Can Compliance Co-Exist with Common Sense?

By Walika, Christine; Barefoot, Jo Ann S. | ABA Banking Journal, March 1997 | Go to article overview

Can Compliance Co-Exist with Common Sense?


Walika, Christine, Barefoot, Jo Ann S., ABA Banking Journal


A public policy book hit the best-seller lists several years ago by advocating that government stop producing micro-management-style regulation and instead leave implementation to common sense.

The Death of Common Sense received rave reviews in Washington. Both President Clinton and House Speaker Newt Gingrich invited the author to discuss his ideas.

I was reminded of this by last month's ABA Banking Journal Compliance Clinic. In that column the Federal Reserve's Griffith C. Garwood defended keeping the new Community Reinvestment Act regulation general in the face of industry pressure to add more certainty.

This column raised a question that has long plagued compliance regulation: the inescapable tradeoff between certainty and simplicity.

The simpler a rule is, the less certain its meaning, making implementation confusing and enforcement inconsistent.

The more certain a rule is, the more detailed it becomes--and, therefore, the more burdensome.

Compliance officers and other bankers work under laws at both extremes of this spectrum.

On the simple-but-uncertain end is CRA. The CRA law is very simple--just a few pages and a general mandate. The old CRA regulation, too, was short and simple. The new regulation is somewhat more detailed but, as Garwood pointed out, still very general. The generality leaves the crucial question of "how much is enough" entirely to examiner judgment. This in turn leads to a great deal of confusion over how to comply, and inevitable inconsistencies in evaluation.

At the certain-but-burdensome end of the continuum are Truth in Lending and Regulation Z. With few exceptions, the provisions of Regulation Z are crystal clear. Whether a creditor has performed under them is answerable by "yes" or "no." Reg Z is so process oriented that penalties apply even when no one has been harmed.

Is there no solution to this world of extremes? To some extent, yes.

However, there are principles that can help minimize the negative effects, while preserving the positives. Here are some key questions for Congress, regulators, and bankers to ponder as new rules are designed and discussed.

1. If the government is treating a matter with broad, flexible mandates, are the guidelines clear?

It would have been impossible to fashion an objective, quantitative, simple CRA that would not have wreaked havoc with banks' right to choose their own strategies and to manage themselves.

We can wish for such a simple solution. It is a fantasy. In the real world, the complexity and variety of financial institutions and the markets they serve requires that the mandate be broad and the evaluation be subjective.

However, are the CRA standards as clear as they can be?

Certainly, in the other major area where agencies rely on examiner judgment-fair lending--there is no question: the standards are NOT clear enough.

For years, the regulators enforced only the procedural aspects of Regulation B2. These involve technical issues, much like the requirements of Reg Z.

All this, however, had nothing to do with whether the bank had granted credit fairly to all--the intent of the laws behind the rule. It was assumed that, if the procedure was being followed most of the time, it would tend to prevent discrimination in the first place. At the least, it was hoped, the procedure would make it possible for the consumer to detect and complain about it if it should occur. Few such complaints occurred, and the regulators believed discrimination was dead.

Then in the early 1990s, the federal government de facto broadened its concern about credit discrimination to encompass unintentional discrimination that occurred as a by-product of the normal lending process. This focus on theoretically existed in the law all along, but was never a focus of enforcement.

The goal in combating unintended discrimination was in essence a CRA-like one--an effort to encourage lenders to be proactive and affirmative in finding ways to get more credit to minority borrowers. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Can Compliance Co-Exist with Common Sense?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.