Federal Reserve Moves to Eliminate “Reputation Risk” From Bank Exams - What Banks & Mortgage Divisions Need to Know
The Federal Reserve has issued a Notice of Proposed Rulemaking that would formally codify the removal of “reputation risk” from its examination and supervisory framework for banks.
For banks, bank holding companies, and mortgage banking businesses that operate within the Federal Reserve’s supervisory orbit, the proposal is worth close attention.
What Is “Reputation Risk”?
At a high level, reputation risk refers to the possibility that negative publicity or public criticism about a bank’s business practices, whether true or not, could lead to lost customers, reduced revenue, or litigation. That concept has long been criticized as subjective.
The concern is that an open-ended supervisory standard can create uncertainty about whether lawful customer relationships, products, or lines of business may draw scrutiny based on optics rather than measurable legal, credit, liquidity, operational, or market risk.
The distinction affects how regulated institutions prepare for exams, document risk decisions, and evaluate lawful business relationships that may attract scrutiny for reasons unrelated to traditional safety and soundness concerns. Examination and supervisory expectations are most manageable when they are tied to objective and identifiable risk categories, not broad concerns about how a relationship or business activity may be perceived.
What Would the Proposed Rule Do?
The proposed rule would prohibit the Federal Reserve from using reputation risk as a component of examination programs or in supervisory materials used for banking organizations.
The proposal also would prohibit the Federal Reserve from encouraging or pressuring banks to deny or condition financial services based on a customer’s:
Political beliefs
Religious beliefs
Lawful speech or associations
Lawful but politically disfavored business activities
The proposal would take a policy change the Federal Reserve already announced in June 2025 and make it binding through formal rulemaking.
Why Does It Matter?
For mortgage banking and related companies regulated by the Federal Reserve, the proposal is less about headline politics and more about supervisory clarity. A vague reputational standard can influence how institutions assess counterparties, warehouse relationships, servicing relationships, and other lawful business activity. It also can complicate internal decision-making when compliance, risk, and business teams are trying to distinguish between actual safety and soundness concerns, generalized concern about criticism or public reaction and potentially changing viewpoints of regulators.
The Notice of Proposed Rulemaking seems to recognize those concerns. In the Board’s view, the concept is too imprecise to serve as a useful examination standard, particularly when the same underlying issues can be addressed through more established risk categories. The notice identifies several reasons for the proposal, including:
Reputation risk can be difficult to quantify and communicate clearly
Lack of clarity can make supervisory expectations harder for banks to understand and remediate
The underlying concerns can be addressed through more established risk categories, such as credit, market, liquidity, operational, and legal risk
Codification may help ensure more consistent supervisory practices going forward
The proposal also reflects concern that reputational concepts may be used in ways that affect access to banking services for lawful customers or lawful industries.
What Are the Strategic Implications for Mortgage Banking Executives?
The proposal does not reduce the importance of traditional risk management. It simply removes one controversial and subjective category from the supervisory framework.
Mortgage divisions of regulated banks and affiliated institutions should use this opportunity to:
Review Examination Strategy: Ensure internal teams are prepared to address supervisory concerns using objective risk categories
Assess Customer and Counterparty Policies: Confirm that onboarding, account, and relationship decisions are tied to measurable compliance, legal, fraud, credit, or operational concerns
Evaluate Documentation Protocols: Make sure escalation and risk decisions are documented in a way that clearly identifies the actual basis for concern
Monitor the Rulemaking: Watch whether the final rule is adopted as proposed or revised in response to comments
What Are the Nine Questions?
The proposal posits nine questions for comment. Take a look at the questions here.
Need More Information?
Questions about how this proposal could affect your supervisory posture, relationships or mortgage platform practices? Contact troy@garrishorn.com.
Comment deadline: April 27, 2026.