The Office of Inspector General put emphasis on the need for the Federal Housing Finance Agency to create a risk-based plan to better observe Fannie Mae and Freddie Mac’s compliance with entities that sell loans to or service them for the Enterprises.
When the government-sponsored enterprises work with counterparties, these entities contract to follow federal and state laws that govern the origination and servicing of loans.
However, the OIG found that the FHFA does not thoroughly oversee how the government-sponsored enterprises monitor these counterparties fulfillment to such contracts.
"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," said Russell Rau, Inspector General for Audits.
Furthermore, the OIG believes the FHFA has not actively overseen — through its examination process — how the GSEs monitor counterparty compliance to the contracts with federal and state laws, including consumer protection acts.
Similarly, Fannie Mae and Freddie Mac do not have formal programs in place to review the entities compliance with federal and state law, except where the GSEs face legal liability from a counterparty’s failure to comply, such as predatory lending.
"In spite of their counterparties’ commitments, the Enterprises do not review the loans they buy at the time of purchase to assess whether consumers are being treated properly according to applicable law. Instead, both Enterprises have noted that they generally rely on the counterparties’ representations and warranties of compliance with consumer protection laws," Rau said.
Instead, both government-sponsored enterprises noted that they rely on the counterparties’ representations and warranties of compliance with consumer protection laws.
Additionally, since the GSEs can require the entities to repurchase loans if they uncover violations, they concern themselves with compliance issues only when they may be liable as a purchaser for noncompliance, the report explained.
For it’s part, the FHFA has not performed any reviews specific to how the Enterprises monitor counterparty compliance.
Although the agency’s new reps and warrant framework directs the GSEs to conduct reviews of compliance within their seller and servicer guidelines, more specific instruction to identify loans with legal compliance issuers are not included, Rau stated.
"Neither Enterprise has implemented procedures to identify and refer for repurchase mortgages that were originated in violation of federal and/or state laws or regulations, and FHFA has not instructed them to develop such procedures," the report explained.
The FHFA declined to comment, but noted in its memorandum that it has begun to put together a plan to address its role in supervising Fannie Mae and Freddie Mac’s oversight of their counterparty’s compliance.
Brad German, spokesman for Freddie Mac, told HousingWire that the GSE takes consumer protection very seriously.
"We agree in the spirit of the FHFA comments and and we'll work closely with them to implement any actions deemed appropriate," he said.
On a similar note, the OIG noted that the agency has taken steps to oversee the GSEs, including the development of an information-sharing agreement with regulators such as the Federal Reserve Board and the Office of the Comptroller of the Currency.
"Going forward, such inter-agency 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," the report concluded.