Regulatory Compliance in Uncharted Territory
Enough already! Never have truer words been spoken in relation to regulatory compliance. Credit unions are at the breaking point, with some already broken. The number of changes to consumer protection laws and regulations is unprecedented.
For the past year. credit unions faced short implementation periods to comply with the CARD Act, MDIA and comprehensive amendments to Regulation Z and RESPA. On a single day in August, the Federal Reserve issued more than 1,000 pages of proposed and interim rules on Regulation Z alone. And credit unions must tackle new privacy and risk-based pricing notices. Early in 2011, credit unions will begin making new Regulation Z disclosures regarding mortgage payment changes and the sale or transfer of mortgages. Credit unions will also need to comply with registration requirements for mortgage originators and ensure mortgage loan origination practices comply with Regulation Z changes. The most sobering news of all is that the biggest compliance challenges could still be a year or two away courtesy of the Dodd-Frank Act.
Back in 1994, my first job out of law school was a compliance officer of a mid-sized credit union. First task was bringing the credit union into compliance with the Truth in Savings Act as the mandatory compliance date was only seven months away. Truth in Savings represented the biggest regulatory compliance change affecting credit unions in years. However, given the fact that at that time there were virtually no other regulatory compliance changes substantially impacting the credit union, Truth in Savings got my full attention. Seminars, white papers, half-day training sessions complete with flip charts and role playing exercises, no stone was left unturned. When all was said and done, seven months of hard work equated to full compliance with the new law.
Fast forward to today. The landscape could not be more different. Credit unions are faced with thousands of pages of regulatory changes that make Truth in Savings look like a walk in the park. Not only are today's regulatory changes cumulatively more complex and comprehensive, the timeframe to comply is becoming shorter and shorter. Thankfully state leagues and trade associations have stepped up and are doing more now than ever to assist credit unions with compliance. At the end of the day though, even if you can comprehend the impact of these changes, your credit union still has to spend enormous time and resources on implementing all of the measures to bring the credit union into compliance.
One would think that those focusing on assisting credit unions with regulatory compliance would have nothing to complain about. An umbrella salesman cannot curse the rain, right? Not necessarily. We have a front row seat to witness the hurdles faced by credit unions in trying to do the right thing and comply. For instance, there was an enormous amount of work done by credit unions to comply with three rounds of the CARD Act provisions. Much of the past year was spent deciphering the new credit card rules and implementing a multitude of measures to comply. After all of that, word comes that the Consumer Financial Protection Bureau's first order of business will be to revamp credit card disclosures.
Another example is the Real Estate Settlement Procedures Act and Regulation Z. Credit unions are now using new good faith estimate and HUD-1 lending forms for real estate loans pursuant to substantial RESPA changes. There have been at least 16 amendments and proposed amendments to Regulation Z since January 2010, many impacting real estate lending disclosures. In the midst of all of this, the CFPB intends to combine Regulation Z and RESPA disclosures for certain real estate loans so that consumers receive one disclosure instead of two. Given the ridiculous number of documents provided to borrowers to sign in order to obtain a mortgage, less paperwork is a good thing. However, how does combining Regulation Z and RESPA disclosures relate to all of the amendments enacted and proposed? Will credit unions have to start over again and again in terms of adopting new disclosures and terminology as the rules change?
While the intentions are good, it would be nice to at least know that we are heading toward simpler documentation and less of it. Unfortunately, there are too many signs indicating otherwise. The Dodd-Frank Act requires over a dozen new pieces of information to be collected and reported as part of your Home Mortgage Disclosure Act Loan Application Register. Credit unions will be collecting and reporting new information such as borrower credit scores and collateral property value. Although you might be in a better position to defend your loan decisions against claims of fair lending violations, reporting the additional information will necessitate additional training, new forms, and the possibility of technical data collection violations.
It is difficult for a credit union to not shrink from the compliance burden. Faced with the overwhelming number of regulatory compliance changes, I know of too many credit unions that are considering offering less products and services to members. At what point does the risk of violating consumer protection requirements become too much? For some, that point has been passed.
For others, the focus has not been solely on the seemingly insurmountable compliance challenges. Instead, these credit unions keep almost a running list of everything they have done to bring their products and services into compliance with the changes. They want to show their examiners they are making a good faith effort at regulatory compliance. Gone are the days when a credit union could ever feel absolutely comfortable with regulatory compliance. Instead, it comes down to effectively assessing the compliance risk to your credit union and deciding on a path that best mitigates those risks.
John Zasada is principal, financial institutions at Larson Allen. He can be reached at 218-790-1086 or firstname.lastname@example.org