Managing Reputation Risk

Gary Peterson is president of IMAG and the developer of innovative reputation risk solutions. He is an expert in identifying regulatory risk within financial institutions and in designing effective controls and programs to lessen these risks. Jeff Naimon is a partner of the law firm Buckley Kolar, with expertise in mortgage banking and mortgage servicing. IMAG has joined forces with Buckley Kolar, to provide solutions for organizations to effectively manage their reputation risk.

It's hard to imagine an industry that has had to cope with more reputation risk issues than mortgage servicing firms in the subprime market. Today, this "mother of all risks" has captured the full attention of corporate leaders, product heads, regulators, investors, the plaintiff's bar, consumer advocates and, of course, consumers themselves. Reputation risk strikes hard, fast and with maximum destructive effect, taking along with it profits, hard-won business franchise and ultimately, careers. Everyone is demanding that action be taken, but what can really be done to guard against a risk that few understand?

Reputation risk affects every part of the industry and every organization. Consider a few recent situations: FAMCO - brought down by AARP, the FTC, state attorneys general and private plaintiff lawyers. CitiFinancial - settled allegations for over $200 million, with the FTC. Household - settled joint state attorneys general case for just under $500 million and sold company to HSBC. Fairbanks - FTC investigations prompted by congressional and media attention led to major ratings downgrades, loss of business and severe reputational harm.

Now there are new anti-predatory lending laws to contend with, coupled with an imminent fair lending "explosion" brought on with the coming release of the Home Mortgage Disclosure Act subprime pricing data. Potential reputation risk issues are bearing down with freight-train speed.

But reputation risk seems too broad and complex to manage. Too many issues can give rise to too much risk. With restrictions on so many fees, revenues are down and budgets are tighter. One bad event can undo years and even decades of progress and hard work. Where should the focus and priority be? What are applicable best practices? How can your organization avoid being "next"?

Here is a brief Q&A to give your team some guidance in this complex new world:

Q: Can reputation risk be defined?

A: Yes. Reputation risk arises when a situation, occurrence, business practice or event has the potential to materially influence the public and stakeholder's perceived trust and confidence in an institution, resulting in a measurable, negative impact on financial performance on a short- or long-term basis.

Q: Reputation risk is a very broad term. Can it be broken down into subrisks?

A: Yes. Reputation risk comprises three areas:

Inherent Risk - Risks that arise from, or are an intrinsic feature of, products and services (or their delivery) and which negatively impact market and customer satisfaction. For example, would you take your car back to a garage that didn't fix it?

Environmental Risk - Risks that arise from the way business is conducted (e.g. geographic, industrial, political, societal, etc.), while unrelated to the quality of the products or services, can negatively impact market and customer brand or franchise acceptance. For example, Halliburton, a top energy company that appears mired in political allegations.

Governance & Control Risk - Risks that arise from losses as a result of inadequate or failed internal processes, people, systems and losses caused by an organization's failure to adopt or adhere to applicable laws, regulation rules, codes, industry standards or practices. These losses negatively impact the market and customer's perception of institutional integrity. Events come rapidly to mind - Enron, Tyco, WorldCom, Boeing, Citibank and Fairbanks.

Q: What are the essential components to managing our company's reputation risk?

A: Your organization must address three components:

Issue Identification - identifying key risk issues and potential reputation risk events across all products, services and operations. This requires substantial subject matter/industry expertise in mortgage servicing and the utilization of an accepted analysis methodology.

Impact Measurement - since not every risk issue gives rise to reputation risk, it is critical to utilize an empirically based, risk assessment methodology to proactively isolate those issues most capable of giving rise to reputation risk events.

Impact measurement requires independent, experienced risk analysis. Indep-endence ensures that the risk review is totally objective and is free to focus on all product, service and cross-organizational areas. Risk expertise is critical, because of the complexity of the reputation risk area.

Risk Reduction - appropriate risk responses and targeted solutions must be implemented to control and mitigate potential reputation risk issues. These solutions include the development of specific metrics and controls, the development of an enterprisewide reputation risk database, staff training and prompt escalation procedures.

While reputation risk is difficult to proactively manage, organizations that meet the challenge realize the highest dividends. The organization that looks deep within it is able to generate exceptional customer satisfaction, market acceptance, and institutional integrity - the hallmarks of success. Copyright 2005 SourceMedia, Inc. All Rights Reserved. http://www.sourcemedia.com http://www.mortgageservicingnews.com