Fade to grey

Anyone who works regularly with financial laws and regulations knows that they are not always black and white – there is often a grey area where risks need to be weighed and decisions made. This often impossible to color grey area is also where litigation arises. In sum, bank regulatory attorneys work daily in the gradations of grey between the lines of legal and regulatory language (it's not as bleak and Dickensian as it sounds). We are starting to see an increased blurring of the lines and a fade to grey in bank regulations. The rules are changing. The unknown, unclear, subjective, and open to interpretation areas of the law – the grey – have always existed, always will, and will necessarily grow as regulations expand. But the fade to grey discussed here is not a byproduct of the increasing complexity of banking regulations. It may not always be evident, but most banking laws and regulations attempt to minimize the grey and set clear rules and standards to the extent possible. The fade to grey is instead the move from rule-based regulation, which at least attempts to set forth clear standards, to more subjective, principle-based regulation, which hold banks to an often elusive guiding principle. Fair lending and CRA are the traditional banking regulations that adopt a more principle based approach. There are certainly some clear directives, but the parameters of what is and is not redlining or whether an action has a disparate impact on a protected class can become very unclear on the fringes. In those cases, redlining and disparate impact exist when the regulators say they exist – when a bank's actions violate the anti-discriminatory principle of the law. In the past few years, principle-based regulation has expanded into UDAAP. The boundaries of what is an unfair, deceptive, or abusive practice do not begin to get defined until regulators and attorney generals bring UDAAP actions. There are no rules or procedures that can be followed to ensure compliance; there is no checklist or roadmap. There is merely a principle, and guidance for the bank to follow and serve that principle. The most recent incarnation of principle-based regulation is Operation Choke Point, and the regulators scrutiny of 'reputational risk.' Banks are increasingly turning down customers in certain industries because they fear the ire of the regulators. Legal companies selling marijuana, guns and ammunition, gambling, and payday loans appear to be in the crosshairs, but banks aren't prohibited by law or regulation from serving these companies. Instead, regulators point to 'reputational risk' and leave banks with the unenviable task of divining the geography of that illusive principle. Bankers, like lawyers, like clear rules to follow so risk can be quantified and minimized. Principle-based regulations can be frustrating because the risk is difficult to quantify and can shift with changes in the political guard. Particularly in the nascent stage of principle-based regulations, banks are put in the position of either staying on the shore by taking an ultra-conservative approach and reigning in services, or wading out into grey, unknown waters, not knowing what could be nipping at their toes. With principle-based regulations, banks may never have abundantly clear rules, but with a solid strategic plan, along with effective policies and procedures, risk can be minimized. Community banks are used to the grey and with a sound approach will not fade with it.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.