Billions of Dollars Are at Risk: GAO

Dozens of federal programs – including several affecting financial services – are vulnerable to waste, fraud and abuse because of poor oversight by agencies or neglect from Congress, the Government Accountability Office said in an annual report this month.

“Tens of billions of dollars in additional benefits and ­substantial improvements to the health, well-being and security of the nation would be achieved by fully addressing high-risk issues,” the GAO said in its annual report on “high-risk” federal programs. To qualify for the list, at least $1 billion must be in jeopardy.

And the oversight gaps are not improving, Comptroller General Gene Dorado told the House Oversight and Reform Committee, which held a hearing on the report earlier this month. “In most areas, progress since our last high-risk update has been limited,” he said.

Committee Chairwoman Carolyn Maloney (D-N.Y.), blamed former President Trump for part of the problem.

“Over the past four years, the objective metrics of the High-Risk List show that the federal government improved less, and regressed more, than before the former President took office,” he told Dorado.

The massive report cited several areas affecting financial services:

Financial Regulation

As it has in the past, the GAO said that Congress should consider consolidating the number of federal agencies involved in supervising the safety and soundness of financial institutions. The GAO did not name which agencies might be consolidated, so it is unclear whether the agency is including the NCUA in the mix.

“The current structure introduces significant challenges for efficient and effective oversight of financial institutions and activities,” the GAO said, noting that in the years leading up to the 2007-2009 financial crisis, the regulatory system had not adapted to significant changes in the marketplace.

For instance, the GAO said entities that played critical roles in the financial markets were not being regulated effectively.

Again, the GAO was vague about the changes it believes should be adopted, but did say that Congress should consider changes to ensure the consistency of consumer protections and the consistency of financial oversight for similar institutions and services.

The GAO noted that while Congress created the Financial Stability Oversight Council (FSOC) in the Dodd-Frank Act, it did not give the council sufficient authority to address risks from financial activities that include multiple entities. For instance, the FSOC can recommend but not require regulators to act on problems involving systemic risk.

Specifically, the FSOC can recommend but not compel regulators to act with respect to systemic risk arising from such activities. This presents a challenge to holding the FSOC and financial regulators accountable for addressing systemic risk.

“Hence, addressing weaknesses in the U.S. financial regulatory structure will require additional congressional leadership,” the GAO concluded.

Paycheck Protection Program

The program, created as a response to the coronavirus crisis, has faced allegations of inefficiency and waste after it was hastily cobbled together to provide businesses with loans to stay in operation during the pandemic. In ­December, the SBA’s auditors issued a “disclaimer of opinion” on the SBA’s financial statements for the year ending Sept. 30.

The GAO said that as of January 2020, the SBA continues to suffer delays in providing oversight plans and estimates of improper payments, adding that until the SBA produces such plans, the GAO cannot fully evaluate how well the program is operating or whether the SBA is conducting effective oversight.

Between May and October, financial institutions filed more than 1,400 suspicious activity reports with the Financial Crimes Enforcement Network related to the PPP loans.

The SBA’s auditors said that more than two million approved loans, totaling $189 billion, potentially were not in conformance with the requirements of the program and that 896,000 errors from lenders were noted.

Flood Insurance

The National Flood Insurance Program (NFIP) is seriously under water, according to the GAO. It is tasked with two competing goals – keeping flood insurance affordable and keeping the program solvent. The result has been that an emphasis on keeping rates affordable has resulted in premium charges that are not sufficient for paying claims.

The GAO first added the NFIP to the high-risk list in 2006.

The program has been forced to borrow from the Treasury Department to pay claims from natural disasters. As of August 2020, the Federal Emergency Management Agency (FEMA) owed the Treasury $20.5 billion despite Congress having cancelled $16 million in debt in 2017.

Problems with the program abound, the GAO said. “For ­example, after multiple delays, FEMA’s effort to modernize NFIP’s insurance policy and claims management system ultimately took 17 years to complete,” the GAO said.

The program’s authorization has expired, but Congress has been unable to enact legislation to update the flood insurance program; instead, the program has been funded through a series of short-term measures.

Postal Service

“USPS’s overall financial condition is unsustainable and deteriorating,” the GAO bluntly declared. “Savings from USPS’s cost-reduction efforts have dwindled in recent years.”

Postal service expenses exceeded revenue by $18 billion in 2018 and 2019, as labor costs continued to increase while the volume of the most popular mail products decreased.

The Postal Service is expected to be self-sufficient, which is not necessarily an issue for credit unions. However, some lawmakers and think tanks have recommended that basic banking services be offered in post offices to help generate revenue. In fact, several years ago, the Postal Service’s Inspector General suggested that postal banking might help alleviate the system’s problems.

The IG in 2015 estimated that the USPS could generate $1.1 billion annually by expanding the financial products it offers. In a separate report on the issue, the GAO said considering the cost involved, the services would generate $100 million to $200 million in net revenue.

The GAO also said while offering additional non-postal products at post offices could provide consumer, government or community benefits, “viability may be limited.”

The GAO said some other countries offer banking at post offices, but that USPS and banking associations interviewed pointed out that other nations have vastly different regulatory structures. In addition, it said, some foreign postal operators are selling their banks.

Housing Finance

The GAO said that Congress will have to enact changes to finally settle the federal government’s role in housing finance. And while hearings have been held, the House and Senate have not agreed on the issue.

Meanwhile, the federal role in housing finance increased during the financial crisis and the federal government currently supports about two-thirds of the mortgage market.

To complicate matters, the Federal Home Financing Agency, which placed the housing Government Sponsored Enterprises in conservatorship, reported that the enterprises had received $191.4 billion in capital support as of the end of the last fiscal year.

And the GAO said it is up to Congress to fix the problem.

“Overall progress on resolving the federal role in housing finance will be difficult to achieve until Congress provides further direction by enacting changes to the housing finance system,” the accountability office said.

Cybersecurity

Federal agencies must take “urgent action” to implement a comprehensive cybersecurity strategy, perform oversight of the system, secure and protect it, the GAO said.

The Treasury Department has been designated as the lead agency for the sector, but by the end of the fiscal year, the department had not implemented recommendations to establish a system for measuring efforts to mitigate cybersecurity risk.