Self-Policing Can Prevent More Regulatory Burden

Much of what we call "consumer compliance" is contained in the Consumer Credit Protection Act. These laws and regulations are designed to provide key protections for consumers. The protections take several forms.

First, the laws mandate certain action, such as providing information in the form of disclosures. Thus, we have the Truth in Lending disclosures and calculations. We have Good Faith Estimates of settlement costs and HUD-1s. We have flood hazard notices and adverse action notices.

Second, the laws prohibit certain actions. The ECOA prohibits discrimination on any of nine bases. Flood hazard protection prohibits closing a loan secured by property located in a flood hazard area without flood insurance.

Third, the laws require certain consequences for any mistakes, such as under-disclosing the cost of a loan. Restitution and rescission are the brainchildren of lender errors.

These consumer protection laws now pervade the business of extending credit. Similar laws underlay the deposit relationship with customers. While these laws protect consumers, they also add to the costs of banking. Why do we have them?

Many of today's compliance regulations are the direct result of industry practices. Some of the practices relate directly to the laws created to change the practice. Others were driven by related practices that gave momentum to an otherwise sleepy piece of legislation.

For example, Regulation CC is the result of banks placing lengthy holds on checks - particularly on deposits made by Congressmen and their employees. Regulation B is the direct result of underwriting practices, such as discounting a wife's income and refusing to make loans to a single woman without a co-signer.

In contrast, Truth in Savings is the direct result of paying interest only on the investable balance in the consumer's account. That practice gave the necessary momentum to an otherwise slow and aging piece of legislation. Here, it was the deceptive practice of advertising a rate without also indicating that the rate would not be paid on the entire balance that angered Congress and resulted in the Truth in Savings Act.

This brief history indicates that - to a great extent - the industry has its future in its own hands. Industry behavior that deceives or is unfair to consumers will result in more laws and regulations. By the same token, it is within the industry's power to prevent or minimize additional burden. It can do this by recognizing sensitive consumer issues and responding to them.

Perhaps most important, we know that inaction will lead to more regulatory burden. It only takes a few "bad actors" to generate the concerns needed to pass legislation. It only takes a few banks to place the entire industry in a bad light. It will take concerted effort by all industry members to ensure "best practices" and to prevent burdensome legislation.

That's why compliance managers should watch their bank's practices beyond the known required and prohibited practices and look to the future, to the practices that can lead to more burden. Areas such as new non-traditional products are particularly important for industry-developed best practices to prevent legislation or regulation. Other targets involve old stand-bys, such as marketing credit cards. We don't need more burden. Let's face it - compliance jobs are secure with the laws that are in place right now. In fact, most compliance managers already have too much to do. So make yourself look good by leading your bank to best practices that will prevent future legislation - and burden.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 7, 6/97