The Federal Housing Finance Agency (FHFA) announced on Wednesday it has changed its proposal to amend the Suspended Counterparty Program (SCP), offering a less severe version after several trade groups raised concerns about its impacts on the mortgage market.
The SCP, established in June 2012 during the Obama administration, requires that entities report to FHFA if an individual or institution they do business with has committed certain types of misconduct within the prior three years. The FHFA can order the entities to cease doing business or entering into new business with these counterparties. Final suspension orders are published on FHFA’s website.
In July 2023, the FHFA added more forms of counterparty misconduct to keep regulated entities from doing business with organizations found to have committed fraud. These include misconduct in the context of civil enforcement, and criminal or civil misconduct in connection with the management or ownership of real property.
The original version of the proposal also authorized FHFA to immediately suspend business with counterparties when misconduct has “resulted in debarment, suspension, or limited denial of participation imposed by a federal agency” without first issuing a proposed suspension order.
Two months after the initial proposal became public, three trade groups — the American Bankers Association (ABA), Independent Community Bankers of America (ICBA) and Mortgage Bankers Association (MBA) — sent a letter to the FHFA and said that it “exposes lenders and servicers to a draconian remedy (…) for what could be low-level civil or contractual transgressions.”
“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,” FHFA Director Sandra L. Thompson said in a statement.
The new proposal distinguishes between misconduct that poses a material risk to regulated entities and behavior that has a minimal impact. It also eliminates the proposed immediate suspension order.
The new version authorizes the suspension of business when counterparty misconduct results in a federal prohibition order or a civil money penalty above a specific threshold, and when counterparties have committed criminal or civil misconduct related to the management or ownership of real property.
Bob Broeksmit, president and CEO of the MBA, said the original version would have “punished counterparties for potentially minor civil or administrative sanctions.” He called the revision a “smart move.”
“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,” Broeksmit said.
FHFA will receive comments on the new draft of the rule within 60 days of its publication in the Federal Register.
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