WASHINGTON — America’s Credit Unions is supporting a Federal Housing Finance Agency proposal to eliminate “reputational harm” as an independent basis for suspending counterparties, arguing the change would make regulatory decisions more objective while preserving the agency’s ability to address fraud and other serious misconduct.
In an Aug. 12 comment letter to the FHFA, America’s Credit Unions said the proposed changes to the agency’s Suspended Counterparty Program would better align the program with objective, risk-based supervisory standards.
The trade group, which represents credit unions serving more than 146 million members nationwide, said removing reputational harm from the program would not prevent the FHFA from taking action against counterparties that present financial, operational or safety-and-soundness risks.
“Removing reputational harm would preserve FHFA’s ability to address serious counterparty misconduct while ensuring suspension decisions are grounded in measurable financial, operational, and safety-and-soundness risks,” Tyler Maron, regulatory advocacy counsel for America’s Credit Unions, said in the letter.
The Suspended Counterparty Program allows the FHFA to identify and suspend individuals and entities from doing business with its regulated entities based on certain types of misconduct.
Reputation Standard is ‘Redundant’
America’s Credit Unions agreed with the FHFA’s conclusion that removing reputational harm from the program would not diminish the agency’s ability to identify counterparties that pose legitimate risks.
The trade group said reputational concerns rarely exist by themselves and are typically the result of underlying misconduct that already produces financial losses, legal exposure, operational problems or safety-and-soundness concerns.
Misconduct covered by the program includes fraud, embezzlement, theft, forgery, perjury and false statements related to mortgage transactions. America’s Credit Unions said those activities can lead to:
- Direct financial losses.
- Legal liability.
- Operational disruptions.
- Weakened risk-management controls.
- Broader safety-and-soundness concerns.
Those risks are already addressed by the program’s financial harm and safety-and-soundness standards, the trade group said, making a separate reputational-harm test largely duplicative.
“For credit unions, eliminating this redundant element streamlines the SCP while preserving FHFA’s ability to identify and suspend counterparties that pose legitimate risks to regulated entities,” America’s Credit Unions said.
Concerns About Subjectivity
The organization also argued that reputation risk is inherently more subjective than other risks considered by financial regulators.
Unlike financial losses, operational failures or safety-and-soundness concerns, reputational harm can be difficult to define, measure and apply consistently across different institutions and circumstances, the group said.
Eliminating the standard would provide regulated institutions with greater predictability by ensuring enforcement actions are tied to demonstrable risks rather than potentially differing assessments of reputational damage, according to the letter.
America’s Credit Unions said credit unions benefit from a clear framework that allows them to know suspension decisions are based on material threats to safety and soundness rather than subjective judgments.
Aligning FHFA With Other Regulators
The trade group also said the FHFA proposal would bring the agency into greater alignment with other federal financial regulators that have moved away from treating reputation risk as a standalone supervisory concern.
America’s Credit Unions specifically cited the National Credit Union Administration, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., saying those regulators have recently emphasized underlying financial, operational, compliance and safety-and-soundness risks rather than reputation risk itself.
That consistency is particularly important for credit unions because they can operate under overlapping regulatory requirements and interact with multiple federal regulators, the group said.
“When agencies apply similar supervisory and risk frameworks, institutions can more easily understand, implement, and comply with regulatory requirements,” America’s Credit Unions said.
Reducing ‘Uncertainty’
The trade group said aligning the FHFA program with the broader regulatory shift toward objective, risk-based supervision would reduce uncertainty and the compliance challenges created by differing supervisory and enforcement standards.
America’s Credit Unions said the FHFA proposal strikes the appropriate balance between maintaining the agency’s authority to act against serious misconduct and providing counterparties with a more predictable regulatory framework.
“The proposal appropriately preserves FHFA’s ability to address serious counterparty misconduct while promoting a more objective, consistent, and risk-based supervisory framework,” the trade group said.
