Clear & Conspicuous: A Federal Reserve Standard for Disclosures

We saw it coming. When the privacy regulation was promulgated, the agencies had to set standards for notifications. As usually happens when regulation drafters attempt to balance burden with flexibility, the result was a less-than-crystal-clear standard.

For purposes of notifications under privacy, the notice must be "reasonably understandable and designed to call attention to the nature and significance of the information" being disclosed. Clear?

This Regulation P definition at least had the distinction of being clearer than other definitions on the books. And the other definitions or guidance had the disadvantage of differing from each other.

The Fed has decided to take the step of establishing a more uniform standard for disclosures throughout its consumer compliance regulations by incorporating the Regulation P standard into Regulations B, E, DD, M and Z. On its face, this looks like a reasonable, logical move. The difficulty, as always, will be in the implementation.

Setting similar or identical disclosure standards for Regulations Z and DD makes a great deal of sense as the two regulations require very similar disclosures. The standard should be relatively easy to apply consistently to these two regulations.

It gets more complicated when you try to equate information disclosed in Regulation B to the presentation of information under Regulation Z. The guidance and standard may be the same, but the content and results will be quite different. Examiners, auditors, and compliance managers need to be ready to deal with these differences.

Regulation B
There are several notices triggered by Regulation B. The notice getting the most attention is the notice of action taken. Until this proposed change, the primary guidance provided in Regulation B is model forms including sample applications and sample denial and counteroffer notices. The regulation provides some protection from liability if a creditor uses these models correctly.

Now, however, the proposed standard would add an element to this guidance. No matter how much the creditor relies on the model forms, the result should be reasonably understandable to the consumer. It should also call attention to the nature and significance of the information in the disclosure.

The most frequently-given notice under Regulation B is the notice of action taken. Although this includes approval notices, consumers seem to get the gist quickly of an approval letter. It is the denial and counteroffer notices that are more difficult. There are some who would argue that the model forms don't meet the proposed standard.

First, how clear is it to the customer that there is a counteroffer? This is often glossed over with a few congratulatory sentences before the bad news is delivered. While this has been clearly acceptable under the existing regulation, it may draw fire under the proposed standard.

Second - and most significant - is the selection of reasons. Too often, the reasons selected are obscure in their relationship to the credit application. And also too often, they are written in lender gobbledy-gook. A personal favorite is "3X30; 2X90." What normal consumer understands that one?

One other problematic disclosure is the notice advising applicants that they do not need to disclose marital income if they are not relying on it to qualify for the credit. This notice is tucked away in the model forms in a manner that does not exactly call attention to it. It is also in pretty small type. Even though the presentation is theoretically sanctioned by the model forms, you should consider carefully whether it communicates well enough to your customers. The fact that the loan officer specifically called the applicant's attention to it and explained its meaning does not mean that the message in fine print meets the new clear and conspicuous standard. This is probably a good topic for comments, just in case you are looking for one.

Adoption of the clear and conspicuous standard should trigger attention to other notices, including notices of incompleteness and the notice of right to a copy of the appraisal. Often, key notices are placed in the application package. Some information, such as the right to a copy of the appraisal, is included on a page of notices titled "Important Notices: Please Read Carefully." If the appraisal notice looks just like six other (boring) notices, will this be considered as designed to call attention to the nature and significance of the information in the disclosure?

Regulation Z
Having looked at the issues on the soft notice side, let's look at Truth in Lending. There is a lot riding on TIL disclosures. Unlike penalties under ECOA for disclosure failures (usually a modest civil money penalty) the consequences under Truth in Lending are huge. If a court finds that a disclosure fails to meet the clear and conspicuous standard, it probably means that all similar disclosures failed. And that could mean that no disclosures were given for any of those loans. The restitution and rescission consequences don't bear thinking about. Under TIL, it is therefore also important to seek an official regulatory statement that the model forms, when correctly used, provide clear and conspicuous information.

There is an additional complication under the Regulation Z model. The proposal would include the Regulation P language that specifically permits inclusion of other information so long as it does not detract from the clarity of the disclosure's message. While this may be easy to apply in the context of a Regulation B adverse action notice, it is much trickier when format of disclosures is dictated. For both closed-end and open-end credit disclosures, some formats are required. Including other information, while apparently permitted by the proposed standard, would be prohibited or limited to the existing regulatory standard. In closed end credit, any information included in the federal box must be directly related to the information required by the disclosure. This is a much tighter standard than a clear and conspicuous standard.

Marketing
The permission to include additional information extends to marketing material. This could be - used effectively - an opening for more creative marketing ideas. However, any such additions should be monitored very carefully for compliance.

For example, periodic deposit account statements may include promotional material in the statement itself. It must be positioned, however, so that it does not interfere with or detract from the information disclosed under Regulation DD.

The same permission and concern would apply to open-end credit statements. The disclosures must be clear - but you may use statements for marketing purposes. This is something that we have suggested for some time. Since you have to mail the statement anyway, why not use the opportunity to tell the customer about other products?

Comments, Please
Comments on the proposals to all five regulations are due no later than January 30, 2004. Get yours in. While in concept, this is probably a done deal, this is the ideal time to request more specific guidance, regulation by regulation. In particular, ask for guidance related to the model forms.

ACTION STEPS

• Review your notices under all regulations in the context of a reasonably understandable standard. Also look at whether the disclosures call attention to the content.
• Review adverse action notices carefully to evaluate whether the reasons given are reasonably understandable to the consumer.
• Do a quick review of periodic statements for both deposit and credit accounts to see how clear and conspicuous the required disclosures actually are.
• Train anyone who provides disclosures, especially new account disclosures and adverse action notices, to focus on how effectively the notices communicate. Ask for suggestions to improve the notices.
• Review consumer complaints to see whether any complaints arose from ineffective notices - or could have been prevented by better notices.
• If you have any ideas, submit a comment letter. Be sure to suggest that model forms are all deemed to meet the clear and conspicuous standard.