Compliance without Pain? What's Wrong with the Way We Regulate? Too Much Angst, Too Little Delivered. Is There a Better Way?

Article excerpt

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We all use the term "regulatory burden." It means many things, from too much work to supremely difficult calculations. We use the term to refer to consumer protection regulations and to safety and soundness regulations. The real meaning is murky at best, but we know it's out there and that something should be done about it.

In the past several years, both the industry and regulatory agencies have worked to identify components of regulatory burden and find ways to minimize it. Statutes and regulations were scoured and some laws were changed, resulting in a little less burden.

But there is plenty more burden on the horizon. Congress is looking actively at the negative results of predatory and nontraditional mortgage lending. Once more, we face a legislative solution that carries a heavy burden. Both consumer protection and safety and soundness may be affected. And banks will have to do more.

It's a recurring pattern. Does it always have to be this way? Or is there a better way to regulate?

One law, a few formulas, a thousand disclosures

The first step in finding a better way to regulate is to take a hard look at the current process, to find the weak points. It's a process of many steps, beginning with consumer complaints and congressional action through the issuance of regulations all the way to compliance efforts and examinations.

Generally, regulation writing and disclosure design begins with a law. The mission of those writing the regulation and designing the disclosures is to carry out the mandate of the statute.

In the case of Regulation Z, implementing the Truth in Lending Act, this process involved defining the elements of "finance charge," developing formulas for calculation of APRs, and designing the format and content of disclosures. The result is the thousands of disclosures presented to consumers each year.

When a draft regulation is put out for comment, the industry and other interested parties have the opportunity to opine. Far too few bankers take the time and trouble to review the proposal and develop thoughtful comments. Those who do comment tend to focus on the details. Industry members consider how to do what the regulation would require and the feasibility and cost of doing that. Consumer advocates consider whether it gives them the protections that they want. All of this occurs under the umbrella of the statute and its specific provisions.

The results of this process are often mixed. There is more consumer protection. There is enhanced safety and soundness. The goals of the statute are met. But do the resulting regulations really work? Too often, the answer is "no."

Rules fail because they focus on the statute

Here is the fatal flaw in this process. The entire process looks backward at the statute rather than toward the statute's goal of consumer protection. The result is regulatory burden not fully justified by the benefits.

A disclosure designed to comply with the law may not be clear and informative for consumers. Focusing on the statute's details fails to consider how to effectively communicate information.

Nothing illustrated the weaknesses of this approach more powerfully than the Gramm-Leach-Bliley Act's privacy regulations. While the regulations and disclosures carry out the mandates of the act, the disclosures are less than effective in communicating with the consumers they are designed to help.

Truth in Lending isn't far behind. How many consumers pick up a TIL disclosure, read it, and understand it? Almost no one except a lender or a regulator understands the difference between the loan amount on the face of the note and the "amount financed" on the TIL disclosure. The consumer is more likely to be confused than informed.

The industry suffers from the same fatal flaw. When regulations are issued, banks focus on how to comply. …