A re-proposal made this week by the Federal Housing Finance Agency (FHFA) to change to the Suspended Counterparty Program (SCP) tones down some initially proposed stern measures, reflecting concerns brought up by the lending industry.
The FHFA originally established the SCP in 2012 to protect regulated entities — Fannie Mae, Freddie Mac, the Federal National Mortgage Association and the Federal Home Loan Banks — from parties with a history of fraud or certain other forms of financial misconduct. The SCP requires any regulated entity to report to the FHFA if any party it does business with has committed certain types of misconduct in the last three years.
If it is deemed necessary, the FHFA can suspend these parties, labeled as “counterparties” in the text of the SCP, from doing business with regulated entities.
In July last year, the FHFA proposed adding more types of misconduct to be covered under the SCP. For example, the original text of the SCP defines covered misconduct as administrative sanctions and convictions, but defined “conviction” as limited solely to judgments of guilt of criminal offense. Arguing that counterparties that have committed misconduct in the context of civil enforcement actions propose just as much risk (even though their conduct may not have risen to the level of criminal sanction), the July 2023 proposal broadened the definition of “conviction” to include judgments in civil matters as well. The proposal also sought to include findings that a counterparty knowingly committed a material breach of contract as grounds for suspension.
Additionally, the July proposal sought to permit the FHFA to issue an immediate suspension order (without first issuing a proposed suspension order) in certain cases, such as when the counterparty’s misconduct resulted in an administrative sanction by a federal agency.
Such propositions raised concerns within the lending world, leading to the Mortgage Bankers Association (MBA), the American Bankers Association and the Independent Community Bankers of America to issue a joint letter to the FHFA last September. The groups argued that broadening the proposed list of misconduct covered by the SCP constituted a “dramatic expansion of FHFA’s authority to suspend entities” without any specific evidence of risk or harm to the government-sponsored enterprises. The proposal, the groups asserted, “exposes lenders and servicers to a draconian remedy” in response to potentially low-level civil or contractual violations.
Those groups weren’t the only ones opposed to the suggested changes; the FHFA noted that it received seven comment letters expressing “strong opposition” to the proposed rule.
In response, the FHFA removed the recommendation of an immediate suspension from its re-proposal this week. And while the new proposal still aims to broaden the SCP’s definition of misconduct to include civil actions and prohibition orders, the scope of such additions would be limited only to orders from certain Federal agencies and, where applicable, only when agencies have imposed civil penalties of at least $1 million.
“Amending the Suspended Counterparty Program will help strengthen FHFA’s ability to protect its regulated entities from risks presented by other businesses that engage in misconduct,” said Sandra L. Thompson, director of the FHFA. “FHFA has carefully reviewed the feedback from stakeholders in developing this re-proposal, which will better ensure the regulated entities’ safety and soundness so they continue to serve as a reliable and stable source of liquidity for the U.S. housing finance system.”
Bob Broeksmit, president and CEO of the MBA, lauded the FHFA for its adjustments to the proposal.
“A re-proposal is a smart move,” Broeksmit said, “and we commend FHFA for its receptiveness to our strong opposition to the initial proposal, which would have punished counterparties for potentially minor civil or administrative sanctions.
“The re-proposal appears to address some of MBA’s significant concerns outlined in our joint comment letter. We are pleased to see the elimination of the proposed immediate suspension order, refinements that preserve due process, and a narrowing of the application of the SCP to violations of a certain magnitude or gravity.”
