Why Isn't Regulatory Burden Getting Better?

Why, when there have been concerted efforts by both Congress and the bank regulatory agencies (to say nothing of the industry) to reduce regulatory burden, does it seem to be growing instead? And it has been growing! Anyone in the compliance business can testify to that.

For example, take writing a this newsletter. Instead of desperately looking for ideas to fill issues, we have had to make decisions about what not to include - a scary proposition when we are in the business of knowledge. This editor's desk (which hasn't been seen in a while) is groaning under growing piles of regulatory missives. There are draft bills, proposed regulations, final regulations, negotiated rulemakings and non-rulemakings, interpretive letters, updates to examination manuals, and more. While the pile grows on our desk, the forest outside is being depleted.

What's going on? Why isn't burden relief working? We think there are several reasons. First, rules are rules. It isn't just what they say, its the fact that they exist. "Simplifying" them simply changes them, but the rules are still there. And that means regulatory burden.

Take, for example, the finance charge. Truth in Lending and Regulation Z define finance charge. Certain types of fees are included; other types of fees are excluded. Which fees are included depends on what type of loan it is. We are all supposed to know what we are doing and which fees count. Finance charge calculations have been the bane of creditor's since Truth in Lending was invented. It is the top violation of all compliance.

Recently, there have been serious efforts made to improve on the finance charge definition with the goal of regulatory improvement. Philosophers could debate endlessly about whether the changes have in fact been improvements - after they finish figuring out how many angels can dance on the head of a pin. In the meantime, creditors have to live with the rule.

What has actually happened to Regulation Z's definition of finance charge is that some charges that used not to be finance charges (third party fees) are now included and other charges (certain taxed and filing fees) are now excluded. And some of the circumstances have changed. The problem is, we still have to figure it out. And we still get it wrong a lot! And now the Federal Reserve is looking at the definition of finance charge with the possible goal of changing it again - really changing it this time.Second, change is a form of burden by itself. Change means that what we used to know isn't quite right any more. We need to learn something new. And - tougher yet - we need to unlearn what we used to do. This means breaking some habits. When was the last time you tried to break a habit? How long are those New Year's resolutions good for, anyway?

One of our favorite examples of change that didn't always change is the ECOA notice requirement. When Regulation B was first issued (yes, some of us were alive and in this business back in 1975) it contained a requirement that the creditor provide applicants with the ECOA notice at the beginning of the application process. One of the "simplifications" that the Federal Reserve staff made in the major rewrite of Regulation B that took effect in March, 1977, was to move the ECOA notice into the adverse action notice requirement. They concluded that there was no need to have the ECOA notice if all went according to application, but that if denied, applicants should have information about their rights. Moreover, information at that time would be when it was actually needed.

Now that was 20 years ago, folks. And we STILL find those early ECOA notices in loan files. We even find it written into loan procedures. When we (tactfully) point out that they no longer need to provide an early ECOA notice, we find that creditors cling to the security of knowing that it was once a requirement. They want to see in writing that the notice is not required. And of course, it isn't there anymore because it's "gone."

Lots of people now in the lending business never saw that requirement in the first place. It lasted less than 18 months. But someone told them it was there, or had been there, or something...

This is perhaps a very good example of what makes compliance so hard. Much of what lenders and other bankers is passed on through professional lore. Compliance training sessions play only a small part in this learning process. So much of what we work on is actually unlearning. This makes trying to teach a changing topic even more difficult because we don't always know what we need to teach people to unlearn. All of regulatory simplification and burden reduction doesn't change the fact that Bob, Dave, and Susan traded tips at the water cooler - and they were trading old news - or incorrect information. Compliance management has to over-ride this phenomenon. We have to get the right information to the right place - frequently. So the more it changes, even if that change appears to be an improvement, the busier we are. That's why in the current "favorable" regulatory burden reduction environment, we are busier than ever!

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 12 & 13, 10/97