FHFA moves to drop ‘reputational harm’ from consideration in counterparty suspensions

The Federal Housing Finance Agency (FHFA) wants to drop “reputational harm” as a basis for suspending firms and individuals that do business with Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

In a notice of proposed rulemaking published Monday in the Federal Register, the agency said removing the reputational-harm standard would “eliminate redundancy” and reinforce that counterparty oversight should rest on “material and measurable risks.”

If finalized, FHFA would issue a suspension order only when covered misconduct is likely to cause significant financial harm to a regulated entity or threaten its safe and sound operations. Comments are due on or before Aug. 12.

The Suspended Counterparty Program requires the government-sponsored enterprises (GSEs) to report when they learn that a counterparty has been convicted of, or administratively sanctioned for, certain types of misconduct tied to mortgages, mortgage securities or other lending products within the past three years.

FHFA can initiate a proposed suspension based on these reports, referrals from the FHFA’s Office of Inspector General or other information. A final suspension order directs the regulated entities to stop doing business with the suspended party, and respondents may appeal to the FHFA director.

Under the current rule, FHFA may issue a final order if the record shows the misconduct is likely to cause “significant financial or reputational harm” to a regulated entity, or otherwise threatens safe and sound operations.

Covered misconduct includes fraud, embezzlement, theft, conversion, forgery, bribery, perjury, false statements or claims, tax evasion, obstruction of justice, and similar offenses when connected to mortgage or other lending activity.

FHFA said its experience, administering the program shows the reputational-harm prong is unnecessary and adds subjectivity. In the agency’s view, misconduct severe enough to qualify as “covered” already implies financial risk or a safety-and-soundness concern—making an additional reputational test duplicative.

The proposal would also bring FHFA’s approach closer to that of other federal banking regulators, including the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC).

FHFA said the change aligns with administration directives to reduce regulatory burdens, focus enforcement on clearly authorized statutory powers, and use public and private resources more prudently.

This article was written by Flávia Furlan Nunes and generated with the assistance of HousingWire Automation, then reviewed by a HousingWire editor before publication.