Requirements of the Data Quality Law

   Congress recently enacted important new Data Quality legislation as part of the FY 2001 Consolidated Appropriations Act (P.L. 106-554) which requires OMB to develop government-wide standards for the information quality in the form of guidelines which are to be completed not later than September 30, 2001. Congress has provided for broad input in developing the Data Quality standard, mandating that OMB shall seek "public and Federal agency involvement." Key elements of the new Data Quality law include:

• OMB must define four key Data Quality terms:

  	-- Quality	-- Objectivity
  	-- Utility	-- Integrity

• OMB must also include a mechanism through which the interested public can petition agencies to correct information which does not meet the OMB standard.

• Other federal agencies must issue their own conforming guidelines within one year of the issuance of the OMB guidelines.

• Agencies are to report periodically to the Director of OMB regarding the number and nature of Data Quality complaints received by the agency and how such complaints were handled.

CRE Data Quality Initiative: Financial Sector

CRE's Data Quality Initiative in General

   CRE believes that the Data Quality provision represents a significant advancement of Good Government principles and should be given broad applicability to all government sectors. Since government information routinely serves as the basis for regulation and resource allocation, it is imperative that the information on which the government bases these decision be accurate and valid. CRE believes that the new Data Quality provisions will further this goal by promoting transparency, the use of sound science, and formulation of rational regulatory policy.

   CRE is committed to active involvement in the implementation phase of the Data Quality law. CRE has already stated its plans to offer its insights and assistance to OMB as it drafts its generic Data Quality guidance and to the agencies as they prepare their conforming guidelines. Therefore, as a first step, CRE is launching a Data Quality Initiative for the Financial Sector. CRE's Data Quality Initiative will:

• Provide CRE consultations with agency officials regarding the tenets of the new Data Quality law and interim steps which agencies may take to improve information quality prior to issuance of OMB's guidelines.

• Review select agency information products and activities as a quality screen. CRE will make this information and its analysis open to the public for comment through postings on its website.

• CRE will then issue a Regulatory Report Card on Data Quality at the agency and make recommendations for ways to improve existing processes.

CRE's Data Quality Initiative: Focus on OFHEO

   On October 30, 2000, the Office of Federal Housing Enterprise Oversight (OFHEO) issued a call for public comments in the Federal Register on its comprehensive study of the systemic risks which the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) may pose to the nation's financial system in general and to U.S. housing finance markets in particular (65 Fed. Reg. 64718). The study is designed to examine the nature and magnitude of any risks posed by the enterprises, whether and to what extent the enterprises contribute to or mitigate systemic risk, what actions OFHEO or others could do to mitigate systemic risk. The notice sought public comment by December 29^th on research questions which OFHEO plans to address in the study; however, that deadline was subsequently extended by the agency until January 29, 2001 (65 Fed. Reg. 79904, Dec. 20, 2000).

• Click here to review the questions for which OFHEO sought public comment.
  
• Click here to review CRE's comments to OFHEO on systemic risk and the applicability of the Data Quality law.
  
• Click here to learn how to submit a comment on systemic risk to OFHEO.
  
• Click here to submit a comment to CRE's Interactive Public Docket on this issue.

   As a prototype case, CRE is focusing its Data Quality Initiative on OFHEO's systemic risk study of Fannie Mae and Freddie Mac. CRE has chosen the OFHEO study for Data Quality review because of the broad nature of OFHEO's inquiry and the significant consequences which could flow from inaccurate information in the agency's analyses. Consultations and analyses similar to those discussed above will be undertaken.

   CRE looks forward to cooperative efforts with OFHEO to ensure that congressionally-mandated principles for information quality are incorporated in its systemic risk assessment, and we anticipate broadening the Data Quality Initiative to other agencies in the near future.

[Attachment #1]

Questions on Systemic Risk Posed by OFHEO

Whether and to What Extent Fannie Mae and Freddie Mac Pose Risks to the Financial System and U.S. Housing Finance Markets

1. Do Fannie Mae and Freddie Mac pose systemic risk, as define below, to the U.S. and international financial systems? If so, how? How does any systemic risk posed by the Enterprises compare in magnitude and character, to that posed by other large financial firms such as large, complex banking organizations (LCBOs)?
   

2. Do the activities of Fannie Mae and Freddie Mac reduce the systemic risk of the U.S. and international financial systems? If so, how?
   
   
3. Can the risks the Enterprises pose to the financial system in general and U.S. housing markets in particular, and any systemic risk they may pose, by quantified meaningfully? If so, how?
   
   
4. If Fannie Mae or Freddie Mac defaulted, how severe would losses on that Enterprise's obligations have to be to render other financial firms undercapitalized or insolvent? How many firms could experience such solvency problems? How does the risk of solvency problems vary for different types of firms, e.g., federally insured depository institutions, securities firms, major derivatives dealers, other Government-sponsored enterprises (GSEs), and pension and retirement funds? How does that risk vary for firms of different size? How severe might such solvency problems be? How might such problems affect the functioning of the financial system?
   
   
5. If Fannie Mae or Freddie Mac experienced severe financial distress or failed, how many other financial firms could experience liquidity problems? How would such liquidity problems differ for different types of firms, e.g., federally insured depository institutions, securities firms, major derivatives dealers, other GSEs, and pension and retirement funds? How does that risk vary for firms of different size? How severe might such liquidity problems be? How might such problems affect the functioning of the financial system?
   
   
6. If Fannie Mae or Freddie Mac failed or significantly curtailed its activities, how would liquidity in U.S. mortgage markets be affected? Would the other Enterprise or the rest of the industry be able to effectively fill the void? What would be the likely effects on the supply and price of mortgage credit? What would be the likely effects on economic activity in the housing sector? How might prospective homebuyers be affected?
   
   
7. What is the risk that solvency or liquidity problems at financial firms caused by severe financial distress at or default by either Enterprise could be serious enough to reduce employment or economic output or hamper the achievement of the goals of federal housing policy?
   
   
8. Fannie Mae and Freddie Mac are major participants in national and international systems for clearing and settling financial transactions. What risks do the Enterprises pose to such systems?
   
   
9. The outstanding debt of Fannie Mae and Freddie Mac has grown at an annual average rate of nearly 24 percent since year-end 1992. If debt issued by the Enterprises continued to grow substantially faster than most other types of credit market instruments, how would any risks Fannie Mae and Freddie Mac pose to the financial system as a whole, and U.S. housing finance markets in particular, be affected? How would those risks be affected if debt issued by the Enterprises and other GSEs replaced Treasury securities as a benchmark in financial markets?
   
   
10. How independent are the risks posed by Fannie Mae and Freddie Mac?

The Effect of Federal Sponsorship and Regulation on the Risks Posed by the Enterprises

11. What are the implications for the risks Fannie Mae and Freddie Mac pose to the financial system in general and U.S. housing finance markets in particular of the fact that investors in the Enterprises' obligations believe the federal government would act to protect them in the event either Enterprise failed?
    
    
12. Is there uncertainty about the actions the federal government would take in the event either Enterprise experienced severe financial distress? Does any such uncertainty affect the risks posed by Fannie Mae or Freddie Mac?
    
    
13. How does current federal regulation of Fannie Mae and Freddie Mac affect any systemic risk posed by the Enterprises?

Actions to Reduce Risks Posed by Fannie Mae and Freddie Mac

14. What steps could be taken to reduce the risk that a default by Fannie Mae or Freddie Mac would cause other financial firms to experience solvency or liquidity problems? What are the potential costs and benefits of those options?
    
    
15. What steps could be taken to reduce the risk of the Enterprises developing liquidity problems if either of them experienced severe financial distress? What are the potential costs and benefits of those options?
    
    
16. In addition to OFHEO's capital regulation and examinations of Fannie Mae and Freddie Mac, what steps can OFHEO or other appropriate entities take to reduce any risks the Enterprises may pose to clearing and settlement systems? What are the potential costs and benefits of those options?
    
    
17. In what areas could increased transparency and public disclosure by Fannie Mae and Freddie Mac reduce the risks they pose to the financial system in general and U.S. housing finance markets in particular? What specific information would be most valuable to market participants?
    
    
18. Could increased market discipline of Fannie Mae and Freddie Mac reduce the risks they pose to the financial system in general and U.S. housing finance markets in particular? If so, how? What specific actions could be taken to increase market discipline of the Enterprises? Could increased market discipline increase the risks Fannie Mae and Freddie Mac pose?
    
    
19. Should OFHEO's approach to regulating the Enterprises be adapted to reflect the risks Fannie Mae and Freddie Mac pose to the financial system in general and U.S. housing finance markets in particular? If so, how?
    
    
20. Should OFHEO's statutory authority be adapted to reflect the risk Fannie Mae and Freddie Mac pose to the financial system in general and U.S. housing finance markets in particular? If so, how?

[Attachment #2]

December 21, 2000

Mr. Robert S. Seiler, Jr.
Manager of Policy Analysis
Office of Federal Housing Enterprise Oversight
1700 G Street, N.W., Fourth Floor
Washington, D.C. 20552

Dear Mr. Seiler:

   I am writing in response to the Office of Federal Housing Enterprise Oversight's (OFHEO) call for public comments in the Federal Register on the issue of the potential systemic risk posed by Fannie Mae and Freddie Mac to the nation's financial system and to the U.S. housing finance market (65 Fed. Reg. 64718, October 30, 2000). As an organization with considerable expertise in the area of risk assessment, the Center for Regulatory Effectiveness (CRE) is pleased to offer the agency its comments and recommendations on this significant area of inquiry.

About the CRE

   The Center for Regulatory Effectiveness was established in 1996, after passage of the Congressional Review Act, to provide Congress with independent analyses of agency regulations. From this initial organizing concept, CRE has grown into a nationally recognized clearinghouse for recommendations and activities to improve the federal regulatory process.

   CRE has no members, but it receives, from time to time, financial support, services in kind, and work product from trade associations and private companies. Thus, CRE is able to draw upon the views of hundreds of firms. In addition, the CRE Advisory Board consists of former career officials from the Office of Management and Budget's (OMB) Office of Information and Regulatory, each of whom brings their own perspective to the Center.

   Another unique feature of the CRE is its website ( which is designed to promote sound public policy and regulation by facilitating interaction between government, industry, organized groups, and the interested public. The CRE website encourages dialogue by reporting on various regulations or issues with the potential for regulatory action. CRE also identifies opportunities for public comments on these issues and has introduced the concept of an "Interactive Public Docket," which allows for ongoing debate of proposed regulations even beyond the close of formal agency public comment periods. I invite you to visit our website as a way to better understand our organization and the types of issues in which we are interested.

CRE Comments on OFHEO's Systemic Risk Inquiry

    As noted above, the Center for Regulatory Effectiveness has been very active in the field of risk assessment, albeit in the environmental area, as is demonstrated on our website. The field of environmental risk assessment has been evolving for decades to reach its current state of reliability for regulatory purposes, and while CRE applauds the expansion of risk assessment to other disciplines, such steps must be taken deliberately and with great care.

   CRE agrees with OFHEO that Fannie Mae and Freddie Mac have performed exceptionally well in the past, and while OFHEO's inquiry is valid and in keeping with its regulatory responsibilities, there is no basis for the enterprises to be seen as suspect. The enterprises might be encouraged to consider additional efforts at transparency, as such efforts by any organization routinely benefit interested parties and the public. However, particularly in operations which are apparently working well, it is imperative that the agency gather a significant amount of information with ample opportunities for public comment prior to taking any regulatory action. Otherwise, the very financial system and housing finance markets which OFHEO seeks to protect could be jeopardized.

   Lastly, we would note that analyses generated by OFHEO will have to comply with the "Data Quality" provisions of the recently enacted FY 2001 Consolidated Appropriations Act. Please feel free to contact us or our website if you need additional information on this new statutory provision.

[Attachment #3]

How to Submit Comments on Systemic Risk to OFHEO

Written Comments

Written comments on the systemic risk issue may be submitted to OFHEO by January 29, 2001 to:

Electronic Comments

Electronic comments may be submitted by e-mail to: