Assumptions are often said to be at the heart of all disasters, and perhaps the most dangerous in bank management today is the assumption that a computer model purchased from an outside vendor is complete and accurate. “I could tell you stories,” as the saying goes, but here are two excerpts from examiner reports done on modeling software that your bank could buy-or already owns:

• “Most variable-rate accounts (other than loans) are treated as having fixed repricing periods of from one-to-three months in the data distribution. This is not in accordance with management’s view or common modeling practice, and is not subject to change or correction by the user.”
• “The ‘Average Gap’ calculated by this model is actually average gap-months per month(AGMM). This result is then used to estimate the user’s margin risk under the ‘gap’ method. If an immediate rate shock is used, no error is induced; in any other rate scenario, use of AGMM produces significant error, even to the point of mistaking asset-sensitivity for liability-sensitivity (or vice versa).”

Pedigree of a challenge

“Model risk” is the latest stress point to be identified as facing commercial banks and it has a bit of regulatory history behind it.

In 1996, the three federal banking regulators issued a joint policy statement on Interest Rate Risk that advised banks that they would be expected to maintain certain standards in their internal risk management processes. Banks are required to identify and measure the risks they face; to set risk-management policy for the portfolio; and to police violations of policy.

Further guidance for banks now comes in Bulletin 2000-16, “Risk Modeling: Model Validation,” from the Comptroller.

The document raises OCC’s concern that banks’ asset-liability management models have themselves created a new kind of risk: misdirection based on using models that contain faulty features. As the bulletin puts it, “OCC has observed several instances in which decision makers … relied on erroneous price or exposure estimates … with serious consequences for their bank’s [sic] reputation and profitability.”

Managing “model risk” has really always been part of the bank’s overall asset-liability management process. It was implied in 1996; this latest bulletin merely made it official.

Begin with a policy

Thus, model risk joins interest rate, price, foreign exchange, and other sorts of risk that must be addressed in each bank’s sensitivity management process. The first task, then, is to set a policy on it, and Bulletin 2000-16 provides a general outline for model validation:

• Validation should be independent of the model’s developer, to ensure impartiality.
• Internal responsibility for validation should be formalized and defined-if some unspecified “somebody” is supposed to take care of it, nobody will take care of it.
• Validation should be thoroughly documented-the “somebody” mentioned above may be somebody different a year or more down the road.

From this framework, measures (and limits thereon) are derived, and the responsible party prepares periodic analyses, as with any other risk. Results are reported and actions taken, to assure compliance with the Model Risk Management Policy.

The OCC bulletin takes pains to stress that purchasing a model from an outside vendor does not exempt a bank from its validation responsibility. As a consequence, by subscribing to a vendor’s model that does not have an independent validation available, a bank assumes responsibility for inaccurate or erroneous conclusions arising from that model’s use-just as though the bank had developed the model itself.

The interests of the OCC and the bank are exactly the same here: each is best served when the bank’s decision-makers have access to accurate, timely information about the bank’s risk position when rates change.

The new information in Bulletin 2000-16, then, isn’t that model validation is required; it is that such validation is necessary. Remember, according to 2000-16, use of inaccurate models has had “serious consequences” in some cases, and there have been even more near-misses than you’d like to believe.

Clearly, bankers need a game plan for assuring model validity. The companion outline to this article-to appear in Part 2 next month-was developed for independent, third-party validation of vendors’ models. Be forewarned that some tasks involved in validation are straightforward, while others prove quite trying in execution.

Where is the threshold of “no”?

As each bank undertakes model validation, it will learn to identify with the conclusion of Bulletin 2000-16:

• “Model development is a complex and error-prone process. While many completed models work as planned, some models contain fundamental errors. Moreover, the internal logic of most models is usually very abstract and limiting, so it requires considerable judgment and expertise to apply model results outside of the narrow context under which they are derived.”

However, again quoting from the bulletin:

• “Model validation not only increases the reliability of a model, but also promotes improvements and a clearer understanding of a model’s strengths and weaknesses among management and user groups.”

But there’s another side to this-the possibility that there will be enough off-kilter about a model that your bank wants to find another. How do you draw the line?

Aristotle recognized that “The power to veto is the power to govern.” This concept should be kept in mind in validating a computer model. If, as is common, the reviewer sets up a single criterion that the model must meet or be held “invalid,” that criterion has “the power to veto” the model, and thus it excessively dominates the validation process. Furthermore, such a standard inevitably reflects any biases on the part of the individual reviewer, distorting the validation process.

Two alternatives to the use of these “must-meet” standards offer a better balance.

The first is negotiation: the reviewer should discuss the draft validation report with the in-house or third-party developer of the model being validated. This is a chance for the developer to offer to remedy the exception, in advance of the final report’s release. This remedy may range from a simple change in documentation to a revision of the model’s calculation methodology. (Exceptions are often resolved by the developer’s “refining the perception” of the reviewer-with no change in the model required at all!)

The second alternative is disclosure: the reviewer should discuss any unresolved exceptions fully in his report (including in that discussion a “Developer’s Response,” if appropriate), and explain to the user the nature and implications of any perceived weaknesses.

Finally, toward the universal goal of user success, the developer should be willing to make the reviewer’s final report available to any interested user.

Monday, 2:32 PM
Ken shook a couple of aspirin onto his palm and offered the bottle to me.

“You’ll need it,” he warned.

“So, what’s the problem?” I asked, gulping stale coffee.

“Well, you remember the last time the examiners were in, we were launching the Loan-Plus product?” I nodded. “And you remember it raised that tricky issue on Reg Z calculations, and that we ran the question past Sherri?”

I remembered. Our lead examiner, Sherri Hanson, had scratched her head a little over it, because it was an innovative product that didn’t fit neatly into traditional treatment under Truth in Lending. Our lawyers had already reviewed Ken’s ideas on how to calculate and disclose the APRs. Ken, our compliance officer, was a genius at Regulation Z. The attorneys agreed with him—or, at least, they didn’t disagree. They’d covered themselves by recommending we pay them to research a full legal opinion on it. That was going to cost thousands of dollars so, before we committed to it, we’d put the question to Sherri. She’d suggested one tweak to Ken’s approach, and then said it was right on target. Problem solved, and no big fees.

“Yes, I remember,” I said, feeling my temples beginning to throb. “We set up the whole process to fit her advice. Don’t tell me we didn’t do what she said.”

“No, it’s not that,” Ken said. “In fact, we did exactly what she said. We dotted every ‘i’.”

“So,” I said with puzzlement, “what’s the problem?”

“The new guy, Wayne Lowry—Sherri’s replacement. He says we’re doing it all wrong.”

Examiners—seems as soon as you get so you can communicate with one, they get transferred and you have to start all over. I looked at Ken. “Tell me you’re kidding.”

“I wish I were.”

“Well, did you tell him we did what Sherri said?”

“Yeah.”

“And?”

“He said, ‘Too bad’.”

Tuesday, 8:15 AM
Mr. Lowry,” I smiled and held out my hand. “We met very briefly last week—I’m Anne Rivers, SVP for lending.

“Yes, I remember.” He didn’t return the smile. We all took seats around the creaky old table in the bank’s corner conference room. Ken sat beside me. Wayne and two of his compliance specialists lined up facing us. Wayne pulled out a legal pad, full of close handwriting, and a well-chewed pencil. The frown deepened.

“As I believe you know, there is a problem with your Reg Z disclosures,” he began. He outlined the argument.

“All this means,” he concluded, “that the bank has understated APRs on all the affected loans. As a result, you will be required to search the universe of affected loans, identify all impacted customers, notify them in writing of the illegal disclosures, and reimburse them for the amount of the overcharge.”

I winced and swallowed. This lending campaign had been a huge success. There were thousands of customers. The potential fallout was flashing before my eyes. Not just the hit to earnings, which would be substantial for a bank our size, but also the customer impact. We’d just launched a very clever—and expensive—new image campaign, complete with a new slogan. Everyone was talking about it. Its whole premise was that our bank put the customer first, no matter what. This examiner was ordering us to send letters to a large percentage of these customers, saying, in essence, that we’d cheated them.

Got to tread carefully, I told myself.

“Mr. Lowry,” I said, “I think Ken has given you some of the background on this. We were very careful with this disclosure, because we knew the product was unusual. We didn’t take a step on this, not one, until we got a signoff from our examiners. Sherri Hanson reviewed our approach in depth, and told us it was fully compliant.”

“Well, as you know, Sherri is no longer with the agency,” he sniffed. “If” (he put a malevolent emphasis on the word and repeated it) “if, Sherri ever said that, then, she was wrong.”

If you can’t rely on your lead examiner, I thought, who can you rely on?

“But,” I said, “we dealt in good faith here. Our lawyers signed off.” (I didn’t mention their little caveats and the fact that we’d saved some money.) “And Sherri did too. If we made a mistake, it was inadvertent. Ordering a full file search and reimbursement action—well, that seems like overkill. Especially since, as I think you’ll agree, the customers all received a very clear, meaningful disclosure.”

I looked for some sign of belief in his eyes. I saw nothing.

“I don’t think you could find a single customer who would claim they didn’t understand the loan terms. We went an extra mile on that, to spell everything out clearly. Again, because it was a new type of product, we wanted to make certain our customers really understood. In a million years, this bank would never mislead our customers.We’d be out of business.”

“Well,” Wayne said. “The Truth in Lending Act does not concern itself with good intentions.”

I bridled a bit at this and I knew he could see it, but it didn’t phaze him in the least.

“And the Act doesn’t concern itself with what customers did or didn’t understand,” he continued. “Reg Z is a very technical rule. You have to get it right, technically. If you don’t, and it results in an overcharge, then my hands are tied. We have to order a reimbursement. Period.”

Gradually, a smile had spread over his face. It seemed to say, “gotcha!” Score one for you, I thought, bitterly.

A Week Later
I knew it!” Ken slammed his fist on the mahogany table in our law firm’s conference room. “I knew I was right!”

Sure enough. We had anted up (better late than never) for a complete legal opinion from our high-priced attorneys. And they were siding squarely with Ken and Sherri. We’d been calculating the APRs correctly. So they said.

I played devil’s advocate. Turning to the senior partner, I said, “Are you saying that we’re unequivocally right? Or, are you saying we have a good legal argument, one we can defend and might win, but that they may have a pretty good one, too?”

The senior lawyer removed his gold-rimmed glasses, took a handkerchief from his pocket, and wiped the left lens. He took a deep breath and paused. For drama, no doubt. A dozen old lawyer jokes streamed through my brain—none of them seemed very funny right now.

“I think,” he said in best lawyerly tones, “that we have an extremely strong case. [They can never just say “yes, I think you’re right” can they? I thought.] That is not to say that there’s no merit in the agency’s interpretation. It’s possible to come up with the construction they’re using. After all, this is an unusual product. Even though the Fed regularly updates its interpretation of Regulation Z, it’s difficult—probably impossible—for them to anticipate all the innovation in today’s marketplace.”

He paused to wipe the other lens.

“Lenders are inventing new products faster than the regulatory apparatus can regulate them. It’s a growing problem—financial companies doing things that don’t stay within the lines of traditional lending. That pushes you into legal no-man’s land.”

The young associate who had researched the issue chimed in. “It’s true,” she said, “it’s the Wild West. You can find one lawyer, or examiner, pointing to one section of the law and regulation and agency interpretation, and then find another citing a different set of provisions. The guidance is inconsistent–self-contradictory, in fact. That is, it works fine if you’re just looking at traditional products, but not if you break out of the box.”

She pushed back her chair and folded her arms. “Better get used to it. It’s the way it’s going to be.”

Meaning, I thought, we’d need to spend more on legal fees to them, up front, instead of just trying to read and follow the regulations like we used to. The old way has been bad enough. Great. “So, what do we do?” I asked.

“Well,” said the senior partner. “We fight.” He put his glasses back on.

That Evening, 6:21 PM
I jumped, heart pounding, as a shrieking car horn jarred me out of my thoughts. An SUV filled with teenagers sped around me as I swerved back into the right lane. The kid in the passenger seat made an obscene gesture.

This predicament was getting to me, no doubt about it. My mind had been miles away from the road in front of me.

I like examiners. Ninety out of a hundred are good people. Okay, I wouldn’t deny that the job attracts, maybe, more than its fair share of people on a power trip. But, still, they’re usually very professional, and reasonably hard-working. And, the truth is, we need them. Sure, some of what they do is an onerous, unnecessary burden on good banks like mine, but I’d be the last to argue that the system doesn’t need watchdogs.

In fact, I’d generally found that a good examiner like Sherri Hanson could be almost like a partner, consulting with the bank on how to handle complex issues.

But, this thing with Wayne. He was the kind of examiner that drives a wedge between banks and regulators. He’d sunk his teeth into us but good, and, could taste blood now, I reckoned, and he really didn’t care what we did or said. He wasn’t going to let go. Don’t let the facts get in my way—that was his position.

When I’d returned from the lawyers earlier today, I’d met with my boss, Pete Crandall, the CEO, and shared my worries. I told him that Wayne was a bully, and that I couldn’t shake the sense that Wayne was enjoying this confrontation—that he’d already mentally put our heads on his den wall.

After all, the lawyers said we had a strong argument, but Wayne wouldn’t even acknowledge it. I’d told Pete that I thought we should be afraid of Wayne, because he was looking for the “gotcha” situation, something he could use to frighten and intimidate other bankers.

We weren’t the first, either. I’d made a couple of calls to my counterparts in other banks. Sure enough, one of them had a story about clashing with Wayne. It hadn’t had a happy ending.

“What do you recommend?” Pete had asked me.

I had ducked the question then. Pete wasn’t the type to sit still, though, and he wanted to call one of the senior regulators in the agency’s regional office and feel out the situation. I didn’t disagree. Based on what he learned, we’d figure out where to go next. I couldn’t help feeling queasy, though. We were clearly going over Wayne’s head.

Suddenly the clouds unloaded, hammering my car and pounding the new spring flowers into the mud. When I got out of the car at home, the bulbs my husband and I had planted last fall looked like they’d been stomped by a bad little boy. I wondered, as I unlocked the house door, if Wayne had been that type of kid.

Next Morning, 7:30 AM
I jumped over a brown puddle, making a mental note to check maintenance plans for patching the potholes in the parking lot. Entering the lobby, I followed the aroma to the coffee bar, poured a cup, and balanced it and my briefcase as I made my way down the hall, greeting the early-birds in their cubicles. I hoped the coffee would wash away the last of the antacid tablets I’d chewed on the drive to work. I hadn’t used so many in the course of one week since I’d been in college.

As I reached my own office, I stopped. There was Wayne.

“Good morning, Wayne,” I said pleasantly, forcing myself. Wayne didn’t smile.

“I hear Pete Crandall called the region,” he said.

“Oh?” I said, playing dumb.

“He called my boss’ boss, to complain about me.”

“I don’t think he did that, Wayne,” I said, putting down the coffee and pulling the briefcase strap off my shoulder. “Come on in my office and let’s talk about it.”

“No thanks,” he said icily. “No need to talk. But, I want to give you some advice. Good advice, in the bank’s best interests. I’m cautioning you. You won’t help yourselves by attacking me. I’m just doing my job. Your bank has made a big mistake. It’s my job to require you to correct it. Fighting that, especially by attacking me—I’ll just tell you, that’s not going to make things better for you. It’s going to make them worse.”

He walked away. When I got to my desk, I popped the last of my stomach pills.

A Month Later, 10:00 AM
Yes, there’s no doubt about it, they broke the mold when they made Al. We’re going to miss him. Miss him already.” The agency’s new regional director sounded friendly as she walked us into her conference room and offered coffee. I passed. I’d had my caffeine quota on the plane when we flew in.

Besides, I was already on edge. It made me nervous that the director’s predecessor, Al Morelli, had retired just before our problem came to a head. The new director, Arthea Munz, had transferred in from another region. She seemed able and reasonable, but we didn’t know her.

And what worried me was, Munz didn’t know us. I was sure that Al would have given us the benefit of the doubt if he saw one, because he knew we were good guys. Arthea didn’t know us at all.

Arthea turned the floor over to Pete, who made the brief statement we’d prepped him on. He said, “The first thing we want to say is that our bank is 100% committed to complying with the letter, and with the spirit, of every law. We believe in compliance. It’s more than a legal obligation. It’s an ethical imperative. And beyond that, we deeply believe it’s good business. Our customers trust us to treat them right, and we work to deserve that trust, and that’s the whole basis of our success over the years. As I think you know, we’ve invested much more than many of our peers in assuring we have the resources and expertise to do compliance right.”

I smiled to myself. Pete had hit just the right note. If he’d been too combative, he could trigger the regulatory reflex that tended to classify banks as either good guys or bad guys. If Arthea tossed us in the “bad guy” category, we were doomed. At the same time, though, Pete didn’t grovel. He laid out the broad strokes of our case, making it clear that we believed we were right. He concluded by telling Arthea that he trusted the agency to be fair to us.

Next our lawyers began explaining the legal merits of our case. Arthea listened with seeming interest, while two regional specialist types took it all in with their eyes fixed on legal pads they were filling with notes. Wayne, who was hearing our spiel for about the third time, sat silently at the end of the table, glowering. Much as I didn’t like him being there, I felt curiously sorry for him. I wouldn’t want to be him just now anymore than I liked being me, just now.

“Another factor,” I said, “is that we checked our compliance plans in advance with the examiners, and even made a change they suggested. Now, we’re being told the exact opposite of that advice.”

“Ah, yes.” The director lost her pleasant expression and looked at her staff. “Yes, we’ve checked into that aspect. Ahem. Uh, first, you should know we have found no documented record that any of that occurred.”

I opened my mouth to protest, but she cut me off.

“And,” she said pointedly, “even if it were true, it’s the bank’s responsibility to comply with the law. Examiners try to be helpful, they may even offer informal advice, but that in no way affects the bank’s responsibility to meet its legal obligations.”

Ugh. And I’d left my stomach pills in the car, back at our home airport’s parking lot.

An hour later, we were back out in the sunshine, walking down the agency’s front steps toward our taxi.

“Well,” Pete said, “that seemed to go well, don’t you think?” As we climbed into the cab, the lawyers were agreeing.

I wasn’t so sure—not by a long sight.

Two Weeks Later, 2:45 PM
The applause faded. As the lights came up, I watched the panel of speakers squinting in the sudden brightness. What a bore.

Ken the compliance officer had insisted that I must take in this regulators’ compliance panel at the consumer lending conference I attended every year. I’d have much preferred to be at the session across the hall, on internet lending. Unlike this session, that one seemed to have an overflow crowd.

I stifled a yawn. I considered myself pretty enlightened about the importance of compliance. Ken was good at his job and I’d gone to a lot of trouble to pay enough to keep him with us. I still found it strange, though, that someone as smart as Ken found this stuff so fascinating.

I checked my watch—still 15 minutes of questions and answers. I was studying the program’s blurb about the night’s dinner cruise, when somethingl made me tune back in. A banker had stood and was asking a question that almost exactly tracked our situation. I held my breath. The senior Washington regulator for our agency pulled the microphone closer and started to speak.

“Yes,” he said, “yes, we’ve started seeing this kind of product in banks in the last year or so. I don’t, of course, know the details of your scenario, but in general, here’s how we’re looking at the Reg Z issues for this type of loan.” He went on to describe an agency policy that was exactly what we’d been doing!

Aha! I thought. We’ve got them! I blessed Ken’s insistence that I attend.

But, how to use the information? Maybe I should approach this regulator after the panel, or buttonhole him over drinks tonight at the cruise, and tell him our problem. That, though, might boomerang on us if it angered Wayne and the region. Maybe, instead, I should tell Wayne what the Washington man had said. But, Wayne had displayed no trace of willingness to listen to our arguments. And he’d been extremely defensive about any hint we were going over his head.

When I got back to the bank, I resolved, I’d set up a meeting of our decisionmakers to agree on a strategy.

Two Nights Later
The stress of this Reg Z thing was really starting to get to me now. I needed more sleep and more exercise. I decided to go swimming. It was a warm spring evening, the air humid and heavy, and I enjoyed the feeling of pushing my tired arms and legs through the cool water…

Suddenly, something grabbed my foot, pulling me under! Some kind of water-monster had me in its grip. It had Wayne Lowry’s face …

I jerked awake. For a moment I lay in bed, heart pounding. I got up and pulled open the bedroom window, letting cooler air pour into the room. I thought about my husband, innocently asleep, oblivious. I was going to have to tell him I had no prospects of getting a bonus this year. That meant we could toss out those vacation brochures we’d been collecting.

No matter how this ended, it was bad for the bank, and bad for me. The costs would be docked, formally or informally, against my unit’s profitability. And my group had messed up in a way that invited a body-blow to the bank’s reputation. Just yesterday, I’d had an unsettling call from the kid who covered the banking beat at the local newspaper. He would have a field day with this story, if we paid off.

And just today, we’d briefed the board’s audit committee. Pete had looked grim afterwards. He would have to make a presentation tomorrow to the full board.

Yep, I could kiss my bonus goodbye, not to mention my hopes for promotion this year. And the worst of it was, I deserved all these bad things—at least partly. I’d skimped on the legal work on the Loan-Plus product, even though I knew it was innovative. True, the lawyers still said we were right, but if I’d taken the right steps up front, maybe we could have stayed off the defensive. Once you were on defense with examiners, it was hard just to fight your way back to the line of scrimmage.

If I wasn’t careful, I could find my own job at risk. I didn’t sleep much the rest of that night.

Monday, 9:00 AM
There was a vein I’d never noticed before, pulsing in Pete Crandall’s neck. It was purple. For that matter, so was his face. He stared again at the letter in his hand. He cursed and began to crumple the paper, then checked himself.

“You’re right,” I said. “It’s absurd.”

“This…” he was sputtering now, struggling for control. “…this looks like exactly the same letter we got from Wayne, weeks ago, months ago. Doesn’t it?” He looked at me and then at the lawyers, then back to me again.

“Yes,” I said. “Ninety percent of it is the same, word for word. They’re saying Wayne was right, backing him up.”

“But, what about our arguments? They haven’t even answered them. How can that be?”

The senior lawyer spoke. “They ignored our arguments,” he said flatly, polishing his lenses. Annoyingly placid, I thought, recalling all the extra fees we’d paid for the ignored work.

I said, “It’s not that surprising, really. In a situation like this, the agency wants to be fair, but there’s a huge institutional defense reflex that kicks in. Once we started appealing this up the line to the region, we triggered an instinct to close ranks and support the front-line examiner. I don’t think they’re trying to mistreat us.”

Pete rolled his eyes. I continued.

“But, if there’s an argument in Wayne’s favor, then, that’s going to be the one they’ll lean toward, unless there’s just overwhelming ammunition to knock it down.”

“But there is! There is!,” Pete said, that purple vein throbbing again. “We gave them all that. They just blew it off.”

“Yes, it looks like they did,” I admitted.

Pete was staring out the window, then turned to me. “You said the policy guy in D.C. agrees with us. Can’t we just call him up? Put the problem in front of him?”

I looked at Ken. “What do you think?” I asked.

The compliance man shuffled papers and shifted in his chair. “I suppose we could,” he said slowly. “But, I don’t know him. We don’t know anyone in the Washington compliance division, or anyway, they don’t know us. How do you make an approach like that, without getting people’s hackles up? We’d look like we were complaining. And, what is it we’d be asking him to do? Even if the top guys are sympathetic, which they might not be, their next step is to call the region and ask what happened. When they do, who’s to say they’ll get the whole story? And, no matter what they hear, or what they think of it, just having them take that step stirs up problems for Wayne.”

Ken seemed to shudder. “I’ve been spending a lot of time with Wayne lately. He wouldn’t like it.”

The younger lawyer said, “We could engage someone to approach the Washington folks for us.” Everyone looked at her.

“We know the D.C. law firms that specialize in these regulatory problems,” she said. “And there are consulting firms, too, with the contacts we don’t have. They could review the bank’s actions, our legal work, and assuming they agree we’re right, they could—you know—feel out the regulators. Maybe approach them initially with a hypothetical. Not naming their client, but just describing the situation and asking how the agency would like to see it handled.”

The senior partner suddenly seemed more than academically interested. “That’s true,” he said. “Or for that matter, we could do that for you—pursue a hypothetical. We don’t have the close contacts in D.C., that’s not our practice. But we know how to make an approach and see how receptive they are.”

I looked at Pete and read his mind. He was watching dollar signs piling up.

“That sounds expensive,” he said.

“Yes,” said Ken, “although if it solved the problem fast, it could definitely be our cheapest alternative.”

“Well,” Pete said, “I would sure prefer not to spend that money. Apart from inviting some hired guns, what are our options?”

The senior lawyer spoke up. “The options are to comply with this order, do the file search, and pay the reimbursements. Or, to fight. As you just said, we can take it up through the chain of command to the folks in Washington. Or we can try the agency’s independent review process—they can bring in a neutral mediator who isn’t involved in the case. If that fails, we can take them to court.”

I watched Pete picturing the decimal point on our legal bills, the number of digits escalating from five figures to six figures to who-knows-what. He was weighing this against the costs of caving in and paying off. He looked at me. “What do you think?” he said.

Then they all looked at me. After all this time, I had it boiled down to a few words.

“Here’s what I think. First of all, we’re right. We can’t lose sight of that. We are sure we’re right, on the merits.” They all nodded. “But, if we fight, we need to understand that we’ll pay a high cost. It’s not just legal fees and staff time. It’s Wayne.”

They were still listening. “Wayne, and the regional staff. They think they’re right. And, we have to assume they’ll all be around for a while. If we go over their heads, and succeed, we have to expect they’ll be less than happy.” Heads nodded.

I frowned. “So, we have to weigh the two things. If we fight, if we take this to D.C., I believe we’ll win. But, we’ll pay a price.”

A Year Later
I took a sip of coffee and tackled my e-mail. There was a message from Ken about the new compliance exam that had started a week ago. I opened and read it, then sat back and smiled.

We had made the right decision, I thought. The agency appeal process had been incredibly good. In fact, it had exceeded my wildest hopes, in terms of fairness—and quickness. It had taken only one meeting and a few weeks of back-and-forth, to reach consensus. The Washington policy types said our interpretation of Reg Z was in full accord with theirs. Well, we had pointed out diplomatically, it was not surprising there had been some confusion about it. After all, Reg Z is complicated and our Loan-Plus product was unusual. It takes time to sort out regulatory issues in a fast-changing marketplace.

Wayne Lowry, we’d said, was a fine examiner. We appreciated that he’d been conscientiously doing the best job he could with the information he had. He and the regional folks had backed off graciously enough. We had not had to send any dreaded letters and fat checks to customers.

I hit the reply button on the e-mail, composed a quick note to Ken with a copy to Pete, and sent it off. The next message contained the latest year-to-date numbers for my department. I opened it and smiled again. We were way ahead of plan. I leaned back and looked at a poster on my wall, an ocean scene. My husband and I were collecting travel brochures again.

My thoughts were interrupted by a sharp tap at the door. I looked up.

There was Wayne, filling the door frame.

“Wayne,” I said, smiling. “Come on in.”

As usual, the son-of-a-gun was poker-faced.

“I just wanted to let you know. We’ve found a potentially serious fair-lending violation. Disparate treatment, in pricing. We’re still investigating, of course, but it looks likely to trigger a formal enforcement action. I just wanted you to know. As a … courtesy.”

As he walked into my office, I reached for a desk drawer, opened it, and looked at my bottle of aspirin. I shut the drawer. It was a little thing, but I wasn’t going to let him see me take one.

Wayne sat down, looked me in the eye, and smiled. BJ

By Jo Ann S. Barefoot