Dueling regs can hurt consumers

There are many consumer protection regulations. Each stands alone. Each has its own purposes, definitions, and rules designed to carry out a specific purpose. But sometimes they don’t work so well together.

Take, for example, the Bank Secrecy Act’s requirement for a customer identification program. It is designed to ensure that the bank knows that the customer is legitimate and isn’t using the institution to launder money or commit any other financial crime.

But it isn’t that simple.

While BSA is encouraging you to find out everything possible about customers and would-be customers, the Equal Credit Opportunity Act places strict limits on what the creditor may ask or obtain from credit applicants. ECOA and Regulation B limit information requests so that the information cannot be used to discriminate against the applicant.

Which reg wins?

Which regulation is more important?

When those two regulations dueled, Regulation B won. Preventing discrimination was the priority when compared to techniques for determining the customer’s identity. The easy way to confirm the customer’s identity might be to make a copy of the driver’s license or passport and slap it into the file. But Regulation B rules that this is illegal collection of race and other prohibited information.

It is still possible to have a strong CIP process without making a copy and putting it in the file. Review of the license or passport supported by a document stating that this was done, and recording the license or passport number, can be sufficient.

When two regulations duel with each other, it is up to the regulators to duke it out and decide which regulation wins.

But what happens when the duel is within a single regulation? 

Can this really happen?

Yes.

Duels within rules

It has happened already. Take a look at Regulation Z rules for the merged loan estimate and loan closing forms. The new Regulation Z rule adopts the application trigger from Regulation X (RESPA), meaning that the creditor has three business days to generate a loan estimate.

But “estimate” it is not. It is a commitment to costs, give or take 10% on some of the costs.

Producing accurate projections on the loan amount and interest rate is not new. It’s been done since the Truth in Lending Act was enacted. But lenders were not held to a tolerance based on the early disclosure. Of course, if examiners ever found a pattern of under-disclosure, there would be some nasty and expensive consequences.

Unfortunately, it isn’t just finance charge information that has to be correct on the loan estimate. Six items of information must be determined: applicant’s name, applicant’s SSN, applicant’s stated income, requested loan amount, property address, and property value, estimated by the applicant.

From this list of six items, there is much more to disclose than finance charge information. For example, creditors must disclose details about the escrow account. This means somehow learning about taxes and insurance costs, but without asking. It means knowing what services will be needed and including those costs unless a change is justified by changed circumstances—such as finding termites.

And how about the settlement agent’s fee? How often is there a good number to work with at this stage of the application—literally before the application. And the costs of a title search and title insurance? 

All this based on only six items of information, with no guarantee that the information provided by the consumer is accurate.

What goes on in the minds of regulation writers?

It is one thing to require detailed and precisely accurate early disclosures. It is quite another thing to take away the information needed to produce them. In the new Regulation Z mortgage disclosures, consumers are protected at both ends—and the creditor is caught in the middle.

How long will responsible creditors—the ones that want their borrowers to be able to pay off their loan and stay in their home—stay in the mortgage market? 

Is it really consumer protection when the regulation is so restrictive that lenders can’t make loans?