did not clearly state that forbearance is an option for borrowers.

    Federal Issues HUD OIG CARES Act Covid-19 Mortgages Forbearance

  • Office of the Inspector General issues statement on Coronavirus oversight challenges

    Federal Issues

    The Office of the Inspector General of the Federal Reserve Board, which provides independent oversight of both the Consumer Financial Protection Bureau and the Federal Reserve Board, issued a statement on Coronavirus pandemic oversight challenges. The statement identifies areas of focus for the OIG, including coordination between the Reserve Banks, data aggregation, and monitoring and tracing the unique features associated with specific programs (e.g., the Paycheck Protection Program). The OIG is also actively monitoring, among other things, measures taken to encourage financial institutions to lend consistent with specific lending programs and the extent to which pandemic response lending efforts reach intended recipients and communities. The OIG has also expanded testing of critical information technology systems and has broadened the scope of security reviews.

    Federal Issues Covid-19 OIG Federal Reserve CFPB SBA Monitoring Financial Institutions

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