Samantha: Hello, this is Samantha Shares.
This episode covers N C U Aâs proposed rule to eliminate reputation
risk from its supervisory program.
The following is an audio version of that proposal.
This podcast is educational and is not legal advice.
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And now the proposal.
Summary
The National Credit Union Administration Board (Board) is issuing a notice
of proposed rulemaking to codify the elimination of reputation
risk from its supervisory program.
Among other things, the proposed rule would prohibit the agency from
criticizing or taking adverse action against an institution, defined as an
entity for which the N C U A makes or will make supervisory determinations
or other decisions, either solely or jointly on the basis of reputation risk.
The proposed rule would also prohibit the agency from requiring, instructing,
or encouraging an institution to close an account, to refrain from providing an
account, product, or service, or to modify or terminate any product or service on the
basis of a person or entityâs political, social, cultural, or religious views
or beliefs, constitutionally protected speech, or on the basis of politically
disfavored but lawful business activities perceived to present reputation risk.
Supplementary Information
I.
Background and Policy Objectives
Citing reputation risk as a basis for supervisory criticisms can lead to
inconsistency and subjectivity in the examination and supervision process,
without adding material value from a safety and soundness perspective.
To improve the efficiency and effectiveness of the examination
and supervision program, the N C U A has removed reputation risk from its
supervisory framework and is proposing to codify this change through regulation.
These actions align with the requirements in Executive Order 14331, Guaranteeing
Fair Banking for All Americans, that notes the use of reputation risk can be
a pretext for restricting law-abiding individualsâ and businessesâ access
to financial services on the basis of political or religious beliefs or
disfavored but lawful business activities.
Because assessing reputation risk is subjective, it can lead to confusion
and is time-consuming to measure for both examiners and credit unions.
Reputation risk is ambiguous and lacks measurable criteria, which
leaves it too open to interpretation.
Therefore, the agencyâs supervision for reputation risk could reflect
individual perspectives rather than data-driven conclusions.
Given the difficulty of measuring reputation risk or quantifying its impact,
if any, in an accurate and precise way, it is inappropriate for the agency to
examine credit unions for this risk.
While it is important for a credit union to operate in a manner that member-owners
view as favorable, credit union management is generally in the best position to
identify the business decisions that will positively influence the membershipâs
perception or opinion of the credit union.
Examiners are not equipped and should not be expected to gauge public
opinion or quantify the impact of member perception on a credit unionâs
financial and operational condition.
The highly subjective nature of these determinations creates
unpredictability and inconsistency for regulated entities and introduces
the potential for political or other biases into the supervisory process.
This could result in examiners implicitly or explicitly encouraging or
discouraging credit unions to restrict access to credit union services on the
basis of examinersâ personal views of a groupâs or individualâs political,
social, cultural, or religious views or beliefs, constitutionally protected
speech, or politically disfavored but lawful business activities.
If a credit union alters its behavior to comply with supervisory
expectations relating to reputation risk management, such as by closing an
account or choosing not to enter into or continue a business relationship
with a member or accountholder that it would otherwise maintain, it is
forgoing an opportunity to maintain or build a productive relationship within
its authorized field of membership that may otherwise be consistent
with sound risk management practice.
Even though reputation risk has been assessed as part of N C U Aâs examination
and supervision program for decades, the agency has not seen evidence of
reputation risk being a primary driver of unsafe or unsound conditions, or
posing a material risk to the National Credit Union Share Insurance Fund.
From a safety and soundness perspective, most activities that could negatively
impact a credit unionâs reputation do so through traditional risk channels
such as credit risk and liquidity risk.
These core financial and operational risk areas are more concrete and measurable and
allow examiners to more objectively assess a credit unionâs safety and soundness.
In addition to not enhancing safety and soundness, focusing on reputation
risk can distract credit unions and the agency from devoting resources
to managing core financial and operational risks that are quantifiable
and have been shown to present significant threats to credit unions.
In the judgment of the agency, examining for reputation risk diverts resources that
could be better spent on other risks that have been shown to present significant,
tangible threats to institutions and that are more easily quantified and
addressed through regulatory intervention.
The N C U A is responsible for the supervision and examination of all
federally insured credit unions, including for safety and soundness principles.
In furtherance of these objectives, the agencyâs supervision should
focus on concrete risks and more objective criteria directly related
to applicable statutory requirements.
In the agencyâs experience, using reputation risk in its supervisory
process does not further this mission.
II.
Legal Authority
Under the Federal Credit Union Act (F C U Act), the N C U A examines all F I
C Us and is required to ensure that all F I C Us operate safely and soundly.
In particular, 12 U.S.C.
1786(b) compels the agency to act to correct unsafe or unsound
conditions or practices in F I C Us.
Further, under the F C U Act, the N C U A is the chartering and
supervisory authority for federal credit unions and the federal
supervisory authority for F I C Us.
The F C U Act grants the N C U A a broad mandate to issue regulations
governing both F C Us and F I C Us.
Section 120 of the F C U Act is a general grant of regulatory authority,
and it authorizes the Board to prescribe rules and regulations for
the administration of the F C U Act.
Section 207 of the F C U Act is a specific grant of authority
over share insurance coverage, conservatorships, and liquidations.
Section 209 of the F C U Act is a plenary grant of regulatory authority to the
N C U A to issue rules and regulations necessary or appropriate to carry out its
role as share insurer for all F I C Us.
Accordingly, the F C U Act grants the Board broad rulemaking authority to ensure
the credit union industry and the Share Insurance Fund remain safe and sound.
Also, the N C U A has statutory authority to determine whether F I
C Us are operated in an unsafe or unsound manner and terminate a F I
C Uâs insurance if a F I C U is not operated in a safe or sound manner.
Finally, the Board has the authority to adopt such rules as it sees fit for
the transaction of its business, which includes oversight of the N C U Aâs
supervisory and examination programs.
III.
Description of the Proposed Rule and Changes
Based on the legal authorities set forth previously, the subjectivity of reputation
risk, the limited value of reputational risk at identifying risks to safety and
soundness or other statutory mandates, and the potential for distracting
examiners and institutions from examining or managing core financial and
operational risks, the agency has removed reputation risk from its supervisory
framework and is proposing to codify this change in N C U Aâs regulations.
This proposed rule would be a regulation as defined in section
5 of Executive Order 14192.
The proposed rule would be a significant regulatory action for the
purposes of Executive Order 12866.
The proposed elimination of reputation risk supervision is deregulatory.
The proposed rule would not alter or affect the ability of an institution
to make business decisions regarding its members, accountholders, or
third-party arrangements and to manage them effectively, consistent
with safety and soundness and compliance with applicable laws.
The proposed rule would prohibit the agency from criticizing, formally or
informally, rewarding, using in its decision-making process, or taking any
adverse action against institutions on the basis of reputation risk.
The agency would be prohibited from requiring, instructing, or encouraging an
institution or its employees, to refrain from contracting with or to terminate
or modify a contract with a third party, including an institution-affiliated
party, on the basis of reputation risk.
The agency also could not require, instruct, or encourage an institution
or its employees to refrain from doing business with or to terminate or modify
a business relationship with a third party, including an institution-affiliated
party, on the basis of reputation risk.
The proposed rule would also prevent the agency from requiring, instructing,
or encouraging an institution or its employees to enter into a contract
or business relationship with a third party on the basis of reputation risk.
The proposed rule would further prohibit the agency from requiring, instructing,
or encouraging an institution or its employees to terminate a contract with,
discontinue doing business with, or modify the terms under which it will
do business with a person or entity on the basis of the personâs or entityâs
political, social, cultural, or religious views or beliefs, constitutionally
protected speech, or on the basis of the third partyâs involvement in politically
disfavored but lawful business activities perceived to present reputation risk.
The proposed rule would also prevent the agency from requiring, instructing,
or encouraging an institution or its employees to engage in or refrain from
acquiring or terminating a relationship with any person or entity within
the credit unionâs authorized field of membership, or person or entity
the credit union or institution is otherwise lawfully permitted to serve,
on the basis of reputation risk.
This prohibition would not affect member service requirements and
limitations related to a credit unionâs field of membership.
Similarly, this prohibition would not affect requirements intended to
prohibit or reject transactions or accounts associated with Office of
Foreign Assets Control-sanctioned persons, entities, or jurisdictions.
Such prohibitions and rejections would not be based on the personâs or entityâs
political, social, cultural, or religious views or beliefs, constitutionally
protected speech, or politically disfavored but lawful business activities
perceived to present reputation risk.
The prohibition also does not affect the agencyâs authority to enforce
the requirements of the provisions of United States Code title 31, chapter
53, subchapter II regarding reporting on monetary transactions, field of
membership requirements under the F C U Act, administration of Community
Development Revolving Loan Fund activities, or any other application
decision where federal law mandates the N C U A to consider criteria such
as character and fitness or integrity.
âAdverse action,â as defined by the proposed rule, would include the provision
of negative feedback, including written feedback in a report of examination,
a document of resolution, oral feedback, or an enforcement action.
This definition would only apply to N C U A-initiated adverse actions.
N C U A will often jointly examine federally insured, state-chartered credit
unions along with the state regulator.
In these instances, the state regulator generally will take
the lead in issuing the report of examination and any corrective action.
If the state regulator elects to examine for reputation risk, N C U A examiners
will not participate in these discussions or enforce any resulting supervisory
actions taken by the state regulator.
Furthermore, adverse action encompasses any N C U A-led action of any agency
employee, including any communication characterized as informal or preliminary.
A downgrade (or contribution to a downgrade) of any supervisory rating,
including a rating assigned under N C U Aâs CAMELS ratings system
also would constitute an âadverse actionâ under the proposed rule.
Further, an approval or denial of a filing, or an imposition of a
discretionary supervisory action under prompt corrective action, on
the basis of âreputation riskâ would constitute an âadverse actionâ under
the proposed rule, except where federal law requires consideration
of reputation-related criteria.
This includes any burdensome requirements placed on an approval, the introduction
of additional approval requirements, or any other heightened requirements
or emphasis on an activity or change.
The agency is also including a general âcatch-allâ for any other
actions, including approval or denial of applications, waivers, and other
agency actions or decisions for any party, that could impact the party.
This catch-all is meant to include actions such as decisions on applications
for waivers, applications to engage in certain business activities
for which supervisory permission is required, or other regulatory
decisions affecting institutions.
The agency believes that most actions would be covered under the other
definitions outlined in the regulation but has included this additional
âcatch-allâ to account for any circumstances that may not be apparent
or may become applicable as regulatory and supervisory standards change.
Additionally, actions subject to this prohibition would include feedback
that is oral, a condition attached to an approval, the introduction of
new approval requirements, and any other heightened requirements that
are intended to force the institution to address perceived reputation risk.
The term âdoing business withâ in the proposed rule is intended to be
construed broadly and to include both business relationships with credit
union members, accountholders, and with third-party service providers.
It is also intended to include the relationship of an institution with
organizations or individuals that the institution is providing with
charitable donations or services.
This term is intended to include both existing business relationships
and prospective business relations.
The term âinstitution-affiliated partyâ has the same meaning as in 12 U.S.C.
1786(r).
The proposed rule would define âreputation riskâ as the risk, regardless of how
the risk is labeled by the institution or by the agency, that an action or
activity, or combination of actions or activities, or lack of actions or
activities, of an institution could negatively impact public perception of
the institution for reasons unrelated to the current or future financial and
operational condition of the institution.
This definition is intended to include not just risks that the agency or the
institution identify as âreputation risks,â but any similar risk based
around concerns regarding the publicâs perception of the institution beyond
the scope of other risks in the agencyâs supervisory frameworks.
This definition is not intended to capture risks posed by public perceptions
of the institutionâs current or future financial or operational condition
because such perceptions relate to risks other than reputation risk.
For example, public perceptions that an institution has insufficient
liquidity and therefore is susceptible to a run on shares would
not be considered reputation risk.
The prohibitions of the proposed rule would apply to actions taken on the basis
of reputation risk; political, social, cultural, or religious views and beliefs;
constitutionally protected speech; or based on bias against politically
disfavored but lawful business activities perceived to present reputation risk.
The proposed rule would not prohibit criticism, supervisory feedback, or
other actions to address traditional risk channels related to safety and
soundness and compliance with applicable laws, including credit risk, interest
rate risk, and transaction risk (including cybersecurity, information
security, and illicit finance), provided that such criticism, supervisory
feedback, or other actions addressing these other risks is not a pretext by
examiners aimed at reputation risk.
Under the proposed rule, the N C U A would make one conforming amendment
to the N C U Aâs regulations to eliminate references to reputation risk.
The conforming amendment would be made in the stress testing
requirements for complex credit unions.
One other N C U A regulation codified in 12 C F R part 717 refers to
reputation risk concerning certain identity theft prevention programs
required by the Fair and Accurate Credit Transactions Act of 2003.
However, by statute, guidelines and regulations for these programs must occur
jointly across certain federal agencies, so no conforming amendment is suggested
for 12 C F R part 717 at this time.
The N C U A will consider making changes to 12 C F R part 717 in a separate,
joint rulemaking in the future.
Until that separate, joint rulemaking occurs, the N C U A expects to
exercise its discretion in enforcing 12 C F R part 717 by using agency
resources to assess compliance without regard to reputation risk.
IV.
Expected Effects
A.
Background
As previously discussed, to improve the efficiency and effectiveness
of the supervisory framework, the N C U A is proposing to establish
a regulation codifying the removal of reputation risk from its
examination and supervision programs.
B.
Parties Affected by the Proposal
1.
N C U A Regulated Entities Affected by the Rule
The N C U A currently supervises 2,740 F C Us and 1,630 federally
insured, state-chartered credit unions (collectively referred to as F I C Us).
Because all F I C Us were subject to reputation risk assessments, the proposed
rule would affect all 4,370 institutions.
2.
Other Parties
Because the proposed rule aims to remove the influence of the agencyâs reputation
risk assessments on institutionsâ member and business relationships, N C U A
concludes that the proposed rule could potentially affect all F I C Usâ current
and future members and business partners.
It would also affect any other institutions over which the N C U A has
or may be granted supervisory authority.
C.
Current Legal and Regulatory Baselines
On September 25, 2025, the N C U A issued Letter to Credit Unions 25âC
Uâ05 wherein the agency notified supervised institutions that it was
ceasing to use reputation risk in the examination and supervisory process.
The N C U A also sent a memo to staff on that same day, instructing
staff that they may no longer base supervisory concerns on reputation risk.
N C U A employees were notified that they may not refer to or engage in
discussions about reputation risk or similar concepts as part of examinations
and supervision contacts or other regulatory or supervisory actions (such
as waivers, application decisions, or enforcement actions) for a credit union
or credit union service organization.
The agency is in the process of removing reputation risk from its regulations,
policies, manuals, and training materials.
Therefore, the N C U A has already discontinued reputation risk-based
supervision as of September 25, 2025.
The proposed rule would create a formal, legal mandate to remove reputation risk
from N C U Aâs supervision framework.
Effectively, there would be no additional burden, and therefore no compliance
costs since reputation risk will not be examined for effective September 25, 2025.
D.
Costs and Benefits
Implementing a regulation to prohibit the use of reputation risk in the
examination and supervision program will remove uncertainty and the
potential for misuse, which inherently will provide benefits to F I C Us.
The removal of reputation risk will ensure greater consistency and objectivity
of supervisory decisions, increasing the predictability for regulated
institutions to understand and manage regulatorsâ supervisory expectations.
The proposed rule should benefit credit unions and their members by formally
eliminating actual or perceived reputation risk-related regulatory restrictions
and constraints on member services that would otherwise be permissible.
Other than the inherent benefits described above, the N C U A cannot quantify the
number of institutions, or the associated costs, where an institution was criticized
for activities because of reputation risk.
Nor does the N C U A have the information necessary to quantify the number of
institutions that might make changes to their operations based on this change.
This concludes the proposal.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.