By: Mikel Dunnagan
“Begin at the beginning and go on till you come to the end: then stop,” said the King inAlice in Wonderland.
Similar to this quote, the Dodd-Frank Act’s (DFA) Integrated Disclosures rules make for some confusing reading, requiring one to think like a regulator when attempting to understand the new rules. (This of course assumes that thinking occurs when regulations are written.) The ABS team has been meeting regularly with our forms and document prep partners since last August. During this time, we’ve observed the best and worst of the Consumer Finance Protection Board’s (CFPB) regulation writing abilities – doting on every jot and tittle in one section and using a broad-brush ambiguous explanation in another section.
When performing research on the DFA, or any regulatory topic for that matter, much of the regulatory world is hidden in plain sight – you just need to know where to look. Thus, you may need to review some or all of the following documents in order to begin at the beginning, go on till you come to the end and then stop.
Congress writes or the President takes executive action to create an Act/Executive Order. This gives the outline for a specifically chosen regulator (such as the CFPB, OCC, FDIC, FRB, or NCUA) to write rules to implement what Congress or the President wants done. Sometimes the Act or Order goes into great detail, while other times it is very vague, leaving lots of room for regulatory interpretation. In the DFA, the Integrated Disclosure rules provide some of the best (or worst) of both worlds – detailand ambiguity.
A particular agency is given responsibility for writing the regulation and commentary. In this instance, the DFA specified that the CFPB was to write the regulatory changes to Regulations X and Z that implement the portions of the Act pertaining to the new Loan Estimate and Closing Disclosure. A careful reading of the Act and the Regulations reveals that not everything in the DFA is in the Regulations and not everything in the Regulations is in the DFA. This little verse is key to understanding the law-making process.
The making of laws, like the making of sausages, is not a pretty sight. The less people know about how they are made, the better they sleep at night.
The regulation acts as the sausage grinder, combining the act, what the regulators think the act means and what they want it to mean.
The regulatory agency writing the regulation also provides commentary to explain what it just wrote. Often, the commentary gives examples of both what is written and of the regulatory expectations not specifically stated in the regulation itself. In addition to the commentary, models or required forms are often included.
Formal Written Guidance
Those entities to be regulated, in this case bankers, are then allowed to review, offer questions and provide other input. The regulators will then review this input and often come to the understanding that the act, regulation and commentary aren’t clear on one or several points. The agencies then get together and publish joint formal, written guidance. This guidance gives clarification beyond the act, regulation and commentary.
Additionally, the individual agencies (CFPB, FDIC, FRB, OCC, NCUA) publish letters to their regulated banks that set out formal written guidance specific to that particular agency. Agencies will also provide written responses to specific questions from a single institution which applies only to a specific set of circumstances for that particular institution. For example, specific institution guidance to an FDIC bank may not help you argue your point with your OCC examiner during an exam. However, that written response may give a window into understanding how an examiner views a specific set of facts.
Each agency has its own version of the exam handbook with their spin on the regulation. Periodically, the handbooks are revised to cover regulatory changes, joint guidance issuance and trends in exam findings related to banks regulated by that agency.
Agencies often provide webinars, teleconferences, seminars, and even have representatives sit as official spokespersons at conferences and seminars hosted by other entities. Whenever a representative of an agency makes a presentation, that person always caveats the presentation with the statement that the comments are not binding on the agency and that the regulation and commentary trump any comments made during the presentation.
With regard to the upcoming changes in the DFA, institutions have been provided with the new and improved Regulations X and Z, the commentary to Regulation Z, the CFPB examination handbook, and various other implementation tools available from the CFPB website. Also, the CFPB has produced four webinars that have been archived for your listening pleasure. All may be found at the CFPB’s website here:http://www.consumerfinance.gov/regulatory-implementation/tila-respa/. Two of the better resources on the website are the Small Entity Compliance Guide and the Guide to Loan Estimate and Closing Disclosure Forms. We recommend these as required reading for persons responsible for compliance with the Integrated Disclosures rules.
The CFPB has stated numerous times that no additional guidance on this topic will be forthcoming. However, numerous institution trade groups and individual institutions have requested additional clarification of the Integrated Disclosure rules. We remain hopeful that the CFPB will reconsider its stance and begin to address some of the areas of ambiguity.
As these waves of regulatory change assault, ABS remains an able partner in understanding the practical implications brought about by these compliance changes and for developing effective strategies for our clients.