Posted by Tyrone Beasley on Tuesday, September 7th, 2010

The term “black and white” is used in various ways, but as it relates to regulatory compliance for financial institutions it means no interpretation required, plain and simple, easily understandable, no grey area. Of the myriad of regulatory requirements financial institutions must comply with, many are black and white with a sprinkle of grey and confusion mixed in for excitement and wonder. When to provide certain disclosures to a consumer when they apply for a home purchase loan is black and white. For the most part, consumer disclosures are required in three business days. Determining the appropriate depth of anti-money laundering program elements to put in place to catch a terrorist, however, is full of grey matter.

We bankers love and adore regulatory compliance so much that we would sell our first born on eBay in exchange for new regulatory requirements, but only if the requirements are black and white. We are smart people, but grey matter confuses us to no end. (Ok, I’m kidding about the love thing…for some of you anyway.)

There are a plethora of new and revised regulations expected as a result of the recent financial reform bill. Some may actually be good, with emphasis on the term “may.” But let’s not kid ourselves; most of the new and revised regulations will be burdensome and, in combination, will require additional resources and costs to ensure ongoing compliance. And dare I say some of the new and revised regulatory requirements will not fall into the black and white category. They will be grey anatomy.

You will soon find that the regulations themselves are secondary to the new measuring stick called “unfair or deceptive acts or practices.” Under the new environment, being in compliance with regulatory requirements is only a piece of the puzzle. That’s the black and white piece so to speak. You will also have to meet the grey matter test of unfair or deceptive acts or practices. Let’s say you advertise a new loan product. Also assume the advertisement is in full compliance with applicable regulatory requirements. Well, that would only be step one – the black and white step. Step two is a regulator’s determination of whether the advertisement is deceptive or whether the loan product itself is unfair to consumers. That, my friends, is the grey step. I can come up with many blatant unfair and deceptive acts or practices in the form of advertisements, products, procedures and policies. But I’m not concerned with the blatant situations; I’m more concerned with those that are not, and regulatory examiners will determine if they are unfair or deceptive.

The regulatory agencies define “unfair” as an act or practice that causes or is likely to cause substantial injury (usually monetary) to consumers, cannot be reasonably avoided by consumers and is not outweighed by countervailing benefits to consumers or to competition. “Deceptive” is defined as a representation, omission or practice that misleads or is likely to mislead a consumer; the consumer interprets it reasonably under the circumstances; and it is material. No matter how you slice it, just about any particular act or practice can fall within the grey area of someone’s interpretation.

The battle cry for unfair and deceptive acts and practices is born from the mortgage crisis as many consumer and community groups cried foul play after the mortgage bubble burst. Their complaint is that lenders employed deceptive practices to get consumers into certain loan products, such as interest-only loans, variable rate loans with teaser rates and negative amortization loans. Now regulators have jumped on board and will view every banking action and activity through the unfair or deceptive lens.

Going forward, you must consider the definitions of unfair and deceptive in every facet of decision making related to customers. Advertisements and new loan and deposit products must be internally scrutinized with these definitions in mind. In doing so, err on the side of conservatism; if it’s questionable to you, it will certainly be questionable to a regulator. All of the bank regulatory agencies, including the new consumer protection bureau, will measure consumer-related activities of banks by the unfair and deceptive stick. Unfortunately, the measuring stick is not black and white.