FEDERAL HOUSING FINANCE BOARD

 Photos from “Habitat for Humanity” 

OFFICE OF INSPECTOR GENERAL

SEMIANNUAL REPORT 

FOR THE PERIOD

April 1, 2006 –September 30, 2006 
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

OFFICE OF INSPECTOR GENERAL 

 

 

 

SEMIANNUAL REPORT 

FOR THE PERIOD 

April 1, 2006 – September 30, 2006 

EDWARD KELLEY 

INSPECTOR GENERAL
 

TABLE OF CONTENTS 

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

 Background on the FHLBank System, the Finance Board, 

 And the Office of Inspector General...................................................................... 3 

 Audit Activity.................................................................................................... 5 

 Investigative Activity.......................................................................................... 6 

 Summary of “Section 5” Reporting Requirements.................................................... 7 

 Table A – Listing of Completed Audits, Surveys, Limited 

 Reviews, and Evaluations..................................................................... 9 

 Table B – Summary of Investigations................................................................. 10 

 Table C – IG Reports with Questioned/Unsupported Costs... .................................. 11 

 Table D – IG Reports Recommending Better Use of Funds....................................... 12 

i 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

EXECUTIVE SUMMARY 

 The mission of the Office of Inspector General (OIG) at the Federal Housing Finance Board 

(Finance Board) is to support the agency’s overall mission and goals established by the 

President, the 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 1, 2004 to 

March 31, 2009, and in accordance with the Inspector 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 have monitored Finance Board actions 

related to the appointment of Public Interest Directors to the boards of the twelve Federal Home 

Loan Banks. We also have continued evaluating the effectiveness of the examination and 

supervision function and the usefulness of industry reporting requirements. We addressed 

agency administrative policies and procedures related to financial reporting, privacy, and 

information technology. We remained an active member in the federal Inspector General 

community to facilitate our statutory mandate to participate in government-wide efforts to 

prevent fraud, waste, and abuse and to remain current on matters affecting the IG community 

as well as the Finance Board. We continued to rely heavily on contracting and assistance from 

other members of the Inspectors 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. Five audits were 

in process at the beginning of the reporting period and three audits were initiated during the 

period. By the end of this reporting period, OIG had completed the following four audits: 1) an 

audit of the quality of guidance provided to examiners, 2) an audit of the Finance Board’s 

compliance with the privacy provisions of Section 522 of the Consolidated Appropriations Act of 

2005, 3) an audit of the data integrity of the Call Reporting System, and 4) an audit of the Finance 

Board’s compliance with the Federal Information Security Management Act for fiscal year 2006. 

Four audits remained in process at the end of the reporting period. They are: 1) an audit of the 

disposition off IT equipment, 2) an audit of the accuracy of FHFB merit pay calculations, 3) an 

audit of the Finance Board’s Fiscal Year 2006 Financial Statements, and 4) a Limited Review of 

the Finance Board’s implementation of OMB Circular A-123. 

 Our investigative activity was performed in accordance with Quality Standards for 

Investigations issued by the President’s Council on Integrity and Efficiency (PCIE) and the 

Executive Council on Integrity and Efficiency (ECIE). Investigative matters continue to be 

appropriately coordinated with officials in the Department of Justice, the Federal Bureau of 

Investigations, and other law enforcement entities. We continued to focus on resolving 

1 

investigative matters expeditiously and identifying control weaknesses that may contribute to 

possible fraud or abuse. During the reporting period, we received one allegation, which after 
 

review, was referred to another Finance Board office for disposition. Consequently, no 

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 authorities and responsibilities; 

2) the Congress, in order to keep them appropriately informed; 3) external auditors, to facilitate 

timely and accurate reporting on Finance Board operations; and 4) the Inspector General 

community, to keep 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 procurement function, bill payment procedures, payroll function, and 

information technology 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 Inspector 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 Inspectors 

General and began hosting the monthly meetings of the ECIE. We also responded to various 

inquiries involving the activities of the Inspector General community. 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 

 

2

 

 

 

 

 Edward Kelley 

 Inspector General 

 
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

BACKGROUND ON THE FHLBANK SYSTEM, THE FINANCE BOARD, 

AND THE OFFICE OF INSPECTOR GENERAL

 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 numbered 8,158 as of June 30, 2006. These institutions, in turn, use the funds for home 

mortgages, to meet savings withdrawal needs, and for other authorized purposes. As of June 30, 2006, the 

FHLBanks had outstanding loans (Advances) to member institutions totaling $640 billion for these purposes. 

Also, through June 30, 2006 the Affordable Housing Program (AHP) of the Federal Home Loan Bank System 

has provided approximately $2.7 billion to help house some of America’s neediest families. As of September 

30, 2006, more than 539,000 housing units were approved. Under the competitive application program, the 

AHP funded almost 491,000 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 Investment Cash Advance (CICA) Programs 

including the Community Investment Program (CIP). CICA lending, not including AHP, since the inception of 

the program is more than $44 billion as of December 31, 2005. 

 The Federal Housing Finance Board (Finance Board), with a fiscal year 2006 budget of approximately 

$35.9 million and 131 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. 

 

3
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 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 Thrift 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, 2006 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 Office 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. 

4
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

AUDIT ACTIVITY 

 

 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, 2006 to March 31, 2007, is 

included as an Exhibit to the five-year strategic plan. Both can be viewed at OIG’s website 

http://intranet.fhfb.gov/FBOffices/oig.htm. During the semiannual reporting period April 1, 2006 

through September 30, 2006, OIG completed four audits (Table A on page 9). At the 

conclusion of this period, OIG also had four audits in process. OIG continued to coordinate with 

the Government Accountability Office and the Inspector General community on audits that 

impact the Finance Board. Specifically, OIG’s audit activities included: 

COMPLETED 

An audit of FHFB Data Integrity of the Call Reporting System; 

An audit of the Adequacy of FHFB’s Privacy and Data Protection Procedures and Policies, 

which includes the privacy provisions of Section 522 of the Consolidated Appropriations Act of 

2005; 

An audit of the quality of guidance provided to examiners; and 

An audit of the FHFB’s compliance with the Federal Information Security Management Act for 

fiscal year 2006. 

WORK-IN-PROCESS 

 

An audit of FHFB’s disposition of IT equipment; 

An audit of FHFB’s Merit Promotion Pool Calculations; 

A limited scope review of FHFB’s compliance with OMB Circular A-123; and 

An audit of FHFB’s financial statements for fiscal year 2006. 

5
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

INVESTIGATIVE ACTIVITY 

 

 During this reporting period OIG continued to operate in full compliance with the PCIE/ECIE 

Quality Standards for Investigations. The number of investigative matters processed by the 

Office of Inspector General during this reporting period increased to three. We had no 

investigative matters in process at the beginning of the reporting period but did receive three 

allegations. Two of the allegations were closed after the preliminary investigation stage. The 

third matter was referred to another Finance Board office for disposition. 

 

Table B, on page 10, contains a numerical summary of investigations, allegations, 

preliminary inquires, and referrals. 

6
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 

SUMMARY OF “SECTION 5” REPORTING REQUIREMENTS 

 

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

 recommended corrective actions [5a(1) and (2)] 

 During this reporting period, the Federal Housing Finance Board (Finance Board) continued 

to postpone the appointment of Public Interest Directors (PIDs) to the Boards of the 12 

Federal Home Loan Banks (FHLBanks). Although the Finance Board acknowledges its 

statutory responsibility under the Financial Institutions Reform, Recovery and Enforcement 

Act of 1989 (FIRREA), to make PID appointments, it has taken the position that there are 

no deadlines for when the appointments must be made. While OIG has not examined the 

question of explicit or implicit deadline requirements in FIRREA, it is clear that, from a 

governance perspective, FIRREA requires that the Boards function with both Industry and 

Public Interest Directors. By the end of calendar year 2006, the terms of all PIDs on 

FHLBank Boards throughout the FHLBank System will expire if the Finance Board does not 

make any PID appointments in the interim. To avoid impairing the FHLBanks’ Boards’ 

ability to operate in compliance with FIRREA and their ability to properly carry out their 

governance responsibilities, the Finance Board should take immediate actions to appoint 

qualified Public Interest Directors to the FHLBanks’ Boards of Directors. 

 

2. Previously reported significant recommendations with incomplete corrective actions 

 [5a(3)] 

None 

3. Prosecution, convictions, and referrals [5a(4)] 

 None 

4. Reports on failure to provide information or assistance [5a(5)] 

 None 

5. List of issued audit reports [5a(6)] 

 See attached Table A. 

7 
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

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

OIG completed an audit of FHFB’s compliance with the Federal 

Information Security Management Act and identified a continued problem 

with the CIO’s reliance on a contractor to perform the 

inherently governmental duties required of the Finance Board’s 

Information Security Officer (ISO). However, the CIO has agreed to 

consider alternatives to the use of a contractor to perform the ISO duties. 

7. Statistical table – audits with questioned/unsupported costs [5a(8)] 

 See attached Table C. 

8. Statistical table – audits recommending that funds 

be put to better use [5a(9)] 

 See attached Table D. 

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

 

None 

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

 None 

11. OIG disagreement with management decisions [5a(12)] 

See number 1 above. 

8
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 

 TABLE A 

LISTING OF COMPLETED AUDITS, SURVEYS, LIMITED REVIEWS, 

AND EVALUATIONS

REPORT NUMBER DATE COMPLETED TITLE OF 

REPORT

06-A-01-OS August 15, 2006 Audit of the quality of 

guidance provided to 

 examiners 

06-A-02-OM/ISTS September 29, 2006 Audit of the 

Adequacy of FHFB’s 

Privacy and Data 

 Protection 

 Procedures and 

 Policies 

 

06-A-03-OS/ISTS September 29, 2006 Audit of the Data 

 Integrity of the FHFB 

 Call Reporting 

 System 

 

06-A-04-ISTS/OM September 29, 2006 Audit of the Finance 

 Board’s compliance 

 with the Federal 

 Information Security 

 Management Act for 

 fiscal year 2006 

 

9
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 TABLE B 

SUMMARY OF INVESTIGATIONS 

 

BEGINNING CASES NUMBERS 

Cases Pending at the Beginning of Period: 

At the Finance Board.................................................................................... 0 

At the Department of Justice.......................................................................... 0 

At other agencies........................................................................................ 0 

NEW CASES RECEIVED 

Allegations Received During Current Period...................................................... 3 

STATUS OF CASES (as of March 31, 2006) 

Resulted in: 

Allegations Pend. Completion of Prelim. Invest/Audit............................................ 0 

Preliminary Investigation Completed- (Cases Closed).......................................... 2 

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

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

Cases Scheduled for Audit/Ltd. 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 FHFB Management- (Cases Closed)...................................... 1 

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

DISPOSITION 

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

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

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

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

Other (Pending/Referrals, etc.)....................................................................... 0 

10
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 TABLE C 

INSPECTOR GENERAL REPORTS 

WITH QUESTIONED/UNSUPPORTED COSTS 

 DOLLAR VALUE

 NUMBER QUESTIONED UNSUPPORTED 

 OF REPORTS COSTS COSTS

a. For which no management 

 decision has been made by 

 the commencement of the 

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

 

b. Which were issued during the 

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

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

c. For which a management decision 

 was made during the reporting 

 period......................................... 0 0 0 

(i) dollar value of disallowed costs.. 0 0 0 

(ii) dollar value of costs not 

 disallowed................................ 0 0 0 

d. For which no management decision 

 has been made by the end of the 

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

e. Report for which no management 

 decision was made within six 

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

Note: Boldface type entries reflect actual statutory language. 

11
 

September 30, 2006 SEMIANNUAL REPORT TO CONGRESS 

 TABLE D 

INSPECTOR GENERAL REPORTS 

RECOMMENDING THAT FUNDS BE PUT TO BETTER USE 

 

 NUMBER DOLLAR 

 OF REPORTS VALUE

a. For which no management decision 

 has been made by the commencement 

 of the reporting period.......................................... 0 0 

b. Which were issued during the reporting period...... 0 0 

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

c. For which a management decision was made 

 during the reporting period................................... 0 0 

 (i) dollar value of recommendations that was 

 agreed to by management.............................. 0 0 

 - based upon proposed management action.... 0 0 

 - based upon proposed legislation action........ 0 0 

 (ii) dollar value of recommendations that were 

 not agreed to by management........................ 0 0 

d. For which no management decision has been made 

 by the end of the reporting period.......................... 0 0 

e. Reports for which no management decision was made 

 within six months of issuance................................... 0 0 

Note: Boldface entries reflect actual statutory language. 

12