Making Regulations Larger Than Life

In theory, a law is what it says it is, and so is a regulation. The idea behind a legal system such as ours is to provide clear guidance, clear prohibitions, and clear mandates - just like the Ten Commandments.

Reality often undermines theory. Take consumer protection laws and the compliance, examination and supervision process. If, in an unexpected quiet moment, you step back from the daily process and take a long-distance view of the consumer protection laws and then compare those laws with specific events and practices, you may find that in many ways, we have strayed from the theory.

Think of the legal outlines and the compliance goals as a map. The map constitutes form and direction. The map shows how to get from here to there. The map shows choices of routes. It even offers choices of destination. But is regulatory traffic moving smoothly?

Theory is great, but in reality there are potholes and detours. There are even washouts. Such problems are not exclusive to streets and roads. It happens in regulatory compliance as well.

In theory, most of the consumer protection laws provide fairness for customers. As such, the concept of the requirement, such as telling the truth about the cost of credit or the return on a deposit, should not fairly be considered regulatory burden. It is simply sound business.

In practice, compliance can be very different. It is the detours, potholes, gridlock and washouts that provide the regulatory burden. How do these happen? On roads, the answers are weather and normal wear and tear. But this is where our analogy breaks down. When it comes to compliance, the problems are invented by examiners and by institutions alike. We invent them by directing our attention to violations and losing sight of the underlying purposes of the consumer protection laws. To use a different analogy, we scrutinize each tree but forget about the forest.

Take Truth in Lending as an example. The purpose of TIL is to provide consumers with useful information about the cost of credit before they make a credit decision or become obligated on a loan. To determine whether TIL is working, the question should be "what did the consumers know and when did they know it?" Instead, we bury ourselves in ferreting out technicalities. Is this a finance charge? Was the disclosure a day late? Is the APR calculated correctly? Is the terminology on the disclosure correct? Is it sufficiently specific? Is it too specific?

Then there is Regulation CC and its concept of making funds available at a reasonable time based on the type and nature of the checks deposited. When evaluating Regulation CC compliance, what do we look at? For starters, we have a feeding frenzy with hold notices. We focus on the timing, content, and calculations. When we find a violation, it is cited. But do we ever ask whether the customers knew what they needed to know when they needed to know it?
Looked at this way, both examiners and bankers are responsible for building up regulatory burden. We fail to look at the big picture and focus all our attention on the checklist in front of us. It is important to pause every now and then to ask what the check list is for. Instead, we use the checklist to direct our actions. We look for and count violations.

We do the same thing when we look for ways to reduce regulatory burden. We nit-pick our way through regulations. Regulatory burden cannot be reduced by deleting items from the audit or examination checklist. It can only be reduced by redrawing the map. So before all the leaves turn color and fall off the trees, step back and take a good look at the forest. It is time to make the forest healthy by culling out the dead wood.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 10, 9/05