Observations of Griff Garwood

We recently had the opportunity to discuss the state of compliance with Griff Garwood, Director of the Federal Reserve Board's Division of Consumer and Community Affairs. Griff has been directly and indirectly involved with compliance regulation since the early days of Regulation Z - long before that regulation was sufficiently complex to merit "simplification." Griff has taken that regulation and many others through increasingly sophisticated developments to their present state. He is one of the best qualified practitioners to assess where compliance is headed.

Reducing Regulatory Burden
In terms of the effort to reduce regulatory burden, Garwood believes that we learned a great deal from the last Congress. The new Republican majority placed a high priority on reducing regulatory burden and paperwork. That Congress labored to produce a regulatory reform bill that, in the end, did little that significantly reduced regulatory burden.

While the Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") did include improvements to many important areas, some issues - such as major cuts to CRA and Truth in Savings - didn't appear in the final law. In other respects, most of the changes were minor, particularly when compared to the substance of the complete laws on the books. Garwood, having watched this process in the context of his responsibilities for developing implementing regulations, concludes that compliance as we know it is going to be around.

Garwood discussed what is being done by the regulatory agencies that will have an impact - he hopes positive - on banks in the future. He cautions that while the Federal Reserve Board approaches their regulatory drafting responsibilities with sincere concerns about regulatory burden, any expectations for regulatory burden relief should be realistic.

The FRB staff is working well with HUD staff to simplify Truth in Lending and RESPA disclosures, Garwood stated. That review will include consideration of whether the statutes should be modified. He noted that whatever recommendations the two agencies develop for combining Truth in Lending and RESPA disclosures, the ultimate disclosures must comply with each statute. Ideas that the statutes do not permit would require legislative change.

Regulatory Review
In addition to carrying out the work that has been assigned to the FRB by EGRPRA, the FRB continues to maintain its commitment to review its regulations with the goal of simplification, modernization, and improvement. Under the regulatory review program each regulation is scheduled for review every five years. Several compliance ">
Garwood stressed that the Board is committed to trying to take a fresh look at regulations. While cautioning that major changes are difficult given the detail of the statutes, he believes that honest and good efforts are going on.

Looking to the future, Garwood's team is working to make sure the FRB's regulations accommodate developments in technology. Issues under scrutiny include whether and how electronic notices can be used in lieu of paper notices.

Efforts to reduce regulatory burden can't be limited to regulations. Garwood pointed out that of 57 potential documents at a real estate loan closing, 12 are required by compliance laws. The remainder are generated by state law, and by non-government entities such as private mortgage insurers and secondary market purchasers. Put in this context, regulatory reform can't affect more than a small portion of closing documents. Real reform would have to go far beyond the question of what laws apply. Real reform could only be achieved by a joint effort between all the parties involved, including the public and the private sectors.

CRA Examinations
Garwood stated that the early returns on the small bank CRA exam are positive. Although overall, FRB examiners have spent more time on the new procedure, Garwood expects that this will change with the next cycle of examinations.

The mandatory date for the new large bank examination procedure is coming in July, and Garwood stated that the agencies are working well together to prepare for the implementation of those procedures. Continuing the efforts to develop and maintain consistency in examinations, the agencies are conducting combined training. They also have convened a task force of selected field examiners to study the process to date, discuss procedures, and review each other's work.

Garwood refrains from predicting how well the new regulation will work, although he sincerely hopes for its success. He cautions, however, that the industry should refrain from asking for greater specificity. Industry requests for specificity can only result in the loss of flexibility to take account of local conditions or the development of rules that work well for some banks, but not for others.

Compliance Examinations
Having the longest established team of compliance examination specialists, the Federal Reserve System is now redeveloping its compliance examination procedures. Garwood describes this as a "top to bottom" review. The FRB is looking at developing a risk-focused examination that is tailored to a bank's specific attributes such as products, market situation, and history.

All aspects of the compliance examination are on the table, including the frequency and scope of exams. The FRB is also looking at how to take advantage of technology and automation to facilitate the examination process. For example, it may be possible to use technology to conduct large portions of the examination off-site. Always sensitive to regulatory burden, Garwood points out that the down-side of this advance could be the data submission needed for off-site review.

He also indicated that fair lending continues to play an important role in compliance examinations. Although giving no specific details, he stressed several times that fair lending should remain a top priority for the industry.

Getting Ideas From Other Countries
Garwood has participated in several international banking projects which have given him a perspective on how Americans approach compliance. For example, he finds that some other nations are more aggressive about privacy than we are, but no nation has the complete array of compliance regulation and disclosure requirements that affect U.S. banking.

One European approach that intrigues him is the United Kingdom's ombudsman system. He observed that the U.K. ombudsman can be more aggressive than the laws actually require but that it is on an individual basis. In addition, the ombudsman works with fewer laws than we have in the United States.

And the future
When asked what he considers to be important compliance priorities, Garwood responded that fair lending would have to be a priority. He believes it is a mistake to assume, that because of the nationwide reexamination of affirmative action, fair lending is "last year's issue." Garwood observes that concerns about fair treatment of customers won't go away. Fair lending is fundamental to American values. Fair lending may get more difficult as market segmentation and risk-based pricing affect the industry in the future.

On that same basis, he places CRA as a close second priority. Also emerging as issues are private mortgage insurance, ATM surcharges, and customer privacy.

Electronic banking and the related electronic compliance issues will be increasingly urgent. The FRB will be dealing with questions such as whether the holder of a stored value card should be protected by government regulations, and if so, to what extent. Then there is the question of whether, when, and how an electronic notice may be substituted for a paper notice.

Garwood observed that it would be "naive to assume that every law has been written." Industry practices and consumer needs will determine the future of compliance.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 3, 3/97