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The Spirit of Compliance

All law students learn that there is a difference between the letter of the law and the spirit of the law. The letter of the law is the framework. It is the hardware that establishes the metes and bounds of the issue. It cannot be ignored or eluded (if you want to be compliant).

The spirit of the law is a different matter. The spirit of the law is what the law was supposed to accomplish - not to be confused with what it actually did accomplish. When lawyers and judges grapple with difficult verbal hair-splitting, the wiser among them also look to the spirit of the law. Understanding and applying the law's intent should help to resolve the hair-splitting semantic disputes. The principle is that the dispute should be resolved in the manner most consistent with the spirit of the law.

In the world of compliance, we often lose sight of the spirit of the law. We easily get totally preoccupied with the letter of the law. For compliance specialists, the letter of the law tends to be the source information as well as the last word. It becomes how we are measured during examinations.

Examiners get stuck in the same mire. They measure us - and they are measured - by the letter of the law. This gives conscientious examiners a very high anxiety level and encourages a tendency to look too hard at the letter of the law. They have argued about whether funds to refinance a loan that was used to purchase a home is actually purchase money because it is refinancing a purchase-money loan. While examiners are preoccupied with their debates, we get caught up in discussions about whether certain fees are really document preparation fees or finance charges.

In doing this, we overlook the goal of Truth in Lending and RESPA: to provide information to the consumer that will enable the consumer to understand the true cost of the transaction. When was the last time you asked yourself about the spirit of the law when worrying over whether the transaction is subject to the early three-day disclosures?

Similar concerns were raised at the government's conference on privacy notices. Several participants observed that a major shortcoming in the notification process was that institutions were more focused on compliance with the law and avoidance of enforcement actions than they were with communication. And communication of information was the whole point of those privacy notices.

When we direct our attention and efforts to literal compliance, we easily lose sight of what we are trying to do. We forget the affirmative spirit of the law and concentrate only on how it can come back to hurt us.

The examination and supervision process has a great deal to do with this. We know that if an examination produces "findings" that we face difficulties. We also know that the solutions to those difficulties will have little to do with the spirit of the law. The solutions will be driven by the spirit of enforcement.

The other major force against giving primary attention to the spirit of laws is the bottom line. Compliance is seen as a burden and cost rather than as an opportunity to enhance the bottom line. While this is certainly true in the short term, it overlooks why compliance exists.

What happens when we use this approach is more compliance. When we meet enforcement goals instead of customer service goals, we will get more compliance because consumers still want a solution. Until we approach compliance with attention to the spirit of the law - why the law was intended - we will keep missing the mark.

Real reduction of regulatory burden takes more than good compliance. It takes good banking. Good banking means looking at more than the bottom line or the walls established by laws. Good banking means considering what the customer wants (as long as this is realistic and legal), and how to best provide what the customer wants. Good banking means caring about the customer as much as the bottom line. Good banking means good products and excellent service. It means being a part of the community.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 3, 3/02




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