Section 1317(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. § 4517(a)) and Section 20 of the Federal Home Loan Bank Act (12 U.S.C. 1440) require FHFA to conduct annual examinations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBanks) and to ensure that the entities operate in a safe and sound manner. In addition, FHFA supervises U.S. Financial Technology, LLC (U.S. FinTech) – a joint venture owned by Fannie Mae and Freddie Mac – and the Office of Finance (OF), which together with the FHLBanks forms the FHLBank System. Collectively, these are referred to as the “regulated entities.”
- Learn more about Fannie Mae and Freddie Mac
- Learn more about the FHLBank System
FHFA conducts safety and soundness oversight through two primary divisions: the Division of Enterprise Regulation (DER), which supervises Fannie Mae, Freddie Mac, and U.S. FinTech; and the Division of Federal Home Loan Bank Regulation (DBR), which supervises the Federal Home Loan Bank System. Both divisions employ risk-based supervision programs as part of their oversight.
Examination Activities
FHFA conducts supervision using a risk-based approach to identify existing and emerging risks to the regulated entities, evaluate the overall effectiveness of each regulated entity’s risk management systems and controls, and assess each regulated entity’s compliance with applicable laws and regulations.
DER and DBR implement the risk-based approach through targeted examinations and monitoring. Targeted examinations are structured assessments designed to evaluate a specific risk area and are conducted at each regulated entity throughout the year. Monitoring provides insight into emerging risks, operational changes, and broader trends that may affect the safety and soundness of a regulated entity. Monitoring activities include regular touchpoints with the regulated entities, as well as reviews of routinely submitted materials.
A dedicated examiner-in-charge assigned to each regulated entity is responsible for leading and coordinating examination and monitoring activities, while subject matter experts provide consistent supervision of risk areas.
FHFA communicates any adverse findings identified through the examination process to the regulated entity and assesses the remediation. FHFA also assesses the responsiveness of boards of directors and management to internal or external auditors identifying deficiencies or weaknesses.
Examination Ratings
FHFA issues a Report of Examination to each regulated entity’s board of directors and senior management annually. The report communicates supervisory conclusions, summaries of adverse findings, and the composite and component ratings.
To assign a composite rating and component ratings to each regulated entity, FHFA's examiners use a uniform rating system known as CAMELSO. The composite rating is based on an evaluation and individual rating of seven components:
- Capital
- Asset Quality
- Management
- Earnings
- Liquidity
- Sensitivity to Market Risk
- Operational Risk
Under the CAMELSO rating system, the composite and component ratings range from 1 (best - the lowest degree of supervisory concern) to 5 (worst - the highest level of supervisory concern). See Advisory Bulletin 2012-03: FHFA Examination Rating System for more information about FHFA’s rating system, including how composite ratings are determined. U.S. FinTech and OF are only rated on the “Management” and “Operational Risk” components due to their simpler scope and operations.
Housing Finance Examiner Commission Program
FHFA offers the Housing Finance Examiner Commissioning Program to staff. The main objective of the program is to provide examiners with broad-based knowledge to conduct successful risk-based examinations.
A Housing Finance Examiner Commission will indicate that an examiner is qualified to lead an examination of a major risk area. The program combines coursework, on-the-job training, and testing to ensure an examiner has the skills and technical knowledge necessary to evaluate the condition and practices of the regulated entities.