Laws and Regulations - What's the Difference?

The current brouhaha over the RESPA servicing transfer notice brings to the front burner a common question: what is the difference between a law and a regulation. The corollary is: why do we care? We care because, right now, it makes a huge difference in what we do to comply with RESPA.

RESPA itself calls for a simple disclosure when a federally related loan is made. Section 6(a) simply says "[e]ach person who makes a federally related mortgage loan shall disclose to each person who applies for the loan, at the time of application for the loan, whether the servicing of the loan may be assigned, sold, or transferred to any other person at any time while the loan is outstanding."

This is a drastic reduction from the old requirement that included details about responsibilities and servicing transfers by quartiles.Under the act, the more important notices, often referred to as "hello notices" and "goodby notices", contain the details about the date of the transfer, when and where to send payments, and the contact information for each company. These notices provide all this information at the time the consumer is most likely to use it - when the transfer happens.

The problem is that HUD hasn't changed the regulation to reflect the new law. This isn't for lack of trying - although HUD didn't try very hard. HUD actually proposed a change to the regulation to simplify servicing transfer notices. Unfortunately for the industry, HUD included several other controversial changes in the same proposal and the controversy put a stop to the process. HUD never separated out the non-controversial portion, the servicing transfer notice, to clean up the regulation.

The result is that you see different mandates in the law and the regulation. Which one is right? The short answer is that the law trumps the regulation - especially if it is passed or revised after the regulation was issued, as is the case with this RESPA problem. Congress passed the revisions to RESPA to undo the complicated notice created in the regulation. The fact that HUD hasn't corrected the regulation doesn't change the fact that Congress has eliminated that detailed notice requirement.

Think of laws, regulations and other interpretive material as a top-down organization chart. The top of the chart, the CEO, is the law itself, the many statutes discussed, debated, and passed by Congress and signed into law by the President.

The kind of law that the banking industry deals with generally targets specific practices and identifies specific protections. The laws also provide for enforcement. In the banking world, this happens through the examination system as well as through private actions.

The next box on the organization chart is the regulation, which ties in closely to the law and functions as a Chief Operating Officer. Agencies are authorized by the laws to issue regulations. The regulation provides detail to the act and, in some situations, provides clarification or interpretation to the law.

The Truth in Lending Act assigns the regulation-writing responsibility to the Federal Reserve. Other laws, such as CRA, may be assigned to all agencies that supervise entities subject to the law. Some laws divide responsibility. An example of this is Truth in Savings which gives regulatory authority to the Federal Reserve for banks and thrifts and to the NCUA for credit unions.

After the regulations come the official interpretations, the CFOs of the regulatory world. An official interpretation is literally an on-the-record statement by the agency explaining what it means in the regulation. Official interpretations basically have the same authority as the regulation.

Finally, in come the troops, with wide variations in responsibility and authority. This includes unofficial interpretations and statements from staff. Once you get down to the troops level, the authority is gone, but what they say can give you valuable guidance. Take the guidance for what it is worth. When you have an important question, start at the top.

What does this mean for RESPA? It means that the regulation that is still on the books is worthless. In effect, it has been fired by the CEO and no longer has any authority. Remind examiners of this when they try to tell you to use the long form disclosure.

Laws
This is the top of the pile, right after the Constitution. Everything, including the agency's authority, flows from the law.

Regulations
Regulations can only be issued when authority to do so is conferred on an agency by Congress through laws. Some laws, such as the Fair Debt Collection Practices Act, are non-regulatory statutes, meaning that no agency has authority to issue regulations.

Footnotes & Appendices
These are part of the regulation and have the same authority as the regulation.

Official Interpretations
The agency's on-the-record interpretation or explanation of its regulation. Official Interpretations carry the same force as the regulation.

Unofficial interpretations
These are not binding on the agency. Courts are not obligated to follow them. Unofficial interpretations provide guidance, but no protection. The agency may change its mind. On the positive side, these unofficial interpretations generally help you to understand how the agency approaches an issue. Think of them as an early warning system.

Enforcement Policies
An enforcement policy is a statement of how the agency intends to enforce the regulation. It does not necessarily deal with interpretation or clarification of the regulation but does provide excellent compliance guidance by telling you what the examiners will make you do if they find a problem. Enforcement policies should guide your internal reviews and corrective action.

Some one at the agency said so
This is not worth the paper it is written on unless you have a good connection with the person, such as the person is your chief examiner. Then it is polite to listen.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 6, 6/03