Improving the Effectiveness of GSE Oversight: Legislative Proposalsin the 108th Congress
CRS Report for Congress
Improving the Effectiveness of GSE Oversight:
th
Legislative Proposals in the 108 Congress
Updated January 6, 2005
Loretta Nott
Analyst in Economics
Government and Finance Division
Mark Jickling
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Improving the Effectiveness of GSE Oversight:
Legislative Proposals in the 108th Congress
Summary
Fannie Mae and Freddie Mac, two of the largest government-sponsored
enterprises (GSEs), were created to establish a secondary mortgage market in order
to improve the distribution of capital available for home mortgage financing. To help
these institutions accomplish this mission, Congress granted them several statutory
benefits not available to other private companies. The advantages of GSE status have
helped the enterprises to grow rapidly and become the dominant players in the
secondary mortgage market.
In 1992, Congress established the Office of Federal Housing Enterprise
Oversight (OFHEO), an independent agency within the Department of Housing and
Urban Development (HUD), to oversee the financial safety and soundness of the
enterprises. OFHEO is authorized to set capital requirements, conduct annual risk-
based examinations, and generally enforce compliance with safety and soundness
standards.
With the rapid growth in the GSEs, questions have been raised about the
effectiveness of the current regulatory regime. Several legislative proposals
introduced in the past addressed GSE regulatory reform, but Congress did not take
action on them. However, with the recent accounting problems at both Fannie Mae
and Freddie Mac, the adequacy of GSE regulation has become a prominent
legislative issue once again.
Four bills were considered in the 108th Congress that aimed to strengthen the
current regulatory framework and improve the effectiveness of GSE supervision:
H.R. 2575 (Representative Baker), H.R. 2803 (Representative Royce), S. 1508
(Senators Hagel\Sununu\Dole), and S. 1656 (Senator Corzine). On March 26, 2004,
Chairman Shelby of the Senate Banking Committee released a draft bill, which was
offered as a substitute for S. 1508 during markup on April 1, 2004, and passed by the
committee with several amendments. No further legislative action was taken during
the 108th Congress. While the proposals took somewhat different approaches to
regulatory reform, all appeared to
!abolish OFHEO and reconstitute the GSE regulator within the
Department of the Treasury, or as an independent agency;
!increase the budget autonomy of the new office by exempting its
assessments from the annual appropriations process; and
!enhance the safety and soundness and enforcement tools available
to the new regulator.
This CRS report describes OFHEO’s current regulatory framework and provides
a detailed analysis of legislative proposals in the 108th Congress that aimed to
strengthen the safety and soundness regulation of the GSEs. This report is an
historical record of consideration of this issue in the 108th Congress and will not be
updated.
Contents
In troduction ......................................................1
The Current Regulatory Framework...................................5
Capital Standards..............................................5
The Minimum Level.......................................5
The Critical Level.........................................6
The Risk-Based Level......................................6
Enforcement Actions...........................................6
Legislative Proposals...............................................7
Reconstituting the GSE Regulator.................................7
Funding .....................................................9
Mission Approval.............................................10
Capital Standards.............................................11
Enforcement Authority........................................12
The Administration’s View.........................................13
List of Tables
Table 1. Side-By-Side Comparison of GSE Regulation Proposals...........15
Improving the Effectiveness of GSE
th
Oversight: Legislative Proposals in the 108
Congress
Introduction
Government-sponsored enterprises (GSEs) are privately owned, congressionally
chartered financial institutions created for specific public policy purposes. They
benefit from certain exemptions and privileges, including an implied federal
guarantee, intended to enhance their ability to borrow money. The two largest GSEs
are Fannie Mae and Freddie Mac (herein referred to as the enterprises or GSEs).1
These GSEs were created by Congress to establish and maintain a secondary
mortgage market, increasing liquidity and improving the distribution of capital
available for home mortgage financing.2 To help these institutions accomplish this
mission, Congress has provided them with several benefits not available to other
financial institutions.3 These statutory benefits provide the enterprises with lower
funding costs, the ability to operate with less capital, and lower direct costs.4 The
advantages of GSE status have enabled the enterprises to grow rapidly and become
dominant players in the secondary mortgage market.
1 The other GSEs are the Federal Home Loan Bank System, the Farm Credit System, and
Farmer Mac. Sallie Mae, a sixth GSE, is in the process of being fully privatized.
2 For a detailed description of the development of the U.S. secondary mortgage market, see
Office of Federal Housing Enterprise Oversight, Report to Congress, June 2003, at
[http://www.ofheo.gov/media/pdf/WEBsiteOFHEOREPtoCongress03.pdf], visited on Oct.
3 These statutory benefits include (1) exemption from state and local taxes, (2) a line of
credit with the U.S. Treasury up to $2.25 billion, (3) eligibility of their debt to serve as
collateral for public deposits, (4) eligibility of their securities for Federal Reserve open
market purchases, (5) eligibility for their corporate securities to be purchased without limit
by federally regulated financial institutions, (6) assignment of mortgage-related securities
they have issued or guaranteed to the second-lowest credit risk category at depository
institutions, and (7) exemption from the registration requirements of the Securities and
Exchange Commission.
4 For more information on these advantages, see the following reports: U.S. Department of
the Treasury, Government Sponsorship of the Federal National Mortgage Association and
the Federal Home Loan Mortgage Corporation, July 11, 1996; U.S. Congressional Budget
Office, Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac, May 1996;
and U.S. Congressional Budget Office, Federal Subsidies and the Housing GSEs, May
Congress has always been concerned that the safety and soundness of the
enterprises be maintained so that they can meet their public policy mission and not
pose risks to taxpayers. Prior to 1992, oversight was the responsibility of the
Department of Housing and Urban Development (HUD) and the Federal Home Loan
Bank Board. In 1992, Congress established the Office of Federal Housing Enterprise
Oversight (OFHEO), an independent agency within HUD, to oversee the financial
safety and soundness of the enterprises. The office is authorized to set capital
requirements, conduct annual risk-based examinations, and generally enforce
compliance with safety and soundness standards.
Since the creation of OFHEO, mortgage investments at the GSEs have grown
by more than 620% to $1.4 trillion. The GSEs have become two of the largest
private debt issuers in the world. At the end of 2002, the combined debt of the
enterprises totaled $1.5 trillion — an amount equal to almost half of all publicly held
federal debt. In addition to enterprise debt, investors now hold over $1.7 trillion in
mortgage-backed securities issued by Fannie Mae and Freddie Mac.5
As a result of the rapid growth of these institutions and their implied federal
backing, there has been an increasing concern that the enterprises may pose a
problem of systemic risk to the nation’s financial system.6 At the same time,
questions have been raised about the effectiveness of the current regulatory
environment. There have been several legislative proposals introduced in the past
to address these issues, but Congress did not take action on them.
Events in the past two years, however, have brought a new urgency to this issue.
In 2003, Freddie Mac admitted that it had used improper accounting policies to create
the appearance of steady earnings growth and issued a restatement of financial
results, revising net income for 2000-2002 upwards by $5 billion.7 OFHEO imposed
a $125 million fine and is pursuing civil actions against several former Freddie
executives.8 Following the special examination of Freddie Mac, OFHEO began to
5 For more information, see Office of Federal Housing Enterprise Oversight, FY 2003-2008
Strategic Plan, Sep. 30, 2003, at [http://www.ofheo.gov/media/pdf/0308stratplan93003a.
pdf], visited Oct. 4, 2004.
6 For a comprehensive analysis of these risks, see Office of Federal Housing Enterprise
Oversight, Systemic Risk: Fannie Mae, Freddie Mac, and the Role of OFHEO, Feb. 2003,
at [http://www.ofheo.gov/media/archive/docs/reports/sysrisk.pdf], visited Oct. 4, 2004.
Furthermore, the IMF has recently stated that the GSE “regulators need to look closely at
whether agencies’ capital adequacy is sufficient, especially bearing in mind the questions
about internal controls that have emerged in Freddie Mac....it is unclear whether [the GSEs]
have taken sufficient account of the risk that the market may not be deep enough to allow
them to continuously hedge their growing portfolios in times of stress.” For more
information, see IMF, Global Financial Stability Report: Market Developments and Issues,
Sept. 2003, pp. 16-22, at [http://www.imf.org/external/pubs/ft/gfsr/2003/02/index.htm],
visited on Oct. 4, 2004.
7 For more information, see CRS Report RS21567, Accounting and Management Problems
at Freddie Mac, by Mark Jickling.
8 For more information, see the Dec. 10, 2003 press release issued by OFHEO at
(continued...)
review the accounting policies and practices at Fannie Mae, and recently published
its preliminary findings on September 22, 2004.9 OFHEO charges that Fannie Mae
did not follow generally accepted accounting practices in two critical areas: (1)
amortization of discounts, premiums, and fees involved in the purchase of home
mortgages and (2) accounting for financial derivatives contracts. According to
OFHEO, these deviations from standard accounting rules allowed Fannie Mae to
reduce volatility in reported earnings, present investors with an artificial picture of
steadily growing profits, and, in at least one case, to meet financial performance10
targets that triggered the payment of bonuses to company executives. On December
15, 2004, the Securities and Exchange Commission (SEC) directed Fannie Mae to
restate its accounting results since 2001 after finding inadequacies in Fannie's
accounting policies and methodologies. These accounting problems, and the related
safety and soundness concerns, have made GSE regulatory reform a prominent
legislative issue once again.
Four bills were considered in the 108th Congress that aimed to strengthen the
current regulatory framework and improve the effectiveness of GSE supervision:
H.R. 2575 (Representative Baker), H.R. 2803 (Representative Royce), S. 1508
(Senators Hagel\Sununu\Dole), and S. 1656 (Senator Corzine).
In addition, the House Financial Services Committee released a manager’s
amendment in preparation for a markup originally scheduled for October 8, 2003.
However, on October 7, 2003, the Department of the Treasury announced its
opposition to the manager’s amendment, claiming the bill “falls short of real11
reform.” Subsequently, the markup was postponed and the current status of the
manager’s amendment remains uncertain.
On March 26, 2004, Chairman Shelby of the Senate Banking Committee
released a draft GSE reform bill. On April 1, 2004, the draft was offered at
committee markup as an amendment in the nature of a substitute for S. 1508, and was
passed with several further amendments. No further legislative action was taken on
this or any other GSE reform bill before the adjournment of the 108th Congress.
While the proposals take somewhat different approaches to regulatory reform,
all appear to
!abolish OFHEO and reconstitute the GSE regulator within the
Department of the Treasury, or as an independent agency;
8 (...continued)
[http://www.ofheo.gov/News.asp?FormMode=Release&ID=119], visited on Oct. 4, 2004.
9 Office of Federal Housing Enterprise Oversight, Report of Findings to Date: Special
Examination of Fannie Mae, Sept. 17, 2004, available at [http://www.ofheo.gov/media/
pdf/FNMfindingstodate17sept04.pdf], visited on Oct. 4, 2004.
10 For a detailed summary of OFHEO’s findings, see CRS Report RS21949, Accounting
Problems at Fannie Mae, by Mark Jickling.
11 Robert Blackwell and Jody Shenn, “It’s Official: White House Won’t Back Oxley GSE
Bill,” American Banker, Oct. 8, 2003.
!increase the budget autonomy of the new office by exempting its
assessments from the annual appropriations process; and
!enhance the safety and soundness and enforcement tools available
to the new regulator.
Treasury Secretary John Snow appeared before the House Financial Services
Committee on September 10, 2003, and then again before the Senate Banking
Committee on October 16, 2003, to outline the Administration’s recommendations
“for the essential, minimum requirements for a credible regulator”12 for the housing
GSEs. In addition to the creation of a new agency to oversee the safety and
soundness of all the housing GSEs (Fannie Mae, Freddie Mac, and the Federal Home
Loan Banks), the Treasury Secretary outlined several recommendations intended to
strengthen the new agency’s general regulatory, supervisory and enforcement powers.
The President’s budget plan for FY2005 reiterates these recommendations, but also
specifically proposes that the new agency be placed within the Department of the
Treasury, “provided the Department is given adequate oversight authority.”13
Currently, there is no legislative proposal that encompasses all of the
Administration’s recommendations.
However, in testimony before the Senate Banking Committee, Federal Reserve
Board Chairman Alan Greenspan noted that “[w]orld-class regulation, by itself, may
not be sufficient and indeed, as suggested by Treasury Secretary Snow, may even
worsen the situation if market participants infer from such regulation that the
government is all the more likely to back GSE debt.”14 Concerned that this may
continue to encourage the enterprises to grow faster than the residential mortgage
market, posing a potential a risk to the nation’s financial system, the Federal Reserve
Board Chairman urged Congress to also consider limiting the GSEs’ debt issuance
and asset purchases. The Treasury Department, however, has recently claimed that
it already has the authority to limit the GSEs’ debt issuances and that such action is
currently being considered.15
This report describes OFHEO’s current regulatory framework and provides a
detailed analysis of the legislative proposals introduced in the 108th Congress that aim
12 Prepared testimony of John W. Snow, Secretary of the Treasury, in U.S. Congress, Senate
Committee on Banking, Housing and Urban Affairs, Proposals for Improving the Regulationthst
of the Housing GSEs, hearings, 108 Cong., 1 sess., Oct. 16, 2003, p. 2, at
[http://banking.senate.gov/_files/ACFB2.pdf], visited on Oct. 4, 2004.
13 See the Office of Management and Budget, Budget of the United States Government,
Fiscal Year 2005, Analytical Perspectives, p. 83, at [http://www.whitehouse.gov/omb/
budget/fy2005/pdf/spec.pdf], visited on Oct. 4, 2004.
14 Prepared testimony of Alan Greenspan, Chairman, Board of Governors of the Federal
Reserve System, in U.S. Congress, Senate Committee on Banking, Housing and Urban
Affairs, Proposals for Improving the Regulation of the Housing Government Sponsoredth
Enterprises, hearings, 108 Cong., 2nd sess., Feb. 24, 2004, p. 9, at
[http://banking.senate.gov/_files/ACF1BA.pdf], visited on Oct. 4, 2004.
15 Rob Blackwell, “A Treasury View on GSE Debt, And Unintended Consequences,”
American Banker, May 14, 2004.
to strengthen the safety and soundness regulation of the enterprises. A short
summary of the Administration’s views on GSE oversight can be found in the final
section of this report.
The Current Regulatory Framework
OFHEO is an independent agency, within HUD, whose primary mission is to
oversee the financial safety and soundness of the enterprises. The office was
established by Congress with the passage of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (herein referred to as the Safety and16
Soundness Act). In order to fulfill its mission, OFHEO is authorized to establish
and ensure compliance with capital standards for the enterprises, conduct annual risk-
based examinations to assess the management practices and financial condition of the
enterprises, and take enforcement actions as specified by the Safety and Soundness
Act. Mission regulation — ensuring the enterprises comply with their affordable
housing mandates — is within the purview of HUD.
OFHEO is under the management of a director, who is appointed by the
President and confirmed by the Senate, for a term of five years. The office is funded
through annual assessments collected from the enterprises on a semi-annual basis.
Unlike other financial regulators, however, OFHEO’s assessments are subject to the
annual congressional appropriations process.
Capital Standards
The Safety and Soundness Act mandated the adoption of three capital level
standards for the enterprises: (1) the minimum level, (2) the critical level and (3) the
“risk-based” level. The first two levels are considered static standards, where a
certain amount of capital is required to be held for every dollar of assets and may
vary according to the riskiness of the assets. The third level is a performance
standard derived from “stress tests.” These types of capital standards indicate how
well the capital on hand functions in keeping a company solvent under a variety of
adverse economic conditions. Their worth depends upon how well the stress tests
are structured.
The Minimum Level. The minimum capital standard requires each enterprise
to hold capital equal to the sum of 2.5% of its on-balance sheet assets, plus 0.45% of
the unpaid balance of mortgage-backed securities sold off-book, plus 0.45% of other
off-balance sheet obligations.
The Critical Level. The critical capital standard requires that the enterprises
hold capital equal to the sum of 1.25% of on-balance sheet assets, plus 0.25% of the
16 P.L. 102-550, Title XIII; 106 Stat. 3941 (1992). For a detailed analysis of the oversight
provisions of this law, see CRS Report RL32230, Regulation of Fannie Mae and Freddie
Mac Under the Federal Housing Enterprises Financial Safety and Soundness Act: A Legal
Analysis, by Nathan Brooks.
unpaid balance of mortgage-backed securities, plus 0.25% of other off-book
obligations.
The Risk-Based Level. The risk-based capital standard requires each
enterprise to hold enough capital to cover both credit and interest rate risks, plus an
additional 30% for management and operations risk.17 Credit or default risk is the
risk that a borrower will default on the mortgage which the company holds as an
asset. Interest rate risk is the risk of loss should rates rise or fall dramatically. This
risk arises because funds borrowed by the enterprises may come due and have to be
refinanced at new interest rates on a different schedule than the funds received from
investments which earn yields set under different market conditions.
The Safety and Soundness Act specified several of the details regarding the risk-
based capital standard and directed OFHEO to adopt a financial regulation
implementing the standard by December 1, 1994. The final regulations, however,
were not issued until September 13, 2001. As specified by statute, the risk-based
capital standard involves a 10-year stress period, during which severe credit and
interest rate shocks occur simultaneously. The parameters of the stress test are
specified in the law. The required level of risk-based capital is determined as the
amount that allows the enterprises to remain solvent in every quarter of the 10-year
stress period, plus an additional 30% for operations and management risk. However,
as a result of innovations in handling financial risk, the risk-based standards have
turned out to be less strict than the minimum standards.
Based on these three capital standards, Congress defined four classifications
with respect to meeting them: (1) adequately capitalized, if both the risk-based and
the minimum levels are met; (2) undercapitalized, if the minimum level is met, but
not the risk-based; (3) significantly undercapitalized, if only the critical capital level
is met; and (4) critically undercapitalized, if none of the levels is met by an
enterprise.
Enforcement Actions
The range of enforcement actions available to OFHEO is largely dependent
upon the capital classifications. For the adequately capitalized category, there are no
prescribed supervisory actions, but cease-and-desist orders may be issued for conduct
which seriously threatens the enterprise’s capital base. An enterprise in the
undercapitalized classification must have a capital restoration plan approved by the
office and may not make any capital distribution that could result in further slippages.
If no plan is approved or an approved plan is not complied with, the office is
authorized to reclassify the enterprise downward. For the significantly
undercapitalized class, a capital restoration plan and any capital distributions must
be approved. Additional limits may be imposed on growth, activities may be
restricted, new capital may be required, and, should the restoration plan not be
approved or followed, the office is authorized to appoint a conservator to take over
operations. For a critically undercapitalized enterprise, the office shall appoint a
17 Congress arbitrarily set the capital standard for management and operations risk at 30%.
conservator unless there is a finding of adverse impact on financial markets and that
such appointment is not in the public interest.
Legislative Proposals
Four bills were introduced in the 108th Congress that aimed to strengthen
OFHEO’s current statutory framework: H.R. 2575, H.R. 2803, S. 1508, and S. 1656.
In addition, the House Financial Services Committee released a manager’s
amendment in preparation for a markup originally scheduled for October 8, 2003,
that was subsequently postponed. On March 26, 2004, Chairman Shelby of the
Senate Banking Committee released a draft bill, which was amended and approved
by the Banking Committee on April 1, 2004, after being adopted as an amendment
in the nature of a substitute for S. 1508.
A side-by-side comparison of the major provisions of these bills and drafts can
be found in Table 1 at the end of this report.18 While the approaches to regulatory
reform vary somewhat, all the legislative proposals address (1) reconstituting the
GSE regulator, (2) funding, (3) mission approval, (4) capital standards and (5)
enforcement authority. Each of these issues will be discussed in detail below.
Reconstituting the GSE Regulator
All the bills propose to abolish OFHEO and replace it either with a new office
located within the Department of the Treasury, or, in the case of S. 1508 (as passed
by the Banking Committee) bill, with an independent agency to regulate the housing
GSEs, including the FHLBs. S. 1508 (as introduced by Senators Hagel, Sununu, and
Dole) would establish the Office of Federal Enterprise Supervision (OFES), an
agency in Treasury with the same regulatory responsibilities for safety and soundness
oversight as OFHEO. S. 1656 and the House Financial Services manager’s
amendment would do the same, except S. 1656 would name the new entity the Office
of Federal Housing Enterprise Supervision (OFHES) and the manager’s amendment
would name it the Office of Housing Finance Supervision (OHFS). H.R. 2575
proposes to rename the Office of Thrift Supervision (OTS) as the Office of Housing
Finance Supervision (OHFS) and transfer the authority to regulate the safety and
soundness of the enterprises to this new office. In addition to OFHEO, H.R. 2803
would also abolish the Federal Housing Finance Board (FHFB), the independent
regulator responsible for overseeing the Federal Home Loan Banks (FHLBs), and
establishes the Office of Housing Finance Oversight (OFHO) in Treasury to succeed
the authority of both OFHEO and FHFB.
Historically, changes in the regulatory environment for the enterprises have
tended to reflect the evolving role of GSEs in housing policy. With the growing
dominance of the enterprises in U.S. mortgage markets and the possible risks they
pose to the financial system, there has been a growing consensus about the potential
18 S. 1508 as introduced is not included in the side-by-side, as all of its provisions were
replaced by Chairman Shelby’s draft bill, which was adopted during committee markup as
an amendment in the nature of a substitute.
gains from reconstituting the safety and soundness regulator under the auspices of the
Treasury. For example, if the office is established within Treasury, it can benefit
from Treasury’s financial expertise and prominence. This action not only can be seen
as creating opportunities for coordination and sharing of expertise with OTS and the
Office of the Comptroller of the Currency (OCC), the two other financial regulators
under Treasury, but also help reinforce the importance of the regulator’s mission for
safety and soundness oversight.
Furthermore, it is a fundamental principle of financial regulation that the office
be independent and at arm’s length from the enterprises. In a 1997 report, GAO
noted that a housing GSE regulator needs to have “the independence and prominence
that would allow it to act independently of the influence of the housing GSEs, which
are large and politically influential institutions. If a GSE had more political clout and
prominence that its regulator, it would be that much more difficult for the regulator
to implement corrective action.”19 Establishing the safety and soundness regulator
in Treasury, allows the office to acquire the immediate level of government
prominence that is thought necessary for overseeing the enterprises.
Although the benefits of reconstituting the GSE regulator within Treasury are
well recognized, there remains considerable debate over how involved Treasury
should be with the regulatory responsibilities of the new office. The Administration
has clearly stated that it will only support proposals for reconstituting the GSE
regulator within Treasury that require some degree of policy accountability to the
Secretary of the Treasury.20 Although H.R. 2803 would subject the director to the
general oversight of the Secretary of the Treasury, H.R. 2575, the House Financial
Services manager’s amendment, S. 1508 (as introduced by Senators Hagel, Sununu,
and Dole), and S. 1656 would all prohibit the Secretary of the Treasury from
involvement in the authority of the director of the office.
If an agreement cannot be reached on this issue, other options such as
establishing a new stand-alone agency, may be considered, as S. 1508 (as passed by
the Banking Committee) proposes. On February 10, 2003, Comptroller General
David Walker testified in favor of creating a single stand-alone regulator for all the
housing GSEs.21
19 U.S. Government Accountability Office, Government-Sponsored Enterprises: Advantages
and Disadvantages of Creating a Single Housing GSE Regulator, GAO/GGD-97-139, July
20 For more information on the Administration’s recommendations for improving GSE
oversight, see “The Administration’s View” section of this report.
21 Prepared testimony of David Walker, Comptroller General of the United States in U.S.
Congress, Senate Committee on Banking, Housing and Urban Affairs, Proposals to Improveth
the Regulatory Regime for Government Sponsored Enterprises, hearings, 108 Congress,nd
2 sess., Feb. 10, 2004, at [http://www.banking.senate.gov/_files/walker.pdf], visited on
Oct. 4, 2004.
Funding
As previously discussed, OFHEO’s assessments are subject to the annual
congressional appropriations process. For many years now, OFHEO has argued that
this process has hindered its ability to conduct effective long-term planning and
precludes flexibility in resource management. For instance, during periods when the
government has operated under a continuing resolution, OFHEO has been forced to
cut back on its activities. The agency also claims it is unable to respond quickly to
important regulatory concerns, such as Freddie Mac’s restatement of income, without
stretching thin its ability to conduct its primary safety and soundness oversight
responsibilities. In testimony before the Senate Committee on Banking, Housing and
Urban Affairs on July 17, 2003, the director of OFHEO noted that the “amount of
resources needed to address the issues surrounding Freddie Mac’s restatement is
straining our resources.”22
In light of these issues, OFHEO has recommended that the agency be
permanently funded, and exempt from the appropriations process, like other financial
regulators. OFHEO has said that permanent funding would permit the agency to
adapt more easily to changes in the enterprises’ activity and respond to problems in
a timely manner. The office has asked for assessment language similar to that of the
Federal Reserve, OTS, OCC and FHFB:
Amounts received by the Director from assessments under this section may be
deposited in the manner provided in section 5234 of the Revised Statutes (12
U.S.C. 192) with respect to assessments by the Comptroller of the Currency. The
amounts received by the Director from any assessment under this section shall
not be construed to be Government or public funds or appropriated money.
Notwithstanding any other provision of law, the amounts received by the
Director from any assessment under this section shall not be subject to
apportionment for the purpose of chapter 15 of title 31 or under any other23
authority.”
All the bills authorize the director of the new entity to collect annual
assessments, exempt from the annual congressional appropriations process.
However, H.R. 2575, H.R. 2803, S. 1508 (as introduced by Senators Hagel, Sununu,
and Dole) and S. 1656 also retain the requirement that assessments be placed in a
fund in the Treasury. The Constitution states that “No money shall be drawn from24
the Treasury, but in consequence of appropriations made by law...” Thus, the bills
retain the requirement for appropriations, but create a permanent appropriation. In
22 Prepared testimony of the Honorable Armando Falcon, Jr., Director of the Office of
Federal Housing Enterprise Oversight, in U.S. Congress, Senate Committee on Banking,
Housing and Urban Affairs, Regulatory Oversight of Government Sponsored Enterprisethst
Accounting Practices, hearings, 108 Cong., 1 sess., July 17, 2003, at
[http://www.ofheo.gov/News.asp?FormMode=Release&ID=84], visited on Oct. 4, 2004.
OFHEO has also seen its requested funding cut by Congress in four of the past 10 years:
23 12 U.S.C. § 1467. This is the assessments language found in the OTS statute.
24 U.S. Const., Art. I § 9, cl. 7.
these cases, the appropriations committees can still cap or otherwise restrict the use
of funds by an agency, which means that the offices established in these four bills are
not removed from the appropriations process. The legislative language found in the
House Financial Services manager’s amendment is similar to what applies to other
federal bank regulators and would completely remove the new regulator from the
appropriations process. S. 1508 (as passed by the Banking Committee) similarly
provides that the assessments collected by the new agency are not to be considered
government funds or appropriated monies.
The bills employ different language as to what costs the assessments are
authorized to cover. The House Financial Services manager’s amendment, both
Senate bills, and S. 1508 (as passed by the Banking Committee) state that the annual
assessments shall cover “all reasonable costs and expenses of the Office,” while H.R.
2803 and H.R. 2575 state that the assessments shall cover the costs of the director
“with respect to regulation and supervision.” However, it is not clear in the latter
case whether, for example, janitorial staff would be covered under this provision.
This could potentially expose the regulator to challenges by the enterprises regarding
the appropriateness of the assessments.
Also, with the exception of the House Financial Services manager’s amendment
and S. 1508 (as passed by the Banking Committee), the bills do not address the
regulator’s funding requirements during a crisis. In general, regulators have found
it important to maintain enough working capital to carry out elevated supervision in
a crisis, above and beyond normal costs. For example, in the statute for OTS
assessments, Congress authorized a working capital fund for emergency
circumstances. It permits OTS to collect fees and assessments in excess of actual
expenses to help maintain such a fund. As the four introduced bills are currently
written, the safety and soundness regulator may find itself without sufficient funding
in a time of crisis. The House Financial Services manager’s amendment and S. 1508
(as passed by the Banking Committee) authorize the GSE regulator to maintain a
working capital fund above and beyond the agency’s immediate operating expenses.
Mission Approval
In the current regulatory environment, HUD has the oversight responsibilities
for the housing mission of the enterprises, including approval authority for any new
program and enforcement of compliance with affordable housing goals. The decision
to split the oversight functions of mission approval from safety and soundness
represented the legislative compromise worked out over the potential conflicting
interests that could arise between these two functions. For instance, if HUD had to
take responsibility for protecting taxpayers from the risk of having to make good on
GSE losses by requiring higher capital, then HUD could be in the position of
simultaneously promoting housing credit and raising its cost. Alternatively, a
separate and independent safety and soundness regulator could set up the possibility
of the GSEs playing the regulators off against each other. For example, in order to
avoid a mission change which might lower profitability — such as raising goals for
specific forms or locations of housing credit — the enterprises might claim it to be
unsafe and have the change overruled.
Despite the separation of these functions, Congress included a temporary
provision in the Safety and Soundness Act that authorized OFHEO to consult with
HUD in regard to the safety and soundness of any proposed new programs. This
provision expired last year, but OFHEO and HUD continue to maintain open lines
of communication in regards to new program approval. Nevertheless, there is a
growing consensus that combining mission and safety and soundness regulation
would not necessarily create conflict. For example, other financial regulators, such
as the Federal Reserve, OTS, OCC, and the FDIC have been able to successfully
oversee both mission compliance and the financial condition of banks and thrifts for
years. In addition, the FHFB has combined the two with respect to the Federal Home
Loan Banks.
H.R. 2803, S. 1508 (as introduced by Senators Hagel, Sununu, and Dole), and
S. 1508 (as passed by the Banking Committee) would both transfer prior approval
authority of new programs to the director from the HUD Secretary. Under S. 1656,
new programs must be approved by the director, in consultation with the HUD
Secretary. H.R. 2575 proposes to retain prior approval authority with the HUD
Secretary, but expand the authority to all new “activities” rather than just new
“programs.” It would also remove the current 45-day time limit that HUD must meet
in order to avoid automatic approval of a proposed new program. The House
Financial Services manager’s amendment retains prior approval authority with the
HUD Secretary, as well as the 45-day time limit, but expands the Secretary’s
authority to both new and ongoing programs. The HUD Secretary is also required
to consult with the new safety and soundness regulator in regard to these programs.
All the bills, however, would retain the HUD Secretary’s authority for affordable
housing goals and/or fair housing responsibilities.
Capital Standards
As previously discussed, Congress has set in statute the minimum capital level
requirements for the enterprises, as well as the parameters of OFHEO’s risk-based
capital model. OFHEO does not have the authority to enforce capital requirements
based on alternative parameter assumptions or an increase in perceived risk due to
unsafe or unsound practices. In an appearance before the House Financial Services
Committee on February 11, 2003, Federal Reserve Board Chairman Alan Greenspan
argued that a regulator must have strong control over capital requirements “because
without it regulation, in my judgment, will be deficient.”25
H.R. 2575 and S. 1508 (as introduced by Senators Hagel, Sununu, and Dole)
would give the director discretion to apply alternative interest rate scenarios to the
risk-based capital model, including the assumptions regarding interest rates, home
prices, and new business. S. 1508 (as introduced by Senators Hagel, Sununu, and
Dole) also requires that the risk-based capital standard be similar to those used by
federal banking regulators. Similarly, these bills authorize the director to increase
the required minimum and critical capital levels for the enterprises by regulation or
order.
25 Damian Paletta, “Greenspan: Give Regulator Control Over GSEs’ Capital,” American
Banker, Feb. 12, 2004.
H.R. 2803 proposes that safety and soundness standards be prescribed by the
director pursuant to Section 39 of the Federal Deposit Insurance Act, which provides
the director broad powers in setting standards relating to issues, such as internal
controls, interest rate exposure, and asset growth. It could also possibly be
interpreted as providing the ability to set capital standards. The bill, however, offers
no provision to amend the capital standard requirements currently set out in statute.
Thus, current law’s specific language pertaining to capital may obviate the bill’s
broader construction, preventing any changes to the current standards.
S. 1656 mandates that the director review the adequacy of current risk-based
capital standards and, if necessary, make recommendations to Congress for changes
in the statutory levels. The bill would also authorize the director to modify the
capital level if the current level were determined to be inadequate to ensure safety
and soundness.
The House Financial Services manager’s amendment and S. 1508 (as passed by
the Banking Committee) would delete the statutory capital levels in current law and
authorize the director to establish risk-based capital requirements by regulation or
order. The director would file periodic reports with Congress, describing the risk-
based capital standard, the minimum and critical capital levels, and the methodology
by which levels were set.
Enforcement Authority
All the bills, except H.R. 2803, would authorize the director to reduce the
capital classification of an enterprise by one level if the director determines in writing
that an enterprise is engaging in conduct that could result in a rapid depletion of core
capital or that the value of the property subject to mortgages held or securitized by
the enterprise has decreased significantly. After notice and an opportunity for
hearing, the director determines whether an enterprise is in an unsafe or unsound
condition. These bills authorize the director to issue cease-and-desist orders to
address unsafe or unsound conditions or practices with respect to the enterprises and
their affiliates.26 H.R. 2575 , the House Financial Services manager’s amendment,
and S. 1508 (as passed by the Banking Committee) would also authorize the director
to appoint a receiver to liquidate or wind up the affairs of a critically undercapitalized
enterprise. Under S. 1508, however, the appointment of a receiver would not become
effective unless Congress failed to pass a joint resolution of disapproval within 45
days.
In regard to these bills, there are two important issues that are worth noting.
First, it is not clear from the legislative language what constitutes “a rapid depletion
of core capital.” This lack of clarity could prevent the regulator from responding
quickly in order to prevent a financial crisis.
26 “Enterprise-affiliated parties” are defined in the bills as (1) directors, officers, or
employees of a GSE, (2) shareholders, joint venture partners, or consultants, or (3)
independent contractors who knowingly or recklessly violate law, breach fiduciary duty, or
participate in an unsafe or unsound practice.
Second, the determination that an enterprise is in an unsafe or unsound
condition depends on the potential for a depletion of capital. Thus, the enforcement
powers hinge on the enterprises becoming undercapitalized. However, there are
circumstances upon which an enterprise can be considered adequately capitalized, yet
conducting unsafe or unsound practices. In this regard, H.R. 2803 would allow for
the same broad enforcement authority as federal bank regulators that does not depend
on the capitalization of the enterprises.
The Administration’s View
Treasury Secretary John Snow appeared before the House Financial Services
Committee on September 10, 2003, and then again before the Senate Banking
Committee on October 16, 2003, to outline the Administration’s recommendations
for improving GSE oversight. In his October 16th testimony, the Treasury Secretary
emphasized that these recommendations are not “a wish list of reforms that we would
like to see enacted...[but rather]...the minimum elements that are needed in a credible
regulatory structure, a structure that can ensure that our housing finance system
remains a strong and vibrant source of funding for expanding homeownership27
opportunities in America.” These same recommendations are outlined in the
President’s budget proposal for FY2005.28
First, given that the present GSE structure “is ill-equipped to deal effectively
with the current size, complexity, and importance of Fannie Mae, Freddie Mac, and
the Federal Home Loan Banks,”29 the Administration recommends the creation of a
new agency to oversee the safety and soundness of all the housing GSEs.
Although Treasury Secretary Snow testified last year that the Administration
was not specifically requesting that the new agency be made a bureau of the Treasury
Department, he noted that it would support such a proposal as long as “the new
agency were established with adequate elements of policy accountability to the30
Secretary of the Treasury.” The President’s budget proposal, however, specifically
advocates that the new agency be placed within the Department of the Treasury. The
Administration views the direct involvement of the Treasury Department in
providing policy guidance to the new regulatory agency as essential to reduce the risk
of regulatory capture and to ensure that the new regulator’s policies are not
reinforcing the market misperception of an implied guarantee. According to the
Treasury Secretary’s testimony last year, the Administration requires, at a minimum,
that the new agency clear any new regulations and policy statements to the Congress
27 Prepared testimony of John W. Snow, Secretary of the Treasury, in U.S. Congress, Senate
Committee on Banking, Housing and Urban Affairs, Proposals for Improving the Regulationthst
of the Housing GSEs, hearings, 108 Cong., 1 sess., Oct. 16, 2003, p. 2, at
[http://www.banking.senate.gov/_files/ACFB2.pdf], visited on Oct. 4, 2004.
28 Office of Management and Budget, Budget of the United States Government, Fiscal Year
29 Prepared testimony of Treasury Secretary John W. Snow, p. 2.
30 Prepared testimony of Treasury Secretary John W. Snow, p. 3.
through the Treasury Department, and that the Treasury Department have review
authority over the new agency’s budget.
Second, in order to strengthen the new agency’s general regulatory, supervisory
and enforcement powers, the Administration also recommends the following:
!funding the agency by assessments on its regulated entities that are
not subject to the congressional appropriations process;
!transferring the authority for approving new activities of the housing
GSEs from HUD to the new regulator;
!providing the agency the authority to direct, if necessary, the
liquidation of an enterprise’s assets; and
!giving the agency broad authority to set both minimum and risk-
based capital standards.
Finally, on a separate note, the Administration also encourages Congress to
consider eliminating the statutory requirement for the President to appoint five
members of the enterprises’ board of directors. Currently, the GSEs’ board of
directors shall have eighteen members, five of whom are appointed annually by the
President, and the remaining thirteen are elected annually by the common
stockholders. The Administration’s proposal would require that all eighteen board
members be elected by the shareholders for a one-year term.
On April 2, 2004, the Secretaries of the Treasury and HUD released a statement
of opposition to S. 1508 as reported by the Senate Banking Committee. The
statement referred to an amendment adopted in markup which allows Congress to
overrule the GSE regulator’s decision to appoint a receiver, and characterized this
amendment as significantly weakening “a core power needed for a strong regulator,”
likely to “reinforce the false impression” that the GSEs have a government
guarantee.31 (Under S. 1508 as reported, Congress has 45 days after the appointment
of a receiver to pass a joint resolution of disapproval.)
31 U.S. Department of the Treasury, Office of Public Affairs, Joint Statement of Treasury
Secretary John Snow and Housing and Urban Development Secretary Alphonso Jackson,
JS-1294, April 2, 2004, at [http://www.ustreas.gov/press/releases/js1294.htm], visited on
Oct. 4, 2004.
CRS-15
Table 1. Side-By-Side Comparison of GSE Regulation Proposals
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
Federal Housing EnterpriseSecondary MortgageSecondary MortgageHousing FinanceFederal Housing
Regulatory Reform Act ofMarket EnterprisesMarket EnterprisesRegulatoryEnterprise Oversight
2004Regulatory ImprovementRegulatory ImprovementRestructuring Act ofModernization Act of
ActAct20032003
w regulatoryFederal Housing EnterpriseOffice of Housing FinanceOffice of HousingOffice of HousingOffice of Federal
to replaceSupervisory AgencySupervision (OHFS)Finance SupervisionFinance OversightHousing Enterprise
(FHESA)(OHFS)(OHFO)Supervision (OFHES)
iki/CRS-RL32069
g/wposition andIndependent federal agency,An office in theOffice of ThriftMerges OFHEO andAn office in the
s.orto assume functions ofDepartment of theSupervision (OTS) in theFederal HousingDepartment of the
leakencyOFHEO and FederalTreasury. (Sec. 101)Department of the Finance Board (FHFB Treasury, not to be
Housing Finance BoardTreasury to be renamed— currently overseermerged or consolidated
://wiki(FHFB). (Sec. 101)as OHFS and to assumeof the Federal Homewith any other branch of
httpmost of OFHEO’sLoan banks) intothe Treasury. (Sec.
functions. (Sec. 101)OHFO, a bureau in the101)
Department of the
Treasury. (Sec. 101)
CRS-16
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
ernance of newDirector appointed by theDirector appointed by theDirector of OTS willDirector appointed byDirector appointed by
encyPresident, with advice andPresident, with advice andbecome director ofPresident, with advicethe President, with
consent of the Senate, to aconsent of the Senate, to aOHFS. (Sec. 102)and consent of theadvice and consent of
six-year term. Three deputyfive-year term. DeputySenate, to a five-yearthe Senate, to a
directors to be appointed bydirector to be appointed byterm. Two deputyfive-year term. OFHEO
director, to oversee (1) thedirector, with such dutiesdirectors: 1) for Safetydirector to serve as
housing GSEs, (2) theand powers as the directorand Soundness (todirector of OFHES for
FHLBs, and (3) the housingmay assign. (Sec. 101)exercise OFHEO’s andat least one year. (Sec.
mission and goals. (Sec.FHFB’s authority) and101)
101)2) for Housing
iki/CRS-RL32069Enterprise Charter
g/wCreates a Federal HousingCompliance (to
s.orEnterprise Board, with noexercise authority
leakexecutive powers, to advisecurrently vested in the
://wikithe director. Boardmembers include secretariesSecretary of HUD). (Sec. 101)
httpof Treasury, HUD,
chairman of the SEC, and
the FHESA director. (Sec.
CRS-17
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
alifications ofU.S. citizen with knowledgeU.S. citizen neitherNo financial interest in aNo financial interest inU.S. citizen neither
of financial management oremployed by nor having ahousing GSE (in additiona housing GSE or aemployed by nor having
oversight and capitalfinancial interest in ato qualifications for headFederal Home Loana financial interest in a
markets, includinghousing GSE, with aof OTS). (Sec. 102)Bank (FHLB), U.S.housing GSE. (Sec.
mortgage securities anddemonstratedcitizenship. (Sec. 101)101)
housing markets. May notunderstanding of housing
be employed by, or have afinance. (Sec. 101)
financial interest in a GSE,
or have served as a GSE
director or executive for the
iki/CRS-RL32069past three years.
g/w(Sec. 101)
s.or
leak
://wiki
http
CRS-18
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
ties andTo oversee prudentialTo oversee GSEs andTo ensure that GSEsTo prescribeTo ensure that GSEs
operations of GSEs, toensure that they operate inoperate in a financiallyregulations necessaryoperate in a financially
ensure that GSEs maintaina safe and sound mannersafe and sound manner,to carry out the act andsafe and sound manner,
adequate capital and(including maintenance ofcarry out their missionsfunctions assigned tocarry out their missions
internal controls, to see thatadequate capital andonly through authorizedthe director. only through authorized
GSEs foster liquid,internal controls), fosteractivities, and remain (Sec. 101)activities, and remain
efficient, and competitiveliquid and competitiveadequately capitalized,adequately capitalized,
housing markets, to ensuremortgage markets, complyand to exercise generalIn addition to any otherand to exercise general
that GSEs comply with thewith applicable laws, rules,supervisory andauthority of thesupervisory authority.
authorizing statutes and thatand regulations, and carryregulatory authority. director, to prescribe
iki/CRS-RL32069they engage only inout their missions onlysafety and soundness(Sec. 102)
g/wactivities consistent withthrough activities(Sec. 103)standards pursuant to
s.orthose statutes, and to meetauthorized by their chartersSection 39 of the
leakat least twice a year withand consistent with theFederal Deposit
://wikiGSEs’ external auditors. With respect to the FHLBs,public interest. Insurance Act. Thesestandards are to have
httpto ensure that they provide(Sec. 102)the same force and
funds to communityeffect with regard to
financial institutions toGSEs as federal bank
support small businessesregulators’ standards
and farms and accept ashave with regard to
collateral whole interests infederally insured
such loans.depository institutions.
(Sec. 102)(Sec. 102)
CRS-19
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
thority toYes. (Sec. 102)Yes. (Sec. 102)Yes. (Sec. 103)Yes, but director mayYes. (Sec. 102)
atenot let FHLBs take on
examination duties.
(Sec. 101)
to hireYes: examiners, accountantsYes, for three yearsYes, and director mustNo provision.Yes, for three years
iners andand economists may befollowing enactment.report to Congress withinafter enactment.
hhired directly, in accordanceDirector must report to90 days on changes inDirector must report to
linedwith the excepted serviceCongress within 90 daysthe hiring process,Congress annually on
iki/CRS-RL32069procedures. (Sec. 105)on changes in the hiringresults, etc. (Sec. 104)changes in the hiring
g/wprocess, results, etc. (Sec.process, results, etc.
s.or104)(Sec. 103)
leak
://wiki
http
CRS-20
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
encyDirector to establish andDirector to establish andAgency to determineAnnual assessments toDirector to establish and
collect annual assessmentscollect annual assessmentsamount of and collectbe collected fromcollect annual
from GSEs, not to exceedfrom GSEs, not to exceedannual assessments fromGSEs and FHLBs. assessments from GSEs,
reasonable costs ofreasonable costs ofGSEs, not exceedingSecretary of HUD tonot to exceed
regulation, includingregulation, includingreasonable costs oflevy similarreasonable costs of
examinations, creditexaminations, creditregulation, includingassessment. Amountsregulation, including
reviews, and enforcement. reviews, and enforcement. examinations and creditcollected to be placedexaminations and credit
Amounts collected are notAmounts collected are notreviews. Secretary ofin the Federal Housingreviews. Assessments
to be construed to beto be construed to beHUD to levy similarEnterprise Oversightto be deposited in a
government or public fundsgovernment or publicassessment to coverFund in Treasury, to befund in the Treasury for
iki/CRS-RL32069or appropriated money. funds or appropriatedHUD’s GSE-relatedavailable without fiscalthe director’s use
g/w(Sec. 106)money. (Sec. 106)regulatory functions. year restrictions.without fiscal year
s.orAmounts collected to beRetains requirementlimitation. Creates a
leakAssessments may includeAssessments may includeplaced in a fund infor appropriations, butpermanent
://wikian amount in excess ofactual expenses, as deemedan amount in excess ofactual expenses, as deemedTreasury with separateaccounts for director andcreates a permanentappropriation. (Sec.appropriation. (Sec.105)
httpnecessary by the Director,necessary by the Director,HUD, to be available101)
to maintain a workingto maintain a workingwithout fiscal year
capital fund. Collections incapital fund. Collectionsrestrictions. Retains
excess of the amount thein excess of the amount therequirement for
Director deems necessary toDirector deems necessaryappropriations, but
maintain the workingto maintain the workingcreates a permanent
capital fund shall becapital fund shall beappropriation. (Sec.
remitted annually to GSEs.remitted annually to GSEs.106)
(Sec. 106)(Sec. 106)
CRS-21
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
No provision.The Secretary of HUD willDirector to submit plansDirector to submitDirector to submit plans
submit plans and forecasts and forecasts to OMBplans and forecasts toand forecasts to OMB
to OMB before each fiscalbefore each fiscal year,OMB and Treasurybefore each fiscal year,
year regarding HUD’sand reports on operationsbefore each fiscal year,and reports on
GSE oversight activities. as soon as practicableand reports onoperations as soon as
(Sec. 121)after the ending of theoperations as soon aspracticable after the
fiscal year and eachpracticable after theending of fiscal years
quarter thereof. Theending of fiscal yearsand quarters thereof.
Secretary of HUD willand quarters thereof.(Sec. 105)
submit similar plans andThe Secretary of HUD
iki/CRS-RL32069reports to the director. will submit similar
g/w(Sec. 106)plans and reports to the
s.ordirector. (Sec. 101)
leak
://wiki
http
CRS-22
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
ing goalsHUD authority transferredHUD Secretary retainsHUD Secretary retainsHUD Secretary retainsHUD Secretary retains
to FHESA, except for fairauthority to establish andauthority to enforceauthority to enforceauthority to enforce
housing responsibilities. enforce housing goals. housing goals. (Sec.housing goals. (Sec.housing goals. (Sec.
(Sec. 125)Establishes a HUD Office107)103)102)
of GSE Mission Oversight.
Director shall establish an(Sec. 121) HUD Secretary
annual goal for hometo prepare an annual
purchases by low-income,housing report on GSEs
first-time buyers who areand housing goals. (Sec.
good credit risks but can’t123)
iki/CRS-RL32069cover a down payment or
g/wclosing costs. (Sec. 127)
s.or
leakProvides for improved
://wikiprovision of mortgage creditto low-income families and
httpunderserved markets.
(Title IV)
CRS-23
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
alDirector approval neededSecretary of HUD’s priorSecretary of HUD’sGSE charterNew programs must be
for newfor new programs. Newapproval authorityapproval authoritycompliance authorityapproved by the
ramsprograms must not be inretained, but considerationretained — newtransferred fromDirector, in consultation
itiesconflict with the statutes orof new and ongoingactivities may beSecretary of HUD towith the Secretary of
with the public interest. programs to includeapproved only if they areDirector. (Sec. 103)HUD. New programs
(Sec. 122)consultation with theauthorized by GSEshall be approved unless
Director. New andcharters, can bethey are found to be
ongoing GSE programsconducted in a safe andinconsistent with safety
must be consistent withsound manner, and are inand soundness or not
their charters, not unsafe orthe public interest. (Sec.authorized by GSE
iki/CRS-RL32069unsound, and in the public108)charters. (Sec. 102)
g/winterest. (Sec. 122)
s.or
leakits on non-No provision.No provision.Secretary of HUD shallNo provision.On a quarterly basis,
ission relatedby regulation limit theDirector shall review
://wikiamount of such assets aand provide written
httpGSE may hold at anycomment to GSEs on
time. (Sec. 109)the appropriateness and
quality of nonmortgage-
related assets held in
and outside the GSE’s
liquidity portfolio.
(Sec. 107)
ing loanNo provision.No provision.Loan limits to be raisedNo provision.No provision.
itsor lowered each year
according to a housing
cost index maintained by
the Director. (Sec. 110)
CRS-24
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
Regulated entities mustDirector shall require eachDirector shall requireNo provision.GSEs must register their
ationregister at least one class ofGSE to obtain and discloseGSEs to releasestock with the SEC and
capital stock with the SEC,an annual credit rating, andfinancial, business, andmake public disclosures
and maintain suchto publicly disclose interestother information thatregarding interest rate
registration under therate and credit risk. would be in the publicand credit risks and
Securities Exchange Act of(Sec. 110)interest. (Sec. 111)their credit rating. (Sec.
comply with SEC proxy and
insider transaction rules.
(Sec. 108)
iki/CRS-RL32069
g/wEnterprises must also
s.ordisclose on a quarterly basis
leakthe fair value of
://wikishareholders’ equity. (Sec. 109)
http
iews of GSEDirector shall require eachDirector shall require eachEach GSE must be ratedNo provision.Each GSE must be rated
orthinessGSE to obtain and discloseGSE to obtain and disclosebiennially by two SEC-biennially by two SEC-
an annual credit rating. an annual credit rating. recognized credit ratingrecognized credit rating
(Sec 108)(Sec 110)organizations (Sec. 112)organizations (Sec. 109)
CRS-25
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
sk-based capitalDirector shall establish byDirector shall establish byDirector may specify theNo provision.Director to review the
regulation or order risk-regulation or order risk-assumptions aboutadequacy of risk-based
based capital requirementsbased capital requirementsinterest rates, homestandards and, if
to ensure safe and soundto ensure safety andprices, and new businessneeded, recommend
operation and thesoundness. (Sec. 109) that are to be used bythat Congress make
maintenance of sufficientGSEs in calculatingchanges in the statutory
capital and reserves toDirector shall report tocapital requirements. standards to better align
support risks that arise. Congress annually on risk-(Sec. 113)capital with risk and
(Sec. 108)based capital requirementsreflect evolving best
and tests. (Sec. 161)practices in large
iki/CRS-RL32069FHESA shall reportfinancial institutions.
g/wquarterly on the levels ofDirector may also
s.orrequired capital and themodify the current risk-
leakmethods by which the levelsbased capital level if the
://wikiare calculated. (Sec. 161)level is inadequate toensure safety and
httpsoundness. (Sec. 110)
ents toRegulated entities mustDirector shall requireDirector shall requireNo provision.GSEs must register their
register at least 1 class ofGSEs to issue subordinatedGSEs to issuestock with the SEC and
th, disclosure,capital stock with the SEC,debt, maintain appropriatesubordinated debt,make public disclosures
arketand make disclosures underlevels of liquidity, obtainmaintain appropriateregarding interest rate
the Securities Exchange Actand disclose an annuallevels of liquidity, obtainand credit risks and
of 1934. (Sec. 108)credit rating, and makeand disclose an annualtheir credit rating. (Sec.
public disclosurescredit rating, and make112)
regarding interest rate andpublic disclosures
credit risk. (Sec. 110)regarding interest rate
and credit risk. (Sec.
CRS-26
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
inimum andTo be set by the director,No provision.May be adjusted (but notNo provision.Director authorized to
and may be raised aboveset below statutoryissue regulations to
elsminimum levels if directorminimums) by director. ensure compliance with
determines that the benefits(Sec. 114)minimum and critical
outweigh adverse effects oncapital levels. (Sec.
the housing mission. (Sec.111)
pitalDirector may reclassify aDirector may reclassify aDirector may reclassify aNo provision.Director may reclassify
GSE whose conduct couldGSE whose core capital isGSE whose core capitala GSE whose core
iki/CRS-RL32069rapidly deplete core capital,rapidly being depleted, oris rapidly being depleted,capital is rapidly being
g/wor has caused a significantwhich (after notice andwhich (by the director’sdepleted, which (by the
s.orloss to asset values, oropportunity for a hearing)written finding, afterdirector’s written
leakwhich is determined (afteris determined to be in annotice and opportunityfinding, after notice and
notice and opportunity for aunsafe or unsoundfor a hearing) is in anopportunity for a
://wikihearing) to be in an unsafecondition, or engaging inunsafe or unsoundhearing) is in an unsafe
httpor unsound condition. (Sec.an unsafe or unsoundcondition, or engaging inor unsound condition, or
141)practice. (Sec. 141)an unsafe or unsoundengaging in an unsafe or
practice. (Sec. 131)unsound practice. (Sec.
CRS-27
S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
isory actionsDirector must monitorDirector must monitorDirector must monitorNo provision.Director must monitor
GSE’s condition,GSE’s condition,GSE’s condition,GSE’s condition,
edcompliance with its capitalcompliance with its capitalcompliance with itscompliance with its
restoration plan, and therestoration plan, and thecapital restoration plan,capital restoration plan,
efficacy of the plan. Noefficacy of the plan. Noand the efficacy of theand the efficacy of the
growth in total assets isgrowth in total assets isplan. No growth in totalplan. No growth in total
permitted for anpermitted for anassets is permitted for anassets is permitted for
undercapitalized GSE,undercapitalized GSE,undercapitalized GSE,an undercapitalized
unless the director hasunless the director hasunless the director hasGSE, unless the director
accepted the GSE’s capitalaccepted the GSE’s capitalaccepted the GSE’shas accepted the GSE’s
iki/CRS-RL32069restoration plan, an increaserestoration plan, ancapital restoration plan,capital restoration plan,
g/win assets is consistent withincrease in assets isan increase in assets isan increase in assets is
s.orthe plan, and the ratio ofconsistent with the plan,consistent with the plan,consistent with the plan,
leaktangible equity to assets isand the ratio of tangibleand the ratio of tangibleand the ratio of tangible
://wikiincreasing. No newactivities or acquisitionsequity to assets isincreasing. No newequity to assets isincreasing. No newequity to assets isincreasing. No new
httppermitted without theproducts may be issued, orproducts may be issued,products may be issued,
Director’s prior approval. acquisitions made, withoutor acquisitions made,or acquisitions made,
Actions that may be takenthe Director’s priorwithout the Director’swithout the Director’s
under current law withapproval. Actions thatprior approval. Actionsprior approval. Actions
regard to significantlymay be taken under currentthat may be taken underthat may be taken under
undercapitalized GSEs maylaw with regard tocurrent law with regardcurrent law with regard
be taken with regard tosignificantlyto significantlyto significantly
undercapitalized GSEs. undercapitalized GSEsundercapitalized GSEsundercapitalized GSEs
(Sec. 142)may be taken with regardmay be taken with regardmay be taken with
to undercapitalized GSEs. to undercapitalizedregard to
(Sec. 142)GSEs. (Sec. 132)undercapitalized GSEs.
(Sec. 132)
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
isory actionsSupervisory actions thatSupervisory actions thatSupervisory actions thatNo provision.Supervisory actions that
regulator may take underregulator may take underregulator may take underregulator may take
nificantlycurrent law must be taken,current law must be taken,current law must beunder current law must
edincluding one or more of theincluding one or more oftaken, including one orbe taken, including one
following: new election ofthe following: new electionmore of the following:or more of the
directors, dismissal ofof directors, dismissal ofnew election of directors,following: new election
directors and/or executives,directors and/ordismissal of directorsof directors, dismissal
and hiring of qualifiedexecutives, and hiring ofand/or executives, andof directors and/or
executive officers. Withoutqualified executivehiring of qualifiedexecutives, and hiring
written approval of director,officers. Without writtenexecutive officers. of qualified executive
iki/CRS-RL32069executives of a significantlyapproval of director,Without written approvalofficers. Without
g/wundercapitalized GSE mayexecutives of aof director, executives ofwritten approval of
s.ornot receive bonuses or paysignificantlya significantlydirector, executives of a
leakraises. (Sec. 143)undercapitalized GSE mayundercapitalized GSEsignificantly
://wikinot receive bonuses or payraises. (Sec. 143)may not receive bonusesor pay raises. (Sec. 133)undercapitalized GSEmay not receive
httpbonuses or pay raises.
(Sec. 133)
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
isory actionsDirector may appoint (orThe director may appointAfter written notice toNo provision.No provision.
FHESA serve as) a receiveran enhanced conservator toCongress, the director
or conservator for severalliquidate a criticallymay appoint a receiver to
edcauses related to financialundercapitalized GSE andliquidate a critically
difficulty or violation of lawwind up its affairs, inundercapitalized GSE
)or regulation. Director mayaccordance with suchand wind up its affairs.
also appoint a limited-liferegulations as the Director(Sec. 134)
enterprise to deal with themay issue. (Sec. 144)
affairs of a GSE in default.
Congress may overrule the
iki/CRS-RL32069appointment of a receiver
g/wby passing a joint resolution
s.orof disapproval within 45
leakdays. (Sec. 144)
://wikiWith certain exceptions, aWith certain exceptions, aWith certain exceptions,No provision.With certain exceptions,
httpGSE may not make a capitalGSE may not make aa GSE may not make aa GSE may not make a
distribution that wouldcapital distribution thatcapital distribution thatcapital distribution that
cause it to becomewould cause it to becomewould cause it to becomewould cause it to
undercapitalized. (Sec. 141)undercapitalized. (Sec.undercapitalized. (Sec.become
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
entDirector may issue cease-Director may issue cease-Director may issueDirector may issueDirector may issue
(cease-and-desist orders for unsafeand-desist orders forcease-and-desist orderscease-and-desistcease-and-desist orders
desist orders)or unsound practices, or forunsafe and unsoundfor unsafe and unsoundorders, includingfor unsafe and unsound
an unsatisfactory rating.practices or violations ofpractices or violations oforders to takepractices or violations
(Sec. 151)law. A less-than-law. A less-than-affirmative actions, toof law. A less-than-
satisfactory examinationsatisfactory examinationthe same extent andsatisfactory examination
Temporary cease-and-desistrating may be deemed anrating may be deemed anunder the samerating may be deemed
orders may be issued if GSEunsafe and unsoundunsafe and unsoundprocedures andan unsafe and unsound
actions are likely to weakenpractice. Director may notpractice. (Sec. 151)conditions as federalpractice. (Sec. 151)
its financial condition priorenforce compliance withbank regulators with
iki/CRS-RL32069to the conclusion of a cease-housing goals. (Sec. 151)respect to insured
g/wand-desist proceeding. depository institutions.
s.or(Sec. 152)(Sec. 101)
leak
://wiki
http
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
entTemporary cease-and-desistIf an unsound or unsafeIf an unsound or unsafeDirector may issueIf an unsound or unsafe
orders may be issued if GSEpractice appears likely topractice appears likely totemporary cease-and-practice appears likely
porary cease-actions are likely to weakencause insolvency orcause insolvency ordesist orders, includingto cause insolvency or
desistits financial condition priorsignificant dissipation ofsignificant dissipation oforders to takesignificant dissipation
s)to the conclusion of a cease-assets or earnings, directorassets or earnings,affirmative action, toof assets or earnings,
and-desist proceeding. may issue temporarydirector may issuethe same extent anddirector may issue
(Sec. 152)cease-and-desist orders,temporary cease-and-under the sametemporary cease-and-
including orders to takedesist orders, includingprocedures anddesist orders, including
affirmative action toorders to take affirmativeconditions as federalorders to take
remedy the unsafe andaction to remedy thebank regulators withaffirmative action to
iki/CRS-RL32069unsound practice. Directorunsafe and unsoundrespect to insuredremedy the unsafe and
g/wmay seek an injunction inpractice. Director maydepository institutions. unsound practice.
s.orfederal court to enforce aseek an injunction in(Sec. 101)Director may seek an
leakcease-and-desist order. federal court to enforce ainjunction in federal
://wiki(Sec. 152)cease-and-desist order. (Sec. 152)court to enforce a cease-and-desist order. (Sec.
http 152)
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S. 1508 House Fin. Serv.
Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
moval andAfter written notice andAfter written notice andAfter written notice andDirector may issueAfter written notice and
opportunity for a hearing,opportunity for a hearing,opportunity for asuspension andopportunity for a
the director may suspend orthe director may suspendhearing, the director mayremoval orders to thehearing, the director
remove “enterprise-or remove “enterprise-suspend or removesame extent and undermay suspend or remove
affiliated parties” (definedaffiliated parties” (defined“enterprise-affiliatedthe same procedures“enterprise-affiliated
below) who have 1) violatedbelow) who have 1)parties” (defined below)and conditions asparties” (defined below)
a law or a cease-and-desistviolated a law or a cease-who have 1) violated afederal bank regulatorswho have 1) violated a
or other written order, 2)and-desist or other writtenlaw or a cease-and-desistwith respect to insuredlaw or a cease-and-
engaged in an unsafe ororder, 2) engaged in anor other written order, 2)depository institutions. desist or other written
unsound practice, or 3)unsafe or unsound practice,engaged in an unsafe or(Sec. 101)order, 2) engaged in an
iki/CRS-RL32069breached fiduciary duty,or 3) breached fiduciaryunsound practice, or 3)unsafe or unsound
g/wsuch that 1) the GSE isduty, such that 1) the GSEbreached fiduciary duty,practice, or 3) breached
s.orlikely to suffer loss or theis likely to suffer loss orsuch that 1) the GSE isfiduciary duty, such that
leakenterprise affiliated partythe party gain, and 2) thelikely to suffer loss or1) the GSE is likely to
://wikigain, and 2) the unsafe orunsound practiceunsafe or unsound practicedemonstrates continuingthe party gain, and 2) theunsafe or unsoundsuffer loss or the partygain, and 2) the unsafe
httpdemonstrates continuingdisregard for the safety andpractice demonstratesor unsound practice
disregard for the safety andsoundness of the GSE. continuing disregard fordemonstrates personal
soundness of the GSE. Also(Sec. 153)the safety and soundnessdishonesty or
provides for industry-wideof the GSE. (Sec. 153)continuing disregard for
suspensions under certainthe safety and
circumstances. (Sec. 153)soundness of the GSE.
(Sec. 153)
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
“Enterprise-affiliated“Enterprise-affiliated“Enterprise-affiliatedNo provision.“Enterprise-affiliated
parties” are defined as 1)parties” are defined as 1)parties” are defined as 1)parties” are defined as
directors, officers, ordirectors, officers, ordirectors, officers, or1) directors, officers, or
ployees) isemployees of a GSE, 2)employees of a GSE, 2)employees of a GSE, 2)employees of a GSE, 2)
ect to cease-shareholders, joint ventureshareholders, joint ventureshareholders, jointshareholders, joint
desist orders orpartners, or consultants, 3) partners, or consultants, orventure partners, orventure partners, or
oval andindependent contractors3) independent contractorsconsultants, or 3) consultants, or 3)
who knowingly orwho knowingly orindependent contractorsindependent contractors
?recklessly violate law,recklessly violate law,who knowingly orwho knowingly or
breach fiduciary duty, orbreach fiduciary duty, orrecklessly violate law,recklessly violate law,
iki/CRS-RL32069participate in an unsafe orparticipate in an unsafe orbreach fiduciary duty, orbreach fiduciary duty,
g/wunsound practice (whereunsound practice. participate in an unsafeor participate in an
s.orsuch actions are likely to(Sec. 111)or unsound practice. unsafe or unsound
leakcause significant losses in (Sec. 116)practice. (Sec. 114)
://wikithe GSE, or (4) non-profitsthat receive their principal
httpfunding on an ongoing basis
from a GSE.
(Sec. 2)
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
il moneyThree tiers of fines: 1)Three tiers of fines: 1)Three tiers of fines: 1)Director may imposeThree tiers of fines: 1)
$10,000 per day for$10,000 per day for$10,000 per day forcivil fines to the same$10,000 per day for
violations of orders, etc., 2)violations of orders, etc.,violations of orders, etc.,extent and under theviolations of orders,
$50,000 per day for a2) $50,000 per day for a2) $50,000 per day for asame procedures andetc., 2) $50,000 per day
pattern of misconduct orpattern of misconduct orpattern of misconduct orconditions as federalfor a pattern of
breach of fiduciary dutybreach of fiduciary dutybreach of fiduciary dutybank regulators withmisconduct or breach of
with financial gain to thewith financial gain to thewith financial gain to therespect to insuredfiduciary duty with
individual, and 3) up to aindividual, and 3) up to aindividual, and 3) up to adepository institutions. financial gain to the
maximum of $2 million formaximum of $2 million formaximum of $2 million(Sec. 101)individual, and 3) up to
knowingly engaging inknowingly engaging infor knowingly engaginga maximum of $2
iki/CRS-RL32069violations, breaches ofviolations, breaches ofin violations, breaches ofmillion for knowingly
g/wfiduciary duties, or unsafefiduciary duties, or unsafefiduciary duties, orengaging in violations,
s.oror unsound practices thator unsound practices thatunsafe or unsoundbreaches of fiduciary
leakcause substantial losses to acause substantial losses topractices that causeduties, or unsafe or
://wikiGSE. (Sec. 155)a GSE. (Sec. 155)substantial losses to aGSE. (Sec. 155)unsound practices thatcause substantial losses
httpto a GSE. (Sec. 155)
iminal penaltiesAnyone who participatesAnyone who participatesAnyone who participatesNo provision.Anyone who
directly or indirectly in thedirectly or indirectly in thedirectly or indirectly inparticipates directly or
affairs of a GSE whileaffairs of a GSE whilethe affairs of a GSEindirectly in the affairs
under suspension or orderunder suspension or orderwhile under suspensionof a GSE while under
of removal shall be liableof removal shall be liableor order of removal shallsuspension or order of
for a fine of up to $1for a fine of up to $1be liable for a fine of upremoval shall be liable
million, or five yearsmillion, or five yearsto $1 million, or fivefor a fine of up to $1
imprisonment. (Sec. 156)imprisonment. (Sec. 156)years imprisonment. million, or five years
(Sec. 156)imprisonment. (Sec.
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Banking Committee)
No provision.No provision.No provision.Director to becomeDirector to become
stitutionsmember of FFIEC. member of FFIEC.
amination(Sec. 106)(Sec. 102)
EC)
E directorsStrikes provision in currentStrikes provision in currentNo provision.No provision.No provision.
law under which 5 memberslaw by which 5 members
of GSE boards of directorsof GSE boards of directors
are appointed by theare appointed by the
President. President.
iki/CRS-RL32069(Sec. 172)(Sec. 171)
g/w
s.ore LoanFHLBs come under theNo provision.No provision.Merges OFHEO andRequires FHLBs to
leaksregulation of FHESA,Federal Housingregister their stock with
which assumes the duties ofFinance Board (FHFB the SEC and comply
://wikithe Federal Housing— currently overseerwith certain SEC
httpFinance Board (FHFB).of the Federal Homereporting requirements.
(Sec. 203)Loan Banks) into(Sec. 112) Calls for a
OHFO, a bureau in thestudy of merging FHFB
Creates a Federal HomeDepartment of thewith OFEHS. (Sec.
Loan Bank FinanceTreasury. (Sec. 101)113)
Corporation to act as a
fiscal agent and issue and
service the consolidated
debt of the FHLBs.
(Replaces the Office of
Finance.)
(Sec. 204)
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
1. Director and bank1. Treasury and bank1. Treasury and bankNo studies or reports1. Director shall report
ongressregulators to report onregulators to report onregulators to report oncalled for.biennially to Congress
various matters related toholdings of GSE securitiesholdings of GSEon nonmortgage assets
holdings of GSE securitiesby insured banks, andsecurities by insuredheld by GSEs and GSE
by insured depositorysystemic risk implications.banks, and systemic riskcompliance with the
institutions.implications.Basel Committee’s
2. Director to report onSound Practices for
with GAO)to report on GSEportfolios, riskGSEs’ investment(Sec. 107)
portfolio operations, riskmanagement practices, andportfolios, risk
iki/CRS-RL32069management, and mission.related safety andmanagement practices,
g/wsoundness implications.and related safety and
s.or3. Director to report on thesoundness implications.
leakgrowth of GSE debt , and3. Treasury to report on
://wikianalyze whether debt levelsought to be limited if thegrowth of GSE debt and possible effects of limits3. Treasury to report ongrowth of GSE debt and
httpGSE is not operating in aon GSE debt issuance.possible effects of limits
safe and sound manner oron GSE debt issuance.
fails to maintain a certain4. Director to report
debt rating.annually to Congress on4. Treasury to report on
risk-based capitalGSEs line of credit with
4. Director to reportstandards for GSEs,the Treasury: its
quarterly on risk-basedincluding minimum andpurposes and the
capital standards and thecritical capital levels.possible effects of
method by which thoseeliminating it.
standards are determined.(Sec. 161)
5. Director to report
5. GAO to report annuallyannually on risk-based
on the allocation ofcapital standards and
FHESA’s resources and theminimum and critical
level of assessmentscapital levels.
collected by the agency.
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Provision(as passed by theManager’s AmendmentH.R. 2575H.R. 2803S. 1656
Banking Committee)
ansition fromVarious provisions dealingVarious provisions dealingVarious provisionsVarious provisionsVarious provisions
o newwith abolition of OFHEOwith abolition of OFHEO,dealing with abolition ofdealing with abolitiondealing with abolition
encyand the FHFB, continuationcontinuation of certainOFHEO, continuation ofof OFHEO,of OFHEO,
of certain regulations,regulations, transfer ofcertain regulations,continuation of certaincontinuation of certain
transfer of property andproperty and facilities,transfer of property andregulations, transfer ofregulations and
facilities, employee rightsemployee rights andfacilities, employeeproperty and facilities,authorities, transfer of
and benefits, etc. (Title III)benefits, etc. (Title II,rights and benefits, etc. employee rights andproperty and facilities,
Secs. 201-204) (Title II, Secs. 201-204) benefits, etc. (Title II,employee rights and
Secs. 201-204) benefits, etc. (Title II,
Secs. 201-204)
iki/CRS-RL32069
g/we dateOne year from the date ofOne year post-enactment. One year post-Six months post-One year post-
s.orenactment. (Sec. 173)(Sec. 173)enactment. enactment. enactment. (Sec. 162)
leak(Sec. 172)(Sec. 107)
://wiki
http