What FHFA’s counterparty suspension change may mean

The Federal Housing Finance Agency is proposing a change that would remove certain criteria for counterparty suspension while maintaining a focus on triggers related to credit, market and operational concerns.

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The proposal seeks to remove “reputational harm” from as a trigger because it “potentially diverts agency resources from more salient risks without adding material value from a safety and soundness perspective,” according to the FHFA.

The change, which is in line with a similar one by other regulators, is significant for mortgage businesses that work with Fannie Mae, Freddie Mac or the Federal Home Loan Banks because suspensions threaten livelihoods.

“An SCP suspension is functionally a death sentence for any firm whose business runs through the enterprises,” Tim Rood, founder and CEO of compliance automation firm Impact Capitol, wrote in a recent newsletter.

Political origins

President Trump has been interested in weeding out language around “reputational” risk because of his interest in preventing debanking for political or religious reasons, and the FHFA proposal mirrors a recent bank action to that end.

The FHFA says its proposal specifically is a follow-on to actions taken by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and National Credit Union Administration in response to an executive order against debanking last year.

“FHFA is not a federal banking regulator as contemplated by the executive order, however, FHFA is aligning with other financial regulatory agencies to promote consistency,” General Counsel Clinton Jones wrote in the proposal.

FHFA Director Bill Pulte has broadly advocated for many of President Trump’s policies.

Industry implications

The proposed narrowing of the suspended counterparty criteria contrasts past efforts to expand the parameters that the Mortgage Bankers Association and other groups opposed. Plans for this were withdrawn after a reproposal in 2024.

“MBA has long viewed suspension as a remedy that should be reserved for the most serious transgressions,” said Pete Mills, senior vice president of residential policy and strategic industry engagement, in an email.

Mills added that the association is “pleased that FHFA is continuing to improve the regulation,” and will decide whether to file a formal comment letter after staff and members review the proposal more closely. 

The proposal, while simple on its face, does have some ramifications for businesses worth thinking through, according to some early reports weighing in on it.

“The shift is procedural on the surface, substantive beneath it,” according to executive intelligence platform Palanor. 

Palanor generally concluded in its initial review of the proposal that the plan would require FHFA to focus primarily on quantifiable concerns when considering withdrawing counterparties’ approvals.

“By eliminating ‘reputational harm’ as a basis for suspension, FHFA is narrowing its supervisory discretion to material and measurable risks,” Palanor wrote.

That means counterparties facing potential suspensions could have more recourse, according to Rood.

“Anchoring suspensions to material, measurable financial risk gives a targeted counterparty a more concrete standard to contest on appeal — and removes the catch-all category that was hardest to rebut,” he said.

However, some legal experts have shown concern that moves aimed at preventing debanking could have complicated interactions with anti-money laundering rules, which FHFA works with the Financial Crimes and Enforcement Network to address.

The agency’s watchdog has found some room for improvement in its work with FinCen last year and FHFA subsequently agreed to its investor general’s recommendations to beef up efforts in this area.

While the Trump administration has called for more policing of international transactions, it’s called for a more streamlined approach to some other aspects of AML regulation.

FHFA will be accepting comments on the proposed change to its suspended counterparty criteria until Aug. 12.