Banking Law

NAFCU Compliance Blog's Anthony Demangone was reading an interview with Elizabeth Warren recently and rather than spitting up a little in his mouth, actually agreed with something she said. In this instance, it was about why Warren wants to find ways to make financial product disclosures "simple": "Complex regulations are killing community banks. They can?t afford an army of lawyers to work through the regulatory thicket."

Anthony was all over that lawyer-bashing bitch-slap like he'd just found the Messiah.

Amen, amen, amen.  I've said this again and again - people assume that "banks" (a terms that seems to group Wall Street, community banks, credit unions, and interstellar institutions like BofA together) have entire buildings filled with regulatory attorneys who are waiting to analyze complex regulatory documents and create even-more complex account agreements.  Wrong!  A super-majority of credit unions have no attorney on staff.  If regulations are clearly written, I think you'll see a strange occurrence.  The regulatory burden will decrease, and compliance with regulations will increase.  (By the way, every time I see the term "army of lawyers," I always think of this scene.  (YouTube.))

I got a kick out of that paragraph because (1) I love a guy who can make that kind of obscure connection to a LTOR Youtube video and use it to bash lawyers like me; and (2) I happen to agree with him, that lawyers have been part of the problem, not the solution.

As I pointed out recently, OCC General Counsel Julie Williams was singing this tune six years ago. Since Ms. Warren's been getting the favorable press on this issue lately, and since Ms. Williams has been "dissed" by the Obama administration because she did her job in arguing persuasively for the OCC's preemption "rights," I'm going to re-post my entry for January 12, 2005 in its entirety. In Washington, there are no new ideas, merely new mouths opening every day to claim credit for the same. ****************************************************************************************************************************

In a speech today, Acting Comptroller of the Currency Julie Williams calls for nothing short of a revolution: consumer disclosures that actually disclose useful information in an understandable manner!

As Williams notes, the entire point of consumer disclosures that are mandated by federal law is to provide consumers with important information so that that they understand the risks of the loan or other transaction into which they are entering, and can weigh those risks for themselves. If they can't understand the disclosures, they won't be able to properly weigh the risks.

So how is the US Congress doing in achieving that goal through the use of the numerous disclosure forms that it has required over the years? According to Williams, "this system is on the verge of breaking down." Why? "Not because consumers are getting too little information, but because they are getting too much information that's not what they're really after; and because the volume of information presented may not be informing consumers, but rather obscuring what's most helpful to understanding of financial choices."

The burden on the banking industry of complying with such disclosure obligations is enormous, especially on smaller community banks. Williams contends that compliance with Gramm-Leach-Bliley privacy notices alone involves hundreds of millions of dollars annually. Such burdens, Williams also contend, threaten the viability of the community banking system.

What should be done? Williams has suggestions for all parties:

• For Congress: "First, that Congress should consider more emphasis in financial services legislation on articulating the goals to be achieved through a particular consumer protection disclosure regime, rather than the precise elements of mandated disclosures. And, second, that Congress should look for opportunities to require, and please provide adequate time for, regulators to include consumer testing as part of their rulemaking processes." In other words, quit having lawyers draft the rules, and let consumers have input, so that the rules will be in a format that consumers understand. Williams uses the FDA process for drafting consumer labels on food products as a prime example of the way in which the process ought to work.
• For the regulators: "Admit that we can?t throw a bunch of lawyers ? however talented ? into a room and expect that they are going to come up with consumer disclosures that are understandable to most people." Instead "embrace consumer testing" in the design of consumer disclosures. Interestingly, Williams goes on to advise that regulators need to be prepared to "police" the banking industry to correct bad practices that might evolve, but are not anticipated or covered by existing disclosures or specific regulations. She specifically mentions Section 5 of the the Federal Trade Commission Act that bars unfair or deceptive trade practices as an important tool in this approach, and that was the subject of a recent post on this blawg.
• For the bankers, while she "feels the pain" of their regulatory burden, she remains troubled by continued resistance of banks' marketing departments to fully inform customers, who, if they actually understand the risks, might then decide "NOT TO BUY" a service or products from the bank. "The tension here is that shorter, focused consumer disclosures can meaningfully reduce regulatory burden, but, if they are done well, they will also empower consumers to make some decisions that a particular bank may not like." That's the price the banks have to be willing to pay.
• Finally, she calls upon consumer advocacy groups to stop merely calling for more disclosure, and to focus on better disclosure. They need to put their effort where their mouths are, and help all sides find out what information consumers really need and how better to make disclosures of that information understandable.

This is all good common sense. What are the odds that she'll inspire any progress? Stay tuned.