An 'Unsustainable' State

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SAN ANTONIO-The state of financial services regulations has reached a point where it feels "unsustainable" to William Klewin.

Klewin, the director of regulatory compliance for CUNA Mutual Group, said credit unions have been hit with a "deluge of laws" and a "flood of regulations" in recent years. Even stable regulations such as the Truth In Lending Act have been revamped, rewritten and rereleased.

"Truth in Lending has become a catch-all for anything remotely related to lending," he said. "The new updates are complex, dense and incredibly difficult to understand."

Complying with the rules is a challenge for every lender, he continued. CUs face major expenses for training, education, documentation, auditing and risk management-and Klewin warned the reg front will continue to grow as an expense going forward.

"There are little pieces of information in the rules that credit union staffs have to be aware of," he said. "There are so many rules already, this feels unsustainable."

Interim Interim Rules

As if CUs didn't have enough to worry about, Klewin noted the recent maneuvers involving the Mortgage Disclosure Improvement Act. He said interim interim rules were proposed before the original interim rules had a chance to go into effect. As a result, data processors have struggled to meet the requirement to calculate the "total of payments" when a "payment schedule" is no longer required.

Klewin's advice: few CUs took advantage of this particular provision previously, so they should simply follow the Truth In Lending Act.

A new rule affecting appraisals on principal dwellings became effective Dec. 27, 2010. Klewin said he is not against the rule, just its complexity. He said it is difficult for CUs to know if they are in compliance.

"The loan officer compensation rule is another one that is difficult to comply with," he said. "Credit unions must make sure their compensation structure complies, and all processes must be in place to ensure the correct options are disclosed to borrowers. After that, they must monitor, monitor, monitor."

So what is next for Truth In Lending, also known as Reg Z? Klewin said lenders and consumer groups alike have protested recent changes.

"No one liked al of the rules, for different reasons," he said. "The Federal Reserve Board kicked the can down the road to the Consumer Financial Protection Bureau. Huge changes in the rule are possible. If people thought the CARD Act was difficult to comply with, this will be monstrous. A lot of people may want to retire."

Likewise, there are more regulations still to come from the Dodd-Frank Act. Klewin said it has become difficult to know if the practices CUs have in place today won't be deemed "unfair" tomorrow.

"There is lots of uncertainty," he said.

Dealing with Uncertainty's Cost

All of these changes likely will have a negative impact on CUs' ability to serve their members. Klewin said they must have a long-term plan in place to deal with the uncertainty.

"First, credit unions must find a competent compliance staff," he counseled. "They will have to endure increased compliance risks, moral and morale risks, and reputation risks."

The moral risk, he explained, is because regulations make is so difficult to lend to members, in some cases people will decide they don't like the rules and will deliberately circumvent them. The morale risk: lending staff will simply say, "it is too difficult, I give up."

"One person should have overall accountability for compliance," he said, acknowledging a CU's compliance officer sometimes is not well respected or loved because he/she is seen as a frequent deliverer of "No."

"Make compliance a priority, understand the risks, and pay attention both to the details and the bigger picture. The compliance staff must have special skills, from risk assessment capabilities to communication skills."

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