Yesterday, the Federal Reserve announced that, henceforth, it is going to extend its consumer protection oversight to the non-bank subsidiaries of banks, which as the Washington Post noted, is “a group of lenders that includes several major originators of subprime loans.” The Fed intends for the announcement to indicate its newfound seriousness regarding consumer protection:
The policy, which will take effect immediately, also provides for the investigation of consumer complaints against these nonbank entities…The policy announced today builds upon the groundwork of the pilot program and responds to a need for more effective supervision and consumer protection.
But this move seems to be aimed more at fending off the drive to take away the Fed’s consumer protection responsibilities (via creation of a Consumer Financial Protection Agency or CFPA) than any meaningful change of heart on the Fed’s part. “Is this trying to make up for the vulnerable position they’re in?” asked Cornelius Hurley, a professor at the Boston University School of Law and a former Fed lawyer. “It certainly sounds that way.” Federal Reserve Chairman Ben Bernanke has been vociferously opposed to the CFPA proposal. “I understand why some would want to see a new agency that would be fully committed to this area. And, I’m not criticizing that,’’ Bernanke has said. “I’m simply saying that…we believe we can continue to do good work in this area.’’
The Fed’s new policy announcement actually fits in perfectly with the Fed’s tendency to announce consumer protection initiatives long after the horse has already left the barn. For instance, the Fed was warned about the spread in subprime and predatory lending by the Greenlining Institute in 2004, and by Edward Gramlich, a member of the Reserve Board itself, in 2005. However, it didn’t get around to issuing its “Guidance on Nontraditional Mortgages” until September, 2006, at which point subprime loans constituted 20 percent of mortgage originations, totaling $600 billion. Even then, the guidance was a list of best practices, not a ban on predatory products.
Jim Carr, of the National Consumer Reinvestment Coalition, said that, “even if the Fed were proposing a regime that was as comprehensive as the law, it wouldn’t take away the inherent conflicts between the Fed’s support for the banks versus its protection of consumers.” Indeed, it’s fine if the Fed wants to take a stab at policing predatory lending, but it has shown no competency in that area in the past, so the drive to create the CFPA shouldn’t get hung up by the Fed’s promises.