FmERAL HOUSING FmANCE BOD 

Image Provided by Habitat for Humanity of Huron Vdey 

OFFICE QF INSPECTOR GENERAL 

SmmM REPORT 

FOR THE PERIOD 

April 1,2007- September 30,2007 
OFFICE OF INSPECTOR GENERAL 

SEMIANWUA L REPOR T 

FOR THE PERIOD 

April 1, 2007 - September 30, 2007 

EDWARD KELLEY 

INSPECTOR GENERAL 
TABLE OF CONTENTS 

Executive Summary ........................................................................................ 1 

Background on the FHLBank System. the Finance Board. 

And the Office of Inspector General ............................. 

Audit Activity ............................... 

Investigative Activity .......................................... 

Summary of "Section 5" Reporting Requirements .......... 

Table A . Listing of Completed Audits. Surveys. Limited 

Reviews. and Evaluations ................................... 

Table B - Summary of Investigations ........................... 

Table C - IG Reports with Questioned~Unsupported Costs ................... 

Table D - IG Reports Recommending That Funds Be Put to Better Use ......... 
EXECUTIVT SUMMARY 

The mission of the Office of lnspector General (01G) at the Federal Housing Finance Board (Finance 

Board) is to support the agency's overall mission and goals established by the President, Congress, and the 

Finance Board, while helping to protect the agency from fraud, waste, and abuse. Consistent with OIG's 

strategic plan for the period, April I, 2004 to March 31,2009, and in accordance with the lnspector General 

Act of 1978, as amended (IG Act), we continue to rely on audits, investigations, and formal and informal 

technical assistance to accomplish our mission. OIG's strategic plan and annual audit plan are designed to 

support the Finance Board's strategic plan. In that regard, we examined agency efforts to hire and retain 

qualified examiners. We continued to address agency administrative policies and procedures related to 

financial reporting, privacy, and information technology security. We remained an active member in the 

federal Inspectors General community to facilitate our statutory mandate to participate in government-wide 

efforts to Drevent fraud, waste, and abuse and to remain current on matters affectina the IG communitv as 

well as the Finance ~osrd. W;continued to rely heavily on contracting and assistake from other members 

of the lnspector General community for resources to accomplish required audits and investigations. 

We conducted audits and audit recommendation follow-up of agency program and administrative functions. 

These audits were conducted in accordance with generally accepted government auditing standards issued by 

the Government Accountability Office. Two audits were in process at the beginning of the reporting period and 

five audits were initiated during the period. By the end of this reporting period, OIG had completed an audit of 

the Finance Board's compliance with the Federal Information Security Management Act. Six audits remained 

in process at the end of the reporting period. They are: 1) an audit of the Finance Board's Fiscal Year 2007 

Financial Statements, 2) a limited review of the Finance Board's implementation of OMB Circular A-123, 3) an 

audit of the Thoroughness of Examinations, 4) an audit of the Finance Board's Continuity of Operations Plan, 

5) an audit of the Disposition of IT equipment, and 6) an audit of the Finance Board's Merit Pay Increase 

Process. 

Our inve~tigar~ve act.vity was performed n accordance with Qualify Standards for 1nvest;qations issued by 

Ine President's Counc:, on lnrearitv and Effic~encv ,PCIE) and the EX~CJI ve Council on 1ntear.t~ and 

Efficiency (ECIE). ~nvesti~ativemkters continue'ti be ~ppropriately coordinated with officiis the 

Department of Justice, the Federal Bureau of Investigation, and other law enforcement entities. We 

continued to focus on resolving investigative matters-expeditiously and identifying control weaknesses that 

may contribute to possible fraud or abuse. During the reporting period, we received two allegations. After a 

preliminary review, one of the allegations was closed and the second allegation remained in process at the 

end of the period. 
We continued to maintain positive working liaisons with: 1) Finance Board officials, in efforts to identify and 

correct management problems and to clarify OIG's mission, authorities and responsibilities; 2) Congress, in 

order to keep them appropriately informed; 3) external auditors, to facilitate timely and accurate reporting on 

Finance Board operations; and 4) the lnspector General community, to stay apprised of evolving issues that 

affect the Finance Board. Specifically, OIG continued to monitor and provide informal input, as appropriate, 

into management efforts to enhance the agency's human resources function, bill payment procedures, 

payroll function, and information technology security function. We also continued to coordinate with other 

financial regulatory agencies and the Government Accountability Office on audits and reviews impacting the 

Finance Board. In addition, OIG participated in activities involving the entire lnspector General community. 

As part of our affiliation with the ECIE, we continued to coordinate peer reviews of ECIE members' audit 

operations - a mechanism for assuring quality audits by lnspector Generals - and began hosting the monthly 

meetings of the ECIE. We also began serving on the PClElEClE audit committee and responded to various 

inquiries involving the activities of the lnspector General community. 

Edward Kelley 

lnspector General 
BACKGROLJAD ON THE FmBANY SYSTEM; Tm FmANCE BOARD, 

Ah59 TNE OFFICE OF lNSPECTOR GEhERAL 

The Federal Home Loan Bank System (FHLBank System) was created in 1932 to promote home 

ownership and a strong home finance industry. Its network of 12 district Federal Home Loan Banks 

(FHLBanks) provides lending, deposit, and other services to member institutions. Originally, the FHLBank 

System's membership was limited to thrift institutions, whose membership was mandatory. Since the 

FHLBank System's inception, membership has grown to include savings and loans, savings banks, 

cooperative banks, and a small number of insurance companies. As of August 1989, membership was 

opened to commercial banks and credit unions that meet a commitment to housing finance, as defined in 

law. As of May 13, 2000, membership for all financial institutions in the system became voluntary. 

The 12 FHLBanks borrow funds in the nation's credit markets to lend to the FHLBank System member 

institutions, which totaled 81 19 as of June 30, 2007. These institutions, in turn, use the funds for home 

mortgages, to meet savings withdrawal needs, and for other authorized purposes. As of June 30, 2007, the 

FHLBanks had outstanding loans (Advances) to member institutions totaling $642.1 billion for these 

purposes. Also, through December 31,2006 the Affordable Housing Program (AHP) of the Federal Home 

Loan Bank System has provided approximately $2.9 billion to help house some of America's neediest 

families. As of December 31,2006, more than 575,000 housing units were approved. Under the competitive 

application program, the AHP funded almost 518,000 units of which 70% were for very-low income 

households. 

Concurrent with the Affordable Housing Program, the Federal Home Loan Bank System has increased its 

efforts in overall community development through its Community lnvestment Cash Advance (CICA) 

Programs including the Community lnvestment Program (CIP). From 1990 through 2006, the CIP has 

provided more than $37 billion in advances for housing, and CICA and CIP together have provided $1 1.4 

billion in advances and grants for economic development projects benefiting targeted communities and 

households. 

The Federal Housing Finance Board (Finance Board), with a fiscal year 2007 budget of approximately 

$35.9 million and 143.5 employees, is the regulator of the FHLBank System. It is an independent agency 

established by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The Finance 

Board's function is to ensure that FHLBanks: 1) operate in a safe and sound manner; 2) carry out their 

housing finance mission; and 3) remain adequately capitalized and able to raise funds in the capital markets. 

The Finance Board receives its operating funds from assessments levied against the 12 FHLBanks. 
The Finance Board has only indirect involvement - through the 12 FHLBanks - with the FHLBank 

System's member institutions. Unlike its predecessor, the Federal Home Loan Bank Board, the Finance 

Board neither monitors nor examines any of the individual members of the FHLBank System. The Office of 

Thrifl Supervision, a separate federal government agency, monitors, examines, and regulates individual 

member institutions. The Finance Board is only responsible for annually examining the 12 FHLBanks and 

the Office of Finance. 

As of April 1,2007 approximately 80 percent of the Finance Board's staff resources are dedicated, in 

whole or in part, to: 1) examining the safety and soundness of the 12 FHLBanks and the Ofice of Finance; 

2) reviewing and evaluating the work of each FHLBank's internal audit staff; 3) monitoring FHLBank System 

compliance with laws, regulations, policies, and procedures; 4) assessing the FHLBank System's financial 

condition; 5) modeling and analyzing the implementation of financial policies; 6) maintaining and 

promulgating membership policies; 7) monitoring the election and appointment of FHLBank Directors; 8) 

collecting information on individual FHLBank policies and marketing activities; and 9) monitoring and 

reviewing FHLBank and members' compliance with requirements of the Affordable Housing Program and the 

Community Investment Program. 

The Office of Inspector General (OIG) is responsible for the conduct of audits and investigations at the . . Finance Board in accordance with generally accepted government auditing standards and investigative 

standards. OIG may also conduct audit or investigative activities at the 12 FHLBanks and other related 

entities when: 1) requested to do so by the chairman; 2) necessary to obtain information on the Finance 

Board's administration of its program; and 3) aimed at detecting fraud or inefficiency in the administration or 

operation of Finance Board programs. 
On April 19.2004, OIG issued its Strategic Plan for the period April 1, 2004 to March 31,2009. OIG's annual audit 

plan for the period April 1, 2007 to March 31, 2008. is included as an Exhibit to the five-year strategic plan. Both can 

be viewed at the OIG's web page located at htt~:l/www.fnfb.qov/Defa~It~asp~?Paqe=100 . During the semiannual 

reporting period April 1,2007 through September 30,2007, OIG completed one audit (Table A, on page 9). At the 

conclusion of this period. OIG also had six audits in process. OIG continued to coordinate with the Government 

Accountability Ofti&? and the Inspector General community on audits that impact the Finance Board. In this regard, 

the Inspector General was appointed to serve on the IG community's Audit Committee and continued to coordinate 

audit peer reviews that ~~C~ECIE IG's ofice is required by statuteto undergo every three years. Specifically, OIG's 

audit activities at the Finance Board included: 

comIJrJD 

An audit of the Finance Board's Compliance with the Federal Information Security Management Act. 

WORK-IN-PROCESS 

A limited scope review of the Finance Board's compliance with OMB Circular A-123, 

An audit of the Finance Board's financial statements for fiscal year 2007, 

An audit of the Thoroughness of Examinations, 

An audit of the Finance Board's Continuity of Operations Plan, 

An audit of the Finance Board's disposition of IT equipment, and 

An audit of the Finance Board's Merit Pay Increase Process. 
INVESTIGATIVE ACTIVlTY 

During this reporting period OIG continued to operate in full compliance with the PClEiEClE Quality 

Standards for lnvestiaations. The number of investigative matters processed by the Office of Inspector 

General during this reporting period remained constant. We had no investigative matters in process at the 

beginning of the reporting period but did receive two allegations during the period. One of the allegations 

was closed after the preliminary investigation stage. The second matter remained under preliminary review at 

the end of the reporting period. 

TableB, on page 10, contains a numerical summary of investigations, allegations, preliminary inquires, ana 

referrals. 
SuMh4ARY OF "SECTION 5" REPORrnG REQUIREMENTS 

1. Significant problems, abuses, deficiencies disclosed by management and IG's 

recommended corrective actions. [5a(l) and (211 

None. 

2. Previously reported significant recommendations with incomplete corrective actions 

[5a(3)1 

None. 

3. Prosecution, convictions, and referrals 

None. 

4. Reports on failure to provide information or assistance 

None, 

5. List of issued audit reports 

See attached MA, on page 9. 

6. Summary of significant reports [5a(7)1 

In accordance with the Federal lnformation Security Management Act, OIG contracted for an audit of the Finance 

Board's security over electronic information processing. While several matters were noted, none were significant. 

The agency's Chief lnformation Officer and his staff have a commendable program for continually identifying 

potential information security threats and hardening the agency's security measures to counter the potential 

security threats. 

7. Statistical table- audits with questionedlunsupported costs [5a(8)] 

See attached Table C, on page 11. 
8. Statistical table- audits recommending that funds 

be put to better use 

See attached Table D, on page 12 

9. Summary of prior-period audits with no current management [5a(10)] 

decisions 

None. 

10. Reasons for revisions of significant management decisions [5a(11)] 

None. 

11. OIG disagreement with management decisions 

None. 
TABLE A 

USTING OF COMPLETl33 AUDITS. SURVEYS. LIMITED REVIEWS. 

AND EVALUATIONS 

REPORT NUMBER DATE COMPLETED TITLE OF REPORT 

September 21,2007 Audit of the Finance Board's 

Compliance with the Federal 

Information Security Management 

Act 
TABLE B 

SUMMARY OF INVESTIGATIONS 

BEGINNING CASES 

Cases Pending at the Beginning of Period: 

At the Finance Board ............................... ........ At the Department of Justice .......................................... 

At other agencies ......................................................... 

NEW CASES RECEIVED 

Allegations Received During Current Period ........ 

STATUS OF CASES (as of March 31.2006) 

Resulted in: 

Allegations Pend . Completion of Prelim . InvesffAudit ........................................... 1 

Preliminary Investigation Completed- (Cases Closed) .......................................... 1 

Cases Pending Completion of Full Investigation ................................................. 0

Full Investigation Completed- (Cases Closed) .................................................... 0

Cases Scheduled for AuditlLtd . Rev . - (Cases Closed) ........................................ 0 

Cases Pending Decision by Finance Board management ..................................... 0 

Cases Pending Decision by Dept . of Justice ...................................................... 0 

Cases Pending Decision by Other Agencies ...................................................... 0 

Cases Referred to the Finance Board Management- (Cases Closed) ..................... 0 

Referred to Other Agencies- (Cases Closed) ..................................................... 0 

DISPOSITION 

Civil ........................................................................................................... 0 

Criminal ..................................................................................................... 0 

Administrative Sanctions ............................................................................... 0 

Corrective Action Taken ................................................................................ 0 

Other (PendinglReferrals. etc.) .................. ..................... ....... 0 
mSPECT0R GENERAL REPORTS 

WITH QUESTIONEDNNSUF'PORTED COSTS 

DOLLAR VALUE 

NUMBER QUESTIONFD UNSUPPORTED 

OF REPORTS COSTS COSTS 

a. For which no management 

decision has been made bv . the commencement of the 

reporting period ....................... 

b. Which were issued during the 

reporting period. .......................... 0 

Subtotals (a+b) .............................. 0 

c. For which a management decision 

was made during the reporting 

period ......................................... u 

(i) dollar value of disallowed costs.. 0 

(ii) dollar value of costs not 

disallowed ................................ 

d. For which no management decision 

has been made by the end of the 

reporting period ............................ 0 

e. Report for which no management 

decision was made within six 

months of issuance .......................... 0 

Note: Boldface type entries reflect actual statutory language. 
1 ABLE D 

INSPECTOR GENERAL REPORTS 

RECOMMENDING THAT FUNDS BE PUT TO BETTE37 USE 

NUMBER 

OF REPORTS 

a. For which no management decision 

has been made by the commencement 

of the reporting period ....................................... 

b. Which were issued during the reporting period ...... 

Subtotals (a+b) .................................................... 

c. For which a management decision was made 

during the reporting period ................................... 

(i) dollar value of recommendations that was 

agreed to by management ........................... 

- based upon proposed management action .... 

- based upon proposed legislation action. 

(ii) dollar value of recommendations that were 

not agreed to by management ........................ 

d. For which no management decision has been made 

by the end of the reporting period .......................... 

e. Reports for which no management decision was made 

within six months of issuance ................................... 

DOLLAR 

VALUE 

Mote: Boldface entries reflect actual statutory language