President Barack Obama's proposal for a new Consumer Financial Protection Agency met with fast disapproval from Federal Reserve officials, who don't want to lose control of writing the rules on lending and disclosure practices on mortgages and credit cards. But their opposition won't find many supporters in the U.S. Congress, which believes the Fed's response to the recent mortgage crisis was too little too late.
The new Consumer Financial Protection Agency (CFPA) will be the watchdog for consumers and supplant the Fed's authority to set rules for mortgages and credit cards. "We've got to make sure that we have somebody who is focused and responsible for protecting consumers, whether it's on subprime loans, for their mortgages, for their credit cards," Obama told Bloomberg.
How the new CFPA will finally look may be very different from the one Obama proposed once Congress gets involved in writing the bill, but I doubt the Fed's case will get much support. The Fed generally has not been a strong advocate for consumers, even though it has held the powers to help them.
The Fed had powers since passage of the 1994 Home Ownership and Equity Protection Act to prevent predatory lending, yet it sat by and watched abuses throughout the inflating of the housing bubble. The Fed also had authority to dictate disclosure rules under the Truth in Lending Act, yet many people took mortgages without a clear understanding of the loans they were taking. The Fed can also hold banks accountable for lending patterns under the Community Reinvestment Act, yet it failed to enforce those rules during this mortgage crisis. Instead the Fed dragged its feet on consumer protection as subprime mortgages doubled in three years to around $600 billion in 2006. This subprime lending ignited the global credit crisis of 2007.
The consumer side of the Fed's responsibility has always taken a back seat to the roles of monetary policy and bank supervision. The central bank "utterly failed the American people as a regulator," Senator Richard Shelby, the Senate Banking Committee's ranking Republican, told Bloomberg. Senate Banking Committee Chairman Christopher Dodd also questions the Fed's role as a consumer protector, so the Fed will face bipartisan opposition to any attempt to keep its consumer protection powers.
In fact, Dodd questions giving the Fed even more powers, such as the suggestion that the Fed have broader supervisory powers over all the financial firms whose collapse would threaten the entire system. Obama wants to give the Fed authority over financial companies judged too big to fail, and give it the authority to set stronger capital and liquidity standards. Congress appears unwilling to give that type of power to a body with the independence that the Fed enjoys.
If the Fed is given more power, it will likely come with some loss of independence. Some are pushing for Senate approval of Federal Reserve Bank Presidents. Right now they are appointed by local boards. The Congress has no role in deciding who should be a bank president, yet these presidents have crucial votes on monetary policy decisions that impact the entire nation.
Expect the decisions about how to restructure our financial regulatory system to take months and lots of behind the scenes deal-making. My only wish is that consumers truly do end up with a strong consumer financial advocate that puts their needs above all other financial entities.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to the Federal Reserve and The Complete Idiot's Guide to Improving Your Credit Score.