Fannie Mae 2006 Annual Report Download - page 32

to the extent authorized by Congress, to cover OFHEO’s reasonable expenses. OFHEO’s formal enforcement
powers include the power to impose temporary and final cease-and-desist orders and civil monetary penalties
on us and our directors and executive officers.
OFHEO Consent Order
In 2003, OFHEO began a special examination of our accounting policies and practices, internal controls,
financial reporting, corporate governance, and other matters. On May 23, 2006, concurrently with OFHEO’s
release of its final report of the special examination, we agreed to OFHEO’s issuance of a consent order that
resolved open matters relating to their investigation of us. Under the consent order, we neither admitted nor
denied any wrongdoing and agreed to make changes and take actions in specified areas, including our
accounting practices, capital levels and activities, corporate governance, Board of Directors, internal controls,
public disclosures, regulatory reporting, personnel and compensation practices.
In the OFHEO consent order, we agreed to the following additional restrictions relating to our capital activity:
• We must maintain a 30% capital surplus over our statutory minimum capital requirement until such time
as the Director of OFHEO determines that the requirement should be modified or allowed to expire,
taking into account factors such as the resolution of accounting and internal control issues.
• As long as the capital restoration plan is in effect, we must seek the approval of the Director of OFHEO
before engaging in any transaction that could have the effect of reducing our capital surplus below an
amount equal to 30% more than our statutory minimum capital requirement. For a discussion of the
capital restoration plan, see “Capital Adequacy Requirements—Capital Restoration Plan and OFHEO-
Directed Minimum Capital Requirement.”
• We must submit a written report to OFHEO detailing the rationale and process for any proposed capital
distribution before making such distribution.
• We are not permitted to increase our net mortgage portfolio assets above the amount shown in our
minimum capital report to OFHEO as of December 31, 2005 ($727.75 billion), except in limited
circumstances at the discretion of OFHEO. We will be subject to this limitation on portfolio growth until
the Director of OFHEO has determined that expiration of the limitation is appropriate in light of
information regarding any or all of the following:
• our capital;
• market liquidity issues;
• housing goals;
• risk management improvements;
• our outside auditor’s opinion that our consolidated financial statements present fairly in all material
respects our financial condition;
• receipt of an unqualified opinion from an outside audit firm that our internal control over financial
reporting is effective pursuant to section 404 of the Sarbanes-Oxley Act of 2002; or
• other relevant information.
We submitted an updated business plan to OFHEO on February 28, 2007 that included an update on our
progress in remediating our internal control deficiencies, completing the requirements of the consent order and
other matters. OFHEO reviewed our business plan and directed us to maintain compliance with the
$727.75 billion portfolio cap. On August 10, 2007, in response to our request that OFHEO grant us a 10%
increase in our $727.75 billion portfolio cap, OFHEO advised us to maintain compliance with the existing
portfolio cap.
As part of the OFHEO consent order, our Board of Directors agreed to review all individuals who at the time
of the review were affiliated with us, including Board members, and who were mentioned in OFHEO’s final
17