Full text of Agency Financial Report : Fiscal Year 2019

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AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  TABLE OF CONTENTS  Contents FOREWORD ........................................................................................................................................................................ ii MESSAGE FROM THE AGENCY HEAD FOR THE OFFICE OF FINANCIAL STABILITY ......................... iii EXECUTIVE SUMMARY................................................................................................................................................. iv Part 1: Management's Discussion and Analysis Program Background, Organization Structure, and Operational Goals .................................................... 1 Active TARP Programs .................................................................................................................................................. 2 Analysis of Fiscal Years 2019 and 2018 Financial Summary and Cumulative Net Income .............. 6 Analysis of Systems, Controls, and Legal Compliance .................................................................................... 12 Limitations of the Financial Statements ............................................................................................................... 16 Part 2: Financial Section GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT ............................................................. 19 Appendix I: Management’s Report on Internal Control over Financial Reporting ............................. 24 Appendix II: OFS Response to Auditor’s Report ............................................................................................... 25 FINANCIAL STATEMENTS ......................................................................................................................................... 26 NOTES TO THE FINANCIAL STATEMENTS ......................................................................................................... 31 REQUIRED SUPPLEMENTARY INFORMATION ................................................................................................. 55 Part 3: Other Information (Unaudited) Section A – Payment Integrity .................................................................................................................................. 59 Section B – Fraud Reduction and Data Analytics Act ...................................................................................... 61 Section C – Reduce the Footprint ............................................................................................................................ 62 Additional TARP Historical Information .............................................................................................................. 63 TARP Glossary ................................................................................................................................................................. 67  For the online version of this Report see www.FinancialStability.gov and search on Reports by Frequency, Yearly  TABLE OF CONTENTS  i  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  FOREWORD The Office of Management and Budget (OMB) Circular A-136 provides agencies with the guidance for reporting financial and performance information to Congress, the President, and the American people on an annual basis. In lieu of the consolidated Performance and Accountability Report (PAR), the U.S. Department of the Treasury’s (Treasury) Office of Financial Stability (OFS) has chosen to prepare a series of separate reports to provide the fiscal year 2019 financial and performance information for the Troubled Asset Relief Program (TARP). The following Agency Financial Report (AFR) is the first in this series of reports, and includes the following components:        Message from the Agency Head: A statement from the Deputy Assistant Secretary for Community and Economic Development providing his assessment of the reliability and completeness of the financial and performance data contained in the report, as well as a summary status of TARP programs. Management’s Discussion and Analysis: This section contains summary information about the TARP mission and organizational structure of OFS; background and analysis of OFS programs, initiatives and operational goals; and analysis of financial statements, systems, controls, and legal compliance, including the Management’s Statement of Assurance. Financial Section: This section provides the Independent Auditor’s Report, the financial statements, the notes to the financial statements, and other statutory reporting. Other Information: This section includes the information regarding Payment Integrity, Fraud Reduction and Data Analytics Act, and Reduce the Footprint.  In addition to this AFR, the performance section of the OFS fiscal year 2019 Congressional Budget Justification satisfies the reporting requirements of the following major legislation:        Reports Consolidation Act of 2000; Government Performance and Results Act of 1993 (GPRA) and GPRA Modernization Act of 2010; Government Management Reform Act of 1994; Federal Managers’ Financial Integrity Act of 1982 (FMFIA); Federal Financial Management Improvement Act of 1996 (FFMIA); and Improper Payments Information Act of 2002 (IPIA), as amended by the Improper Payments Elimination and Recovery Act of 2010 (IPERA).  These reports will be available on the OFS website at: OFS Financial Reports Archive.  ii  FOREWARD  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  MESSAGE FROM THE AGENCY HEAD FOR THE OFFICE OF FINANCIAL STABILITY November 4, 2019 I am pleased to present the Office of Financial Stability’s (OFS) Agency Financial Report for Fiscal Year 2019. This report describes our financial and performance results for the 11th year of the Troubled Asset Relief Program (TARP). Within this report you will find the comparative fiscal years 2019 and 2018 financial statements for TARP, the U.S. Government Accountability Office (GAO) independent auditor’s report with the audit opinion on these financial statements, an opinion from GAO on OFS’s internal control over financial reporting for TARP, and the results of GAO’s tests of OFS’s compliance with selected provisions of laws, regulations, contracts, and agreements applicable to OFS. The Emergency Economic Stabilization Act of 2008 (EESA) established OFS within the Office of Domestic Finance at the Department of the Treasury (Treasury) to implement TARP. The authority to make new commitments through TARP ended October 3, 2010. Since then, Treasury has focused on the orderly wind-down of TARP. As of September 30, 2019, OFS had collected 103 percent of the $412.1 billion in program funds that were disbursed under TARP investment programs, as well as an additional $17.5 billion from Treasury’s equity stake in American International Group, Inc. Of the original ten investment programs, eight are effectively closed. Investment programs with remaining outstanding balances include the Capital Purchase Program (CPP, $17 million) and the Community Development Capital Initiative (CDCI, $23 million). OFS continues to wind-down those positions as quickly as practicable. Hardest Hit Fund (HHF) has assisted approximately 397 thousand homeowners in preventing foreclosures, and helped stabilize neighborhoods in 18 states and the District of Columbia. In 2019, HHF programs assisted approximately 25 thousand households even as the majority of the states closed programs signifying the start of the orderly wind-down. Making Home Affordable (MHA) closed to new applications in December 2016, as required by the Consolidated Appropriations Act, 2016. Although MHA is closed to new applicants, OFS continues to monitor servicer compliance with guidelines that pertain to post-modification activities. The financial and performance data contained in this report are reliable and complete. For the 11th consecutive year, OFS has earned unmodified opinions from the GAO on its financial statements for TARP, and its internal control over financial reporting for TARP. Sincerely,  Gavin Beske Deputy Assistant Secretary for Community and Economic Development  MESSAGE FROM THE AGENCY HEAD  iii  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  EXECUTIVE SUMMARY It was out of extraordinary circumstances over a decade ago that TARP and OFS were created. Both were a central part of the emergency measures taken by the federal government pursuant to EESA. Collectively, TARP and the federal government’s other emergency programs helped to prevent the collapse of the U.S. financial system. Through EESA, the federal government was able to limit the broader financial and economic damage caused by the crisis. Although we are recovering, these measures were critical to restarting economic growth, and in restoring access to capital and credit. Since late 2010, OFS has focused on carefully winding down TARP’s investment programs, recovering the OFS’s outstanding investments, and continuing to implement the various housing programs under TARP to help struggling homeowners avoid foreclosure. While the total amount disbursed for TARP programs was $442.2 billion, OFS has collected $425.5 billion (or $443.0 billion if including the $17.6 billion in proceeds from the additional Treasury American International Group, Inc. [AIG] shares) through repayments, sales, dividends, interest, and other income. As of September 30, 2019, only $40 million in bank investments remain outstanding. The Management’s Discussion & Analysis (MD&A) within this AFR describes the establishment of OFS, its background, mission, and organizational structure. OFS administers programs that fall into two major categories: Investments and Housing. In total, OFS had responsibility for 13 individual programs. All of these programs have either been closed or are in the process of winding down. Each year, OFS reports on our Operational Goals, which were developed by management to achieve our strategic goal to transform government-wide financial stewardship.  iv  These goals include: 1. Completing the wind-down of remaining TARP investment programs; 2. Continuing to help struggling homeowners avoid foreclosure; 3. Minimizing the cost of the TARP programs to the taxpayer; and 4. Operating with the highest standards of transparency, accountability, and integrity. The first Operational Goal is to complete the wind-down of the remaining TARP investment programs, the CPP and CDCI. OFS continues to exit CPP and CDCI by either: (i) allowing banks that are able to repurchase in full in the near future to do so; or (ii) restructuring and selling OFS’s investments in limited cases. The dividend rate step-ups for CDCI banks took effect in 2018, which increased the rate of bank repayments. OFS’s second Operational Goal is to continue helping struggling homeowners avoid foreclosure. The Consolidated Appropriations Act, 2016, signed into law on December 18, 2015, provided that the MHA program would terminate on December 31, 2016, except with respect to certain loan modification applications made before such date. As set forth in program guidelines, MHA servicers were required to evaluate applications submitted before the deadline and offer trial modifications to eligible applicants. All MHA transactions, including first and second lien permanent modifications, short sales or deeds-in-lieu of foreclosure, and unemployment forbearance plans, were required to be completed per program guidelines by December 1, 2017.  EXECUTIVE SUMMARY  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  The largest program within MHA is HAMP. Under this program approximately 1.7 million homeowners have had their mortgages modified permanently. HAMP has also set new standards and changed practices throughout the mortgage servicing industry in fundamental ways. Another OFS housing program, HHF, provides funding to 18 states and the District of Columbia through each state’s Housing Finance Agency (HFA) to provide assistance to struggling homeowners through locally-tailored programs. HFAs have implemented many types of programs to help homeowners, including mortgage payment assistance, reinstatement, short sale/transition assistance, principal reduction, and modification assistance. As the housing recovery has evolved, HFAs have undertaken additional initiatives such as blight elimination and down payment assistance programs, which help prevent foreclosures by stabilizing neighborhoods and property values. As of September 30, 2019, 11 of 19 HFAs have drawn 100 percent in HHF funding and all but one have drawn at least 80 percent in HHF funding, including 4 HFAs that have closed all their HHF programs to new applicants.  OFS’s final Operational Goal is to continue operating with the highest possible standards of transparency, accountability, and integrity. OFS posts a variety of reports online that provide taxpayers with regular and comprehensive information about how TARP funds are being spent, who has received them and on what terms, and how much has been collected to date. In addition to discussing program performance, the MD&A addresses OFS’s financial performance in the Analysis of Fiscal Years 2019 and 2018 Financial Summary and Cumulative Net Income section. OFS provides an overview of its financial data and explains its fiscal year 2019 net cost from operations and related loans, equity investments, and other credit programs. Finally, the Analysis of Systems, Controls, and Legal Compliance section of the MD&A provides a discussion of the actions OFS has taken to address its management control responsibilities. This section includes OFS’s assurance related to FMFIA and FFMIA.  The third Operational Goal of OFS is to minimize the cost of the TARP programs to the taxpayer. OFS pursues this goal by carefully managing the timely exit of these investments to reduce taxpayers’ exposure, returning TARP funds to reduce the federal debt, and continuing to replace government assistance with private capital in the financial system.  EXECUTIVE SUMMARY  v  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  This page intentionally left blank.  vi  EXECUTIVE SUMMARY  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  EXECUTIVE SUMMARY i  vi  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  viii  EXECUTIVE SUMMARY  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Program Background, Organization Structure, and Operational Goals Program Background TARP was created on October 3, 2008, pursuant to EESA. Treasury established OFS within the Office of Domestic Finance to carry out the authorities given to the Secretary of the Treasury to implement TARP. EESA authorized the Secretary of the Treasury to establish TARP to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on terms and conditions as are determined by the Secretary” to restore the liquidity and stability of the financial system. The terms “troubled assets” and “financial institution” are defined within EESA which can be found at: House Resolution 110-1424. In addition, Section 109 of EESA provides the authority to assist homeowners. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), signed into law in July 2010, reduced total TARP purchase authority from $700.0 billion to a cumulative $475.0 billion. OFS’s authority to make new program commitments under TARP originally expired on October 3, 2010. The Consolidated Appropriations Act, 2016 (the Act), gave the Secretary of the Treasury the ability to commit an additional $2.0 billion in TARP funds to current HHF participants. The additional funding committed under the Act was obligated by Treasury as of June 2016. OFS currently does not have the authority to commit new program funds.  OFS Organization Structure OFS is part of, and reports to, the Office of the Deputy Assistant Secretary for Community and Economic Development in the Office of the Assistant Secretary for Financial Institutions. OFS staff is responsible for TARP program management, compliance, finance and operations Certain staff within the Treasury Office of General Counsel and the Treasury  MANAGEMENT’S DISCUSSION AND ANALYSIS  Office of Financial Agents also support OFS, as well as other Treasury Departmental Offices. OFS is not envisioned as a permanent organization, so to the extent possible when economically efficient and appropriate, OFS utilizes private sector expertise to support the execution and liquidation of TARP programs. These firms assist in the areas of custodial services, accounting and internal controls, administrative support, legal advisory, financial advisory, program compliance, and information technology.  TARP Wind-Down Initiatives As of September 30, 2019, ten of the 13 TARP programs are closed or closed to new applicants. For those active TARP programs, each is in a wind-down phase or steady state of operations. Launched in fiscal year 2018 and more formally implemented in fiscal year 2019, OFS embarked on a number of administrative and organizational operations wind-down initiatives to mirror the state of the remaining TARP programs. These initiatives included, among others, the following:           Realigning the OFS organization structure; Implementing a structured planning approach for OFS personnel departures and transition of duties; Streamlining policies and procedures; Applying a risk-based approach to simplifying financial, operational and compliance processes and reporting; Planning for the decommissioning of legacy operations and ancillary finance management support systems; and Expanding use of collaborative technology solutions for OFS staff  1  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY    knowledge sharing, cross-training, continuity, and succession planning; and Planning for the transfer for permanent records to appropriate Federal Records Centers at the National Archives.  Throughout these initiatives, OFS staff headcount continues to decrease commensurate  with the orderly wind-down of the TARP programs. Despite this, OFS managers are responsible for identifying and proactively managing relevant program and administrative risks, and ensuring that effective internal controls are continuously designed and maintained throughout the life of TARP.  Active TARP Programs Bank Support Programs OFS disbursed a total of $245.5 billion under the various TARP bank programs. As of September 30, 2019, OFS has collected more than $275.9 billion through repayments, dividends, interest, warrant sales, and other income, representing $30.5 billion in excess of disbursements. OFS is focused on recovering TARP funds in a manner that continues to promote the nation’s financial stability while maximizing returns on behalf of the taxpayers.  CPP In fiscal year 2019, OFS continued to make progress winding down the CPP. Each dollar collected from CPP participants now represents additional collections in excess of disbursements on behalf of taxpayers. From inception of the program through September 30, 2019, OFS has received $199.7 billion in CPP repayments/sales, along with $12.1 billion in dividends and interest, and $15.0 billion of other proceeds in excess of cost, which totals $226.8 billion. As of September 30, 2019, $17 million in CPP gross investments remained outstanding in two institutions. During fiscal years 2019 and 2018, OFS collected a total of $5 million and $19 million, respectively, in repayments, warrants, dividends, and interest from institutions in the CPP program. Under the CPP, OFS has also received warrants to purchase common shares or other securities from the banks. OFS has  2  followed a policy of disposing of warrants as soon as practicable if no agreement is reached on a repurchase. As of September 30, 2019, all warrant positions have expired. OFS continues to work with CPP institutions to restructure certain investments that will allow them to exit TARP. Additional information on the CPP, including details on the program’s purpose, overview, and status can be found at the following link: TARP: Capital Purchase Program  CDCI In fiscal year 2019, OFS continued to make progress winding down the CDCI. From inception through September 30, 2019, OFS has received $520 million in CDCI repayment/sales, along with $66 million in dividends and interest. As of September 30, 2019, $23 million in CDCI investments remained outstanding in five institutions. During fiscal years 2019 and 2018, OFS collected a total of $21 million and $34 million, respectively, in repayments, early repayments, dividends, and interest from institutions in the CDCI program.  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Additional information on CDCI, including details on the program’s purpose, overview, and status can be found at the following link:  TARP: Community Development Capital Initiative  Automotive Industry Financing Program OFS fully wound down the Automotive Industry Financing Program (AIFP) during fiscal year 2015, selling its remaining stake in Ally Financial. OFS disbursed $79.7 billion in loans and equity investments to the auto industry through the AIFP. As of September 30, 2019, OFS has collected $70.6 billion through sales, repayments, dividends, interest, recoveries, and other income. This includes $73 million collected during fiscal year 2019, related to the Motors Liquidation Company Debtor-in-  Possession Lenders Trust which made its final distribution in late 2018 and the Avoidance Action Trust (AAT) which finalized a settlement in 2019. Additional information on the AIFP, including details on the program’s purpose, overview, and status can be found at the following link: TARP: Automotive Industry Financing Program  Housing Programs MHA  HHF  Consistent with OFS’s goal of continuing to help struggling homeowners avoid foreclosure, OFS developed and implemented a process to seamlessly transition the program from an active program to steady state. As of September 30, 2019, 57 servicers are participating in OFS’s MHA program for non-Government Sponsored Enterprise (GSE) loans. As of September 30, 2019, OFS has commitments to fund up to $23.5 billion in MHA payments and has disbursed $20.7 billion since inception.  In addition to MHA, OFS operates the HHF, which allows participating state HFAs in the nation’s hardest hit states to design innovative, locally-tailored foreclosure prevention programs.  Treasury continues to monitor servicer compliance with MHA guidelines that pertain to post-modification activities and which require remedial action. Additional information on MHA, including details on the program’s purpose, overview, and status can be found at the following link: TARP: Making Home Affordable Program  MANAGEMENT’S DISCUSSION AND ANALYSIS  As of September 30, 2019, the 19 HFAs have collectively drawn approximately $9.4 billion (98 percent) of the $9.6 billion allocated under the program. For fiscal years 2019 and 2018, this program has disbursed $0.3 billion and $0.6 billion, respectively. Each state draws down funds as they are needed, but must have no more than five percent of their allocation on hand before they can draw down additional funds. States have until December 31, 2020 to commit funds and December 31, 2021, to expend all HHF funding. Each HFA submits a quarterly report on the progress of its programs. These reports measure states’ performance against metrics set by OFS for various aspects of their programs.  3  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Direct links to each state’s most recent performance report can be found at:  Federal Housing Administration Refinance Program  TARP: Hardest Hit Fund Program Documents  On March 26, 2010, the Federal Housing Administration (FHA) and OFS announced enhancements to the FHA Refinance Program, designed to make homeownership more affordable for borrowers whose homes are worth less than the remaining amounts on their mortgage loans (negative equity). As of September 30, 2019, FHA had guaranteed 7,234 refinance loans with a total face value of approximately $1.0 billion, of which 4,200 loans were subject to OFS coverage at the time of purchase with a face value of $620 million.  OFS also publishes a Quarterly Performance Summary, a companion reference to the HFAs’ Quarterly Performance Reports. The Summary contains performance data and trends, and brief program descriptions for each HFA. The Quarterly Performance Summary can be found at: TARP: Hardest Hit Fund - Quarterly Performance Summary Additional information on the HHF, including details on the program’s purpose, overview, and status can be found at the following link: TARP: Hardest Hit Fund Program  On-Going Operational Goals Minimize Cost to Taxpayers OFS manages TARP investments to minimize costs to taxpayers by ensuring the timely exit of these investments to reduce taxpayers’ exposure, return TARP funds to reduce the federal debt, and continue to replace government assistance with private capital in the financial system. OFS has taken a number of steps during fiscal years 2019 and 2018 to dispose of OFS’s outstanding investments in a manner that balances speed of exit with maximizing returns for taxpayers. OFS takes a disciplined portfolio approach – reviewing each investment and closely monitoring risk and performance. In addition to repayments by participants, OFS has disposed of investments to third parties through public and private offerings and auctions with approval from regulators.  Compliance OFS monitors certain TARP-related statutory and contractual obligations of remaining TARP  4  recipients. Historically, statutory obligations have included certification and disclosures related to executive compensation restrictions. For most of OFS’s preferred stock investments, TARP recipients need to comply with restrictions on payment of dividends and on repurchases of junior securities. OFS also performs regular reviews of the 19 HFAs participating in the HHF program to evaluate each HFA’s ongoing compliance with their contractual agreement with OFS, as well as their compliance with HHF program terms and underwriting requirements. In addition, all mortgage servicers participating in MHA are subject to program guidelines that require the servicer to offer MHA assistance to all eligible borrowers and to have effective systems, processes, and controls to administer the programs. Servicers are subject to periodic, compliance reviews by OFS’s compliance agent, Making Home Affordable-Compliance (MHA-C), a separate, independent division of Freddie Mac serving as financial agent to Treasury, to  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  monitor whether servicers’ obligations under MHA requirements are being met. In fiscal year 2011, OFS began publishing quarterly assessments for the largest participating servicers. These assessments were used to ensure focus on emerging areas of interest, draw servicer attention to higher risk areas, and prompt the industry to improve its practices. As the program has evolved and servicers have significantly improved their performance, OFS has updated the assessment to ensure it includes metrics that address current areas of interest and concern. In fiscal year 2019, OFS continued to perform quarterly assessments of participating servicer performance through the managed servicer testing (MST) model, which was first implemented in fiscal year 2018 and focuses on servicer compliance with MHA guidelines pertaining to post-modification activities.  Continue to Operate with the Highest Standards of Transparency, Accountability, and Integrity To protect taxpayers and help ensure that every dollar is directed towards promoting financial stability, OFS established comprehensive accountability and transparency measures. OFS is committed to operating its investment and housing programs in full view of the public. This includes providing regular and comprehensive information about how TARP funds are being spent, who has received them and on what terms, and how much has been collected to date. All of this information, along with numerous reports of different frequencies, is posted in the Financial Stability section of the Treasury.gov website, which can be found at: http://www.treasury.gov/initiatives/financialstability/reports/Pages/default.aspx These reports include:  MANAGEMENT’S DISCUSSION AND ANALYSIS              A Monthly TARP Update that features detailed financial data related to each TARP investment program, including the status of disbursements and all collections by category; A monthly report to Congress that details how TARP funds have been used, the status of recovery of such funds by program, and information on the estimated cost of TARP; A monthly report on dividend and interest payments; A quarterly performance report on MHA (the last comprehensive issue which was published as of September 10, 2018, when all MHA programs were officially closed; streamlined one-page performance summaries continue to be published quarterly); A report of each transaction (such as an investment or repayment) within two business days of each transaction; A quarterly report on the Hardest Hit Fund; and A quarterly report to Congress on administrative expense obligations.  In addition, OFS regularly publishes data files related to MHA and transaction reports that show activity related to MHA and HHF. The release of the data file fulfills a requirement within the Dodd-Frank Act to make available loan-level data about the program. OFS updates the file monthly. Researchers interested in using the MHA Data File can access the file and user guide at: http://www.treasury.gov/initiatives/financialstability/reports/Pages/mha_publicfile.aspx  Audited Financial Statements OFS prepares separate financial statements for TARP on an annual basis. This is the 11th OFS AFR, which includes the audited financial statements for the fiscal years ended September  5  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  30, 2019 and September 30, 2018. Additional reports for prior periods are available at: http://www.treasury.gov/initiatives/financialstability/reports/Pages/Annual-AgencyFinancial-Reports.aspx In its 11 years of operation, TARP’s financial statements have received unmodified audit opinions from its auditor, the Government Accountability Office (GAO).  TARP Tracker Since 2013, OFS has offered an interactive tool called the TARP Tracker, which allows users to track the flow of TARP funds over the lifetime of each individual TARP investment area. The TARP Tracker allows users to view each investment area separately to get a clearer sense of what has occurred in a particular program, and includes a scroll of events, major transactions, and legislative actions that have impacted the program. Readers are invited to refer to these documents at: http://www.treasury.gov/initiatives/financialstability/reports/Pages/default.aspx  Oversight by Three Separate Agencies OFS activities are currently reviewed by three oversight entities:     The Financial Stability Oversight Board, established by EESA Section 104; Specific responsibilities for the GAO as set out in EESA Section 116; and The Special Inspector General for TARP, established by EESA Section 121.  OFS has productive working relationships with all of these bodies, and cooperates with each oversight agency’s effort to produce periodic audits and reports that focus on the many aspects of TARP. Individually and collectively, the oversight bodies’ audits and reports have made, and continue to make, important contributions to the TARP programs.  Congressional Hearings and Testimony OFS officials have testified in numerous Congressional hearings since TARP was created. Copies of their written testimony are available at: http://www.treasury.gov/initiatives/financialstability/news-room/Pages/default.aspx  Analysis of Fiscal Years 2019 and 2018 Financial Summary and Cumulative Net Income Comparative Summary of Net Costs OFS’s fiscal year 2019 net cost of operations of $1.4 billion includes the reported net income related to TARP investment and FHA Refinance programs, as well as expenses for TARP Investment Programs, the Treasury housing programs under TARP, and administrative expenses. For the fiscal year ended September 30, 2019, OFS reported net subsidy income for three  6  programs – Public-Private Investment Program (PPIP), AIFP, and FHA Refinance. These programs collectively reported net subsidy income of $74 million. For the fiscal year ended September 30, 2019, OFS reported costs for two programs – CPP and CDCI totaling $6 million. Fiscal year 2019 costs for the Treasury housing programs under TARP were $1.4 billion and administrative costs were $51 million. For the fiscal year ended September 30, 2018, the net cost of operations was $2.2 billion. These net cost amounts reported in the financial  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  statements reflect only transactions through September 30, 2019 and September 30, 2018, and therefore are different than lifetime cost estimates made for budgetary purposes. Over time the cost of TARP programs will change. As described later in the OFS audited financial statements, these estimates are based in part on currently projected economic factors. These economic factors will likely change, either increasing or decreasing the lifetime cost of TARP.  Comparative Summary of TARP Equity Investments As of the end of fiscal years 2019 and 2018, TARP had a combined CPP and CDCI investment Outstanding Balance of $40 million and $65 million, respectively. Comparatively, the combined Estimated Value of Investment for CPP and CDCI during these fiscal years was $23 million and $54 million, respectively. Estimated Value of Investment represents the present value of net cash inflows that OFS estimates it will receive from the programs. These estimates include market risk assumptions. The total difference of $17 million and $11 million as of the end of fiscal years 2019 and 2018 respectively is considered the “subsidy cost allowance” under the Federal Credit Reform Act methodology OFS follows for budget and accounting purposes.  Inception to Date TARP Program Summary Table 1 provides a financial summary for TARP programs since its inception on October 3, 2008, through September 30, 2019. For each program, the table provides utilized TARP authority (which includes purchases made, legal  MANAGEMENT’S DISCUSSION AND ANALYSIS  commitments to make future purchases, and offsets for guarantees made), the amount actually disbursed, repayments to OFS from program participants or from sales of the investments, write-offs and losses, net outstanding balance as of September 30, 2019, and cash inflows on the investments in the form of dividends, interest or other fees. Most TARP funds were used to make investments in preferred stock or to make loans. OFS has generally received dividends on the preferred stock and interest payments on the loans from the institutions participating in TARP programs. These payments represent additional proceeds received on OFS’s TARP investments. From inception through September 30, 2019, OFS received a total of $24.5 billion in dividends and interest. OFS has conducted numerous sales or auctions of its investments in banking institutions as part of its exit strategy for winding down TARP. As of September 30, 2019, OFS has sold its investments in 190 banks for combined principal receipts of $3.1 billion through individual private auctions. OFS also received warrants in connection with most of its investments, which provide an opportunity for OFS on behalf of taxpayers to realize additional proceeds on investments. Since the program’s inception through September 30, 2019, OFS has received $9.7 billion in gross proceeds from the disposition of warrants associated with CPP, TIP, AGP, and AIG. As of September 30, 2019, all such warrants have expired. See Note 6 in the financial statements for further discussion.  7  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Table 1: TARP Summary1 From TARP Inception through September 30, 2019 (Dollars in millions) Purchase Price or Guarantee Amounts  Total $ Disbursed  Investment Repayments  Write-offs and Losses6  Outstanding Balance7  Received from Investments  Programs Active in 2019 Bank Support Programs Capital Purchase Program2 Community Development Capital Initiative Subtotal for Investment Programs Treasury Housing Programs under TARP Subtotal for Active Programs  $204,895  $204,895  $(199,671)5  $(5,206)  $17  $27,106  570  570  (520)  (27)  23  66  205,465  205,465  (200,191)  (5,233)  40  27,172  33,1174  30,087  N/A  N/A  N/A  -  $238,582  $235,552  $(200,191)  $(5,233)  $40  $27,172  (Table continued on the following page.)  8  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Purchase Price or Guarantee Amounts  Total $ Disbursed  Investment Repayments  Write-offs and Losses6  Outstanding Balance7  Received from Investments  Programs Closed in Fiscal Years 2019 or Prior Bank Support Programs Targeted Investment Program Asset Guarantee Program Credit Market Programs  $40,000  $40,000  $(40,000)  -  -  $4,432  5,000  -  -  -  -  4,126  18,625  18,625  (18,625)  -  -  3,852  Term Asset-Backed Securities Loan Facility  100  100  (100)  -  -  685  SBA 7(a) Securities Purchase Program  367  367  (4)  -  13  Automotive Industry Financing Program  79,692  79,692  (63,037)  (16,656)  -  7,586  American International Group Investment Program3 Subtotal for Closed Programs Total for TARP Programs  67,835  67,835  (54,350)  (13,485)  -  959  $211,620  $206,620  $(176,475)  $(30,145)  $-  $21,651  $450,201  $442,172  $(376,667)  $(35,378)  $40  $48,823  Public Private Investment Program  (363)  Other Programs  Note: Figures may not foot due to rounding. table shows TARP activity for the period from inception through September 30, 2019, on a cash basis. Received from investments includes dividends and interest income reported in the Statement of Net Cost, and Proceeds from sale and repurchases of assets in excess of costs.  1 This  2 OFS  received $31.9 billion in proceeds from sales of Citigroup common stock, of which $25.0 billion is included at cost in Investment Repayments, and $6.9 billion of net proceeds in excess of cost is included in Received from Investments.  3 The  amounts for AIG reflect only the operations of TARP and do not reflect proceeds received from the sale of shares of AIG common stock held by Treasury outside of TARP (additional Treasury shares).  4  Individual obligation amounts are $23.5 billion for the Making Home Affordable Program, $9.6 billion for the Hardest Hit Fund, and $45 million committed for the FHA Refinance Program.  5  Includes $2.2 billion of Small Business Lending Fund (SBLF) refinancing outside of TARP and CDCI exchanges from CPP of $363 million.  6 Losses  represent proceeds less than cost on sales of assets, which are reflected under “net proceeds from sales and repurchases of assets in excess of (less than) cost” in Note 6 of the financial statements.  7  Total disbursements less repayments, write-offs and losses do not equal the total outstanding balance because the disbursements for the Treasury housing programs under TARP do not require (and OFS does not expect) repayments.  MANAGEMENT’S DISCUSSION AND ANALYSIS  9  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Comparison of Estimated Lifetime TARP Costs over Time The ultimate cost of TARP is not expected to change significantly as only a few investment programs remain open with most of the original disbursed investments repaid. The cost estimates are sensitive to slight changes in model assumptions, such as general economic conditions, specific stock price volatility of the entities in which OFS has an equity interest, estimates of expected defaults, and prepayments. Wherever possible, OFS uses market prices of tradable securities to estimate the fair value of TARP investments. Use of market prices is possible for TARP investments that trade in public markets or are closely related to tradable securities. For those TARP investments that do not have direct analogs in private markets, OFS uses internal marketbased models to estimate the market value of these investments. All future cash flows are adjusted for market risk. Further details on asset valuation can be found in Note 6 of the financial statements.  Key Factors Affecting TARP Future Activities and Ultimate Cost Market conditions and the performance of specific financial institutions are critical determinants of TARP’s estimated lifetime cost. The changes in OFS estimates since TARP’s inception through September 30, 2019, provide a good illustration of this impact. Table 2 provides information on how OFS’s estimated lifetime cost of TARP has changed over time.  10  The cost estimates for the non-housing programs have fluctuated in large part due to changes in the market prices of common stock for AIG, GM and Ally. This table assumes that all expected investments and disbursements for Treasury housing programs under TARP are completed, and adhere to general government budgeting guidance. The cost amounts in Table 2 are based on assumptions regarding future events, which are inherently uncertain. This table will not match the financial statements since the table includes repayments and disbursements expected to be made in the future. Data within this table is consistent with the estimated TARP lifetime cost disclosures on the OFS website at: http://www.treasury.gov/initiatives/financialstability/Pages/default.aspx TARP investment programs are nearly wound down with only $40 million of the total $412.1 billion disbursed still outstanding, representing 7 small banks in the CPP and CDCI portfolios. The estimated lifetime income associated with investment programs is currently $346 million and may fluctuate slightly in the future. Similarly, with the MHA program in wind-down, estimated lifetime costs should not significantly fluctuate, but will depend on macroeconomic factors, including real estate values, financing availability, re-default rates, and market demand for housing.  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Table 2: Estimated Lifetime TARP Costs (Income)1 (Dollars in billions) Estimated Lifetime Cost (Income) as of September 30  Program  20095  2010  2011  2012  2013  2014  2015  2016  2017  2018  2019  ($14.6)  ($11.2)  ($13.0)  ($14.9)  ($16.1)  ($16.1)  ($16.3)  ($16.3)  ($16.3)  ($16.3)  ($16.3)  (1.9)  (3.8)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (2.2)  (3.7)  (3.7)  (3.9)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  (4.0)  0.4  0.3  0.2  0.2  0.1  0.1  0.1  0.1  0.1  0.1  0.1  1.4  (0.7)  (2.4)  (2.4)  (2.7)  (2.7)  (2.7)  (2.7)  (2.7)  (2.7)  (2.7)  (0.3)  (0.4)  (0.4)  (0.5)  (0.6)  (0.6)  (0.6)  (0.6)  (0.6)  (0.6)  (0.6)  N/A  0.0  0.0  (0.0)  (0.0)  (0.0)  (0.0)  (0.0)  (0.0)  (0.0)  (0.0)  34.5  14.7  23.6  24.3  14.7  12.2  12.1  12.2  12.2  12.2  12.1  56.8  36.9  24.3  15.3  15.2  15.2  15.2  15.2  15.2  15.2  15.2  74.1  32.1  24.6  14.1  2.6  0.1  (0.2)  (0.2)  (0.3)  (0.3)  (0.3)  50.0  45.6  45.6  45.6  37.7  37.4  37.4  34.7  32.6  32.5  32.8  $124.1  $77.7  $70.2  $59.7  $40.3  $37.5  $37.2  $34.5  $32.3  $32.3  $32.4  Bank Support Programs Capital Purchase Program Targeted Investment Program Asset Guarantee Program2 Community Development Capital Initiative Credit Market Programs Public Private Investment Program Term Asset-Backed Securities Loan Facility SBA 7(a) Securities Purchase Program Other Programs Automotive Industry Financing Program American International Group Investment Program3 Subtotal Treasury Housing Programs under TARP4 Total  Note: Figures may not foot due to rounding. Estimated program costs (+) or savings (in parentheses) over the life of the program, including interest on reestimates and excluding administrative costs. 2 Prior to the termination of the guarantee agreement, OFS guaranteed up to $5.0 billion of potential losses on a $301.0 billion portfolio of loans. 3 The amounts for AIG reflect only the operations of TARP and do not reflect proceeds received from the sale of shares of AIG common stock held by Treasury outside of TARP (additional Treasury shares). 4 The estimated lifetime cost for Treasury Housing Programs under TARP consist of the MHA, HHF, and FHA Refinance programs. The estimated lifetime cost of the FHA Refinance Program (which is accounted for under credit reform) represents the total estimated subsidy cost associated with total obligated amount. 5 Estimated lifetime cost for 2009 includes funds for projected disbursements and anticipated obligations. 1  MANAGEMENT’S DISCUSSION AND ANALYSIS  11  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Analysis of Systems, Controls, and Legal Compliance  MANAGEMENT ASSURANCES The Office of Financial Stability’s (OFS) management is responsible for establishing and maintaining effective internal control and financial management systems that meet the objectives of the Federal Managers’ Financial Integrity Act (FMFIA), 31 U.S.C. 3512(c),(d). OFS has evaluated its management controls, internal controls over financial reporting, and compliance with the federal financial systems standards. As part of the evaluation process, we considered the results of extensive documentation, assessment and testing of controls across OFS, as well as the results of independent audits. We conducted our reviews of internal controls in accordance and based on criteria with FMFIA and Office of Management and Budget (OMB) Circular A-123. As a result of our reviews, management concludes that the management control objectives described below, taken as a whole, were achieved as of September 30, 2019. Specifically, this assurance is provided relative to Section 2 (internal controls) and 4 (systems controls) of FMFIA. OFS further assures that the financial management systems relied upon by OFS are in substantial compliance with the requirements imposed by the Federal Financial Management Improvement Act (FFMIA). OFS’s internal controls are designed to meet the management objectives established by Treasury and listed below: (a) (b) (c) (d) (e)  Alignment of strategic goals with the agency’s mission; Effective and efficient operations; Reliable reporting; Compliance with applicable laws and regulations; and Financial management systems comply with Federal financial management systems requirements.  In addition, OFS management conducted its assessment of the effectiveness of internal control over financial reporting which includes the safeguarding of assets and compliance with applicable laws and regulations, in accordance and based on criteria with OMB Circular A-123, Management’s Responsibility for Enterprise Risk Management and Internal Control. Based on the results of this evaluation, OFS provides unmodified assurance that internal control over financial reporting is appropriately designed and operating effectively as of September 30, 2019, with no related material weaknesses noted. Sincerely,  Gavin Beske Deputy Assistant Secretary for Community and Economic Development  12  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Federal Managers’ Financial Integrity Act (FMFIA) The management control objectives under FMFIA are to reasonably ensure that: • •  •  Obligations and costs are in compliance with applicable law; Funds, property, and other assets are safeguarded against waste, loss, unauthorized use, or misappropriation; and Revenues and expenditures applicable to agency operations are properly recorded and accounted for to permit the preparation of accounts, reliable financial and statistical reports, and to maintain accountability over the assets.  FMFIA requires agencies to evaluate and report on the effectiveness of controls over operations and financial reporting, compliance with applicable laws and regulations (FMFIA Section 2), and conformance with financial management systems requirements (FMFIA Section 4) and Federal Financial Management Improvement Act (FFMIA) that protect the integrity of federal programs. Deficiencies that seriously affect an agency’s ability to meet these objectives are deemed “material weaknesses.” OFS continues to have a high performing internal control program in compliance with FMFIA. FMFIA and OMB Circular A-123,  Management’s Responsibility for Enterprise Risk Management and Internal Control, require agencies to evaluate and report on enterprise risk management (ERM) and internal controls in place to help ensure effectiveness and efficiency of operations, compliance with applicable laws and regulations, and reliability of reporting.  MANAGEMENT’S DISCUSSION AND ANALYSIS  OFS has completed these rigorous internal control assessments since fiscal year 2009. OFS has a Senior Assessment Team (SAT) to guide the organization’s efforts to meet the statutory and regulatory requirements surrounding ERM and a sound system of internal control. OFS’s ERM and internal control framework is based on the principles of the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The SAT leverages this framework in communicating risks and control objectives across OFS and its third-party service providers. Furthermore, OFS managers are responsible for identifying relevant risks, and ensuring that effective internal controls are implemented in their areas of responsibility. OFS senior management provides subcertification statements annually concerning whether there is reasonable assurance that the objectives of ERM and internal control are met. Senior management also reports on and takes steps to correct control weaknesses and tracks those weaknesses through resolution. OFS management believes that maintaining integrity and accountability in all programs and operations is critical to its mission and demonstrates responsible stewardship over assets and resources. It also promotes responsible leadership and maximizes desired program outcomes. OFS has received unmodified opinions from the GAO on its financial statements and internal control over financial reporting for TARP since fiscal year 2009, its first year of operation. OFS continues to execute its ERM and internal controls assessment process to ensure that management can identify risks and deficiencies and take timely corrective actions. The OFS fiscal year 2019 self-assessment of its ERM activities and system of internal controls did not identify any significant deficiencies or material weaknesses.  13  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Federal Financial Management Improvement Act and Financial Management Systems Federal Financial Management Improvement Act (FFMIA) FFMIA mandates that agencies “…implement and maintain financial management systems that comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the United States Government Standard General Ledger (USSGL) at the transaction level.” FFMIA also requires the development of remediation plans by any entity unable to report substantial compliance with these requirements. During fiscal year 2019, OFS used a riskbased approach to assess its financial management systems’ compliance with FFMIA, as required by OMB and in accordance with Treasury-wide guidance. OFS conducted its self-assessment to determine its risk levels and determined that all OFS financial management systems are in compliance with FFMIA.  Financial Management Systems Framework OFS’s financial management systems framework consists of two fundamental components: 1) core financial and mixed systems maintained by OFS and Treasury bureaus that cross-service OFS; and 2) systems that are financially relevant, operated, and supported by financial agents. Combined, this framework satisfies OFS’s diverse financial, operational, and reporting needs as well as OFS’s internal and external reporting requirements. In fiscal year 2019, OFS continued to utilize the Core Investment Transaction Flow (CITF), TARP’s system of record and accounting translation engine.  14  In addition, OFS continued to utilize financial systems maintained by Treasury Departmental Offices and various Treasury bureaus. These systems are in compliance with federal financial management systems requirements and undergo regular independent audits. In fiscal year 2019, OFS continued to devote substantial attention to simplifying its technology footprint in concert with the reduced activity and size of OFS operations. The simplification effort helps ensure the reliability, maintainability, and controllability of OFS technology as TARP programs winddown. Certain financially relevant systems are operated and supported by financial agents, which provide services to OFS. The financial agency agreements, maintained by the Treasury Office of the Fiscal Assistant Secretary in support of OFS, require financial agents to design and implement suitably robust security plans and internal control programs. These plans and programs are reviewed and approved by OFS on an on-going basis.  Legal Compliance OFS is subject to numerous legislative and regulatory requirements that promote and support an effective ERM and internal control environment. At least on an annual basis, OFS conducts a formal process to identify and document applicable laws and regulations. This process includes the review and consideration of Treasury guidance, statutory and OMB requirements, as well as consultation with OFS program management and the Treasury Office of General Counsel. OFS program managers are responsible for identifying laws and regulations which impact their areas, developing policies and procedures which ensure compliance with those laws and regulations, and disseminating  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  information to employees regarding compliance responsibilities. In order to test compliance with laws and regulations, OFS maps the requirements of each applicable law or regulation to controls that support the requirements. The majority of the laws and regulations applicable to OFS are tested in this manner. In instances where OFS cannot leverage specific controls, OFS  either performs alternative evaluation procedures or, through adherence to the guidance provided by Treasury, checks that controls are in place to meet guidance concerns and specifications where they apply. The results of OFS’s evaluation of compliance with applicable laws and regulations are reflected in OFS’s assurance statement.  Other Management Information, Initiatives, and Issues Areas for Improvement Over the next year, OFS management will focus on maintaining its internal control environment in several key areas as follows: •  •  As programs continue to wind-down, OFS will remain vigilant to maintain effective processes and controls. OFS management will take steps to sustain adequate segregation of duties and the right level of institutional knowledge among remaining staff as the size of the organization decreases. Third-party service providers will continue to support critical services as programs continue to wind-down. OFS will oversee and monitor closely  MANAGEMENT’S DISCUSSION AND ANALYSIS  these third parties to safeguard OFS resources and help ensure the operational efficiency of programs and processes. Where necessary and appropriate to ensure fiscal responsibility, OFS will look to reduce the number of third-party service providers commensurate with the wind-down in OFS operations.  •  As OFS programs conclude and staff continues to decrease, OFS plans to streamline the number and depth of policies and procedures to make them more efficient. OFS will manage this process through the SAT to ensure that any resulting risk is minimal and controlled.  15  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Limitations of the Financial Statements The principal financial statements have been prepared to report the financial position and results of operations of OFS’s TARP programs, consistent with the requirements of 31 U.S.C. 3515(b). While the statements have been prepared from the books and records of OFS and the Department of the Treasury in accordance with Section 116 of EESA and Generally Accepted Accounting Principles (GAAP) for Federal entities and the formats prescribed by OMB, the statements are in addition to the financial reports used to monitor and control budgetary resources which are prepared from the same books and records. The statements should be read with the realization that they are for a component of the U.S. Government.  16  MANAGEMENT’S DISCUSSION AND ANALYSIS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  AUDITOR’S REPORT  17  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  18  AUDITOR’S REPORT  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  GOVERNMENT ACCOUNTABILITY OFFICE AUDITOR’S REPORT  441 G St. N.W. Washington, DC 20548  Independent Auditor’s Report To the Deputy Assistant Secretary for Community and Economic Development In our audits of the fiscal years 2019 and 2018 financial statements of the Troubled Asset Relief Program (TARP), which is implemented by the Office of Financial Stability (OFS),1 we found     the OFS financial statements for TARP as of and for the fiscal years ended September 30, 2019, and 2018, are presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles; OFS maintained, in all material respects, effective internal control over financial reporting for TARP as of September 30, 2019; and no reportable noncompliance for fiscal year 2019 with provisions of applicable laws, regulations, contracts, and grant agreements we tested.  The following sections discuss in more detail (1) our report on the financial statements and on internal control over financial reporting, which includes the required supplementary information (RSI)2 and other information included with the financial statements; 3 (2) our report on compliance with laws, regulations, contracts, and grant agreements; and (3) agency comments. GAO has the responsibility to audit OFS’s annual financial statements for TARP under the Emergency Economic Stabilization Act of 2008 (EESA), as amended.4  1Section  101 of the Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, div. A, 122 Stat. 3765, 3767 (Oct. 3, 2008), classified at 12 U.S.C. § 5211, established OFS within the Department of the Treasury (Treasury) to implement TARP. 2The  RSI consists of Management’s Discussion and Analysis and the Combined Statement of Budgetary Resources, which are included with the financial statements. 3Other  information consists of information included with the financial statements, other than the RSI and the auditor’s  report. 4EESA  is classified, in part, as amended, at sections 5201 through 5261 of Title 12 of the United States Code. Section 116(b) of EESA, 12 U.S.C. § 5226(b), requires that Treasury annually prepare and submit to Congress and the public audited fiscal year financial statements for TARP that are prepared in accordance with generally accepted accounting principles. Section 116(b) further requires that GAO audit TARP’s financial statements annually in accordance with generally accepted auditing standards.  AUDITOR’S REPORT  19  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Report on the Financial Statements and on Internal Control over Financial Reporting In accordance with EESA, we have audited the OFS financial statements for TARP. The OFS financial statements for TARP comprise the balance sheets as of September 30, 2019, and 2018; the related statements of net cost, changes in net position, and budgetary resources for the fiscal years then ended; and the related notes to the financial statements. We also have audited OFS’s internal control over financial reporting for TARP as of September 30, 2019, based on criteria established under 31 U.S.C. § 3512(c), (d), commonly known as the Federal Managers’ Financial Integrity Act (FMFIA). We conducted our audits in accordance with U.S. generally accepted government auditing standards. We believe that the audit evidence we obtained is sufficient and appropriate to provide a basis for our audit opinions. Management’s Responsibility OFS management is responsible for (1) the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; (2) preparing, measuring, and presenting the RSI in accordance with U.S. generally accepted accounting principles; (3) preparing and presenting other information included in documents containing the audited financial statements and auditor’s report, and ensuring the consistency of that information with the audited financial statements and the RSI; (4) maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; (5) evaluating the effectiveness of internal control over financial reporting based on the criteria established under FMFIA; and (6) its assessment about the effectiveness of internal control over financial reporting as of September 30, 2019, included in the accompanying Management’s Report on Internal Control over Financial Reporting in appendix I. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements and an opinion on OFS’s internal control over financial reporting for TARP based on our audits. U.S. generally accepted government auditing standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, and whether effective internal control over financial reporting was maintained in all material respects. We are also responsible for applying certain limited procedures to the RSI and other information included with the financial statements. An audit of financial statements involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the auditor’s assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit of financial statements also involves evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.  20  AUDITOR’S REPORT  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  An audit of internal control over financial reporting involves performing procedures to obtain evidence about whether a material weakness exists.5 The procedures selected depend on the auditor’s judgment, including the assessment of the risk that a material weakness exists. An audit of internal control over financial reporting also includes obtaining an understanding of internal control over financial reporting and evaluating and testing the design and operating effectiveness of internal control over financial reporting based on the assessed risk. Our audit of internal control also considered OFS’s process for evaluating and reporting on internal control over financial reporting based on criteria established under FMFIA. Our audits also included performing such other procedures as we considered necessary in the circumstances. We did not evaluate all internal controls relevant to operating objectives as broadly established under FMFIA, such as those controls relevant to preparing performance information and ensuring efficient operations. We limited our internal control testing to testing controls over financial reporting. Our internal control testing was for the purpose of expressing an opinion on whether effective internal control over financial reporting was maintained, in all material respects. Consequently, our audit may not identify all deficiencies in internal control over financial reporting that are less severe than a material weakness. Definitions and Inherent Limitations of Internal Control over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition, and (2) transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements due to fraud or error. We also caution that projecting any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinion on Financial Statements In our opinion, OFS’s financial statements for TARP present fairly, in all material respects, TARP’s financial position as of September 30, 2019, and 2018, and its net cost of operations, changes in net position, and budgetary resources for the fiscal years then ended in accordance with U.S. generally accepted accounting principles.  5A  material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected, on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis.  AUDITOR’S REPORT  21  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Opinion on Internal Control over Financial Reporting In our opinion, OFS maintained, in all material respects, effective internal control over financial reporting for TARP as of September 30, 2019, based on criteria established under FMFIA. Other Matters Required Supplementary Information U.S. generally accepted accounting principles issued by the Federal Accounting Standards Advisory Board (FASAB) require that the RSI be presented to supplement the financial statements. Although the RSI is not a part of the financial statements, FASAB considers this information to be an essential part of financial reporting for placing the financial statements in appropriate operational, economic, or historical context. We have applied certain limited procedures to the RSI in accordance with U.S. generally accepted government auditing standards, which consisted of inquiries of management about the methods of preparing the RSI and comparing the information for consistency with management’s responses to the auditor’s inquiries, the financial statements, and other knowledge we obtained during the audit of the financial statements, in order to report omissions or material departures from FASAB guidelines, if any, identified by these limited procedures. We did not audit and we do not express an opinion or provide any assurance on the RSI because the limited procedures we applied do not provide sufficient evidence to express an opinion or provide any assurance. Other Information OFS’s other information contains a wide range of information, some of which is not directly related to the financial statements. This information is presented for purposes of additional analysis and is not a required part of the financial statements or the RSI. We read the other information included with the financial statements in order to identify material inconsistencies, if any, with the audited financial statements. Our audit was conducted for the purpose of forming an opinion on OFS’s financial statements for TARP. We did not audit and do not express an opinion or provide any assurance on the other information. Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements In connection with our audits of OFS’s financial statements for TARP, we tested compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements consistent with our auditor’s responsibility discussed below. We caution that noncompliance may occur and not be detected by these tests. We performed our tests of compliance in accordance with U.S. generally accepted government auditing standards. Management’s Responsibility OFS management is responsible for complying with laws, regulations, contracts, and grant agreements applicable to OFS.  22  AUDITOR’S REPORT  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Auditor’s Responsibility Our responsibility is to test compliance with selected provisions of laws, regulations, contracts, and grant agreements applicable to OFS that have a direct effect on the determination of material amounts and disclosures in TARP’s financial statements, and perform certain other limited procedures. Accordingly, we did not test compliance with all laws, regulations, contracts, and grant agreements applicable to OFS. Results of Our Tests for Compliance with Laws, Regulations, Contracts, and Grant Agreements Our tests for compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements disclosed no instances of noncompliance for fiscal year 2019 that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our tests was not to provide an opinion on compliance with laws, regulations, contracts, and grant agreements applicable to OFS. Accordingly, we do not express such an opinion. Intended Purpose of Report on Compliance with Laws, Regulations, Contracts, and Grant Agreements The purpose of this report is solely to describe the scope of our testing of compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements, and the results of that testing, and not to provide an opinion on compliance. This report is an integral part of an audit performed in accordance with U.S. generally accepted government auditing standards in considering compliance. Accordingly, this report on compliance with laws, regulations, contracts, and grant agreements is not suitable for any other purpose. Agency Comments In commenting on a draft of this report, OFS stated that it is proud to receive an unmodified opinion on its financial statements and its internal control over financial reporting. OFS also stated that it is committed to maintaining the high standards and transparency reflected in these audit results. The complete text of OFS’s response is reproduced in appendix II.  Cheryl E. Clark Director Financial Management and Assurance November 4, 2019  AUDITOR’S REPORT  23  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Appendix I: Management’s Report on Internal Control over Financial Reporting  DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220  Management’s Report on Internal Control over Financial Reporting The Office of Financial Stability’s (OFS) internal control over financial reporting (for TARP) is a process effected by those charged with governance, management, and other personnel, the objectives of which are to provide reasonable assurance that (1) transactions are properly recorded, processed, and summarized to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition; and (2) transactions are executed in accordance with provisions of applicable laws, including those governing the use of budget authority; regulations; contracts; and grant agreements, noncompliance with which could have a material effect on the financial statements. OFS management is responsible for maintaining effective internal control over financial reporting, including the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. OFS management evaluated the effectiveness of OFS’s internal control over financial reporting as of September 30, 2019, based on the criteria established under 31 U.S.C. 3512(c), (d) (commonly known as the Federal Managers’ Financial Integrity Act). Based on that evaluation, we conclude that, as of September 30, 2019, OFS’s internal control over financial reporting was effective.  Gavin Beske Deputy Assistant Secretary for Community and Economic Development November 4, 2019  24  AUDITOR’S REPORT  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Appendix II: OFS Response to Auditor’s Report  DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220  November 4, 2019 Ms. Cheryl E. Clark Director, Financial Management and Assurance U.S. Government Accountability Office 441 G Street, N.W. Washington, DC 20548 Dear Ms. Clark: We have reviewed the Independent Auditor’s Report concerning your audit of the Office of Financial Stability’s (OFS) fiscal year 2019 financial statements. OFS is proud to receive a 11th consecutive unmodified opinion on its financial statements and internal controls over financial reporting. We appreciate the professionalism and commitment demonstrated by your staff throughout the audit process. The process was valuable for us and resulted in concrete improvements in our operations and financial management efforts. OFS is committed to maintaining the high standards and transparency reflected in these audit results as we carry out our responsibilities for managing the Troubled Asset Relief Program.  Sincerely,  Gavin Beske Deputy Assistant Secretary for Community and Economic Development  AUDITOR’S REPORT  25  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  FINANCIAL STATEMENTS Office of Financial Stability (OFS) prepares financial statements for the Troubled Asset Relief Program (TARP) as a critical aspect of ensuring the accountability and stewardship for the public resources entrusted to it and as required by Section 116 of the Emergency Economic Stabilization Act of 2008 (EESA). Preparation of these statements is also an important part of OFS’s financial management goal of providing accurate and reliable information that may be used to assess performance and allocate resources. OFS management is responsible for the accuracy and propriety of the information contained in the financial statements and the quality of internal controls. The statements are, in addition to other financial reports, used to monitor and control budgetary resources. OFS prepares these financial statements from its books and records in conformity with the accounting principles generally accepted in the United States for federal entities and the formats prescribed by the Office of Management and Budget (OMB).  the assets, liabilities, or results of operations of commercial entities in which OFS has a significant equity interest.  While these financial statements reflect activities of OFS in executing its programs, including providing resources to various entities to help stabilize the financial markets, they do not include, as more fully discussed in Note 1,  The Statement of Budgetary Resources provides information about funding and availability of budgetary resources and the status of those resources for the fiscal years ended September 30, 2019 and 2018.  26  The Balance Sheet summarizes OFS assets, liabilities and net position as of September 30, 2019 and 2018. Intragovernmental assets and liabilities resulting from transactions between federal agencies are presented separately from assets and liabilities resulting from transactions with the public. The Statement of Net Cost presents the net cost of operations for the fiscal years ended September 30, 2019 and 2018. The Statement of Changes in Net Position presents the change in OFS’s net position for two components, Unexpended Appropriations and Cumulative Results of Operations, for the fiscal years ended September 30, 2019 and 2018. The ending balances of both components of net position are also reported on the Balance Sheet.  FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  BALANCE SHEET Dollars in Millions ASSETS Int ragovernment al Asset s: Fund Balanc e with Treasury (Note 3)  $  Tot al Int ragovernment al Asset s  15,737  $  17,174  15,737  17,174  Cash on Deposit for Housing Program (Not e 4)  10  10  Equit y Invest ment s, Net (Not e 6)  23  54  Tot al Asset s  $  15, 770  $  17, 238  LIABILITIES Int ragovernment al Liabilit ies: Ac c ounts Pay able and Other Liabilities Due to the General Fund (Note 7) Princ ipal Pay able to the Bureau of the Fisc al Serv ic e (Note 8) Tot al Int ragovernment al Liabilit ies Ac c ount s Payable and Ot her Liabilit ies  -  1  75  28  35  60  110  89  13  17  Liabilit ies for Treasury Housing Programs Under TARP: FHA-Refinanc e Program (Notes 5 and 6) Making Home Affordable Program (Note 5) Tot al Liabilit ies  1  1  74  119  $  198  $  226  $  15,569  $  17,004  Commit ment s and Cont ingenc ies (Not e 9) NET POSITION Unexpended Appropriations Cumulativ e Results of Operations  3  8  Tot al Net Posit ion  $  15, 572  $  17, 012  Tot al Liabilit ies and Net Posit ion  $  15, 770  $  17, 238  The accompanying notes are an integral part of these financial statements.  FINANCIAL STATEMENTS  27  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  STATEMENT OF NET COST Dollars in Millions STRATEGIC GOAL: TRANSFORM GOVERNMENT-WIDE FINANCIAL STEWARDSHIP Gross Cost of Operat ions: Program Subsidy Cost (Inc ome) (Not e 5 and Not e 6) Equity Inv estment Programs FHA-Refinanc e Program Tot al Program Subsidy Cost (Inc ome)  $  Int erest Expense on Borrow ings from t he Bureau of t he Fisc al Servic e (Not e 10) Treasury Housing Programs Under TARP (Not e 5) Administ rat ive Cost Tot al Gross Cost of Operat ions  2 1,407 51 1, 393  Earned Revenue: Div idend and Interest Inc ome - Programs (Note 6) Interest Inc ome on Financ ing Ac c ount (Note 10) Subsidy Allowanc e Amortization (Note 10) Tot al Earned Revenue Tot al Net Cost of Operat ions  (67) $ (67)  3 2,165 67 2, 209  (1) (1) (2) $  1, 391  (3) (1) 1 (3) $  The accompanying notes are an integral part of these financial statements.  28  (25) (1) (26)  FINANCIAL STATEMENTS  2, 206  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  STATEMENT OF CHANGES IN NET POSITION  Dollars in Millions Beginning Balanc es  $  17, 004  $  8  $  19, 205  $  9  Budget ary Financ ing Sourc es Appropriations Rec eiv ed Appropriations Used Other Adjustments - Canc eled Authority Ot her Financ ing Sourc es Tot al Financ ing Sourc es  63 (1,459) (39) (1,435)  1,459 (73) 1,386  79 (2,232) (48) (2,201)  2,232 (27) 2,205  Net Cost of Operat ions Net Change  (1,435)  (1,391) (5)  (2,201)  (2,206) (1)  Ending Balanc es  $  15, 569  $  3  $  17, 004  $  8  The accompanying notes are an integral part of these financial statements.  FINANCIAL STATEMENTS  29  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  STATEMENT OF BUDGETARY RESOURCES  Dollars in Millions BUDGETARY RESOURCES Unobligated Balanc es Brought Forward, Oc tober 1 Rec ov eries of Prior-Year Unpaid Obligations Ac tual Repay ments of Debt, Prior-Year Balanc es Canc elled Authority Other Changes in Unobligated Balanc es Unobligated Balanc e from Prior-Year Budget Authority , Net Appropriations Borrowing Authority Spending Authority from Offsetting Collec tions TOTAL BUDGETARY RESOURCES (Not e 11) STATUS OF BUDGETARY RESOURCES New Obligations and Upward Adjustments (Total) Unobligat ed Balanc e, End of Y ear: Apportioned, Unexpired Ac c ounts Unapportioned, Unexpired Ac c ounts Unexpired Unobligated Balanc e, End of Year Expired Unobligated Balanc e, End of Year Unobligat ed Balanc e, End of Y ear (Tot al) TOTAL STATUS OF BUDGETARY RESOURCES OUTLAY S, NET Outlay s, Net (Total) Distributed Offsetting Rec eipts AGENCY OUTLAY S, NET  $  113 320 (39) (304) 90 63 153 $  $  59  $  4 4 90 94 153  $  1,507 (27) 1, 480  34 (15) 19 3 87 109  $  29  $  1 79 80 80 109  $  (71) (71)  $  181 4,022 (48) (4,046) 109 79 188 $  44 (32) 12 40 52  $  75  $  18  $  4 4 109 113 188  $  2 32 34 34 52  2,290 (15) 2, 275 $  (50) (50)  $  The accompanying notes are an integral part of these financial statements.  30  FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  NOTES TO THE FINANCIAL STATEMENTS NOTE 1. REPORTING ENTITY The Troubled Asset Relief Program (TARP) was authorized by the Emergency Economic Stabilization Act of 2008, as amended (EESA). EESA gave the Secretary of the Treasury (the Secretary) broad and flexible authority to establish the TARP to purchase and insure mortgages and other troubled assets, which permitted the Secretary to inject capital into banks and other commercial companies by taking equity positions in those entities to help stabilize the financial markets. The EESA established certain criteria under which the TARP would operate, including provisions that impact the budgeting, accounting, and reporting of troubled assets acquired. Section 115 of the EESA limited the authority of the Secretary to purchase troubled assets up to $700.0 billion outstanding at any one time, calculated as the aggregate purchase prices of all troubled assets held. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 115 of the EESA, limiting the TARP’s authority to a total of $475.0 billion cumulative obligations (i.e., purchases and guarantees) and prohibiting any new obligations for programs or initiatives that had not been publicly announced prior to June 25, 2010. The Consolidated Appropriations Act, 2016 (the Act), gave the Secretary of the Treasury the ability to commit an additional $2.0 billion in TARP funds to current Hardest Hit Fund (HHF) participants. The additional $2.0 billion was obligated by Treasury as of June 2016. OFS currently does not have the authority to commit new program funds. OFS had utilized (including purchases made, legal commitments to make purchases and offsets for guarantees made) $450.2 billion as of September 30, 2019 and $450.5 billion as of September 30, 2018. During fiscal years 2019 and 2018, OFS administered the Capital Purchase Program (CPP); the Community Development Capital Initiative (CDCI); and the Treasury Housing Programs under TARP. See Notes 5 and 6 for details regarding these programs.  NOTES TO FINANCIAL STATEMENTS  Through the purchase of troubled assets, OFS entered into several different types of direct loan, equity investment, and other credit programs (consisting of the Federal Housing Administration (FHA) Refinance Program) (collectively, OFS programs) with private entities. OFS programs were entered into with the intent of helping to stabilize the financial markets and mitigating, as best as possible, any adverse impact on the economy; they were not entered into to engage in the business activities of the respective private entities nor to be permanent in nature. These private entities are not included in the federal budget, and OFS does not hold a majority ownership interest in them (except for two investments) nor controls them with risk of loss or expectation of benefit. OFS’s intent is to liquidate its ownership in these entities as soon as practicable. Following the criteria in Statement of Federal Financial Accounting Standards (SFFAS) 47, OFS has not consolidated into its financial statements the assets, liabilities, or results of operations of these entities in which OFS has a significant equity interest. Instead, these financial statements reflect the activities of OFS in executing its programs, including providing resources to various entities to help stabilize the financial markets. The value of such investments was recorded in OFS financial statements. Using SFFAS 47 criteria, the two investments in which OFS holds a majority ownership interest, are considered to be disclosure entities for fiscal year 2019, and are further discussed in Note 6. Implementation of SFFAS 47, as of October 1, 2017, did not result in any changes to the reporting entity as compared to previous year under the guidance of Statement of Federal Financial Accounting Concepts No. 2, Entity and Display, for fiscal year 2017.  31  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  The EESA established OFS within the Office of Domestic Finance of the U. S. Department of the Treasury (Treasury) to administer the TARP and required its separate audited financial statements. OFS prepares stand-alone financial  statements for TARP to satisfy EESA Section 116(b) (1) and as an office of the Treasury, its financial statements are consolidated into Treasury’s Agency Financial Report.  NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting and Presentation The accompanying financial statements include the results of operations of the TARP and have been prepared from the accounting records of OFS in conformity with accounting principles generally accepted in the United States for federal entities (Federal GAAP), and the OMB Circular A-136, Financial Reporting Requirements, as revised. Federal GAAP includes the standards issued by the Federal Accounting Standards Advisory Board (FASAB). The FASAB is recognized by the American Institute of Certified Public Accountants (AICPA) as the official accounting standards-setting body for the U.S. Government. Accounting standards require all reporting entities to disclose that accounting standards allow certain presentations and disclosures to be modified, if needed, to prevent the disclosure of classified information. Section 123(a) of the EESA requires that the budgetary cost of purchases of troubled assets and guarantees of troubled assets, and any cash flows associated with authorized activities, be determined in accordance with the Federal Credit Reform Act of 1990 (FCRA). Section 123(b) (1) of the EESA requires that the budgetary costs of troubled assets and guarantees of troubled assets be calculated by adjusting the discount rate for market risks. As a result of this requirement, OFS considered market risk in its calculation and determination of the estimated net present value of its equity investment and FHA Refinance  32  programs for budgetary purposes. Similarly, market risk is considered in the valuations for financial reporting purposes (see Note 6 for further discussion). Consistent with its accounting policy for equity investments in private entities, OFS accounts for its equity investments at fair value. Since fair value is not defined in federal accounting standards, as established in Statement of Federal Financial Accounting Standards (SFFAS) No. 34,  The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board, OFS conforms to fair value definitions contained in the private sector Financial Accounting Standards Codification (ASC) 820, Fair Value Measurement. OFS defines fair value of its equity investments as the estimated amount of proceeds that would be received if the equity investments were sold to a market participant in an orderly transaction. Note 6 presents Equity Investments tabulated by the Level of Observation of the inputs used in the valuation process. Level 1 assets are measured using quoted market prices for identical assets. Level 2 assets are measured using observable market inputs other than direct market quotes. Level 3 assets are measured using unobservable inputs. OFS uses the present value accounting concepts embedded in SFFAS No. 2, Accounting for Direct Loans and Loan Guarantees, as amended (SFFAS No. 2), to derive fair value measurements for its equity investments in Levels 2 and 3. OFS concluded that some of the equity investments,  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  such as preferred stock, were similar to direct loans since there was a stated rate and a redemption feature which, if elected, required repayment of the amount invested. Furthermore, consideration of market risk provided a basis to arrive at a fair value measurement. Therefore, OFS concluded that SFFAS No. 2 (as more fully discussed below) should be followed for reporting and disclosure requirements of its equity investments. OFS applies the provisions of FCRA for budgetary accounting and the associated FASAB accounting standard SFFAS No. 2 for financial reporting for loan guarantee programs. Liabilities under the FHA Refinance Program are recognized at the net present value of their estimated future cash flows when the FHA guarantees loans. For equity investments, the subsidy allowance account represents the difference between the face value of the outstanding equity investment balance and the net present value of the expected future cash flows or fair value, and is reported as an adjustment to the face value of the equity investment. OFS recognizes dividend income associated with equity investments when declared by the entity in which OFS has invested and when received in relation to any repurchases, exchanges, and restructurings. OFS reflects changes, referred to as reestimates, in its determination of the value of equity investment and FHA Refinance programs in the subsidy cost on the Statement of Net Cost annually. In certain programs, OFS has received common stock warrants, additional preferred stock (referred to as warrant preferred stock) or additional notes as additional consideration. OFS accounts for any proceeds received from the sale of these investments as fees under SFFAS No. 2; as such, they are credited to the subsidy allowance rather than to income.  NOTES TO THE FINANCIAL STATEMENTS  Use of Estimates OFS has made certain estimates and assumptions relating to the reporting of assets, liabilities, revenues, and cost to prepare these financial statements. Actual results could significantly differ from these estimates. Major financial statement lines that include estimates are Equity Investments, Net, and the Liabilities for Treasury Housing Programs under TARP on the Balance Sheet, and related Program Subsidy Cost (Income) on the Statement of Net Cost (see Note 6). The most significant differences between actual results and estimates may occur in the valuation of OFS’s programs. These valuation estimates are sensitive to slight changes in model assumptions, such as general economic conditions, specific stock price volatility of the entities in which OFS has an equity interest, estimates of expected default, and prepayment rates. Forecasts of future financial results have inherent uncertainty, and Equity Investments, Net, as of fiscal year-ends include relatively illiquid assets with values that are sensitive to future economic conditions and other assumptions. Estimates are also prepared for the FHA Refinance Program to determine the liability for losses.  Credit Reform Accounting OFS accounts for the cost of equity investment and FHA Refinance programs in accordance with Section 123(a) of the EESA and the FCRA for budgetary accounting, and fair value and SFFAS No. 2 respectively, for financial reporting. The FCRA calls for the establishment of program, financing and general fund receipt accounts to segregate and report receipts and disbursements. These accounts are classified as either budgetary or non-budgetary in the Statement of Budgetary Resources. OFS maintains budgetary program accounts which receive appropriations and  33  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  obligate funds to cover the subsidy cost of equity investment and FHA Refinance programs, and disburse the subsidy cost to OFS’s financing accounts. The financing accounts are nonbudgetary accounts that are used to record all of the cash flows resulting from the OFS equity investment and FHA Refinance programs. Cash flows include disbursements, borrower repayments, repurchases, fees, recoveries, interest, dividends, proceeds from the sale of stock and warrants, borrowings from and repayments to Treasury, negative subsidy and the subsidy cost received from the program accounts, as well as subsidy reestimates and modifications. Financing arrangements specifically for the TARP activities are provided for in EESA as follows: (1) borrowing for program funds under Section 118, reported as “appropriations” in these financial statements and (2) borrowing by financing accounts for amounts not covered by subsidy cost, under the FCRA and Section 123. OFS uses budgetary general fund receipt accounts to record the receipt of amounts paid from the financing accounts when there is a negative subsidy or negative modification (a reduction in subsidy cost due to changes in program policy or terms that change estimated future cash flows) from the original estimate or a downward reestimate. Any assets in these accounts are non-entity assets, not available to OFS, and are offset by intragovernmental liabilities. At the end of the fiscal year, the fund balance transferred to the U.S. Treasury through the general fund receipt accounts is not included in OFS’s reported Fund Balance with Treasury. SFFAS No. 2 requires that the actual and expected costs of federal credit programs be fully recognized in financial reporting. OFS calculated and recorded initial estimates of the future performance of equity investment and FHA Refinance programs. The data used for these estimates were reestimated annually, at fiscal year-end, to reflect adjustments for market risk, asset performance, and other key variables and economic factors. The reestimate data were then  34  used to estimate and report the Program Subsidy Cost (Income) in the Statement of Net Cost. A detailed discussion of OFS’s subsidy calculation and reestimate assumptions, process, and results is provided in Note 6.  Fund Balance with Treasury The Fund Balance with Treasury (FBWT) includes funds available to pay current liabilities and finance authorized purchases. Cash receipts and disbursements are processed by the Treasury, and OFS’s records are reconciled with those of the Treasury on a regular basis. Available unobligated balances represent amounts that are apportioned for obligation in the current fiscal year. Unavailable unobligated balances represent unanticipated collections in excess of the amounts apportioned. Obligated balances not yet disbursed include undelivered orders and unpaid expended authority. Non-Budgetary FBWT represents unavailable funds from appropriations fulfilled. See Note 3.  Equity Investments, Net Equity Investments, Net represents the estimated net outstanding amount of the OFS equity investments. The equity investment balances have been determined in accordance with the provisions of SFFAS No. 2 and are recorded at fair value (see Note 6). Write-offs of equity investment balances (presented in Note 6 table) are recorded when a legal event occurs, such as a bankruptcy or liquidation with suspension or termination of collection action, or extinguishment of a debt instrument by agreement and there is currently no expectation of further collection. Under SFFAS No. 2, write-offs do not affect the Statement of Net Cost because the written-off asset is fully reserved. Therefore, the write-off  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  removes the asset balance and the associated subsidy allowance.  General Property and Equipment Equipment with a cost of $50,000 or more per unit and a useful life of two years or more is capitalized at full cost and depreciated using the straight-line method over the equipment’s useful life. Other equipment not meeting the capitalization criteria is expensed when purchased. Software developed for internal use is capitalized and amortized over the estimated useful life of the software if the cost per project is greater than $250,000. However, OFS may expense such software if management concludes that total period costs would not be materially distorted and the cost of capitalization is not economically prudent. Based upon these criteria, OFS reports no capitalized property, equipment or software on its Balance Sheet as of September 30, 2019 and 2018.  Accounts Payable and Other Liabilities Accounts Payable and Other Liabilities are amounts due to intragovernmental or public entities that are anticipated to be liquidated during the next operating cycle (within one year from the balance sheet date).  Due to the General Fund Due to the General Fund represents the amount of accrued downward reestimates not yet funded, related to direct loan, equity investment, and FHA Refinance programs as of September 30, 2019 and 2018. See Notes 6 and 7.  NOTES TO THE FINANCIAL STATEMENTS  Principal Payable to the Bureau of the Fiscal Service Principal Payable to the Bureau of the Fiscal Service (Fiscal Service) is the amount due for equity investments funded by borrowings from the Fiscal Service as of the end of the fiscal year. Additionally, OFS borrows from the Fiscal Service for payment of intragovernmental interest and payment of downward reestimates to the general fund, as necessary. See Note 8.  Liabilities for Treasury Housing Programs under TARP There are three initiatives in the Treasury Housing Programs: the Making Home Affordable Program, the Hardest Hit Fund and the FHA Refinance Program. OFS has determined that credit reform accounting is not applicable to the Treasury Housing Programs under TARP except for the FHA Refinance Program. Therefore, liabilities for the Making Home Affordable Program and Hardest Hit Fund are accounted for in accordance with SFFAS No. 5, Accounting for Liabilities of the Federal Government. In accordance with this standard, a liability is recognized for any unpaid amounts due and payable as of the reporting date. The liability estimate, as of September 30, 2019 and 2018, is based on information about loan modifications reported by participating servicers for the Making Home Affordable Program. See Note 5. At the end of fiscal year 2010, OFS entered into a loss-sharing agreement with the FHA to support a program in which FHA would guarantee refinancing for borrowers whose homes are worth less than the remaining amounts owed under their mortgage loans, i.e., “underwater.” The liability for OFS’s share of losses was determined under credit reform accounting and shown as FHA Refinance Program, one of the Liabilities for Treasury Housing Programs under TARP, on the Balance Sheet. See Notes 4, 5 and 6.  35  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Unexpended Appropriations Unexpended Appropriations represents OFS’s undelivered orders and unobligated balances reduced by cancelled authority in budgetary appropriated funds as of September 30, 2019 and 2018.  Cumulative Results of Operations Cumulative Results of Operations, presented on the Balance Sheet and on the Statement of Changes in Net Position, represents the net results of OFS’s operations not funded by appropriations or some other source, such as borrowing authority, from inception through fiscal year-end. Cumulative Results of Operations in 2019 and 2018 included $10 million, reported as Cash on Deposit for Housing Program on the Balance Sheet, see Note 4.  Other Financing Sources The Other Financing Sources line in the Statement of Changes in Net Position for each year consists primarily of downward reestimates. Each program’s reestimates, upward and downward, are recorded separately, not netted together.  Leave A liability for OFS employees’ annual leave is accrued as it is earned and reduced as leave is taken. Each year the balance of accrued annual leave is adjusted to reflect current pay rates as well as forfeited “use or lose” leave. Amounts are unfunded to the extent current or prior year appropriations are not available to fund annual leave earned but not taken. Sick leave and other types of non-vested leave are expensed as taken. The liability is included in the Balance Sheet amount for Accounts Payable and Other Liabilities.  36  Employee Health and Life Insurance and Workers’ Compensation Benefits OFS employees may choose to participate in the contributory Federal Employees Health Benefit and the Federal Employees Group Life Insurance Programs. OFS matches a portion of the employee contributions to each program. Matching contributions are recognized as current operating expenses. The Federal Employees’ Compensation Act (FECA) provides income and medical cost protection to covered federal civilian employees injured on the job, and employees who have incurred a work-related injury or occupational disease. Future workers’ compensation estimates are generated from an application of actuarial procedures developed to estimate the liability for FECA benefits. The actuarial liability estimates for FECA benefits include the expected liability for death, disability, medical, and miscellaneous costs for approved compensation cases. Any FECA amounts relating to OFS employees are expensed as incurred.  Employee Pension Benefits OFS employees participate in either the Civil Service Retirement System (CSRS) or the Federal Employees’ Retirement System (FERS) and Social Security. These systems provide benefits upon retirement and in the event of death, disability or other termination of employment and may also provide pre-retirement benefits. They may also include benefits to survivors and their dependents, and may contain early retirement or other special features. OFS contributions to retirement plans and Social Security, as well as imputed costs for pension and other retirement benefit costs administered by the Office of Personnel Management, are recognized on the Statement of Net Cost as Administrative Cost. Federal employee benefits also include the Thrift Savings Plan (TSP). For FERS employees, a TSP  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  account is automatically established and OFS matches employee contributions to the plan, subject to limitations. The matching contributions are recognized as Administrative Costs on the Statement of Net Cost.  Related Parties There are no related parties for OFS.  NOTE 3. FUND BALANCE WITH TREASURY Fund Balance with Treasury (FBWT), by status, as of September 30, 2019 and 2018, is presented in the following table.  As of September 30, (Dollars in Millions)  2019  St at us o f Fund Balance wit h Treasury Unobligated Balance Available Unavailable Obligated Balance Not Yet Disbursed Nonentity Funds and Anticipated Spending  $  2018  5 $ 169 3,054  6 141 4,822  -  1  Non-Budgetary FBWT To t al  $  12,509 15,737 $  -  12,205 17,174  1  Non-Budgetary FBWT represents Housing Program amounts no longer available for obligation, since the purpose for which the appropriation was enacted has been fulfilled.  NOTE 4. CASH ON DEPOSIT FOR HOUSING PROGRAM As of September 30, 2019 and 2018, OFS had $10 million, on deposit with a commercial bank to facilitate its payments of claims under the FHA Refinance Program as OFS’s agent.  NOTES TO THE FINANCIAL STATEMENTS  See Note 5 for further details regarding the FHA Refinance Program. Under terms of the agreement with the commercial bank, unused funds will be returned to OFS upon the termination of the program.  37  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  NOTE 5. TREASURY HOUSING PROGRAMS UNDER TARP Fiscal years 2019 and 2018 marked a transition point for housing programs under TARP as the largest program, Making Home Affordable (MHA), closed to new applicants on December 30, 2016 and final assistance actions were required to be offered on or before December 1, 2017. These programs were designed to prevent avoidable foreclosure and provide stability for the housing market, and primarily provide assistance to homeowners who are Housing Program  experiencing financial hardships. The programs fall into three initiatives: 1) Making Home Affordable Program (MHA); 2) Hardest Hit Fund (HHF); and 3) FHA Refinance Program. Features of these initiatives follow:  Features  MHA Home Affordable Modification Program (HAMP)  First Lien Modification Program (Tier 1, Tier 2, and Streamline)  Provides for upfront, monthly and annual incentives to servicers, borrowers and investors who participate, whereby the investor and the OFS share the costs of modifying qualified first liens, conditional on borrower performance.  Principal Reduction Alternative Program (PRA)  Pays financial incentives to investors for principal reduction in conjunction with a first lien HAMP modification. Designed to assist eligible borrowers unable to retain their homes through a HAMP modification, by simplifying and streamlining the short sale and deed-inlieu of foreclosure processes and providing financial incentives to servicers and investors as well as relocation assistance to borrowers who pursue short sales and deeds-in-lieu.  Home Affordable Foreclosure Alternatives (HAFA)  Unemployment Forebearance Program (UP)  Offers assistance to unemployed homeowners through temporary forebearance of a portion of their mortgage payments. This program does not require any payments from the OFS.  Treasury FHA-HAMP  Provides mortgage modifications similar to HAMP, but for FHA-insured or guaranteed loans offered by the FHA.  Second Lien Modification Program (2MP)  Offers financial incentives to participating servicers who modify second liens in conjunction with a HAMP modification.  Rural Development HAMP (RD-HAMP)  Provides for lower monthly payments on USDA guaranteed loans.  HHF  Provides locally tailored assistance to states hardest hit by the housing market downturn, to assist struggling homeowners and help stabilize housing markets.  FHA Refinance Program  Joint initiative with HUD to encourage refinancing of existing underwater mortgage loans not currently insured by FHA into FHA insured mortgages.  38  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Making Home Affordable In early 2009, Treasury launched MHA to help struggling homeowners avoid foreclosure. Since its inception, MHA has helped homeowners avoid foreclosure by providing a variety of solutions to modify their mortgages, get temporary forbearance if they are unemployed, or transition out of homeownership via a short sale or deed-inlieu of foreclosure. The cornerstone of MHA is the Home Affordable Modification Program (HAMP), which provides eligible homeowners the opportunity to reduce their monthly mortgage payments to more affordable levels. Treasury also launched programs under MHA to help homeowners who are unemployed, “underwater” on their loans (those who owe more on their home than it is currently worth), or struggling with second liens. MHA also includes programs to help homeowners with loans insured or guaranteed by FHA and the U.S. Department of Agriculture (USDA). All MHA disbursements are made to servicers either for themselves or for the benefit of borrowers and investors, and all payments are contingent on borrowers remaining in good standing. Fannie Mae, as the MHA Program Administrator, provides direct programmatic support as a financial agent on behalf of OFS. Freddie Mac provides compliance oversight of servicers as financial agent on behalf of OFS, and the servicers work directly with the borrowers to modify and service the borrowers’ loans. Fees paid to Fannie Mae and Freddie Mac are included in Administrative Costs reported on the Statement of Net Cost. The MHA program terminated on December 31, 2016, except with respect to certain loan modification applications made before such date, per December 2015, Section 709(b) of the Consolidated Appropriations Act, 2016 (the Act).  NOTES TO THE FINANCIAL STATEMENTS  In FY 2019, Treasury de-obligated an additional $304 million from MHA, lowering Treasury’s obligation to $23.5 billion.  Hardest Hit Fund The HHF was implemented in fiscal year 2010, and provides locally tailored assistance to states hit hardest by the housing market downturn, to assist struggling homeowners and help stabilize housing markets through each state’s Housing Finance Agency (HFA). States that meet the criteria for this program, consisting of Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, as well as the District of Columbia, receive funding from OFS. States have until December 31, 2021 to utilize all HHF funding.  FHA Refinance Program The FHA Refinance Program is intended to encourage refinancing of existing underwater mortgage loans not currently insured by FHA into FHA-insured mortgages. OFS established a letter of credit that obligated OFS’s portion of any claims associated with the FHA-guaranteed mortgages. OMB determined that for budgetary purposes, the FHA Refinance Program cost is calculated under the FCRA, and accordingly OFS determined that it was appropriate to follow SFFAS No. 2 for financial reporting. Therefore, the liability is calculated at the net present value of estimated future cash flows. Homeowners were able to refinance into FHA guaranteed mortgages through December 31, 2016 and OFS will honor its share of claims against the letter of credit through December 31, 2022. Cumulatively, as of September 30, 2019 and September 30, 2018, 4,200 loans that required potential Treasury contribution, with a total value of $620 million, had been refinanced through the program for both  39  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  years, of which 1,474 and 1,609, respectively, could still require a Treasury contribution.  $71,658 was disbursed during fiscal year 2019. See Notes 4 and 6 for further details about the deposit and the program. OFS paid $0.2 million in fiscal year 2019 and $0.3 million in fiscal year 2018 to maintain the letter of credit.  OFS originally deposited $50 million with a commercial bank as its agent to administer payment of claims under the program; that amount was reduced to $10 million in 2015.  The table below recaps housing program commitments as of September 30, 2019, and payments and accruals as of September 30, 2019 and 2018.  Cumulatively, $361,159 in claim payments have been made as of September 30, 2019, of which  Treasury Housing Programs Under TARP Total Commitments as of Fiscal Year Payments through September 30, (Dollars in Millions)  September 30, 2019  MHA  2019  Accruals as of September 30,  2018  $  1,118  9,600  $  334  625  -  -  2  45  -  -  -  -  $  33,117  $  1,452  $  1,600  2,225  $  2018  23,472  Totals  $  2019  HFA Hardest Hit Fund FHA Short Refinance  $  1  $  74  74  $  $  119  119  1  Total commitments represent amounts obligated to support all of OFS's Housing programs. As of September 30, 2019, $2,956 million remains available to be spent. FHA- Refinance commitments include a maximum of $18 million of administrative fees that can be charged over the life of the program for the Letter of Credit facility. 2  Payments do not include $10 million of reserve funds transferred, shown on Balance Sheet as Cash on Deposit for Housing Program, nor the subsidy cost to fund OFS's estimated share of defaults, which establishes the liability for losses, see Note 6. Payments are the FHA-Refinance Letter of Credit administrative expense only.  40  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  NOTE 6. EQUITY INVESTMENTS, NET AND FHA REFINANCE PROGRAM OFS administers programs designed to help stabilize the financial system and restore the flow of credit to consumers and businesses. OFS made direct loans and equity investments under TARP. OFS also entered into other credit programs, which  Program Direct Loans and Equity Investments Capital Purchase Program Community Development Capital Initiative Automotive Industry Financing Program Other Credit Program FHA Refinance Program  Equity Investment Programs Capital Purchase Program In October 2008, OFS began implementation of the TARP with the CPP, designed to help stabilize the financial system by assisting in building the capital base of certain viable U.S. financial institutions to increase the capacity of those institutions to lend to businesses and consumers and support the economy. OFS invested a total of $204.9 billion in 707 institutions under the CPP program between October 2008 and December 2009. Under this program, OFS purchased senior perpetual preferred stock from qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies (Qualified Financial Institution or QFI). The senior preferred stock had a stated dividend rate of 5.0 percent through year five, which increased to 9.0 percent in subsequent years. In addition to the senior preferred stock, OFS received warrants, with a 10-year term, as required by Section 113(d) of EESA, from public QFIs to purchase a number of shares of common stock. QFIs that are Subchapter S corporations issued subordinated debentures instead of preferred stock (to comply with tax code  NOTES TO THE FINANCIAL STATEMENTS  currently consist of a loss-sharing program under TARP. The table below recaps OFS’s remaining programs by title and type:  Program Type Equity Investment/Subordinated Debentures Equity Investment/Subordinated Debentures Equity Investment and Direct Loan Loss-sharing Program with FHA  regulations) with interest rates of 7.7 percent for the first five years and 13.8 percent thereafter. OFS received warrants from non-public QFIs for the purchase of additional senior preferred stock (or subordinated debentures if appropriate) with a stated dividend rate of 9.0 percent (13.8 percent interest rate for subordinate debentures) and a liquidation preference equal to 5.0 percent of the total senior preferred stock (additional subordinate debenture) investment. These warrants were immediately exercised and resulted in OFS holding additional senior preferred stock (subordinated debentures) (collectively referred to as “warrant preferred stock”) of non-public QFIs. In addition to the above transactions, OFS entered into other transactions with various financial institutions including exchanging existing preferred shares for a like amount of non-tax-deductible Trust Preferred Securities, exchanging preferred shares for shares of mandatorily convertible preferred securities and selling preferred shares to financial institutions that were acquiring the QFIs that have issued the preferred shares. Generally, these transactions are entered into with financial institutions in poor financial condition with a high likelihood of failure. As such, in accordance with SFFAS No. 2, these transactions are considered workouts and not modifications. The changes in cost associated with these transactions are captured in the year-end reestimates.  41  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  During fiscal years 2019 and 2018 there were no institutions closed by their regulators or declaring bankruptcy.  There were no CPP institutions written off during fiscal year 2019 and one during fiscal year 2018. The following tables provide key data points related to the CPP for the fiscal years ending September 30, 2019 and 2018.  CPP Part icipat ing Inst it ut io ns  Number of Institutions Funded  707  707  Institutions Paid in Full, Merged or Investments Sold  (506)  (505)  Institutions Transferred to CDCI  (28)  (28)  Institutions Refinanced to SBLF  (137)  (137)  (34)  (34)  Number of Institutions w ith Outstanding OFS Investments  2  3  Institutions in Bankruptcy or Receivership (not w ritten off)  -  -  Number of CPP Institutions Valued at Year-End  2  3  Of the Institutions Valued, Number that Have Missed One or More Dividend Payments  1  1  Institutions Written Off After Bankruptcy or Receivership  CPP Invest ment s (Dollars in Millions)  Outstanding Beginning Balance, Investment in CPP Institutions, Gross  $  Repayments and Sales of Investments  (5)  Write-Offs  (17)  (1)  Outstanding Balance, Investment in CPP Institutions, Gross  $  Interest and Dividend Collections Net Proceeds from Sales and Repurchases of Assets in Excess of (Less than) Cost  17  48 (4)  -  Losses from Sales and Repurchases of Assets  42  23 $  (4) $  23  $  - $  2  $  (1) $  9  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Community Development Capital Initiative In February 2010, OFS announced the CDCI to invest lower cost capital in Community Development Financial Institutions (CDFIs). Under the terms of the program, OFS purchased senior preferred stock (or subordinated debt) from eligible CDFIs. The senior preferred stock had an initial dividend rate of 2 percent. CDFI banks and thrifts could apply to receive capital up to 5 percent of risk-weighted assets while CDFI credit unions could apply for up to 3.5 percent of total assets. To encourage repayment while recognizing the unique circumstances facing CDFIs, the dividend rate increases to 9 percent after eight years. CDFIs participating in the CPP, subject to certain criteria, were eligible to exchange, through September 30, 2010, their CPP preferred shares (subordinated debt) then held by OFS for CDCI preferred shares (subordinated debt). These exchanges were treated as disbursements from CDCI and repayments to CPP. OFS invested a total of $570 million ($363 million as a result of exchanges from CPP) in 84 institutions under the CDCI. As of September 30, 2019 there were 5 institutions with outstanding OFS investments. As of September 30, 2018 there were 12 institutions with outstanding OFS investments. During fiscal years 2019 and 2018, there were no CDCI institutions written off. In fiscal year 2019, OFS received $20 million in repayments and $1 million in dividends and interest from its CDCI investments with, as of September 30, 2019, an outstanding balance of $23 million and value of $11 million. In fiscal year 2018, OFS received $32 million in repayments and $1 million in dividends and interest from its CDCI investments with, as of September 30, 2018, an outstanding balance of $43 million and value of $33 million.  Automotive Industry Financing Program General Motors Company and General Motors Corporation In the period ended September 30, 2009, the OFS provided $51.0 billion to General Motors Corporation (Old GM) through various loan agreements including the initial loan for general and  NOTES TO THE FINANCIAL STATEMENTS  working capital purposes, auto supplier and warranty programs, and the final loan for debtor in possession (DIP) financing while Old GM was in bankruptcy. Since 2014, OFS retained no ownership of GM. OFS received a cumulative total of $39.7 billion in stock sale proceeds, loan repayments, dividends and interest on the GM program. In fiscal year 2011, $986 million of OFS’s loan to Old GM was converted to an administrative claim. OFS retains the right to recover additional proceeds but recoveries are dependent on actual liquidation proceeds and pending litigation. Because OFS did not expect to recover any significant additional proceeds from this claim, OFS recognized a write-off of the remaining $826 million in fiscal year 2014 resulting in no outstanding balance since September 30, 2014. During fiscal year 2018, OFS recovered $13 million on this administrative claim. In August 2016, Treasury along with Export Development Canada (EDC), which jointly financed the administration of the General Motors bankruptcy, entered into a settlement with the Unsecured Creditors Committee of General Motors Corporation (UCC) to split any proceeds of the Avoidance Action Trust (AAT) litigation, with Treasury and EDC receiving 30 percent and the unsecured creditors receiving 70 percent. As a condition of the settlement, OFS provided an advance of $13 million to the AAT to fund the ongoing operating and legal costs associated with the litigation. This settlement yields the most favorable attainable economic outcome for OFS to recover funds related to this claim. During fiscal year 2019 OFS received $73 million in AAT distributions from the settlement.  Valuation Methodology OFS applies fair value and the provisions of SFFAS No. 2 to account for equity investments and the FHA Refinance Program. This standard requires measurement of the asset or liability at the net present value of the estimated future cash flows. The cash flow estimates for each transaction reflect the actual structure of the instruments. For each of these instruments, analytical cash flow models generate estimated cash flows to and from OFS over the estimated term of the instrument. Further, each cash flow model reflects the specific terms and conditions of the program, technical assumptions regarding the underlying assets, risk of default or  43  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  other losses, and other factors as appropriate. The models also incorporate an adjustment for market risk to reflect the additional return required by the market to compensate for variability around the expected losses reflected in the cash flows (the “unexpected loss”). The adjustment for market risk requires the OFS to determine the return that would be required by market participants to enter into similar transactions or to purchase the assets held by OFS. Accordingly, the measurement of the assets attempts to represent the proceeds expected to be received if the assets were sold to a market participant in an orderly transaction. The methodology employed for determining market risk for equity investments generally involves using market prices of similar securities to estimate an appropriate market-adjusted discount rate that results in measuring equity investments at fair value. The adjustment for market risk for loans is intended to capture the risk of unexpected losses, but not intended to represent fair value, i.e., the proceeds that would be expected to be received if the loans were sold to a market participant. OFS uses market observable inputs, when available, in developing cash flows and incorporating the adjustment required for market risk. For purposes  44  of this disclosure, OFS has classified its programs’ asset valuations as follows, based on the observability of inputs that are significant to the measurement of the asset:   Quoted prices for Identical Assets (Level 1): The measurement of assets in this classification is based on direct market quotes for the specific asset, e.g. quoted prices of common stock.    Significant Observable Inputs (Level 2): The measurement of assets in this classification is primarily derived from market observable data, other than a direct market quote, for the asset. This data could be market quotes for similar assets for the same entity.    Significant Unobservable Inputs (Level 3): The measurement of assets in this classification is primarily derived from inputs which generally represent management’s best estimate of how a market participant would assess the risk inherent in the asset. These unobservable inputs are used because there is little to no direct market activity.  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  The following table displays the assets held by the observability of inputs significant to the measurement of each value.  As of September 30, 2019  (Dollars in Millions)  Quoted Prices for Identical Assets (Level 1)  Significant Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3)  Total  Pro gram CPP  $  2  CDCI To t al TARP Pro grams  $  7 $  9  - $  12  4  $  10 $  - $  11  14 $  23  1  For CPP, Level 1 includes Harbor Bankshares Corporation, valued at $6.6M (Original disbursement of $6.8M, restructured into 4,287,024 common shares (or 65.8% of Shares Outstanding)). For CDCI, Level 1 includes Carver Bancorp, Inc, valued at $10M (Original disbursement of $19M, restructured into 2,321,286 common shares (or 62.8% of Shares Outstanding)). While Treasury holds majority ownership in both entities, the holdings do not meet the criteria for consolidation into these financial statements. As of September 30, 2018  (Dollars in Millions)  Quoted Prices for Identical Assets (Level 1)1  Significant Observable Inputs (Level 2)  Significant Unobservable Inputs (Level 3)  Total  Pro gram CPP  $  CDCI To t al TARP Pro grams  11  $  10 $  21  $  - $  10 $  21  -  23  33  - $  33 $  54  1  For CPP, Level 1 includes Harbor Bankshares Corporation, valued at $6.6M (Original disbursement of $6.8M, restructured into 5,491,843 common shares (or 84.3% of Shares Outstanding)). For CDCI, Level 1 includes Carver Bancorp, Inc, valued at $10M (Original disbursement of $19M, restructured into 2,321,286 common shares (or 62.8% of Shares Outstanding)). While Treasury holds majority ownership in both entities, the holdings do not meet the criteria for consolidation into these financial statements.  NOTES TO THE FINANCIAL STATEMENTS  45  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  The following provides a description of the methodology used to develop the cash flows and incorporate the market risk into the measurement of OFS assets.  Financial Institution Equity Investments6 The estimated values of preferred equity investments are the net present values of the expected dividend payments and proceeds from repurchases and sales. In fiscal year 2018, OFS implemented a new estimation methodology in its model for its remaining equity investments to better capture the expected performance of remaining securities. The model estimates the probability of default, preferred share calls and preferred dividends based on the institution’s historical dividend payment performance and on the historical behavior of the equity investments for similar TARP and non-TARP Treasury programs. Inputs to the model include institution-specific dividend payments, preferred share calls, failures for TARP and non-TARP Treasury programs, as well as a financial market stress index published by the Federal Reserve Bank of St. Louis. The market risk adjustment is estimated by applying credit spreads from similar securities. For both of its fiscal year 2019 and 2018 models, OFS estimates the values and projects the cash flows of warrants using an option-pricing approach based on the current stock price and its volatility. Investments in common stock that are exchange traded are valued at the quoted market price as of year-end.  6  Subsidy Cost and Reestimates The recorded subsidy cost of equity investments or the FHA Refinance program is based upon the calculated net present value of expected future cash flows. OFS’s actions, as well as changes in legislation may change estimated future cash flows resulting in changes to subsidy cost. These changes in subsidy cost are recorded as modifications. The cost or reduction in cost of a modification is recognized when it occurs. During fiscal year 2019 and 2018, there were no modifications to any of the remaining programs. The purpose of reestimates is to update original program subsidy cost estimates to reflect actual cash flow experience as well as changes in equity investment valuations or forecasts of future cash flows. Forecasts of future cash flows are updated based on actual program performance to date, additional information about the portfolio, additional publicly available relevant historical market data on securities performance, revised expectations for future economic conditions, and enhancements to cash flow projection methods. For fiscal years 2019 and 2018, financial statement reestimates for all programs, except the FHA Refinance program, were performed using actual financial transaction data through September 30. For fiscal years 2019 and 2018 market and security specific data publicly available as of September 30 were used. FHA Refinance reestimates used actual financial transaction data through August 31. Net downward reestimates for the fiscal years ended September 30, 2019 and 2018, totaled $67 million and $26 million, respectively. Descriptions of the reestimates, by OFS’s Program, are as follows:  This consists of equity investments made under CPP and CDCI.  46  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Capital Purchase Program  Public-Private Investment Program (PPIP)  The $4 million upward reestimate for CPP for fiscal year ended September 30, 2019 was the result of sales and reduced market values.  For fiscal year ended September 30, 2018 there was a $0.5 million downward reestimate due to a recovery collection. The PPIP program was closed in 2016.  The $4 million downward reestimate for CPP for the fiscal year ended September 30, 2018 was the result of repayments and improved market values.  Summary Table  Community Development Capital Initiative The $2 million upward reestimate for CDCI for fiscal year ended September 30, 2019 was the result of sales and reduced market values. The $7 million downward reestimate for CDCI for fiscal year ended September 30, 2018 was the result of repayments and improved market values.  The following table recaps gross equity investments, subsidy allowance, net equity investments, reconciliation of subsidy cost allowance and subsidy cost, by TARP program, as of and for the fiscal years ended September 30, 2019 and 2018. OFS’s authority expired October 3, 2010 and no commitments were made thereafter, so there were no investment program budget execution subsidy rates for fiscal years 2019 and 2018.  Automotive Industry Financing Program For fiscal year ended September 30, 2019 a $73 million downward reestimate was due to collections related to the AAT distributions. For fiscal year ended September 30, 2018 a $13 million downward reestimate was due to collections related to the Old GM.  NOTES TO THE FINANCIAL STATEMENTS  47  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Troubled Asset Relief Program Equit y Invest ment s (Dollars in Millions)  TOTAL  CPP  PPIP  AIFP  CDCI  As o f S ept ember 30, 2019 Equit y Invest ment Pro grams: Equity Investments Outstanding, Gross Subsidy Cost Allow ance Equity Investments Outstanding, Net Obligations for Investments not yet Disbursed Reco nciliat io n o f S ubsidy Co st Allo wance: Balance, Beginning of Period Interest and Dividend Revenue Net Proceeds from Sales and Repurchases of Assets in Excess of (Less than) Cost Net Interest Expense on Borrow ings from Fiscal Service and Financing Account Balance Balance, End of Period, Before Reestimates Subsidy Reestimates Upw ard (Dow nw ard), Net Balance, End of Period Reco nciliat io n o f S ubsidy Co st (Inco me): Subsidy Cost (Income) for Disbursements Subsidy Reestimates Upw ard (Dow nw ard), Net Total Equity Investment Programs Subsidy Cost (Income)  $ $  40 $ (17) 23 $  17 $ (5) 12 $  -  $  $  $  -  $  -  $  -  $  -  $  $  12 1  $  2 -  $  -  $  -  $  -  $ -  10 1 -  -  $  72  (1)  -  73  (1) 84 (67) 17 $  1 4 5  -  73 (73) - $  $  (67)  4  $  (67) $  4  $  (Dollars in Millions)  TOTAL  $  $  $  CPP  -  $  PPIP  23 (12) 11  (1) 10 2 12  (73)  2  (73) $  2  AIFP  CDCI  As o f S ept ember 30, 2018 Equit y Invest ment Pro grams: Equity Investments Outstanding, Gross Subsidy Cost Allow ance Equity Investments Outstanding, Net Obligations for Investments not yet Disbursed Reco nciliat io n o f S ubsidy Co st Allo wance: Balance, Beginning of Period Interest and Dividend Revenue Net Proceeds from Sales and Repurchases of Assets in Excess of (Less than) Cost Write-Offs Net Interest Expense on Borrow ings from Fiscal Service and Financing Account Balance Balance, End of Period, Before Reestimates Subsidy Reestimates Upw ard (Dow nw ard), Net Balance, End of Period Reco nciliat io n o f S ubsidy Co st (Inco me): Subsidy Cost (Income) for Disbursements Subsidy Reestimates Upw ard (Dow nw ard), Net Total Equity Investment Programs Subsidy Cost (Income)  48  $ $  66 $ (12) 54 $  $  -  $  -  $  -  $  -  $  -  $  30 3  $  13 2  $  -  $  -  $  17 1  23 (17)  23 $ (2) 21 $  9 (17)  -  $  $  $  -  1 -  13 -  $  43 (10) 33  -  (2) 37 (25) 12 $  (1) 6 (4) 2 $  1 (1) - $  13 (13) - $  $  (25)  (4)  (1)  (13)  (7)  $  (25) $  (4) $  (1) $  (13) $  (7)  $  NOTES TO THE FINANCIAL STATEMENTS  (1) 17 (7) 10  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  FHA Refinance Program As discussed in Note 5, OFS entered into a losssharing agreement with the FHA to support a program in which FHA guarantees refinancing of borrowers whose homes were worth less than the remaining amounts owed under their mortgage loans. Homeowners were able to refinance into FHA guaranteed mortgages through December 31, 2016, therefore, no new loans were guaranteed during fiscal years 2019 and 2018. Cumulatively, as of September 30, 2019 and 2018, 4,200 loans that required potential Treasury contribution, with a total value of $620 million, had been refinanced through the program for both years, of which 1,474 and 1,609 loans, respectively, could still require a Treasury contribution. OFS’s maximum exposure for all active loans for FHA’s guarantee totaled $17.9 million and $20 million at September 30, 2019 and 2018, respectively. OFS’s guarantee resulted in a liability  of $1 million at September 30, 2019 and September 30, 2018. The liability was calculated, using credit reform accounting, as the present value of the estimated future cash outflows for OFS’s share of losses incurred on any defaults of the FHA guaranteed loans. Cumulatively, as of September 30, 2019 and 2018, $361,159 and $289,501 of claims had been paid by OFS under the program, respectively. At September 30, 2019 and 2018, OFS’s remaining obligation under the FHA program was $24 million. Budget subsidy rates for the program, entirely for defaults, were set at 0.8 percent for loans guaranteed in fiscal year 2017 (loans endorsed by FHA from October 1, 2016 to December 31, 2016). The program recorded $1million downward reestimate for fiscal year 2018. The following table details the changes in the FHA Refinance Program liability and the subsidy cost for the program during fiscal years 2019 and 2018.  FHA-Refinance Pro gram Liabilit y  Fiscal Year 2019  (Dollars in Millions)  Balance, Beginning of Period  $  Balance, End of Period, Before Reestimates Subsidy Reestimates - Upw ard (Dow nw ard), Net Balance, End of Period  $  Reco nciliat io n o f Subsidy Co st (Inco me) Subsidy Reestimates - Upw ard (Dow nw ard), Net To t al Subsidy Co st (Inco me)  $ $  NOTES TO THE FINANCIAL STATEMENTS  2018 1 $  2  1  2  -  (1)  1  $  - $ - $  1  (1) (1)  49  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  NOTE 7. DUE TO THE GENERAL FUND As of September 30, 2019, OFS accrued $75 million of downward reestimates payable to the General Fund. As of September 30, 2018, OFS accrued $28  million of downward reestimates payable to the General Fund. Due to the General Fund is a nonentity liability on the Balance Sheet.  NOTE 8. PRINCIPAL PAYABLE TO THE BUREAU OF THE FISCAL SERVICE (Fiscal Service) The equity investment and the FHA Refinance Programs, accounted for under federal credit reform, are funded by subsidy appropriations and borrowings from the Fiscal Service. OFS also borrows funds to pay the Treasury General Fund for downward reestimates (these reduce program subsidy cost) in advance of receiving the expected cash flows that cause the downward reestimate. OFS makes periodic principal repayments to the  Fiscal Service based on the analysis of its cash balances and future disbursement needs. All debt is intragovernmental and covered by budgetary resources. See additional details on borrowing authority in Note 11, Statement of Budgetary Resources. Debt transactions for the fiscal years ended September 30, 2019 and 2018 were as follows:  As of September 30, (Dollars in Millions)  2019  Beginning Balance, Principal Payable t o t he Fiscal Service New Borrow ings Repayments Ending Balance, Principal Payable t o t he Fiscal Service  $  2018 60 $ 3 (28) 35 $  $  119 (59) 60  Borrowings from the Fiscal Service by the OFS, outstanding as of September 30, 2019 and 2018 were as follows: As of September 30, (Dollars in Millions)  CPP CDCI To t al Bo rro wings Out st anding  As of September 30, 2019, borrowings carried remaining terms ranging from 19 to 22 years, with interest rates from 2.96 percent to 3.80 percent. As  50  2019 $ $ $  2018 19 $ 16 35 $  18 42 60  of September 30, 2018, borrowings carried remaining terms ranging from 20 to 23 years, with interest rates from 2.96 percent to 3.80 percent.  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  NOTE 9. COMMITMENTS AND CONTINGENCIES OFS is party to various legal actions and claims brought by or against it. In the opinion of management and the Office of General Counsel, the ultimate resolution of these legal actions and claims will not have a materially adverse effect on OFS’s financial statements. Contingent liabilities related to litigation are recorded in the financial statements if and when losses are determined to be probable and measurable. Contingent liabilities are disclosed where the conditions for liability recognition have not been met and the likelihood of unfavorable  NOTES TO THE FINANCIAL STATEMENTS  outcome is more than remote. If litigation losses are to be paid by the Treasury Judgment Fund, the related cost is allocated to the appropriate federal entity, which records the cost and an offsetting financing source in its financial statements. Refer to Note 5 for additional commitments relating to the Treasury Housing Programs under TARP and Note 6 relating to Equity Investments, Net and FHA Refinance Programs.  51  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  NOTE 10. STATEMENT OF NET COST The Statement of Net Cost (SNC) presents the net cost of operations for OFS under the strategic goal to transform government-wide financial stewardship. OFS has determined that all initiatives and programs under the TARP fall within this strategic goal.  income on financing account balances. OFS’s SNC for fiscal year 2018 includes $3 million of intragovernmental costs relating to interest expense on borrowings from the Fiscal Service and $1 million in intragovernmental revenues relating to interest income on financing account balances.  OFS’s SNC reports the annual accumulated full cost of the TARP’s output, including both direct and indirect costs of the program services and output identifiable to TARP, in accordance with SFFAS No. 4, Managerial Cost Accounting Concepts and Standards.  Subsidy allowance amortization on the SNC is the difference between interest income on financing fund account balances, dividends and interest income on equity investments and FHA Refinance programs from TARP participants, and interest expense on borrowings from the Fiscal Service. The subsidy allowance account is used to present the equity investments at the estimated net present value of future cash flows. OFS’s SNC includes $1 million of subsidy allowance amortization for fiscal year 2018.  OFS’s SNC for fiscal year 2019 includes $2 million of intragovernmental costs relating to interest expense on borrowings from the Fiscal Service and $1 million intragovernmental revenues relating to interest  NOTE 11. STATEMENT OF BUDGETARY RESOURCES The Statement of Budgetary Resources (SBR) presents information about total budgetary resources available to OFS and the status of those resources. For the fiscal year ended September 30, 2019, OFS’s total resources in budgetary accounts were $153 million and resources in non-budgetary financing accounts, including spending authority from collections of equity investment liquidations, dividends, interest and fees, were $109 million. For the fiscal year ended September 30, 2018, OFS’s total resources in budgetary accounts were $188 million and resources in non-budgetary financing accounts were $52 million.  Permanent Indefinite Appropriations OFS receives permanent indefinite appropriations annually, if necessary, to fund increases in the projected subsidy costs of equity investments and  52  FHA Refinance programs as determined by the reestimation process required by the FCRA. Additionally, Section 118 of the EESA states that the Secretary may issue public debt securities and use the resulting funds to carry out EESA and that any such funds expended or obligated by the Secretary for actions authorized by EESA, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure or obligation.  Borrowing Authority OFS is authorized to borrow from the Fiscal Service to pay interest costs in excess of interest income and to fund downward reestimates transfers to the General Fund. As of September 30, 2019 OFS had no borrowing authority available of the $3 million  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  authorized. As of September 30, 2018 OFS had no borrowing authority available or authorized. OFS uses dividends and interest received as well as recoveries on direct loans and liquidation of equity investments to repay debt in the non-budgetary direct loan and equity investment program financing accounts. These receipts are not available for any other use per credit reform accounting guidance.  funds remained in non-budgetary financing accounts.  Explanation of Differences Between the Statement of Budgetary Resources and the Budget of the United States Government  Apportionment Categories of Obligations Incurred: Direct versus Reimbursable Obligations  Federal agencies and entities are required to explain material differences between amounts reported in the SBR and the actual amounts reported in the Budget of the U.S. Government (the President’s Budget).  All of OFS’s apportionments are Direct and are Category B. Category B apportionments typically distribute budgetary resources on a basis other than calendar quarters, such as by activities, projects, objects or a combination of these categories. OFS obligations incurred are direct obligations (obligations not financed from intragovernmental reimbursable agreements).  The President’s Budget for 2021, with the “Actual” column completed for fiscal year 2019, has not yet been published as of the date of these financial statements. The President’s Budget is currently expected to be published and delivered to Congress in early March 2020. It will be available at https://www.whitehouse.gov/omb/budget/  Undelivered Orders Undelivered orders as of September 30, 2019 were $3 billion in budgetary accounts, all Non-Federal and no funds remained in non-budgetary financing accounts. Undelivered orders as of September 30, 2018 were $4.7 billion in budgetary accounts and no  NOTES TO THE FINANCIAL STATEMENTS  The 2020 President’s Budget, with the “Actual” column completed for the fiscal year ended September 30, 2018, was published in March 2019, and reconciled to the SBR. The only differences between the two documents were due to:  Rounding; and  Expired funds that are not shown in the “Actual” column of the President’s Budget.  53  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  NOTE 12. RECONCILIATION OF NET COST OF OPERATIONS TO OUTLAYS, NET The Reconciliation of Net Cost of Operations to Outlays, Net explains the difference between proprietary financial accounting information and budgetary accounting information. Financial accounting is intended to provide a picture of the government’s financial operations and financial position and is presented on an accrual basis. The accrual basis includes information about costs arising from the consumption of assets and the incurrence of liabilities. Budgetary accounting is used for planning and control purposes and relates to both the receipt and use of cash, as well as  reporting the federal deficit. The reconciliation of net cost, presented on an accrual basis, and the net outlays, presented on a budgetary basis, provides an explanation of the relationship between financial accounting and budgetary information. The reconciliation serves not only to identify costs paid for in the past and those that will be paid in the future, but also to assure integrity between financial and budgetary financial accounting. For the fiscal year ended September 30, 2019 the Reconciliation of Net Cost of Operations to Outlays, Net consisted of the following:  Dollars in Millions Int ragovernment al Net Cost of Operat ions  $  13  Wit h t he Public $  Tot al Fisc al Y ear 2019  1,378  $  1,391  Component s of Net Cost That Are Not Part of Net Out lays: Year-end c redit reform subsidy re-estimates Other1  68  -  68  7  -  7  -  (31)  (31)  -  4  4  (47)  -  (47)  -  45  45  28  18  46  Inc rease / (Dec rease) in Asset s: Equity Inv estments (Inc rease) / Dec rease in Liabilit ies: Ac c ounts Pay able and Other Liabilities Due to the General Fund Making Home Affordable Program Tot al Component s of Net Cost That Are Not Part of Net Out lays: Component s of Net Out lays That Are Not Part of Net Cost : Effec t of prior y ear agenc ies c redit reform subsidy re-estimates Distributed Offsetting Rec eipts Tot al Component s of Net Out lays That Are Not Part of Net Cost Out lays, Net 1  54  $  (1)  -  (1)  (27)  -  (27)  (28)  -  (28)  13  $  1,396  $  1,409  Other includes the cost of the CPP and CDCI programs.  NOTES TO THE FINANCIAL STATEMENTS  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  REQUIRED SUPPLEMENTARY INFORMATION  REQUIRED SUPPLEMENTARY INFORMATION COMBINED STATEMENT OF BUDGETARY RESOURCES  Dollars in Millions BUDGETARY RESOURCES Unobligated Balanc e Brought Forward, Oc tober 1  $  Rec ov eries of Prior-Year Unpaid Obligations Ac tual Repay ments of Debt, Prior-Year Balanc es Canc elled Authority Other Changes in Unobligated Balanc es  113  $  34  $  - $  34  $  113  320  -  304  -  -  (15)  -  (15)  -  (39)  -  -  -  (39)  (304)  Unobligated Balanc e from Prior-Year Budget Authority , Net  90  Appropriations  16  -  (304)  -  -  19  -  19  90  63  -  1  -  62  Borrowing Authority  -  3  -  3  -  Spending Authority from Offsetting Collec tions  -  87  -  87  TOTAL BUDGETARY RESOURCES (Not e 11)  -  $  153  $  109  $  1  $  109  $  152  $  59  $  29  $  1  $  29  $  58  STATUS OF BUDGETARY RESOURCES New Obligations and Upward Adjustments (Total) Unobligat ed Balanc e, End of Y ear: Apportioned, Unexpired Ac c ounts Unapportioned, Unexpired Ac c ounts Unexpired Unobligated Balanc e, End of Year Expired Unobligated Balanc e, End of Year Unobligat ed Balanc e, End of Y ear (Tot al) TOTAL STATUS OF BUDGETARY RESOURCES  $  4  1  -  1  -  79  -  79  -  4  80  -  80  4  90  -  -  -  90  94  80  -  80  153  $  109  $  1  $  109  4  94 $  152  OUTLAY S, NET Outlay s, Net (Total)  1,507  Distributed Offsetting Rec eipts AGENCY OUTLAY S, NET  REQUIRED SUPPLEMENTARY INFORMATION  (71)  (27) $  1, 480  $  (71) $  1,453  (71)  (27) 1, 426  54  $  (71) $  54  55  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  REQUIRED SUPPLEMENTARY INFORMATION COMBINED STATEMENT OF BUDGETARY RESOURCES  Dollars in Millions BUDGETARY RESOURCES Unobligated Balanc e Brought Forward, Oc tober 1  $  Rec ov eries of Prior-Year Unpaid Obligations Ac tual Repay ments of Debt, Prior-Year Balanc es Canc elled Authority Other Changes in Unobligated Balanc es  181  $  Appropriations  $  42  $  44  $  139  -  4,004  -  -  (32)  -  (32)  -  (48)  -  -  -  (48)  (4,046)  Unobligated Balanc e from Prior-Year Budget Authority , Net  44  4,022  18  -  (4,046)  -  -  109  12  -  12  109  79  -  -  -  79  Borrowing Authority  -  -  -  -  -  Spending Authority from Offsetting Collec tions  -  40  -  40  TOTAL BUDGETARY RESOURCES (Not e 11)  $  188  $  52  $  75  $  18  $  -  -  $  52  $  188  - $  18  $  75  STATUS OF BUDGETARY RESOURCES New Obligations and Upward Adjustments (Total)  $  Unobligat ed Balanc e, End of Y ear: Apportioned, Unexpired Ac c ounts Unapportioned, Unexpired Ac c ounts Unexpired Unobligated Balanc e, End of Year Expired Unobligated Balanc e, End of Year Unobligat ed Balanc e, End of Y ear (Tot al) TOTAL STATUS OF BUDGETARY RESOURCES  $  4  2  -  2  -  32  -  32  -  4  34  -  34  4  109  -  -  -  109  113  34  -  34  188  $  52  $  -  $  52  4  113 $  188  OUTLAY S, NET Outlay s, Net (Total)  2,290  Distributed Offsetting Rec eipts AGENCY OUTLAY S, NET  56  (50)  (15) $  2, 275  $  (50) $  2,226  (50)  (15) 2, 211  64  $  (50)  $  64  REQUIRED SUPPLEMENTARY INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  OTHER INFORMATION  57  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  58  REQUIRED SUPPLEMENTARY INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Section A – Payment Integrity Risk Assessment The central purpose of the Improper Payments Information Act of 2002 (IPIA, Pub. L. 107-300) is to enhance the accuracy and integrity of federal payments. To achieve this objective, IPIA provided an initial framework for federal agencies to identify the causes of and solutions for reducing improper payments. On July 22, 2010, the Improper Payments Elimination and Recovery Act of 2010 (IPERA, Pub. L. 111-204) was signed into law. IPERA amends IPIA, generally repealed the Recovery Auditing Act (31 USC §§3561-3567), and significantly increased agency payment recapture efforts by expanding the types of payments to be reviewed and lowering the dollar threshold of annual payments that require agencies to conduct payment recapture audit programs. Agencies continue to be required to review their programs and activities periodically to identify those susceptible to significant improper payments. OMB Circular No. A-123, Management’s  Responsibility for Enterprise Risk Management and Internal Control, Appendix C, “Requirements for Effective Estimation and Remediation of Improper Payments” (A-123, Appendix C), amended October 20, 2014, defines “significant improper payments” as gross annual improper payments in a program exceeding both the threshold of 1.5 percent and $10 million, or exceeding $100 million regardless of the improper payment percentage. A-123, Appendix C, also requires agencies to review all programs with annual payments of $1 million or more, if costeffective. OFS managers are held accountable for developing and strengthening financial management controls to detect and prevent improper payments, and thereby better safeguard taxpayer dollars. OTHER INFORMATION  OFS carried out its fiscal year 2019 IPERA review per Treasury-wide guidance and did not assess any programs or activities as susceptible to significant improper payments.  Recapture of Improper Payment Reporting In accordance with IPIA, as amended, and OMB Circular No. A-123, Appendix C, OFS performs and reports annually on its payment recapture program for all programs and payment activities that expend $1 million or more, including contracts, benefits, and other payment types. During fiscal year 2019, OFS reviewed administrative and program payments totaling approximately $1.5 billion. OFS does not have an improper payment recapture audit contingency contract or formal management improvement program in place. Instead, OFS performs both targeted postaward audits and improper payment recapture audits designed to identify erroneous payments, principally applying payment offsets for any identified erroneous payments. OFS has in place extensive annual audit and testing procedures to monitor administrative and program payments for errors. To date, these procedures have identified no significant erroneous payments or audit findings. More specifically, with respect to administrative payments, OFS works externally with the Treasury Fiscal Service – Administrative Resource Center and Internal Revenue Service – Office of Treasury Procurement Services (OTPS) to support payment recapture reporting. Fiscal Service processes OFS’s contract and administrative payments, including payments to OFS’s financial agents. OTPS solicits, negotiates, and awards contracts on behalf of OFS. Both organizations have extensive payment 59  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  recapture audit and improper payments reporting capabilities. OFS performs extensive payment recapture audit activities to identify erroneous incentive payments under the MHA program. OFS ensures that the Investor Reporting 2 (IR/2) system, the MHA system of record, is configured to calculate incentive payments in accordance with program guidelines based on data provided by servicers. The MHA program administrator performs a validation of all incentive payments which is then reconciled with OFS loan level payment and accounting files on a monthly basis. In addition, the MHA compliance agent performs sample-based post-award loan level reviews of MHA incentive payments to ensure validity in accordance with the MHA Program Handbook for Servicers of Non-GSE Mortgages and Supplemental Directives issued by Treasury. In conjunction with participating states’ HFAs, OFS also performs targeted payment recapture audit activities to detect and prevent erroneous payments under the HHF program. OFS reports annually improper payments identified through its recapture audit activities. Improper payments, recapture audit results, and disposition of recaptured funds are disclosed within the U.S. Department of the Treasury AFR. In  60  summary, OFS has a strong enterprise risk management and internal control environment in place to prevent, detect, and correct improper payments associated with its administrative and program payments.  IPERIA Do Not Pay Initiative The Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA, Pub. L. 112-248) was signed into law on January 10, 2013, and also amends IPIA. It is important to note that Section 5 of IPERIA, regarding the “Do Not Pay” Initiative, is treated separately from Circular No. A-136 reporting requirements. Fiscal Service partnered with the Saint Louis and Kansas City Federal Reserve Banks to operate the “Do Not Pay Business Center” as part of a government-wide “Do Not Pay” solution. OFS implemented the “Do Not Pay” solution in fiscal year 2013 to monitor administrative disbursements to ensure, to the extent permitted by law, a thorough review of available databases with relevant information on eligibility occurs before the release of any federal funds. To date, the Fiscal Service “Do Not Pay” Business Center has not identified any potential OFS improper payments. Additional “Do Not Pay” analysis is disclosed within the U.S. Department of the Treasury AFR.  OTHER INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Section B – Fraud Reduction and Data Analytics Act Overview of the Act  Reporting  Under the Fraud Reduction and Data Analytics Act of 2015 (FRDAA, P.L. 114-186, 31 USC 3321), each entity must disclose in its AFR information pertaining to its fraud reduction efforts undertaken during the fiscal year.  OFS has no confirmed fraud within its programs and activities.  These disclosures should include information on the entity’s progress in implementing:   financial and administrative controls pursuant to FRDAA;    the fraud risk principle in the Standards for Internal Control in the Federal Government; and    OMB Circular A-123 with respect to leading practices for managing fraud risk.  These disclosures should also include information on the entity’s progress in:   identifying risks and vulnerabilities to fraud (e.g., payroll, beneficiary payments, grants, large contracts, purchase and travel cards); and    establishing strategies, procedures, and other steps to curb fraud.  OTHER INFORMATION  OFS is subject to rigorous oversight. OFS’s Senior Assessment Team (SAT) routinely discusses risks, including those related to fraud, during its meetings. OFS’s operational and accounting process are well-documented and relatively mature, most having been established over nine years ago. These processes consider fraud risk principles outlined within the Standards for Internal Control in the Federal Government. The remaining TARP investments are steadily being liquidated through planned, wellcoordinated transactional events. There are established practices for initiating, approving, processing and recording payments to third parties, including those related to the TARP programs and for the TARP administration. During wind-down, OFS remains vigilant in ensuring its controls are adequate to prevent or detect fraud. OFS disclosures required under FRDAA are included within the U.S. Department of the Treasury Agency Financial Report.  61  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Section C – Reduce the Footprint Overview of the Memorandum  Reporting  Consistent with Section 3 of the OMB Memorandum M-12-12, Promoting Efficient Spending to Support Agency Operations, and OMB Management Procedures Memorandum 2015-01, the “Reduce the Footprint” implementation policy, all CFO Act entities must set annual targets to reduce the total square footage of their domestic inventory of office and warehouse space compared to the Fiscal Year 2015 baseline.  OFS disclosures required under the Memorandum are included within the U.S. Department of the Treasury AFR.  62  OTHER INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Additional TARP Historical Information Bank Support Programs CPP CPP was launched in October 2008 to help stabilize the financial system by providing capital to viable financial institutions of all sizes throughout the nation. OFS continues to winddown the remaining CPP investments through repayments by those institutions that are able to repay, restructurings and sales of common stock, where OFS’s investment shares were converted to common stock holdings. OFS received preferred stock or debt in each bank in which it made an investment, as well as warrants. Under the terms of the CPP, participating financial institutions were to repay the funds they received, with the approval of their regulators.  Targeted Investment Program OFS established the Targeted Investment Program (TIP) in December 2008. OFS invested a total of $40.0 billion in two institutions – Bank of America (BofA) and Citigroup – under the TIP. OFS completed the wind-down of the TIP in December 2009 when both BofA and Citigroup repaid their TIP investments in full. OFS received net proceeds of $4.4 billion in excess of disbursements.  Asset Guarantee Program Under the Asset Guarantee Program (AGP), TARP commitments were used to support two institutions – BofA and Citigroup. BofA, however, ultimately decided not to participate in this program and paid OFS a termination fee of $276 million. In January 2009, OFS, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) agreed to share potential losses on a $301.0 billion pool of  OTHER INFORMATION  Citigroup’s covered assets. As a premium for the guarantee to Citigroup, OFS received $4.0 billion of Citigroup preferred stock, which was reduced by $1.8 billion upon early termination of the agreement. OFS completed the wind-down of the AGP in February 2013, and received more than $4.1 billion in proceeds from the AGP without disbursing any claim payments.  Supervisory Capital Assessment Program In 2009, Treasury worked with federal banking regulators to develop a comprehensive “stress test” known as the Supervisory Capital Assessment Program (SCAP). The SCAP closed on November 9, 2009, without making any investments.  CDCI On February 3, 2010, OFS created the Community Development Capital Initiative (CDCI) to help viable certified Community Development Financial Institutions (CDFIs) and the communities they serve cope with effects of the financial crisis. Under this program, CDFI banks, thrifts, and credit unions received investments aggregating $570 million in capital with an initial dividend or interest rate of two percent. To encourage repayment while recognizing the unique circumstances facing CDFIs, the dividend rate increased to nine percent after eight years. For additional information on the bank support programs please visit the OFS website at: http://www.treasury.gov/initiatives/financialstability/TARP-Programs/bank-investmentprograms/Pages/default.aspx  63  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Credit Market Programs Public-Private Investment Program On March 23, 2009, OFS launched the Legacy Securities Public-Private Investment Program (PPIP) to help restart the market for non-agency residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS). OFS completed the wind-down of the PPIP during fiscal year 2015, with no debt or equity investments outstanding after the final equity repayment was made in June 2013.  Term Asset-Backed Securities Loan Facility The Term Asset-Backed Securities Loan Facility (TALF) was a joint OFS-Federal Reserve program that was designed to restart the markets for asset-backed securities (ABS) and CMBS, which had ground to a virtual standstill during the early months of the financial crisis. As of September 30, 2015, all TALF loans provided by Federal Reserve Bank of New York (FRBNY) had been repaid in full and the program closed. Since inception, accumulated income earned from investments in TALF, LLC totaled $685 million.  Small Business Administration 7(a) Securities Purchase Program OFS launched the Small Business Administration (SBA) 7(a) Securities Purchase Program to help facilitate the recovery of the secondary market for small business loans, and thus help free up credit for small businesses. Under this program, OFS purchased securities comprised of the guaranteed portion of SBA 7(a) loans, which finance a wide range of small business needs. OFS invested approximately $367 million in 31 SBA 7(a) securities between March and September 2010. Investments under the SBA 7(a) program were fully liquidated by January 2012, resulting in proceeds in excess of cost of $9 million. For additional information on the credit market programs, please visit the OFS website at: http://www.treasury.gov/initiatives/financialstability/TARP-Programs/credit-marketprograms/Pages/default.aspx  Automotive Industry Financing Program AIFP was launched in December 2008 to help prevent the disorderly liquidations of General Motors (GM) and Chrysler, which would have resulted in a significant disruption of the U.S. auto industry. Recognizing that both GM and Chrysler were on the verge of collapse, OFS disbursed $79.7 billion in loans and equity investments to GM, Chrysler, and General Motors Acceptance Corporation (now known as Ally Financial). To further maximize the recovery of TARP funds for taxpayers, OFS, along with Export Development Canada (EDC), which jointly financed administration of the General Motors  64  bankruptcy (Old GM), entered into a settlement with the Unsecured Creditors Committee of General Motors Corporation to split any proceeds of the AAT litigation, with OFS and EDC receiving 30 percent and the unsecured creditors receiving 70 percent. As a condition of the settlement, OFS and EDC provided an advance of $15 million ($13 million provided by OFS) in September 2016 to the AAT to fund the ongoing litigation against certain lenders to Old GM. This settlement yields the most favorable attainable economic outcome to ensure OFS is repaid some portion of any assets recovered through the pending lawsuit.  OTHER INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Recoveries from the bankruptcy liquidation of Old GM remains possible. For additional information on the AIFP, please visit the OFS website at:  http://www.treasury.gov/initiatives/financialstability/TARP-Programs/automotiveprograms/Pages/default.aspx  American International Group, Inc. Investment Program In 2008, AIG facing potentially fatal liquidity problems and with the crisis threatening to intensify and spread more broadly throughout the economy, Treasury and FRBNY provided assistance to AIG. In December 2012, Treasury exited all remaining holdings in AIG through the sale of common stock and AIG’s repurchase of warrants. During the financial crisis, the Treasury’s and the FRBNY’s peak support for AIG totaled $182.3 billion. That included $69.8 billion in TARP funds that OFS committed and $112.5 billion committed by the FRBNY, including $22.1 billion in commitments which were later cancelled. As a result of the combined efforts of AIG, Treasury, and the FRBNY, $22.7 billion in excess of the total of funds disbursed were recovered through sales and other income.  OFS’s cumulative net proceeds from repayments, sales, dividends, interest, and other income related to AIG assets totaled $55.3 billion. While TARP recovered less than its $67.8 billion total investment, this was offset by the proceeds from the additional Treasury shares of AIG, resulting in overall proceeds in excess of disbursements of $5.0 billion for Treasury as a whole. For additional information on the AIG Investment Program, please visit the Office of Financial Stability website at: http://www.treasury.gov/initiatives/financialstability/TARP-Programs/aig/Pages/default.aspx  Housing Programs MHA In early 2009, OFS launched MHA to help struggling homeowners avoid foreclosure and stabilize the housing market. MHA is aimed at helping homeowners experiencing financial hardships to remain in their homes until their financial position improves or they relocate to a more sustainable living situation. At the same time, MHA protects the interests of taxpayers by disbursing funds only when transactions are completed and only as long as contracts remain in place. The cornerstone of MHA is HAMP which provides eligible homeowners the opportunity to reduce their monthly mortgage payments to  OTHER INFORMATION  more affordable and sustainable levels to avoid foreclosure. In addition to HAMP, OFS introduced programs under MHA to help homeowners who are unemployed, “underwater” on their loan (i.e., those who owe more on their home than it is currently worth), or are struggling with a second lien. MHA also includes options for homeowners who would like to transition to a more affordable living situation through a short sale or deed-in-lieu of foreclosure. The Act provided that MHA would terminate on December 31, 2016, except with respect to certain loan modification applications made before such date. As set forth in program guidelines, MHA servicers were required to  65  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  evaluate applications submitted before the deadline and offer trial modifications to eligible applicants. All MHA transactions, including first and second lien permanent modifications, short sales or deeds-in-lieu of foreclosure, and unemployment forbearance plans, were required to be completed per program guidelines by December 1, 2017. At this point, MHA is in a steady state until final incentives on existing modifications are paid per program requirements. MHA has set new standards for mortgage assistance and consumer protection, which have contributed to millions of homeowners receiving assistance to avoid foreclosure through other government programs and proprietary mortgage modifications. In addition to HAMP, MHA includes programs to help homeowners address specific types of mortgages, in conjunction with FHA and the United States Department of Agriculture (USDA).  HHF HHF was established in February 2010 to provide targeted aid to homeowners in states hit hardest by the economic and housing market downturn. In an effort to restore stability to housing markets, HHF provides funding for state Housing Finance Agencies (together with the eligible entities, collectively “HFAs”) to develop locally-tailored foreclosure prevention solutions in areas that have been hardest hit by home price declines and high unemployment. In total, $9.6 billion in HHF funds has been allocated among 18 states and the District of Columbia.  66  HHF programs vary state to state, but may include such programs as mortgage payment assistance for unemployed or underemployed homeowners, reinstatement to bring homeowners current on their mortgage or property taxes, principal reduction to help homeowners modify or refinance into more affordable mortgages, funding to eliminate homeowners’ second lien loans, funding for blight elimination activities, funding for down payment assistance to homebuyers, and help for homeowners who are transitioning out of their homes into more affordable living situations.  Support for FHA Refinance Program In March 2010, enhancements were made to an existing FHA program that permitted lenders to provide additional refinancing options to homeowners who owe more than their homes are worth because of large declines in home prices in their local markets. This program, known as the FHA Refinance Program, was intended to provide more opportunities for qualifying mortgage loans to be restructured and refinanced into FHA-insured loans. On December 31, 2016, the application period for the FHA Refinance Program ended. For additional information on the housing programs, please visit the OFS website at: http://www.treasury.gov/initiatives/financialstability/TARPPrograms/housing/Pages/default.aspx  OTHER INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  TARP Glossary Asset-Backed Security (ABS): A financial instrument representing an interest in a pool of other assets, typically consumer loans. Most ABS are backed by credit card receivables, auto loans, student loans, or other loan and lease obligations. Agency Financial Report (AFR): This report provides an overview of the programs, accomplishments, challenges, and management’s accountability for the resources entrusted to the agency. The report is prepared in accordance with the requirements of the OMB Circular A-136, Financial Reporting Requirements. Asset Guarantee Program (AGP): A TARP program under which OFS, together with the Federal Reserve and the FDIC, agreed to share losses on certain pools of assets held by systemically significant financial institutions that faced a high risk of losing market confidence due in large part to a portfolio of distressed or illiquid assets. Automotive Industry Financing Program (AIFP): A TARP program under which OFS provided loans or equity investments in order to avoid a disorderly bankruptcy of one or more auto companies that would have posed a systemic risk to the country’s financial system. Capital Purchase Program (CPP): A TARP program pursuant to which OFS invested in preferred equity securities and other securities issued by financial institutions. Commercial Mortgage-Backed Securities (CMBS): A financial instrument representing an interest in a commercial real estate mortgage or a group of commercial real estate mortgages. Community Development Capital Initiative (CDCI): A TARP program that provides lowcost capital to Community Development Financial Institutions to encourage lending to small businesses and help facilitate the flow of  OTHER INFORMATION  credit to individuals in underserved communities. Community Development Financial Institution (CDFI): A financial institution that focuses on providing financial services to low- and moderate- income, minority and other underserved communities, and is certified by the CDFI Fund, an office within OFS that promotes economic revitalization and community development. Consolidated Appropriations Act, 2016: The law which included provisions that i.) the MHA program will terminate on December 31, 2016, except with respect to certain loan modification applications made before such date and ii.) provided Treasury authority to commit an additional $2.0 billion in TARP funds to the HHF program. Debtor-In-Possession (DIP): A debtor-inpossession in U.S. bankruptcy law has filed a bankruptcy petition but still remains in possession of its property. DIP financing usually has priority over existing debt, equity and other claims. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act): The law that limited Treasury’s authority to purchase or guarantee troubled assets to a maximum of $475.0 billion. Emergency Economic Stabilization Act (EESA): The law that created the Troubled Asset Relief Program (TARP). Government Sponsored Enterprises (GSEs): Private corporations created by the U.S. Government. Fannie Mae and Freddie Mac are GSEs. Hardest Hit Fund (HHF): A TARP program to help 18 hardest hit states, plus the District of Columbia, to develop locally-tailored programs to assist struggling homeowners in their communities.  67  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  Home Affordable Modification Program (HAMP): A TARP program OFS established to help struggling, homeowners reduce their mortgage payments to affordable and sustainable levels and avoid foreclosure.  Qualifying Financial Institution (QFI): Private and public U.S.-controlled banks, savings associations, bank holding companies, certain savings and loan holding companies, and mutual organizations.  Housing Finance Agencies (HFAs): Statecharted authorities established to help meet the affordable housing needs of the residents of their states.  Residential Mortgage-Backed Securities (RMBS): A financial instrument representing an interest in a group of residential real estate mortgages.  Legacy Securities: CMBS and non-agency RMBS issued prior to 2009 that were originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations without ratings enhancement and that are secured directly by actual mortgage loans, leases or other assets and not other securities.  Small Business Administration (SBA) 7(a) Securities Purchase Program: A TARP program under which OFS purchased securities backed by the guaranteed portions of the SBA 7(a) loans.  Making Home Affordable (MHA): A comprehensive plan to stabilize the U.S. housing market and help struggling homeowners reduce their monthly mortgage payments to more affordable levels and avoid foreclosure. HAMP is part of MHA. Non-Agency Residential Mortgage-Backed Securities: RMBS that are not guaranteed or issued by Freddie Mac, Fannie Mae, any other GSE, Ginnie Mae, or a U.S. federal government agency. Preferred Stock: Equity ownership that usually pays a fixed dividend and gives the holder a claim on corporate earnings superior to common stock owners. Preferred stock also has priority in the distribution of assets in the case of liquidation of a bankrupt company. Public-Private Investment Program (PPIP): A TARP program designed to support the secondary market in mortgage-backed securities. The program is designed to increase the flow of credit throughout the economy by partnering with private investors to purchase Legacy Securities from financial institutions.  68  Servicer: An administrative third party that collects mortgage payments, handles tax and insurance escrows, and may even bring foreclosure proceedings on past due mortgages for institutional loan owners or originators. The loan servicer also generates reports for borrowers and mortgage owners on the collections. Targeted Investment Program (TIP): A TARP program created to stabilize the financial system by making investments in institutions that are critical to the functioning of the financial system. Term Asset-Backed Securities Loan Facility (TALF): A program under which the Federal Reserve Bank of New York made term nonrecourse loans to buyers of AAA-rated AssetBacked Securities in order to stimulate consumer and business lending. Troubled Asset Relief Program (TARP): The Troubled Asset Relief Program, which was established under EESA to stabilize the financial system and help prevent a systemic collapse. Warrant: A financial instrument that represents the right, but not the obligation, to purchase a certain number of shares of common stock of a company at a fixed price.  OTHER INFORMATION  AGENCY FINANCIAL REPORT | FISCAL YEAR 2019  Contact Information Department of the Treasury – Office of Financial Stability 1500 Pennsylvania Avenue NW Washington, DC 20220 Telephone 202-622-2000 | Treasury Press Office 202-622-2960  Website Information Treasury ........................................................................................................................... www.treasury.gov Office of Financial Stability ............................................................................. www.financialstability.gov Making Home Affordable Program........................................................ www.makinghomeaffordable.gov  Additional References TARP Programs .................... www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx TARP Reports ....................................... www.treasury.gov/initiatives/financial-stability/reports/Pages/default.aspx TARP Tracker .......................... www.treasury.gov/initiatives/financial-stability/reports/Pages/TARP-Tracker.aspx Financial Reports ....... www.treasury.gov/initiatives/financial-stability/reports/Pages/Annual-Agency-Financial-Reports.aspx  OTHER INFORMATION  69  THE DEPARTMENT OF THE TREASURY | OFFICE OF FINANCIAL STABILITY  WWW.FINANCIALSTABILITY.GOV 70  OTHER INFORMATION