Prohibition on Use of Reputation Risk by NCUA

NATIONAL CREDIT UNION ADMINISTRATION <CFR>12 CFR Parts 702 and 791</CFR> <RIN>RIN 3133-AF67</RIN> <SUBJECT>Prohibition on Use of Reputation Risk by NCUA</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> National Credit Union Administration (NCUA). <HD SOURCE="HED">ACTION:</HD> Proposed rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> 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 NCUA 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 entity's 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. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Comments must be received by December 22, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Comments may be submitted in one of the following ways. (Please send comments by one method only): • <E T="03">Federal eRulemaking Portal: https://www.regulations.gov.</E> The docket number for this proposed rule is NCUA-2025-0972. Follow the “Submit a comment” instructions. If you are reading this document on <E T="03">federalregister.gov,</E> you may use the green “SUBMIT A PUBLIC COMMENT” button beneath this rulemaking's title to submit a comment to the <E T="03">regulations.gov</E> docket. A plain language summary of the proposed rule is also available on the docket website. • <E T="03">Mail:</E> Address to Melane Conyers-Ausbrooks, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. • <E T="03">Hand Delivery/Courier:</E> Same as mailing address. Mailed and hand-delivered comments must be received by the close of the comment period. • <E T="03">Public Inspection:</E> Please follow the search instructions on <E T="03">https://www.regulations.gov</E> to view the public comments. Do not include any personally identifiable information (such as name, address, or other contact information) or confidential business information that you do not want publicly disclosed. All comments are public records; they are publicly displayed exactly as received, and will not be deleted, modified, or redacted. Comments may be submitted anonymously. If you are unable to access public comments on the internet, you may contact the NCUA for alternative access by calling (703) 518-6540 or emailing <E T="03">OGCMail@ncua.gov.</E> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">Office of Examination and Insurance:</E> Michael Dondarski, Associate Director, at (703) 548-2638 or at 1775 Duke Street, Alexandria, VA 22314. <E T="03">Office of General Counsel:</E> Kevin Tuininga, Deputy General Counsel, Office of General Counsel, at (703) 518-6540 or at the above address. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background and Policy Objectives</HD> 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 NCUA 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, <SU>1</SU> <FTREF/> that notes the use of reputation risk can be a pretext for restricting law-abiding individuals' and businesses' access to financial services on the basis of political or religious beliefs or disfavored but lawful business activities. <FTNT> <SU>1</SU>  90 FR 38925 (Aug. 12, 2025). </FTNT> 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 agency's 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 is it 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 membership's 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 union's 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 examiners' personal views of a group's or individual's 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 NCUA's 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 (Share Insurance Fund). From a safety and soundness perspective, most activities that could negatively impact a credit union's reputation do so through traditional risk channels (for example, credit risk and liquidity risk, among others). These core financial and operational risk areas are more concrete and measurable and allow examiners to more objectively assess a credit union's 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 NCUA is responsible for the supervision and examination of all federally insured credit unions (FICUs), including for safety and soundness principles. <SU>2</SU> <FTREF/> In furtherance of these objectives, the agency's supervision should focus on concrete risks and more objective criteria directly related to applicable statutory requirements. In the agency's experience, using reputation risk in its supervisory process does not further this mission. <FTNT> <SU>2</SU>   <E T="03">See, e.g.,</E> 12 U.S.C. 1756, 1781, 1784, 1786, 1789. The NCUA also insures member accounts at all FICUs and manages liquidations of insolvent FICUs. </FTNT> <HD SOURCE="HD1">II. Legal Authority</HD> Under the Federal Credit Union Act (FCU Act), the NCUA examines all FICUs and is required to ensure that all FICUs operate safely and soundly. <SU>3</SU> <FTREF/> In particular, 12 U.S.C. 1786(b) compels the agency to act to correct unsafe or unsound conditions or practices in FICUs. Further, under the FCU Act, the NCUA is the chartering and supervisory authority for federal credit unions (FCUs) and the federal supervisory authority for FICUs. <SU>4</SU> <FTREF/> The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority, and it authorizes the Board to prescribe rules and regulations for the administration of the FCU Act. <SU>5</SU> <FTREF/> Section 207 of the FCU Act is a specific grant of authority over share insurance coverage, conservatorships, and liquidations. <SU>6</SU> <FTREF/> Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue rules and regulations necessary or appropriate to carry out its role as share insurer for all FICUs. <SU>7</SU> <FTREF/> Accordingly, the FCU Act grants the Board broad rulemaking authority to ensure the credit union industry and the Share Insurance Fund remain safe and sound. Also, the NCUA has statutory authority to determine whether FICUs are operated in an unsafe or unsound manner and terminate a FICU's insurance if a FICU is not operated in a safe ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 44k characters. 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