Federal Housing Finance Agency: Oversight of the Federal Home Loan Banks' Agricultural and Small Business Collateral Policies Could Be Improved
Published: 2010-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Home Loan Bank System is a government-sponsored enterprise comprising 12 regionally-based Federal Home Loan Banks (FHLBank), the primary mission of which is to support housing finance and community and economic development. Each FHLBank makes loans (advances) to member financial institutions in its district, such as banks, which traditionally are secured by single-family mortgages. In 1999, the Gramm-Leach-Bliley Act (GLBA) authorized FHLBanks to accept alternative forms of collateral, such as agricultural and small business loans, from small members. GAO was asked to assess (1) factors that may limit the use of alternative collateral; and (2) selected aspects of the Federal Housing Finance Agency's, (FHFA) related regulatory oversight practices. GAO reviewed FHLBank policies and FHFA documentation; and interviewed FHLBank and FHFA officials, and a nongeneralizable random sample of 30 small lenders likely to have significant levels of agricultural or small business loans in their portfolios.
section_title: What GAO Found
paragraphs: FHLBank and FHFA officials cited several factors to help explain why alternative collateral represents about 1 percent of all collateral that is used to secure advances. These factors include a potential lack of interest by small lenders in pledging such collateral to secure advances or the view that many such lenders have sufficient levels of single-family mortgage collateral. Officials from two FHLBanks said their institutions do not accept alternative collateral at all, at least in part for these reasons. Further, FHLBank officials said alternative collateral can be more difficult to evaluate than single-family mortgages and, therefore, may present greater financial risks. To mitigate these risks, the 10 FHLBanks that accept alternative collateral generally apply higher discounts, or haircuts, to it than any other form of collateral, which may limit its use. For example, an FHLBank with a haircut of 80 percent on alternative collateral generally would allow a member to obtain an advance worth 20 percent of the collateral's value. While GAO's interviews with 30 small lenders likely to have significant alternative collateral on their books found that they generally valued their relationships with their local FHLBanks, officials from half said the large haircuts on alternative collateral or other policies limited the collateral's appeal. FHFA's oversight of FHLBank alternative collateral policies and practices has been limited. For example, FHFA guidance does not direct its examiners to assess the FHLBanks' alternative collateral policies. As a result, the FHLBanks have wide discretion to either not accept alternative collateral or apply relatively large haircuts to it. While the FHLBanks may view these policies as necessary to mitigate potential risks, 9 of the 12 FHLBanks did not provide documentation to GAO to substantiate such policies. Further, the documentation provided by three FHLBanks suggests that, in some cases, haircuts applied to alternative collateral may be too large. Also, the majority of the FHLBanks have not developed quantitative goals for products related to agricultural and small business lending, such as alternative collateral, as required by FHFA regulations. FHFA officials said that alternative collateral has not been a focus of the agency's oversight efforts because it does not represent a significant safety and soundness concern. However, in the absence of more proactive FHFA oversight from a mission standpoint, the appropriateness of FHLBank alternative collateral policies is not clear. FHFA should revise its examination guidelines to include periodic analysis of alternative collateral, and enforce its regulation pertaining to quantitative goals for products related to agricultural and small business lending. FHFA agreed with these recommendations.

section_title: Letter
paragraphs: The Federal Home Loan Bank System (FHLBank System) is a government- sponsored enterprise (GSE) that consists of 12 regionally based Federal  Home Loan Banks (FHLBank), the primary mission of which is to support  housing finance and community and economic development. To carry out  its mission, the FHLBank System issues debt in capital markets, generally  at relatively favorable rates due to its GSE status, and each FHLBank  makes loans (advances) to member financial institutions, such as banks  and thrifts, located in its district. Traditionally, member institutions have  secured advances by pledging single-family mortgages or investment-grade  securities as collateral to their FHLBank. However, section 604 of title VI  of the Gramm-Leach-Bliley Act (GLBA), also known as the Federal Home  Loan Bank System Modernization Act of 1999, authorizes FHLBanks to  accept alternative collateral, such as small business and small farm loans,  from small members, known as Community Financial Institutions (CFI),  which are defined as having $1.029 billion or less in total assets. In  enacting the GLBA reforms, the goal was to help smaller banks or thrifts,  which may have limited single-family mortgages and other traditional  assets to pledge as collateral, gain greater access to the liquidity offered by  FHLBank advances. In so doing, the GLBA reforms were supposed to help  improve economic development credit opportunities in rural areas and  other underserved communities.
GLBA’s legislative history also contains language suggesting that the  FHLBanks and their former financial soundness and mission regulator, the  Federal Housing Finance Board (FHFB), should “prioritize” the FHLBank  System’s economic development efforts through the use of alternative  collateral. FHFB regulations required each FHLBank to develop strategic  business plans that established quantitative performance goals for  products, which could include alternative collateral, related to small  business, small farm, and small agribusiness lending. In 2008, as part of  the provisions of the Housing and Economic Recovery Act of 2008  (HERA), FHFB was abolished and replaced by the Federal Housing  Finance Agency (FHFA), which assumed FHFB’s financial soundness and  mission oversight responsibilities for the FHLBank System.
While the FHLBanks have been authorized to accept alternative collateral  for more than 10 years, its use has been minimal, according to FHFA data.  Specifically, FHFA data indicate that alternative collateral secured about   1 percent of all FHLBank advances in 2008 and that percentage has been  fairly constant at 1 percent or less since 2001. In general, FHLBanks  located in regions with significant agriculturally based economies—such  as the FHLBanks located in Dallas, Des Moines, and Topeka—generally  report higher acceptance of alternative collateral than other FHLBank  districts. Several FHLBanks, including those in Atlanta, Cincinnati, and  New York, either have not sought regulatory approval to accept alternative  collateral or CFI members in their districts have not pledged such  collateral.
You requested that we review issues pertaining to the FHLBanks’  implementation of the GLBA collateral reforms. Specifically, this report  (1) discusses factors that may limit the use of alternative collateral to  secure FHLBank advances; and (2) assesses selected aspects of FHFA’s  oversight of the FHLBanks’ alternative collateral policies and practices.
To address the first objective, we analyzed relevant sections of GLBA and  HERA, and FHLBank collateral policies and procedures, particularly those  pertaining to alternative collateral. While we were able to review each  FHLBank’s collateral policies and procedures, the confidentiality of such  information limited what we could publicly disclose in our report. We  also conducted interviews with officials from FHFA, the 12 FHLBanks, the  Council of Federal Home Loan Banks, and the Independent Community  Bankers of America. Further, we identified 796 CFI members, as of  September 30, 2009, that either (1) met criteria established by the FDIC  defining them as significant agricultural lenders or (2) met criteria  established by the Small Business Administration’s (SBA) Office of  Advocacy defining them as significant small business lenders. We also  identified several CFIs that met the definition of both an agricultural and  small business lender. From these populations, we interviewed a  nongeneralizable, random sample of 30 CFI members. Therefore, the  sample consists of CFIs that might be expected to encounter challenges in  obtaining FHLBank advances by pledging traditional forms of collateral.  The sample also was designed to ensure that it included the perspective of  CFIs (1) located in FHLBank districts that have high, some, or no use of  alternative collateral; and (2) are very small (that is, those with less than  $100 million in assets). The views expressed by the banks in our sample  cannot be generalized to the universe of CFIs. For the second objective,  we analyzed FHFA’s regulations, examination policies and procedures,  and recent FHLBank examination results to understand the nature of rules  and information used by the agency to assess the FHLBanks’ collateral  management efforts. We also reviewed GLBA, HERA, and Financial  Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)  requirements, as well as the FHLBanks’ strategic business and Targeted  Community Lending Plans and federal internal control standards. Finally,  we reviewed FDIC’s asset valuation estimates for various loan types in  banks that recently failed or were on the verge of failure. To assess the  reliability of FDIC, FHFA, and SBA’s Office of Advocacy data, we (1)  interviewed officials knowledgeable about the data; (2) assessed the data  for obvious outliers and missing information; (3) checked a sample of the  data against publicly available financial information on banks and thrifts;  and (4) reviewed independent reports, and determined that the data were  sufficiently reliable for our purposes. Appendix I contains a detailed  description of our scope and methodology.
We conducted this performance audit from October 2009 to July 2010, 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.
subsections: section_title: Background
paragraphs: The FHLBank System was established in 1932 and consists of 12  FHLBanks (see fig. 1). Member financial institutions, which typically are  commercial banks and thrifts (or savings and loans), cooperatively own  each of the 12 FHLBanks. To become a member of its local FHLBank, a  financial institution must maintain an investment in the capital stock of  the FHLBank in an amount sufficient to satisfy the minimum investment  required for that institution in accordance with the FHLBank’s capital  plan. In addition to the ability to obtain advances, other benefits of  FHLBank membership for financial institutions include earning dividends  on their capital investments and access to various products and services,  such as letters of credit and payment services. As of December 31, 2009,  more than 8,000 financial institutions with approximately $13 trillion in  assets were members of the FHLBank System. The FHLBank System’s  total outstanding advances stood at more than $631 billion.
As established by statute and FHFA regulations, the FHLBanks are  required to develop and implement collateral standards and other policies  to mitigate the risk that member institutions may default on outstanding  advances. To help do so, the FHLBanks generally apply a blanket lien on  all or specific categories of a member’s assets to secure the collateral  underlying the advance. In general, a blanket lien agreement is intended to  fully protect the FHLBank by securing its right to take and possibly sell  any or all of a member’s assets in the event it fails or defaults on its  outstanding advances. In limited circumstances, FHLBanks may permit or  require their members to pledge collateral under (1) a listing (specific  detail) lien agreement in which the members are to report detailed  information, such as the loan amount, payments, maturity date, and  interest rate for the loans pledged as collateral; or (2) a delivery lien  agreement, in which members are required to deliver the collateral to the  FHLBank or an approved safekeeping facility. From a member’s  perspective, the benefits of listing collateral in lieu of a blanket lien  agreement can include better pricing terms. Some FHLBanks may require  members to list or deliver collateral to better protect their financial  interests in instances in which a member is in danger of failure or its  financial condition begins to deteriorate.
FHLBanks also seek to manage risk and mitigate potential losses by  applying varying haircuts, or discounts, to collateral pledged to secure  advances. To illustrate: suppose that an FHLBank member sought to  pledge a single-family residential mortgage loan portfolio with a value of  $100 million to secure an advance from its district FHLBank. If the  FHLBank applied a haircut of 25 percent to such collateral, the member  would generally be able to secure advances of up to $75 million subject to  other risk-management policies the FHLBank may have established. In  general, the FHLBanks’ haircut levels tend to increase based on the  perceived risks associated with the collateral being pledged. As described  in this report, single-family mortgages and other forms of traditional  collateral generally are perceived as representing less risk than alternative  forms of collateral, such as agricultural and small business loans. Since  FHLBanks generally issue advances under blanket lien agreements, they  may calculate a member’s total borrowing capacity by applying varying  haircuts to each form of eligible collateral on the member’s books and  communicating this information to the member on a periodic basis.
In the event that a member institution fails, FHLBanks have a “first lien”  on its assets. That is, they have priority over all other creditors, including  FDIC, to obtain the collateral necessary to protect against losses on their  outstanding advances. In a typical bank or thrift failure, FDIC pays off  outstanding FHLBank advances in full and takes possession of the  collateral on the institution’s books to help offset its losses. According to  the FHLBank Office of Finance, in the 78-year history of the FHLBank  System, no FHLBank has ever suffered a credit loss on an advance.
The FHLBanks’ haircuts and other risk management policies are intended  to mitigate potential losses; however, they also may limit some members’  interest in obtaining advances. For example, an FHLBank member may  perceive that the level of haircuts applied to the collateral it pledges may  unduly restrict the amount of financing it would like to obtain through  advances. Administrative and other costs associated with obtaining  advances also may factor into an FHLBank member’s decision making  process. For example, FHLBank officials conduct on-site inspections to  assess members’ collateral management practices or require members to  have such practices independently audited. For some FHLBank members,  the costs of such administrative procedures may outweigh the potential  benefits of obtaining advances, particularly if they view the haircuts  applied to the collateral as unreasonable.
While the FHLBank System’s primary mission over the years has been to  promote housing finance generally through its advance business, it is also  required by statute and regulation to meet other specific mission  requirements. For example, FIRREA authorizes both the Affordable  Housing Program (AHP) and the Community Investment Program (CIP) to  assist the FHLBanks’ affordable housing mission. Under AHP, each  FHLBank is required to set aside 10 percent of its previous year’s earnings  to fund interest rate subsidies on advances to members engaged in lending  for long-term, low- and moderate-income, owner-occupied, and affordable  rental housing at subsidized interest rates. In using the advances, the  FHLBank members are to give priority to qualified projects, such as the  purchase of homes for low- or moderate-income families or to purchase or  rehabilitate government-owned housing. FIRREA also established CIP,  which requires FHLBanks to provide flexible advance terms for members  to undertake community-oriented mortgage lending. CIP advances may be  made at the FHLBank’s cost of funds (for advances with similar  maturities) plus the cost of administrative fees. Moreover, FIRREA  requires FHFB (now FHFA) to establish standards of community  investment or service for members of FHLBanks to maintain continued  access to long-term advances. These standards include the development  of a Targeted Community Lending Plan (which is designed to help the  FHLBanks assess the credit needs of the communities that they serve) and  quantitative lending goals that address identified credit needs and  marketing opportunities in each FHLBank’s district.
FHFA has safety and soundness and mission oversight for the FHLBank  System and Fannie Mae and Freddie Mac. For example, FHFA is  responsible for ensuring that the FHLBanks establish appropriate  collateral management policies and practices to mitigate the risks  associated with their advance business. From a mission standpoint, FHFA  also is responsible for ensuring that the FHLBanks are in compliance with  statutes and regulations pertaining to the AHP and CIP programs. While  GLBA does not establish specific requirements for alternative collateral,  its legislative history suggests that the FHLBanks and FHFB, and by  extension FHFA, should prioritize the FHLBank System’s economic  development activities through the use of alternative collateral. To carry  out its responsibilities, FHFA may issue regulations, establish capital  standards, and conduct on-site safety and soundness or mission-related  examinations. FHFA also may take enforcement actions, such as issuing  cease and desist orders, and may place an FHLBank, Fannie Mae, or  Freddie Mac into conservatorship or receivership if they become  undercapitalized or critically undercapitalized.
section_title: FHLBank and CFI Officials Cited Several Factors, Including Lack of Interest and Risk-Management Policies, to Explain Minimal Use of Alternative Collateral
paragraphs: Officials from the 12 FHLBanks cited several factors to help explain the  minimal use of alternative collateral to secure advances in the FHLBank  System. These factors include a potential lack of interest among many CFI  members; the view that many CFIs belong to the FHLBank System  primarily to have access to letters of credit and other products or to obtain  a backup source of liquidity; and that many CFIs may have sufficient  holdings of traditional collateral to secure advances. Moreover, due to the  potential risks associated with alternative collateral, the 10 FHLBanks that  accept it have established risk-management strategies to mitigate potential  losses, which also may limit its use. In particular, the FHLBanks generally  have applied higher haircuts to alternative collateral than to any other type  of collateral used to secure advances. Officials from many of the 30 CFIs  we interviewed said that they valued their relationships with their local  FHLBanks and the products and services provided. However, officials  from half of these CFIs expressed concerns about the level of the haircuts  applied to alternative collateral or other FHLBank risk-management  strategies. In some cases, they said the haircuts or policies limited their  willingness to pledge such collateral to obtain advances.
subsections: section_title: FHLBank Officials Generally Attributed the Minimal Use of Alternative Collateral to Limited Demand among Many CFI Members and Ready Availability of Traditional Collateral
paragraphs: According to representatives from the 12 FHLBanks, they have ongoing  member outreach programs that are intended, in part, to address  members’ credit and collateral needs and the various products available to  them. The FHLBank officials said that outreach activities can include  telephone calls or visits to members to discuss the availability of  alternative collateral and its potential use by CFI members. Some  FHLBanks also have annual meetings, online product tutorials, and  electronic bulletins that provide information about alternative collateral.
While officials from the 12 FHLBanks said they had outreach programs in  place, some officials cited the significant differences in the membership  characteristics across the FHLBank System as affecting the use of  alternative collateral (see table 1). For example, CFIs represent more than  80 percent of the membership and about 30 percent of the assets of the  FHLBanks in Dallas and Topeka, and many of these CFI members focus on  agricultural lending due to its prominence in the regional economies.  While CFI assets represented a relatively small proportion, or 13 percent,  of the total assets of members in the Des Moines FHLBank district,  officials said that alternative collateral was of significant interest to their  members due to the prominence of agricultural-related businesses in the  district. In contrast, CFI assets represented a relatively small portion, or  less than 10 percent, of all membership assets in the FHLBank districts of  Atlanta and New York, neither of which have submitted new business  activity notices to FHFA requesting approval to accept alternative  collateral; and the FHLBank of Cincinnati reported no alternative  collateral activity at year-end 2008. Officials from these three FHLBanks  said that their memberships had not expressed an interest in pledging  alternative collateral. Similarly, although CFI membership and assets also  were relatively significant in the Chicago FHLBank district, officials said  that their membership had not expressed much interest in using  alternative collateral to secure advances. One FHLBank official noted that,  given the cooperative nature of the FHLBank System, membership interest  often drove the decision to make certain products and services available.
Officials from several FHLBanks also said that CFIs often do not take out  advances from their local FHLBank and, therefore, have no reason to use  alternative collateral. Rather than taking out advances, several FHLBank  officials said many CFIs derive other benefits from their membership,  particularly letters of credit, and other services. The officials added that  CFIs also may belong to the FHLBank System to have a backup source of  liquidity in case other sources, including customer deposits or the federal  funds market become unavailable or prohibitively expensive.
According to some FHLBank officials, many CFIs may have sufficient  traditional collateral, such as single-family mortgages and investment- grade securities, to secure advances. Officials at the FHLBanks of Boston,  Cincinnati, and Pittsburgh said that they reported no or low levels of  alternative collateral securing advances at year-end 2008, in part, because  their members had sufficient levels of other eligible collateral. Atlanta and  New York FHLBank officials said that they conducted regular analyses to  determine whether any banks in their membership were collaterally  constrained and, therefore would need alternative collateral to obtain an  advance. Officials at these banks said since 2000, their annual analyses  have determined that alternative collateral was not needed among their  membership.
Our analysis of FHFA, FDIC, and SBA’s Office of Advocacy data found that  while most CFIs may have sufficient traditional sources of collateral to  secure advances, a considerable minority of CFIs with significant holdings  of alternative collateral on their books may face challenges in doing so.  For example, we identified 480 CFIs with $47.3 billion in assets, as of  December 31, 2009, that met the FDIC’s definition of an agricultural bank  (see table 2). The FHLBanks of Des Moines and Topeka had the most  agricultural CFI members and the CFIs in these two districts had the  greatest amount of total assets for such lenders.
Using SBA’s Office of Advocacy data we also found 326 CFIs with $102.3  billion in assets, as of September 30, 2009, that were identified as the  largest small business lenders (see table 3). The number and assets of  small business CFIs appeared to be more evenly distributed across the  FHLBank System than agricultural CFIs. We interviewed a limited sample  of 30 representatives from these agricultural and small business CFIs and  discuss their perspectives on FHLBank alternative collateral policies and  practices later in this report.
section_title: FHLBank Policies That Focus On Potential Risks May Also Limit the Use of Alternative Collateral
paragraphs: FHFA and some FHLBank officials said that alternative collateral  generally has been viewed as representing greater risks than single-family  mortgages and investment-grade securities. For example, FHFA officials  said that it could be difficult to establish a value for agricultural and small  business loans because they generally have not been actively traded in  secondary markets. In the absence of secondary markets, alternative  collateral may be relatively illiquid, which means an FHLBank might face  difficulties in selling such underlying collateral if a CFI failed or defaulted  on its advance. As described earlier, FDIC generally pays the FHLBank  the principal balance of the outstanding advances of failed members and  takes possession of the underlying collateral. However, FDIC may not  always follow this procedure in future bank failures and the possibility of  a CFI defaulting on a loan or failing would put the FHLBank at a risk of  losses, as it might be unable to sell the alternative collateral in a timely  manner. In contrast, FHLBanks generally can more easily estimate values  for traditional collateral because mortgages often are pooled into  securities and actively traded on secondary markets. In the event a  member failed or defaulted on its outstanding advances, the FHLBanks  generally would be able to sell the underlying collateral that secured the  mortgages or securities.
In a previous report, we commented on the challenges associated with  establishing values for small business loans as compared with single- family mortgage loans. Unlike mortgage lending, small business loans  exhibit greater heterogeneity and more complexity. For example, although  mortgage lending has become more complicated in recent years, the type  of financing that prospective homebuyers seek remains fairly standardized  (two general categories—fixed- or variable-rate loans) and the collateral  securing mortgages, generally single-family residences, is relatively easy to  understand and market. In contrast, the types of financing that small  businesses typically seek can range from revolving lines of credit to term  loans, and the collateral pledged against such loans also may vary widely  in risk and marketability (from relatively secure real estate to less secure  inventory).
The 10 FHLBanks that accept alternative collateral have adopted risk- management policies intended to mitigate the perceived risks of such  collateral, but which also may limit its appeal to CFIs. These FHLBanks  generally apply higher haircuts to alternative collateral than to any other  type of collateral that may be used to secure advances. As shown in table  4, the haircuts, or range of haircuts, that the FHLBanks apply to alternative  collateral generally have been higher than for traditional forms of  collateral, such as single-family mortgages or commercial real estate loans.  The maximum haircut applied by an FHLBank to alternative collateral is  80 percent under a blanket lien policy, which generally means that the  member could take out an advance of up to 20 percent of the value of such  collateral, whereas the maximum haircut applied to commercial real estate  collateral is 67 percent. Over the years, commercial real estate has been  viewed as a potentially risky type of asset that has resulted in significant  bank losses and numerous bank failures.
The haircuts that the FHLBanks apply to alternative collateral can vary  significantly. For example, the haircut on small business loans ranges from  40 to 80 percent. In contrast, two FHLBanks apply a uniform 50 percent  haircut to all three types of alternative collateral (see table 4). We discuss  the extent to which the FHLBanks have an analytical basis for the haircuts  applied to alternative collateral later in this report.
Some FHLBanks also maintain other collateral policies designed to  mitigate the perceived risks associated with alternative collateral. For  example, the FHLBanks have established borrowing capacity limits to  further minimize the risks associated with making advances and generally  apply them to all members. However, some FHLBanks have established  more stringent borrowing limits for members pledging alternative  collateral. For example, in addition to applying haircuts of more than 50  percent, one FHLBank limits the amount of alternative collateral that a  member may pledge to 20 percent of the member’s total assets. One  FHLBank sets the limit at 10 percent, in addition to its 50 percent haircut.  In contrast, most other FHLBanks’ policies set borrowing capacity rates  from 30 to 55 percent for members.
section_title: CFIs Generally Valued Their Relations With FHLBanks, but Half Raised Concerns about Haircuts on Alternative Collateral or Other FHLBank Risk- Management Policies
paragraphs: While many CFIs may have significant traditional collateral resources to  pledge to secure advances, we conducted interviews with 30 CFIs that  could be constrained in their ability to obtain FHLBank advances due to  their significant involvement in agricultural or small business lending.  Most of the CFIs in our sample said that they valued the products and  services they received from their local FHLBank. Officials from many of  the CFIs said that FHLBank membership provided their institutions with  access to a stable and relatively low-cost source of liquidity or provided  access to a key source of backup liquidity, among other things. Officials  from several CFIs that have significant concentrations in agricultural loans  said that their ability to pledge such loans as collateral helped them to  obtain advances and thereby expand their lending activities, because the  advances generally allowed CFIs to provide borrowers with long-term  financing on favorable terms.
To some degree, the results from our interviews with officials from the 30  CFIs were consistent with rationales offered by FHLBank and FHFA  officials about the minimal use of alternative collateral in the FHLBank  System. Officials from 15 of the 30 CFIs we interviewed said that they had  pledged alternative collateral to help secure FHLBank advances and  officials from all but one of these reported having advances outstanding  (see table 5). Officials from the other 15 CFIs said they had not used  alternative collateral to secure an advance because, for example, they  generally had sufficient traditional collateral to secure advances or  sufficient levels of other sources of liquidity, such as customer deposits, to  finance their lending activities (see table 5). As discussed previously,  FHLBank officials have stated that readily available traditional collateral is  one reason that many CFIs have not pledged alternative collateral to  obtain advances.
However, officials from 15 of the 30 CFIs we interviewed expressed  concern about the haircuts applied to alternative collateral or other  FHLBank policies that may limit its appeal and use. Of these 15 CFIs,  officials from 11 specifically expressed concern about the level of haircuts.  These officials, some of whom had not yet pledged alternative collateral to  secure an advance, said that their local FHLBank’s large haircuts were a  factor in their banks’ decision not to pledge alternative collateral. Some of  the officials also said that their local FHLBank’s haircuts were not  consistent with historical losses on small business, small farm, or small  agribusiness loans.
Officials from 4 of the 15 CFIs expressed concern about other FHLBank  policies unrelated to haircuts, which included limitations on the types of  alternative collateral accepted by some FHLBanks and limits on borrowing  that some FHLBanks apply to alternative collateral. For example, an  official from an agricultural CFI with $56 million in total assets said that its  local FHLBank has a policy that limits the amount of an advance a CFI  member could obtain using alternative collateral to 10 percent of total  assets. The official characterized the policy as highly restrictive,  particularly for a small agricultural lender. The FHLBank to which this  lender belongs permits non-CFI members using traditional collateral to  secure an advance to borrow up to 35 percent of their total assets.
section_title: FHFA’s Oversight of the FHLBanks’ Alternative Collateral Policies and Practices Has Been Limited
paragraphs: While FHFB held a conference in 2005 on the use of alternative collateral  which may have focused the FHLBanks’ attention on the issue, regulatory  oversight of the FHLBanks’ policies and practices for such collateral, from  a mission standpoint, has been limited. For example, FHFA examiners  have not been routinely directed to assess the FHLBanks’ analytical basis  for the haircuts on alternative collateral, although they are directed to do  so for traditional forms of collateral. In the absence of regulatory  oversight, the FHLBanks have exercised wide discretion in establishing  policies and practices pertaining to alternative collateral over the years.  Although the FHLBanks may view these policies and practices as  necessary to protect their financial soundness, our review also indicates  that many FHLBanks have not substantiated through documentation the  analytical basis for such policies, including establishing the haircut levels.  Available FHLBank documentation suggests that some haircuts applied to  alternative collateral may need to be lowered and others raised. Moreover,  a majority of the FHLBanks have not established quantitative performance  goals for products, related to agricultural and small business lending in  their strategic business plans, which could include alternative collateral,  as required by agency regulations. Additionally, the FHLBanks are not  required to identify and address agricultural and small business financing  needs in their communities, including potential uses for alternative  collateral, through a process of market analysis and consultations with  stakeholders as they are required to do by FHFA regulations for their  Targeted Community Development Plans, which agency officials said  largely pertain to the AHP and CIP programs. FHFA officials said they  have not focused oversight efforts on alternative collateral policies and  practices because its minimal use within the FHLBank System does not  represent a safety and soundness concern. But, without more proactive  oversight by FHFA from a mission standpoint, the appropriateness of  FHLBank alternative collateral policies may not be clear.
subsections: section_title: FHFA Examinations Do Not Include Reviews of the FHLBanks’ Analytical Basis for Their Alternative Collateral Policies and Practices
paragraphs: While FHFA examination guidance does not require reviews of FHLBank  alternative collateral policies and practices, it does include procedures  related to general collateral management policies and practices. For  example, examiners are expected to assess whether each FHLBank has  addressed appropriate levels of collateralization, including valuation and  collateral haircuts. According to FHFA officials, at every examination an  examiner will review documentation of the FHLBanks’ general collateral  valuation and haircut analyses, and any available underlying financial  models.
Our review of FHFB and FHFA examinations of each of the 12 FHLBanks  over the past three examination cycles confirmed that examiners did not  address the FHLBanks’ alternative collateral management policies and  practices. However, consistent with the examination guidance, the  examinations did include analysis of the FHLBanks’ general collateral  policies and practices. For example, FHFA examiners noted that one  FHLBank did not regularly review its collateral haircuts and that the  current haircuts had not been validated by well-documented analyses.
Examiners also found that another FHLBank disregarded the results of a  collateral valuation model to establish haircuts for certain members  without sufficient analysis to support the decision. FHFA officials we  contacted said that due to mounting concerns about the FHLBanks’ safety  and soundness in 2009, the agency conducted a focused review of the  FHLBanks’ collateral management practices, including valuation and  haircut methodologies. They also noted that they have been monitoring  the FHLBanks’ progress in responding to examiners’ recommendations to  improve documentation of their general collateral haircut policies.
FHFA guidance also includes procedures for assessing the FHLBanks’  compliance with other mission-related programs. Specifically, the  examination guidance includes procedures for assessing the FHLBanks’  implementation of the AHP and the CIP programs. As established by FHFA  guidance, examiners should assess the effectiveness of these programs at  each FHLBank and whether program operations were consistent with the  laws and policies that govern them. For example, the examination  guidance indicates that examiners should evaluate the reasonableness of  fees associated with these programs, whether the FHLBank has met its  established community lending goals, and the extent to which the projects  funded by the programs benefited eligible targeted businesses or  households. Our review found that the examinations generally included  sections that assessed the FHLBanks’ implementation of AHP and CIP  programs.
FHFA officials cited several reasons why the agency’s examination  procedures and practices did not specifically address alternative  collateral. First, they said that the use of alternative collateral was minimal  and did not represent a significant safety and soundness concern. Because  single-family mortgages, investment-grade securities, and commercial real  estate loans represent the vast majority of member assets that are pledged  to secure advances, FHFA officials said that they have focused their  examination resources on them. They wanted to ensure that the  FHLBanks have established adequate policies and procedures for  managing such collateral, including the analytical basis for the haircuts  applied to it, and the mitigation of potential losses. Furthermore, FHFA  officials said important differences between alternative collateral and  other mission-related programs, such as the AHP program, explained the  differences in the agency’s oversight approaches. They said that FIRREA  establishes specific requirements for how the AHP program is to be  funded and implemented. For example, the statute establishes the level of  annual contribution from each FHLBank to fund their AHP programs as  well as minimum requirements for the FHLBanks’ mandated AHP  implementation plans. In contrast, FHFA officials said GLBA only  authorizes the FHLBanks to accept alternative collateral to secure  advances, and does not establish specific requirements for operating the  program that could be assessed through examinations.
section_title: In the Absence of FHFA Examination Oversight, FHLBanks Have Wide Discretion to Establish Haircuts and Other Policies for Alternative Collateral, but Documentation to Support These Policies Is Limited
paragraphs: While FHFA may prioritize FHLBank safety and soundness concerns and  the structure of the AHP and CIP programs may facilitate their oversight  from a mission standpoint, FHFA’s, as well as FHFB’s, limited oversight of  alternative collateral may have limited its appeal within the FHLBank  System. By not implementing examination procedures that are consistent  with its general approaches to monitoring FHLBank collateral practices,  FHFA has provided the FHLBanks with wide discretion in adopting  policies and practices for alternative collateral. Although the FHLBanks  may have adopted policies that they believe are necessary to protect their  financial interests while complying with their missions, our work indicates  that the analytical bases for these generally have not been fully  documented.
Although federal internal control standards established that key decisions  need to be documented, one of the two FHLBanks that has not accepted  alternative collateral provided a documented basis for its policy. Further,  of the 10 FHLBanks that accept alternative collateral, 3 provided  documentation of the basis of the haircuts that they applied to such  collateral. Analysis from 2 FHLBanks suggested that their haircuts for all  types of alternative collateral were too high and 1 FHLBank subsequently  revised the haircuts downward by an average of about 11 percentage  points. The other FHLBank’s analysis suggested that the haircuts it applied  to agricultural collateral might be too high, while the haircuts for small  business collateral might be too low. Of the 7 FHLBanks that did not  provide any documentation of their alternative collateral haircuts, officials  from 3 said they have not documented such analysis and the other 4 did  not respond to our requests. An official from 1 of the FHLBanks that has  not established documentation for its alternative haircuts said they had  been set at a level to be “conservative.” As discussed previously, FHFA  guidance directs examiners to assess the analytical basis for the haircuts  applied to other forms of collateral.
We also analyzed FDIC data on the estimated losses on various loan  categories in banks that failed or were on the verge of failure between  January 2009 and February 2010, which raises some questions and  reinforces the need for further analysis of the risks associated with  alternative collateral. Prior to a bank’s failure, FDIC contractors conduct  on-site reviews to assess the value (defined as the estimated market value  of the loans as a percentage of the outstanding balances) of the assets held  by the bank to calculate how much the failure will cost the Deposit  Insurance Fund. According to FDIC officials, estimates are made on the  value of the loans of such banks, including single-family residential loans,  residential and nonresidential construction loans, consumer loans,  business loans, and agricultural loans. According to the FDIC data, the  estimated value of agricultural loans was higher than the value of any  other type of loan reviewed. Our discussions with several agricultural CFIs  and reviews of some regulatory and independent reports also suggest that  the U.S. agricultural economy has performed somewhat better than the  broader economy in recent years, which may explain why such collateral  recently may have outperformed other types of loans as suggested by  FDIC data. Furthermore, while the commercial and industrial loans  category (which includes small business loans) had a lower estimated  value than the agricultural, consumer, and single-family mortgage loan  categories, according to the FDIC’s asset valuation estimates, it had a  higher estimated value than the nonresidential and residential  construction loan categories.
However, important limitations apply to any analysis of these FDIC data.  First, because the data only cover recent bank failures or near failures,  they do not provide a historical basis to assess the relative risk of the  various loan types. Many banks have failed recently primarily due to  substantial losses on residential mortgages and commercial real estate  loans, of which each has experienced significant price declines. Second,  the analysis does not control for any other factors that may be related to  FDIC’s asset valuation estimates, such as the characteristics of the loans  made by the banks. Nevertheless, these data raise questions about the  FHLBanks’ analytical basis for the haircuts that are currently applied to  alternative collateral as well as the need for FHFA to routinely review the  basis for these policies from a mission standpoint to help ensure that they  are not unduly limiting the use of such collateral to secure advances.
section_title: FHFA Has Not Enforced or Amended Regulations That Could Focus the FHLBanks’ Attention on Agricultural and Small Business Lending, Including the Use of Alternative Collateral
paragraphs: In 2000, FHFB issued regulations, which remain in effect today, that  require each FHLBank’s board of directors to adopt a strategic business  plan that describes how the business activities of the FHLBank will  achieve its mission. As part of the strategic business plan, FHLBanks must  establish quantitative performance goals for products related to  multifamily housing, small business, small farm, and small agribusiness  lending. Such products could include advances to CFIs that are secured by  alternative collateral. As part of its mission oversight responsibilities,  FHFA is responsible for ensuring that the FHLBanks comply with these  annual goal requirements in establishing their plans.
Our review indicates that the strategic business plans of five FHLBanks do  not include such goals. While the remaining seven FHLBanks have  established goals for alternative collateral lending, three have set goals at  zero. The four FHLBank strategic business plans that include the required  goals establish annual benchmarks for the number or dollar amount of  advances made to members for the purpose of lending to small businesses,  small farms, and small agribusinesses. FHFA officials said that lending  goals for alternative collateral are not part of its planned review of  FHLBanks’ 2010 strategic business plans. In the absence of vigorous  oversight and enforcement by FHFA, many FHLBanks may continue to  place a low priority on requirements that they establish quantitative  annual goals for products related to agricultural and small business  lending, which could include advances secured by alternative collateral.
According to FHFA officials, the regulation pertaining to the AHP and CIP  programs requires the FHLBanks to develop annual Targeted Community  Lending Plans to address identified credit needs and market opportunities  for targeted community lending in their districts. To develop these plans,  FHLBanks are to consult with members, economic development  organizations, and others, and establish quantitative community lending  goals. FHLBanks also must conduct market research to ascertain their  district’s economic development needs and opportunities. The regulator  then uses the Targeted Community Lending Plans to help determine the  extent to which FHLBanks have achieved their mission to provide  community and economic development opportunities in their districts.
Although FHFA’s regulation that requires the establishment of Targeted  Community Lending Plans may provide a means for the FHLBanks to  identify lending and economic development needs within their  communities and respond accordingly, it does not specifically require the  FHLBanks to analyze small business and agricultural lending needs or  opportunities for the use of alternative collateral. According to FHFA  officials, this is because the regulation pertains specifically to the AHP and  CIP programs. Given that FHFA does not require the FHLBanks to include  an assessment of opportunities to use alternative collateral to support  small business and agricultural lending in their Targeted Community  Lending Plans, such plans generally have not addressed such issues. One  FHLBank’s Targeted Community Lending Plan—that of the FHLBank of  Indianapolis—did discuss issues pertaining to agricultural and small  business lending. Specifically, the plan for 2010 stated that the Bank  intends to increase its small business, small farm, or small agribusiness  lending by 5 percent in the next year.
While FHFA officials told us that the regulation that requires the  FHLBanks to develop Targeted Community Lending Plans does not pertain  to alternative collateral, we note that the general process involved in  creating the plans is potentially beneficial in that it calls on the FHLBanks  to review relevant information and consult with stakeholders in their  communities to identify and address relevant lending needs. A similar  process—through revisions to FHFA’s regulations pertaining to Targeted  Community Lending Plans, or strategic business plans, or other measures  as appropriate—that would require the FHLBanks to assess agricultural  and small business lending needs as well as opportunities to use  alternative collateral, could better focus their attention on potential  opportunities and strategies to enhance such financing.
section_title: Conclusions
paragraphs: GLBA’s inclusion of new types of collateral for CFIs indicates that these  types of available collateral should be taken in account when formulating  strategies for the FHLBanks’ economic development efforts. However, the  regulators’ limited oversight of FHLBank alternative collateral policies and  practices over the years has provided the FHLBanks with wide discretion  to establish risk-management policies, which although viewed as  necessary to protect against potential losses may involve an off-setting  trade-off. That is, they may unduly limit the appeal and use of alternative  collateral.
We have identified several areas of concern. In many cases the FHLBanks  have not substantiated and documented their reasons for not accepting  alternative collateral or applying relatively high haircuts to it. Available  FHLBank documentation suggests that some alternative collateral haircuts  may be too high; limited FDIC asset valuation estimates indicate that the  risks associated with alternative collateral can vary over time; and 15 of  the 30 CFI representatives we interviewed expressed concerns about  haircuts applied to such collateral and other risk-management practices,  some of whom said such policies and practices limited their willingness to  use alternative collateral. In addition, because FHFA has not leveraged its  existing examination procedures to include an assessment of the  FHLBanks’ alternative collateral policies, the appropriateness of such  policies may not be clear. Furthermore, FHFA has not ensured that all  FHLBanks establish quantitative goals for products related to agricultural  and small business lending, which could include alternative collateral, in  their strategic business plans as required by the agency’s regulations.  Finally, FHFA has not taken steps, such as revising its regulations  pertaining to Targeted Community Development Plans, or strategic  business plans, or other measures as may be appropriate, to follow a  process whereby they conduct market analysis and consult with a range of  stakeholders in their communities to identify and address agricultural and  small business financing needs, including the use of alternative collateral.  We recognize that FHFA has critical responsibilities to help ensure that  the FHLBanks’ operate in a safe and sound manner, and has not focused  on alternative collateral because it was not deemed a risk to safety and  soundness. Nevertheless, the agency also has an obligation to take  reasonable steps to help ensure that the FHLBank System is achieving the  missions for which it was established, including economic development  through the use of alternative collateral.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Acting Director of FHFA take the following  actions to help ensure that the FHLBanks’ economic development mission- related activities include the appropriate use of alternative collateral, as  provided for in GLBA.
Revise FHFA examination guidance to include requirements that its  examiners periodically assess the FHLBanks’ alternative collateral policies  and practices, similar to the manner in which other forms of collateral,  such as single-family mortgages, are assessed. Specifically, FHFA should  revise its guidance to ensure that examiners periodically assess the  FHLBanks’ analytical basis for either (1) not accepting alternative collateral, or (2) establishing their haircuts and other risk-management  policies for such collateral.
Enforce regulatory requirements that the FHLBanks’ strategic business  plans include quantitative performance goals for products related to  agricultural and small business financing, including the use of alternative  collateral as appropriate.
Consider requiring the FHLBanks, through a process of market analysis  and consultations with stakeholders, to periodically identify and address  agricultural and small business financing needs in their communities,  including the use of alternative collateral. Such requirements could be  established through revisions to FHFA’s regulations for Targeted  Community Development Plans or strategic business plans or through  other measures as deemed appropriate.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FHFA for its review and comment.  We received written comments from FHFA’s Acting Director, which are  reprinted in appendix II. In its comments, FHFA expressed certain  reservations about the analysis in the draft as discussed below, but agreed  to implement our recommendations. Specifically, FHFA stated that the  agency would (1) review each FHLBank’s policies and practices, starting  with the 2011 annual supervisory examination cycle, to assure that they  can substantiate their collateral practices and are meeting their CFI  members’ liquidity needs; (2) issue an Advisory Bulletin to the FHLBanks  that provides supervisory guidance on how to include goals for alternative  collateral in the preparation of FHLBank strategic business plans  beginning in 2011, and review those plans to ensure they include such  goals; and (3) direct the FHLBanks to document their outreach and  alternative collateral needs assessment efforts in their strategic business  plans, and instruct examiners to monitor the FHLBanks’ efforts in these  areas as part of the agency’s ongoing supervisory review. FHFA also  provided technical comments, which we incorporated as appropriate.
In commenting on the draft report, FHFA said that it has no evidence that  any CFI member is collaterally constrained and unable to access advances  as a result of the FHLBanks’ collateral risk management practices. FHFA  also said that it has no evidence that any issues discussed in the draft  report have resulted in or contributed to a lack of liquidity for small farm,  agriculture, and small business lending. In addition, FHFA noted that in  many cases, CFI members obtain sufficient liquidity by pledging real  estate-related collateral and, therefore, CFI members’ ability to obtain an  advance is not limited by the type of collateral they have. While our draft  report noted that most CFIs may not be collaterally constrained, we  identified nearly 800 CFIs, constituting about 13 percent of all CFIs, that  may face challenges in obtaining an advance using traditional collateral  because they have substantial amounts of small business and agricultural  collateral on their books. Further, we interviewed a nongeneralizable  sample of 30 of these CFIs and found that half of them expressed concerns  with FHLBank haircuts and other policies related to alternative collateral.  Several CFIs said that the haircuts applied to alternative collateral were a  factor in their decision not to pledge alternative collateral to secure an  advance. In agreeing to implement the recommendations, FHFA will have  the information necessary to help assess the extent to which CFIs may  face challenges in obtaining financing as well as the appropriateness of  FHLBank alternative collateral policies and practices.
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 of this report to other  interested congressional committees and to the Acting Director of the  Federal Housing Finance Agency. In addition, the report will be available  at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-8678 or shearw@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 III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) discuss factors that may limit the  use of alternative collateral to secure Federal Home Loan Bank  (FHLBank) advances; and (2) assess selected aspects of the Federal  Housing Finance Agency’s (FHFA) oversight of the FHLBanks’ alternative  collateral policies and practices.
To address the first objective, we reviewed relevant sections of the  Gramm-Leach-Bliley Act of 1999, the Housing and Economic Recovery Act  of 2008, and FHLBank collateral policies and procedures, particularly  those pertaining to alternative collateral. While we were able to review  each FHLBank’s collateral policies and procedures, the confidentiality of  such information limited what we could publicly disclose in our report.  Specifically, because the collateral haircut policies of some of the  FHLBanks generally are considered to be proprietary, we were unable to  specify the policies of individual FHLBanks. Where appropriate, we used  an alphabetic system when discussing FHLBank collateral policies and  limited discussion of details to ensure the protection of the FHLBanks’  identities. We also conducted interviews with representatives from FHFA,  the regulator of the FHLBank System; the 12 FHLBanks; the Council of  Federal Home Loan Banks; the Independent Community Bankers of  America; and obtained information from a nongeneralizable, random  sample of 30 Community Financial Institutions (CFI).
To develop the nongeneralizable, stratified random sample of 30 CFIs, we  first identified the population of CFIs that may have limited sources of  traditional collateral to secure FHLBank advances. To identify CFIs that  may have relatively large volumes of agriculturally related loans on their  books, we used the Federal Deposit Insurance Corporation’s (FDIC)  definition of an agricultural bank; that is, a bank having 25 percent or more  of its loans associated with agricultural lending. FHFA provided a list of  6,281 CFI members as of September 30, 2009—of which 470 met FDIC’s  definition of an agricultural bank, meaning that they held at least 25  percent of their assets in agricultural loans. (We note that the report  includes updated data on agricultural banks as of year-end 2009.) To  identify CFIs that may have relatively large volumes of small business  loans on their books, we used information from the Small Business  Administration’s (SBA) Office of Advocacy. Specifically, because there is  no similar threshold to define a small business lender, we used the SBA’s  Office of Advocacy’s determination of the top 10 percent of small business  lenders in each state to determine the small business sample population.  We then matched and merged this list of institutions, by institution name,  with FHFA’s list of CFI members. The resulting list included 326 small  business CFIs and their total assets for each FHLBank district. The final  sample population of agricultural and small business CFIs totaled 796.  From this final sample population, we identified 10 lenders that met the  definition of both an agricultural and small business CFI. We sampled this  dual-status CFI population separately because of its potential to provide a  unique perspective on alternative collateral in the FHLBank System.
Our sample was stratified to ensure that it included the perspective of  CFIs located in FHLBank districts that had (1) high, some, or no use of  alternative collateral, as of year-end 2008; and, (2) banks that are very  small, meaning less than $100 million in total assets. We defined an  FHLBank as having had a “high” acceptance of alternative collateral if it  accepted more than $500 million in alternative collateral in 2008; “some”  acceptance if it accepted from $1 to $500 million in alternative collateral in  2008; and “no” acceptance if it accepted no alternative collateral ($0) in  2008. We then over sampled within each stratum to accommodate refusals  to participate and randomly selected a nongeneralizable sample of 30 CFIs  (see table 6).
To obtain information from the CFIs in our sample, we used a Web-based  protocol to conduct structured telephone interviews. The majority of  responses, 29, were obtained by telephone; and 1 was obtained by e-mail.  We used data from FHFA on the use of alternative collateral throughout  the FHLBank System and information from our interviews with the 12  FHLBank representatives to develop our structured interview. We  pretested the structured interview protocol and made revisions as  necessary. Questions from the structured interview focused on the  background and local economies of the CFIs, their use of products and  services from their local FHLBank, and their views of and experience with  pledging alternative collateral to obtain an advance from an FHLBank. The  views expressed by representatives of the CFIs in our sample cannot be  generalized to the entire population of all CFIs.
To present details and illustrative examples regarding the information  obtained from the CFI interviews, we analyzed the narrative (open-ended)  and closed-ended responses and developed summaries. These summaries  were then independently reviewed to ensure that original statements were  accurately characterized.
To assess the FHFA and FDIC data used in our analyses, we interviewed  agency officials knowledgeable about the data. In addition, we assessed  FHFA, FDIC, and SBA’s Office of Advocacy data for obvious outliers and  missing information. To assess the accuracy of the SBA’s Office of  Advocacy and FHFA data, we compared a sample of it against public  information from the Federal Financial Institutions Examination Council’s  Uniform Bank Performance Report, which is an analytical tool created for  bank supervisory, examination, and management purposes and can be  used to understand a bank’s financial condition. We determined that the  data were sufficiently reliable for the purpose of this engagement.
For the second objective, we reviewed FHFA’s examination policies and  procedures and federal internal control standards, as well as a total of 23  FHFA and Federal Housing Finance Board (the FHFA predecessor)  examinations covering each of the 12 FHLBanks over the past three  examination cycles. We reviewed FHFA’s regulation pertaining to the  development of strategic business plans and we reviewed 11 FHLBanks’  plans for 2010; and 1 plan submitted for 2009 because it was the most  recently available for that FHLBank. Additionally, we reviewed FHFA’s  regulation pertaining to the development of Targeted Community Lending  Plans and we reviewed each of the 12 FHLBanks’ plans for 2010. We also  discussed FHFA’s oversight program for alternative collateral with senior  agency officials.
Finally, we conducted limited analysis to gain a perspective on the level of  FHLBank haircuts applied to alternative collateral. To do so, we obtained  and reviewed documentation of analyses from 3 FHLBanks; the other 9  FHLBanks generally did not provide such documentation. Confidentiality  considerations limited the amount of information we could disclose about  the analyses from the 3 FHLBanks that provided documentation. We also  obtained and analyzed data from FDIC on the estimated losses from banks  that failed or were on the verge of failure, by various loan types, for the  period January 2009 through February 2010. These data were obtained  through asset specialists who were contracted by FDIC to review the asset  portfolios of failed institutions and to develop anticipated loss rates,  expressed as a percentage of outstanding loan balances, on the various  categories of the banks’ asset portfolios. As discussed in this report, this  approach has several important limitations, including not providing a  historical basis for estimating the risks associated with alternative  collateral over time or controlling for any other factors that may be related  to the characteristics of the loans made by the banks. To assess the  reliability of the FDIC data, we interviewed agency officials  knowledgeable about the data. In addition, these data are corroborated by  information from our CFI interviews and several independent reports  which suggest that the agricultural sector has performed somewhat better  than the broader economy in recent years. We determined that the data  were sufficiently reliable for the purpose of this engagement, which was to  understand the FHLBanks collateral haircuts relative to the recent  performance of alternative collateral assets in the financial markets.
We conducted this performance audit from October 2009 to July 2010, 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.
section_title: Appendix II: Comments from the Federal Housing Finance Agency
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Wesley M. Phillips, Assistant  Director; Benjamin Bolitzer; Tiffani Humble; Ronald Ito; Fred Jimenez;  Grant Mallie; Timothy Mooney; Linda Rego; Barbara Roesmann; Jerome  Sandau; and Rebecca Shea made key contributions to this report.