For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32069 ------------------------------------------------------------------------------ Order Code RL32069 CRS Report for Congress Received through the CRS Web Improving the Effectiveness of GSE Oversight: Legislative Proposals in the 108th 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 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Oversight: Legislative Proposals in the 108th 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. 4, 2004. 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 2001. CRS-2 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...) CRS-3 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 performance targets that triggered the payment of bonuses to company executives.10 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 real reform."11 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. CRS-4 ! 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 Regulation of the Housing GSEs, hearings, 108th Cong., 1st 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 Sponsored Enterprises, hearings, 108th 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. CRS-5 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 and Soundness Act).16 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. CRS-6 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%. CRS-7 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. CRS-8 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 1997, p. 14. 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 Improve the Regulatory Regime for Government Sponsored Enterprises, hearings, 108th Congress, 2nd sess., Feb. 10, 2004, at [http://www.banking.senate.gov/_files/walker.pdf], visited on Oct. 4, 2004. CRS-9 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 other authority."23 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 from the Treasury, but in consequence of appropriations made by law..."24 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 Enterprise Accounting Practices, hearings, 108th Cong., 1st 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: 1997, 1998, 1999, and 2001. 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. CRS-10 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. CRS-11 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. CRS-12 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. CRS-13 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 homeownership opportunities in America."27 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 the Secretary of the Treasury."30 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 Regulation of the Housing GSEs, hearings, 108th Cong., 1st 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 2005, Analytical Perspectives, pp. 81-85. 29 Prepared testimony of Treasury Secretary John W. Snow, p. 2. 30 Prepared testimony of Treasury Secretary John W. Snow, p. 3. CRS-14 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 the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Short title Federal Housing Enterprise Secondary Mortgage Secondary Mortgage Housing Finance Federal Housing Regulatory Reform Act of Market Enterprises Market Enterprises Regulatory Enterprise Oversight 2004 Regulatory Improvement Regulatory Improvement Restructuring Act of Modernization Act of Act Act 2003 2003 New regulatory Federal Housing Enterprise Office of Housing Finance Office of Housing Office of Housing Office of Federal entity to replace Supervisory Agency Supervision (OHFS) Finance Supervision Finance Oversight Housing Enterprise OFHEO (FHESA) (OHFS) (OHFO) Supervision (OFHES) Composition and Independent federal agency, An office in the Office of Thrift Merges OFHEO and An office in the location of new to assume functions of Department of the Supervision (OTS) in the Federal Housing Department of the agency OFHEO and Federal Treasury. (Sec. 101) Department of the Finance Board (FHFB Treasury, not to be Housing Finance Board Treasury to be renamed -- currently overseer merged or consolidated (FHFB). (Sec. 101) as OHFS and to assume of the Federal Home with any other branch of most of OFHEO's Loan banks) into the Treasury. (Sec. functions. (Sec. 101) OHFO, a bureau in the 101) Department of the Treasury. (Sec. 101) CRS-16 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Governance of new Director appointed by the Director appointed by the Director of OTS will Director appointed by Director appointed by agency President, with advice and President, with advice and become director of President, with advice the President, with consent of the Senate, to a consent of the Senate, to a OHFS. (Sec. 102) and consent of the advice and consent of six-year term. Three deputy five-year term. Deputy Senate, to a five-year the Senate, to a directors to be appointed by director to be appointed by term. Two deputy five-year term. OFHEO director, to oversee (1) the director, with such duties directors: 1) for Safety director to serve as housing GSEs, (2) the and powers as the director and Soundness (to director of OFHES for FHLBs, and (3) the housing may assign. (Sec. 101) exercise OFHEO's and at least one year. (Sec. mission and goals. (Sec. FHFB's authority) and 101) 101) 2) for Housing Enterprise Charter Creates a Federal Housing Compliance (to Enterprise Board, with no exercise authority executive powers, to advise currently vested in the the director. Board Secretary of HUD). members include secretaries (Sec. 101) of Treasury, HUD, chairman of the SEC, and the FHESA director. (Sec. 103) CRS-17 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Qualifications of U.S. citizen with knowledge U.S. citizen neither No financial interest in a No financial interest in U.S. citizen neither director of financial management or employed by nor having a housing GSE (in addition a housing GSE or a employed by nor having oversight and capital financial interest in a to qualifications for head Federal Home Loan a financial interest in a markets, including housing GSE, with a of OTS). (Sec. 102) Bank (FHLB), U.S. housing GSE. (Sec. mortgage securities and demonstrated citizenship. (Sec. 101) 101) housing markets. May not understanding of housing be employed by, or have a finance. (Sec. 101) financial interest in a GSE, or have served as a GSE director or executive for the past three years. (Sec. 101) CRS-18 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Duties and To oversee prudential To oversee GSEs and To ensure that GSEs To prescribe To ensure that GSEs authorities of operations of GSEs, to ensure that they operate in operate in a financially regulations necessary operate in a financially director ensure that GSEs maintain a safe and sound manner safe and sound manner, to carry out the act and safe and sound manner, adequate capital and (including maintenance of carry out their missions functions assigned to carry out their missions internal controls, to see that adequate capital and only through authorized the director. only through authorized GSEs foster liquid, internal controls), foster activities, and remain (Sec. 101) activities, and remain efficient, and competitive liquid and competitive adequately capitalized, adequately capitalized, housing markets, to ensure mortgage markets, comply and to exercise general In addition to any other and to exercise general that GSEs comply with the with applicable laws, rules, supervisory and authority of the supervisory authority. authorizing statutes and that and regulations, and carry regulatory authority. director, to prescribe they engage only in out their missions only safety and soundness (Sec. 102) activities consistent with through activities (Sec. 103) standards pursuant to those statutes, and to meet authorized by their charters Section 39 of the at least twice a year with and consistent with the Federal Deposit GSEs' external auditors. public interest. Insurance Act. These With respect to the FHLBs, standards are to have to ensure that they provide (Sec. 102) the same force and funds to community effect with regard to financial institutions to GSEs as federal bank support small businesses regulators' standards and farms and accept as have with regard to collateral whole interests in federally insured such loans. depository institutions. (Sec. 102) (Sec. 102) CRS-19 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Authority to Yes. (Sec. 102) Yes. (Sec. 102) Yes. (Sec. 103) Yes, but director may Yes. (Sec. 102) delegate not let FHLBs take on examination duties. (Sec. 101) Authority to hire Yes: examiners, accountants Yes, for three years Yes, and director must No provision. Yes, for three years examiners and and economists may be following enactment. report to Congress within after enactment. accountants through hired directly, in accordance Director must report to 90 days on changes in Director must report to a streamlined with the excepted service Congress within 90 days the hiring process, Congress annually on process procedures. (Sec. 105) on changes in the hiring results, etc. (Sec. 104) changes in the hiring process, results, etc. (Sec. process, results, etc. 104) (Sec. 103) CRS-20 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Source of agency Director to establish and Director to establish and Agency to determine Annual assessments to Director to establish and funding collect annual assessments collect annual assessments amount of and collect be collected from collect annual from GSEs, not to exceed from GSEs, not to exceed annual assessments from GSEs and FHLBs. assessments from GSEs, reasonable costs of reasonable costs of GSEs, not exceeding Secretary of HUD to not to exceed regulation, including regulation, including reasonable costs of levy similar reasonable costs of examinations, credit examinations, credit regulation, including assessment. Amounts regulation, including reviews, and enforcement. reviews, and enforcement. examinations and credit collected to be placed examinations and credit Amounts collected are not Amounts collected are not reviews. Secretary of in the Federal Housing reviews. Assessments to be construed to be to be construed to be HUD to levy similar Enterprise Oversight to be deposited in a government or public funds government or public assessment to cover Fund in Treasury, to be fund in the Treasury for or appropriated money. funds or appropriated HUD's GSE-related available without fiscal the director's use (Sec. 106) money. (Sec. 106) regulatory functions. year restrictions. without fiscal year Amounts collected to be Retains requirement limitation. Creates a Assessments may include Assessments may include placed in a fund in for appropriations, but permanent an amount in excess of an amount in excess of Treasury with separate creates a permanent appropriation. (Sec. actual expenses, as deemed actual expenses, as deemed accounts for director and appropriation. (Sec. 105) necessary by the Director, necessary by the Director, HUD, to be available 101) to maintain a working to maintain a working without fiscal year capital fund. Collections in capital fund. Collections restrictions. Retains excess of the amount the in excess of the amount the requirement for Director deems necessary to Director deems necessary appropriations, but maintain the working to maintain the working creates a permanent capital fund shall be capital fund shall be appropriation. (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 the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Financial operating No provision. The Secretary of HUD will Director to submit plans Director to submit Director to submit plans plan and forecasts submit plans and forecasts and forecasts to OMB plans and forecasts to and forecasts to OMB to OMB before each fiscal before each fiscal year, OMB and Treasury before each fiscal year, year regarding HUD's and reports on operations before each fiscal year, and reports on GSE oversight activities. as soon as practicable and reports on operations as soon as (Sec. 121) after the ending of the operations as soon as practicable after the fiscal year and each practicable after the ending of fiscal years quarter thereof. The ending of fiscal years and quarters thereof. Secretary of HUD will and quarters thereof. (Sec. 105) submit similar plans and The Secretary of HUD reports to the director. will submit similar (Sec. 106) plans and reports to the director. (Sec. 101) CRS-22 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Housing goals HUD authority transferred HUD Secretary retains HUD Secretary retains HUD Secretary retains HUD Secretary retains to FHESA, except for fair authority to establish and authority to enforce authority to enforce authority to enforce housing responsibilities. enforce housing goals. housing goals. (Sec. housing goals. (Sec. housing goals. (Sec. (Sec. 125) Establishes a HUD Office 107) 103) 102) of GSE Mission Oversight. Director shall establish an (Sec. 121) HUD Secretary annual goal for home to prepare an annual purchases by low-income, housing report on GSEs first-time buyers who are and housing goals. (Sec. good credit risks but can't 123) cover a down payment or closing costs. (Sec. 127) Provides for improved provision of mortgage credit to low-income families and underserved markets. (Title IV) CRS-23 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Prior approval Director approval needed Secretary of HUD's prior Secretary of HUD's GSE charter New programs must be authority for new for new programs. New approval authority approval authority compliance authority approved by the GSE programs programs must not be in retained, but consideration retained -- new transferred from Director, in consultation and/or activities conflict with the statutes or of new and ongoing activities may be Secretary of HUD to with the Secretary of with the public interest. programs to include approved only if they are Director. (Sec. 103) HUD. New programs (Sec. 122) consultation with the authorized by GSE shall be approved unless Director. New and charters, can be they are found to be ongoing GSE programs conducted in a safe and inconsistent with safety must be consistent with sound manner, and are in and soundness or not their charters, not unsafe or the public interest. (Sec. authorized by GSE unsound, and in the public 108) charters. (Sec. 102) interest. (Sec. 122) Limits on non- No provision. No provision. Secretary of HUD shall No provision. On a quarterly basis, mission related by regulation limit the Director shall review assets amount of such assets a and provide written GSE may hold at any comment 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) Conforming loan No provision. No provision. Loan limits to be raised No provision. No provision. limits or 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 the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Public disclosure of Regulated entities must Director shall require each Director shall require No provision. GSEs must register their information register at least one class of GSE to obtain and disclose GSEs to release stock with the SEC and capital stock with the SEC, an annual credit rating, and financial, business, and make public disclosures and maintain such to publicly disclose interest other information that regarding interest rate registration under the rate and credit risk. would be in the public and credit risks and Securities Exchange Act of (Sec. 110) interest. (Sec. 111) their credit rating. (Sec. 1934. Enterprises must 112) comply with SEC proxy and insider transaction rules. (Sec. 108) Enterprises must also disclose on a quarterly basis the fair value of shareholders' equity. (Sec. 109) Reviews of GSE Director shall require each Director shall require each Each GSE must be rated No provision. Each GSE must be rated creditworthiness GSE to obtain and disclose GSE to obtain and disclose biennially by two SEC- biennially by two SEC- an annual credit rating. an annual credit rating. recognized credit rating recognized credit rating (Sec 108) (Sec 110) organizations (Sec. 112) organizations (Sec. 109) CRS-25 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Risk-based capital Director shall establish by Director shall establish by Director may specify the No provision. Director to review the tests regulation or order risk- regulation or order risk- assumptions about adequacy of risk-based based capital requirements based capital requirements interest rates, home standards and, if to ensure safe and sound to ensure safety and prices, and new business needed, recommend operation and the soundness. (Sec. 109) that are to be used by that Congress make maintenance of sufficient GSEs in calculating changes in the statutory capital and reserves to Director shall report to capital requirements. standards to better align support risks that arise. Congress annually on risk- (Sec. 113) capital with risk and (Sec. 108) based capital requirements reflect evolving best and tests. (Sec. 161) practices in large FHESA shall report financial institutions. quarterly on the levels of Director may also required capital and the modify the current risk- methods by which the levels based capital level if the are calculated. level is inadequate to (Sec. 161) ensure safety and soundness. (Sec. 110) Requirements to Regulated entities must Director shall require Director shall require No provision. GSEs must register their enhance capital register at least 1 class of GSEs to issue subordinated GSEs to issue stock with the SEC and strength, disclosure, capital stock with the SEC, debt, maintain appropriate subordinated debt, make public disclosures and market and make disclosures under levels of liquidity, obtain maintain appropriate regarding interest rate discipline the Securities Exchange Act and disclose an annual levels of liquidity, obtain and credit risks and of 1934. (Sec. 108) credit rating, and make and disclose an annual their credit rating. (Sec. public disclosures credit rating, and make 112) regarding interest rate and public disclosures credit risk. (Sec. 110) regarding interest rate and credit risk. (Sec. 115) CRS-26 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Minimum and To be set by the director, No provision. May be adjusted (but not No provision. Director authorized to critical capital and may be raised above set below statutory issue regulations to levels minimum levels if director minimums) by director. ensure compliance with determines that the benefits (Sec. 114) minimum and critical outweigh adverse effects on capital levels. (Sec. the housing mission. (Sec. 111) 108) Capital Director may reclassify a Director may reclassify a Director may reclassify a No provision. Director may reclassify classifications GSE whose conduct could GSE whose core capital is GSE whose core capital a GSE whose core rapidly deplete core capital, rapidly being depleted, or is rapidly being depleted, capital is rapidly being or has caused a significant which (after notice and which (by the director's depleted, which (by the loss to asset values, or opportunity for a hearing) written finding, after director's written which is determined (after is determined to be in an notice and opportunity finding, after notice and notice and opportunity for a unsafe or unsound for a hearing) is in an opportunity for a hearing) to be in an unsafe condition, or engaging in unsafe or unsound hearing) is in an unsafe or unsound condition. (Sec. an unsafe or unsound condition, or engaging in or unsound condition, or 141) practice. (Sec. 141) an unsafe or unsound engaging in an unsafe or practice. (Sec. 131) unsound practice. (Sec. 131) CRS-27 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Supervisory actions Director must monitor Director must monitor Director must monitor No provision. Director must monitor applicable to GSE's condition, GSE's condition, GSE's condition, GSE's condition, undercapitalized compliance with its capital compliance with its capital compliance with its compliance with its GSEs restoration plan, and the restoration plan, and the capital restoration plan, capital restoration plan, efficacy of the plan. No efficacy of the plan. No and the efficacy of the and the efficacy of the growth in total assets is growth in total assets is plan. No growth in total plan. No growth in total permitted for an permitted for an assets is permitted for an assets is permitted for undercapitalized GSE, undercapitalized GSE, undercapitalized GSE, an undercapitalized unless the director has unless the director has unless the director has GSE, unless the director accepted the GSE's capital accepted the GSE's capital accepted the GSE's has accepted the GSE's restoration plan, an increase restoration plan, an capital restoration plan, capital restoration plan, in assets is consistent with increase in assets is an increase in assets is an increase in assets is the plan, and the ratio of consistent with the plan, consistent with the plan, consistent with the plan, tangible equity to assets is and the ratio of tangible and the ratio of tangible and the ratio of tangible increasing. No new equity to assets is equity to assets is equity to assets is activities or acquisitions increasing. No new increasing. No new increasing. No new permitted without the products may be issued, or products may be issued, products may be issued, Director's prior approval. acquisitions made, without or acquisitions made, or acquisitions made, Actions that may be taken the Director's prior without the Director's without the Director's under current law with approval. Actions that prior approval. Actions prior approval. Actions regard to significantly may be taken under current that may be taken under that may be taken under undercapitalized GSEs may law with regard to current law with regard current law with regard be taken with regard to significantly to significantly to significantly undercapitalized GSEs. undercapitalized GSEs undercapitalized GSEs undercapitalized GSEs (Sec. 142) may be taken with regard may be taken with regard may be taken with to undercapitalized GSEs. to undercapitalized regard to (Sec. 142) GSEs. (Sec. 132) undercapitalized GSEs. (Sec. 132) CRS-28 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Supervisory actions Supervisory actions that Supervisory actions that Supervisory actions that No provision. Supervisory actions that applicable to regulator may take under regulator may take under regulator may take under regulator may take significantly current law must be taken, current law must be taken, current law must be under current law must undercapitalized including one or more of the including one or more of taken, including one or be taken, including one GSEs following: new election of the following: new election more of the following: or more of the directors, dismissal of of directors, dismissal of new election of directors, following: new election directors and/or executives, directors and/or dismissal of directors of directors, dismissal and hiring of qualified executives, and hiring of and/or executives, and of directors and/or executive officers. Without qualified executive hiring of qualified executives, and hiring written approval of director, officers. Without written executive officers. of qualified executive executives of a significantly approval of director, Without written approval officers. Without undercapitalized GSE may executives of a of director, executives of written approval of not receive bonuses or pay significantly a significantly director, executives of a raises. (Sec. 143) undercapitalized GSE may undercapitalized GSE significantly not receive bonuses or pay may not receive bonuses undercapitalized GSE raises. (Sec. 143) or pay raises. (Sec. 133) may not receive bonuses or pay raises. (Sec. 133) CRS-29 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Supervisory actions Director may appoint (or The director may appoint After written notice to No provision. No provision. applicable to FHESA serve as) a receiver an enhanced conservator to Congress, the director critically or conservator for several liquidate a critically may appoint a receiver to undercapitalized causes related to financial undercapitalized GSE and liquidate a critically GSEs (liquidation difficulty or violation of law wind up its affairs, in undercapitalized GSE authority) or regulation. Director may accordance with such and wind up its affairs. also appoint a limited-life regulations as the Director (Sec. 134) enterprise to deal with the may issue. (Sec. 144) affairs of a GSE in default. Congress may overrule the appointment of a receiver by passing a joint resolution of disapproval within 45 days. (Sec. 144) Restriction on With certain exceptions, a With certain exceptions, a With certain exceptions, No provision. With certain exceptions, capital distributions GSE may not make a capital GSE may not make a a GSE may not make a a GSE may not make a distribution that would capital distribution that capital distribution that capital distribution that cause it to become would cause it to become would cause it to become would cause it to undercapitalized. (Sec. 141) undercapitalized. (Sec. undercapitalized. (Sec. become 141) 131) undercapitalized. (Sec. 131) CRS-30 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Enforcement Director may issue cease- Director may issue cease- Director may issue Director may issue Director may issue authority (cease- and-desist orders for unsafe and-desist orders for cease-and-desist orders cease-and-desist cease-and-desist orders and-desist orders) or unsound practices, or for unsafe and unsound for unsafe and unsound orders, including for unsafe and unsound an unsatisfactory rating. practices or violations of practices or violations of orders to take practices or violations (Sec. 151) law. A less-than- law. A less-than- affirmative actions, to of law. A less-than- satisfactory examination satisfactory examination the same extent and satisfactory examination Temporary cease-and-desist rating may be deemed an rating may be deemed an under the same rating may be deemed orders may be issued if GSE unsafe and unsound unsafe and unsound procedures and an unsafe and unsound actions are likely to weaken practice. Director may not practice. (Sec. 151) conditions as federal practice. (Sec. 151) its financial condition prior enforce compliance with bank regulators with to the conclusion of a cease- housing goals. (Sec. 151) respect to insured and-desist proceeding. depository institutions. (Sec. 152) (Sec. 101) CRS-31 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Enforcement Temporary cease-and-desist If an unsound or unsafe If an unsound or unsafe Director may issue If an unsound or unsafe authority orders may be issued if GSE practice appears likely to practice appears likely to temporary cease-and- practice appears likely (temporary cease- actions are likely to weaken cause insolvency or cause insolvency or desist orders, including to cause insolvency or and-desist its financial condition prior significant dissipation of significant dissipation of orders to take significant dissipation proceedings) to the conclusion of a cease- assets or earnings, director assets or earnings, affirmative action, to of assets or earnings, and-desist proceeding. may issue temporary director may issue the same extent and director may issue (Sec. 152) cease-and-desist orders, temporary cease-and- under the same temporary cease-and- including orders to take desist orders, including procedures and desist orders, including affirmative action to orders to take affirmative conditions as federal orders to take remedy the unsafe and action to remedy the bank regulators with affirmative action to unsound practice. Director unsafe and unsound respect to insured remedy the unsafe and may seek an injunction in practice. Director may depository institutions. unsound practice. federal court to enforce a seek an injunction in (Sec. 101) Director may seek an cease-and-desist order. federal court to enforce a injunction in federal (Sec. 152) cease-and-desist order. court to enforce a cease- (Sec. 152) and-desist order. (Sec. 152) CRS-32 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Removal and After written notice and After written notice and After written notice and Director may issue After written notice and prohibition opportunity for a hearing, opportunity for a hearing, opportunity for a suspension and opportunity for a authority the director may suspend or the director may suspend hearing, the director may removal orders to the hearing, the director remove "enterprise- or remove "enterprise- suspend or remove same extent and under may suspend or remove affiliated parties" (defined affiliated parties" (defined "enterprise-affiliated the same procedures "enterprise-affiliated below) who have 1) violated below) who have 1) parties" (defined below) and conditions as parties" (defined below) a law or a cease-and-desist violated a law or a cease- who have 1) violated a federal bank regulators who have 1) violated a or other written order, 2) and-desist or other written law or a cease-and-desist with respect to insured law or a cease-and- engaged in an unsafe or order, 2) engaged in an or 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 breached fiduciary duty, or 3) breached fiduciary unsound practice, or 3) unsafe or unsound such that 1) the GSE is duty, such that 1) the GSE breached fiduciary duty, practice, or 3) breached likely to suffer loss or the is likely to suffer loss or such that 1) the GSE is fiduciary duty, such that enterprise affiliated party the party gain, and 2) the likely to suffer loss or 1) the GSE is likely to gain, and 2) the unsafe or unsafe or unsound practice the party gain, and 2) the suffer loss or the party unsound practice demonstrates continuing unsafe or unsound gain, and 2) the unsafe demonstrates continuing disregard for the safety and practice demonstrates or unsound practice disregard for the safety and soundness of the GSE. continuing disregard for demonstrates personal soundness of the GSE. Also (Sec. 153) the safety and soundness dishonesty or provides for industry-wide of the GSE. (Sec. 153) continuing disregard for suspensions under certain the safety and circumstances. (Sec. 153) soundness of the GSE. (Sec. 153) CRS-33 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Who (besides the "Enterprise-affiliated "Enterprise-affiliated "Enterprise-affiliated No provision. "Enterprise-affiliated GSEs and their parties" are defined as 1) parties" are defined as 1) parties" are defined as 1) parties" are defined as officers and directors, officers, or directors, officers, or directors, officers, or 1) directors, officers, or employees) is employees of a GSE, 2) employees of a GSE, 2) employees of a GSE, 2) employees of a GSE, 2) subject to cease- shareholders, joint venture shareholders, joint venture shareholders, joint shareholders, joint and-desist orders or partners, or consultants, 3) partners, or consultants, or venture partners, or venture partners, or removal and independent contractors 3) independent contractors consultants, or 3) consultants, or 3) suspension who knowingly or who knowingly or independent contractors independent contractors authority? recklessly violate law, recklessly violate law, who knowingly or who knowingly or breach fiduciary duty, or breach fiduciary duty, or recklessly violate law, recklessly violate law, participate in an unsafe or participate in an unsafe or breach fiduciary duty, or breach fiduciary duty, unsound practice (where unsound practice. participate in an unsafe or participate in an such actions are likely to (Sec. 111) or unsound practice. unsafe or unsound cause significant losses in (Sec. 116) practice. (Sec. 114) the GSE, or (4) non-profits that receive their principal funding on an ongoing basis from a GSE. (Sec. 2) CRS-34 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Civil money Three tiers of fines: 1) Three tiers of fines: 1) Three tiers of fines: 1) Director may impose Three tiers of fines: 1) penalties $10,000 per day for $10,000 per day for $10,000 per day for civil 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 the violations of orders, $50,000 per day for a 2) $50,000 per day for a 2) $50,000 per day for a same procedures and etc., 2) $50,000 per day pattern of misconduct or pattern of misconduct or pattern of misconduct or conditions as federal for a pattern of breach of fiduciary duty breach of fiduciary duty breach of fiduciary duty bank regulators with misconduct or breach of with financial gain to the with financial gain to the with financial gain to the respect to insured fiduciary duty with individual, and 3) up to a individual, and 3) up to a individual, and 3) up to a depository institutions. financial gain to the maximum of $2 million for maximum of $2 million for maximum of $2 million (Sec. 101) individual, and 3) up to knowingly engaging in knowingly engaging in for knowingly engaging a maximum of $2 violations, breaches of violations, breaches of in violations, breaches of million for knowingly fiduciary duties, or unsafe fiduciary duties, or unsafe fiduciary duties, or engaging in violations, or unsound practices that or unsound practices that unsafe or unsound breaches of fiduciary cause substantial losses to a cause substantial losses to practices that cause duties, or unsafe or GSE. (Sec. 155) a GSE. (Sec. 155) substantial losses to a unsound practices that GSE. (Sec. 155) cause substantial losses to a GSE. (Sec. 155) Criminal penalties Anyone who participates Anyone who participates Anyone who participates No provision. Anyone who directly or indirectly in the directly or indirectly in the directly or indirectly in participates directly or affairs of a GSE while affairs of a GSE while the affairs of a GSE indirectly in the affairs under suspension or order under suspension or order while under suspension of a GSE while under of removal shall be liable of removal shall be liable or order of removal shall suspension or order of for a fine of up to $1 for a fine of up to $1 be liable for a fine of up removal shall be liable million, or five years million, or five years to $1 million, or five for a fine of up to $1 imprisonment. (Sec. 156) imprisonment. (Sec. 156) years imprisonment. million, or five years (Sec. 156) imprisonment. (Sec. 156) CRS-35 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Federal Financial No provision. No provision. No provision. Director to become Director to become Institutions member of FFIEC. member of FFIEC. Examination (Sec. 106) (Sec. 102) Council (FFIEC) GSE directors Strikes provision in current Strikes provision in current No provision. No provision. No provision. law under which 5 members law by which 5 members of GSE boards of directors of GSE boards of directors are appointed by the are appointed by the President. President. (Sec. 172) (Sec. 171) Federal Home Loan FHLBs come under the No provision. No provision. Merges OFHEO and Requires FHLBs to Banks regulation of FHESA, Federal Housing register their stock with which assumes the duties of Finance Board (FHFB the SEC and comply the Federal Housing -- currently overseer with certain SEC Finance Board (FHFB). of the Federal Home reporting requirements. (Sec. 203) Loan Banks) into (Sec. 112) Calls for a OHFO, a bureau in the study of merging FHFB Creates a Federal Home Department of the with OFEHS. (Sec. Loan Bank Finance Treasury. (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) CRS-36 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Reports and studies 1. Director and bank 1. Treasury and bank 1. Treasury and bank No studies or reports 1. Director shall report for Congress regulators to report on regulators to report on regulators to report on called for. biennially to Congress various matters related to holdings of GSE securities holdings of GSE on nonmortgage assets holdings of GSE securities by insured banks, and securities by insured held by GSEs and GSE by insured depository systemic risk implications. banks, and systemic risk compliance with the institutions. implications. Basel Committee's 2. Director to report on Sound Practices for 2. Director (in consultation GSEs' investment 2. Director to report on Managing Liquidity. with GAO)to report on GSE portfolios, risk GSEs' investment (Sec. 107) portfolio operations, risk management practices, and portfolios, risk management, and mission. related safety and management practices, soundness implications. and related safety and 3. Director to report on the soundness implications. growth of GSE debt , and 3. Treasury to report on analyze whether debt levels growth of GSE debt and 3. Treasury to report on ought to be limited if the possible effects of limits growth of GSE debt and GSE is not operating in a on GSE debt issuance. possible effects of limits safe and sound manner or on GSE debt issuance. fails to maintain a certain 4. Director to report debt rating. annually to Congress on 4. Treasury to report on risk-based capital GSEs line of credit with 4. Director to report standards for GSEs, the Treasury: its quarterly on risk-based including minimum and purposes and the capital standards and the critical capital levels. possible effects of method by which those eliminating it. standards are determined. (Sec. 161) 5. Director to report 5. GAO to report annually annually on risk-based on the allocation of capital standards and FHESA's resources and the minimum and critical level of assessments capital levels. collected by the agency. CRS-37 S. 1508 House Fin. Serv. Provision (as passed by the H.R. 2575 H.R. 2803 S. 1656 Manager's Amendment Banking Committee) Transition from Various provisions dealing Various provisions dealing Various provisions Various provisions Various provisions OFHEO to new with abolition of OFHEO with abolition of OFHEO, dealing with abolition of dealing with abolition dealing with abolition agency and the FHFB, continuation continuation of certain OFHEO, continuation of of OFHEO, of OFHEO, of certain regulations, regulations, transfer of certain regulations, continuation of certain continuation of certain transfer of property and property and facilities, transfer of property and regulations, transfer of regulations and facilities, employee rights employee rights and facilities, employee property and facilities, authorities, transfer of and benefits, etc. (Title III) benefits, etc. (Title II, rights and benefits, etc. employee rights and property 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) Effective date One year from the date of One year post-enactment. One year post- Six months post- One year post- enactment. (Sec. 173) (Sec. 173) enactment. enactment. enactment. (Sec. 162) (Sec. 172) (Sec. 107) ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32069