Today's Trends in Credit Regulation

Coordinating Internal Processes to Avoid Acting at Cross Purposes
By Elizabeth C. Yen

The federal government is an enormous bureaucracy, so it shouldn’t be a surprise that federal agencies occasionally act at cross purposes. As one recent example, consider the conflict between the Federal Housing Finance Agency (FHFA) and so-called Property Assessed Clean Energy (PACE) property retrofit financing programs championed by Congress and the U.S. Department of Energy. Under a PACE financing, a homeowner would repay the cost of an energy efficiency retrofit through special assessments added by a participating municipality to the homeowner’s regular property tax bills for a period of time (often 20 years). FHFA was concerned that a senior priority tax assessment lien could arise in connection with a default under a PACE financing, which would in turn create a default under the terms of a Fannie Mae/Freddie Mac first mortgage on the retrofitted property. The safety and soundness of the GSEs would thereby be potentially adversely affected (to the extent that the GSEs invest in loans that are potentially subject to PACE liens). The Comptroller of the Currency took a cue from FHFA and warned national banks about mortgage loan safety and soundness issues raised by PACE programs. As a result of this conflict among various federal agencies, many PACE programs have been suspended or curtailed, and municipalities have had to come up with alternative acceptable uses for federal funds originally allocated to PACE programs. A few states are experimenting with modified PACE programs, where the PACE lien would be junior to an already recorded first mortgage on the retrofitted property. It is probably an understatement to say that PACE proponents within and outside the federal government are disappointed by this federal stand-off.

PACE was originally promoted as a way to encourage homeowners to voluntarily retrofit their properties to make them more energy efficient, using competitive grants for federal funds, using existing local property tax assessment processes as the billing and collection mechanism for PACE financing. Through unfortunate timing, PACE was getting off the ground at the same time federal regulators were deciding how to cope with an evolving residential mortgage crisis or meltdown, and PACE proponents apparently did not fully appreciate the extent to which a senior property tax lien program would create problems for residential first mortgage lenders and investors.

As another recent example of a federal agency acting somewhat at cross purposes with itself, consider the Social Security Administration (SSA), which recently mailed out 2011 benefit statements to persons already receiving Social Security benefits, as well as 2011 notices of estimated future benefits to persons not yet receiving Social Security benefits. The notices of estimated future benefits only showed the last 4 digits of the recipient’s Social Security number and included a few other identity theft-related precautions. In contrast, 2011 benefit statements sent to existing benefits recipients disclosed recipients’ complete Social Security numbers at the top of each page (front and back) of a multi-page statement (including pages containing essentially boilerplate information about how to challenge the SSA’s calculation of 2011 benefits). The Office of Management and Budget advised federal agencies in 2007 to review and eliminate instances where use of Social Security numbers is unnecessary. One wonders whether the lack of Social Security number truncation in the 2011 SSA benefit statements might perhaps have been due in part to the cost of reprogramming an older, pre-existing benefit statement computer system.

It is not difficult to find other examples of federal (and state) governmental agencies acting inconsistently or at cross purposes. In some cases, this occurs because of laws that promote conflicting goals or purposes. (Consider, for instance, federal income tax deductions for home mortgage interest and real property taxes, FHA low downpayment mortgage programs, Community Reinvestment Act and other federal initiatives meant to encourage homeownership, coexisting with separate federal requirements and restrictions that may intentionally make it more difficult for individuals to qualify for home mortgage financing.) In some cases, the conflict or inconsistency might arise from so-called “siloing”, where one agency or group does not look beyond its own “silo” to see what other agencies or groups are doing. “Siloing” in government is hard to avoid, since individual agencies and departments are typically given very specific and focused missions and purposes. Employees of a given agency or department inevitably develop a shared common perspective and approach to managing their regulated entities, and different agencies and departments inevitably develop differing regulatory approaches.

One can only hope that the new Consumer Financial Protection Bureau, with six divisions, and potentially 500 or more employees by the end of 2011, will not act inconsistently or at cross purposes. However, as a practical matter, since government is generally presumed to be correct and is rarely successfully challenged, the public sector does not have much incentive to reduce inter- or intra-agency conflicts.

When a single business entity is subject to the jurisdiction of multiple regulators, this invariably creates compliance difficulties - differing approaches to (and differing subject matters of) regulation among governmental entities will necessarily require one single regulated entity to harmonize various legal and regulatory inconsistencies.

It is all too easy to complain about government bureaucracy and inefficiency. It might be more useful for private enterprise to try to draw analogies from the contradictions within a large governmental organization to how the private sector could minimize similar internal inconsistencies. Potential examples of inconsistent internal business practices and procedures might include the following:

  • Advertising a strong commitment to consumer privacy, but reserving the right in privacy policy notices to disclose nonpublic personal information to third parties for marketing and other purposes unrelated to account servicing, and requiring consumers to opt out of such information sharing. (This inconsistency could be the result of insufficient coordination among marketing and compliance groups or “silos.”)
  • Allowing consumers to check a box on a web page to opt out of receiving unsolicited marketing e-mails, but having a system that automatically resumes sending unsolicited marketing e-mails to existing customers who have transacted business online recently, without regard to whether those customers had previously specifically opted out of receiving such e-mails.
  • Disclosing the use of up-to-date information security practices, but allowing employees (and/or third parties) to access, copy, disclose, and discard sensitive personal financial information without basic security safeguards.
  • Encouraging consumers to have their required periodic payments automatically posted to credit or debit card accounts at no extra charge, but charging past-due
    customers who agree to have an individual payment processed online or by telephone a “convenience fee”.
  • Encouraging consumers to avail themselves of overdraft or other services offered by one line of business, when other lines of business within the same company might consider use of such services negatively when evaluating a consumer’s eligibility for (or when pricing) other services offered by the company.
  • Allowing employee compensation formulas, stockholder expectations, and other short-term profit-driven metrics to inadvertently encourage uneven (unequal) customer service or compliance “short cuts”.
  • Focusing on how to comply with new regulations (such as the new Truth in Lending mortgage loan originator compensation regulations, or the new Fair Credit Reporting Act adverse action credit score disclosure requirements) without considering other relevant pre-existing, unaffected legal requirements (such as fair lending and Equal Credit Opportunity Act requirements).

Businesses should monitor their internal processes and reduce internal communication barriers, to avoid acting at cross purposes. If a financial services company or other business acts inconsistently or at cross purposes, its customers (and regulators) generally will not presume that the company is in the right, and the existence of conflicting legal requirements generally will not provide an acceptable excuse for a company’s internal inconsistency. Furthermore, unlike government, the private sector cannot rely on “sovereign immunity” arguments to avoid liability to third parties. In most cases, even good faith reliance on a regulator’s informal advice will not provide a useful defense.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP, headquartered in Maryland. She is admitted to practice in Connecticut only. The views expressed herein are personal and not necessarily those of any employer, client, constituent or affiliate of the author. Elizabeth can be reached at 203-776-1911 or by email at

Article Archive

2024   2023   2022   2021   2020   2019   2018   2017   2016   2015   2014   2013   2012   2011   2010   2009  

Copyright © 2024, LLC. All rights reserved.