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# Legislative Bulletin........................................................May 17, 2007

**Contents:**

**H.R. 1427**---Federal Housing Finance Reform Act

H.R. 1427---Federal Housing Finance Reform Act (*Frank, D-MA*)

**[Order of Business]{.underline}**: The bill is scheduled to be
considered on Thursday, May 17^th^, subject to a likely modified open
rule, allowing all germane amendments that have been pre-filed in the
*Congressional Record* by close of business on Wednesday, May 16^th^.

**[Background]{.underline}**: The Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) are government-sponsored enterprises (GSEs) created to facilitate a
*secondary* mortgage market. That is, GSEs are privately owned,
congressionally chartered financial institutions created to enhance the
availability of credit for home mortgages. Under their charter, they
exist to buy mortgages from lenders in the *primary* mortgage market and
package them into securities for sale to investors on Wall Street. With
the old loans off their books, lenders in the primary market can then
make additional loans to consumers. Currently, the GSEs are regulated by
the Department of Housing and Urban Development's Office of Federal
Housing Enterprise Oversight, commonly known as OFHEO.

However, Fannie Mae and Freddie Mac's charter came with significant
government subsidies not enjoyed by their private sector competitors,
including a \$2.3 billion line of credit with the U.S. Treasury (i.e.,
borrowing at below-market rates), an exemption from state and local
taxes, and an exemption from certain Securities and Exchange Commission
(SEC) registration requirements (including fees as publicly traded
companies). In addition, as a result of these government subsidies,
Fannie Mae and Freddie Mac benefit from an *implicit* guarantee that the
debt they issue is backed by the full-faith-and-credit of the U.S.
Treasury, making GSE debt instruments almost as attractive to investors
as government bonds.

**[Recent Accounting Failures:]{.underline}** 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. OFHEO imposed a \$125 million fine and pursued civil
actions against several former Freddie Mac executives. Similarly, in
2004, OFHEO issued a public report that was highly critical of
accounting methods at Fannie Mae. OFHEO charged that Fannie Mae has not
followed generally accepted accounting practices, allowing Fannie Mae to
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 "cookie jar" bonuses to company
executives.

In addition, Fannie Mae reported that it was unable to file a
third-quarter earnings statement because its auditor refused to sign off
on the accounting results. One month later, after finding similar
inadequacies in Fannie Mae's accounting policies and methodologies, the
SEC directed Fannie Mae to restate all of its accounting results since
2001. Shortly after this announcement, both Fannie Mae's CEO and CFO
resigned their posts. Such recent accounting failures have led many
lawmakers and commentators to conclude that current regulatory framework
of OFHEO governing the GSEs is inadequate. H.R. 1427 is an attempt to
provide a stronger such regulatory framework.

**[Note]{.underline}**: This bill is similar---but not identical---to
H.R. 1461 from the 109^th^ Congress, which passed the House by a vote of
[331-90](http://clerk.house.gov/evs/2005/roll547.xml). To see the RSC
Legislative Bulletin on the bill from last Congress, go here:
[http://www.house.gov/hensarling/rsc/doc/GSE%20Legislative%20Bulletin.pdf](http://www.house.gov/hensarling/rsc/doc/GSE Legislative Bulletin.pdf).

[]{.mark}

**[Possible Conservative Concerns:]{.underline}** Some conservatives may
be concerned with the following provisions:

-   The **Affordable Housing Fund** (see below);

-   The increased conforming loan limits in **"high cost areas"** (see
    below);

-   The **six-month delay** before the new regulator is up and running
    (see below); and

-   The **new duty to "minimize the cost of housing finance"** (see
    below).

[]{.mark}

Last Congress, RSC Members sent the following letter expressing support
for strong controls over the portfolios of GSEs:
<http://www.house.gov/hensarling/rsc/doc/Hensarling--GSE.pdf>

Additionally, RSC Members sent the following letter opposing the
Affordable Housing Fund:
[[http://www.house.gov/hensarling/rsc/doc/GSE%20slush%20fund.pdf]{.underline}](http://www.house.gov/hensarling/rsc/doc/GSE slush fund.pdf).

[]{.mark}

**[NOTE: Republican Leader John Boehner (R-OH) and Republican Whip Roy
Blunt (R-MO) are urging a NO vote on H.R. 1427, if the Affordable
Housing Fund is not removed before final passage.]{.underline}**

**[Summary by Title:]{.underline}**

***[Title I: Reform of Regulation of Enterprises and Federal Home Loan
Banks]{.underline}***

-   **Definitions:** Defines a regulated entity as Fannie Mae, Freddie
    Mac, their affiliates, and each Federal Home Loan Bank. An affiliate
    includes: directors, employees, officers, controlling stockholders,
    agents, shareholders, consultants, independent contractors (an
    accountant or an attorney), or any not-for-profit entity "that
    receives its principal funding, on an ongoing basis, from any
    regulated entity."

-   **New Regulator**: Establishes the Federal Housing Finance Agency
    (FHFA) to regulate Fannie Mae, Freddie Mac, and the Federal Home
    Loan Banks (FHLBs) and replace OFHEO. The new independent agency
    would be headed by a Director, appointed by the President and
    confirmed by the Senate, for a term of five years. In addition, the
    bill would require the appointment of three deputy directors; one to
    supervise the GSEs, one to oversee the FHLBs, and the other to focus
    on the affordable housing mission of the GSEs (see below).

> []{.mark}

-   **Director Duties:** Requires the regulator to ensure that regulated
    entities operate in a "safe and sound manner," maintain adequate
    capital and internal controls, and contribute to "liquid, efficient,
    competitive, and resilient national housing finance markets **that
    minimize the cost of housing finance.**" Some conservatives may
    argue that this last new duty will inhibit the new regulator from
    restraining the GSEs and lend support to their arguments when they
    later attempt to engage in new business activities.

> In fulfilling these principal duties, the regulator would be
> instructed to propound regulations setting forth standards regarding
> the:
>
> \(1\) adequacy of internal controls and information systems;
>
> \(2\) independence and adequacy of internal audit systems;
>
> \(3\) management of interest rate and market risk;
>
> \(4\) adequacy and maintenance of liquidity and reserves;
>
> \(5\) management of asset and investment portfolio growth;
>
> \(6\) investments and acquisitions by an enterprise to ensure they are
> consistent with current law purposes;
>
> \(7\) maintenance of adequate accounting policies;
>
> \(8\) issuance of subordinated debt;
>
> \(9\) overall risk management processes (for example, ensuring
> adequate oversight from the Board of Directors); and
>
> \(10\) other operational and management standards deemed appropriate.
>
> If a GSE failed to meet these standards, FHFA would issue a plan to
> correct the deficiency and would be charged with either freezing an
> entity's total assets or requiring an increase in its capital stocks,
> if the plan was not adhered to (in the case of a GSE being
> undercapitalized).

-   **Federal Housing Enterprise Board**: Establishes a five-member
    Federal Housing Enterprise Board to advise the new Director on
    "overall strategies and policies" in carrying out the duties under
    the legislation. The Board would be comprised of the Director, the
    Secretary of the Treasury, the Secretary of Housing and Urban
    Development (HUD), and two other members appointed by the President
    with expertise in capital markets, secondary mortgage markets,
    mortgage financing, and the development of affordable housing.

-   **Nonprofit Contributions:** Requires the GSEs to report annually
    the total amount of charitable contributions to nonprofit
    organizations made in the previous fiscal year. The report would
    have to identify the name of the nonprofit and the amount of the
    individual contribution if over a "designated amount" (to be set by
    the regulator). This information would have to be made publicly
    available.

-   **Assessments:** Authorizes FHFA to collect annual assessments from
    the GSEs to provide for its costs and expenses and any enforcement
    proceedings against them and to punish them for being
    undercapitalized. These assessments are not to be construed as
    government funds (although the amounts collected and spent are
    recorded for federal budget purposes as receipts and outlays). This
    provision effectively frees the regulator from the appropriations
    process, ensuring a certain level of independence.

-   **Withholding Executive Compensation**: Authorizes the regulator to
    require a regulated entity to withhold compensation to its executive
    officers for any fraudulent act or omission, breach of trust or
    fiduciary duty, insider abuse, or violation of any law, regulation,
    or order.

-   **Minorities and Women**: Requires each regulated entity to
    establish or designate an Office of Minority and Women Inclusion to
    ensure, "to the maximum extent possible," the inclusion and
    utilization of minorities and women (and businesses owned by people
    in such wide categories) in the activities of the regulated entity.

-   **Capital Requirements**: Allows the regulator to adjust the
    risk-based capital requirements and provide for minimum capital
    levels to ensure the safety and soundness of the GSEs. The Director
    could, by order, increase minimum capital levels on a temporary
    basis, if the regulated entity has violated prudential standards or
    if an unsafe or unsound condition exists.

-   **Assets and Liabilities**: Requires FHFA to review on a periodic
    basis the assets and liabilities of each GSE, and if necessary, to
    require by order the disposal or acquiring of an asset or liability.

-   **Corporate Governance and Ethics**: Requires a majority of the
    board of directors of each regulated entity to be "independent," as
    defined by the New York Stock Exchange. In addition, the bill would
    require the board to meet at least eight times a year and prohibits
    a member from voting by proxy. Compensation of board members would
    be limited to what is "reasonable and appropriate" and "commensurate
    with the duties and responsibilities of such person" and shall take
    into account not just earnings but also risk management and legal
    and regulatory compliance. Each entity would have to establish and
    administer a written code of conduct and ethics. An enterprise could
    not (directly, indirectly, or through a subsidiary) make any
    personal loan to a board member or executive officer.

-   **Compliance and Risk-Management Programs**: Each regulated entity
    would have to establish a compliance program "reasonably designed"
    to ensure that the enterprise complies with applicable laws,
    regulations, and internal controls. Additionally, each entity would
    have to establish a risk-management program "reasonably designed" to
    manage the risks of operation. Both programs would have to be led by
    designated officers who report directly to the CEO and regularly to
    the board.

-   **SEC Registration**: Requires each GSE to register at least one
    class of its capital stock with the Securities and Exchange
    Commission (SEC) and to comply with sections 14 (proxy reporting )
    and 16 (transaction disclosure requirements for directors, officers,
    and principal stockholders) of the Securities Exchange Act.

-   **Guarantee Fees**: Directs the Government Accountability Office
    (GAO) to study guarantee fees (the GSEs charge a fee for the risk
    involved with guaranteeing loans), including the factors used to
    determine their amount, the amount incurred by each enterprise to
    provide guarantees, and the total revenue earned from collecting
    such fees.

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-   **New Business Activity**: Requires the GSEs to receive approval
    from FHFA *before* undertaking any new programs or business
    activities *and grandfathers in any current ones* (some of which may
    be inconsistent with the GSEs charter). The regulator would be
    required to note such an application in the Federal Register and
    allow for a period of public comment. Approval would then be granted
    on the basis of whether the new activity is: consistent with the
    GSEs' chartering statutes, taking into consideration the definition
    of the terms "mortgage loan origination" and "secondary mortgage
    loan origination;" consistent with the safety and soundness of the
    enterprise; is in the public interest; and does not materially
    impair the efficiency of the mortgage finance system. Products and
    services "other than residential mortgage financing" or that create
    "significant new exposure to risk for the enterprise or holder of
    the mortgage" would have to be subject to the new business activity
    pre-approval requirements..

-   **Automated Loan Underwriting:** Prohibits the regulator from
    preventing a GSE from offering the "automated loan underwriting
    system" in existence upon enactment or other education and
    counseling activities as a primary market activity. This software
    technology uses statistical models to determine objectively in a
    matter of minutes whether a borrower is likely to default on a loan.
    Fannie Mae and Freddie Mac have pioneered such technology. Some
    conservatives may view this service as a primary market activity,
    and by prohibiting the Director from defining it as such, the bill
    continues the GSEs' ability to crowd out other unsubsidized
    companies that wish to offer the technology but lack such a dominant
    market share.

-   **Conforming Loan Limits:** Sets conforming loan limits (loans that
    are to be sold to Fannie Mae and Freddie Mac must "conform" with
    these limits) at:

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-   \$417,000 for a single-family residence,

-   \$533,850 for a two-family residence,

-   \$645,300 for a three-family residence, and

-   \$801,950 for a four-family residence

> H.R. 1427 requires these limits to be increased or decreased each year
> depending on a new housing index the FHFA is directed to establish
> surveying the housing market.
>
> In addition, the bill would allow for the GSEs to further increase the
> loan limit in **"high cost areas"** where the median price for such
> size residences exceeds the conforming loan limit. The adjustment
> would be up to the lesser of 150% of the loan limit (in 2005,
> \$540,000 was 150% of the single-family conforming loan limit) or the
> area median home price and would apply only to mortgages that are the
> basis for securities sold by the enterprises. H.R. 1427 would direct
> the FHFA to study whether restricting this increase in the conforming
> loan limits in high cost areas to such mortgages "will result in an
> increase in the cost to borrowers for mortgages on housing in such
> high-cost areas." If so, the regulator would be allowed to terminate
> the restriction. Some conservatives may be concerned that this
> provision will lead to an overly broad application of "high-cost
> area," lessening the cost (via federal subsidies) of housing for
> consumers who are not necessarily low- or middle-income and crowding
> out private competitors. Other conservatives have argued that the
> high-cost adjustments are needed in certain areas where real estate is
> extremely expensive and "middle class" is defined by higher incomes
> than in the rest of the country.

[]{.mark}

-   **Standards for Subprime Loans**: Directs the regulator to issue
    standards by which mortgages purchased would be considered subprime
    for the purpose of complying with the reporting requirement in
    Housing and Community Development Act of 1992.

-   **Affordable Housing Goals:** Requires the FHFA to set annual
    single-family and multi-family goals for the GSEs to purchase
    mortgages benefiting low-income families and families living in
    low-income areas (defined in the bill). These targets would be a
    percentage of the three-year rolling average of publicly available
    data, as required under the Home Mortgage Disclosure Act of 1975,
    and could be increased or reduced at the discretion of the Director.
    In addition, H.R. 1427 would add a duty for the GSEs to serve
    "underserved markets," including in rural areas, by developing
    certain loan products and flexible underwriting guidelines. GSEs
    would be required to provide the regulator with sufficient
    information to determine if minorities are charged a different
    interest rate than are non-minorities.

> The regulator could reduce a housing goal, if a GSE requests as such,
> only if market and economic conditions or the financial condition of
> the GSE require such action; or efforts to meet the goal would result
> in the constraint of liquidity, over-investment in certain market
> segments, or other consequences contrary to the intent of the law.
>
> If a GSE fails (or there is a substantial probability that it will
> fail) to comply with the affordable housing goals, the regulator would
> be authorized to inform the enterprise of the reasons for such a
> determination and provide the data on which it is based. In addition,
> the regulator *may* require that the enterprise submit a housing plan
> for it to meet its housing goals. If the GSE refuses to submit such a
> plan, submits an unacceptable plan, or fails to comply with the plan,
> the regulator could issue a cease and desist order or impose civil
> monetary penalties.
>
> Affordable housing goals are already a part of current law to ensure
> that the GSEs, which benefit from substantial federal subsidies, are
> not driven solely by profit but also a commitment to expand housing to
> low-income families in low-income areas. However, the GSEs have
> typically not met their goals, and the current regulatory structure
> has lacked the power to force compliance.

[]{.mark}

-   **Affordable Housing Fund**: Requires the FHFA (in consultation with
    HUD Secretary) to establish and manage an Affordable Housing Fund,
    which would be funded by the GSEs. The Fund would provide formula
    grants to increase homeownership for extremely low- and very
    low-income families, increase investment in housing in low-income
    and chronically distressed areas, increase and preserve the supply
    of rental and owner-occupied hosing for extremely low- and very
    low-income families, increase investment in public infrastructure
    development related to this housing above, and leverage investments
    from other sources in affordable housing and in public
    infrastructure development.

> For fiscal years 2007 through 2011, each GSE would have allocate to
> the Fund 1.2 basis points of its average total mortgage portfolio (1.2
> cents per \$100 of the value of its mortgage portfolio, as defined in
> the bill) during the preceding year. The regulator would have to
> temporarily suspend the required allocation for a GSE to the Fund if
> he finds that such allocations would contribute to the financial
> instability of the GSE, cause the enterprise to be classified as
> undercapitalized, or prevent the GSE from successfully completing a
> capital restoration plan.
>
> The GSEs would not be required to make allocations to the Fund in 2012
> or in any year thereafter. Not later than June 30, 2011, the regular
> would have to submit to Congress a report making recommendations on
> whether the Fund should be extended or modified.
>
> In FY2007, all Fund allocations would all be directed to disaster
> relief from Hurricanes Katrina and Rita (2005): 75% to the Louisiana
> Housing Finance Agency, and the remaining 25% to the Mississippi
> Development Authority. After FY2007, the HUD Secretary would have to
> establish a formula to allocate funds to states and Indian tribes
> based on specified factors, including population, housing
> affordability, percentage of extremely low- and very low-income
> families, and the extent of substandard housing. The regulator would
> determine the formula amount for each grantee ([states and Indian
> tribes]{.underline}) and publish in the *Federal Register* the
> available amounts.
>
> Each grantee could then designate a state housing finance agency,
> housing and community development entity, tribally designated housing
> entity, or other qualified instrumentality of the grantee to receive
> grants. An annual allocation to a grantee would be reduced by the
> amount of misused funds that were not returned or reimbursed in the
> preceding year. Each grantee would have to create and publish a plan
> for distribution of grant amounts each year, including requirements
> for applicants to receive assistance.
>
> Grants could be used only for:
>
> \--the production, preservation, and rehabilitation of rental housing
> for extremely and very low-income families;
>
> \--the production, preservation, and rehabilitation of housing for
> homeownership (including downpayment assistance, closing cost
> assistance, and assistance for
>
> interest-rate buy-downs) for extremely and very low-income first-time
> home buyers; and
>
> \--public infrastructure development activities in connection with
> housing activities funded above.
>
> Grant funds could be provided only to organizations, agencies, or
> entities (including for-profit, non-profit, or faith-based entities)
> with a demonstrated capacity for carrying out
>
> eligible housing activities, and that make assurances to the grantee
> (as required by the regulator) that they will comply with the
> requirements of the program. All funds would have to be used or
> committed within two years of the grant date, or be subject to
> recapture.
>
> The regulator would have to set forth [prohibited uses]{.underline} of
> grant amounts, which would have to include use for:
>
> \--political activities;
>
> \--advocacy;
>
> \--lobbying, whether directly or through other parties;
>
> \--counseling services;
>
> \--travel expenses;
>
> \--preparing or providing advice on tax returns;
>
> \--administrative, outreach, or other costs of the grantee or any
> recipient of such
>
> grant amounts (except those for carrying out the program required
> under this section).
>
> The regulator would have to require each grantee to develop and
> maintain a system to ensure that all recipients of funds use those
> funds in accordance with the above provisions, and any applicable
> regulations, requirements, or conditions. The regulator would have to
> establish minimum requirements for grantees and recipients, including
> appropriate financial reporting, record retention, and audit
> requirements.
>
> If the regulator or a grantee (subject to the regulator's review)
> determines that
>
> any recipient of assistance has used any amounts in a manner that is
> materially
>
> in violation of this program and its affiliated regulations, the
> grantee would have to require that, within 12 months after the
> determination of such misuse, the grant recipient would have to
> reimburse [the grantee]{.underline} (not the Fund or the taxpayer) for
> misused amounts and return to the grantee any amounts that remain
> unused or uncommitted for use.
>
> The regulator would have to require each grantee to submit an annual,
> publicly available report to the regulator that describes the
> activities funded under this program and the manner in which the
> grantee complied with the allocation plan established for the grantee.
>
> If the regulator determines, after reasonable notice and opportunity
> for hearing, that a grantee (a state or Indian tribe) has failed to
> comply substantially with any provision of this program, and until the
> regulator is satisfied that there is no longer any such failure to
> comply, the regulator would have to either reduce the amount of
> assistance under this program to the grantee by an amount equal to the
> misused amounts; require the grantee to repay an amount equal to the
> misused amounts; limit the availability of Fund assistance to the
> grantee to activities or recipients not affected by such failure to
> comply; or terminate any Fund assistance to the grantee.
>
> If a successor fund for affordable housing grants were to be
> established after the enactment of this legislation, but before
> FY2012, all remaining amounts in the Fund would have to be transferred
> to the successor fund.
>
> The bill states that nothing in the housing goals or the Affordable
> Housing Fund should be regarded as authorizing a GSE to engage in any
> program or activity that contravenes or is inconsistent with its
> charter.
>
> The Affordable Housing Fund in last year's bill (H.R. 1461) was
> different in two main ways: the assessment was 5% of annual revenues,
> and the grants were made directly by the GSEs to affordable housing
> entities.
>
> **[NOTE:]{.underline}** Many conservatives have regarded the required
> GSE contributions to the Fund as a tax on publicly-traded
> corporations. Arguably, since the GSEs constitute a duopoly, they have
> a heightened ability to pass this "contribution" on to consumers --
> thus making housing less affordable rather than more.
>
> Furthermore, despite the provisions of the Affordable Housing Fund
> section that restrict the use of grants, many conservatives in the
> past have expressed concerns that the Fund could still be used by
> liberal entities to displace other funds. Money is fungible, so that
> if a group cannot use Fund grants for political activities, it could
> certainly have more money freed up for political activities because of
> the injection of Fund grants.
>
> For example, if someone gives you \$100 and says you can't use it to
> pay your electric bill, yet you deposit the money in your bank and
> then write a \$100 check to your electric company, have you used the
> gift money to pay your electric bill? Maybe, or maybe not. More
> importantly, does it matter? The gift money unquestionably offset your
> other expenditures. Perhaps you didn't use the gifted \$100 to pay
> your bill, but you now have \$100 extra to buy other things.
>
> The largest organizations (and thus the most able to commit resources
> to apply for federal grants) who work on affordable housing issues
> include, for example, ACORN (led voter registration efforts against
> Republicans, with allegations of voter fraud in Florida, Ohio, and
> North Carolina), National Council of La Raza (allegations of voter
> fraud in the Bob Dornan-Loretta Sanchez election of 1996), and Housing
> Works (led a demonstration against Senator Rick Santorum for his
> anti-needle exchange and pro-abstinence voting record). These entities
> unquestionably, and sometimes unabashedly, engage in partisan, leftist
> political activities.

[]{.mark}

> For example, ACORN, the Association of Community Organizations for
> Reform Now, is actually an umbrella organization for more than 75
> entities, most of which are run out of a single office in New Orleans.
> Among these entities are [unions]{.underline}, schools, radio
> stations, home mortgage counseling centers, tax advising centers,
> voter-mobilization organizations, lobbying firms, and even a furniture
> company. For example, the Service Employees International Union Local
> 880 once listed its contact email as <seiu880@acorn.org> (it changed
> its email address when the Employment Policies Institute highlighted
> this address in a report).
>
> Estimates of ACORN's annual operation budget range from 30 to 40
> million dollars. The Employment Policies Institute reports that large
> amounts of money move back and forth from various elements of the
> ACORN network all the time.
>
> For more information on ACORN, including a map of where ACORN has been
> accused of election fraud, go here: <http://www.rottenacorn.com/>.

-   **GSE Enforcement**: The regulator could issue cease-and desist
    orders and/or impose civil monetary penalties (as detailed in the
    bill) against GSEs in violation of their charters.

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-   **Capital Classifications**: Requires the regulator to classify the
    capital levels of the GSEs and the Federal Home Loan Banks as either
    adequately capitalized, undercapitalized, significantly
    undercapitalized, or critically undercapitalized. The regulator
    could reclassify a GSE for deficient capitalization if it is
    "engaging in conduct that could result in a rapid depletion of core
    or total capital," if after notice and a hearing, it is determined
    the GSE is "engaging in an unsafe or unsound practice" or in "an
    unsafe and unsound condition." In addition, H.R. 1427 would prohibit
    a GSE from making a capital distribution that would cause it to be
    undercapitalized.

> Some conservatives may be concerned that H.R. 1427 does not improve
> substantially on the powers of the current regulator. According to a
> study by American Enterprise Institute (AEI), "the regulator will lack
> the authority and leverage against a GSE to increase capital
> temporarily to address a problem such as the recent accounting and
> internal control failures...unless it can make the case that these tie
> directly to safety and soundness." Source:
> [http://www.aei.org/publications/pubID.22705/pub_detail.asp]{.underline}

-   **Capital Restoration**: Requires the regulator to closely monitor
    the condition of undercapitalized enterprises and whether they are
    complying with a capital restoration plan. If a GSE lacked such
    sufficient capital levels, its total assets would be frozen at the
    level of the preceding calendar quarter unless the regulator
    accepted its capital restoration plan (and an increase in assets is
    consistent with that plan) or the ratio of total capital to assets
    would enable it to become adequately capitalized in a reasonable
    amount of time. In addition, H.R. 1427 would prohibit an
    undercapitalized GSE from acquiring any new entities or engaging in
    any new business activity unless it is similarly consistent with an
    approved capital restoration plan.

-   **Significantly Undercapitalized Measures**: Directs the regulator
    to take action against a significantly undercapitalized GSE to
    improve its management by: (1) ordering the election of a new board
    of directors, (2) dismissing any board member or executive officer
    who held office for more than 180 days prior to the entity becoming
    undercapitalized, and (3) employing qualified executives. In
    addition, H.R. 1427 would prohibit a significantly undercapitalized
    entity from paying out a bonus to any executive if in the last year
    the entity has became significantly undercapitalized.

-   **Appointment of a Conservator**: Allows (but does not require) the
    regulator to appoint FHFA as conservator to manage the financial
    affairs of a critically undercapitalized GSE if:

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-   the entity's assets are less than its obligation to its creditors;

-   there has been substantial dissipation of assets resulting from
    either a violation of the law or an unsafe and unsound business
    practice;

-   the entity willfully violated a cease-and-desist order or concealed
    its records from the regulator;

-   the entity sustained a substantial loss to its capital and there is
    no "reasonable prospect" of becoming adequately capitalized; or

-   the entity either fails to submit or to implement a capital
    restoration plan.

> The conservator would have the power to restore the entity to a sound
> and solvent condition, including through liquidating the entity (with
> due regard to the housing finance market) and winding up its affairs.

-   **Cease and Desist Orders**: Allows the regulator to issue
    cease-and-desist orders to a regulated entity that is about to
    engage in an unsafe or unsound business practice or has violated a
    law or regulation. Unsound and unsound business practice is defined
    as a less-than-satisfactory rating for asset quality, management,
    earnings, or liquidity. Temporary cease-and-desist orders may be
    issued if such activities or violations is likely to cause
    insolvency or a significant dissipation of assets. If a cease and
    desist order is not obeyed, the regulator could seek an injunction
    to enforce the order in federal district court.

-   **Enforcement and Jurisdiction:** Authorizes the regulator or the
    Attorney General, upon request, to seek enforcement of orders in
    federal district court.

-   **Civil Penalties:** Establishes three tiers of civil penalties: (1)
    \$10,000 for each day for violating orders and regulations; (2)
    \$50,000 for each day for any violation that "recklessly engages in
    an unsafe or unsound practice," breaches a fiduciary duty, and is
    part of a pattern of misconduct; and (3) a maximum \$2 million for
    each day when such misconduct is done knowingly.

-   **Management Removal:** Authorizes the removal of any official from
    his post (with fair notice and hearing) who violates an order,
    engages in unsafe or unsound activity, breaches a fiduciary duty,
    *and* such action involves personal dishonesty or a willful
    disregard for the safety and soundness of the entity. Anyone who
    knowingly participates in the business of the enterprises after
    being suspended or removed shall be liable for a fine of up \$1
    million or five years of imprisonment.

-   **Criminal Penalties**: Assesses criminal penalties of up to \$1
    million and/or five years in prison on anyone who participates,
    directly or indirectly, in the affairs of a regulated entity while
    under suspension or order of removal.

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-   **Presidentially-Appointed Board Members:** Eliminates the current
    requirement that five of the members of each GSE's Board of
    Directors be appointed by the President and reduces the size of the
    board from 18 to between 7 and 15.

-   **Portfolio Operations Report**: Requires the FHFA to report to
    Congress with: (1) a description of each GSE\'s portfolio holdings,
    including mortgages, mortgage-backed securities, non-mortgages and
    any other assets; (2) a description of the risk involved with such
    holdings (including the use of derivatives to hedge against such
    risk); (3) an analysis of whether such holdings are safe and sound
    and consistent with the mission of the GSEs; and (4) an assessment
    of the risk such portfolios pose for the housing and capital markets
    as a whole.

-   **Alternative Secondary Market System Study**: Requires FHFA to
    study alternatives to the current secondary market system if the
    GSEs were privatized and how it would impact taxpayers.

-   **Effective Date**: The underlying bill does not include a section
    (Section 185) setting the effective date for this title, however,
    despite their being numerous references to Section 185 throughout
    the bill. It is expected that the Manager's Amendment will add
    Section 185 to the bill, making Title I (i.e. the implementation of
    the new regulator) effective six months after this bill's enactment.
    Some conservatives may be concerned that this **six-month gap** may
    allow or encourage GSEs to expand into new activities before the new
    regulations take effect.

***[Title II: Federal Home Loan Banks]{.underline}***

-   **Boards of Directors**: Reduces the number of directors for each
    Federal Home Loan Bank (FHLB) from 14 to 13 -- none of whom will be
    appointed -- and increases the term of service from three to four
    years. In addition, H.R. 1427 would repeal the cap on director
    compensation and allow pay to be based on what is reasonable and
    appropriate. Requires that two-fifths of each FHLB's directors be
    "independent" (i.e. have no conflicts of interest, such as being an
    officer of the FHLB).

-   **FHFA Oversight:** Replaces the Finance Board with the FHFA as the
    overseer of FHLBs.

-   **Joint Activities:** Permits two or more FHLBs to establish a joint
    office for the purpose of performing common or collective functions.

-   **Information Sharing:** Directs the regulator to prescribe
    regulations ensuring that each FHLB has access to information that
    it needs to determine the nature and extent of its liability.

-   **Voluntary Mergers:** Permits the FHLBs to merge with each other
    upon the approval of their own Boards of Directors and the new
    regulator.

-   **SEC Disclosure Requirements:** Exempts the FHLBs from certain SEC
    disclosure and reporting requirements, with respect to their
    ownership of capital stock and transactions in the ordinary course
    of business.

-   **Community Financial Institution Members:** Allows insured
    depository institutions with less than \$1 billion in total assets
    (increasing the threshold from \$500 million) to receive advances
    from the FHLBs for lending. In addition, the bill adds community
    development lending to the list of allowable uses of such advances.

-   **Affordable Housing Program Study:** Requires GAO to study the
    extent to which the FHLBs' current affordable housing programs are
    being used to assist long-term care facilities for low- and
    moderate-income individuals.

-   **Effective Date:** Makes the provisions of this title effective six
    months after enactment of the legislation.

***[Title III: Transfer of Functions, Personnel, and Property of OFHEO,
the Federal Housing Finance Board, and HUD]{.underline}***

-   **Abolishment of OFHEO:** Abolishes the Office of Federal Housing
    Enterprise Oversight (OFHEO) six months after this bill's enactment
    and provides for the transfer of its functions to FHFA. All
    regulations, orders, resolutions, and determinations made by OFHEO
    or a court would remain in force, and become enforceable by FHFA.
    During the six-month period beginning on the date of enactment, the
    OFHEO director would be instructed to manage the office "solely for
    the purpose of winding up the affairs." Some conservatives may be
    concerned that this six-month gap may allow or encourage GSEs to
    expand into new activities before the new regulations take effect.

-   **Employee Rights:** Guarantees that each OFHEO employee is
    transferred to FHFA for employment with the same status, tenure,
    grade, and pay as held immediately prior to the transfer and will
    retain their benefits for at least one year.

-   **Abolishment of the Federal Housing Finance Board:** Abolishes the
    Federal Housing Finance Board (FHFB) six months after this bill's
    enactment and provides for the transfer of its functions to FHFA.
    All regulations, orders, resolutions, and determinations made by
    FHFB or a court would remain in force, and become enforceable by
    FHFA. During the six-month period beginning on the date of
    enactment, the FHFB director would be instructed to manage the
    office "solely for the purpose of winding up the affairs." Some
    conservatives may be concerned that this six-month gap may allow or
    encourage FHLBs to expand into new activities before the new
    regulations take effect.

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-   **Employee Rights:** Guarantees that each FHFB employee is
    transferred to FHFA for employment with the same status, tenure,
    grade, and pay as held immediately prior to the transfer and will
    retain their benefits for at least one year.

[]{.mark}

-   **Abolishment of Enterprise-Related Functions at HUD:** Directs the
    HUD Secretary to determine, within three months of this bill's
    enactment, which employees to transfer to the FHFA to maintain
    oversight of the regulated enterprises. Six months from enactment,
    all such oversight functions would have to be transferred to FHFA.
    Provides for continuity of employee status, regulations, use of
    property, and agency services, in much the same way as does the
    abolishment language earlier in this title. Provides for transfer
    from HUD of enterprise-related unexpended appropriations, assets,
    liabilities, contracts, property, records, authorizations, and
    facilities.

[]{.mark}

**[Committee Action]{.underline}**: On March 9, 2007, the bill was
referred to the Financial Services Committee, which, on March 29^th^,
marked up the bill and ordered it reported to the full House by voice
vote.

**[Administration Position]{.underline}**: The Statement of
Administration Policy (SAP) for H.R. 1427 expresses support for the
overall legislation, but expresses concerns about the Affordable Housing
Fund and the increased loan limits for high-cost areas. To read the full
SAP, click here:
<http://www.whitehouse.gov/omb/legislative/sap/110-1/hr1427sap-h.pdf>.

**[Cost to Taxpayers]{.underline}**: CBO estimates that H.R. 1427 would
increase revenues by \$850 million in FY2008 and by \$2.72 billion over
the FY2008-FY2012 period. The bill would also increase mandatory
spending by \$570 million in FY2008 and by \$2.72 billion over the
FY2008-FY2012 period. These revenue and spending figures are due largely
to the Affordable Housing Fund. H.R. 1427 would also
[reduce]{.underline} authorizations by \$1 million in FY2008 and by \$22
million over the FY2008-FY2012 period (due largely to the elimination of
certain HUD responsibilities).

**[Does the Bill Expand the Size and Scope of the Federal
Government?]{.underline}**: Yes, the bill includes a new tax on the
secondary mortgage market (stemming from the GSEs' contributions to the
affordable housing fund) and increases the conforming loan limits in
"high-cost" areas which expands the reach of federal subsidies further
into the private sector.

**[Does the Bill Contain Any New State-Government, Local-Government, or
Private-Sector Mandates?]{.underline}**: Yes, the bill would impose
numerous private-sector mandates on Fannie Mae, Freddie Mac, and the
FHLBs. Additionally, the bill would impose certain intergovernmental
mandates in the form of state preemptions. Such preemption would allow
FHFA to

act outside the authority of state law in some circumstances and would
preempt state statute-of- limitations and contract laws, primarily in
the instance that FHFA serves as the receiver or conservator of a
regulated entity.

**[Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax
Benefits/Limited Tariff Benefits?]{.underline}**: The Financial Services
Committee, in House Report 110-142, asserts that, "H.R. 1427 does not
contain any congressional earmarks, limited tax benefits, or limited
tariff benefits as defined in clause 9 of rule XXI."

**[Constitutional Authority]{.underline}**: The Financial Services
Committee, in House Report 110-142, cites constitutional authority in
Article I, Section 8, Clause 1 (the congressional power to promote the
general welfare of the United States) and Clause 3 (the congressional
power to regulate interstate commerce).

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718