17 June 2009
[Federal Register: June 17, 2009 (Volume 74, Number 115)]
[Proposed Rules]
[Page 28636-28639]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jn09-16]
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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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[[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:
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.
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.
E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail to RegComments@fhfa.gov. Please include ``RIN
2590-AA11'' in the subject line of the message.
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 RegComments@fhfa.gov 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--
Any director, officer, employee, or controlling
stockholder of, or agent for, a regulated entity;
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;
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;
Any not-for-profit corporation that receives its principal
funding, on an ongoing basis, from any regulated entity; and
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]
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