Which Reg O?!? (and meet Reg N)

Think you know "O"?  It's all about lending to insiders, right? 

Well, guess again.

There's more to "O" than what you think you know.

The O that you know

Anyone who has attended ABA's National Compliance School is familiar with Mike Maher's class on Regulation O, often fondly referred to as "Oh no! It's Reg O!" , or "Oh no! More O!" 

And now, there is more than one Regulation O.

"Oh no, not more O," you say? 

Oh, yes.

Times are changing--thanks to the Consumer Financial Protection Bureau.

Regulation O has always meant rules about lending to insiders, even for institutions not regulated by the Federal Reserve. Always. Everyone in compliance knows what Reg O means.

But now, the Bureau of Consumer Financial Protection, showing no recognition for the previous, almost sacred designation of O, is calling one of its inherited regulations "O."

To which we in the compliance fraternity say, "O? No!" 

But the deed is done.

Of new regs O and N

At the same time, almost side by side in the Federal Register, the Bureau published a new Regulation N. At least, in addition to new compliance challenges, these two regulations, side by side, give us a little bit to laugh about. Oh NO!

The new Regulation O is the reincarnation of the Federal Trade Commission's rule on mortgage assistance relief services. 

How to tell them apart, Old O and New O?

Think of the new O as a rule for outsiders instead of insiders. It is directed at entities that claim to provide mortgage relief to borrowers who are underwater. The rule was designed to prevent fraudulent "offers" to help.

Then there is the new Regulation N, which brings over from the FTC the UDAP rule on mortgage advertising. Again, this rule, when at the FTC, applied only to entities over which FTC had jurisdiction.

In both interim final rules, the changes made are largely technical and cosmetic. The new regulation substitutes CFPB for FTC. As the Bureau explains, the interim final rule "does not impose any new substantive obligations on persons subject to the existing" rules. Instead, the rule makes only "technical, formatting, and stylistic changes."

Gearshifts under Bureau jurisdiction

But this is only the beginning.

The Bureau also announced that it expects to conduct future rulemakings that may involve substantive change to these and other regulations. What could this mean?

When CFPB issues a regulation to address a specific practice, it is less clear which entities are subject to the regulation. After all, FTC has no jurisdiction over banks. This lack of jurisdiction automatically limits any rule they issue to non-banks. In the hands of the Bureau, things could be a little different.

When the Bureau warned that it will review and may substantively revise these regulations, one area it could change is the coverage of the regulation. In fact, the Bureau actually stated that the review will address the possibility of expanding the scope of these regulations to include persons presently excluded from coverage under the FTC rule.

In other words, the Bureau may change this rule to include banks and savings associations that were not subject to FTC regulation.

In some respects, expanding the scope to provide more uniform coverage makes sense. That would theoretically mean that every company or person taking certain actions must operate under the same rules. We can't really object to that concept. After all, banks have been calling for a level playing field for years.

But there is a dark side to this possibility. Many of the services that a bank provides, such as discussing an application to rewrite a mortgage loan, could be covered under regulations if the definitions are written so broadly that any type of customer interaction could be considered to be providing mortgage assistance relief. That would give us two Regulation Os to deal with.

A closer look at Reg N

And don't leave out Regulation N. Currently, coverage of Regulation N is limited to entities subject to FTC jurisdiction under the FTC Act. Thus, although it defines "person" broadly to include "any individual, group, unincorporated association, limited or general partnership, corporation or other business entity," it does not include banks or thrifts--yet.

The rule lists practices which would violate the regulation. Most of the practices relate to various types of marketing and include misrepresentations of APR, interest, and fees--practices  already prohibited by Truth in Lending.

Other practices prohibited by Regulation N reach beyond the existing Regulation Z advertising rules. This could include misrepresenting or understating parts of the obligation such as escrow, or making misleading comparisons between two types of loans.

For financial institutions under regulatory agency supervision, Regulation N would not change much if it were expanded to apply to them. However, it does have the potential to create confusion--or simply complicate research.

Worse yet, it could mean that a practice could violate two regulations instead of one.

How your work will be affected

Compliance managers need to know that this rule is now on the books of the Bureau. Financial institutions, especially the larger institutions that will routinely be examined by the Bureau, need to watch this one closely.

Theoretically, it is just as possible for a lender to make promises of debt reduction or debt consolidation as it is for a credit counselor. The problem is not necessarily who performs the function but the function itself. To this end, whether the perpetrator is a financial institution or a fraudulent credit "repair" counselor, the harm is the same.

Similarly, credit counseling or mortgage repair services could be construed to include a bank's mortgage loan originator, giving guidance or advice to a current or potential customer. How would a mortgage loan originator be able to sell a consumer on refinancing with the bank, switching from the current mortgage lender, without coming under the regulation's coverage?

When assessing Bureau regulations, remember something: It puts itself forward as a protector of consumers. When an issue is approached exclusively from the perspective of consumer protection, why should it make any difference whether the entity subject to the regulation is an individual, a community bank, a payday lender,  a multi-national bank or a finance company? The consumer reasonably expects equal protections, no matter what type of individual or company is offering the service or product.

When looking at issues from the broader perspective of the Bureau, it may be difficult to justify applying a rule only to non-banks. In short, future consumer protection rulemaking is likely to focus on the consumer and not on the business or product.

What this means for compliance managers is clear. You need to watch the Bureau closely. You need to think about comparative and competitive aspects of any regulatory proposal.

And when the Bureau proposes something, you need to comment!

Disclaimer: Views in Common Sense Compliance do not necessarily reflect the viewpoint of the American Bankers Association.