Compliance Blog

Posted by Anthony Demangone

Yogi Berra is a smart man.  This is one of his best observations.

Baseball is 90 percent mental.  And the other half is physical.

That is actually true, for anyone who has played the game.  I think Professor Berra was on to something. A similar calculation could be used for regulations. 

Ninety-percent of regulatory burden is made up of all the rules and regulations.  The other half is how those rules are written.

One of these days, someone is going to reinvent how regulations are drafted and presented.  If they get it right, I think it will be a win-win.  The regulations will be easier to read and understand.  And that will lead to greater compliance.  Usually, the goal of a regulation is to solve a simple problem.  If regulators can come up with simple, creative ways to solve that problem, everyone will be better off. 

Here are two examples off what I mean. 

1.  The CARD Act and Regulation Z. When the CARD Act became law, it mandated that the Fed issue a number of credit card-related regulations.  Those were issued in three waves.  The first proposal totaled more than 800 pages (ultimately 241 in the federal register) of dense regulatory language.  We spent a lot of resources helping our member figure out how to break the rule down into readable portions. (When someone can add value by helping someone else figure out how to read a regulation you've written, you may have a problem.) Over the course of the next year, additional proposals and clarifications were issued.  

And it continues.  Just last month, the Fed issued another "clarification" to clear up a hand-full of CARD Act-related issues.  The length of that clarification totaled more than 300 pages.  
 

2.  Unnecessary complexity.   MDIA has created an interesting discussion that has reached the level of complexity needed to launch a rocket into space.  What is that issue? If you overstate the loan's APR in your dwelling-secured loan's disclosures, must you re-disclose your MDIA disclosures under Regulation Z?  You'd think this would be a simple question.  But it is not.  I won't bore you with the bloody details.  But if you want to see the complexity - read this article issued by the Fed.   

To paraphrase Allen Iverson, we're talking about an overstated APR.  An overstated APR. A creditor in this situation has disclosed an APR to the member that ends up being higher than what the member will get.  The member will get a lower APR when the loan is consummated. In many cases, the member is no better or worse off - they pay the same amount. But in some cases, the lender must halt the process, re-disclose, and then wait for the necessary time before the loan can move to closing.

This could have been regulated a different way.  How about this general rule? If you overstate the APR, no harm, no foul. No need to re-disclose.  Just let the member know at closing what the new APR is.  If the member proceeds to closing, they surely didn't mind the higher APR.  And for those who think that this creates a perverse incentive to inflate costs to err on the side of overstating the APR, thereby erasing the need for re-disclosure, Adam Smith is rolling over in his grave.   Market pressures will demand that they get that as close as possible.  If it is too high, they'll lose mortgages at the margins to other lenders.

These were just two examples of how the regulatory system seems to be breaking down.  When it takes hundreds of pages to explain one provision of a rule, be it a provision of the CARD Act or MDIA, it may be time to come up with a different rule altogether. 

Here's a thought.  

What if financial organizations could create their consumer disclosures using a risk-based system that is based on their products and services.  The regulation could come up with certain over-arching goals, such as clarity of disclosures, and certain prohibited practices.  But beyond those basic requirements, each organization would have to defend its disclosures and advertisements against basic principles: Is this disclosure or advertisement easy to understand? Does it accurately describe the features and costs of the account or service? Can we say (with a straight face) that it would not mislead or confuse the average consumer. 

What do you guys think?

*** 

Give them what they want?  Well, during compliance school, more than a few of you approached me and said something like this

Yes, we like the compliance stuff...but we really like pictures of your kids.

I understand completely. And with that in mind...

They just had their 2-year check up.  Kate is now 3 foot, one inch tall.  Briggs is a clean three feet.  They both weigh just under 26 pounds.  Kate is in the 99th percentile for height.  Briggs is in the 86th percentile.  Come on, growth!  The Demangone side of the gene pool never saw 6 feet, to the best of my knowledge.  I look forward to when my kids can look down on me.

Have a great weekend, everyone!