Where Does Regulatory Burden Come From?

There is nothing quite like going through a mortgage settlement to get a fresh perspective on compliance, regulatory burden, and paperwork in general. I have just endured a real estate settlement ceremony to refinance the mortgage on my home. I don't know how many trees we killed, but we did use up at least 2 reams of paper - legal size at that - all in the cause of lowering the interest rate.We keep hearing widespread griping about compliance and regulatory burden. So it was interesting to look at this settlement process and consider how much of this so-called regulatory burden is actually driven by compliance regulations.

The answer was surprising. Not much.

In the context of consumer compliance, there are several disclosures. There is the HUD-1 Settlement Sheet, now a standard tool for almost all real estate closings. Then there is the Truth in Lending disclosure full of consumer-friendly information like the APR, the amount financed, and the total of payments. There may be the copy of the appraisal given to the borrower at that time. And there may also be the borrower's proof of flood hazard insurance. But when it comes to what we call compliance, that's about it.

Most of the massive pile of paper is the direct result of living in a litigious society. Most of the papers were for the lawyers. The standard forms for mortgages and deeds are many pages long. They make up a significant part of the paper pile.

Then there are also the "important" documents, such as an errors and omissions agreements, that are thought up by the lawyers. These documents are not compliance dictated by federal regulations, although many lenders consider them as such. The truth is, they exist because the lawyers try to cover all of the "what if" situations they can think of. The result is more documents to sign.

What the lawyers do is designed to protect the lender from possible future harm when something goes wrong. That's why they think up the "what if" situations.

Compliance is intended to do something quite different. It is intended to create equal bargaining power to consumers by providing key information to those consumers. The burden comes when the information has to be provided in a certain format, using certain calculations and mistakes become violations.

So why do we hear so much griping about compliance and why do so many people in the industry consider compliance to be the primary or only component of regulatory burden?

One reason is that it is easy to do so. Blaming compliance for numerous problems is easy - and relatively safe. Certainly it is much safer than complaining about safety and soundness!

But what are these complainers really saying? They are really saying that they don't want to be held to the standard set by the compliance laws. Consider what this means - not necessarily doing business in a way that is fair to customers, not providing customers with information about loan terms and conditions - and costs. What kind of lender is that? More important, what is the ethical compass of a lender that resents compliance?

Right now, your ethical compass is getting a great deal of attention. In top-down examinations, the examiners will inevitably see the degree of involvement and concern your board and senior management have for compliance and customer service. This is an excellent time to take a hard look at your institution, evaluate its ethics, and plan for strong compliance and internal audit programs in the next budget.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 7, 7/03