After weeks of going back and forth, members of the Senate Banking Committee are reportedly close to crafting a compromise regarding the creation of a Consumer Financial Protection Agency (CFPA). Instead of forming a new independent agency — which was the Obama administration’s proposal and included in the regulatory reform reform bill passed by the House last year — the compromise entails placing a new consumer division inside the Federal Reserve.
The Republican-initiated proposal was crafted by Sen. Bob Corker (R-TN), who has been negotiating with Banking Committee Chairman Chris Dodd (D-CT), and it constitutes a complete turnabout from the Fed bashing that has occurred in the Senate for the last year. Anti-Fed sentiment led to Chairman Ben Bernanke receiving the most votes against confirmation in Fed history, yet now a bunch of senators want to turn to the Fed to protect consumers.
However, the problem with the proposal is that the Fed has had consumer protection responsibilities for years, which it has completely neglected. And Dodd has forcefully acknowledged this, calling the Fed an “abysmal failure” when it came to protecting consumers:
“I really want the Fed to focus on its core enterprise and do what it was designed to do, which is monetary policy,” Dodd said. “We saw over the last number of years when they took on consumer protection responsibilities and regulation of bank holding companies, it was an abysmal failure.” [11/20/2009]
“[The CFPA] will take on the consumer protection rulemaking authority currently held by the Federal Reserve, which failed for over 14 years to put an end to the predatory mortgage lending practices that led to the financial crisis.”[6/11/2009]
In a statement, Dodd said federal law “requires the Federal Reserve to write rules to protect home borrowers from unfair or deceptive practices”…”For far too many years, far too many risky and abusive subprime loans were made without a reasonable analysis of the borrower’s ability to repay the loan.” [5/17/2007]
Corker also used to recognize that the Fed is a failure in terms of consumer protection, saying “‘sometimes it’s very difficult for the Fed’ to penalize lenders because Fed examiners work at the banks’ offices every day and can become co-opted.”
To review the history, the Fed was granted the ability to police mortgage lending in 1994, but it wasn’t until September 2006 that the Fed finally released its Guidance on Nontraditional Mortgage Product Risks, which is only a list of suggestions and not a ban of the most pernicious lending practices. In 2004, the Greenlining Institute warned the Fed that “unscrupulous” lending practices were spreading, and in 2005, Federal Reserve Board governor Edward Gramlich tried to warned his colleagues “of the decline of lending standards and the dangers that this posed.”
Despite all this, the Fed did nothing. Even Former Fed governor Frederic Mishkin has said that “the Federal Reserve should give up its role as a consumer protection regulator…The skills and mindset required to operate as a consumer protection regulator is fundamentally different from those required by a systemic regulator.”
So why is Dodd turning to the Fed as the best location for an enhanced consumer protection division? And does he think that House Financial Services Chairman Barney Frank (D-MA), who pushed very hard to get an independent CFPA through the House, will go along with this plan? While it may lead to political expedience (though even that is questionable, as Banking Committee ranking member Richard Shelby (R-AL) is a well-known Fed skeptic), this new proposal certainly does not seem like the best deal for consumers.