FHFA Should Develop and Implement a Risk-Based Plan to Monitor the Enterprises’ Oversight of Their Counterparties’ Compliance with Contractual Requirements Including Consumer Protection Laws

by Barry Fagan


OIG assessed FHFA’s oversight of Fannie Mae’s and Freddie Mac’s (the Enterprises) monitoring of their counterparties’ compliance with their contractual agreements, with an emphasis on their compliance with federal consumer protection laws.1 Counterparties include entities that sell mortgage loans to or service them for (e.g., collect payments for) the Enterprises. When they work with the Enterprises, counterparties contract, among other things, to follow federal and state laws that govern originating and servicing mortgage loans. However, OIG found that FHFA does not thoroughly oversee how the Enterprises monitor counterparties’ contractual compliance. Specifically, FHFA does not examine how the Enterprises monitor compliance with consumer protection laws, and, indeed, OIG determined that the Enterprises do not ensure that their counterparties’ business practices follow all federal and state laws and regulations designed to protect consumers from unlawful activities such as discrimination.

According to FHFA officials, it relies upon other federal regulatory agencies that are responsible for enforcing laws that protect mortgage borrowers. For their part, the Enterprises actively focus on counterparty compliance with these laws primarily where they may face legal liability for their counterparties’ noncompliance (e.g., predatory lending). Otherwise, the Enterprises rely on their counterparties’ self-certified compliance and informally monitor federal agencies’ enforcement activities.

1 The Enterprises’ counterparties’ obligations to abide by federal and state laws and regulations, such as consumer protection laws, do not derive solely from their contracts with the Enterprises. These contracts merely reiterate the counterparties’ existing legal obligations. Thus, OIG selected consumer protection laws for emphasis herein because the Enterprises have no ability to waive the application of consumer protection laws and regulations, whereas they freely can waive many other provisions of their contracts (e.g., underwriting standards). See OIG, FHFA’s Oversight of Fannie Mae’s Single-Family Underwriting Standards (AUD-2012-003, March 22, 2012).

Multiple federal consumer protection laws apply to residential mortgages. For example, entities that originate mortgages must follow the Fair Housing Act, the Equal Credit Opportunity Act, and the Truth-In-Lending Act. (Appendix D describes examples of these laws in more detail.)

Historically, federal banking regulators such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation enforced these laws. Recently, however, the new Consumer Financial Protection Bureau (CFPB) has taken on much of this responsibility under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),9 enacted in July 2010.10 As a result, federal regulators have begun to collaborate to protect consumers by entering into agreements with CFPB to coordinate key aspects of supervision, such as sharing information and avoiding contradictory directives.

FHFA officials have indicated that the agency is considering how to coordinate with other regulators in light of its responsibility to make sure the Enterprises’ work is consistent with the public interest.11 The agency, however, has not actively supervised the Enterprises’ oversight of counterparties’ contractual compliance with federal consumer protection laws.

FHFA has begun to put together a plan to address its role in overseeing the Enterprises’ oversight of their counterparties’ compliance with federal consumer protection laws. Recently, FHFA has begun to take steps to work with federal regulators responsible for supervising and regulating counterparties that sell mortgages to the Enterprises. For example, the agency has developed an information-sharing agreement with regulators in the consumer financial market, such as the Federal Reserve Board and the Office of the Comptroller of the Currency. In addition, agency officials have met with specific regulators, such as the Federal Deposit Insurance Corporation. FHFA is determining how best to coordinate with these agencies to further its mission, but has not specifically addressed its role in monitoring the Enterprises’ oversight of their counterparties’ compliance with contractual provisions requiring adherence to consumer protection laws.

Going forward, such interagency coordination may be helpful in formulating a risk-based plan to assess how the Enterprises monitor their counterparties’ contractual compliance with federal and state laws generally and with consumer protection laws in particular.


FHFA should develop a risk-based13 plan to monitor the Enterprises’ oversight of their counterparties’ compliance with contractual representations and warranties, including those related to federal consumer protection laws.

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Barry Fagan

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