Making Regulatory Burden Worse

Sometimes we are our own worst enemies. The Regulation B signature rule changes is precisely such a situation. What happened was we asked questions.

When questions are asked, regulators answer them - usually. And we don't always like the answers.

Laws and regulations offer quite enough in the way of regulatory burden. However, interpretations and other forms of answers to questions take us further down the burden road. The interpretations provide yet more detail and detailed interpretations limit options. The problem is that with compliance, we seek certainty. It's nice to know something for sure. It's nice to know that we are doing it correctly. So when any doubt exists, we tend to ask.

Acting on regulatory answers is safer than cutting a solitary path through the regulatory wilderness. But regulatory answers limit our options. We have to stay on the track laid out by the regulators and we no longer have the option of choosing our own path. And the path defined by regulations and interpretations becomes narrower and narrower.

The concepts that underlay compliance are not difficult. Compliance is difficult because there are specific ways that tasks must be performed. The more specific a law, regulation, or interpretation, the more difficult compliance gets.

Consider the difference between "make sure the customer is aware of all of the costs of credit" and correctly calculating and disclosing the finance charge and APR - which includes knowing what is or isn't a finance charge. The first concept seems fairly easy. We know the second - the Truth in Lending disclosures - is difficult. In fact, it is so difficult that it always makes the top violations list. Now look at the Regulation B problem. There is this basic concept in ECOA and Regulation B that prohibits forcing people into a credit transaction simply because of their relationship with the primary borrower. The rule seems simple: don't require spousal signatures unless the spouse is really an applicant.

Compliance didn't come easily to some lenders, so violations continued. Over time, the regulators tightened up the rules. There were adjustments to the definition of applicant to ensure that victims had standing to sue. Then there were clarifications in the Commentary, including the explanation that a joint financial statement does not constitute a joint application.

The latest revision is nothing more than another attempt to clearly state the original rule so that lenders can no longer pretend they didn't understand it or no longer think of arguments around it. The FRB did this by placing the burden of proof squarely on the lender rather than allowing the lender to make assertions about the applicants' intent.

This naturally led to questions, such as what would be sufficient evidence to constitute satisfactory proof. However, through our questions, we have turned the rule into something new and huge. The answers weren't exactly good news. The answers gave examples that would be clear. In this case, clarity also constituted a heavier degree of compliance. The suggestion in response to the questions was that a clear indication from the co-signer, such as a separate form, or a special box to check and/or initial, would clearly suffice. What was given as an example is rapidly becoming an expectation. It is only a small step to a requirement.

The next time a rule such as the signature rule comes out, think about it before asking. Because if you ask, you'll get an answer!

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 4, 5/04