RIGULATORY INSIDER
By BonitA g. Jones
A 30-Year Journey: From the Simplification
of Reg. Z to Its ‘Revitalization’
The reguLAtors continue their wave of rulemaking, with the period between April 1 and July 31, 2009, being particularly busy. During these four months, the agencies1 finalized six significant consumer protection rules or guidance documents and issued five regulatory proposals. For
the most part, the regulatory changes fell under regulation Z.
That said, stepping back to reflect on the scope and significance of
the consumer protection regulatory
changes within the last two years I’m
reminded of the behemoth effort in
1980 to simplify Reg. Z, also known
as the Truth in Lending Simplification
Act of 1980. Now, almost 30 years later,
we seem to have come full circle to another comprehensive effort—this time
to “revitalize” the regulation.
In the context of what is happening
today, let’s take a look at Table 1, which
recaps the environment then and now,
for a brief comparison of four factors:
the economic climate and its relation
to consumer credit issues, the extent
of regulatory changes in response, the
drivers of the changes, and the process
for formulating the new rules.
Table 1 suggests that the simplification
initiative in 1980 was less intense than
today’s directive, but in fact the overarching goal is the same: to build consumer
capacity to make fully informed decisions about credit products and minimize the likelihood of surprises that can
have financial consequences. However,
the resultant rule-writing process has
become exponentially more dynamic
(and resource-intensive) and will no
doubt influence regulators’ compliance
expectations. It is useful to anticipate such
expectations, so we have outlined points
under the following questions that you
might want to keep in mind.
What do the current changes to
Regulation Z suggest about the
regulators’ expectations?
1. The new regulatory changes will
curtail bad credit practices in large part
because the rules
apply to all lenders, not just the ■
depository institutions that are supervised by the federal banking
and thrift agencies (Note: The interagency supervisory group7 completed its pilot review of targeted
nonbank mortgage subsidiaries in
2008. Federal Reserve Chairman
Ben Bernanke has indicated that
the review provided “important
insight into lenders’ practices, particularly their oversight of broker
relationships.” 8 Additionally, Federal Reserve Governor Elizabeth Duke
stated that “the Federal Reserve is
instituting an ongoing program for
supervision of nonbank subsidiaries of bank holding companies” and
“will continue to work cooperatively and share information with
other agencies with overlapping
jurisdictions.” 9 Outside of this pilot
effort, Congress is aware of the need
to consider regulatory reform that
enables appropriate and consistent
oversight of independent as well as
bank-affiliated nonbank entities.)
provide not only additional infor- ■
mation to consumers at critical
points in the credit process, but
also go further by restricting certain
practices, e.g., imposition of fees
such as certain prepayment penalties, coercion of appraisers, and the
most recently proposed restrictions
on lender compensation.
include disclosure formats and con- ■
tent that have been extensively vetted
and tested by consumers for mortgage, credit card, and private education loan transactions. In a speech,
“The Systemic Importance of Consumer Protection,” Governor Duke
said, “To ensure that new disclosures
are useful to consumers, the Federal
Reserve has used consumer testing to
explore how consumers process information and understand important
features of financial products. This
has been quite an informative exercise. We have used what we learned
from consumer testing to improve
the disclosures we require.” 10 As an
example, the new credit card rules
require that certain key terms be disclosed in a conspicuous table because
field testing indicated that consumers
were unlikely to read dense language
but were comfortable with interpreting information in a table format.
Testing also revealed that there was no
reasonable way to explain the practice
of double-cycle billing when calculating interest rates on credit cards, so
the new rules ban the practice. 11
2. Financial institutions will meet the
regulatory expectations because
past compliance ratings profiles illus- ■
trate the sound capacity of banking
companies to effectively implement
new rules; in fact, despite an uptick
