Complexity Cost Credit Unions
I have some good news this morning. The CFPB is going to come out with material in the coming months to assist institutions in complying with the myriad of changes to mortgage lending practices and disclosures mandated by Dodd-Frank and recently translated into thousands of pages of regulations with more to come. According to the CFPB, it will be coming out with a document explaining the regulations in non-legalese and even providing a compliance check list. The CFPB deserves credit for helping people actually comply with its regulations, but the very fact that this material is necessary underscores what’s wrong with our regulatory environment in general and Regulation Z, which implements the Truth in Lending Act, in particular. The complexity of regulations, not just the regulations themselves, is imposing an ever-increasing financial burden on financial institutions and ultimately the consumers that purchase their products. The CFPB can and should do something about this.
The costs are real but they are hidden from the public. Virtually every mortgage lender in the country that is at all concerned about conducting its business lawfully has already tasked someone with translating the mortgage and servicing regulations into an operational blueprint. This should include those institutions that are going to be exempt from these mandates because the exemptions are not absolute and an institution exempt today may not be five years from now. For those brave souls who are responsible for taking on this task, the summaries provided at the beginning of the regulations and even the plain language of the regulations themselves are not sufficient to get the job done, which means that they have to delve in to Regulation Z. The problem is that Reg Z references so many provisions that the exceptions often swallow up the rules and you have to refer to two or three different regulations in various parts of the code to figure out what it is the regulators are actually driving at. Remember, the Truth in Lending Act started as a very simple and noble concept: a mandate to ensure that consumers can easily compare the cost of credit. Clearly, this has spun out of control.
Now, the CFPB is to blame for none of this complexity, but as a result of the enormous power it has been given over virtually all the country’s major consumer regulations, it has the ability to do something about this and has so far taken a pass. For instance, in coming out with its qualified mortgage regulations, it could have eliminated the numerous cross references to other parts of the regulation and combined the regulations into a more straightforward legal document. At the very least, as a colleague of mine suggested yesterday, it should include hyper-links to the cross referenced material so that people who actually have to read this stuff for a living could do so more quickly and efficiently. In addition, when reading a regulation, you not only have to understand the plain language, but also read the interpretations through which regulators provide guidance. The reality is that many of these sections do more than just interpret a regulation but actually make substantive additions to what lenders have to do when complying with the law. Why is this a big deal? Because some day, there is going to be someone, maybe even you, who has to make a quick judgment call as to how to interpret a given section of the regulations and you should be able to rely on what the regulations themselves actually say.
If you’re reading this and your first reaction is “gee, I’m glad I don’t do compliance,” your second reaction should be to realize how needlessly inefficient and costly this labyrinth of regulatory gobbledygook is to your credit union I’m not embarrassed to admit that it took me about three hours yesterday to get to the point where I really understood one section of the new regulations. Multiply these man-hours across the nation and you see that the complexity results in millions of costly man hours that could be avoided if the CFPB started to streamline the regulatory monstrosity.