[Federal Register Volume 74, Number 115 (Wednesday, June 17, 2009)]
[Proposed Rules]
[Pages 28636-28639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-14189]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 74, No. 115 / Wednesday, June 17, 2009 / 
Proposed Rules

[[Page 28636]]



FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1233

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR 1731

RIN 2590-AA11


Reporting of Fraudulent Financial Instruments

AGENCY: Federal Housing Finance Agency; Office of Federal Housing 
Enterprise Oversight.

ACTION: Notice of proposed rulemaking; request for comments.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a 
proposed regulation that would require the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, the Federal 
Home Loan Banks (regulated entities) to report to FHFA any fraudulent 
financial instruments that they purchased or sold. The proposed 
regulation would also require the regulated entities to establish and 
maintain internal controls, procedures, and training programs to ensure 
that any such fraudulent instruments are detected and reported.

DATES: Written comments on the proposed regulation must be received on 
or before August 17, 2009. For additional information, see 
SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on the proposed regulation, 
identified by regulatory information number (RIN) 2590-AA11, by any of 
the following methods:
    <bullet> U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA11, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.
    <bullet> Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA11, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
    <bullet> E-mail: Comments to Alfred M. Pollard, General Counsel, 
may be sent by e-mail to <a href="/cdn-cgi/l/email-protection#792b1c1e3a1614141c170d0a391f111f18571e160f"><span class="__cf_email__" data-cfemail="15477072567a7878707b616655737d73743b727a63">[email protected]</span></a>. Please include ``RIN 
2590-AA11'' in the subject line of the message.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at <a href="/cdn-cgi/l/email-protection#97c5f2f0d4f8fafaf2f9e3e4d7f1fff1f6b9f0f8e1"><span class="__cf_email__" data-cfemail="aaf8cfcde9c5c7c7cfc4ded9eaccc2cccb84cdc5dc">[email protected]</span></a> to ensure timely receipt by the 
agency. Please include ``RIN 2590-AA11'' in the subject line of the 
message.

FOR FURTHER INFORMATION CONTACT: Andra Grossman, Counsel, telephone 
(202) 343-1313 (not a toll-free number), Federal Housing Finance 
Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The 
telephone number for the Telecommunications Device for the Deaf is 
(800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    FHFA invites comments on all aspects of the proposed regulation and 
will take all comments into consideration before issuing the final 
regulation. Copies of all comments will be posted without change, 
including any personal information you provide, such as your name and 
address, on the FHFA Web site at http://www.fhfa.gov. In addition, 
copies of all comments received will be available for examination by 
the public on business days between the hours of 10 a.m. and 3 p.m., at 
the Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. To make an appointment to inspect comments, 
please call the Office of General Counsel at (202) 414-6924.

II. Background

    The Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654 (2008), amended the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) 
(Safety and Soundness Act) to establish FHFA as an independent agency 
of the Federal Government.\1\ FHFA was established to oversee the 
prudential operations of the Federal National Mortgage Association, the 
Federal Home Loan Mortgage Corporation (collectively, Enterprises), the 
Federal Home Loan Banks (Banks) (collectively, regulated entities) and 
to ensure that they operate in a safe and sound manner; remain 
adequately capitalized; foster liquid, efficient, competitive and 
resilient national housing finance markets; comply with the Safety and 
Soundness Act and their respective authorizing statutes, as well as all 
rules, regulations, guidelines, and orders, issued thereunder; and 
carry out their missions through activities that are authorized by the 
above-cited statutes and are consistent with the public interest.
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    \1\ See Division A, titled the ``Federal Housing Finance 
Regulatory Reform Act of 2008,'' Title I, Section 1101 of HERA.
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    The Office of Federal Housing Enterprise Oversight (OFHEO) and the 
Federal Housing Finance Board (FHFB) will be abolished one year after 
enactment of HERA. However, the regulated entities continue to operate 
under regulations promulgated by OFHEO and FHFB until such regulations 
are supplanted by regulations promulgated by FHFA.
    In 2005, OFHEO issued a regulation requiring the Enterprises to 
report mortgage fraud and to establish internal controls, procedures, 
and training programs to ensure that mortgage fraud is detected and 
prevented. As part of this rulemaking, that regulation, 12 CFR part 
1731, ``Mortgage Fraud Reporting,'' would be removed when this 
regulation becomes effective.

III. Proposed Regulation

    Section 1379E of the Safety and Soundness Act (12 U.S.C. 4642(a)), 
subjects the regulated entities to both a reporting and an internal 
controls requirement. Under this statutory provision, the Director must 
require a regulated entity to submit a timely report upon discovery 
that it has purchased or sold a fraudulent loan or financial 
instrument, or suspects a possible fraud relating to the purchase or 
sale of any loan or financial instrument. In addition, the Director 
must require each regulated entity to

[[Page 28637]]

establish and maintain procedures designed to discover any such 
transactions.
    Section 1379E of the Safety and Soundness Act (12 U.S.C. 4642(b)) 
also provides each regulated entity, and any entity-affiliated party, 
protection from liability in making a report, or requiring another to 
make any report, if it acts in good faith. This protection extends to 
any liability arising under any provision of law or regulation, any 
constitution, law, or regulation of any State or political subdivision 
of any State, or under any contract or other legally enforceable 
agreement (including any arbitration agreement) for the submission of 
any report or for any failure to notify persons who are the subject of, 
or who are identified in, the report.
    In addition, Congress has continued to emphasize combating mortgage 
fraud as a key element in stabilizing mortgage markets and protecting 
homeowners and investors. The recently enacted Fraud Enforcement and 
Recovery Act of 2009, Public Law 111-21 (2009), provides new funding 
for anti-fraud efforts, enhances federal penalties and includes a 
review of the current financial and economic crisis.
    Section 1313(f) of the Safety and Soundness Act (12 U.S.C. 
4513(f)), requires the Director, when promulgating regulations relating 
to the Banks, to consider the differences between the Banks and the 
Enterprises with respect to the Banks' cooperative ownership structure, 
liquidity mission, affordable housing and community development 
mission, capital structure, and joint and several liability. The 
Director may also consider any other differences that are deemed 
appropriate. The purpose of this proposed rule is to implement 
statutory provisions that address possible risks to the regulated 
entities associated with fraudulent loans or other instruments. 
Although the respective businesses in which the Banks and the 
Enterprises are engaged differ, all of them are involved to some degree 
in providing financing to the residential mortgage market and thus may 
be exposed to the risk of fraud, particularly when investing in whole 
mortgage loans. In preparing the proposed regulation, the Director 
considered the differences between the Banks and the Enterprises as 
they relate to the above factors. The Director believes that none of 
the unique factors relating to the Banks warrants establishing 
different treatment under the proposed regulation. However, detailed 
guidance may be issued that would address specific business or 
operational differences with respect to the regulated entities. 
Nonetheless, the Director requests comments about whether it would be 
appropriate to include in a final rule any provisions relating to the 
differences between the Banks and the Enterprises.

IV. Section-by-Section Analysis

Section 1233.1 Purpose

    This section as proposed would require each regulated entity to 
report to FHFA the discovery of fraud or possible fraud, in connection 
with a loan or other financial instrument that it has purchased or 
sold, and to establish internal controls, procedures, and training 
programs to detect and report such fraud.

Section 1233.2 Definitions

    This section provides definitions for the terms contained in the 
proposed regulation.
    Bank or Federal Home Loan Bank would be defined as a Bank 
established under the Federal Home Loan Bank Act; the term ``Federal 
Home Loan Banks'' means, collectively, all the Federal Home Loan Banks.
    Director would be defined as the Director of FHFA or his or her 
designee.
    Enterprise would be defined as the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation (collectively, 
Enterprises), and any affiliate thereof.
    Entity-affiliated party would be defined as--
    <bullet> Any director, officer, employee, or controlling 
stockholder of, or agent for, a regulated entity;
    <bullet> Any shareholder, affiliate, consultant, or joint venture 
partner of a regulated entity, and any other person, as determined by 
the Director (by regulation or on a case-by-case basis) that 
participates in the conduct of the affairs of a regulated entity, 
provided that a member of a Federal Home Loan Bank shall not be deemed 
to have participated in the affairs of that Federal Home Loan Bank 
solely by virtue of being a shareholder of, and obtaining advances 
from, that Federal Home Loan Bank;
    <bullet> Any independent contractor for a regulated entity 
(including any attorney, appraiser, or accountant), if:
    [cir] The independent contractor knowingly or recklessly 
participates in--

--Any violation of any law or regulation;
--Any breach of fiduciary duty; or
--Any unsafe or unsound practice; and

    [cir] Such violation, breach, or practice caused, or is likely to 
cause, more than a minimal financial loss to, or a significant adverse 
effect on, the regulated entity;
    <bullet> Any not-for-profit corporation that receives its principal 
funding, on an ongoing basis, from any regulated entity; and
    <bullet> The Office of Finance.
    Fraud would be defined as a material misstatement, 
misrepresentation, or omission relied upon by a regulated entity.
    Possible fraud would be defined as a situation that a regulated 
entity has a reasonable belief, based upon a review of information 
available to the regulated entity, that fraud may be occurring or has 
occurred.
    Regulated entity would be defined as the Federal National Mortgage 
Association and any affiliate thereof, the Federal Home Loan Mortgage 
Corporation and any affiliate thereof, and any Federal Home Loan Bank; 
the term ``regulated entities'' means, collectively, the Federal 
National Mortgage Association and any affiliate thereof, the Federal 
Home Loan Mortgage Corporation and any affiliate thereof, and the 
Federal Home Loan Banks.
    Safety and Soundness Act would be defined as the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992, as amended by 
the Federal Housing Finance Regulatory Reform Act of 2008, Division A 
of the Housing and Economic Recovery Act of 2008, Public Law 110-289, 
122 Stat. 2654 (2008).

Section 1233.3 Reporting

    This section as proposed sets forth the procedures for reporting 
fraud and possible fraud to FHFA, and requires a regulated entity to 
report promptly any fraud or possible fraud in writing to the Director. 
This section also provides that if the situation requires the immediate 
attention of FHFA, a regulated entity must report the matter to FHFA 
immediately by telephone or electronic communication. FHFA expects that 
it would issue guidance and instructions with respect to the format and 
content of fraud reports. This proposed section would allow the 
regulated entities to use fraud-reporting formats used by other 
agencies with jurisdiction over such fraud, but only upon receipt of 
written notice from the Director. For instance, under the Bank Secrecy 
Act of 1970, banking regulatory agencies require the completion and 
submission of Suspicious Activity Reports to the United States 
Department of the Treasury Financial Crimes Enforcement Network. The 
section as proposed would further provide for retention of records by a 
regulated entity and would

[[Page 28638]]

prohibit the disclosure of reporting fraud or possible fraud to the 
parties connected with such fraud without the prior written approval of 
the Director. This requirement would not prevent a regulated entity 
from disclosing or reporting such fraud pursuant to legal requirements, 
including disclosure to appropriate law enforcement authorities. 
Finally, this section reiterates a statutory provision that makes clear 
that a regulated entity does not waive any privilege it may otherwise 
possess as a result of reporting fraud or possible fraud to FHFA under 
these provisions.

Section 1233.4 Internal Controls, Procedures and Training

    This section as proposed would require each regulated entity to 
establish adequate and efficient internal controls and procedures, as 
well as an operational training program, to assure that it has in place 
an effective system to detect and report any fraud.

Section 1233.5 Protection From Liability for Reports

    This section as proposed would provide that a regulated entity and 
any entity-affiliated party that submits a report pursuant to this 
part, in good faith (or requires another person to submit such a 
report), cannot be held liable either for submitting the report, or for 
failing to notify any person who is the subject of such report, or is 
identified in the report.

Section 1233.6 Supervisory Action

    This section as proposed would address that failure to comply with 
the requirements of the final regulation may subject a regulated entity 
or its board members, officers, or employees to supervisory action by 
FHFA under the Safety and Soundness Act, including but not limited to, 
cease-and-desist proceedings and civil money penalties.

Regulatory Impact

Paperwork Reduction Act

    As the proposed regulation pertains to the regulated entities, it 
does not contain any information collection requirement that requires 
the approval of the Office of Management and Budget under the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). In this case, the proposed regulation would 
apply only to the regulated entities, none of which are small entities 
for purposes of this requirement. Accordingly, FHFA hereby certifies 
that the proposed regulation is not likely to have a significant 
economic impact on a substantial number of small business entities for 
purposes of the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 1233

    Administrative practice and procedure, Federal home loan banks, 
Government-sponsored enterprises, Mortgages, Reporting and 
recordkeeping requirements.

12 CFR Part 1731

    Administrative practice and procedure, Government-sponsored 
enterprises.

Authority and Issuance

    Accordingly, for the reasons stated in the preamble, under the 
authority of 12 U.S.C. 4514, 4526, and 4642, the Federal Housing 
Finance Agency proposes to amend chapters XII and XVII of Title 12, 
Code of Federal Regulations, as follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

Subchapter B--Entity Regulations

    1. Add part 1233 to subchapter B to read as follows:

PART 1233--REPORTING OF FRAUDULENT FINANCIAL INSTRUMENTS

Subpart A--General
Sec.
1233.1 Purpose.
1233.2 Definitions.
1233.3 Reporting.
1233.4 Internal controls, procedures, and training.
1233.5 Protection from liability for reports.
1233.6 Supervisory action.

    Authority: 12 U.S.C. 4514, 4526, 4642.

Subpart A--General


Sec.  1233.1  Purpose.

    The purpose of this part is to implement section 1379E of the 
Safety and Soundness Act (12 U.S.C. 4642) by requiring each regulated 
entity to report to FHFA any known or possible fraud in connection with 
a loan or other financial instrument that it has purchased or sold, and 
by requiring each regulated entity to establish internal controls, 
procedures, and training programs designed to detect and report such 
fraud.


Sec.  1233.2  Definitions.

    The following definitions apply to the terms used in this part:
    Bank or Federal Home Loan Bank means a Bank established under the 
Federal Home Loan Bank Act; the term ``Federal Home Loan Banks'' means, 
collectively, all the Federal Home Loan Banks.
    Director means the Director of FHFA or his or her designee.
    Enterprise means the Federal National Mortgage Association, the 
Federal Home Loan Mortgage Corporation (collectively, Enterprises), and 
any affiliate thereof.
    Entity-affiliated party means--
    (1) Any director, officer, employee, or controlling stockholder of, 
or agent for, a regulated entity;
    (2) Any shareholder, affiliate, consultant, or joint venture 
partner of a regulated entity, and any other person, as determined by 
the Director (by regulation or on a case-by-case basis) that 
participates in the conduct of the affairs of a regulated entity, 
provided that a member of a Federal Home Loan Bank shall not be deemed 
to have participated in the affairs of that Federal Home Loan Bank 
solely by virtue of being a shareholder of, and obtaining advances 
from, that Federal Home Loan Bank;
    (3) Any independent contractor for a regulated entity (including 
any attorney, appraiser, or accountant), if:
    (i) The independent contractor knowingly or recklessly participates 
in--
    (A) Any violation of any law or regulation;
    (B) Any breach of fiduciary duty; or
    (C) Any unsafe or unsound practice; and
    (ii) Such violation, breach, or practice caused, or is likely to 
cause, more than a minimal financial loss to, or a significant adverse 
effect on, the regulated entity;
    (4) Any not-for-profit corporation that receives its principal 
funding, on an ongoing basis, from any regulated entity; and
    (5) The Office of Finance.
    Fraud means a material misstatement, misrepresentation, or omission 
relied upon by a regulated entity.
    Possible fraud means that a regulated entity has a reasonable 
belief, based upon a review of information available to the regulated 
entity, that fraud may be occurring or has occurred.
    Regulated entity means the Federal National Mortgage Association 
and any

[[Page 28639]]

affiliate thereof, the Federal Home Loan Mortgage Corporation and any 
affiliate thereof, any Federal Home Loan Bank; the term ``regulated 
entities'' means, collectively, the Federal National Mortgage 
Association and any affiliate thereof, the Federal Home Loan Mortgage 
Corporation and any affiliate thereof, and the Federal Home Loan Banks.
    Safety and Soundness Act means the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992, as amended by the Federal 
Housing Finance Regulatory Reform Act of 2008, Division A of the 
Housing and Economic Recovery Act of 2008, Public Law 110-289, 122 
Stat. 2654 (2008).


Sec.  1233.3  Reporting.

    (a) Timeframe for reporting. (1) A regulated entity shall submit to 
the Director a written report relating to any fraud or possible fraud 
occurring in connection with a loan, a series of loans or other 
financial instruments that the regulated entity has purchased or sold, 
and shall do so promptly after identifying such fraud or possible fraud 
or is notified about such fraud or possible fraud by law enforcement or 
other government authority.
    (2) In addition to submitting a report in accordance with paragraph 
(a)(1) of this section, in any situation that would have a significant 
impact on the regulated entity, the regulated entity shall immediately 
report any fraud or possible fraud to the Director by telephone or 
electronic communication.
    (b) Format for reporting. (1) The report shall be in such format 
and shall be filed in accordance with such procedures that the Director 
may prescribe.
    (2) The Director may require a regulated entity to provide such 
additional or continuing information relating to such fraud or possible 
fraud as the Director deems appropriate.
    (3) A regulated entity may satisfy the reporting requirements of 
this section by submitting the required information on a form or in 
another format used by any other regulatory agency, provided it has 
first obtained the prior written approval of the Director.
    (c) Retention of records. A regulated entity shall maintain a copy 
of any report submitted to the Director and the original or business 
record equivalent of any supporting documentation for a period of five 
years from the date of submission.
    (d) Nondisclosure. (1) A regulated entity may not disclose to any 
person that it has submitted a report to the Director pursuant to this 
section, unless it has first obtained the prior written approval of the 
Director.
    (2) The restriction in paragraph (d)(1) of this section does not 
prohibit a regulated entity from--
    (i) Disclosing or reporting such fraud or possible fraud pursuant 
to legal requirements, including reporting to appropriate law 
enforcement or other governmental authorities; or
    (ii) Taking any legal or business action it may deem appropriate, 
including any action involving the party or parties connected with the 
fraud or possible fraud.
    (e) No waiver of privilege. A regulated entity does not waive any 
privilege it may possess under any applicable law as a consequence of 
reporting fraud or possible fraud under this part.


Sec.  1233.4  Internal controls, procedures, and training.

    (a) In General. Each regulated entity shall establish and maintain 
adequate and efficient internal controls and procedures and an 
operational training program to assure an effective system to detect 
and report fraud in connection with the purchase or sale of a loan or 
other financial instrument.
    (b) Examination. The examination by FHFA of fraud reporting 
programs of each regulated entity must include an evaluation of the 
extent to which internal policies, procedures, and training programs of 
the regulated entity minimize risks from fraud and to the extent that 
fraud or possible fraud is consistently reported to FHFA.


Sec.  1233.5  Protection from liability for reports.

    As provided by section 1379E of the Safety and Soundness Act (12 
U.S.C. 4642(b)), a regulated entity that, in good faith, submits a 
report pursuant to this part, and any entity-affiliated party, that, in 
good faith, submits or requires a person to submit a report pursuant to 
this part, shall not be liable to any person under any provision of law 
or regulation, any constitution, law, or regulation of any State or 
political subdivision of any State, or under any contract or other 
legally enforceable agreement (including any arbitration agreement) for 
such report, or for any failure to provide notice of such report to the 
person who is the subject of such report, or any other persons 
identified in the report.


Sec.  1233.6  Supervisory action.

    Failure by a regulated entity to comply with this part may subject 
the regulated entity or the board members, officers, or employees 
thereof to supervisory action by FHFA, including but not limited to, 
cease-and-desist proceedings and civil money penalties.

CHAPTER XVII--OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT, 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 1731--[REMOVED]

    2. Remove part 1731.

    Dated: June 4, 2009.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E9-14189 Filed 6-16-09; 8:45 am]
BILLING CODE P


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