- Key insight: The National Credit Union Administration is proposing a rule that would prohibit its examiners from considering reputational risk in its exams or facilitating debanking based on political or religious beliefs.
- Expert quote: "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." — NCUA proposed rule
- Forward Look: The NCUA joins the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. in promulgating rules aimed at rooting out debanking, an issue that President Trump has taken a personal interest in.
The National Credit Union Administration is proposing a new rule that would eliminate reputational risk from its supervisory process and prohibit its examiners from encouraging or effectuating debanking based on religious or political views.
The proposed rule, slated for publication in the Federal Register on Oct. 21, would "prohibit the agency from criticizing or taking adverse action" against a credit union "either solely or jointly on the basis of reputation risk." The rule would also prohibit the agency from "requiring, instructing, or encouraging" a credit union from closing, modifying or "refrain from providing an account, product, or service" to a customer "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."
The proposal says that the rule is necessary because reputational risk is inherently subjective and compelling credit unions to consider these unquantifiable risks distracts both the examiners and the banks from more critical risks that warrant their attention.
"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 proposal says.
The Equal Credit Opportunity Act of 1974 prohibits banks or credit unions from discriminating against borrowers on the basis of race, color, religion, national origin, sex, marital status, age, or because an applicant receives income from public assistance, but does not protect borrowers on the basis of their political views.
The proposal was presumably approved by a vote of 1-0, as NCUA Chair Kyle Hauptmann is the sole remaining board member after President Trump fired Democratic board members Todd Harper and Tanya Otsuka. That could bring the agency's regulatory actions into question, as the NCUA's governing statute requires a two-member quorum. Harper and Otsuka are challenging their dismissals in court, and oral argument on the case has been postponed pending the outcome of a lawsuit challenging Trump's dismissal of a Federal Trade Commission member. The Supreme Court is expected to hear the oral argument for the FTC case during its December term.
Debanking — when a bank cuts ties with an existing customer — has been a critical issue for the Trump administration since the president took office in January.
Trump himself called out Bank of America CEO Brian Moynihan at the World Economic Forum in Davos, Switzerland, only days after his inauguration, saying he hopes that Moynihan will "start opening [his] bank to conservatives."
The Federal Reserve in June eliminated reputational risk from its examination practices, though it said it would continue to allow banks to include reputational risk in their own internal risk management processes.
The Federal Deposit Insurance Corp. earlier this month issued a proposal to eliminate reputational risk from its bank examinations, and Senate Banking Committee Chair Tim Scott, R-S.C., proposed a bill in March that would forbid agencies from considering reputational risk in their examinations.
The Office of the Comptroller of the Currency issued a bulletin last month saying that it would take past instances of "politicized or unlawful debanking" into account in future bank applications, including branch openings and closures, the installation of executives and Community Reinvestment Act reviews. Comptroller of the Currency Jonathan Gould said on Oct. 6 that the agency is primarily looking at the largest banks for evidence of politicized or unlawful debanking.
While much of the congressional debate this year around debanking has centered on regulators' efforts to encourage or facilitate debanking, Trump doubled down on the banks themselves in August, saying "the banks discriminated against me very badly."
Trump signed an executive order in August directing federal banking agencies — including the NCUA — to examine banks' policies to determine if there are any that facilitate debanking and to mete out penalties for any who have been found to have those policies and/or debanked a customer in an unlawful way. That order is creating headaches for banks, who are having to comb through their own records to determine whether any of their past decisions might run afoul of the president's order.
