Compliance Blog

Benjamin Franklin said a wonderful thing about reputations. 

"It takes many good deeds to build a reputation, and only one bad one to lose it."

Reputation plays a HUGE role in credit union compliance.  In my view, a good compliance officer sniffs out and discovers all forms of risk when presented with a situation.  Reputation risk is just another one to identify.

In NCUA's Examiner's Guide (see yesterday's post), NCUA defines reputation risk as:

(T)he current and prospective risk to earnings or capital arising from negative public opinion or perception. Reputation risk affects the credit union’s ability to establish new relationships or services, or to continue servicing existing relationships. This risk, which occurs in activities such as asset management decisions and transactions, can expose the credit union to litigation, financial loss, or a decline in membership base. Reputation risk exposure appears throughout the credit union organization. The officials, management, and staff must accept responsibility to exercise an abundance of caution in dealing with members and the community.

Example: The Servicemembers Civil Relief Act does give creditors the ability to challenge servicemembers in several different areas of the law.  For example, a creditor could argue in court that a servicemember is not entitled to the 6% rate protection if it feels the borrower's ability of pay is not materially affected by their military service.  While creditors have the right to do so, should they?  How would such a move look to the general public? 

A good compliance officer will always look for this risk in every decision.  Unpopular or confusing decisions will flood call centers and teller lines.  Some members may leave.  Some potential members may decide not to join.  While I am not suggesting that credit unions avoid all risks, it is important for credit unions to understand the underlying risk with any given decision.