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Question & Answer
Question: I am working with several of our affiliates to try to make our compliance procedures uniform. In several situations, I have asked that they do something that is not specifically required by regulation, for example reporting reasons for denial on their HMDA Loan Application Register. They don't want to do anything that is not specifically required. How should I advise them?
Answer: First, we commend your efforts at uniform procedures. It is always a good idea to follow standard procedures within the company, particularly if products such as loans will be reported by, serviced, or sold within the company.
Generally, the regulatory agencies attempt to provide financial institutions with choices about compliance when the agency believes that doing so is permissible under the statute. Providing reasons for adverse action on the HMDA/LAR and deciding whether to conduct a portfolio search for flood hazard insurance compliance are two examples of this permission. The agencies offer these choices in an attempt to minimize regulatory burden.
It is tempting to take up the "offer" to do less. However, that choice has risks. The institution that chooses the "do less" option is taking on other risks and burdens. For example, the institution that does not report reasons for denial may believe it is reducing its compliance burden. That savings will quickly disappear when a community group challenges their lending record and the reasons for denial are needed to explain and defend the loan decisions.
Many lenders are choosing not to conduct portfolio searches for flood insurance because the search is not required and the lender must pay for most or all of the cost. These lenders are saving compliance costs but taking on the very high risk of being the "insurer" in the event of a flood.
When regulations offer choices, each institution must consider the options and their consequences carefully. The fact that something is not required does not mean that there is no risk in choosing not to do it. Often, the risk is very high. The principal benefit of these options is that the institution may choose how to do it. The prudent institution will do something that is consistent with the regulation.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 17, 11/96
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