MBA, FHLBanks back FHFA plan to drop 'reputational harm' rule

Most of the comments on the Federal Housing Finance Agency's proposal to remove "reputational harm" as a reason to put people on its suspended counterparties list were in favor of the change.

However, one early commenter strongly opposed the move.

"Removing 'reputational harm' from the covered misconduct sends a message that the FHFA has no interest in helping regulated entities protect their reputation from bad actors," said the comment filed on July 16 from Brian Mariner, who did not provide any affiliation.

"It's difficult to see how this change will be anything but harmful to regulated entities and the housing finance industry as a whole, and helpful to would-be bad actors," Mariner wrote.

The other six comments were generally in favor of the notice of proposed rulemaking issued in July. The comment period expired Aug. 12.

Trump Administration officials have commented negatively on the use of reputational risk in regulation. 

The Mortgage Bankers Association called the use of reputational harm in the standard to put an individual or entity on the list as a redundancy to the other portions of the rule which address financial harm or safety and soundness.

"Eliminating reputational harm should not cause counterparties that committed covered misconduct to avoid suspension because those counterparties would still meet the financial harm or safety and soundness risk criteria," said the MBA letter signed by Justin Wiseman, vice president, residential policy and managing regulatory counsel.

If, somehow the conduct did not cause any financial harm or create a safety and soundness issue, "the lens of reputational harm would be too subjective and ill-defined, leading to ambiguous suspension determinations that cannot be supported by material or measurable risks," Wiseman said.

The Defense Credit Union Council added that subjectivity allows for regulators to apply inconsistent standards in the examination and enforcement process.

"Removing this provision improves the regulation's clarity and transparency and aligns the FHFA with other financial regulators, such as credit unions' primary regulator, the National Credit Union Administration, which issued a notice of proposed rulemaking to codify the elimination of 'reputation risk' from its supervisory program," said Jason Stverak, DCUC chief advocacy officer.

The Council of Federal Home Loan Banks, with the unanimous support of the 11 institutions, also filed a letter in support of the change. These institutions are regulated by the FHFA.

"The NPR appropriately notes that most activities that could negatively impact a regulated entity's reputation do so through the traditional risk channels FHFA closely monitors," said Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks. "As a result, reputational harm serves as a duplicative consideration that does not materially enhance the effectiveness of the program."

America's Credit Unions also argued the proposal creates regulatory consistency.

"Providing a clear and transparent framework for suspension decisions gives our members greater confidence and certainty that enforcement actions will be grounded in material safety and soundness threats rather than subjective assessments," said Tyler Maron, regulatory advocacy counsel.

The suspended counterparty list currently consists of 241 names, with the vast majority being suspended indefinitely.

Of the 82 with an end date to their suspension, three will come off the list later this month, one in October and one in December.

The most recent additions, five individuals, were put on the list on July 29.

So far this year, 40 individuals or companies were added to the list.

This was just the latest in regulatory requests for comment. Earlier this month, the comment period for the Consumer Financial Protection Bureau's request for information on the TILA/RESPA Integrated Disclosures ended, as well as for the Department of Housing and Urban Development on manufactured housing.