You are given two reports by the government agency.  

Report 1:
While no commonly accepted definition of a community bank exists, they are generally smaller banks that provide banking services to the local community and have management and board members who reside in the local community. In some of our past reports, we often defined community banks as those with under $10 billion in total assets. However, many banks have assets well below $10 billion as data from the financial condition reports that institutions submit to regulators (Call Reports) indicated that of the more than 6,100 banks in the United States, about 90 percent had assets below about $1.2 billion as of March 2016. Based on our prior interviews and reviews of documents, regulators and others have observed that small banks tend to differ from larger banks in their relationships with customers. Large banks are more likely to engage in transactional banking, which focuses on the provision of highly standardized products that require little human input to manage and are underwritten using statistical information. Small banks are more likely to engage in what is known as relationship banking in which banks consider not only data models but also information acquired by working with the banking customer over time. Using this banking model, small banks may be able to extend credit to customers such as small business owners who might not receive a loan from a larger bank. Small business lending appears to be an important activity for community banks. As of June 2017, community banks had almost $300 billion outstanding in loans with an original principal balance of under $1 million (which banking regulators define as small business lending), or about 20 percent of these institutions’ total lending. In that same month, non- community banks had about $390 billion outstanding in business loans under $1 million representing 5 percent of their total lending. Credit unions are nonprofit member-owned institutions that take deposits and make loans. Unlike banks, credit unions are subject to limits on their membership because members must have a “common bond”—for example, working for the same employer or living in the same community. Financial reports submitted to NCUA (the regulator that oversees federally-insured credit unions) indicated that of the more than 6,000 credit unions in the United States, 90 percent had assets below about $393 million as of March 2016. In addition to providing consumer products to their members, credit unions are also allowed to make loans for business activities subject to certain restrictions. These member business loans are defined as a loan, line of credit, or letter of credit that a credit union extends to a borrower for a commercial, industrial, agricultural, or professional purpose, subject to certain exclusions. In accordance with rules effective January 2017, the total amount of business lending credit unions can do is not to generally exceed 1.75 times the actual net worth of the credit union. Federal banking and credit union regulators have responsibility for ensuring the safety and soundness of the institutions they oversee, protecting federal deposit insurance funds, promoting stability in financial markets, and enforcing compliance with applicable consumer protection laws. All depository institutions that have federal deposit insurance have a federal prudential regulator. The regulator responsible for overseeing a community bank or credit union varies depending on how the institution is chartered, whether it is federally insured, and whether it is a Federal Reserve member (see table 1). Other federal agencies also impose regulatory requirements on banks and credit unions. These include rules issued by CFPB, which has supervision and enforcement authority for various federal consumer protection laws for depository institutions with more than $10 billion in assets and their affiliates. The Federal Reserve, OCC, FDIC, and NCUA continue to supervise for consumer protection compliance at institutions that have $10 billion or less in assets. Although community banks and credit unions with less than $10 billion in assets typically would not be subject to CFPB examinations, they generally are required to comply with CFPB rules related to consumer protection. In addition, FinCEN also issues requirements that financial institutions, including banks and credit unions, must follow. FinCEN is a component of Treasury’s Office of Terrorism and Financial Intelligence that supports government agencies by collecting, analyzing, and disseminating financial intelligence information to combat money laundering. It is responsible for administering the Bank Secrecy Act, which, with its implementing regulations, generally requires banks, credit unions, and other financial institutions, to collect and retain various records of customer transactions, verify customers’ identities in certain situations, maintain AML programs, and report suspicious and large cash transactions. FinCEN relies on financial regulators and others to examine U.S. financial institutions to determine compliance with these requirements. In addition, financial institutions also have to comply with requirements by Treasury’s Office of Foreign Asset Control to review transactions to ensure that business is not being done with sanctioned countries or individuals. In response to the 2007-2009 financial crisis, Congress passed the Dodd- Frank Act, which became law on July 21, 2010. The act includes numerous reforms to strengthen oversight of financial services firms, including consolidating consumer protection responsibilities within CFPB. Under the Dodd-Frank Act, federal financial regulatory agencies were directed to or granted authority to issue hundreds of regulations to implement the act’s reforms. Many of the provisions in the Dodd-Frank Act target the largest and most complex financial institutions, and regulators have noted that much of the act is not meant to apply to community banks. Although the Dodd-Frank Act exempts small institutions, such as community banks and credit unions, from several of its provisions, and authorizes federal regulators to provide small institutions with relief from certain regulations, it also contains provisions that impose additional restrictions and compliance costs on these institutions. As we reported in 2012, federal regulators, state regulatory associations, and industry associations collectively identified provisions within 7 of the act’s 16 titles that they expected to affect community banks and credit unions. The provisions they identified as likely to affect these institutions included some of the act’s mortgage reforms, such as those requiring institutions to ensure that a consumer obtaining a residential mortgage loan has the reasonable ability to repay the loan at the time the loan is consummated; comply with a new CFPB rule that combines two different mortgage loan disclosures that had been required by the Truth-in-Lending Act and the Real Estate Settlement Procedures Act of 1974; and ensure that property appraisers are sufficiently independent. In addition to the regulations that have arisen from provisions in the Dodd-Frank Act, we reported that other regulations have created potential burdens for community banks. For example, the depository institution regulators also issued changes to the capital requirements applicable to these institutions. Many of these changes were consistent with the Basel III framework, which is a comprehensive set of reforms to strengthen global capital and liquidity standards issued by an international body consisting of representatives of many nations’ central banks and regulators. These new requirements significantly changed the risk-based capital standards for banks and bank holding companies. As we reported in November 2014, officials interviewed from community banks did not anticipate any difficulties in meeting the U.S. Basel III capital requirements but expected to incur additional compliance costs. In addition to regulatory changes that could increase burden or costs on community banks, some of the Dodd-Frank Act provisions have likely resulted in reduced costs for these institutions. For example, revisions to the way that deposit insurance premiums are calculated reduced the amount paid by banks with less than $10 billion in assets by $342 million or 33 percent from the first to second quarter of 2011 after the change became effective. Another change reduced the audit-related costs that some banks were incurring in complying with provisions of the Sarbanes- Oxley Act. A literature search indicated that prior studies by other entities, including regulators, trade associations or others, which examined how to measure regulatory burden generally focused on direct costs resulting from compliance with regulations, and our analysis of them identified various limitations that restrict their usefulness in assessing regulatory burden. For example, researchers commissioned by the Credit Union National Association, which advocates for credit unions, found costs attributable to regulations totaled a median of 0.54 percent of assets in 2014 for a non- random sample of the 53 small, medium, and large credit unions responding to a nationwide survey. However, one of the study’s limitations was its use of a small, non-random sample of credit unions. In addition, the research was not designed to conclusively link changes in regulatory costs for the sampled credit unions to any one regulation or set of regulations. CFPB also conducted a study of regulatory costs associated with specific regulations applicable to checking accounts, traditional savings accounts, debit cards, and overdraft programs. Through case studies involving 200 interviews with staff at seven commercial banks with assets over $1 billion, the agency’s staff determined that the banks’ costs related to ongoing regulatory compliance were concentrated in operations, information technology, human resources, and compliance and retail functions, with operations and information technology contributing the highest costs. While providing detailed information about the case study institutions, reliance on a small sample of mostly large commercial banks limits the conclusions that can be drawn about banks’ regulatory costs generally. In addition, the study notes several challenges to quantifying compliance costs that made their cost estimates subject to some measurement error, and the study’s design limits the extent to which a causal relationship between financial regulations and costs could be fully established. Researchers from the Mercatus Center at George Mason University used a nongeneralizable survey of banks to find that respondents believed they were spending more money and staff time on compliance than before due to Dodd-Frank regulations. From a universe of banks with less than $10 billion of assets, the center’s researchers used a non-random sample to collect 200 responses to a survey sent to 500 banks with assets less than $10 billion about the burden of complying with regulations arising from the Dodd-Frank Act. The survey sought information on the respondents’ characteristics, products, and services and the effects various regulatory and compliance activities had on operations and decisions, including those related to bank profitability, staffing, and products. About 83 percent of the respondents reported increased compliance costs of greater than or equal to 5 percent due to regulatory requirements stemming from the Dodd-Frank Act. The study’s limitations include use of a non-random sample selection, small response rate, and use of questions that asked about the Dodd-Frank Act in general. In addition, the self-reported survey items used to capture regulatory burden—compliance costs and profitability—have an increased risk of measurement error and the causal relationship between Dodd- Frank Act requirements and changes in these indicators is not well- established. Community bank and credit union representatives that we interviewed identified three sets of regulations as most burdensome to their institutions: (1) data reporting requirements related to loan applicants and loan terms under the Home Mortgage Disclosure Act of 1975 (HMDA); (2) transaction reporting and customer due diligence requirements as part of the Bank Secrecy Act and related anti-money laundering laws and regulations (collectively, BSA/AML); and (3) disclosures of mortgage loan fees and terms to consumers under the TILA-RESPA Integrated Disclosure (TRID) regulations. In focus groups and interviews, many of the institution representatives said these regulations were time- consuming and costly to comply with, in part because the requirements were complex, required preparation of individual reports that had to be reviewed for accuracy, or mandated actions within specific timeframes. However, federal regulators and consumer advocacy groups said that benefits from these regulations were significant. Representatives of community banks and credit unions in all our focus groups and in most of our interviews told us that HMDA’s data collection and reporting requirements were burdensome. Under HMDA and its implementing Regulation C, banks and credit unions with more than $45 million in assets that do not meet regulatory exemptions must collect, record, and report to the appropriate federal regulator, data about applicable mortgage lending activity. For every covered mortgage application, origination, or purchase of a covered loan, lenders must collect information such as the loan’s principal amount, the property location, the income relied on in making the credit decision, and the applicants’ race, ethnicity, and sex. Institutions record this on a form called the loan/application register, compile these data each calendar year, and submit them to CFPB. Institutions have also been required to make these data available to the public upon request, after modifying them to protect the privacy of applicants and borrowers. Representatives of many community banks and credit unions with whom we spoke said that complying with HMDA regulations was time consuming. For example, representatives from one community bank we interviewed said it completed about 1,100 transactions that required HMDA reporting in 2016, and that its staff spent about 16 hours per week complying with Regulation C. In one focus group, participants discussed how HMDA compliance was time consuming because the regulations were complex, which made determining whether a loan was covered and should be reported difficult. As a part of that discussion, one bank representative told us that it was not always clear whether a residence that was used as collateral for a commercial loan was a reportable mortgage under HMDA. In addition, representatives in all of our focus groups in which HMDA was discussed and in some interviews said that they had to provide additional staff training for HMDA compliance. Among the 28 community banks and credit unions whose representatives commented on HMDA in our focus groups, 61 percent noted having to conduct additional HMDA-related training. In most of our focus groups and three of our interviews, representatives of community banks and credit unions also expressed concerns about how federal bank examiners review HMDA data for errors. When regulatory examiners conducting compliance examinations determine that an institution’s HMDA data has errors above prescribed thresholds, the institution has to correct and resubmit its data, further adding to the time required for compliance. While regulators have revised their procedures for assessing errors as discussed later, prior to 2018, if 10 percent or more of the loan/application registers that examiners reviewed had errors, an institution was required to review all of their data, correct any errors, and resubmit them. If 5 percent or more of the reviewed loan/application registers had errors in a single data field, an institution had to review all other registers and correct the data in that field. Participants in one focus group discussed how HMDA’s requirements left them little room for error and that they were concerned that examiners weigh all HMDA fields equally when assessing errors. For example, representatives of one institution noted that for purposes of fair lending enforcement, errors in fields such as race and ethnicity can be more important than errors in the action taken date (the field for the date when a loan was originated or when an application not resulting in an origination was received). Representatives of one institution also noted that they no longer have access to data submission software that allowed them to verify the accuracy of some HMDA data, and this has led to more errors in their submissions. Representatives of another institution told us that they had to have staff conduct multiple checks of HMDA data to ensure the data met accuracy standards, which added to the time needed for compliance. Representatives of many community banks and credit unions with whom we spoke also expressed concerns that compliance requirements for HMDA were increasing. The Dodd-Frank Act included provisions to expand the information institutions must collect and submit under HMDA, and CFPB issued rules implementing these new requirements that mostly became effective January 2018. In addition to certain new data requirements specified in the act, such as age and the total points and fees payable at origination, CFPB’s amendments to the HMDA reporting requirements also added additional data points, including some intended to collect more information about borrowers such as credit scores, as well as more information about the features of loans, such as fees and terms. In the final rule implementing the new requirements, CFPB also expanded the types of loans on which some institutions must report HMDA data to include open-ended lines of credit and reverse mortgages. Participants in two of our focus groups with credit unions said reporting this expanded information will require more staff time and training and cause them to purchase new or upgraded computer software. In most of our focus groups, participants said that changes should be made to reduce the burdens associated with reporting HMDA data. For example, in some focus groups, participants suggested raising the threshold for institutions that have to file HMDA reports above the then current $44 million in assets, which would reduce the number of small banks and credit unions that are required to comply. Representatives of two institutions noted that because small institutions make very few loans compared to large ones, their contribution to the overall HMDA data was of limited value in contrast to the significant costs to the institutions to collect and report the data. Another participant said their institution sometimes make as few as three loans per month. In most of our focus groups, participants also suggested that regulators could collect mortgage data in other ways. For example, one participant discussed how it would be less burdensome for lenders if federal examiners collected data on loan characteristics during compliance examinations. However, staff of federal regulators and consumer groups said that HMDA data are essential for enforcement of fair lending laws and regulations. Representatives of CFPB, FDIC, NCUA, and OCC and groups that advocate for consumer protection issues said that HMDA data has helped address discriminatory practices. For example, some representatives noted a decrease in “redlining” (refusing to make loans to certain neighborhoods or communities). CFPB staff noted that HMDA data provides transparency about lending markets, and that HMDA data from community banks and credit unions is critical for this purpose, especially in some rural parts of the country where they make the majority of mortgage loans. While any individual institution’s HMDA reporting might not make up a large portion of HMDA data for an area, CFPB staff told us that if all smaller institutions were exempted from HMDA requirements, regulators would have little or no data on the types of mortgages or on lending patterns in some areas. Agency officials also told us that few good alternatives to HMDA data exist and that the current collection regime is the most effective available option for collecting the data. NCUA officials noted that collecting mortgage data directly from credit unions during examinations to enforce fair lending rules likely would be more burdensome for the institutions. CFPB staff and consumer advocates we spoke with also said that HMDA provides a low-cost data source for researchers and local policy makers, which leads to other benefits that cannot be directly measured but are included in HMDA’s statutory goals—such as allowing local policymakers to target community investments to areas with housing needs. While representatives of some community banks and credit unions argued that HMDA data were no longer necessary because practices such as redlining have been reduced and they receive few requests for HMDA data from the public, representatives of some consumer advocate groups responded that eliminating the transparency that HMDA data creates could allow discriminatory practices to become more common. CFPB staff and representatives of one of these consumer groups also said that before the financial crisis of 2007–2009, some groups were not being denied credit outright but instead were given mortgages with terms, such as high interest rates, which made them more likely to default. The expanded HMDA data will allow regulators to detect such problematic lending practices for mortgage terms. CFPB and FDIC staff also told us that while lenders will have to collect and report more information, the new fields will add context to lending practices and should reduce the likelihood of incorrectly flagging institutions for potential discrimination. For example, with current data, a lender may appear to be denying mortgage applications to a particular racial or ethnic group, but with expanded data that includes applicant credit scores, regulators may determine that the denials were appropriate based on credit score underwriting. CFPB staff acknowledged that HMDA data collection and reporting may be time consuming, and said they have taken steps to reduce the associated burdens for community banks and credit unions. First, in its final rule implementing the Dodd-Frank Act’s expanded HMDA data requirements, CFPB added exclusions for banks and credit unions that make very few mortgage loans. Effective January 2018, an institution will be subject to HMDA requirements only if it has originated at least 25 closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the 2 preceding calendar years and also has met other applicable requirements. In response to concerns about the burden associated with the new requirement for reporting open-end lines of credit, in 2017. CFPB temporarily increased the threshold for collecting and reporting data for open-end lines of credit from 100 to 500 for the 2018 and 2019 calendar years. CFPB estimated that roughly 25 percent of covered depository institutions will no longer be subject to HMDA as a result of these exclusions. Second, the Federal Financial Institutions Examination Council (FFIEC), which includes CFPB, announced the new FFIEC HMDA Examiner Transaction Testing Guidelines that specify when agency examiners should direct an institution to correct and resubmit its HMDA data due to errors found during supervisory examinations. CFPB said these revisions should greatly reduce the burden associated with resubmissions. Under the revised standards, institutions will no longer be directed to resubmit all their HMDA data if they exceeded the threshold for HMDA files with errors, but will still be directed to correct specific data fields that have errors exceeding the specified threshold. The revised guidelines also include new tolerances for some data fields, such as application date and loan amount. Third, CFPB also introduced a new online system for submitting HMDA data in November 2017. CFPB staff said that the new system, the HMDA Platform, will reduce errors by including features to allow institutions to validate the accuracy and correct the formatting of their data before submitting. They also noted that this platform will reduce burdens associated with the previous system for submitting HMDA data. For example, institutions no longer will have to regularly download software, and multiple users within an institution will be able to access the platform. NCUA officials added that some credit unions had tested the system and reported that it reduced their reporting burden. Finally, on December 21, 2017, CFPB issued a public statement announcing that, for HMDA data collected in 2018, CFPB does not intend to require resubmission of HMDA data unless errors are material, and does not intend to assess penalties for errors in submitted data. CFPB also announced that it intends to open a rule making to reconsider various aspects of the 2015 HMDA rule, such as the thresholds for compliance and data points that are not required by statute. In all our focus groups and many of our interviews, participants said they found BSA/AML requirements to be burdensome due to the staff time and other costs associated with their compliance efforts. To provide regulators and law enforcement with information that can aid in pursuing criminal, tax, and regulatory investigations, BSA/AML statutes and regulations require covered financial institutions to file Currency Transaction Reports (CTR) for cash transactions conducted by a customer for aggregate amounts of more than $10,000 per day and Suspicious Activity Reports (SAR) for activity that might signal criminal activity (such as money laundering or tax evasion); and establish BSA/AML compliance programs that include efforts to identify and verify customers’ identities and monitor transactions to report, for example, transactions that appear to violate federal law. Participants in all of our focus groups discussed how BSA/AML compliance was time-consuming, and in most focus groups participants said this took time away from serving customers. For example, representatives of one institution we interviewed told us that completing a single SAR could take 4 hours, and that they might complete 2 to 5 SARs per month. However, representatives of another institution said that at some times of the year it has filed more than 300 SARs per month. In a few cases, representatives of institutions saw BSA/AML compliance as burdensome because they had to take actions that seemed unnecessary based on the nature of the transactions. For example, one institution’s representatives said that filing a CTR because a high school band deposited more than $10,000 after a fundraising activity seemed unnecessary, while another’s said that it did not see the need to file SARs for charitable organizations that are well known in their community. Representatives of institutions in most of our focus groups also noted that BSA/AML regulations required additional staff training. Some of these representatives noted that the requirements are complex and the activities, such as identifying transactions potentially associated with terrorism, are outside of their frontline staff’s core competencies. Representatives in all focus groups and a majority of interviews said BSA imposes financial costs on community banks and credit unions that must be absorbed by those institutions or passed along to customers. In most of our focus groups, representatives said that they had to purchase or upgrade software systems to comply with BSA/AML requirements, which can be expensive. Some representatives also said they had to hire third parties to comply with BSA/AML regulations. Representatives of some institutions also noted that the compliance requirements do not produce any material benefits for their institutions. In most of our focus groups, participants were particularly concerned that the compliance burden associated with BSA/AML regulations was increasing. In 2016, FinCEN—the bureau in the Department of the Treasury that administers BSA/AML rules—issued a final rule that expanded due-diligence requirements for customer identification. The final rule was intended to strengthen customer identification programs by requiring institutions to obtain information about the identities of the beneficial owners of businesses opening accounts at their institutions. The institutions covered by the rule are expected to be in compliance by May 11, 2018. Some representatives of community banks and credit unions that we spoke with said that this new requirement will be burdensome. For example, one community bank’s representatives said the new due-diligence requirements will require more staff time and training and cause them to purchase new or upgraded computer systems. Representatives of some institutions also noted that accessing beneficial ownership information about companies can be difficult, and that entities that issue business licenses or tax identification numbers could perform this task more easily than financial institutions. In some of our focus groups, and in some comment letters that we reviewed that community banks and credit unions submitted to bank regulators and NCUA as part of the EGRPRA process, representatives of community banks and credit unions said regulators should take steps to reduce the burdens associated with BSA/AML. Participants in two of our focus groups and representatives of two institutions we interviewed said that the $10,000 CTR threshold, which was established in 1972, should be increased, noting it had not been adjusted for inflation. One participant told us that if this threshold had been adjusted for inflation over time, it likely would be filing about half of the number of CTRs that it currently files. In several focus groups, participants also indicated that transactions that must be checked against the Office of Foreign Assets Control list also should be subject to a threshold amount. Representatives of one institution noted that they have to complete time-consuming compliance work for even very small transactions (such as less than $1). Representatives of some institutions suggested that the BSA/AML requirements be streamlined to make it easier for community banks and credit unions to comply. For example, representatives of one institution that participated in the EGRPRA review suggested that institutions could provide regulators with data on all cash transactions in the format in which they keep these records rather than filing CTRs. Finally, participants in one focus group said that regulators should better communicate how the information that institutions submit contributes to law enforcement successes in preventing or prosecuting crimes. Staff from FinCEN told us that the reports and due-diligence programs required in BSA/AML rules are critical to safeguarding the U.S. financial sector from illicit activity, including illegal narcotics and terrorist financing activities. They said they rely on CTRs and SARs that financial institutions file for the financial intelligence they disseminate to law enforcement agencies, and noted that they saw all BSA/AML requirements as essential because activities are designed to complement each other. Officials also pointed out that entities conducting terrorism, human trafficking, or fraud all rely heavily on cash, and reporting frequently made deposits makes tracking criminals easier. They said that significant reductions in BSA/AML reporting requirements would hinder law enforcement, especially because depositing cash through ATMs has become very easy. FinCEN staff said they utilize a continuous evaluation process to look for ways to reduce burden associated with BSA/AML requirements, and noted actions taken as a result. They said that FinCEN has several means of soliciting feedback about potential burdens, including through its Bank Secrecy Act Advisory Group that consists of industry, regulatory, and law enforcement representatives who meet twice a year, and also through public reporting and comments received through FinCEN’s regulatory process. FinCEN officials said that based on this advisory group’s recommendations, the agency provided SAR filing relief by reducing the frequency of submission for written SAR summaries on ongoing activity from 90 days to 120 days. FinCEN also has recognized that financial institutions do not generally see the beneficial impacts of their BSA/AML efforts, and officials said they have begun several different feedback programs to address this issue. FinCEN staff said they have been discussing ways to improve the CTR filing process, but in response to comments obtained as part of a recent review of regulatory burden they noted that the staff of law enforcement agencies do not support changing the $10,000 threshold for CTR reporting. FinCEN officials said that they have taken some steps to reduce the burden related to CTR reporting, such as by expanding the ability of institutions to seek CTR filing exemptions, especially for low-risk customers. FinCEN is also utilizing its advisory group to examine aspects of the CTR reporting obligations to assess ways to reduce reporting burden, but officials said it is too early to know the outcomes of the effort. However, FinCEN officials said that while evaluation of certain reporting thresholds may be appropriate, any changes to them or other CTR requirements to reduce burden on financial institutions, must still meet the needs of regulators and law enforcement, and prevent misuse of the financial system. FinCEN staff also said that some of the concerns raised about the upcoming requirements on beneficial ownership may be based on misunderstandings of the rule. FinCEN officials told us that under the final rule, financial institutions can rely on the beneficial ownership information provided to them by the entity seeking to open the account. Under the final rule, the party opening an account on behalf of the legal entity customer is responsible for providing beneficial ownership information, and the financial institution may rely on the representations of the customer unless it has information that calls into question the accuracy of those representations. The financial institution does not have to confirm ownership; rather, it has to verify the identity of the beneficial owners as reported by the individual seeking to open the account, which can be done with photocopies of identifying documents such as a driver’s license. FinCEN issued guidance explaining this aspect of the final rule in 2016. In all of our focus groups and many of our interviews, representatives of community banks and credit unions said that new requirements mandating consolidated disclosures to consumers for mortgage terms and fees have increased the time their staff spend on compliance, increased the cost of providing mortgage lending services, and delayed the completion of mortgages for customers. The Dodd Frank Act directed CFPB to issue new requirements to integrate mortgage loan disclosures that previously had been separately required by the Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), and their implementing regulations, Regulation Z and X, respectively. Effective in October 2015, the combined TILA-RESPA Integrated Disclosure (known as TRID) requires mortgage lenders to disclose certain mortgage terms, conditions, and fees to loan applicants during the origination process for certain mortgage loans and prescribe how the disclosures should be made. The disclosure provisions also require lenders, in the absence of specified exceptions, to reimburse or refund to borrowers portions of certain fees that exceed the estimates previously provided in order to comply with the revised regulations. Under TRID, lenders generally must provide residential mortgage loan applicants with two forms, and deliver these documents within specified time frames (as shown in fig. 1). Within 3 business days of an application and at least 7 business days before a loan is consummated, lenders must provide the applicant with the loan estimate, which includes estimates for all financing costs and fees and other terms and conditions associated with the potential loan. If circumstances change after the loan estimate has been provided (for example, if a borrower needs to change the loan amount), a new loan estimate may be required. At least 3 days before a loan is consummated, lenders must provide the applicant with the closing disclosure, which has the loan’s actual terms, conditions, and associated fees. If the closing disclosure is mailed to an applicant, lenders must wait an additional 3 days for the applicant to receive it before they can execute the loan, unless they can demonstrate that the applicant has received the closing disclosure. If the annual percentage rate or the type of loan change after the closing disclosure is provided, or if a prepayment penalty is added, a new closing disclosure must be provided and a new 3-day waiting period is required. Other changes made to the closing disclosure require the provision of a revised closing disclosure, but a new 3-day waiting period is not required. If the fees in the closing disclosure are more than the fees in the loan estimate (subject to some exceptions and tolerances discussed later in this section), the lender must reimburse the applicant for the amount of the increase in order to comply with the applicable regulations. In all of our focus groups and most of our interviews, representatives of community banks and credit unions said that TRID has increased the time required to comply with mortgage disclosure requirements and increased the cost of mortgage lending. In half of our focus groups, participants discussed how they have had to spend additional time ensuring the accuracy of their initial estimates of mortgage costs, including fees charged by third parties, in part because they are now financially responsible for changes in fees during the closing process. Some participants also discussed how they have had to hire additional staff to meet TRID’s requirements. In one focus group of community banks, participants described how mortgage loans frequently involve the use of multiple third parties, such as appraisers and inspectors, and obtaining accurate estimates of the amounts these parties will charge for their services within the 3-day period prescribed by TRID can be difficult. The community banks we spoke with also discussed how fees from these parties often change at closing, and ensuring an accurate estimate at the beginning of the process was not always possible. As a result, some representatives said that community banks and credit unions have had to pay to cure or correct the difference in changed third-party fees that are outside their control. In most of our focus groups and some of our interviews, representatives told us that this TRID requirement has made originating a mortgage more costly for community banks and credit unions. Community banks and credit unions in half of our focus groups and some of our interviews also told us that TRID’s requirements are complex and difficult to understand, which adds to their compliance burden. Participants in one focus group noted that CFPB’s final rule implementing TRID was very long—the rule available on CFPB’s website is more than 1,800 pages including the rule’s preamble—and has many scenarios that require different actions by mortgage lenders or trigger different responsibilities as the following examples illustrate. Some fees in the loan estimate, such as prepaid interest, may be subsequently changed provided that the estimates were in good faith. Other fees, such as for third-party services where the charge is not paid to the lender or the lender’s affiliate, may be changed by as much as 10 percent in aggregate before the lender becomes liable for the difference. However, for some charges the lender must reimburse or refund to the borrower portions of subsequent increases, such as fees paid to the creditor, mortgage broker, or a lender affiliate, without any percentage tolerance. Based on a poll we conducted in all six focus groups, 40 of 43 participants said that they had to provide additional training to staff to ensure that TRID’s requirements were understood, which takes additional time from serving customers. In all of our focus groups and most of our interviews, community banks and credit unions also said that TRID’s mandatory waiting periods and disclosure schedules increased the time required to close mortgage loans, which created burdens for the institutions and their customers. Several representatives we interviewed told us that TRID’s waiting periods led to delays in closings of about 15 days. The regulation mandates that mortgage loans generally cannot be consummated sooner than 7 business days after the loan estimate is provided to an applicant, and no sooner than 3 business days after the closing disclosure is received by the applicant. If the closing disclosure is mailed, the lender must add another 3 business days to the closing period to allow for delivery. Representatives in some of our focus groups said that when changes needed to be made to a loan during the closing period, TRID requires them to restart the waiting periods, which can increase delays. For example, if the closing disclosure had been provided, and the loan product needed to be changed, a new closing disclosure would have to be provided and the applicant given at least 3 days to review it. Some representatives we interviewed said that their customers are frustrated by these delays and would like to close their mortgages sooner than TRID allows. Others said that TRID’s waiting periods decreased flexibility in scheduling the closing date, which caused problems for homebuyers and sellers (for instance, because transactions frequently have to occur on the same day). However, CFPB officials and staff of a consumer group said that TRID has streamlined previous disclosure requirements and is important for ensuring that consumers obtaining mortgages are protected. CFPB reported that for more than 30 years lenders have been required by law to provide mortgage disclosures to borrowers, and CFPB staff noted that prior time frames were similar to those required by TRID and Regulation Z. CFPB also noted that information on the disclosure forms that TRID replaced was sometimes overlapping, used inconsistent terminology, and could confuse consumers. In addition, CFPB staff and staff of a consumer group said that the previous disclosures allowed some mortgage-related fees to be combined, which prevented borrowers from knowing what charges for specific services were. They said that TRID disclosures better highlight important items for home buyers, allowing them to more readily compare loan options. Furthermore, CFPB staff told us that before TRID, lenders and other parties commonly increased a mortgage loan’s fees during the closing process, and then gave borrowers a “take it or leave it” choice just before closing. As a result, borrowers often just accepted the increased costs. CFPB representatives said that TRID protects consumers from this practice by shifting the responsibility for most fee increases to lenders, and increases transparency in the lending process. CFPB staff told us that it is too early to definitively identify what impact TRID has had on borrowers’ understanding of mortgage terms, but told us that some information they have seen indicated that it has been helpful. For example, CFPB staff said that preliminary results from the National Survey of Mortgage Originations conducted in 2017 found that consumer confidence in mortgage lending increased. While CFPB staff said that this may indicate that TRID, which became effective in October 2015, has helped consumers better understand mortgage terms, they noted that the complete survey results are not expected to be released until 2018. CFPB staff said that these results should provide valuable information on how well consumers generally understood mortgage terms and whether borrowers were comparison shopping for loans that could be used to analyze TRID’s effects on consumer understanding of mortgage products. CFPB staff also told us that complying with TRID should not result in significant time being added to the mortgage closing process. Based on the final rule, they noted that TRID’s waiting periods should not lead to delays of more than 3 days. CFPB staff also pointed out that the overall 7-day waiting period and the 3-day waiting period can be modified or waived if the consumer has a bona fide personal financial emergency, and thus should not be creating delays for those consumers. To waive the waiting period, consumers have to provide the lender with a written statement that describes the emergency. CFPB staff also said that closing times are affected by a variety of factors and can vary substantially, and that the delays that community banks and credit unions we spoke with reported may not be representative of the experiences of other lenders. A preliminary CFPB analysis of industry-published mortgage closing data found that closing times increased after it first implemented TRID, but that the delays subsequently declined. CFPB staff also said that they plan to analyze closing times using HMDA data now that they are collecting these data, and that they expect that delays that community banks and credit unions may have experienced so far would decrease as institutions adjusted to the new requirements. Based on our review of TRID’s requirements and discussions with community banks and credit unions, some of the burden related to TRID that community banks and credit unions described appeared to result from institutions taking actions not required by regulations, and community banks and credit unions told us they still were confused about TRID requirements. For example, representatives of some institutions we interviewed said that they believed TRID requires the entire closing disclosure process to be restarted any time any changes were made to a loan’s amount. CFPB staff told us that this is not the case, and that revised loan estimates can be made in such cases without additional waiting periods. Representatives of several other community banks and credit unions cited 5- and 10-day waiting periods not in TRID requirements, or believed that the 7-day waiting period begins after the closing disclosure is received by the applicant, rather than when the loan estimate is provided. Participants in one focus group discussed that they were confused about when to provide disclosures and what needs to be provided. Representatives of one credit union said that if they did not understand a requirement, it was in their best interest to delay closing to ensure they were in compliance. CFPB staff said that they have taken several steps to help lenders understand TRID requirements. CFPB has published a Small Entity Compliance Guide and a Guide to the Loan Estimate and Closing Disclosure Forms. As of December 2017, these guides were accessible on a TRID implementation website that has links to other information about the rule, as well as blank forms and completed samples. CFPB staff told us that the bureau conducted several well-attended, in-depth webinars to explain different aspects of TRID, including one with more than 20,000 participants, and that recordings of the presentations remained available on the bureau’s TRID website. CFPB also encourages institutions to submit questions about TRID through the website, and the staff said that they review submitted questions for any patterns that may indicate that an aspect of the regulation is overly burdensome. However, the Mortgage Bankers Association reported that CFPB’s guidance for TRID had not met the needs of mortgage lenders. In a 2017 report on reforming CFPB, this association stated that timely and accessible answers to frequently asked questions about TRID were still needed, noting that while CFPB had assigned staff to answer questions, these answers were not widely circulated. The association also reported that it had made repeated requests for additional guidance related to TRID, but the agency largely did not respond with additional materials in response to these requests. Although we found that misunderstandings of TRID requirements could be creating unnecessary compliance burdens for some small institutions, CFPB had not assessed the effectiveness of the guidance it provided to community banks and credit unions. Under the Dodd-Frank Act, CFPB has a general responsibility to ensure its regulations are not unduly burdensome, and internal control standards direct federal agencies to analyze and respond to risks related to achieving their defined objectives. However, CFPB staff said that they have not directly assessed how well community banks and credit unions have understood TRID requirements and acknowledged that some of these institutions may be applying the regulations improperly. They said that CFPB intends to review the effectiveness of its guidance, but did not indicate when this review would be completed. Until the agency assesses how well community banks and credit unions understand TRID requirements, CFPB may not be able to effectively respond to the risk that some smaller institutions have implemented TRID incorrectly, unnecessarily burdening their staff and delaying consumers’ home purchases. We did not find that regulators directed institutions to comply with regulations from which they were exempt, although institutions were concerned about the appropriateness of examiner expectations. To provide regulatory relief to community banks and credit unions, Congress and regulators have sometimes exempted smaller institutions from the need to comply with all or part of some regulations. Such exemptions are often based on the size of the financial institution or the level of particular activities. For example, CFPB exempted institutions with less than $45 million in assets and fewer than 25 closed-end mortgage loans or 500 open-end lines of credit from the expanded HMDA reporting requirements. In January 2013, CFPB also included exemptions for some institutions in a rule related to originating loans that meet certain characteristics—known as qualified mortgages—in order for the institutions to receive certain liability protections if the loans later go into default. To qualify for this treatment, the lenders must make a good faith effort to determine a borrower’s ability to repay a loan and the loan must not include certain risky features (such as interest-only or balloon payments). In its final rule, CFPB included exemptions that allow small creditors to originate loans with certain otherwise restricted features (such as balloon payments) and still be considered qualified mortgage loans. Concerns expressed to legislators about exemptions not being applied appeared to be based on misunderstandings of certain regulations. For example, in June 2016, a bank official testified that he thought his bank would be exempt from all of CFPB’s requirements. However, CFPB’s rules applicable to banks apply generally to all depository institutions, although CFPB only conducts compliance examinations for institutions with assets exceeding $10 billion. The depository institution regulators continue to examine institutions with assets below this amount (the overwhelming majority of banks and credit unions) for compliance with regulations enacted by CFPB. Although not generalizable, our analysis of select examinations did not find that regulators directed institutions to comply with requirements from which they were exempt. In our interviews with representatives from 17 community banks and credit unions, none of the institutions’ representatives identified any cases in which regulators required their institution to comply with a regulatory requirement from which they should have been exempt. We also randomly selected and reviewed examination reports and supporting material for 28 examinations conducted by the regulators to identify any instances in which the regulators had not applied exemptions. From our review of the 28 examinations, we found no instances in the examination reports or the scoping memorandums indicating that examiners had required these institutions to comply with the regulations covered by the eight selected exemptions. Because of the limited number of the examinations we reviewed, we cannot generalize our findings to the regulatory treatment of all institutions qualifying for exemptions. Although not identifying issues relating to exemptions, representatives of community banks and credit unions in about half of our interviews and focus groups expressed concerns that their regulators expected them to follow practices they did not feel corresponded to the size or risks posed by their institutions. For example, representatives from one institution we interviewed said that examiners directed them to increase BSA/AML activities or staff, whereas they did not see such expectations as appropriate for institutions of their size. Similarly, in public forums held by regulators as part of their EGRPRA reviews (discussed in the next section) a few bank representatives stated that regulators sometimes considered compliance activities by large banks to be best practices, and then expected smaller banks to follow such practices. However, institution representatives in the public forums and in our interviews and focus groups that said sometimes regulators’ expectations for their institutions were not appropriate, but did not identify specific regulations or practices they had been asked to consider following when citing these concerns. To help ensure that applicable exemptions and regulatory expectations are appropriately applied, federal depository institution regulators told us they train their staff in applicable requirements and conduct senior-level reviews of examinations to help ensure that examiners only apply appropriate requirements and expectations on banks and credit unions. Regulators said that they do not conduct examinations in a one-size-fits- all manner, and aim to ensure that community banks and credit unions are held to standards appropriate to their size and business model. To achieve this, they said that examiners undergo rigorous training. For example, FDIC staff said that its examiners have to complete four core trainings and then receive ongoing on-the-job instruction. Each of the four regulators also said they have established quality assurance programs to review and assess their examination programs periodically. For example, each Federal Reserve Bank reviews its programs for examination inconsistency and the Federal Reserve Board staff conducts continuous and point-in-time oversight reviews of Reserve Banks’ examination programs to identify issues or problems, such as examination inconsistency. The depository institution regulators also said that they have processes for depository institutions to appeal examination findings if they feel they were held to inappropriate standards. In addition to less formal steps, such as contacting a regional office, each of the four regulators have an ombudsman office to which institutions can submit complaints or concerns about examination findings. Staffs of the various offices are independent from the regulators’ management and work with the depository institutions to resolve examination issues and concerns. If the ombudsman is unable to resolve the complaints, then the institutions can further appeal their complaints through established processes. Federal depository institution regulators address regulatory burden of their regulated institutions through the rulemaking process and also through retrospective reviews that may provide some regulatory relief to community banks. However, the retrospective review process has some limitations that limit its effectiveness in assessing and addressing regulatory burden on community banks and credit unions. Federal depository institution regulators can address the regulatory burden of their regulated institutions throughout the rulemaking process and through mandated, retrospective or “look back” reviews. According to the regulators, attempts to reduce regulatory burden start during the initial rulemaking process. Staff from FDIC, Federal Reserve, NCUA, and OCC all noted that when promulgating rules, their staff seek input from institutions and others throughout the process to design requirements that achieve the goals of the regulation at the most reasonable cost and effort for regulated entities. Once a rule has been drafted, the regulators publish it in the Federal Register for public comment. The staff noted that regulators often make revisions in response to the comments received to try to reduce compliance burdens in the final regulation. After regulations are implemented, banking regulators also address regulatory burdens by periodically conducting mandated reviews of their regulations. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) directs three regulators (Federal Reserve, FDIC, and OCC, as agencies represented on the Federal Financial Institutions Examination Council) to review at least every 10 years all of their regulations and through public comment identify areas of the regulations that are outdated, unnecessary or unduly burdensome on insured depository institutions. Under the act, the regulators are to categorize their regulations and provide notice and solicit public comment on all the regulations for which they have regulatory authority. The act also includes a number of requirements on how the regulators should conduct the review, including reporting results to Congress. The first EGRPRA review was completed in 2007. The second EGRPRA review began in 2014 and the report summarizing its results was submitted to Congress in March 2017. While NCUA is not required to participate in the EGRPRA review (because EGRPRA did not include the agency in the list of agencies that must conduct the reviews), NCUA has been participating voluntarily. NCUA’s assessment of its regulations appears in separate sections of the reports provided to Congress for each of the 2007 and 2017 reviews. Regulators began the most recent EGRPRA review by providing notice and soliciting comments in 2014–2016. The Federal Reserve, FDIC, and OCC issued four public notices in the Federal Register seeking comments from regulated institutions and interested parties on 12 categories of regulations they promulgated. The regulators published a list of all the regulations they administer in the notices and asked for comments, including comments on the extent to which regulations were burdensome. Although not specifically required under EGRPRA, the regulators also held six public meetings across the country with several panels of banks and community groups. At each public meeting, at least three panels of bank officials represented banks with assets of generally less than $5 billion and a large number of the panels included banks with less than $2 billion in assets. Panels were dedicated to specific regulations or sets of regulations. For example, one panel covered capital-related rules, consumer protection, and director-related rules, and another addressed BSA/AML requirements. Although panels were dedicated to specific regulations or sets of regulations, the regulators invited comment on all of their regulations at all public meetings. The regulators then assessed the public comments they received and described actions they intended to take in response. EGRPRA requires that the regulators identify the significant issues raised by the comments. The regulators generally deemed the issues that received the most public comments as significant. For the 2017 report, representatives at the Federal Reserve, FDIC, and OCC reviewed, evaluated, and summarized more than 200 comment letters and numerous oral comments they received. For interagency regulations that received numerous comments, such as those relating to capital and BSA/AML requirements, the comment letters for each were provided to staff of one of the three regulators or to previously established interagency working groups to conduct the initial assessments. The regulators’ comment assessments also included reviews by each agency’s subject-matter experts, who prepared draft summaries of the concerns and proposed agency responses for each of the rules that received comments. According to one bank regulator, the subject-matter experts assessed the comments across three aspects: (1) whether a suggested change to the regulation would reduce bank burdens; (2) how the change to the regulation would affect the safety and soundness of the banking system; and (3) whether a statutory change would be required to address the comment. The summaries drafted by the subject-matter experts then were shared with staff representing all three regulators and further revised. The staff of the three regulators said they then met jointly to analyze the merits of the comments and finalize the comment responses and the proposed actions for approval by senior management at all three regulators. In the 2017 report summarizing their assessment of the comments received, the regulators identified six significant areas in which commenters raised concerns: (1) capital rules, (2) financial condition reporting (Call Reports), (3) appraisal requirements, (4) examination frequency, (5) Community Reinvestment Act, and (6) BSA/AML. Based on our analysis of the 2017 report, the Federal Reserve, FDIC, and OCC had taken or pledged to take actions to address 11 of the 28 specific concerns commenters had raised across these six areas. We focused our analysis on issues within the six significant issues that affected the smaller institution and defined an action taken by the regulators as a change or revision to a regulation or the issuance of guidance. Capital rules. The regulators noted in the 2017 EGRPRA report that they received comment letters from more than 30 commenters on the recently revised capital requirements. Although some of the concerns commenters expressed related to issues affecting large institutions, some commenters sought to have regulators completely exempt smaller institutions from the requirements. Others objected to the amounts of capital that had to be held for loans made involving more volatile commercial real estate. In response, the regulators stated that the more than 500 failures of banks in the recent crisis, most of which were community banks, justified requiring all banks to meet the new capital requirements. However, they pledged in the report to make some changes, and have recently proposed rules that would alter some of the requirements. For example, on September 27, 2017, the regulators proposed several revisions to the capital requirements that would apply to banks not subject to the advanced approach requirements under the capital rules (generally, banks with less than $250 billion in assets and less than $10 billion in total foreign exposure). For example, the proposed rule simplifies the capital treatment for certain commercial acquisition, development, and construction loans, and would change the treatment of mortgage servicing assets. Call Reports. The regulators also received more than 30 comments relating to the reports—known as Call Reports—that banks file with the regulators outlining their financial condition and performance. Generally, the commenters requested relief (reducing the number of items required to be reported) for smaller banks and also asked that the frequency of reporting for some items be reduced. In response to these concerns, the regulators described a review of the Call Report requirements intended to reduce the number of items to be reported to the regulators. The regulators had started this effort to address Call Report issues soon after the most recent EGRPRA process had begun in June 2014. In the 2017 EGRPRA report, the regulators noted that they developed a new Call Report form for banks with assets of less than $1 billion and domestic offices only. For instance, according to the regulators, the new form reduced the number of items such banks had to report by 40 percent. Staff from the regulators told us that about 3,500 banks used the new small-bank reporting form in March 2017, which represented about 68 percent of the banks eligible to use the new form. OCC officials told us that an additional 100 federally chartered banks submitted the form for the 2017 second quarter reporting period. After the issuance of the 2017 EGRPRA report, in June 2017 the regulators issued additional proposed revisions to the three Call Report forms that banks are required to complete. These proposed changes are to become effective in June 2018. For example, one of the proposed changes to the new community bank Call Report form would change the frequency of reporting certain data on non-accrual assets— nonperforming loans that are not generating their stated interest rate— from quarterly to semi-annually. In November 2017, the agencies issued further proposed revision to the community bank Call Report that would delete or consolidate a number of items and add a new, or raise certain existing, reporting thresholds. The proposed revision would take effect as of June 2018. Appraisals. The three bank regulators and NCUA received more than 160 comments during the 2017 EGRPRA process related to appraisal requirements. The commenters included banks and others that sought to raise the size of the loans that require appraisals, and a large number of appraisers that objected to any changes in the requirements According to the EGRPRA report, several professional appraiser associations argued that raising the threshold could undermine the safety and soundness of lenders and diminish consumer protection for mortgage financing. These commenters argued that increasing the thresholds could encourage banks to neglect collateral risk-management responsibilities. In response, in July 2017, the regulators proposed raising the threshold for when an appraisal is required from $250,000 to $400,000 for commercial real estate loans. The regulators indicated that the appraisal requirements for 1-4 family residential mortgage loans above the current $250,000 would not be appropriate at the this time because they believed having such appraisals for loans above that level increased the safety of those loans and better protected consumers and because other participants in the housing market, such as the Department of Housing and Urban Development and the government-sponsored enterprises, also required appraisals for loans above that amount. However, the depository institution regulators included in the proposal a request for comment about the appraisal requirements for residential real estate and what banks think are other factors that should be included when considering the threshold for these loans. As part of the 2017 EGRPRA process, the regulators also received comments indicating that banks in rural areas were having difficulty securing appraisers. In the EGRPRA report, the regulators acknowledged this difficulty and in May 2017, the bank regulators and NCUA issued agency guidance on how institutions could obtain temporary waivers and use other means to expand the pool of persons eligible to prepare appraisals in cases in which suitable appraiser staff were unavailable. The agencies also responded to commenters who found the evaluation process confusing by issuing an interagency advisory on the process in March 2016. Evaluations may be used instead of an appraisal for certain transactions including those under the threshold. Frequency of safety and soundness examinations. As part of the 2017 EGRPRA process, the agencies also received comments requesting that they raise the total asset threshold for an insured depository institution to qualify for the extended 18-month examination cycle from $1 billion to $2 billion and to further extend the examinations cycle from 18 months to 36 months. During the EGRPRA process, Congress took legislative action to reduce examination frequency for smaller, well-capitalized banks. In 2015, the FAST Act raised the threshold for the 18-month examination cycle from less than $500 million to less than $1 billion for certain well-capitalized and well-managed depository institutions with an “outstanding” composite rating and gave the agencies discretion to similarly raise this threshold for certain depository institutions with an “outstanding” or “good” composite rating. The agencies exercised this discretion and issued a final rule in 2016 making qualifying depository institutions with less than $1 billion in total assets eligible for an 18-month (rather than a 12-month) examination cycle. According to the EGRPRA report, agency staff estimated that the final rules allowed approximately 600 more institutions to qualify for an extended 18-month examination cycle, bringing the total number of qualifying institutions to 4,793. Community Reinvestment Act. The commenters in the 2017 EGRPRA process also raised various issues relating to the Community Reinvestment Act, including the geographic areas in which institutions were expected to provide loans to low- and moderate-income borrowers and whether credit unions should be required to comply with the act’s requirements. The regulators noted that they were not intending to take any actions to revise regulations relating to this act because many of the revisions the commenters suggested would require changes to the statute (that is, legislative action). The regulators also noted that they had addressed some of the concerns by revising the Interagency Questions and Answers relating to this act in 2016. Furthermore, the agencies noted that they have been reviewing their existing examination procedures and practices to identify policy and process improvements. BSA/AML. The regulators also received a number of comments as part of the 2017 EGRPRA process on the burden institutions encounter in complying with BSA/AML requirements. These included the threshold for reporting currency transactions and suspicious activities. The regulators also received comments on both BSA/AML examination frequency and the frequency of safety and soundness examinations generally. Agencies typically review BSA/AML compliance programs during safety and soundness examinations. As discussed previously, regulators allowed more institutions of outstanding or good composite condition to be examined every 18 months instead of every 12 months. Institutions that qualify for less frequent safety-and-soundness examinations also will be eligible for less frequent BSA/AML examinations. For the remainder of the issues raised by commenters, the regulators noted they do not have the regulatory authority to revise the requirements but provided the comments to FinCEN, which has authority for these regulations. A letter with FinCEN’s response to the comments was included as an appendix of the EGRPRA report. In the letter, the FinCEN Acting Director stated that FinCEN would work through the issues raised by the comments with its advisory group consisting of regulators, law enforcement staff, and representatives of financial institutions. Additional Burden Reduction Actions. In addition to describing some changes in response to the comments deemed significant, the regulators’ 2017 report also includes descriptions of additional actions the individual agencies have taken or planned to take to reduce the regulatory burden for banks, including community banks. The Federal Reserve Board noted that it changed its Small Bank Holding Company Policy Statement that allows small bank holding companies to hold more debt than permitted for larger bank holding companies. In addition, the Federal Reserve noted that it had made changes to certain supervisory policies, such as issuing guidance on assessing risk management for banks with less than $50 billion in assets and launching an electronic application filing system for banks and bank holding companies. OCC noted that it had issued two final rules amending its regulations for licensing/chartering and securities-related filings, among other things. According to OCC staff, the agency conducted an internal review of its agency-specific regulations and many of the changes to these regulations came from the internal review. The agency also noted that it integrated its rules for national banks and federal savings associations where possible. In addition, OCC noted that it removed redundant and unnecessary information requests from those made to banks before examinations. FDIC noted that it had rescinded enhanced supervisory procedures for newly insured banks and reduced the consumer examination frequency for small and newly insured banks. Similarly to OCC, FDIC is integrating its rules for both non-state member banks and state- chartered savings and loans associations. In addition, FDIC noted it had issued new guidance on banks’ deposit insurance filings and reduced paperwork for new bank applications. The 2017 report also presents the results of NCUA’s concurrent efforts to obtain and respond to comments as part of the EGRPRA process. NCUA conducts its review separately from the bank regulators’ review. In four Federal Register notices in 2015, NCUA sought comments on 76 regulations that it administers. NCUA received about 25 comments raising concerns about 29 of its regulations, most of which were submitted by credit union associations. NCUA received no comments on 47 regulations. NCUA’s methodology for its regulatory review was similar to the bank regulators’ methodology. According to NCUA, all comment letters responding to a particular notice were collected and reviewed by NCUA’s Special Counsel to the General Counsel, an experienced, senior-level attorney with overall responsibility for EGRPRA compliance. NCUA staff told us that criteria applied by the Special Counsel in his review included relevance, depth of understanding and analysis exhibited by the comment, and degree to which multiple commenters expressed the same or similar views on an issue. The Special Counsel prepared a report summarizing the substance of each comment. The comment summary was reviewed by the General Counsel and circulated to the NCUA Board and reviewed by the Board members and staff. NCUA identified in its report the following as significant issues relating to credit union regulation: (1) field of membership and chartering; (2) member business lending; (3) federal credit union ownership of fixed assets; (4) expansion of national credit union share insurance coverage; and (5) expanded powers for credit unions. For these, NCUA took various actions to address the issues raised in the comments. For example, NCUA modified and updated its field of credit union membership by revising the definition of a local community, rural district and underserved area, which provided greater flexibility to federal credit unions seeking to add a rural district to their field of membership. NCUA also lessened some of the restrictions on member lending to small business; and raised some of the asset thresholds for what would be defined as a small credit union so that fewer requirements would apply to these credit unions. Also, in April 2016, the NCUA Board issued a proposed rule that would eliminate the requirement that federal credit unions must have a plan by which they will achieve full occupancy of premises within an explicit time frame. The proposal would allow for federal credit unions to plan for and manage their use of office space and related premises in accordance with their own strategic plans and risk-management policies. The bank and credit union regulators’ process for the 2007 EGRPRA review also began with Federal Register notices that requested comments on regulations. The regulators then reviewed and assessed the comments and issued a report in 2007 to Congress in which they noted actions they took in some of the areas raised by commenters. Our analysis of the regulators’ responses indicated that the regulators took responsive actions in a few areas. The regulators noted they already had taken action in some cases (including after completion of a pending study and as a result of efforts to work with Congress to obtain statutory changes). However, for the remaining specific concerns, the four regulators indicated that they would not be taking actions. Similar to its response in 2017, NCUA discussed its responses to the significant issues raised about regulations in a separate section of the 2007 report. Our analysis indicated that NCUA took responsive actions in about half of the areas. For example, NCUA adjusted regulations in one case and in another case noted previously taken actions. For comments related to three other areas, NCUA took actions not reflected in the 2007 report because the actions were taken over a longer time frame (in some cases, after 8 years). In the remaining areas, NCUA deemed actions as not being desirable in four cases and outside of its authority in two other cases. The bank regulators do not conduct other retrospective reviews of regulations outside of the EGRPRA process. We requested information from the Federal Reserve, FDIC, and OCC about any discretionary regulatory retrospective reviews that they performed in addition to the EGRPRA review during 2012–2016. All three regulators reported to us they have not conducted any retrospective regulatory reviews outside of EGRPRA since 2012. However, under the Regulatory Flexibility Act (RFA), federal agencies are required to conduct what are referred to as section 610 reviews. The purpose of these reviews is to determine whether certain rules should be continued without change, amended, or rescinded consistent with the objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of small entities. Section 610 reviews are to be conducted within 10 years of an applicable rule’s publication. As part of other work, we assessed the bank regulators’ section 610 reviews and found that the Federal Reserve, FDIC, and OCC conducted retrospective reviews that did not fully align with the Regulatory Flexibility Act’s requirements. Officials at each of the agencies stated that they satisfy the requirements to perform section 610 reviews through the EGRPRA review process. However, we found that the requirements of the EGRPRA reviews differ from those of the RFA-required section 610 reviews, and we made recommendations to these regulators to help ensure their compliance with this act in a separate report issued in January 2018. In addition to participating in the EGRPRA review, NCUA also reviews one-third of its regulations every year (each regulation is reviewed every 3 years). NCUA’s “one-third” review employs a public notice and comment process similar to the EGRPRA review. If a specific regulation does not receive any comments, NCUA does not review the regulation. For the 2016 one-third review, NCUA did not receive comments on 5 of 16 regulations and thus these regulations were not reviewed. NCUA made technical changes to 4 of the 11 regulations that received comments. In August 2017, NCUA staff announced they developed a task force for conducting additional regulatory reviews, including developing a 4-year agenda for reviewing and revising NCUA’s regulations. The primary factors they said they intend to use to evaluate their regulations will be the magnitude of the benefit and the degree of effort that credit unions must expend to comply with the regulations. Because the 4-year reviews will be conducted on all of NCUA’s regulations, staff noted that the annual one-third regulatory review process will not be conducted again until 2020. Our analysis of the EGRPRA review found three limitations to the current process. First, the EGRPRA statute does not include CFPB and thus the significant mortgage-related regulations and other regulations that it administers— regulations that banks and credit unions must follow—were not included in the EGRPRA review. Under the Dodd-Frank Act, CFPB was given financial regulatory authority, including for regulations implementing the Home Mortgage Disclosure Act (Regulation C); the Truth-in-Lending Act (Regulation Z); and the Truth-in-Savings Act (Regulation DD). These regulations apply to many of the activities that banks and credit unions conduct; the four depository institution regulators conduct the large majority of examinations of these institutions’ compliance with these CFPB-administered regulations. However, EGRPRA was not amended after the Dodd-Frank Act to include CFPB as one of the agencies that must conduct the EGRPRA review. During the 2017 EGRPRA review, the bank regulators only requested public comments on consumer protection regulations for which they have regulatory authority. But the banking regulators still received some comments on the key mortgage regulations and the other regulations that CFPB now administers. Our review of 2017 forum transcripts identified almost 60 comments on mortgage regulations, such as HMDA and TRID. The bank regulators could not address these mortgage regulation-related comments because they no longer had regulatory authority over these regulations; instead, they forwarded these comment letters to CFPB staff. According to CFPB staff, their role in the most recent EGRPRA process was very limited. CFPB staff told us they had no role in assessing the public comments received for purposes of the final 2017 EGRPRA report. According to one bank regulator, the bank regulators did not share non- mortgage regulation-related letters with CFPB staff because those comment letters did not involve CFPB regulations. Another bank regulator told us that CFPB was offered the opportunity to participate in the outreach meetings and were kept informed of the EGRPRA review during the quarterly FFIEC meetings that occurred during the review. Before the report was sent to Congress, CFPB staff said that they reviewed several late-stage drafts, but generally limited their review to ensuring that references to CFPB’s authority and regulations and its role in the EGRPRA process were properly characterized and explained. As a member of FFIEC, which issued the final report, CFPB’s Director was given an opportunity to review the report again just prior to its approval by FFIEC. CFPB must conduct its own reviews of regulations after they are implemented. Section 1022(d) of the Dodd-Frank Act requires CFPB to conduct an assessment of each significant rule or order adopted by the bureau under federal consumer financial law. CFPB must publish a report of the assessment not later than 5 years after the effective date of such rule or order. The assessment must address, among other relevant factors, the rule’s effectiveness in meeting the purposes and objectives of title X of the Dodd-Frank Act and specific goals stated by CFPB. The assessment also must reflect available evidence and any data that CFPB reasonably may collect. Before publishing a report of its assessment, CFPB must invite public comment on recommendations for modifying, expanding, or eliminating the significant rule or order. CFPB announced in Federal Register notices in spring 2017 that it was commencing assessments of rules related to Qualified Mortgage/Ability- to-Repay requirements, remittances, and mortgage servicing regulations. The notices described how CFPB planned to assess the regulations. In each notice, CFPB requested comment from the public on the feasibility and effectiveness of the assessment plan, data, and other factual information that may be useful for executing the plan; recommendations to improve the plan and relevant data; and data and other factual information about the benefits, costs, impacts, and effectiveness of the significant rule. Reports of these assessments are due in late 2018 and early 2019. According to CFPB staff, the requests for data and other factual information are consistent with the statutory requirement that the assessment must reflect available evidence and any data that CFPB reasonably may collect. The Federal Register notices also describe other data sources that CFPB has in-house or has been collecting pursuant to this requirement. CFPB staff told us that they have not yet determined whether certain other regulations that apply to banks and credit unions, such as the revisions to TRID and HMDA requirements, will be designated as significant and thus subjected to the one-time assessments. CFPB staff also told us they anticipate that within approximately 3 years after the effective date of a rule, it generally will have determined whether the rule is a significant rule for section 1022(d) assessment purposes. In tasking the bank regulators with conducting the EGRPRA reviews, Congress indicated its intent was to require these regulators to review all regulations that could be creating undue burden on regulated institutions. According to a Senate committee report relating to EGRPRA, the purpose of the legislation was to minimize unnecessary regulatory impediments for lenders, in a manner consistent with safety and soundness, consumer protection, and other public policy goals, so as to produce greater operational efficiency. Some in Congress have recognized that the omission of CFPB in the EGRPRA process is problematic, and in 2015 legislation was introduced to require that CFPB—and NCUA—formally participate in the EGRPRA review. Currently, without CFPB’s participation, key regulations that affect banks and credit unions may not be subject to the review process. In addition, these regulations may not be reviewed if CFPB does not deem them significant. Further, if reviewed, CFPB’s mandate is for a one-time, not recurring, review. CFPB staff told us that they have two additional initiatives designed to review its regulations, both of which have been announced in CFPB’s spring and fall 2017 Semiannual Regulatory Agendas. First, CFPB launched a program to periodically review individual existing regulations—or portions of large regulations—to identify opportunities to clarify ambiguities, address developments in the marketplace, or modernize or streamline provisions. Second, CFPB launched an internal task force to coordinate and bolster their continuing efforts to identify and relieve regulatory burdens, including with regard to small businesses such as community banks that potentially will address any regulation the agency has under its jurisdiction. Staff told us the agency has been considering suggestions it received from community banks and others on ways to reduce regulatory burden. However, CFPB has not provided public information specifically on the extent to which it intends to review regulations applicable to community banks and credit unions and other institutions or provided information on the timing and frequency of the reviews. In addition, it has not indicated the extent to which it will coordinate the reviews with the federal depository institution regulators as part of the EGRPRA reviews. Until CFPB publicly provides additional information indicating its commitment to periodically review the burden of all its regulations, community banks, credit unions, and other depository institutions may face diminished opportunities for relief from regulatory burden. Second, the federal depository institution regulators have not conducted or reported on quantitative analyses during the EGRPRA process to help them determine if changes to regulations would be warranted. Our analysis of the 2017 report indicated that in responses to comments in which the regulators did not take any actions, the regulators generally only provided their arguments against taking actions and did not cite analysis or data to support their narrative. In contrast, other federal agencies that are similarly tasked with conducting retrospective regulatory reviews are required to follow certain practices for such reviews that could serve as best practices for the depository institution regulators. For example, the Office of Management and Budget’s Circular A-4 guidance on regulatory analysis notes that a good analysis is transparent and should allow qualified third parties reviewing such analyses to clearly see how estimates and conclusions were determined. In addition, executive branch agencies that are tasked under executive orders to conduct retrospective reviews of regulations they issue generally are required under these orders to collect and analyze quantitative data as part of assessing the costs and benefits of changing existing regulations. However, EGRPRA does not require the regulators to collect and report on any quantitative data they collected or analyzed as part of assessing the potential burden of regulations. Conducting and reporting on how they analyzed the impact of potential regulatory changes to address burden could assist the depository institution regulators in conducting their EGRPRA reviews. For example, as discussed previously, Community Reinvestment Act regulations were deemed a significant issue, with commenters questioning the relevance of requiring small banks to make community development loans and suggesting that the asset threshold for this requirement be raised from $1 billion to $5 billion. The regulators told us that if the thresholds were raised, then community development loans would decline, particularly in underserved communities. However, regulators did not collect and analyze data for the EGRPRA review to determine the amount of community development loans provided by banks with assets of less than $1 billion; including a discussion of quantitative analysis might have helped show that community development loans from smaller community banks provided additional credit in communities—and thus helped to demonstrate the benefits of not changing the requirement as commenters requested. By not performing and reporting quantitative analyses where appropriate in the EGRPRA review, the regulators may be missing opportunities to better assess regulatory impacts after a regulation has been implemented, including identifying the need for any changes or benefits from the regulations and making their analyses more transparent to stakeholders. As the Office of Management and Budget’s Circular A-4 guidance on the development of regulatory analysis noted, sound quantitative estimates of costs and benefits, where feasible, are preferable to qualitative descriptions of benefits and costs because they help decision makers understand the magnitudes of the effects of alternative actions. By not fully describing their rationale for the analyses that supported their decisions, regulators may be missing opportunities to better communicate their decisions to stakeholders and the public. Lastly, in the EGRPRA process, the federal depository institution regulators have not assessed the ways that the cumulative burden of the regulations they administer may have created overlapping or duplicative requirements. Under the current process, the regulators have responded to issues raised about individual regulations based on comments they have received, not on bodies of regulations. However, congressional intent in tasking the depository institution regulators with the EGRPRA reviews was to ensure that they considered the cumulative effect of financial regulations. A 1995 Senate Committee on Banking, Housing, and Urban Affairs report stated while no one regulation can be singled out as being the most burdensome, and most have meritorious goals, the aggregate burden of banking regulations ultimately affects a bank’s operations, its profitability, and the cost of credit to customers. For example, financial regulations may have created overlapping or duplicative regulations in the areas of safety and soundness. One primary concern noted in the EGRPRA 2017 report was the amount of information or data banks are required to provide to regulators. For example, the cumulative burden of information collection was raised by commenters in relation to Call Reports, Community Reinvestment Act, and BSA/AML requirements. But in the EGRPRA report, the regulators did not examine how the various reporting requirements might relate to each other or how they might collectively affect institutions. In contrast, the executive branch agencies that conduct retrospective regulatory reviews must consider the cumulative effects of their own regulations, including cumulative burdens. For example, Executive Order 13563 directs agencies, to the extent practicable, to consider the costs of cumulative regulations. Executive Order 13563 does not apply to independent regulatory agencies such as the Federal Reserve, FDIC, OCC, NCUA, or CFPB. A memorandum from the Office of Management and Budget provided guidance to the agencies required to follow this order for assessing the cumulative burden and costs of regulations. The actions suggested for careful consideration include conducting early consultations with affected stakeholders to discuss potential interactions between rulemaking under consideration and existing regulations as well as other anticipated regulatory requirements. The executive order also directs agencies to consider regulations that appear to be attempting to achieve the same goal. However, other researchers often acknowledge that cumulative assessments of burden are difficult. Nevertheless, until the Federal Reserve, FDIC, OCC, and NCUA identify ways to consider the cumulative burden of regulations, they may miss opportunities to streamline bodies of regulations to reduce the overall compliance burden among financial institutions, including community banks and credit unions. For example, regulations applicable to specific activities of banks, such as lending or capital, could be assessed to determine if they have overlapping or duplicative requirements that could be revised without materially reducing the benefits sought by the regulations. New regulations for financial institutions enacted in recent years have helped protect mortgage borrowers, increase the safety and soundness of the financial system, and facilitate anti-terrorism and anti-money laundering efforts. But the regulations also entail compliance burdens, particularly for smaller institutions such as community banks and credit unions, and the cumulative burden on these institutions can be significant. Representatives from the institutions with which we spoke cited three sets of regulations—HMDA, BSA/AML, and TRID—as most burdensome for reasons that included their complexity. In particular, the complexity of TRID regulations appears to have contributed to misunderstandings that in turn caused institutions to take unnecessary actions. While regulators have acted to reduce burdens associated with the regulations, CFPB has not assessed the effectiveness of its TRID guidance. Federal internal control standards require agencies to analyze and respond to risks to achieving their objectives, and CFPB’s objectives include addressing regulations that are unduly burdensome. Assessing the effectiveness of TRID guidance represents an opportunity to reduce misunderstandings that create additional burden for institutions and also affect individual consumers (for instance, by delaying mortgage closings). The federal depository institution regulators (FDIC, Federal Reserve, OCC, as well as NCUA) also have opportunities to enhance the activities they undertake during EGRPRA reviews. Congress intended that the burden of all regulations applicable to depository institutions would be periodically assessed and reduced through the EGRPRA process. But because CFPB has not been included in this process, the regulations for which it is responsible were not assessed, and CFPB has not yet provided public information about what regulations it will review, and when, and whether it will coordinate with other regulators during EGPRA reviews. Until such information is publicly available, the extent to which the regulatory burden of CFPB regulation will be periodically addressed remains unclear. The effectiveness of the EGRPRA process also has been hampered by other limitations, including not conducting and reporting on depository institution regulators’ analysis of quantitative data and assessing the cumulative effect of regulations on institutions. Addressing these limitations in their EGRPRA processes likely would make the analyses the regulators perform more transparent, and potentially result in additional burden reduction. We make a total of 10 recommendations, which consist of 2 recommendations to CFPB, 2 to FDIC, 2 to the Federal Reserve, 2 to OCC, and 2 to NCUA. The Director of CFPB should assess the effectiveness of TRID guidance to determine the extent to which TRID’s requirements are accurately understood and take steps to address any issues as necessary. (Recommendation 1) The Director of CFPB should issue public information on its plans for reviewing regulations applicable to banks and credit unions, including information describing the scope of regulations the timing and frequency of the reviews, and the extent to which the reviews will be coordinated with the federal depository institution regulators as part of their periodic EGRPRA reviews. (Recommendation 2) The Chairman, FDIC, should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 3) The Chairman, FDIC, should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities for streamlining bodies of regulation. (Recommendation 4) The Chair, Board of Governors of the Federal Reserve System, should, as part of the EGRPRA process develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 5) The Chair, Board of Governors of the Federal Reserve System, should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 6) The Comptroller of the Currency should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 7) The Comptroller of the Currency should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 8) The Chair of NCUA should, as part of the EGRPRA process, develop plans for their regulatory analyses describing how they will conduct and report on quantitative analysis whenever feasible to strengthen the rigor and transparency of the EGRPRA process. (Recommendation 9) The Chair of NCUA should, as part of the EGRPRA process, develop plans for conducting evaluations that would identify opportunities to streamline bodies of regulation. (Recommendation 10) We provided a draft of this report to CFPB, FDIC, FinCEN, the Federal Reserve, NCUA, and OCC. We received written comments from CFPB, FDIC, the Federal Reserve, NCUA, and OCC that we have reprinted in appendixes II through VI, respectively. CFPB, FDIC, FinCEN, the Federal Reserve, NCUA, and OCC also provided technical comments, which we incorporated as appropriate. In its written comments, CFPB agreed with the recommendation to assess its TRID guidance to determine the extent to which it is understood. CFPB stated it intends to solicit public input on how it can improve its regulatory guidance and implementation support. In addition, CFPB agreed with the recommendation on issuing public information on its plan for reviewing regulations. CFPB committed to developing additional plans with respect to their reviews of key regulations and to publicly releasing such information and in the interim, CFPB stated it intends to solicit public input on how it should approach reviewing regulations. FDIC stated that it appreciated the two recommendations and stated that it would work with the Federal Reserve and OCC to find the most appropriate ways to ensure that the three regulators continue to enhance their rulemaking analyses as part of the EGRPRA process. In addition, FDIC stated that as part of the EGRPRA review process, it would continue to monitor the cumulative effects of regulation through for example, a review of the community and quarterly banking studies and community bank Call Report data. The Federal Reserve agreed with the two recommendations pertaining to the EGRPRA process. Regarding the need conduct and report on quantitative analysis whenever feasible to strengthen and to increase the transparency of the EGRPRA process, the Federal Reserve plans to coordinate with FDIC and OCC to identify opportunities to conduct quantitative analyses where feasible during future EGRPRA reviews. With respect to the second recommendation, the Federal Reserve agreed that the cumulative impact of regulations on depository institutions is important and plans to coordinate with FDIC and OCC to identify further opportunities to seek comment on bodies of regulations and how they could be streamlined. NCUA acknowledged the report’s conclusions as part of their voluntary compliance with the EGRPRA process; NCUA should improve its qualitative analysis and develop plans for continued reductions to regulatory burden within the credit union industry. In its letter, NCUA noted it has appointed a regulatory review task force charged with reviewing and developing a four-year plan for revising their regulations and the review will consider the benefits of NCUA’s regulations as well as the burden they have on credit unions. In its written comments, OCC stated that it understood the importance of GAO’s recommendations. They stated they OCC will consult and coordinate with the Federal Reserve and FDIC to develop plans for regulatory analysis, including how the regulators should conduct and report on quantitative analysis and also, will work with these regulators to increase the transparency of the EGRPRA process. OCC also stated it will consult with these regulators to develop plans, as part of the EGRPRA process, to conduct evaluations that identify ways to decrease the regulatory burden created by bodies of regulations. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to CFPB, FDIC, FinCEN, the Federal Reserve, NCUA, and OCC. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8678 or evansl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. This report examines the burdens that regulatory compliance places on community banks and credit unions and actions that federal regulators have taken to reduce these burdens; specifically: (1) the financial regulations that community banks and credit unions reported viewing as the most burdensome, the characteristics of those regulations that make them burdensome, and the benefits are associated with those regulations and (2) federal financial regulators’ efforts to reduce any existing regulatory burden on community banks and credit unions. To identify the regulations that community banks and credit unions viewed as the most burdensome, we first constructed a sample frame of financial institutions that met certain criteria for being classified as community banks or community-focused credit unions for the purposes of this review. These sample frames were then used as the basis for drawing our non-probability samples of institutions for purposes of interviews, focus group participation, and document review. Defining a community bank is important because, as we have reported, regulatory compliance may be more burdensome for community banks and credit unions than for larger banks because they are not as able to benefit from economies of scale in compliance resources. While there is no single consensus definition for what constitutes a community bank, we reviewed criteria for defining community banks developed by the Federal Deposit Insurance Corporation (FDIC), officials from the Independent Community Bankers Association, the Office of the Comptroller of the Currency (OCC). Based on this review, we determined that institutions that had the following characteristics would be the most appropriate to include in our universe of institutions, (1) fewer total assets, (2) engage in traditional lending and deposit taking activities, have limited geographic scope, and (3) did not have complex operating structures. To identify banks that met these characteristics, we began with all banks that filed a Consolidated Reports of Condition and Income (Call Report) for the first quarter of 2016 (March 31, 2016) and are not themselves subsidiaries of another bank that filed a Call Report. We then excluded banks using an asset-size threshold, to ensure we are including only small institutions. Based on interviews with regulators and our review of the FDIC’s community bank study, we targeted institutions around the $1 billion in assets as the group that could be relatively representative of the experiences of many community banks in complying with regulations. Upon review of the Call Reports data, we found that the banks in the 90th percentile by asset size were had about $1.2 billion, and we selected this to be an appropriate cutoff for our sample frame. In addition we excluded institutions with characteristics suggesting they do not engage in typical community banking activities like such as deposit-taking and lending; and those with characteristics suggesting they conduct more specialized operations not typical of community banking, such as credit card banks. In addition to ensure that we excluded banks whose views of regulatory compliance might be influenced by being part of a large and/or complex organization, we also excluded banks with foreign offices and banks that are subsidiaries of either foreign banks or of holding companies with $50 billion or more in consolidated assets. Finally, as a practical matter, we excluded banks for which we could not obtain data on one or more of the characteristics listed below. We also relied on a similar framework to construct a sample frame for credit unions. We sought to identify credit unions that were relatively small, engaged in traditional lending and deposit taking activities, and had limited geographic scope. To do this, we began with all insured credit unions that filed a Call Report for the first quarter of 2016 (March 31, 2016). We then excluded credit unions using an asset-size threshold of $860 million, which is the 95th percentile of credit unions, to ensure we are including only smaller institutions. The percentile of credit unions was higher than the percentile of banks because there are more large banks than there are credit unions. We then excluded credit unions that did not engage in activities that are typical of community lending, such as taking deposits, making loans and leases, and providing consumer checking accounts, as well as those credit unions with headquarters outside of the United States. We assessed the reliability of data from FFIEC, FDIC, the Federal Reserve Bank of Chicago, and NCUA by reviewing relevant documentation and electronically testing the data for missing values or obvious errors, and we found the data from these sources to be sufficiently reliable for the purpose of creating sample frames of community banks and credit unions. The sample frames were then used as the basis for drawing our nonprobability samples of institutions for purposes of interviews and focus groups. To identify regulations that community banks and credit unions viewed as among the most burdensome, we conducted structured interviews and focus groups with a sample of a total of 64 community banks and credit unions. To reduce the possibility of bias, we selected the institutions to ensure that banks and credit unions with different asset sizes and from different regions of the country were included. We also included at least one bank overseen by each of the three primary federal depository institution regulators, Federal Reserve, FDIC, NCUA, and OCC in the sample. We interviewed 17 institutions (10 banks and 7 credit unions) about which regulations their institutions experienced the most compliance burden. On the basis of the results of these interviews, we determined that considerable consensus existed among these institutions as to which regulations were seen as most burdensome, including those relating to mortgage fees and terms disclosures to consumers, mortgage borrower and loan characteristics reporting, and anti-money laundering activities. As a result, we determined to conduct focus groups with institutions to identify the characteristics of the regulations identified in our interviews that made these regulations burdensome. To identify the burdensome characteristics of the regulations identified in our preliminary interviews, we selected institutions to participate in three focus groups of community banks and three focus groups of credit unions. For the first focus group of community banks, we randomly selected 20 banks among 647 banks between $500 million and $1 billion located in nine U.S. census geographical areas using the sample frame of community banks we developed, and contacted them asking for their participation. Seven of the 20 banks agreed to participate in the first focus group. However, mortgages represented a low percentage of the assets of two participants in the first focus group, so we revised our selection criteria because two of the regulations identified as burdensome were related to mortgages. For the remaining two focus groups with community banks, we randomly selected institutions with more than $45 million and no more than $1.2 billion in assets to ensure that they would be required to comply with the mortgage characteristics reporting and with at least a 10 percent mortgage to asset ratio to better ensure that they would be sufficiently experienced with mortgage regulations. After identifying the large percentage of FDIC regulated banks in the first 20 banks we contacted, we decided to prioritize contact with banks regulated by OCC and the Federal Reserve for the institutions on our list. When banks declined or when we determined an institution merged or was acquired, we selected a new institution from that state and preferenced institutions regulated by OCC and the Federal Reserve. The three focus groups totaled 23 community banks with a range of assets. We used a similar selection process for three focus groups of credit unions consisting of 23 credit unions. We selected credit unions with at least $45 million in assets so that they would be required to comply with the mortgage regulations and with at least a 10 percent mortgage-to-asset ratio. During each of the focus groups, we asked the representatives from participating institutions what characteristics of the relevant regulations made them burdensome with which to comply. We also polled them about the extent to which they had to take various actions to comply with regulations, including hiring or expanding staff resources, investing in additional information technology resources, or conducting staff training. During the focus groups, we also confirmed with the participants that the three sets of regulations (on mortgage fee and other disclosures to consumers, reporting of mortgage borrower and loan characteristics, and anti-money laundering activities) were generally the ones they found most burdensome. To identify in more detail the steps a community bank or credit union may take to comply with the regulations identified as among the most burdensome, we also conducted an in-depth on-site interview with one community bank. We selected this institution by limiting the community bank sample to only those banks in the middle 80 percent of the distribution in terms of assets, mortgage lending, small business lending, and lending in general that were no more than 70 miles from Washington, D.C. We limited the sample in this way to ensure that the institution was not an outlier in terms of activities or size, and to limit the travel resources needed to conduct the site visit. We also interviewed associations representing consumers to understand the benefits of these regulations. These groups were selected using professional judgement of their knowledge of relevant banking regulations. We interviewed associations representing banks and credit unions. To identify the requirements of the regulations identified as among the most burdensome, we reviewed the Home Mortgage Disclosure Act (HMDA) and its implementing regulation, Regulation C; Bank Secrecy Act and anti-money laundering (BSA/AML) regulations, including those deriving from the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (BSA), and the 2001 USA PATRIOT Act; and the Integrated Mortgage Disclosure Rule Under the Real Estate Settlement Procedures Act (RESPA) with the implementing Regulation X; and the Truth-in-Lending Act (TILA) with implementing Regulation Z. We reviewed the Consumer Financial Protection Bureau’s (CFPB) small entity guidance and supporting materials on the TILA- RESPA Integrated Disclosure (TRID) regulation and HMDA to clarify the specific requirements of each rule and to analyze the information included in the CFPB guidance. We interviewed staff from each of the federal regulators responsible for implementing the regulations, as well as from the federal regulators responsible for examining community banks and credit unions. To identify the potential benefits of the regulations that were considered burdensome by community banks and credit unions, we interviewed representatives from four community groups to document their perspectives on the benefits provided by the identified regulations. To determine whether the bank regulators had required banks to comply with certain provisions from which the institutions might be exempt, we identified eight exemptions from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 from which community banks and credit unions should be exempt and reviewed a small group of the most recent examinations to identify instances in which a regulator may not have applied an exemption for which a bank was eligible. We reviewed 20 safety and soundness and consumer compliance examination reports of community banks and eight safety and soundness examination reports of credit unions. The bank examination reports we reviewed were for the first 20 community banks we contacted requesting participation in the first focus group. The bank examination reports included examinations from all three bank regulators (FDIC, Federal Reserve, and OCC). The NCUA examination reports we reviewed were for the eight credit unions that participated in the second focus group of credit unions. Because of the limited number of the examinations we reviewed, we cannot generalize whether regulators extended the exemptions to all qualifying institutions. To assess the federal financial regulators’ efforts to reduce the existing regulatory burden on community banks and credit unions, we identified the mechanisms the regulators used to identify burdensome regulations and actions to reduce potential burden. We reviewed laws and congressional and agency documentation. More specifically, we reviewed the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) that requires the Federal Reserve, FDIC, and OCC to review all their regulations every 10 years and identify areas of the regulations that are outdated, unnecessary, or unduly burdensome and reviewed the 1995 Senate Banking Committee report, which described the intent of the legislation. We reviewed the Federal Register notices that bank regulators and NCUA published requesting comments on their regulations. We also reviewed over 200 comment letters that the regulators had received through the EGRPRA process from community banks, credit unions, their trade associations, and others, as well as the transcripts of all six public forums regulators held as part the 2017 EGRPRA regulatory review efforts they conducted. We analyzed the extent to which the depository institutions regulators addressed the issues raised in comments received for the review. In assessing the 2017 and 2007 EGRPRA reports sent to Congress, we reviewed the significant issues identified by the regulators and determined the extent to which the regulators proposed or took actions in response to the comments relating to burden on small entities. We compared the requirements of Executive Orders 12866, 13563, and 13610 issued by Office of Management and Budget with the actions taken by the regulators in implementing their 10-year regulatory retrospective review. The executive orders included requirements on how executive branch agencies should conduct retrospective reviews of their regulations. For both objectives, we interviewed representatives from CFPB, FDIC, Federal Reserve, Financial Crimes Enforcement Network, NCUA, and OCC to identify any steps that regulators took to reduce the compliance burden associated with each of the identified regulations and to understand how they conduct retrospective reviews. We also interviewed representatives of the Small Business Administration’s Office of Advocacy, which reviews and comments on the burdens of regulations affecting small businesses, including community banks. We conducted this performance audit from March 2016 to February 2018 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, Cody J. Goebel (Assistant Director); Nancy Eibeck (Analyst in Charge); Bethany Benitez; Kathleen Boggs; Jeremy A. Conley; Pamela R. Davidson; Courtney L. LaFountain; William V. Lamping; Barbara M. Roesmann; and Jena Y. Sinkfield made key contributions to this report.

 

 Report 2:
FEMA’s mission is to help people before, during, and after disasters. It provides assistance to those affected by emergencies and disasters by supplying immediate needs (e.g., ice, water, food, and temporary housing) and providing financial assistance grants for damage to personal or public property. FEMA also provides non-disaster assistance grants to improve the nation’s preparedness, readiness, and resilience to all hazards. FEMA accomplishes a large part of its mission through awarding grants to state, local, and tribal governments and nongovernmental entities to help communities prevent, prepare for, protect against, mitigate the effects of, respond to, and recover from disasters and terrorist attacks. As previously mentioned, for fiscal years 2005 through 2014, the agency obligated about $104.5 billion in disaster relief grants. In addition, as of April 2018, the four major disasters in 2017—hurricanes Harvey, Irma, and Maria; and the California wildfires—had resulted in over $22 billion in FEMA grants. The current FEMA grants management environment is highly complex with many stakeholders, IT systems, and users. Specifically, this environment is comprised of 45 active disaster and non-disaster grant programs, which are grouped into 12 distinct grant categories. For example, one program in the Preparedness: Fire category is the Assistance to Firefighters Grants (AFG) program, which provides grants to fire departments, nonaffiliated emergency medical service organizations, and state fire training academies to support firefighting and emergency response needs. As another example, the Housing Assistance grant program is in the Recovery Assistance for Individuals category and provides financial assistance to individuals and households in geographical areas that have been declared an emergency or major disaster by the President. Table 1 lists FEMA’s non-disaster and disaster-based grant categories. According to FEMA, the processes for managing these different types of grants vary because the grant programs were developed independently by at least 18 separate authorizing laws that were enacted over a 62-year period (from 1947 through 2009). The various laws call for different administrative and reporting requirements. For example, the Robert T. Stafford Disaster Relief and Emergency Assistance Act, as amended, established the statutory authority for 11 of the grant programs, such as the administration of Public Assistance and Individual Assistance grant programs after a presidentially declared disaster. The act also requires the FEMA Administrator to submit an annual report to the President and Congress covering FEMA’s expenditures, contributions, work, and accomplishments, pursuant to the act. As another example, the National Dam Safety Program Act established one of the grant programs aimed at providing financial assistance to improve dam safety. Key stakeholders in modernizing the IT grants management environment include the internal FEMA officials that review, approve, and monitor the grants awarded, such as grant specialists, program analysts, and supervisors. FEMA has estimated that it will need to support about 5,000 simultaneous internal users of its grants management systems. Other users include the grant recipients that apply for, receive, and submit reports on their grant awards; these are considered the external system users. These grant recipients can include individuals, states, local governments, Indian tribes, institutions of higher education, and nonprofit organizations. FEMA has estimated that there are hundreds of thousands of external users of its grants systems. The administration of the many different grant programs is distributed across four divisions within FEMA’s organizational structure. Figure 1 provides an overview of FEMA’s organizational structure and the divisions that are responsible for administering grants. Within three of the four divisions—Resilience, United States Fire Administration, and Office of Response and Recovery—16 different grant program offices are collectively responsible for administering the 45 grant programs. The fourth division consists of 10 regional offices that help administer grants within their designated geographical regions. For example, the Office of Response and Recovery division oversees three different offices that administer 13 grant programs that are largely related to providing assistance in response to presidentially declared disasters. Figure 2 shows the number of grant programs administered by each of the four divisions’ grant program and regional offices. In addition, appendix II lists the names of the 45 grant programs. FEMA’s OCIO is responsible for developing, enhancing, and maintaining the agency’s IT systems, and for increasing efficiencies and cooperation across the entire organization. However, we and the DHS Office of Inspector General (OIG) have previously reported that the grant programs and regional offices develop information systems independent of the OCIO and that this has contributed to the agency’s disparate IT environment. We and the DHS OIG have reported that this disparate IT environment was due, in part, to FEMA’s decentralized IT budget and acquisition practices. For example, from fiscal years 2010 through 2015, the OCIO’s budget represented about one-third of the agency’s IT budget, with the grant program offices accounting for the remaining two-thirds of that budget. In February 2018, the OIG found that FEMA had shown limited progress in improving its IT management and that many of the issues reported in prior audits remained unchanged. As such, the OIG initiated a more comprehensive audit of the agency’s IT management that is ongoing. FEMA has identified 10 primary legacy IT systems that support its grants management activities. According to the agency, most of these systems were developed to support specific grant programs or grant categories. Table 2 summarizes the 10 primary legacy systems. According to FEMA officials, the 10 primary grant systems are all in operation (several have been for decades) and are not interoperable. As a result, individual grant programs and regional offices have independently developed work arounds intended to address existing capability gaps with the primary systems. FEMA officials stated that while these work arounds have helped the agency partially address capability gaps with its primary systems, they are often nonstandardized processes, and introduce the potential for information security risks and errors. This environment has contributed to labor-intensive manual processes and an increased burden for grant recipients. The disparate systems have also led to poor information sharing and reporting capabilities, as well as difficulty reconciling financial data. The DHS OIG and we have previously highlighted challenges with FEMA’s past attempts to modernize its grant management systems. For example, In December 2006, the DHS OIG reported that EMMIE, an effort to modernize its grants management systems and provide a single grants processing solution, was being developed without a clear understanding and definition of the future solution. The report also identified the need to ensure crosscutting participation from headquarters, regions, and states in developing and maintaining a complete, documented set of FEMA business and system requirements. In April 2016, we found weaknesses in FEMA’s development of the EMMIE system. For example, we noted that the system was implemented without sufficient documentation of system requirements, an acquisition strategy, up-to-date cost estimate and schedule, total amount spent to develop the system, or a systems integration plan. In response to our findings and related recommendations, FEMA took action to address these issues. For example, the agency implemented a requirements management process that, among other things, provided guidance to programs on analyzing requirements to ensure that they are complete and verifiable. We reported in November 2017 that EMMIE lacked the ability to collect information on all pre-award activities and, as a result, agency officials said that they and applicants used ad hoc reports and personal tracking documents to manage and monitor the progress of grant applications. FEMA officials added that applicants often struggled to access the system and that the system was not user friendly. Due to EMMIE’s shortfalls, the agency had to develop another system in 2017 to supplement EMMIE with additional grant tracking and case management capabilities. FEMA initiated GMM in 2015, in part, due to EMMIE’s failed attempt to modernize the agency’s grants management environment. The program is intended to modernize and streamline the agency’s grants management environment. To help streamline the agency’s grants management processes, the program established a standard framework intended to represent a common grants management lifecycle. The framework consists of five sequential phases—pre-award, award, post-award, closeout, and post- closeout—along with a sixth phase dedicated to continuous grant program management activities, such as analyzing data and producing reports on grant awards and managing IT systems. FEMA also established 43 distinct business functions associated with these six lifecycle phases. Figure 3 provides the general activities that may occur in each of the grant lifecycle phases, but specific activities would depend on the type of grant being administered (i.e., disaster versus non-disaster). GMM is expected to be implemented within the complex IT environment that currently exists at FEMA. For example, the program is intended to replace the 10 legacy grants management systems, and potentially many additional subsystems, with a single IT system. Each of the 10 legacy systems was developed with its own database(s) and with no standardization of the grants management data and, according to FEMA officials, this legacy data has grown significantly over time. Accordingly, FEMA will need to migrate, analyze, and standardize the grants management data before transitioning it to GMM. The agency awarded a contract in June 2016 to support the data migration efforts for GMM. The agency also implemented a data staging environment in October 2017 to migrate the legacy data and identify opportunities to improve the quality of the data. Further, the GMM system is expected to interface with a total of 38 other systems. These include 19 systems external to DHS (e.g., those provided by commercial entities or other federal government agencies) and 19 systems internal to DHS or FEMA. Some of the internal FEMA systems are undergoing their own modernization efforts and will need to be coordinated with GMM, such as the agency’s financial management systems, national flood insurance systems, and enterprise data warehouses. For example, FEMA’s Financial Systems Modernization Program was originally expected to deliver a new financial system in time to interface with GMM. However, the financial modernization has been delayed until after GMM is to be fully implemented; thus, GMM will instead need to interface with the legacy financial system. As a result, GMM is in the process of removing one of its key performance parameters in the acquisition program baseline related to financial systems interoperability and timeliness of data exchanged. In May 2017, DHS approved the acquisition program baseline for GMM. The baseline estimated the total lifecycle costs to be about $251 million, initial operational capability to be achieved by September 2019, and full operational capability to be achieved by September 2020. FEMA intends to develop and deploy its own software applications for GMM using a combination of commercial-off-the-shelf software, open source software, and custom developed code. The agency plans to rely on an Agile software development approach. According to FEMA planning documentation, the agency plans to fully deliver GMM by September 2020 over eight Agile development increments. Agile development is a type of incremental development, which calls for the rapid delivery of software in small, short increments. Many organizations, especially in the federal government, are accustomed to using a waterfall software development model. This type of model typically consists of long, sequential phases, and differs significantly from the Agile development approach. We have previously reported that DHS has sought to establish Agile software development as the preferred method for acquiring and delivering IT capabilities. However, the department has not yet completed critical actions necessary to update its guidance, policies, and practices for Agile programs, in areas such as, developing lifecycle cost estimates, managing IT requirements, testing and evaluation, oversight at key decision points, and ensuring cybersecurity. (See appendix III for more details on the Agile software development approach.) FEMA’s acquisition approach includes using contract support to assist with the development and deployment efforts. The agency selected a public cloud environment to host the computing infrastructure. In addition, from March through July 2017, the agency used a short-term contract aimed at developing prototypes of GMM functionality for grant tracking and monitoring, case management of disaster survivors, grant reporting, and grant closeout. The agency planned to award a second development contract by December 2017 to complete the GMM system (beyond the prototypes) and to begin this work in September 2018. However, due to delays in awarding the second contract to develop the complete GMM system, in January 2018, the program extended the scope and time frames of the initial short-term prototype contract for an additional year to develop the first increment of the GMM system— referred to as the AFG pilot. On August 31, 2018, FEMA awarded the second development contract, which is intended to deliver the remaining functionality beyond the AFG pilot (i.e., increments 2 through 8). FEMA officials subsequently issued a 90-day planning task order for the Agile development contractor to define the work that needs to be done to deliver GMM and the level of effort needed to accomplish that work. However, the planning task order was paused after a bid protest was filed with GAO in September 2018. According to FEMA officials, they resumed work on the planning task order after the bid protest was withdrawn by the protester on November 20, 2018, and then the work was paused again during the partial government shutdown from December 22, 2018, through January 25, 2019. FEMA began working on the AFG pilot—GMM’s first increment—in January 2018. This increment was intended to pilot GMM’s use of Agile development methods to replace core functionality for the AFG system (i.e., one of the 10 legacy systems).This system supports three preparedness/fire-related grant programs—Assistance to Firefighters Grants Program, Fire Prevention and Safety Grant Program, and Staffing for Adequate Fire and Emergency Response Grant Program. According to FEMA officials, the AFG system was selected as the first system to be replaced because it is costly to maintain and the DHS OIG had identified cybersecurity concerns with the system. Among the 43 GMM business functions discussed earlier in this report, FEMA officials specified 19 functions to be delivered in the AFG pilot. Figure 4 shows the planned time frames for delivering the AFG pilot in increment 1 (which consisted of four 3-month Agile development sub- increments), as of August 2018. As of August 2018, the program was working on sub-increment 1C of the pilot. In September 2018, GMM deployed its first set of functionality to a total of 19 AFG users—which included seven of 169 total internal AFG users, and 12 of more than 153,000 external AFG users. The functionality supported four of the 19 business functions that are related to the closeout of grants (i.e., the process by which all applicable administrative actions and all required work to award a grant have been completed). This functionality included tasks such as evaluation of final financial reports submitted by grant recipients and final reconciliation of finances (e.g., final disbursement to recipients and return of unobligated federal funds). According to FEMA officials, closeout functionality was selected first for deployment because it was the most costly component of the legacy AFG system to maintain, as it is an entirely manual and labor-intensive process. The remaining AFG functionality and remaining AFG users are to be deployed by the end of the AFG pilot. The GMM program is executed by a program management office, which is overseen by a program manager and program executive. This office is responsible for directing the day-to-day operations and ensuring completion of GMM program goals and objectives. The program office resides within the Office of Response and Recovery, which is headed by an Associate Administrator who reports to the FEMA Administrator. In addition, the GMM program executive (who is also the Regional Administrator for FEMA Region IX) reports directly to the FEMA Administrator. GMM is designated as a level 2 major acquisition, which means that it is subject to oversight by the DHS acquisition review board. The board is chaired by the DHS Undersecretary for Management and is made up of executive-level members, such as the DHS Chief Information Officer. The acquisition review board serves as the departmental executive board that decides whether to approve GMM through key acquisition milestones and reviews the program’s progress and its compliance with approved documentation every 6 months. The board approved the acquisition program baseline for GMM in May 2017 (i.e., estimated costs to be about $251 million and full operational capability to be achieved by September 2020). In addition, the program is reviewed on a monthly basis by FEMA’s Grants Management Executive Steering Group. This group is chaired by the Deputy Administrator of FEMA. Further, DHS’s Financial Systems Modernization Executive Steering Committee, chaired by the DHS Chief Financial Officer, meets monthly and is to provide guidance, oversight, and support to GMM. For government organizations, including FEMA, cybersecurity is a key element in maintaining the public trust. Inadequately protected systems may be vulnerable to insider threats. Such systems are also vulnerable to the risk of intrusion by individuals or groups with malicious intent who could unlawfully access the systems to obtain sensitive information, disrupt operations, or launch attacks against other computer systems and networks. Moreover, cyber-based threats to federal information systems are evolving and growing. Accordingly, we designated cybersecurity as a government-wide high risk area 22 years ago, in 1997, and it has since remained on our high-risk list. Federal law and guidance specify requirements for protecting federal information and information systems. The Federal Information Security Modernization Act (FISMA) of 2014 requires executive branch agencies to develop, document, and implement an agency-wide cybersecurity program to provide security for the information and information systems that support operations and assets of the agency. The act also tasks NIST with developing, for systems other than those for national security, standards and guidelines to be used by all agencies to establish minimum cybersecurity requirements for information and information systems based on their level of cybersecurity risk. Accordingly, NIST developed a risk management framework of standards and guidelines for agencies to follow in developing cybersecurity programs. The framework addresses broad cybersecurity and risk management activities, including categorizing the system’s impact level; selecting, implementing, and assessing security controls; authorizing the system to operate (based on progress in remediating control weaknesses and an assessment of residual risk); and monitoring the efficacy of controls on an ongoing basis. Figure 5 provides an overview of this framework. Prior DHS OIG assessments, such as the annual evaluation of DHS’s cybersecurity program, have identified issues with FEMA’s cybersecurity practices. For example, in 2016, the OIG reported that FEMA was operating 111 systems without an authorization to operate. In addition, the agency had not created any corrective action plans for 11 of the systems that were classified as “Secret” or “Top Secret,” thus limiting its ability to ensure that all identified cybersecurity weaknesses were mitigated in a timely manner. The OIG further reported that, for several years, FEMA was consistently below DHS’s 90 percent target for remediating corrective action plans, with scores ranging from 73 to 84 percent. Further, the OIG reported that FEMA had a significant number of open corrective action plans (18,654) and that most of these plans did not contain sufficient information to address identified weaknesses. In 2017, the OIG reported that FEMA had made progress in addressing security weaknesses. For example, it reported that the agency had reduced the number of systems it was operating without an authorization to operate from 111 to 15 systems. According to GAO’s Business Process Reengineering Assessment Guide and the Software Engineering Institute’s Capability Maturity Model Integration® for Development, successful business process reengineering can enable agencies to replace their inefficient and outmoded processes with streamlined processes that can more effectively serve the needs of the public and significantly reduce costs and improve performance. Many times, new IT systems are implemented to support these improved business processes. Thus, effective management of IT requirements is critical for ensuring the successful design, development, and delivery of such new systems. These leading practices state that effective business process reengineering and IT requirements management involve, among other things, (1) ensuring strong executive leadership support for process reengineering; (2) assessing the current and target business environment and business performance goals; (3) establishing plans for implementing new business processes; (4) establishing clear, prioritized, and traceable IT requirements; (5) tracking progress in delivering IT requirements; and (6) incorporating input from end user stakeholders. Among these six selected leading practices for reengineering business processes and managing IT requirements, FEMA fully implemented four and partially implemented two of them for its GMM program. For example, the agency ensured strong senior leadership commitment to changing the way it manages its grants, took steps to assess and document its business environment and performance goals, defined initial IT requirements for GMM, took recent actions to better track progress in delivering planned IT requirements, and incorporated input from end user stakeholders. In addition, FEMA had begun planning for business process reengineering; however, it had not finalized plans for transitioning users to the new business processes. Further, while GMM took steps to establish clearly defined and prioritized IT requirements, key requirements were not always traceable. Table 3 summarizes the extent to which FEMA implemented the selected leading practices. According to GAO’s Business Process Reengineering Assessment Guide, the most critical factor for engaging in a reengineering effort is having strong executive leadership support to establish credibility regarding the seriousness of the effort and to maintain the momentum as the agency faces potentially extensive changes to its organizational structure and values. Without such leadership, even the best process design may fail to be accepted and implemented. Agencies should also ensure that there is ongoing executive support (e.g., executive steering committee meetings headed by the agency leader) to oversee the reengineering effort from start to finish. FEMA senior leadership consistently demonstrated its commitment and support for streamlining the agency’s grants management business processes and provided ongoing executive support. For example, one of the Administrator’s top priorities highlighted in FEMA’s 2014 through 2022 strategic plans was to strengthen grants management through innovative systems and business processes to rapidly and effectively deliver the agency’s mission. In accordance with this strategic priority, FEMA initiated GMM with the intent to streamline and modernize grants management across the agency. In addition, FEMA established the Grants Management Executive Steering Group in September 2015. This group is responsible for transforming the agency’s grants management capabilities through its evaluation, prioritization, and oversight of grants management modernization programs, such as GMM. The group’s membership consists of FEMA senior leaders from across the agency’s program and business support areas, such as FEMA regions, Individual Assistance, Public Assistance, Preparedness, Office of the Chief Financial Officer, Office of Chief Counsel, OCIO, and the Office of Policy and Program Analysis. In this group’s ongoing commitment to reengineering grants management processes, it meets monthly to review GMM’s updates, risks, and action items, as well as the program’s budget, schedule, and acquisition activities. For example, the group reviewed the status of key acquisition activities and program milestones, such as the follow-on award for the pilot contractor and the program’s initial operational capability date. The group also reviewed GMM’s program risks, such as data migration challenges (discussed later in this report) and delays in the Agile development contract award. With this continuous executive involvement, FEMA is better positioned to maintain momentum for reengineering the new grants management business processes that the GMM system is intended to support. GAO’s Business Process Reengineering Assessment Guide states that agencies undergoing business process reengineering should develop a common understanding of the current environment by documenting existing core business processes to show how the processes work and how they are interconnected. The agencies should then develop a deeper understanding of the target environment by modeling the workflow of each target business process in enough detail to provide a common understanding of exactly what will be changed and who will be affected by a future solution. Agencies should also assess the performance of their current major business processes to identify problem areas that need to be changed or eliminated and to set realistically achievable, customer- oriented, and measurable business performance improvement goals. FEMA has taken steps to document the current and target grants management business processes. Specifically, The agency took steps to develop a common understanding of its grants management processes by documenting each of the 12 grant categories. For example, in 2016 and 2017, the agency conducted several nationwide user outreach sessions with representatives from FEMA headquarters, the 10 regional offices, and state and local grant recipients to discuss the grant categories and the current grants management business environment. In addition, FEMA’s Office of Chief Counsel developed a Grants Management Manual in January 2018 that outlined the authorizing laws, regulations, and agency policies for all of its grant programs. According to the Grants Management Executive Steering Group, the manual is intended to promote standardized grants management procedures across the agency. Additionally, the group expects grant program and regional offices to assess the manual against their own practices, make updates as needed, and ensure that their staff are properly informed and trained. FEMA also documented target grants management business process workflows for 18 of the 19 business functions that were notionally planned to be developed and deployed in the AFG pilot by December 2018. However, the program experienced delays in developing the AFG pilot (discussed later in this report) and, thus, deferred defining the remaining business function until the program gets closer to developing that function, which is now planned for August 2019. In addition, FEMA established measurable business performance goals for GMM that are aimed at addressing problem areas and improving grants management processes. Specifically, the agency established 14 business performance goals and associated thresholds in an October 2017 acquisition program baseline addendum, as well as 126 performance metrics for all 43 of the target grants management business functions in its March 2017 test and evaluation master plan. According to FEMA, the 14 business performance goals are intended to represent essential outcomes that will indicate whether GMM has successfully met critical, business-focused mission needs. GMM performance goals include areas such as improvements in the satisfaction level of users with GMM compared to the legacy systems and improvements in the timeliness of grant award processing. For example, one of GMM’s goals is to get at least 40 percent of users surveyed to agree or strongly agree that their grants management business processes are easier to accomplish with GMM, compared to the legacy systems. Program officials stated that they plan to work with the Agile development contractor to refine their performance goals and target thresholds, develop a plan for collecting the data and calculating the metrics, and establish a performance baseline with the legacy systems. Program officials also stated that they plan to complete these steps by September 2019—GMM’s initial operational capability date—which is when they are required to begin reporting these metrics to the DHS acquisition review board. According to GAO’s Business Process Reengineering Assessment Guide, agencies undergoing business process reengineering should (1) establish an overall plan to guide the effort (commonly referred to as an organizational change management plan) and (2) provide a common understanding for stakeholders of what to expect and how to plan for process changes. Agencies should develop the plan at the beginning of the reengineering effort and provide specific details on upcoming process changes, such as critical milestones and deliverables for an orderly transition, roles and responsibilities for change management activities, reengineering goals, skills and resource needs, key barriers to change, communication expectations, training, and any staff redeployments or reductions-in-force. The agency should develop and begin implementing its change management plan ahead of introducing new processes to ensure sufficient support among stakeholders for the reengineered processes. While FEMA has begun planning its business process reengineering activities, it has not finalized its plans or established time frames for their completion. Specifically, as of September 2018, program officials were in the process of drafting an organizational change management plan that is intended to establish an approach for preparing grants management stakeholders for upcoming changes. According to FEMA, this document is intended to help avoid uncertainty and confusion among stakeholders as changes are made to the agency’s grant programs, and ensure successful adoption of new business processes, strategies, and technologies. As discussed previously in this report, the transition to GMM will involve changes to FEMA’s disparate grants management processes that are managed by many different stakeholders across the agency. Program officials acknowledged that change management is the biggest challenge they face in implementing GMM and said they had begun taking several actions intended to support the agency’s change management activities. For example, program officials reported in October 2018 that they had recently created an executive-level working group intended to address FEMA’s policy challenges related to the standardization of grants management processes. Additionally, program officials reported that they planned to: (1) hire additional support staff focused on coordinating grants change management activities; and (2) pursue regional office outreach to encourage broad support among GMM’s decentralized stakeholders, such as state, local, and tribal territories. However, despite these actions, the officials were unable to provide time frames for completing the organizational change management plan or the additional actions. Until the plan and actions are complete, the program lacks assurance that it will have sufficient support among stakeholders for the reengineered processes. In addition, GMM did not establish plans and time frames for the activities that needed to take place prior to, during, and after the transition from the legacy AFG to GMM. Instead, program officials stated that they had worked collaboratively with the legacy AFG program and planned these details informally by discussing them in various communications, such as emails and meetings. However, this informal planning approach is not a repeatable process, which is essential to this program as FEMA plans to transition many sets of functionality to many different users during the lifecycle of this program. Program officials acknowledged that for future transitions they will need more repeatable transition planning and stated that they intend to establish such plans, but did not provide a time frame for when such changes would be made. Until FEMA develops a repeatable process, with established time frames for communicating the transition details to its customers prior to each transition, the agency risks that the transition from the legacy systems to GMM will not occur as intended. It also increases its risk that stakeholders will not support the implementation of reengineered grants management processes. Leading practices for software development efforts state that IT requirements are to be clearly defined and prioritized. This includes, among other things, maintaining bidirectional traceability as the requirements evolve, to ensure there are no inconsistencies among program plans and requirements. In addition, programs using Agile software development are to maintain a product vision, or roadmap, to guide the planning of major program milestones and provide a high-level view of planned requirements. Programs should also maintain a prioritized list (referred to as a backlog) of narrowly defined requirements (referred to as lower-level requirements) that are to be delivered. Programs should maintain this backlog with the product owner to ensure the program is always working on the highest priority requirements that will deliver the most value to the users. The GMM program established clearly defined and prioritized requirements and maintained bidirectional traceability among the various levels of requirements: Grant lifecycle phases: In its Concept of Operations document, the program established six grants management lifecycle phases that represent the highest level of GMM’s requirements, through which it derives lower-level requirements. Business functions: The Concept of Operations document also identifies the next level of GMM requirements—the 43 business functions that describe how FEMA officials, grant recipients, and other stakeholders are to manage grants. According to program officials, the 43 business functions are to be refined, prioritized, and delivered to GMM customers iteratively. Further, for the AFG pilot, the GMM program office prioritized 19 business functions with the product owner and planned the development of these functions in a roadmap. Epics: GMM’s business functions are decomposed into epics, which represent smaller portions of functionality that can be developed over multiple increments. According to program officials, GMM intends to develop, refine, and prioritize the epics iteratively. As of August 2018, the program had developed 67 epics in the program backlog. An example of one of the epics for the AFG pilot is to prepare and submit grant closeout materials. User stories: The epics are decomposed into user stories, which convey the customers’ requirements at the smallest and most discrete unit of work that must be done within a single sprint to create working software. GMM develops, refines, and prioritizes the user stories iteratively. As of August 2018, the program had developed 1,118 user stories in the backlog. An example of a user story is “As an external user, I can log in with a username and password.” Figure 6 provides an example of how GMM’s different levels of requirements are decomposed. Nevertheless, while we found requirements to be traceable at the sprint- level (i.e., epics and user stories), traceability of requirements at the increment-level (i.e., business functions) were inconsistent among different requirements planning documents. Specifically, the capabilities and constraints document shows that five business functions are planned to be developed within sub-increment 1A, whereas the other key planning document—the roadmap for the AFG pilot—showed one of those five functions as being planned for the sub-increment 1B. In addition, the capabilities and constraints document shows that nine business functions are planned to be developed within sub-increment 1B, but the roadmap showed one of those nine functions as being planned for the sub- increment 1C. Program officials stated that they decided to defer these functions to later sub-increments due to unexpected technical difficulties encountered when developing functionality and reprioritizing functions with the product owners. While the officials updated the roadmap to reflect the deferred functionality, they did not update the capabilities and constraints document to maintain traceability between these two important requirements planning documents. Program officials stated that they learned during the AFG pilot that the use of a capabilities and constraints document for increment-level scope planning was not ideal and that they intended to change the process for how they documented planned requirements for future increments. However, program officials did not provide a time frame for when this change would be made. Until the program makes this change and then ensures it maintains traceability of increment-level requirements between requirements planning documents, it will continue to risk confusion among stakeholders about what is to be delivered. In addition, until recently, GMM’s planning documents were missing up- to-date information regarding when most of the legacy systems will be transitioned to GMM. Specifically, while the program’s planning documents (including the GMM roadmap) provided key milestones for the entire lifecycle of the program and high-level capabilities to be delivered in the AFG pilot, these documents lacked up-to-date time frames for when FEMA planned to transition the nine remaining legacy systems. For example, in May 2017, GMM drafted notional time frames for transitioning the legacy systems, including plans for AFG to be the seventh system replaced by GMM. However, in December 2017, the program decided to reprioritize the legacy systems so that AFG would be replaced first—yet this major change was not reflected in the program’s roadmap. Moreover, while AFG program officials were informed of the decision to transition the AFG program first, in June 2018 officials from other grant programs told us that they had not been informed on when their systems were to be replaced. As a result, these programs were uncertain about when they should start planning for their respective transitions. In August 2018, GMM program officials acknowledged that they were delayed in deciding the sequencing order for the legacy system transitions. Program officials stated that the delay was due to their need to factor the Agile development contractor’s perspective into these decisions; yet, at that time, the contract award had been delayed by approximately 8 months. Subsequently, in October 2018, program officials identified tentative time frames for transitioning the remaining legacy systems. Program officials stated that they determined the tentative time frames for transitioning the legacy systems based on key factors, such as mission need, cost, security vulnerabilities, and technical obsolescence, and that they had shared these new time frames with grant program officials. The officials also stated that, once the Agile contractor begins contract performance, they expect to be able to validate the contractor’s capacity and finalize these time frames by obtaining approval from the Grants Management Executive Steering Group. By taking steps to update and communicate these important time frames, FEMA should be better positioned to ensure that each of the grant programs are prepared for transitioning to GMM. According to leading practices, Agile programs should track their progress in delivering planned IT requirements within a sprint (i.e., short iterations that produce working software). Given that sprints are very short cycles of development (e.g., 2 weeks), the efficiency of completing planned work within a sprint relies on a disciplined approach that includes using a fixed pace, referred to as the sprint cadence, that provides a consistent and predictable development routine. A disciplined approach also includes identifying by the start of a sprint which user stories will be developed, developing those stories to completion (e.g., fully tested and demonstrated to, and accepted by, the product owner), and tracking completion progress of those stories. Progress should be communicated to relevant stakeholders and used by the development teams to better understand their capacity to develop stories, continuously improve on their processes, and forecast how long it will take to deliver all remaining capabilities. The GMM program did not effectively track progress in delivering IT requirements during the first nine sprints, which occurred from January to June 2018. These gaps in tracking the progress of requirements, in part, had an impact on the program’s progress in delivering the 19 AFG business functions that were originally planned by December 2018 and are now deferred to August 2019. However, beginning in July 2018, in response to our ongoing review, the program took steps to improve in these areas. Specifically, GMM did not communicate the status of its Agile development progress to program stakeholders, such as the grant programs, the regional offices, and the development teams, during most of the first nine sprints. Program officials acknowledged that they should use metrics to track development progress and, in July 2018, they began reporting metrics to program stakeholders. For example, they began collecting and providing data on the number of stories planned and delivered, estimated capacity for development teams, and the number of days spent working on the sprint, as part of the program’s weekly status reports to program stakeholders, such as product owners. Rather than using a fixed, predictable sprint cadence, GMM allowed a variable development cadence, meaning that sprint durations varied from 1 to 4 weeks throughout the first nine sprints. Program officials noted that they had experimented with the use of a variable cadence to allow more time to complete complex technical work. Program officials stated that they realized that varying the sprints was not effective and, in July 2018 for sprint 10, they reverted back to a fixed, 2 week cadence. GMM added a significant amount of scope during its first nine sprints, after the development work had already begun. For example, the program committed to 28 user stories at the beginning of sprint eight, and then nearly doubled the work by adding 25 additional stories in the middle of the sprint. Program officials cited multiple reasons for adding more stories, including that an insufficient number of stories had been defined in the backlog when the sprint began, the realization that planned stories were too large and needed to be decomposed into smaller stories, and the realization that other work would be needed in addition to what was originally planned. Program officials recognized that, by the start of a sprint, the requirements should be sufficiently defined, such that they are ready for development without requiring major changes during the sprint. The program made recent improvements in sprints 11 and 12, which had only five stories added after the start of a sprint. By taking these steps to establish consistency among sprints, the program has better positioned itself to more effectively monitor and manage the remaining IT development work. In addition, this improvement in consistency should help the program avoid future deferments of functionality. Leading practices state that programs should regularly collaborate with, and collect input from, relevant stakeholders; monitor the status of stakeholder involvement; incorporate stakeholder input; and measure how well stakeholders’ needs are being met. For Agile programs, it is especially important to track user satisfaction to determine how well the program has met stakeholders’ needs. Consistent stakeholder participation ensures that the program meets its stakeholders’ needs. FEMA implemented its responsibilities in this area through several means, such as stakeholder outreach activities; development of a strategic communications plan; and continuous monitoring, solicitation, and recording of stakeholder involvement and feedback. For example, the agency conducted nationwide outreach sessions from January 2016 through August 2017 and began conducting additional outreach sessions in April 2018. These outreach sessions involved hundreds of representatives from FEMA headquarters, the 10 regional offices, and state and local grant recipients to collect information on the current grants management environment and opportunities for streamlining grants management processes. FEMA also held oversight and stakeholder outreach activities and actively solicited and recorded feedback from its stakeholders on a regular basis. For example, GMM regularly verified with users that the new functionality met their IT requirements, as part of the Agile development cycle. Additionally, we observed several GMM biweekly requirements validation sessions where the program’s stakeholders were involved and provided feedback as part of the requirements development and refinement process. In addition, FEMA identified GMM stakeholders and tracked its engagement with these stakeholders using a stakeholder register. The agency also defined processes for how the GMM program is to collaborate with its stakeholders in a stakeholder communication plan and Agile development team agreement. Also, while several officials from the selected grant program and regional offices that we interviewed indicated that the program could improve in communicating its plans for GMM and incorporating stakeholder input, most of the representatives from these offices stated that GMM is doing well at interacting with its stakeholders. Finally, in October 2018, program officials reported that they had recently begun measuring user satisfaction by conducting surveys and interviews with users that have utilized the new functionality within GMM. The program’s outreach activities, collection of stakeholder input, and measurement of user satisfaction demonstrate that the program is taking the appropriate steps to incorporate stakeholder input. Reliable cost estimates are critical for successfully delivering IT programs. Such estimates provide the basis for informed decision making, realistic budget formulation, meaningful progress measurement, and accountability for results. GAO’s Cost Estimating and Assessment Guide defines leading practices related to the following four characteristics of a high-quality, reliable estimate. Comprehensive. The estimate accounts for all possible costs associated with a program, is structured in sufficient detail to ensure that costs are neither omitted nor double counted, and documents all cost-influencing assumptions. Well-documented. Supporting documentation explains the process, sources, and methods used to create the estimate; contains the underlying data used to develop the estimate; and is adequately reviewed and approved by management. Accurate. The estimate is not overly conservative or optimistic, is based on an assessment of the costs most likely to be incurred, and is regularly updated so that it always reflects the program’s current status. Credible. Discusses any limitations of the analysis because of uncertainty or sensitivity surrounding data or assumptions, the estimate’s results are cross-checked, and an independent cost estimate is conducted by a group outside the acquiring organization to determine whether other estimating methods produce similar results. In May 2017, DHS approved GMM’s lifecycle cost estimate of about $251 million for fiscal years 2015 through 2030. We found this initial estimate to be reliable because it fully or substantially addressed all the characteristics associated with a reliable cost estimate. For example, the estimate comprehensively included government and contractor costs, all elements of the program’s work breakdown structure, and all phases of the system lifecycle; and was aligned with the program’s technical documentation at the time the estimate was developed. GMM also fully documented the key assumptions, data sources, estimating methodology, and calculations for the estimate. Further, the program conducted a risk assessment and sensitivity analysis, and DHS conducted an independent assessment of the cost estimate to validate the accuracy and credibility of the cost estimate. However, key assumptions that FEMA made about the program changed soon after DHS approved the cost estimate in May 2017. Thus, the initial cost estimate no longer reflects the current approach for the program. For example, key assumptions about the program that changed include: Change in the technical approach: The initial cost estimate assumed that GMM would implement a software-as-a-service model, meaning that FEMA would rely on a service provider to deliver software applications and the underlying infrastructure to run them. However, in December 2017, the program instead decided to implement an infrastructure-as-a-service model, meaning that FEMA would develop and deploy its own software application and rely on a service provider to deliver and manage the computing infrastructure (e.g., servers, software, storage, and network equipment). According to program officials, this decision was made after learning from the Agile prototypes that the infrastructure-as-a-service model would allow GMM to develop the system in a more flexible environment. Increase in the number of system development personnel: A key factor with Agile development is the number of development teams (each consisting of experts in software development, testing, and cybersecurity) that are operating concurrently and producing separate portions of software functionality. Program officials initially assumed that they would need three to four concurrent Agile development teams, but subsequently realized that they would instead need to expend more resources to achieve GMM’s original completion date. Specifically, program officials now expect they will need to at least double, and potentially triple, the number of concurrent development teams to meet GMM’s original target dates. Significant delays and complexities with data migration: In 2016 and 2017, GMM experienced various technical challenges in its effort to transfer legacy system data to a data staging platform. This data transfer effort needed to be done to standardize the data before eventually migrating the data to GMM. These challenges resulted in significant delays and cost increases. Program officials reported that, by February 2018—at least 9 months later than planned—all legacy data had been transferred to a data staging platform so that FEMA officials could begin analyzing and standardizing the data prior to migrating it into GMM. FEMA officials reported that they anticipated the cost estimate to increase, and for this increase to be high enough to breach the $251 million threshold set in GMM’s May 2017 acquisition program baseline. Thus, consistent with DHS’s acquisition guidance, the program informed the DHS acquisition review board of this anticipated breach. The board declared that the program was in a cost breach status, as of September 12, 2018. As of October 2018, program officials stated that they were in the process of revising the cost estimate to reflect the changes in the program and to incorporate actual costs. In addition, the officials stated that the program was applying a new cost estimating methodology tailored for Agile programs that DHS’s Cost Analysis Division had been developing. In December 2018, program officials stated that they had completed the revised cost estimate but it was still undergoing departmental approval. Establishing an updated cost estimate should help FEMA better understand the expected costs to deliver GMM under the program’s current approach and time frames. The success of an IT program depends, in part, on having an integrated and reliable master schedule that defines when the program’s set of work activities and milestone events are to occur, how long they will take, and how they are related to one another. Among other things, a reliable schedule provides a roadmap for systematic execution of an IT program and the means by which to gauge progress, identify and address potential problems, and promote accountability. GAO’s Schedule Assessment Guide defines leading practices related to the following four characteristics that are vital to having a reliable integrated master schedule. Comprehensive. A comprehensive schedule reflects all activities for both the government and its contractors that are necessary to accomplish a program’s objectives, as defined in the program’s work breakdown structure. The schedule also includes the labor, materials, and overhead needed to do the work and depicts when those resources are needed and when they will be available. It realistically reflects how long each activity will take and allows for discrete progress measurement. Well-constructed. A schedule is well-constructed if all of its activities are logically sequenced with the most straightforward logic possible. Unusual or complicated logic techniques are used judiciously and justified in the schedule documentation. The schedule’s critical path represents a true model of the activities that drive the program’s earliest completion date and total float accurately depicts schedule flexibility. Credible. A schedule that is credible is horizontally traceable—that is, it reflects the order of events necessary to achieve aggregated products or outcomes. It is also vertically traceable—that is, activities in varying levels of the schedule map to one another and key dates presented to management in periodic briefings are consistent with the schedule. Data about risks are used to predict a level of confidence in meeting the program’s completion date. The level of necessary schedule contingency and high-priority risks are identified by conducting a robust schedule risk analysis. Controlled. A schedule is controlled if it is updated regularly by trained schedulers using actual progress and logic to realistically forecast dates for program activities. It is compared to a designated baseline schedule to measure, monitor, and report the program’s progress. The baseline schedule is accompanied by a baseline document that explains the overall approach to the program, defines ground rules and assumptions, and describes the unique features of the schedule. The baseline schedule and current schedule are subject to a configuration management control process. GMM’s schedule was unreliable because it minimally addressed three characteristics—comprehensive, credible, and controlled—and did not address the fourth characteristic of a reliable estimate—well-constructed. One of the most significant issues was that the program’s fast approaching, final delivery date of September 2020 was not informed by a realistic assessment of GMM development activities, and rather was determined by imposing an unsubstantiated delivery date. Table 4 summarizes our assessment of GMM’s schedule. In discussing the reasons for the shortfalls in these practices, program officials stated that they had been uncertain about the level of rigor that should be applied to the GMM schedule, given their use of Agile development. However, leading practices state that program schedules should meet all the scheduling practices, regardless of whether a program is using Agile development. As discussed earlier in this report, GMM has already experienced significant schedule delays. For example, the legacy data migration effort, the AFG pilot, and the Agile development contract have been delayed. Program officials also stated that the delay in awarding and starting the Agile contract has delayed other important activities, such as establishing time frames for transitioning legacy systems. A more robust schedule could have helped FEMA predict the impact of delays on remaining activities and identify which activities appeared most critical so that the program could ensure that any risks in delaying those activities were properly mitigated. In response to our review and findings, program officials recognized the need to continually enhance their schedule practices to improve the management and communication of program activities. As a result, in August 2018, the officials stated that they planned to add a master scheduler to the team to improve the program’s schedule practices and ensure that all of the areas of concern we identified are adequately addressed. In October 2018, the officials reported that they had recently added two master schedulers to GMM. According to the statement of objectives, the Agile contractor is expected to develop an integrated master schedule soon after it begins performance. However, program officials stated that GMM is schedule-driven—due to the Executive Steering Group’s expectation that the solution will be delivered by September 2020. The officials added that, if GMM encounters challenges in meeting this time frame, the program plans to seek additional resources to allow it to meet the 2020 target. GMM’s schedule-driven approach has already led to an increase in estimated costs and resources. For example, as previously mentioned, the program has determined that, to meet its original target dates, GMM needs to at least double, and possibly triple, the number of concurrent Agile development teams. In addition, we have previously reported that schedule pressure on federal IT programs can lead to omissions and skipping of key activities, especially system testing. In August 2018, program officials acknowledged that September 2020 may not be feasible and that the overall completion time frames established in the acquisition program baseline may eventually need to be rebaselined. Without a robust schedule to forecast whether FEMA’s aggressive delivery goal for GMM is realistic to achieve, leadership will be limited in its ability to make informed decisions on what additional increases in cost or reductions in scope might be needed to fully deliver the system. NIST’s risk management framework establishes standards and guidelines for agencies to follow in developing cybersecurity programs. Agencies are expected to use this framework to achieve more secure information and information systems through the implementation of appropriate risk mitigation strategies and by performing activities that ensure that necessary security controls are integrated into agencies’ processes. The framework addresses broad cybersecurity and risk management activities, which include the following: Categorize the system: Programs are to categorize systems by identifying the types of information used, selecting a potential impact level (e.g., low, moderate, or high), and assigning a category based on the highest level of impact to the system’s confidentiality, integrity, and availability, if the system was compromised. Programs are also to document a description of the information system and its boundaries and should register the system with appropriate program management offices. System categorization is documented in a system security plan. Select and implement security controls: Programs are to determine protective measures, or security controls, to be implemented based on the system categorization results. These security controls are documented in a system security plan. For example, control areas include access controls, incident response, security assessment and authorization, identification and authentication, and configuration management. Once controls are identified, programs are to determine planned implementation actions for each of the designated controls. These implementation actions are also specified in the system security plan. Assess security controls: Programs are to develop, review, and approve a security assessment plan. The purpose of the security assessment plan approval is to establish the appropriate expectations for the security control assessment. Programs are to also perform a security control assessment by evaluating the security controls in accordance with the procedures defined in the security assessment plan, in order to determine the extent to which the controls were implemented correctly. The output of this process is intended to produce a security assessment report to document the issues, findings, and recommendations. Programs are to conduct initial remediation actions on security controls and reassess those security controls, as appropriate. Obtain an authorization to operate the system: Programs are to obtain security authorization approval in order to operate a system. Resolving weaknesses and vulnerabilities identified during testing is an important step leading up to achieving an authorization to operate. Programs are to establish corrective action plans to address any deficiencies in cybersecurity policies, procedures, and practices. DHS guidance also states that corrective action plans must be developed for every weakness identified during a security control assessment and within a security assessment report. Monitor security controls on an ongoing basis: Programs are to monitor their security controls on an ongoing basis after deployment, including determining the security impact of proposed or actual changes to the information system and assessing the security controls in accordance with a monitoring strategy that determines the frequency of monitoring the controls. For the GMM program’s engineering and test environment, which went live in February 2018, FEMA fully addressed three of the five key cybersecurity practices in NIST’s risk management framework and partially addressed two of the practices. Specifically, FEMA categorized GMM’s environment based on security risk, implemented select security controls, and monitored security controls on an ongoing basis. However, the agency partially addressed the areas of assessing security controls and obtaining an authorization to operate the system. Table 5 provides a summary of the extent to which FEMA addressed NIST’s key cybersecurity practices for GMM’s engineering and test environment. Consistent with NIST’s framework, GMM categorized the security risk of its engineering and test environment and identified it as a moderate- impact environment. A moderate-impact environment is one where the loss of confidentiality, integrity, or availability could be expected to have a serious or adverse effect on organizational operations, organizational assets, or individuals. GMM completed the following steps leading to this categorization: The program documented in its System Security Plan the various types of data and information that the environment will collect, process, and store, such as conducting technology research, building or enhancing technology, and maintaining IT networks. The program established three information types and assigned security levels of low, moderate, or high impact in the areas of confidentiality, availability, and integrity. A low-impact security level was assigned to two information types: (1) conducting technology research and (2) building or enhancing technology; and a moderate- impact security level was assigned to the third information type: maintaining IT networks. The engineering and test environment was categorized as an overall moderate-impact system, based on the highest security impact level assignment. GMM documented a description of the environment, including a diagram depicting the system’s boundaries, which illustrates, among other things, databases and firewalls. GMM properly registered its engineering and test environment with FEMA’s Chief Information Officer, Chief Financial Officer, and acting Chief Information Security Officer. By conducting the security categorization process, GMM has taken steps that should ensure that the appropriate security controls are selected for the program’s engineering and test environment. Consistent with NIST’s framework and the system categorization results, GMM appropriately determined which security controls to implement and planned actions for implementing those controls in its System Security Plan for the engineering and test environment. For example, the program utilized NIST guidance to select standard controls for a system categorized with a moderate-impact security level. These control areas include, for example, access controls, risk assessment, incident response, identification and authentication, and configuration management. Further, the program documented its planned actions to implement each control in its System Security Plan. For example, GMM documented that the program plans to implement its Incident Response Testing control by participating in an agency-wide exercise and unannounced vulnerability scans. As another example, GMM documented that the program plans to implement its Contingency Plan Testing control by testing the contingency plan annually, reviewing the test results, and preparing after action reports. By selecting and planning for the implementation of security controls, GMM has taken steps to mitigate its security risks and protect the confidentiality, integrity, and availability of the information system. Consistent with NIST’s framework, in January 2018, GMM program officials developed a security assessment plan for the engineering and test environment. According to GMM program officials, this plan was reviewed by the security assessment team. However, the security assessment plan lacked essential details. Specifically, while the plan included the general process for evaluating the environment’s security controls, the planned assessment procedures for all 964 security controls were not sufficiently defined. Specifically, GMM program officials copied example assessment procedures from NIST guidance and inserted them into its security assessment documentation for all of its 964 controls, without making further adjustments to explain the steps that should be taken specific to GMM. Table 6 shows an example of a security assessment procedure copied from the NIST guidance that should have been further adjusted for GMM. In addition, the actual assessment procedures that the GMM assessors used to evaluate the security controls were not documented. Instead, the program only documented whether each control passed or failed each test. GMM program officials stated that the planned assessment procedures are based on an agency template that was exported from a DHS compliance tool, and that FEMA security officials have been instructed by the DHS OCIO not to tailor or make any adjustments to the template language. However, the assessment procedures outlined in NIST’s guidance are to serve as a starting point for organizations preparing their program specific assessments. According to NIST, organizations are expected to select and tailor their assessment procedures for each security control from NIST’s list of suggested assessment options (e.g., review, analyze, or inspect policies, procedures, and related documentation options). DHS OCIO officials stated that, consistent with NIST’s guidance, they expect that components will ensure they are in compliance with the minimum standards and will also add details and additional rigor, as appropriate, to tailor the planned security assessment procedures to fit their unique missions or needs. In November 2018, in response to our audit, DHS OCIO officials stated that they were meeting with FEMA OCIO officials to understand why they did not document the planned and actual assessment procedures performed by the assessors for GMM. Until FEMA ensures that detailed planned evaluation methods and actual evaluation procedures specific to GMM are defined, the program risks assessing security controls incorrectly, having controls that do not work as intended, and producing undesirable outcomes with respect to meeting the security requirements. In addition, the security assessment plan was not approved by FEMA’s OCIO before proceeding with the security assessment. Program officials stated that approval was not required for the security assessment plan prior to the development of the security assessment report. However, NIST guidance states that the purpose of the security assessment plan approval is to establish the appropriate expectations for the security control assessment. By not getting the security assessment plan approved by FEMA’s OCIO before security assessment reviews were conducted, GMM risks inconsistencies with the plan and security objectives of the organization. Finally, consistent with NIST guidance, GMM performed a security assessment in December 2017 of the engineering and test environment’s controls, which identified 36 vulnerabilities (23 critical- and high-impact vulnerabilities and 13 medium- and low-impact vulnerabilities). The program also documented these vulnerabilities and associated findings and recommendations in a security assessment report. GMM conducted initial remediation actions (i.e., remediation of vulnerabilities that should be corrected immediately) for 12 of the critical- and high-impact vulnerabilities and a reassessment of those security controls confirmed that they were resolved by January 2018. Remediation of the remaining 11 critical- and high-impact vulnerabilities and 13 medium- and low- impact vulnerabilities were to be addressed by corrective action plans as part of the authorization to operate process, which is discussed in the next section. The authorization to operate GMM’s engineering and test environment was granted on February 5, 2018. Among other things, this decision was based on the important stipulation that the remaining 11 critical- and high- impact vulnerabilities associated with multifactor authentication would be addressed within 45 days, or by March 22, 2018. However, the program did not meet this deadline and, instead, approximately 2 months after this deadline passed, obtained a waiver to remediate these vulnerabilities by May 9, 2019. These vulnerabilities are related to a multifactor authentication capability. Program officials stated that they worked with FEMA OCIO officials to attempt to address these vulnerabilities by the initial deadline, but they were unsuccessful in finding a viable solution. Therefore, GMM program officials developed a waiver at the recommendation of the OCIO to provide additional time to develop a viable solution. However, a multifactor authentication capability is essential to ensuring that users are who they say they are, prior to granting users access to the GMM engineering and test environment, in order to reduce the risk of harmful actors accessing the system. In addition, as of September 2018, the program had not established corrective action plans for the 13 medium- and low-impact vulnerabilities. Program officials stated that they do not typically address low-impact vulnerabilities; however, this is in conflict with DHS guidance that specifies that corrective action plans must be developed for every weakness identified during a security control assessment and within a security assessment report. In response to our audit, in October 2018, GMM program officials developed these remaining corrective action plans. The plans indicated that these vulnerabilities were to be fully addressed by January 2019 and April 2019. While the program eventually took corrective actions in response to our audit by developing the missing plans, the GMM program initially failed to follow DHS’s guidance on preparing corrective actions plans for all security vulnerabilities. Until GMM consistently follows DHS’s guidance, it will be difficult for FEMA to determine the extent to which GMM’s security weaknesses identified during its security control assessments are remediated. Additionally, as we have reported at other agencies, vulnerabilities can be indicators of more significant underlying issues and, thus, without appropriate management attention or prompt remediation, GMM is at risk of unnecessarily exposing the program to potential exploits. Moreover, GMM was required to assess all untested controls by March 7, 2018, or no later than 30 days after the approval of the authorization to operate; however, it did not meet this deadline. Specifically, we found that, by October 2018, FEMA had not fully tested 190 security controls in the GMM engineering and test environment. These controls were related to areas such as security incident handling and allocation of resources required to protect an information system. In response to our findings, in October 2018, GMM program officials reported that they had since fully tested 27 controls and partially tested the remaining 163 controls. Program officials stated that testing of the 163 controls is a shared responsibility between GMM and other parties (e.g., the cloud service provider). They added that GMM had completed its portion of the testing but was in the process of verifying the completion of testing by other parties. Program officials stated that the untested controls were not addressed sooner, in part, because of errors resulting from configuration changes in the program’s compliance tool during a system upgrade, which have now been resolved. Until GMM ensures that all security controls have been tested, it remains at an increased risk of exposing programs to potential exploits. Consistent with the NIST framework, GMM established methods for assessing and monitoring security controls to be conducted after an authorization to operate has been approved. GMM has tailored its cybersecurity policies and practices for monitoring its controls to take into account the frequent and iterative pace with which system functionality is continuously being introduced into the GMM environment. Specifically, the GMM program established a process for assessing security impact changes to the system and conducting reauthorizations to operate within the rapid Agile delivery environment. As part of this process, GMM embedded cybersecurity experts on each Agile development team so that they are involved early and can impact security considerations from the beginning of requirements development through testing and deployment of system functionality. In addition, the process involves important steps for ensuring that the system moves from development to completion, while producing a secure and reliable system. For example, it includes procedures for creating, reviewing, and testing new system functionality. As the new system functionality is integrated with existing system functionality, it is to undergo automated testing and security scans in order to ensure that the integrity of the security of the system has not been compromised. Further, an automated process is to deploy the code if it passes all security scans, code tests, and code quality checks. GMM’s process for conducting a reauthorization to operate within the rapid delivery Agile development environment is to follow FEMA guidance that states that all high-level changes made to a FEMA IT system must receive approval from both a change advisory board and the FEMA Chief Information Officer. The board and FEMA Chief Information Officer are to focus their review and approval on scheduled releases and epics (i.e., collections of user stories). Additionally, the Information System Security Officer is to review each planned user story and, if it is determined that the proposed changes may impact the integrity of the authorization, the Information System Security Officer is to work with the development team to begin the process of updating the system authorization. Finally, GMM uses automated tools to track the frequency in which security controls are assessed and to ensure that required scanning data are received by FEMA for reporting purposes. Program officials stated that, in the absence of department-level and agency-level guidance, they have coordinated with DHS and FEMA OCIO officials to ensure that these officials are in agreement with GMM’s approach to continuous monitoring. By having monitoring control policies and procedures in place, FEMA management is positioned to more effectively prioritize and plan its risk response to current threats and vulnerabilities for the GMM program. Given FEMA’s highly complex grants management environment, with its many stakeholders, IT systems, and internal and external users, implementing leading practices for business process reengineering and IT requirements management is critical for success. FEMA has taken many positive steps, including ensuring executive leadership support for business process reengineering, documenting the agency’s grants management processes and performance improvement goals, defining initial IT requirements for the program, incorporating input from end user stakeholders into the development and implementation process, and taking recent actions to improve its delivery of planned IT requirements. Nevertheless, until the GMM program finalizes plans and time frames for implementing its organizational change management actions, plans and communicates system transition activities, and maintains clear traceability of IT requirements, FEMA will be limited in its ability to provide streamlined grants management processes and effectively deliver a modernized IT system to meet the needs of its large range of users. While GMM’s initial cost estimate was reliable, key assumptions about the program since the initial estimate had changed and, therefore, it no longer reflected the current approach for the program. The forthcoming updated cost schedule is expected to better reflect the current approach. However, the program’s unreliable schedule to fully deliver GMM by September 2020 is aggressive and unrealistic. The delays the program has experienced to date further compound GMM’s schedule issues. Without a robust schedule that has been informed by a realistic assessment of GMM’s development activities, leadership will be limited in its ability to make informed decisions on what additional increases in cost or reductions in scope might be needed to achieve their goals. Further, FEMA’s implementation of cybersecurity practices for GMM in the areas of system categorization, selection and implementation, and monitoring will help the program. However, GMM lacked essential details for evaluating security controls, did not approve the security assessment plan before proceeding with the security assessment, did not follow DHS’s guidance to develop corrective action plans for all security vulnerabilities, and did not fully test all security controls. As a result, the GMM engineering and test environment remains at an increased risk of exploitations. We are making eight recommendations to FEMA: The FEMA Administrator should ensure that the GMM program management office finalizes the organizational change management plan and time frames for implementing change management actions. (Recommendation 1) The FEMA Administrator should ensure that the GMM program management office plans and communicates its detailed transition activities to its affected customers before they transition to GMM and undergo significant changes to their processes. (Recommendation 2) The FEMA Administrator should ensure that the GMM program management office implements its planned changes to its processes for documenting requirements for future increments and ensures it maintains traceability among key IT requirements documents. (Recommendation 3) The FEMA Administrator should ensure that the GMM program management office updates the program schedule to address the leading practices for a reliable schedule identified in this report. (Recommendation 4) The FEMA Administrator should ensure that the FEMA OCIO defines sufficiently detailed planned evaluation methods and actual evaluation methods for assessing security controls. (Recommendation 5) The FEMA Administrator should ensure that the FEMA OCIO approves a security assessment plan before security assessment reviews are conducted. (Recommendation 6) The FEMA Administrator should ensure that the GMM program management office follows DHS guidance on preparing corrective action plans for all security vulnerabilities. (Recommendation 7) The FEMA Administrator should ensure that the GMM program management office fully tests all of its security controls for the system. (Recommendation 8) DHS provided written comments on a draft of this report, which are reprinted in appendix IV. In its comments, the department concurred with all eight of our recommendations and provided estimated completion dates for implementing each of them. For example, with regard to recommendation 4, the department stated that FEMA plans to update the GMM program schedule to address the leading practices for a reliable schedule by April 30, 2019. In addition, for recommendation 7, the department stated that FEMA plans to ensure that corrective action plans are prepared by July 31, 2019, to address all identified security vulnerabilities for GMM. If implemented effectively, the actions that FEMA plans to take in response to the recommendations should address the weaknesses we identified. We also received technical comments from DHS and FEMA officials, which we incorporated, as appropriate. We are sending copies of this report to the Secretary of Homeland Security and interested congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4456 or harriscc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Our objectives were to (1) determine the extent to which the Federal Emergency Management Agency (FEMA) is implementing leading practices for reengineering its grants management business processes and incorporating business needs into Grants Management Modernization (GMM) information technology (IT) requirements; (2) assess the reliability of the program’s estimated costs and schedule; and (3) determine the extent to which FEMA is addressing key cybersecurity practices for GMM. To address the first objective, we reviewed GAO’s Business Process Reengineering Assessment Guide and Software Engineering Institute’s Capability Maturity Model for Integration for Development to identify practices associated with business process reengineering and IT requirements management. We then selected six areas that, in our professional judgment, represented foundational practices that were of particular importance to the successful implementation of an IT modernization effort that is using Agile development processes. We also selected the practices that were most relevant based on where GMM was in the system development lifecycle and we discussed the practice areas with FEMA officials. The practices are: Ensuring executive leadership support for process reengineering Assessing the current and target business environment and business Establishing plans for implementing new business processes Establishing clear, prioritized, and traceable IT requirements Tracking progress in delivering IT requirements Incorporating input from end user stakeholders We also reviewed selected chapters of GAO’s draft Agile Assessment Guide (Version 6A), which is intended to establish a consistent framework based on best practices that can be used across the federal government for developing, implementing, managing, and evaluating agencies’ IT investments that rely on Agile methods. To develop this guide, GAO worked closely with Agile experts in the public and private sector; some chapters of the guide are considered more mature because they have been reviewed by the expert panel. We reviewed these chapters to ensure that our expectations for how FEMA should apply the six practices for business process reengineering and IT requirements management are appropriate for an Agile program and are consistent with the draft guidance that is under development. Additionally, since Agile development programs may use different terminology to describe their software development processes, the Agile terms used in this report (e.g., increment, sprint, epic, etc.) are specific to the GMM program. We obtained and analyzed FEMA grants management modernization documentation, such as current and target grants management business processes, acquisition program baseline, operational requirements document, concept of operations, requirements analyses workbooks, Grants Management Executive Steering Group artifacts, stakeholder outreach artifacts, Agile increment- and sprint-level planning and development artifacts, and the requirements backlog. We assessed the program documentation against the selected practices to determine the extent to which the agency had implemented them. We then assessed each practice area as: fully implemented—FEMA provided complete evidence that showed it fully implemented the practice area; partially implemented—FEMA provided evidence that showed it partially implemented the practice area; not implemented—FEMA did not provide evidence that showed it implemented any of the practice area. Additionally, we observed Agile increment and sprint development activities at GMM facilities in Washington, D.C. We also observed a demonstration of how the program manages its lower level requirements (i.e., user stories and epics) and maintains traceability of the requirements using an automated tool at GMM facilities in Washington, D.C. We also interviewed FEMA officials, including the GMM Program Executive, GMM Program Manager, GMM Business Transformation Team Lead, and Product Owner regarding their efforts to streamline grants management business processes, collect and incorporate stakeholder input, and manage GMM’s requirements. In addition, we interviewed FEMA officials from four out of 16 grant program offices and two out of 10 regional offices to obtain contextual information and illustrative examples of FEMA’s efforts to reengineer grants management business processes and collect business requirements for GMM. Specifically, We selected the four grant program offices based on a range of grant programs managed, legacy systems used, and the amount of grant funding awarded. We also sought to select a cross section of different characteristics, such as selecting larger grant program offices, as well as smaller offices. In addition, we ensured that our selection included the Assistance to Firefighters Grants (AFG) program office because officials in this office represent the first GMM users and, therefore, are more actively involved with the program’s Agile development practices. Based on these factors, we selected: Public Assistance Division, Individual Assistance Division, AFG, and National Fire Academy. Additionally, the four selected grant program offices are responsible for 16 of the total 45 grant programs and are users of five of the nine primary legacy IT systems. The four selected grant program offices also represent about 68 percent of the total grant funding awarded by FEMA from fiscal years 2005 through 2016. We selected two regional offices based on (1) the largest amount of total FEMA grant funding for fiscal years 2005 through 2016—Region 6 located in Denton, Texas; and (2) the highest percentage of AFG funding compared to the office’s total grant funding awarded from fiscal years 2005 through 2016—Region 5 located in Chicago, Illinois. To assess the reliability of data from the program’s automated IT requirements management tool, we interviewed knowledgeable officials about the quality control procedures used by the program to assure accuracy and completeness of the data. We also compared the data to other relevant program documentation on GMM requirements. We determined that the data used were sufficiently reliable for the purpose of evaluating GMM’s practices for managing IT requirements. For our second objective, to assess the reliability of GMM’s estimated costs and schedule, we reviewed documentation on GMM’s May 2017 lifecycle cost estimate and on the program’s schedule, dated May 2018. To assess the reliability of the May 2017 lifecycle cost estimate, we evaluated documentation supporting the estimate, such as the cost estimating model, the report on GMM’s Cost Estimating Baseline Document and Life Cycle Cost Estimate, and briefings provided to the Department of Homeland Security (DHS) and FEMA management regarding the cost estimate. We assessed the cost estimating methodologies, assumptions, and results against leading practices for developing a comprehensive, accurate, well-documented, and credible cost estimate, identified in GAO’s Cost Estimating and Assessment Guide. We also interviewed program officials responsible for developing and reviewing the cost estimate to understand their methodology, data, and approach for developing the estimate. We found that the cost data were sufficiently reliable. To assess the reliability of the May 2018 GMM program schedule, we evaluated documentation supporting the schedule, such as the integrated master schedule, acquisition program baseline, and Agile artifacts. We assessed the schedule documentation against leading practices for developing a comprehensive, well-constructed, credible, and controlled schedule, identified in GAO’s Schedule Assessment Guide. We also interviewed GMM program officials responsible for developing and managing the program schedule to understand their practices for creating and maintaining the schedule. We noted in our report the instances where the quality of the schedule data impacted the reliability of the program’s schedule. For both the cost estimate and program schedule, we assessed each leading practice as: fully addressed—FEMA provided complete evidence that showed it implemented the entire practice area; substantially addressed—FEMA provided evidence that showed it implemented more than half of the practice area; partially addressed—FEMA provided evidence that showed it implemented about half of the practice area; minimally addressed—FEMA provided evidence that showed it implemented less than half of the practice area; not addressed—FEMA did not provide evidence that showed it implemented any of the practice area. Finally, we provided FEMA with draft versions of our detailed analyses of the GMM cost estimate and schedule. This was done to verify that the information on which we based our findings was complete, accurate, and up-to-date. Regarding our third objective, to determine the extent to which FEMA is addressing key cybersecurity practices for GMM, we reviewed documentation regarding DHS and FEMA cybersecurity policies and guidance, and FEMA’s authorization to operate for the program’s engineering and test environment. We evaluated the documentation against all six cybersecurity practices identified in the National Institute of Standards and Technology’s (NIST) Risk Management Framework. While NIST’s Risk Management Framework identifies six total practices, for reporting purposes, we combined two interrelated practices—selection of security controls and implementation of security controls—into a single practice. The resulting five practices were: categorizing the system based on security risk, selecting and implementing security controls, assessing security controls, obtaining an authorization to operate the system, and monitoring security controls on an ongoing basis. We obtained and analyzed key artifacts supporting the program’s efforts to address these risk management practices, including the program’s System Security Plan, the Security Assessment Plan and Report, Authorization to Operate documentation, and the program’s continuous monitoring documentation. We also interviewed officials from the GMM program office and FEMA’s Office of the Chief Information Officer, such as the GMM Security Engineering Lead, GMM Information System Security Officer, and FEMA’s Acting Chief Information Security Officer, regarding their efforts to assess, document, and review security controls for GMM. We assessed the evidence against the five practices to determine the extent to which the agency had addressed them. We then assessed each practice area as: fully addressed—FEMA provided complete evidence that showed it fully implemented the practice area; partially addressed—FEMA provided evidence that showed it partially implemented the practice area; not addressed—FEMA did not provide evidence that showed it implemented any of the practice area. To assess the reliability of data from the program’s automated security controls management tool, we interviewed knowledgeable officials about the quality control procedures used by the program to assure accuracy and completeness of the data. We also compared the data to other relevant program documentation on GMM security controls for the engineering and test environment. We found that some of the security controls data we examined were sufficiently reliable for the purpose of evaluating FEMA’s cybersecurity practices for GMM, and we noted in our report the instances where the accuracy of the data impacted the program’s ability to address key cybersecurity practices. We conducted this performance audit from December 2017 to April 2019 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Federal Emergency Management Agency (FEMA) awards many different types of grants to state, local, and tribal governments and nongovernmental entities. These grants are to help communities prevent, prepare for, protect against, mitigate the effects of, respond to, and recover from disasters and terrorist attacks. Agile software development is a type of incremental development that calls for the rapid delivery of software in small, short increments. The use of an incremental approach is consistent with the Office of Management and Budget’s guidance as specified in its information technology (IT) Reform Plan, as well as the legislation commonly referred to as the Federal Information Technology Acquisition Reform Act. Many organizations, especially in the federal government, are accustomed to using a waterfall software development model, which typically consists of long, sequential phases, and differs significantly from the Agile development approach. Agile practices integrate planning, design, development, and testing into an iterative lifecycle to deliver software early and often. Figure 7 provides a depiction of software development using the Agile approach, as compared to a waterfall approach. The frequent iterations of Agile development are intended to effectively measure progress, reduce technical and programmatic risk, and respond to feedback from stakeholders in changes to IT requirements more quickly than traditional methods. Despite these intended benefits, organizations adopting Agile must overcome challenges in making significant changes to how they are accustomed to developing software. The significant differences between Agile and waterfall development impact how IT programs are planned, implemented, and monitored in terms of cost, schedule, and scope. For example, in waterfall development, significant effort is devoted upfront to document detailed plans and all IT requirements for the entire scope of work at the beginning of the program, and cost and schedule can be varied to complete that work. However, for Agile programs the precise details are unknown upfront, so initial planning of cost, scope, and timing would be conducted at a high level, and then supplemented with more specific plans for each iteration. While cost and schedule are set for each iteration, requirements for each iteration (or increment) can be variable as they are learned over time and revised to reflect experiences from completed iterations and to accommodate changing priorities of the end users. The differences in these two software development approaches are shown in figure 8. Looking at figure 8, the benefit provided from using traditional program management practices such as establishing a cost estimate or a robust schedule, is not obvious. However, unlike a theoretical environment, many government programs may not have the autonomy to manage completely flexible scope, as they must deliver certain minimal specifications with the cost and schedule provided. In those cases, it is vital for the team to understand and differentiate the IT requirements that are “must haves” from the “nice to haves” early in the planning effort. This would help facilitate delivery of the “must-haves” requirements first, thereby providing users with the greatest benefits as soon as possible. In addition to the contact named above, the following staff made key contributions to this report: Shannin G. O’Neill (Assistant Director), Jeanne Sung (Analyst in Charge), Andrew Beggs, Rebecca Eyler, Kendrick Johnson, Thomas J. Johnson, Jason Lee, Jennifer Leotta, and Melissa Melvin.

Question: Write a one-page summary of the report 1.

Answer: In recent decades, many new regulations intended to strengthen financial soundness, improve consumer protections, and aid anti-money laundering efforts were implemented for financial institutions. Smaller community banks and credit unions must comply with some of the regulations, but compliance can be more challenging and costly for these institutions. GAO examined (1) the regulations community banks and credit unions viewed as most burdensome and why, and (2) efforts by depository institution regulators to reduce any regulatory burden. GAO analyzed regulations and interviewed more than 60 community banks and credit unions (selected based on asset size and financial activities), regulators, and industry associations and consumer groups. GAO also analyzed letters and transcripts commenting on regulatory burden that regulators prepared responding to the comments. Interviews and focus groups GAO conducted with representatives of over 60 community banks and credit unions indicated regulations for reporting mortgage characteristics, reviewing transactions for potentially illicit activity, and disclosing mortgage terms and costs to consumers were the most burdensome. Institution representatives said these regulations were time-consuming and costly to comply with, in part because the requirements were complex, required individual reports that had to be reviewed for accuracy, or mandated actions within specific timeframes. However, regulators and others noted that the regulations were essential to preventing lending discrimination and use of the banking system for illicit activity, and they were acting to reduce compliance burdens. Institution representatives also said that the new mortgage disclosure regulations increased compliance costs, added significant time to loan closings, and resulted in institutions absorbing costs when others, such as appraisers and inspectors, changed disclosed fees. The Consumer Financial Protection Bureau (CFPB) issued guidance and conducted other outreach to educate institutions after issuing these regulations in 2013. But GAO found that some compliance burdens arose from misunderstanding the disclosure regulations—which in turn may have led institutions to take actions not actually required. Assessing the effectiveness of the guidance for the disclosure regulations could help mitigate the misunderstandings and thus also reduce compliance burdens. Regulators of community banks and credit unions—the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration—conduct decennial reviews to obtain industry comments on regulatory burden. But the reviews, conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA), had the following limitations: CFPB and the consumer financial regulations for which it is responsible were not included. Unlike executive branch agencies, the depository institution regulators are not required to analyze and report quantitative-based rationales for their responses to comments. Regulators do not assess the cumulative burden of the regulations they administer. CFPB has formed an internal group that will be tasked with reviewing regulations it administers, but the agency has not publicly announced the scope of regulations included, the timing and frequency of the reviews, and the extent to which they will be coordinated with the other federal banking and credit union regulators as part of their periodic EGRPRA reviews. Congressional intent in mandating that these regulators review their regulations was that the cumulative effect of all federal financial regulations be considered. In addition, sound practices required of other federal agencies require them to analyze and report their assessments when reviewing regulations. Documenting in plans how the depository institution regulators would address these EGRPRA limitations would better ensure that all regulations relevant to community banks and credit unions were reviewed, likely improve the analyses the regulators perform, and potentially result in additional burden reduction. GAO makes a total of 10 recommendations to CFPB and the depository institution regulators. CFPB should assess the effectiveness of guidance on mortgage disclosure regulations and publicly issue its plans for the scope and timing of its regulation reviews and coordinate these with the other regulators' review process. As part of their burden reviews, the depository institution regulators should develop plans to report quantitative rationales for their actions and addressing the cumulative burden of regulations. In written comments, CFPB and the four depository institution regulators generally agreed with the recommendations.