Banking and Finance Law Daily Wrap Up, GOVERNMENT SPONSORED ENTERPRISES—FHFA proposes removing ‘reputational harm‘ from suspended counterparty rule, (Jul 10, 2026)

By Shashi Kant, BALLB, LLM

The proposal would narrow the suspension standard to financial harm and safety-and-soundness risk.

The Federal Housing Finance Agency (FHFA) has proposed amending its Suspended Counterparty Program regulation by removing the term “reputational harm.” The agency said the change would eliminate redundancy and confirm that its supervision of counterparty risk is based on material and measurable risks. Comments are due August 12, 2026.

Suspended Counterparty Program. The Suspended Counterparty Program requires Fannie Mae, Freddie Mac, their affiliates, and the Federal Home Loan Banks to report to FHFA when they become aware that an individual or institution with which they do or have done business has been found within the past three years to have committed covered misconduct. FHFA may issue proposed suspension orders based on reports from regulated entities, referrals from the FHFA Office of Inspector General, or other information. Affected counterparties and regulated entities may respond to proposed suspension orders, and affected counterparties may appeal final suspension orders to the FHFA Director.

Under the current rule, FHFA may issue a final suspension order if the record shows that the underlying misconduct is of a type likely to cause significant financial or reputational harm to a regulated entity or otherwise threaten the safe and sound operation of a regulated entity. A final suspension order directs the regulated entities to stop or refrain from doing business with the suspended individual or institution.

Covered misconduct. The proposed rule would not change the definition of covered misconduct. The regulation defines covered misconduct to include a conviction or administrative sanction within the past three years if the basis of the action involved fraud, embezzlement, theft, conversion, forgery, bribery, perjury, making false statements or claims, tax evasion, obstruction of justice, or a similar offense, in each case in connection with a mortgage, mortgage business, mortgage securities, or other lending product. FHFA said its experience implementing the program shows that the reputational-harm reference is unnecessary. According to the agency, covered misconduct already inherently involves a risk of financial harm or a potential threat to the safety and soundness of the regulated entities. For example, FHFA said a counterparty convicted of fraud in connection with a mortgage security inherently presents a risk of financial harm.

Reason for amendment. FHFA said that eliminating reputational harm would not allow counterparties that committed covered misconduct to avoid suspension, because those counterparties would still meet the financial-harm or safety-and-soundness prong. The agency also said the concept of reputational harm can increase subjectivity and uncertainty in regulation. Although FHFA said it recognizes the importance of the regulated entities’ reputations, it said most activities that could harm reputation do so through traditional risk channels, such as credit risk, market risk, or operational risk. According to FHFA, focusing on reputational harm may divert agency resources from more direct risks without adding material value from a safety-and-soundness perspective. The proposed rule would remove the words “or reputational” wherever they appear in 12 C.F.R. part 1227. The amended standard would allow FHFA to act where covered misconduct is likely to cause significant financial harm to a regulated entity or otherwise threaten the safe and sound operation of a regulated entity.

Alignment with other regulators. FHFA said the amendment would align the agency with other financial regulators that are removing reputation risk from supervisory programs and regulations. The proposal cites actions by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration to remove or propose removing reputation risk from supervisory materials or programs. FHFA also noted that Executive Order 14331 directed federal banking regulators to remove the use of reputation risk or equivalent concepts from guidance documents, manuals, and other materials used to regulate or examine financial institutions. FHFA said it is not a federal banking regulator covered by that order but is aligning with other financial regulatory agencies to promote consistency.

Regulatory impact. FHFA said the proposal would not contain an information collection requiring Office of Management and Budget approval under the Paperwork Reduction Act. The agency also certified that the proposal would not have a significant economic impact on a substantial number of small entities because it applies only to FHFA-regulated entities, which are not small entities for Regulatory Flexibility Act purposes. The Office of Management and Budget determined that the proposed rule is a significant regulatory action under Executive Order 12866, but not an economically significant regulatory action. FHFA said the proposal, if finalized, is not expected to be an Executive Order 14192 regulatory action.

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