FHFA proposes dropping reputational harm from counterparty suspensions

The Federal Housing Finance Agency (FHFA) has proposed removing "reputational harm" as a criterion for suspending firms and individuals that conduct business with Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In a notice of proposed rulemaking published in the Federal Register, the agency indicated that this change would eliminate redundancy and ensure that counterparty oversight is based on "material and measurable risks."

If finalized, the FHFA would issue a suspension order only when covered misconduct is likely to cause significant financial harm to a regulated entity or jeopardize its safe and sound operations. The agency noted that its experience administering the Suspended Counterparty Program suggests the reputational-harm standard is unnecessary and introduces subjectivity. The FHFA believes that misconduct severe enough to be considered "covered" inherently implies financial risk or a safety-and-soundness concern, making an additional reputational test duplicative.

The proposal also aims to bring the FHFA's approach more in line with other federal banking regulators, such as the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Furthermore, the agency stated that the change aligns with administration directives to reduce regulatory burdens and focus enforcement on statutory powers. Public comments on the proposed rule are due on or before August 12.